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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-5358
SUNDSTRAND CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 36-1840610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4949 HARRISON AVENUE
P.O. BOX 7003
ROCKFORD, ILLINOIS 61125-7003
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (815) 226-6000
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON WHICH THE COMMON
TITLE OF EACH CLASS STOCK AND RIGHTS ARE REGISTERED
Common stock-$.50 par value New York Stock Exchange
Common stock purchase rights Chicago Stock Exchange
Pacific Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$3,372,120,250 as of February 26, 1998.*
*For purposes of this calculation, the Registrant has assumed that its directors
and
executive officers are affiliates.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
57,202,492 shares of common stock outstanding at February 26, 1998.
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
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DOCUMENT FORM 10-K REFERENCE
Portions of Registrant's Proxy Statement for Annual Meeting Part III
of Stockholders to be held April 21, 1998
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SUNDSTRAND CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
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PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
Executive Officers of the Registrant........................ 7
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 8
Item 6. Selected Financial Data for the Registrant for Each of the
Last Five Fiscal Years...................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 10
Item 8. Financial Statements and Supplementary Data................. 20
Item 9. Disagreements with Accountants on Accounting and Financial
Disclosure.................................................. 40
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
Item 13. Certain Relationships and Related Transactions.............. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 41
Signatures.............................................................. 46
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CROSS-REFERENCE TABLE OF CONTENTS
Registrant's Proxy Statement for the Annual Meeting of Stockholders to be
held April 21, 1998, including all information required in Part III of Form
10-K. The Cross-Reference Table of Contents set forth in Part III identifies the
source of incorporated material for each of the Form 10-K items included in Part
III. Only those sections of the Proxy Statement cited in the Cross-Reference
Table are part of this Form 10-K and filed with the Securities and Exchange
Commission.
PART I
ITEM 1. BUSINESS
Sundstrand Corporation (Sundstrand or the Registrant) is a multinational
organization comprised of two business segments, Aerospace and Industrial. These
segments are engaged in the design, manufacture, and sale of a variety of
proprietary, technology-based components and systems for diversified
international markets. During 1997, the Registrant purchased the remaining
portions of Leach International Corporation's (Leach) Automated Power Management
System (APMS) product line. Subsequent to December 31, 1997, the Registrant's
Industrial segment acquired Ansimag, Inc., Maso Process-Pumpen GmbH and Robin
Industries S.A. See the Acquisitions section of Management's Discussion and
Analysis of Financial Condition and Results of Operations on page 13 for
additional information.
STRATEGY
The Registrant intends to grow its revenues and market share by introducing
new products, entering new markets, and by making acquisitions. Sundstrand
believes that by focusing its attention on smaller product groups, it can better
anticipate customer needs and improve the timing and increase the volume of new
product development. This focused marketing and development strategy was pursued
in 1997 as several product oriented enterprises, including Emergency Power,
Actuation and Engine Accessories in the Aerospace segment and Falk Couplings
Facility in the Industrial segment, were established. Reliability of the
Registrant's products is also very important. To this end, the Registrant has
devoted and will continue to devote significant efforts at maintaining and
improving product reliability. For additional discussion of strategy see
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 18.
DATE OF INCORPORATION
The Registrant was incorporated in Illinois in 1910 and became a Delaware
corporation in 1966.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The financial information on industry segments can be found on pages 25 and
26.
AEROSPACE SEGMENT
The Aerospace segment consists of three product lines (which include the
Aerospace enterprises listed above), Electric Systems, Mechanical Systems, and
Power Systems.
Sundstrand is the leading supplier of aircraft electric power systems. The
Registrant's systems are installed on every current commercial aircraft platform
offered by Boeing and Airbus Industrie, most regional jet aircraft, and many of
the world's military aircraft. This scope of coverage is important both for the
significant aftermarket business it generates and for the ongoing relationships
it provides with customers. With proven capabilities in electrical power
generation, electronics and power electronics, and hybrid technologies,
Sundstrand can design a total electrical system (generation and distribution)
for each aircraft's power requirements and usage patterns. The completion of the
acquisition of Leach's APMS product line and electrical load management
technology extended Sundstrand's current capabilities for generating and
managing aircraft electric power. The Electric Systems product line accounted
for more than 50 percent of Aerospace segment sales in 1997, 1996, and 1995.
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The Mechanical Systems product line includes aircraft actuation systems,
secondary/emergency power systems, and a range of pumps as well as systems for
missile and space applications and undersea propulsion. Actuation systems
incorporate mechanical, hydraulic, and electrical technologies for the movement
and positioning of aircraft control surfaces such as flaps, slats, and
horizontal stabilizers. Some of the Registrant's largest and most successful
actuation system programs have been for military applications. This experience
base has enabled Sundstrand to expand its product offerings into commercial
markets where opportunities for growth exist. Secondary and emergency power
systems include aircraft accessory drives and engine starting systems along with
ram air turbines and air-driven generators that provide emergency hydraulic or
electric power.
Sundstrand's Power Systems product line produces auxiliary power units
(APUs) and environmental control systems for a wide variety of commercial and
military applications ranging from business jets to commercial transports. Its
APU business is growing successfully as a result of Boeing's commitment to the
Boeing 717 aircraft (the former MD95) on which the Registrant's APU is sole
sourced. In addition, Sundstrand was awarded the U.S. Airways APU contract for
their fleet of A320 family of aircraft. With the progress made in this
operation, its possible the break even point for our Power Systems business
could occur in late 1998 versus original estimates of early 1999.
INDUSTRIAL SEGMENT
The Registrant's Industrial business serves a group of basic industries
throughout the world with a variety of products ranging from small metering
pumps to some of the world's largest ring gears. While the application of the
various products is diverse, the products share similar technology --
mechanically engineered, rotating equipment; related customer industries --
primarily involving raw material processing, bulk material handling, direct
manufacturing and construction; and similar distribution channels --
approximately two-thirds sold through manufacturer representatives and
distributors and one-third sold to end-use customers. The Industrial segment's
business is tied closely to the level of general economic activity as all
products are sold to other industries which utilize them in their own
manufacturing processes.
The Falk Corporation serves a global customer base in industries such as
mining, metal processing, wood and paper processing, construction and cement,
chemical processing, utilities, transportation, food processing, and a variety
of smaller markets. Falk's products include a broad line of standard enclosed
gear drives and flexible shaft couplings sold through a worldwide distributor
network as well as custom-engineered enclosed gear drives, large open gear sets,
large alloy steel castings, and main propulsion marine drives sold directly to
end users. Typical customer applications involve bulk material handling and raw
material processing into finished goods. Falk's standard enclosed gear drives
and couplings are used in conveying and mixing applications, while the larger
custom drives are used for mining crushers and grinders and ship propulsion
systems.
Sullair Corporation is a major multinational manufacturer of rotary screw
industrial and portable air compressors, rotary screw compressors for the
refrigeration market, rotary screw vacuum systems, and pneumatic construction
tools. Filters and dryers are also available for applications requiring
extremely clean, dry air. Sullair's industrial compressors range from
five-horsepower continuous-duty encapsulated models to 600-horsepower,
high-efficiency, two-stage tandem models. Sullair's portable compressors for the
construction market have capacities ranging from 70 cfm to 1,900 cfm. Sullair's
industrial compressors are sold directly to end-use customers and through a
network of distributors, while the majority of portable compressors for the
construction market are sold through distributors.
Sundstrand Fluid Handling Corporation manufactures engineered centrifugal
pumps, compressors, and blowers for the hydrocarbon and chemical processing,
pulp and paper, water treatment, electric power, and sanitary processing
industries worldwide. These pumps are tailored for specific customer
applications worldwide, and sold to end users and engineering contractors.
Milton Roy Company serves the worldwide market with high-quality metering
pumps and specialty pumps. Metering pumps typically are used in municipal and
industrial water conditioning, waste water treatment, chemical processing, and
pulp and paper applications. The larger motor-driven metering pumps are
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often designed into systems and sold through engineering contractors. Smaller
electronic metering pumps, controllers, and pH monitoring systems are stock
items sold through industrial distribution channels for small industrial water
treatment applications.
INTERNATIONAL
For information related to the Registrant's international activities see
the Foreign Operations and Activity discussion on page 13 in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
See the Information by Business Segment on pages 25 and 26.
MATERIALS AND SUPPLIES
The Registrant uses many raw and finished materials of primary and
alloy-type metal in forms such as cast, forged, sheet, and bar, which are
generally available from multiple sources. In addition, mechanical and
electronic materials and supplies such as fasteners, bearings, gaskets, filters,
motors, resistors, transformers, and semiconductors are procured from various
sources. The Registrant deals with numerous suppliers and is not dependent upon
any one manufacturer or supplier of materials, supplies, or services. However,
from time to time, general shortages of particular raw materials and supplies
may have an adverse effect on the Registrant. See additional discussion related
to suppliers in the Impact of Year 2000 section of Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages 14 and 15.
INTELLECTUAL PROPERTY RIGHTS
The Registrant owns a large number of pending and granted patents (expiring
through 2018) and other intellectual property rights and interests, e.g.,
trademarks, copyrights, trade secrets, and licenses, which are of importance in
the aggregate to the conduct of its business and are expected to be of value in
the future. In the judgment of the Registrant, its patents and other
intellectual property rights and interests are adequate for the conduct of its
business, and the loss or expiration of any single or group of patents or other
intellectual properties or interests would not materially affect the conduct of
its business as a whole. In the Registrant's opinion, its design, manufacturing
and marketing skills, experience, and reputation are as responsible for its
positions in the markets it serves as are its patents and other formal
intellectual property rights and interests.
MAJOR CUSTOMERS
In addition to the U.S. government, as discussed in the Government Contract
Matters section on page 18, the Boeing Company is a significant customer of the
Registrant's Aerospace segment. Sales in 1997 to Boeing, including sales where
the U.S. government was the ultimate customer, were 11.8 percent of consolidated
sales and 20.6 percent of Aerospace segment sales. Sales in 1996 to Boeing,
including sales where the U.S. government was the ultimate customer, were 8.7
percent of consolidated sales and 16.9 percent of Aerospace segment sales. Sales
in 1995 to Boeing, including sales where the U.S. government was the ultimate
customer, were 8.8 percent of consolidated sales and 17.8 percent of Aerospace
segment sales.
UNFILLED ORDERS
See the discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 13.
GOVERNMENT CONTRACT MATTERS
See the discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 18 and the Government Contract
Matters footnote on page 40.
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COMPETITION
The Registrant has competitors or potential competitors in each of its
product lines. Some of these competitors or potential competitors may have
greater financial and personnel resources than the Registrant. The Registrant
believes that its research and development, proprietary technology, and product
and service reputations have been of particular significance in maintaining the
Registrant's competitive standing.
RESEARCH AND DEVELOPMENT
See the Research and Development footnote on page 38.
ENVIRONMENTAL MATTERS
See the Environmental Matters footnote on pages 39 and 40.
ITEM 2. PROPERTIES
The Registrant occupies building space totaling approximately 5.9 million
square feet, which is divided by business segment as follows: Aerospace, 2.9
million square feet; Industrial, 2.8 million square feet; and corporate offices,
.2 million square feet. All building space is owned by the Registrant, except
approximately .7 million square feet of leased space, and is well maintained, in
good operating condition, and suitable for its operations. The Registrant owns
approximately 200 acres of vacant land for future expansion.
Aerospace domestic manufacturing facilities are located in Phoenix,
Arizona; San Diego, California; Denver and Grand Junction, Colorado; Rockford,
Illinois; York, Nebraska; and Santa Isabel, Puerto Rico.
Aerospace foreign manufacturing facilities are located in the Republic of
Singapore and Nordlingen, Germany.
Industrial domestic manufacturing facilities are located in Auburn,
Alabama; Arvada, Colorado; Michigan City, Indiana; Acton, Massachusetts;
Ivyland, Pennsylvania; and Milwaukee, Wisconsin.
Industrial foreign manufacturing facilities are located in Eastbourne,
England; Dijon, Montbrison, and Pont-St-Pierre, France; and Madras, India.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is party to litigation matters and claims incurred in the
course of its operations. While the results of litigation and claims cannot be
predicted with certainty, management believes that the final outcome of such
matters will not have a material adverse effect on the Registrant's consolidated
financial position, results of operations, or liquidity.
The Registrant is also involved in a number of matters involving
environmental claims. For information concerning these matters see the Note to
the Registrant's Consolidated Financial Statements captioned "Environmental
Matters" on pages 39 and 40.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Registrant's security holders
during the fourth quarter of fiscal year 1997.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following chart sets forth the executive officers of Registrant, their
ages, their offices with the Registrant, and the period during which they have
held such offices.
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AGE AS OF NUMBER OF
NAME 3/6/98 CURRENT OFFICE AND PRINCIPAL OCCUPATION YEARS AS OFFICER
---- --------- --------------------------------------- ----------------
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Robert H. Jenkins........ 55 Chairman of the Board, President and Chief 2
Executive Officer. Elected President and Chief
Executive Officer October 1, 1995; elected to
additional position of Chairman of the Board
April 15, 1997.(1)
Patrick L. Thomas........ 52 Executive Vice President and Chief Operating 3
Officer, Industrial. Elected Executive Vice
President and Chief Operating Officer,
Industrial January 2, 1995.(2)
Ronald F. McKenna........ 57 Executive Vice President and Chief Operating 2
Officer, Aerospace. Elected Executive Vice
President and Chief Operating Officer, Aerospace
May 6, 1996.(3)
Paul Donovan............. 50 Executive Vice President and Chief Financial 9
Officer. Chief Financial Officer since December
2, 1988; elected to additional position of
Executive Vice President August 7, 1990.
DeWayne J. Fellows....... 53 Vice President and Controller. Controller since 9
February 16, 1989; elected to additional
position of Vice President August 7, 1990.
Mary Ann Hynes........... 50 Vice President, General Counsel and Secretary.
Elected Vice President, General Counsel and
Secretary February 26, 1998.(4)
James R. Carlson......... 54 Vice President and Treasurer. Elected Vice 1
President and Treasurer November 18, 1997.
Appointed Vice President, Treasury Operations
and Assistant Treasurer from January 6, 1997 to
November 18, 1997.(5)
Neil D. Traubenberg...... 48 Vice President, Tax. Elected Vice President, Tax 1
November 18, 1997. Appointed Vice President, Tax
from January 6, 1997 to November 18, 1997.(6)
Patrick J. Winn.......... 48 Vice President, Corporate Human Resources. 1
Elected Vice President, Corporate Human
Resources November 18, 1997. Appointed Vice
President, Corporate Human Resources from
September 13, 1997 to November 18, 1997.(7)
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(1) Mr. Jenkins was Executive Vice President of Illinois Tool Works, Inc. from
March 1, 1990, to September 30, 1995.
(2) Mr. Thomas was President of Milton Roy Company from April 1, 1991, to
January 1, 1995.
(3) Mr. McKenna was Vice President of Business Development, Sundstrand Aerospace
from January 28, 1995, to May 6, 1996 and Vice President and General Manager
of Sundstrand Aerospace Electric Power from December 2, 1989, to January 27,
1995.
(4) Ms. Hynes was General Counsel of Wolters Kluwer U.S., Inc. from January 1996
to February 1998 and General Counsel of Commerce Clearing House, Inc. for
more than five years prior to January 1996.
(5) Mr. Carlson was Assistant Treasurer of the Registrant for more than five
years prior to January 6, 1997.
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(6) Mr. Traubenberg was Tax Director of the Registrant for more than five years
prior to January 6, 1997.
(7) Mr. Winn was Senior Associate Attorney of the Registrant for more than five
years prior to September 13, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK INFORMATION
Sundstrand common stock is listed on the New York, Chicago, and Pacific
stock exchanges under the symbol SNS.
DIVIDENDS AND STOCK PRICE RANGE
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PER SHARE OF COMMON STOCK
----------------------------------------
PRICE RANGE
DIVIDENDS ------------------------
PAID HIGH LOW
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Quarter
1997
First............................................. $.17 $47 $39 7/8
Second............................................ .17 59 1/4 42 1/4
Third............................................. .17 63 1/16 54 1/2
Fourth............................................ .17 60 45 13/16
----
$.68
====
1996
First............................................. $.17 $41 5/8 $33 1/2
Second............................................ .17 40 3/4 33 1/4
Third............................................. .17 40 1/2 32 1/2
Fourth............................................ .17 42 3/4 37 3/4
====
$.68
====
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For information regarding restrictions on dividend payments see the Notes
Payable and Long-Term Debt footnote on page 33. For information on the number of
common stockholders and further information regarding the Registrant's common
stock price, see the Selected Financial Data for the Registrant for Each of the
Last Five Fiscal Years on pages 9 and 10.
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ITEM 6. SELECTED FINANCIAL DATA FOR THE REGISTRANT FOR EACH OF THE LAST FIVE
FISCAL YEARS
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YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997(A) 1996(C) 1995(D) 1994(E) 1993(F)
------- ------- ------- ------- -------------
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
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Summary of Operations
Net Sales
Aerospace.................................... $1,001 $ 785 $ 726 $ 710 $ 754
Industrial................................... 751 736 747 663 629
------ ------ ------ ------ -------
Total................................... $1,752 $1,521 $1,473 $1,373 $ 1,383
====== ====== ====== ====== =======
Operating Profit
Aerospace.................................... $ 209 $ 138 $ 54 $ 88 $ 106
Industrial................................... 128 84 121 106 84
------ ------ ------ ------ -------
Total................................... $ 337 $ 222 $ 175 $ 194 $ 190
====== ====== ====== ====== =======
- ------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes, extraordinary item, and
cumulative effect of accounting change....... $ 294 $ 184 $ 135 $ 149 $ 133
Net earnings from continuing operations before
extraordinary item and cumulative effect of
accounting change............................ $ 188 $ 114 $ 79 $ 96 $ 91
Net earnings available for common shares....... $ 183 $ 114 $ 79 $ 96 $ 141
Return on average equity, after tax............ 34.8% 22.9% 16.2% 19.0% 27.0%
- ------------------------------------------------------------------------------------------------------
Per Share of Common Stock(b)
Basic earnings per share from continuing
operations before extraordinary item and
cumulative effect of accounting change....... $ 3.15 $ 1.87 $ 1.25 $ 1.46 $ 1.28
Basic earnings per share....................... $ 3.06 $ 1.87 $ 1.25 $ 1.46 $ 1.98
Diluted earnings per share from continuing
operations before extraordinary item and
cumulative effect of accounting change....... $ 3.13 $ 1.86 $ 1.25 $ 1.46 $ 1.28
Diluted earnings per share..................... $ 3.04 $ 1.86 $ 1.25 $ 1.46 $ 1.98
Cash dividends................................. $ .68 $ .68 $ .60 $ .60 $ .60
Market value -- high........................... $63.06 $42.75 $35.38 $26.00 $ 22.38
low.......................... $39.88 $32.50 $22.25 $20.50 $ 17.50
year-end..................... $50.38 $42.50 $35.19 $22.75 $ 21.00
Book value..................................... $ 9.33 $ 8.49 $ 7.80 $ 7.80 $ 7.65
- ------------------------------------------------------------------------------------------------------
Year-End Financial Position
Working capital................................ $ 413 $ 375 $ 323 $ 303 $ 365
Current ratio.................................. 1.9 1.9 1.7 1.7 2.1
Total assets................................... $1,700 $1,595 $1,593 $1,587 $ 1,512
Long-term debt................................. $ 222 $ 226 $ 228 $ 247 $ 255
Total debt..................................... $ 365 $ 344 $ 396 $ 441 $ 282
Shareholders' equity........................... $ 542 $ 513 $ 481 $ 494 $ 512
Ratio of total debt to total capital........... 40.2% 40.1% 45.2% 47.1% 35.5%
Shares outstanding at year end (in millions)... 58.1 60.4 61.7 63.3 66.9
- ------------------------------------------------------------------------------------------------------
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YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997(A) 1996(C) 1995(D) 1994(E) 1993(F)
------- ------- ------- ------- -------------
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
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Other Data
Orders received
Aerospace.................................... $1,266 $ 822 $ 896 $ 736 $ 527
Industrial................................... 745 735 761 701 625
------ ------ ------ ------ -------
Total................................... $2,011 $1,557 $1,657 $1,437 $ 1,152
====== ====== ====== ====== =======
Unfilled orders
Aerospace.................................... $1,071 $ 806 $ 769 $ 599 $ 572
Industrial................................... 155 161 162 148 110
------ ------ ------ ------ -------
Total................................... $1,226 $ 967 $ 931 $ 747 $ 682
====== ====== ====== ====== =======
Property, plant, and equipment (excluding
leased equipment):
Additions, at cost........................... $ 119 $ 63 $ 62 $ 54 $ 56
Depreciation................................. $ 58 $ 60 $ 61 $ 61 $ 69
Approximate number of employees................ 10,400 9,400 9,200 9,200 9,300
Approximate number of shareholders of record... 3,300 3,500 3,700 4,000 4,100
</TABLE>
(a) Includes a one-time curtailment gain of $15 million before taxes ($9 million
after taxes equivalent to $.15 per share) related to an amendment to the
Registrant's Retiree Health Insurance Plans. Also includes a charge of $9
million before taxes ($5 million after taxes equivalent to $.09 per share)
related to the cumulative effect of a change in the method of accounting for
certain consulting costs.
(b) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." For further discussion of earnings per share and the
impact of Statement No. 128, see the notes to the consolidated financial
statements beginning on page 27.
(c) 1996 includes a restructuring charge of $32 million before taxes ($23
million after taxes equivalent to $.38 per share) related to the operations
of Sullair Europe S.A. Also includes pension and post-retirement benefit
curtailment gains of $8 million before taxes ($5 million after taxes
equivalent to $.08 per share) related to the shutdown of the Lima, Ohio,
facility.
(d) Includes a restructuring charge of $58 million before taxes ($40 million
after taxes equivalent to $.64 per share) related to the reduction of
manufacturing capacity and the divestiture of two non-core product lines.
(e) Includes a reduction of depreciation expense related to a change in
depreciable lives of $9 million before taxes ($6 million after taxes
equivalent to $.08 per share).
(f) Includes a gain on the sale of the Registrant's Sundstrand Data Control
division of $55 million after taxes, equivalent to $.77 per share and an
extraordinary loss on the early retirement of debt of $5 million after
taxes, equivalent to $.07 per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking information which is
subject to market risks and opportunities that could have a material impact on
actual results, and accordingly should be considered in conjunction with the
cautionary language set forth in the Registrant's most recent report on Form 8-K
which is on file with the Securities and Exchange Commission.
Total sales of the Registrant increased $231 million to $1,752 million in
1997, from $1,521 million in 1996. Net earnings in 1997 were $183 million, or
$3.04 per share assuming dilution, which included a one-time, pretax,
curtailment gain of $15 million related to an amendment to the Registrant's
Retiree Health Insurance Plans, period costs associated with the 1996
restructuring of approximately $2 million and the
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cumulative effect of a change in accounting principle resulting in a pretax
charge of $9 million. Excluding the restructuring charges, related period costs,
one-time gains and cumulative effect of a change in method of accounting for
certain consulting costs, 1997 net earnings were $180 million, or $3.00 per
share assuming dilution, compared with $140 million, or $2.29 per share assuming
dilution, in 1996.
Net earnings in 1996 were $114 million, or $1.86 per share assuming
dilution, which included a pretax restructuring charge of $32 million, one-time
gains related to the 1995 restructuring totaling $8 million, and period costs
related to the 1995 restructuring of approximately $13 million.
SALES BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
1997 1996 1995
SALES (AMOUNTS IN MILLIONS) AND ---------------- ---------------- ----------------
INCREASE (DECREASE) FROM PRIOR YEAR AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
- --------------------------------------- ------ ------ ------ ------ ------ ------
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Business segment
Aerospace -- Commercial.............. $ 737 34.0% $ 550 12.9% $ 487 12.7%
-- Military.............. 264 12.3% 235 (1.7)% 239 (14.0)%
------ ----- ------ ----- ------ -----
-- Total................. 1,001 27.5% 785 8.1% 726 2.3%
Industrial........................... 751 2.0% 736 (1.5)% 747 12.7%
------ ----- ------ ----- ------ -----
Total............................. $1,752 15.2% $1,521 3.3% $1,473 7.3%
====== ===== ====== ===== ====== =====
</TABLE>
Aerospace segment sales in 1997 were $1,001 million, which represents a
$216 million increase over 1996 sales and 57.1 percent of total sales.
Commercial sales in 1997 increased by $187 million compared with 1996 due to a
44% increase in original equipment manufacturer (OEM) sales and a 27% increase
in aftermarket sales. The growth in commercial sales reflected the continued
significant increase in aircraft orders and airline traffic growth, along with
improved profitability of the airline industry. As a result of double digit
increases in both military OEM and aftermarket sales, total military sales were
$264 million in 1997, a $29 million increase from 1996. The growth in military
sales was due primarily to increased shipments on the F-16 program and revenues
from the program to provide the propulsion system for the United Kingdom's Royal
Navy Spearfish torpedo.
1996 Aerospace segment sales were $785 million, representing 51.6 percent
of total sales. The $59 million increase from 1995 sales was due primarily to
higher commercial OEM and aftermarket sales, both of which increased by more
than 10 percent from the prior year. The growth reflected the increase in
aircraft orders, airline traffic growth, and previously depleted spare parts
inventories. Military sales were flat in 1996 compared with 1995.
The Registrant's Electric Systems product line is the largest product line
within the Aerospace segment. This product line accounted for more than 50
percent of Aerospace segment sales in 1997, 1996, and 1995.
Industrial segment sales were $751 million in 1997, representing 42.9
percent of total sales, compared with 1996 sales of $736 million. Falk, Sullair,
and Milton Roy reported modest growth in sales; while sales for Fluid Handling
decreased slightly. The majority of the sales decrease for Fluid Handling
resulted from the devaluation of the French franc against the U.S. dollar during
1997, with actual sales volume remaining flat. Currency issues unfavorably
impacted total Industrial sales growth by approximately $14 million during 1997.
Sales in the Industrial segment were $736 million in 1996, representing
48.4 percent of total sales, compared with sales of $747 million in 1995.
Excluding sales from Milton Roy's divested Spectronic Instruments (Spectronic)
business, 1996 sales increased by $5 million from 1995. Lower sales from
Sullair's industrial compressor business were more than offset by higher sales
of Falk's custom built products and higher domestic sales of Sundstrand Fluid
Handling's Sundyne product. Excluding Spectronic, Milton Roy's sales were flat.
11
<PAGE> 12
OPERATING PROFIT BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
1997 1996 1995
OPERATING PROFIT (AMOUNTS IN MILLIONS) AND --------------- --------------- ---------------
OPERATING PROFIT AS A PERCENT OF NET SALES AMOUNT % AMOUNT % AMOUNT %
- ------------------------------------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Business segment
Aerospace...................................... $209 20.9% $138 17.6% $ 54 7.4%
Industrial..................................... 128 17.0% 84 11.4% 121 16.2%
---- ---- ---- ---- ---- ----
Total....................................... $337 19.2% $222 14.6% $175 11.9%
==== ==== ==== ==== ==== ====
</TABLE>
Aerospace segment operating profit increased by $71 million to $209 million
in 1997 from $138 million in 1996. Excluding $9 million, which was the Aerospace
portion of a one-time curtailment gain related to an amendment to the
Registrant's Retiree Health Insurance Plans, 1997 operating profit was $200
million, or 20.0 percent of sales. The operating profit increase, excluding the
one-time gain, was due primarily to the increase in commercial OEM and
aftermarket sales.
Operating profit in the Aerospace segment increased to $138 million in 1996
from $54 million in 1995. Excluding restructuring related period costs and
one-time gains, 1996 operating profit was $143 million, or 18.2 percent of
sales, compared with $108 million, or 14.9 percent of sales, in 1995 excluding
restructuring related items. The year-over-year increase was due primarily to
the increase in commercial OEM and aftermarket sales.
Industrial segment operating profit was $128 million, which included $6
million for the Industrial portion of a one-time curtailment gain related to an
amendment to the Registrant's Retiree Health Insurance Plans and $2 million in
restructuring related period costs. Excluding one-time items, 1997 operating
profit was $124 million, or 16.5 percent of sales compared with $116 million, or
15.8 percent of sales, in 1996. The improvement resulted from the increase in
Industrial shipments and lower losses at Sullair Europe, as the benefits of the
1996 restructuring plan began to be realized.
Operating profit in the Industrial segment in 1996 was $84 million, which
included a $32 million restructuring charge related to Sullair Europe S.A.
Excluding the restructuring charge, 1996 operating profit was $116 million, or
15.8 percent of sales, compared with $121 million, or 16.2 percent of sales, in
1995. The decrease was due primarily to increased operating losses at Sullair's
European subsidiary and lower profitability at Milton Roy's Flow Control
Division resulting from lower volume and higher manufacturing costs, partially
offset by the restructuring charge recorded to write down the assets of
Spectronic in 1995.
RESTRUCTURINGS
In December 1996, the Registrant initiated a restructuring plan related
primarily to the operations of Sullair Europe S.A. which resulted in a pretax
charge of $32 million. The restructuring was undertaken as a result of
continuing losses at this operation, weakness in the European economy, and
significant competitive pressures in the European markets. The charge included
$11 million in cash termination benefits; $14 million for the partial write-down
of assets of Sullair Europe and $7 million (primarily cash related charges) for
disposition of the facility in St. Priest, France and professional fees.
Operations previously at the St. Priest facility were transferred to other plant
sites in Europe and the United States. The shutdown of the St. Priest facility
and the termination or transfer of the employees was completed during 1997, and
it is anticipated that the sale of the facility will be completed by the end of
1999. Since the charge was recorded in 1996, approximately $8 million has been
paid and charged against the restructuring liability, including costs to
terminate 118 employees. Additionally, restructuring related period costs of $2
million were incurred during 1997.
During 1995, the Registrant recorded a $58 million pretax restructuring
charge related to the reduction of manufacturing capacity in the Aerospace
segment and the divestiture of two non-core product lines. The charge included
$24 million in termination benefits ($9 million in cash related charges and $15
million in non-cash related charges); $29 million for the write-down of assets;
and $5 million (cash related charges) for the disposition of the Registrant's
Lima, Ohio facility. Since that time, $10 million has been disbursed and
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<PAGE> 13
charged against the liability, including costs to terminate 360 employees. The
shutdown of the Lima facility was completed during 1996 and the disposition of
that facility is expected to be completed in the first quarter of 1998. The
shutdown of the Lima facility triggered curtailment and settlement gains during
1996, totaling $8 million, related to pension and other post-retirement benefits
for the terminated employees. These gains are reflected in the restructuring
charge line in the statement of earnings. Additionally during 1996,
approximately $13 million, related primarily to the movement of equipment from
the Lima facility to other manufacturing sites, was charged to costs of products
sold.
ACQUISITIONS
During 1997, the Registrant acquired the remaining portions of Leach
International Corporation's Automated Power Management System product line. The
electric load management technology and related business was purchased from
Leach during 1996. The Leach acquisition provides Sundstrand with the capability
of supplying a complete electrical system on airframes. In 1996, the Registrant
also purchased from Labinal S.A. its interest in Auxiliary Power International
Corporation and related assets.
Subsequent to December 31, 1997, the Registrant acquired the business and
assets, and assumed certain liabilities of Ansimag, Inc. (Ansimag), a
manufacturer of non-metallic, magnetically driven, sealless pumps. The
Registrant also purchased Maso Process-Pumpen GmbH (Maso), located in Germany.
Maso, which concentrates its sales efforts in Europe, designs, develops and
manufactures pumps used in the food processing and pharmaceutical industries,
using the same technology as the Sine(R) pump product line sold by Registrant.
Robin Industries S.A. (Robin) was also acquired by the Registrant subsequent to
December 31, 1997. Robin is located in France and manufactures mixers for
industrial applications.
FOREIGN OPERATIONS AND ACTIVITY
The Registrant has been expanding its international activities during the
past several years, in part through joint-venture operations, acquisitions, and
the development of foreign subsidiaries. Accordingly, the Registrant enters into
foreign currency forward contracts primarily to protect specific assets and
liabilities and certain cash flows from foreign currency exchange rate
fluctuations. As a result, foreign exchange rate fluctuations are not expected
to have a material impact on the Registrant's financial condition or results of
operations. For further information related to foreign currency forward
contracts see the Summary of Significant Accounting Policies note on pages 27
and 28 and the Financial Instruments With Off-Balance-Sheet Risk note on pages
35 and 36.
The Registrant continues to explore a variety of strategies to expand its
international presence, including joint ventures and distribution arrangements.
Markets in areas with high-growth potential, such as the Asia-Pacific region and
Latin America, are the primary focus of the Registrant's efforts. The Registrant
believes the current volatility in the Asian financial markets will have an
adverse effect on the future results of its operations and the estimated impact
has been factored into the Registrant's 1998 forecast which is discussed in the
Outlook section of Management's Discussion and Analysis of Financial Condition
and Results of Operations on pages 18 and 19.
UNFILLED ORDERS
Unfilled orders increased by $259 million to $1,226 million at December 31,
1997, of which $470 million are not expected to be filled in 1998. Unfilled
orders at December 31, 1996 were $967 million. Unfilled orders in the Aerospace
segment increased by approximately 33 percent from 1996 while Industrial segment
unfilled orders decreased approximately four percent. Aerospace unfilled orders
at December 31, 1998 are expected to decline slightly from December 31, 1997 and
Industrial unfilled orders are expected to remain flat.
AUXILIARY POWER UNITS
The Registrant's Power Systems product line includes auxiliary power units
(APUs) and environmental control systems developed and produced for both the
military and commercial aerospace markets. Since 1989, the Registrant has
participated in the development and marketing of a family of APUs to serve the
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<PAGE> 14
commercial airline transport market. Initial entry into this market has required
substantial investment by the Registrant. The Registrant continues to project
near and long-term growth opportunities in both commercial OEM sales and the
aftermarket business. Major 1997 successes included Boeing's commitment to the
Boeing 717 aircraft on which the Registrant's APU is sole sourced; being named
the APU supplier for the Embraer 145, which is gaining acceptance in the new 50
passenger regional jet market; and the Registrant's successful bid for the U.S.
Airways APU contract for their fleet of A320 family of aircraft, which could
cover up to 400 aircraft. Additional investment in the product line is expected,
but at a lower rate than in prior years, as the family of existing APUs is
applied to a limited number of new aircraft platforms.
IMPACT OF YEAR 2000
The Registrant is working to correct its Year 2000 Issue, which if not
resolved could result in the failure of a variety of systems or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. The Registrant's assessment process related to the Year
2000 Issue has been divided into the following categories: business operating
systems (examples include accounting and treasury), other operating systems
(examples include engineering, computer aided drafting and environmental
systems), suppliers/customers, and products. Following is the current status of
each category.
Business Operating Systems
In 1994, the Registrant began the assessment and modification process to
address the Year 2000 Issue. Based on a completed assessment of all business
operating systems, the Registrant determined that it will be required to modify
or replace portions of its software so that its computer systems will function
properly, in the year 2000 and thereafter. The Registrant believes that with
modifications to existing software and, in some cases, conversions to new
software, the Year 2000 Issue will not pose significant operational problems.
However, if such modifications and conversions are not made, or are not
completed on a timely basis, the Year 2000 Issue could have a material impact on
the operations of the Registrant.
The Registrant is utilizing both internal and external resources to
reprogram, or replace, and test software for Year 2000 modifications. The
Registrant estimates the modification and replacement plan is approximately 50
percent complete and anticipates the majority of the systems will be Year 2000
ready by December 31, 1998, with all systems being revised or replaced by June
1999. The total cost of this portion of the Year 2000 project is estimated to be
between $10 million and $15 million and is being funded through operating cash
flows. To date, the Registrant has incurred approximately $4 million related to
the assessment of, and preliminary efforts on, its Year 2000 project, and the
development of a plan and systems modifications.
Other Operating Systems
The Registrant is in the process of finalizing its assessment of Year 2000
Issues associated with other operating systems and expects to complete the
assessment phase and establish an action plan by June 1998. The Registrant
further expects to complete all necessary revisions or replacements of these
systems by June 1999. Preliminary cost estimates for addressing these systems
are not currently available.
Suppliers/Customers
The Registrant has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Registrant's operations are vulnerable to those third parties' failure to
resolve their own Year 2000 Issues. The failure of the systems of such companies
could adversely effect the Registrant's operations.
Products
The Registrant is in the process of determining its exposure to
contingencies related to the Year 2000 Issue for the products it has sold, but
does not believe any exposure would have a material adverse affect on the
Registrant's financial position, results of operations or liquidity.
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<PAGE> 15
The costs of the project and the date on which the Registrant believes it
will complete the Year 2000 modifications are based on management's best
estimates. These estimates were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. These estimates may not be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Registrant's market risk sensitive
instruments and positions is the potential loss arising from adverse changes in
interest rates and foreign currency exchange rates as discussed below.
Interest Rate Risk
The Registrant's exposure to market risk for changes in interest rates
relates primarily to the Registrant's long-term debt obligations. The table
below presents principal amounts and related weighted average interest rates by
year of maturity and estimated fair value for the Registrant's debt obligations
as of December 31, 1997.
<TABLE>
<CAPTION>
FAIR
1998 1999 2000 2001 2002 THEREAFTER TOTAL VALUE
------ ------ ------ ------ ------ ---------- ------ ------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes payable
Variable rate............ $ 143 $ - $ - $ - $ - $ - $ 143 $ 143
Average interest rate.... 7.07% 7.07%
Long-term debt
Fixed rate............... $ 5 $ - $ - $ 100 $ - $ 100 $ 205 $ 236
Average interest rate.... 4.45% 9.47% 9.25% 9.25%
Variable rate............ $ 4 $ - $ 1 $ - $ 3 $ 9 $ 17 $ 17
Average interest rate.... 4.16% 5.00% 4.25% 4.33% 4.31%
</TABLE>
Foreign Currency Risk
The Registrant uses foreign currency forward exchange contracts to mitigate
exposure to foreign currency volatility. These contracts limit the Registrant's
exposure to both favorable and unfavorable currency fluctuations. Financial
instruments are not held or issued for trading purposes. On contracts which
qualify for hedge accounting of a firm commitment, a net investment in a foreign
entity, or an intercompany loan of a long-term nature, gains and losses are
deferred and included in the measurement of the hedged transaction upon
settlement. Foreign currency forward contracts that do not qualify for hedge
accounting are marked-to-market and unrealized gains and losses are included in
current period net income.
The table below provides information about the Registrant's foreign
currency forward exchange contracts. The information is provided in U.S. Dollar
equivalent amounts. The table presents the contractual amount (by year in which
the contracts expire) at the contract exchange rates, the weighted average
contractual foreign currency exchange rates and the estimated fair value of
these contracts as of December 31, 1997.
<TABLE>
<CAPTION>
CONTRACTUAL AMOUNT AVERAGE ESTIMATED
--------------------------------------------------- CONTRACT FAIR
1998 1999 2000 2001 2002 TOTAL RATE VALUE
------ ------ ------ ------ ------ ------ -------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Buy Contracts
British pound sterling... $ 2 $ 2 $ 2 $ 2 $ 2 $ 10 $ 1.50 $ 10
Singapore dollar......... 36 - - - - 36 1.52 32
Other.................... 7 - - - - 7 Various 7
------ ------ ------ ------ ------ ------ ------
Total................. $ 45 $ 2 $ 2 $ 2 $ 2 $ 53 $ 49
====== ====== ====== ====== ====== ====== ======
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
CONTRACTUAL AMOUNT AVERAGE ESTIMATED
--------------------------------------------------- CONTRACT FAIR
1998 1999 2000 2001 2002 TOTAL RATE VALUE
------ ------ ------ ------ ------ ------ -------- ---------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sell Contracts
French franc............. $ 66 $ - $ - $ - $ - $ 66 $ 5.92 $ 65
Other.................... 6 - - - - 6 Various 6
------ ------ ------ ------ ------ ------ ------
Total................. $ 72 $ - $ - $ - $ - $ 72 $ 71
====== ====== ====== ====== ====== ====== ======
</TABLE>
ENVIRONMENTAL MATTERS
For a detailed discussion, see the Environmental Matters note on pages 39
and 40.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $413 million at December 31, 1997, compared with $375
million at December 31, 1996. The $38 million increase was due primarily to
lower restructuring liabilities and higher inventories and other current assets,
partially offset by higher notes payable, accounts payable and other accrued
liabilities. Inventories increased in response to higher sales and order
activity in the Aerospace segment. The investment in higher inventories was
funded with increased notes payable and accounts payable. The significant
increase in other accrued liabilities resulted from higher warranty accruals,
increased loss contract reserves, and higher advanced payments received from
customers; all of which are a result of the previously mentioned growth in sales
and order activity in the Aerospace segment. Other current assets increased
primarily as a result of the advance funding of a trust for incurred but not
reported health care claims.
Net cash flow from operating activities increased to $252 million in 1997
from $168 million in 1996. The growth in cash flow from operations is due
primarily to higher net earnings and lower deferred tax assets resulting from
the realization of tax planning strategies, partially offset by the increase in
working capital previously discussed.
Net cash flow from operating activities in 1996 decreased to $168 million
from $197 million in 1995. Excluding the restructuring charges and related
items, operating cash flow did not change materially year over year as the
unfavorable impact of fluctuations in accounts receivable and accounts payable
balances were substantially offset by higher net earnings and the effect of
increased accrued expenses. The increase in accrued expenses in 1996, excluding
fluctuations in restructuring reserves, was due primarily to increases in
advanced payments received from customers and post-retirement benefit
liabilities.
In 1997, the Registrant used $121 million of cash for investing activities,
primarily for the purchase of fixed assets. The Registrant also used $140
million of cash for financing activities during 1997, primarily to repurchase
its common stock and pay dividends, partially offset by additional borrowings.
During 1996, the Registrant used $86 million of cash for investing
activities, primarily for the purchase of fixed assets and for acquisitions. In
1996, the Registrant used $144 million of cash for financing activities,
primarily to repay short-term borrowings, repurchase its common stock, and pay
dividends.
In 1995, the Registrant used $44 million of cash for investing activities,
primarily for the purchase of fixed assets, an investment in an industrial
revenue bond (IRB) trust, and the purchase of the ram air turbine product line
of Dowty Aerospace Hydraulics, Dowty Group Plc., Cheltenham, England, offset in
part by the proceeds from the sale of assets. The IRB trust was formed to fund
capital improvements at the Registrant's Auburn, Alabama, facility and proceeds
from the sale of assets included cash received in conjunction with the
dispositions of Spectronic and Advanced Power Technologies, Inc. During 1995,
the Registrant used $136 million of cash for financing activities, primarily to
repurchase its common stock, repay both short-term and long-term borrowings, and
pay dividends.
At December 31, 1997, a $335 million unsecured revolving domestic credit
facility, all of which was unused, was being provided to the Registrant by seven
banks. The Registrant also maintains foreign lines of credit for use by foreign
operations totaling the equivalent of approximately $10 million, all of which
were
16
<PAGE> 17
unused at December 31, 1997. The entire unused portion of these credit
facilities was available under the Registrant's most restrictive debt covenants
at December 31, 1997. Cash flow from operating activities and access to credit
facilities and the commercial paper market provide the Registrant with current
and continuing sources of liquidity.
The Registrant issues commercial paper in the United States, which is
supported by its domestic revolving credit facilities. At December 31, 1997 and
1996, the Registrant had $143 million and $118 million of commercial paper
outstanding, respectively.
On February 20, 1996, the Registrant's Board of Directors authorized a
two-for-one stock split payable as a 100 percent stock dividend which was
distributed on March 19, 1996, to shareholders of record on March 5, 1996.
Shareholders' equity has been restated to give retroactive recognition to the
stock split in prior periods by reclassifying from retained earnings to common
stock the par value of the additional shares arising from the split. In
addition, all references to the number of shares and per share amounts of the
Registrant's common stock have been restated to reflect the split.
On June 20, 1995, the Registrant was authorized by its Board of Directors
to issue up to an additional $150 million of long-term debt. During the fourth
quarter of 1995, the Registrant arranged a private shelf facility with the
Prudential Insurance Company of America which will allow it quick access to the
private debt market through November 1998. On February 8, 1996, the Registrant
filed a shelf registration statement on Form S-3 with the Securities and
Exchange Commission which will facilitate quick access to the public debt
market.
On January 26, 1998, the Registrant's Board of Directors authorized the
repurchase of up to an additional 10 million shares of its common stock,
bringing the total authorized for repurchase to 30 million shares. The
Registrant had purchased approximately 16 million shares through December 31,
1997 at a total purchase price of $445 million. In addition, approximately
930,000 shares have been repurchased through February 26, 1998. Funds for the
repurchases were provided by the Registrant's 4(2) commercial paper program and
operating activities. The Registrant will consider a variety of options for the
repurchase of the shares, from time to time, including open market purchases or
Dutch auctions. The Registrant currently intends to hold the repurchased shares
as treasury stock.
The Registrant uses debt to the extent internally generated cash flow is
insufficient to meet its requirements. Accordingly, the ratio of its total debt
to total capital is important since it indicates the Registrant's capacity to
absorb additional debt. This ratio was 40.2 percent at the end of 1997, compared
with 40.1 percent at the end of 1996, and 45.2 percent at the end of 1995. The
Registrant expects that for 1998 its total-debt-to-total-capital ratio will be
in the 40 percent to 45 percent range.
Capital expenditures, cash dividend payments, and working capital
requirements will be financed from the Registrant's continuing sources of
liquidity.
The Registrant remains actively involved in evaluating potential
acquisitions, which may be financed with internal cash flow, debt, stock, or a
combination thereof.
Capital expenditures (excluding leased equipment) consisting of normal
replacements of property, plant, and equipment and increased investment in
machinery and equipment related to increasing volume and new manufacturing
process strategies were $119 million in 1997 compared with $63 million in 1996.
Capital expenditures are expected to increase to approximately $130 million in
1998, as the new manufacturing process strategies program and an information
systems project continue in the Aerospace segment.
Total research and development expenditures for the years 1997, 1996, and
1995 were $117 million, $98 million, and $113 million, respectively, of which
$44 million, $43 million, and $47 million, respectively, was funded by
customers. The Registrant expects 1998 research and development expenditures to
be approximately $135 million, including approximately $45 million of which will
be customer funded.
TAX ISSUES
For a detailed discussion, see the Income Taxes note on pages 33 through
35.
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<PAGE> 18
GOVERNMENT CONTRACT MATTERS
A portion of the Registrant's business results from contracts with or for
government agencies. Military sales in 1997 were $267 million, of which 55
percent and 45 percent were from prime contracts and subcontracts, respectively.
Military sales in 1996 were $240 million, of which 48 percent and 52 percent
were from prime contracts and subcontracts, respectively. Military sales in 1995
were $243 million, of which 42 percent and 58 percent were from prime contracts
and subcontracts, respectively. In addition, sales where the final customer was
the U.S. government represented 65 percent, 72 percent, and 75 percent of total
military sales in 1997, 1996, and 1995, respectively.
For additional discussions on government contract matters, see the
Government Contract Matters note on page 40.
STRATEGY
The Registrant is known internationally for the quality of its engineered
products. In the future, the Registrant intends to continue in this area of
excellence while focusing on new product and market opportunities. The emphasis
will be on sales growth through the development or acquisition of products of
like technology and profit potential. Additionally, the Registrant is focusing
on improving its manufacturing capabilities and processes so that its ability to
manufacture and serve its customers will continue to be important competitive
advantages.
The new business and manufacturing process strategies will be focused
through decentralized organizations. Focused business units and enterprises will
be used to implement customized improvements in work flow, cycle time
reductions, and customer responsiveness.
OUTLOOK
The following discussion contains forward-looking information which is
subject to market risks and opportunities that could have a material impact on
actual results, and accordingly should be considered in conjunction with the
cautionary language set forth in the Registrant's most recent report on Form 8-K
which is on file with the Securities and Exchange Commission.
Aerospace
The sustained strength in commercial aircraft order rates during 1997 will
produce increased shipments to OEM customers during 1998; while aftermarket
shipments will be up slightly. Aerospace military sales are expected to show
continued growth in 1998 as a result of increased shipments to foreign military
customers.
Industrial
The Registrant's Industrial businesses are expected to be up slightly in
1998. A healthy U.S. industrial economy and improved European markets may be
partially offset by the volatility in Asian markets. In addition, the
Registrant's Industrial operating profits are expected to improve as benefits
from the restructuring, which began in 1996, of Sullair Europe's air compressor
business continue to be realized.
Forecast
While the Registrant is concerned about the recent economic turmoil in
Asia, the impact on the Registrant so far has been minimal. Taking into
consideration the uncertainties of this situation, the Registrant has adjusted
its 1998 projection accordingly. Assuming the situation in Asia does not
deteriorate materially from this point, the Registrant projects that 1998 sales
should increase between 10 percent and 15 percent and our 1998 operating profit
should be in the 19 percent range. As a result, we expect to generate diluted
earnings per share of between $3.55 to $3.80, excluding restructuring costs,
one-time items and any future share repurchases. Were it not for the Asian
crisis and the related impact, the diluted earnings per share forecast would
have been approximately $.20 higher. The Registrant's goal for the years beyond
1998 is to increase earnings per share by at least 15 percent per year. For
1998, the Registrant plans to invest approximately
18
<PAGE> 19
$130 million in capital expenditures and expend approximately $135 million on
research and development. Even with this high level of research and development
and capital spending, the Registrant expects to generate operating cash flow
after capital expenditures of between $150 million and $175 million in 1998. The
Registrant's goal is to increase cash flow in 1999 and 2000 by at least $25
million per year. The Registrant will continue to invest its cash for optimal
returns, either by investing in the Company or by growing the Company through
acquisitions. The Registrant expects that its total-debt-to-total-capital ratio
will be in the range of 40 percent to 45 percent at year end 1998.
Total Aerospace sales are projected to increase between 15 percent and 20
percent for 1998 with commercial OEM sales projected to increase by between 25
percent and 30 percent. Commercial aftermarket sales should increase by about 5
percent. Military OEM sales are expected to increase between 25 percent and 30
percent and military aftermarket sales should be up by 5 percent to 10 percent.
Because of the 1996 and 1997 acquisitions and the strategic initiatives
spending, the Aerospace segment operating profit margin is expected to be
reduced by about two percentage points. Despite this reduction, the Aerospace
segment is expected to generate an operating profit margin in excess of 20
percent for 1998, which should result in Aerospace operating profit growing by
approximately 20 percent.
The Registrant expects Industrial segment sales to grow by between 5
percent and 10 percent in 1998. The 1998 Industrial segment operating profit
margin is expected to be between 16.5 percent and 17 percent, which should
result in Industrial segment operating profit growing by 5 percent to 10
percent.
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<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report
The management of Sundstrand is responsible for the preparation and
presentation of the consolidated financial statements and related financial
information included in this Annual Report on Form 10-K. These have been
prepared in conformity with generally accepted accounting principles
consistently applied and, as such, include amounts based on estimates by
management. The consolidated financial statements have been audited by Ernst &
Young LLP, the Registrant's independent auditors.
Management also is responsible for maintaining a system of internal
accounting controls which is designed to provide reasonable assurance that
assets are safeguarded and that transactions are executed in accordance with
management's authorization and are properly recorded. To assure the maintenance
of effective internal controls, management adopts and disseminates policies,
procedures and directives; selects and trains qualified personnel; establishes
organizational structures which permit the delegation of authority and
responsibility; and maintains an active program of internal audits and
appropriate follow-up by management.
The management of Sundstrand also recognizes its responsibility to promote
a strong ethical climate throughout the Company. Toward this end, the Registrant
provides training in ethical decision making to each employee. In addition, each
employee receives a copy of the Registrant's manual on Business Conduct and
Ethics.
The Board of Directors elects an Audit Committee from among its members who
are not employees of the Registrant. The Audit Committee meets periodically with
management, the internal auditors, and the independent auditors to review the
work of each and satisfy itself that they are properly discharging their
responsibilities. Both the independent auditors and internal auditors have free
access to the Audit Committee, without the presence of management, to discuss
internal accounting controls, auditing, and financial reporting matters.
/s/ Robert H. Jenkins /s/ Paul Donovan
Robert H. Jenkins Paul Donovan
Chairman of the Board, President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
January 27, 1998
- --------------------------------------------------------------------------------
Independent Auditors' Report
To the Shareholders and Board of Directors, Sundstrand Corporation
We have audited the accompanying consolidated balance sheets of Sundstrand
Corporation and subsidiaries as of December 31, 1997 and 1996 and the related
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Registrant's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sundstrand
Corporation and subsidiaries at December 31, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 27, 1998
20
<PAGE> 21
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
------ ------ ------
(AMOUNTS IN MILLIONS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $1,752 $1,521 $1,473
Costs and expenses:
Costs of products sold.................................... 1,148 990 957
Marketing and administration.............................. 286 300 297
Restructuring charges, net................................ - 24 58
------ ------ ------
1,434 1,314 1,312
------ ------ ------
Earnings before other income (deductions)................... 318 207 161
Other income (deductions):
Interest expense.......................................... (30) (29) (33)
Interest income........................................... 6 5 5
Other, net................................................ - 1 2
------ ------ ------
(24) (23) (26)
------ ------ ------
Earnings before income taxes and cumulative effect of
accounting
change.................................................... 294 184 135
Less income taxes........................................... 106 70 56
------ ------ ------
Net earnings before cumulative effect of accounting
change.................................................... 188 114 79
Cumulative effect of change in method of accounting for
certain
consulting costs, net of taxes............................ (5) - -
------ ------ ------
Net earnings................................................ $ 183 $ 114 $ 79
====== ====== ======
Weighted-average number of common shares outstanding........ 59.8 61.0 62.7
Weighted-average number of common shares outstanding --
assuming dilution......................................... 60.2 61.3 62.9
Basic earnings per share:
Earnings before cumulative effect of accounting change.... $ 3.15 $ 1.87 $ 1.25
Cumulative effect of change in accounting................. (.09) - -
------ ------ ------
Net earnings.............................................. $ 3.06 $ 1.87 $ 1.25
====== ====== ======
Diluted earnings per share:
Earnings before cumulative effect of accounting change.... $ 3.13 $ 1.86 $ 1.25
Cumulative effect of change in accounting................. (.09) - -
------ ------ ------
Net earnings.............................................. $ 3.04 $ 1.86 $ 1.25
====== ====== ======
Cash dividends per common share............................. $ .68 $ .68 $ .60
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE> 22
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------ ------ -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Cash flow from operating activities:
Net earnings.............................................. $ 183 $ 114 $ 79
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation........................................... 58 61 61
Amortization........................................... 15 12 16
Deferred income taxes.................................. 51 6 (14)
Change in operating assets and liabilities excluding
the effects of acquisitions and divestitures:
Accounts receivable.................................. (13) (18) 6
Inventories.......................................... (75) (37) (32)
Other assets......................................... (20) 5 8
Accounts payable..................................... 23 (4) 9
Accrued expenses..................................... 23 20 58
Other.................................................. 7 9 6
----- ----- ----
Total adjustments...................................... 69 54 118
----- ----- ----
Net cash provided by operating activities................... 252 168 197
----- ----- ----
Cash flow from investing activities:
Cash paid for property, plant, and equipment.............. (119) (64) (63)
Proceeds from the sale of assets.......................... 15 2 43
Cash paid for acquisitions, net of cash acquired.......... (18) (29) (8)
Investment in IRB trust................................... 1 5 (14)
Investments in equity companies........................... - - (2)
----- ----- ----
Net cash used for investing activities...................... (121) (86) (44)
----- ----- ----
Cash flow from financing activities:
Net borrowings (payments) supported by lines of credit.... 25 (50) (26)
Principal payments on long-term debt...................... (4) (7) (23)
Issuance of long-term debt................................ - - 8
Purchase of treasury stock................................ (125) (49) (60)
Proceeds from stock options exercised..................... 5 3 3
Dividends paid............................................ (41) (41) (38)
----- ----- ----
Net cash used for financing activities...................... (140) (144) (136)
----- ----- ----
Effect of exchange rate changes on cash..................... 4 5 (8)
----- ----- ----
Increase (decrease) in cash and cash equivalents.......... (5) (57) 9
Cash and cash equivalents at January 1.................... 18 75 66
----- ----- ----
Cash and cash equivalents at December 31.................... $ 13 $ 18 $ 75
===== ===== ====
Supplemental cash flow information:
Interest paid............................................. $ 29 $ 31 $ 34
Income taxes paid......................................... $ 74 $ 55 $ 64
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE> 23
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
------- -------
(AMOUNTS IN MILLIONS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 13 $ 18
Accounts receivable, net.................................. 326 313
Inventories, net of progress payments..................... 462 378
Deferred income taxes..................................... 49 53
Other current assets...................................... 30 10
------ ------
Total current assets................................... 880 772
Property, Plant, and Equipment, net......................... 472 427
Intangible Assets, net...................................... 265 273
Deferred Income Taxes....................................... 34 78
Other Assets................................................ 49 45
------ ------
$1,700 $1,595
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable............................................. $ 143 $ 118
Long-term debt due within one year........................ 9 4
Accounts payable.......................................... 124 104
Accrued salaries, wages, and commissions.................. 26 25
Accrued postretirement benefits other than pensions....... 17 18
Restructuring liability................................... 5 20
Other accrued liabilities................................. 143 108
------ ------
Total current liabilities.............................. 467 397
Long-Term Debt.............................................. 213 222
Accrued Postretirement Benefits Other Than Pensions......... 357 367
Other Liabilities........................................... 121 96
------ ------
1,158 1,082
------ ------
SHAREHOLDERS' EQUITY
Common stock, par value $.50 per share; authorized
150,000,000 shares; issued 1997 and 1996 --
75,686,028 shares (including shares in treasury)....... 38 38
Additional contributed capital............................ 160 155
Retained earnings......................................... 819 677
Foreign currency translation adjustment................... (9) (8)
Common stock in treasury (at cost); 1997 -- 17,598,391
shares and
1996 -- 15,324,019 shares.............................. (456) (337)
Unamortized value of restricted stock issued.............. (10) (12)
------ ------
542 513
------ ------
$1,700 $1,595
====== ======
</TABLE>
See Notes to Consolidated Financial Statements
23
<PAGE> 24
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(AMOUNTS IN MILLIONS
EXCEPT SHARE DATA)
<S> <C> <C> <C>
Common Stock
Balance at December 31.................................... $ 38 $ 38 $ 38
===== ===== =====
Additional Contributed Capital
Balance at January 1...................................... $ 155 $ 151 $ 147
Stock issued under employee stock plans................... 5 4 4
----- ----- -----
Balance at December 31.................................... $ 160 $ 155 $ 151
===== ===== =====
Retained Earnings
Balance at January 1...................................... $ 677 $ 604 $ 563
Net earnings.............................................. 183 114 79
Cash dividends paid....................................... (41) (41) (38)
----- ----- -----
Balance at December 31.................................... $ 819 $ 677 $ 604
===== ===== =====
Foreign Currency Translation Adjustment
Balance at January 1...................................... $ (8) $ (11) $ (9)
Adjustment for the year................................... (1) 3 (2)
----- ----- -----
Balance at December 31.................................... $ (9) $ (8) $ (11)
===== ===== =====
Common Stock in Treasury
Balance at January 1...................................... $(337) $(287) $(234)
Purchase of 2,506,132, 1,372,074, and 1,920,400 shares for
treasury in 1997, 1996, and 1995, respectively......... (124) (51) (60)
Stock issued under employee stock plans................... 7 5 8
Purchase of shares previously issued under employee stock
plans.................................................. (2) (4) (1)
----- ----- -----
Balance at December 31.................................... $(456) $(337) $(287)
===== ===== =====
Unamortized Value of Restricted Stock Issued
Balance at January 1...................................... $ (12) $ (14) $ (11)
Stock issued under employee stock plans................... (3) (2) (8)
Purchase of shares previously issued under employee stock
plans.................................................. 1 2 1
Net amortization of deferred compensation under employee
stock plans............................................ 4 2 4
----- ----- -----
Balance at December 31.................................... $ (10) $ (12) $ (14)
===== ===== =====
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE> 25
SUNDSTRAND CORPORATION AND SUBSIDIARIES
INFORMATION BY BUSINESS SEGMENT
Financial data with respect to the various business segments in which the
Registrant operates are set forth below. Intersegment sales are immaterial.
Military sales occur primarily in the Aerospace segment.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Net sales
Aerospace................................................. $1,001 $ 785 $ 726
Industrial................................................ 751 736 747
------ ------ ------
$1,752 $1,521 $1,473
====== ====== ======
The above includes:
Military sales (final customer is primarily the U.S.
government)............................................ $ 267 $ 240 $ 243
====== ====== ======
Export sales of domestically manufactured products:
Europe................................................. $ 228 $ 166 $ 152
Asia/Pacific Rim....................................... 158 143 134
North America.......................................... 109 105 83
South America.......................................... 51 33 28
Other.................................................. 32 24 20
------ ------ ------
$ 578 $ 471 $ 417
====== ====== ======
- ------------------------------------------------------------------------------------------
Operating profit
Aerospace................................................. $ 209 $ 138 $ 54
Industrial................................................ 128 84 121
------ ------ ------
Total operating profit................................. 337 222 175
Interest expense............................................ (30) (29) (33)
Interest income............................................. 6 5 5
General corporate expenses.................................. (19) (14) (14)
Other....................................................... - - 2
------ ------ ------
Earnings before income taxes and cumulative effect of
accounting change...................................... $ 294 $ 184 $ 135
====== ====== ======
- ------------------------------------------------------------------------------------------
Assets
Aerospace................................................. $ 952 $ 846 $ 813
Industrial................................................ 578 558 596
Corporate................................................. 170 191 184
------ ------ ------
$1,700 $1,595 $1,593
====== ====== ======
Capital expenditures (includes leased equipment)
Aerospace................................................. $ 74 $ 35 $ 34
Industrial................................................ 35 28 27
Corporate................................................. 10 - 1
------ ------ ------
$ 119 $ 63 $ 62
====== ====== ======
Depreciation and amortization (includes leased equipment)
Aerospace................................................. $ 49 $ 48 $ 53
Industrial................................................ 22 23 22
Corporate................................................. 2 2 2
------ ------ ------
$ 73 $ 73 $ 77
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements
25
<PAGE> 26
SUNDSTRAND CORPORATION AND SUBSIDIARIES
INFORMATION BY BUSINESS SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Geographic Areas
Net sales
Domestic............................................ $1,587 $1,356 $1,301
Foreign(a).......................................... 165 165 172
------ ------ ------
$1,752 $1,521 $1,473
====== ====== ======
Operating profit (loss)
Domestic............................................ $ 348 $ 241 $ 158
Foreign............................................. (11) (19) 17
------ ------ ------
$ 337 $ 222 $ 175
====== ====== ======
Assets
Domestic............................................ $1,543 $1,432 $1,405
Foreign............................................. 157 163 188
------ ------ ------
$1,700 $1,595 $1,593
====== ====== ======
</TABLE>
(a) Amounts do not include export sales of domestically manufactured product.
- --------------------------------------------------------------------------------
Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------
MARCH 31 JUNE 30(C) SEPTEMBER 30(A) DECEMBER 31(B)(D)
-------- ---------- --------------- -----------------
(AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Net sales............................... $389 $440 $433 $ 490
Gross profit............................ $132 $149 $151 $ 172
Net earnings............................ $ 35 $ 43 $ 55 $ 50
Basic earnings per share(c)............. $.58 $.71 $.92 $ .85
Diluted earnings per share(c)........... $.58 $.71 $.91 $ .84
1996
Net sales............................... $368 $371 $371 $ 411
Gross profit............................ $127 $128 $130 $ 146
Net earnings............................ $ 26 $ 34 $ 34 $ 20
Basic earnings per share(c)............. $.42 $.56 $.57 $ .32
Diluted earnings per share(c)........... $.42 $.56 $.56 $ .32
</TABLE>
(a) 1997 includes a one-time curtailment gain of $15 million before taxes ($9
million after taxes equivalent to $.15 per share) related to an amendment to
the Registrant's Retiree Health Insurance Plans.
(b) 1997 includes a charge of $9 million before taxes ($5 million after taxes
equivalent to $.09 per share) related to the cumulative effect of a change
in the method of accounting for certain consulting costs.
(c) The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with Statement of Financial Accounting Standards No.
128, "Earnings Per Share."
(d) 1996 includes a restructuring charge of $32 million before taxes ($23
million after taxes equivalent to $.38 per share) related to the operations
of Sullair Europe S.A.
(e) 1996 includes pension and post-retirement benefit curtailment gains of $8
million before taxes ($5 million after taxes equivalent to $.08 per share)
related to the shutdown of the Lima, Ohio, facility.
See Notes to Consolidated Financial Statements
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF OPERATIONS
Sundstrand Corporation is a multinational organization engaged in the
design, manufacture, and sale of a variety of proprietary, technology-based
components and systems for diversified international aerospace and industrial
markets. The Aerospace and Industrial businesses represent approximately 60
percent and 40 percent of total sales, respectively. The principal markets for
the Aerospace business are airframe manufacturers located primarily in the
United States and Europe as well as world airlines. The ultimate customer for a
significant portion of the Aerospace business is the United States government.
The Industrial businesses serve a wide range of markets, primarily in the United
States and Europe, but with growing activity in Asia and South America.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION provide for the inclusion of the accounts of
Sundstrand Corporation and all subsidiaries. All intercompany transactions are
eliminated in consolidation.
ESTIMATES and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period are required to be made by management in the
preparation of financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
CASH EQUIVALENTS are considered by the Registrant to be all highly liquid
debt instruments purchased with original maturities of three months or less.
SALES UNDER LONG-TERM CONTRACTS, a portion of which are with the U.S.
government, are accounted for under the percentage of completion method. The
Registrant enters into long-term contracts which require it to develop or
advance state-of-the-art technology products. Sales on developmental contracts
are recorded as the related costs are incurred and include estimated profits
calculated on the basis of the relationship between costs incurred and total
estimated costs (cost-to-cost method of percentage of completion). The
Registrant also enters into long-term contracts for the manufacture of products.
Sales on production-type contracts are recorded as deliveries are made
(units-of-delivery method of percentage of completion). Marketing and
administrative costs are expensed as incurred.
On a selective basis, the Registrant may enter into a contract to research
and develop or manufacture a product with a loss anticipated at the date the
contract is signed. These contracts are entered into in anticipation that
profits will be obtained from future contracts for the same or similar products.
These loss contracts often provide the Registrant with intellectual property
rights which, in effect, establish it as the sole producer of certain products.
Such losses are recognized at the date the Registrant becomes contractually
obligated, with revisions made as changes occur in the related estimates to
complete.
Certain contracts and subcontracts are subject to government audit and
review. Information related to government contract matters is presented on page
40.
INVENTORIES are stated at the lower of cost (principally first-in,
first-out method) or market. Certain inventories are valued using the last-in,
first-out method. Inventoried costs relating to long-term contracts are
accounted for based on the percentage-of-completion methods described above.
PROPERTY, PLANT, AND EQUIPMENT is recorded at cost and depreciation is
generally provided on the straight-line basis by charges to expense at rates
based on the estimated useful lives of the assets. Estimated useful lives range
from 3 to 20 years for machinery and equipment and 10 to 40 years for buildings.
Expenditures for new facilities and expenditures that substantially increase the
useful lives of the property are capitalized. Maintenance and repairs are
expensed as incurred.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INTANGIBLE ASSETS of $265 million and $273 million at December 31, 1997 and
1996, respectively (net of accumulated amortization of $108 million and $97
million, respectively), consist primarily of goodwill associated with certain
acquisitions. Goodwill is amortized on a straight-line basis over a period not
to exceed 40 years.
The Registrant annually evaluates whether a change in the estimated useful
life of goodwill is warranted or whether the remaining goodwill balance may be
impaired. The Registrant believes that no impairment of goodwill has occurred
related to the balance at December 31, 1997. However, if the estimated
cumulative undiscounted cash flow, before interest, over the remaining life of
the associated goodwill indicated an impairment, a reduction for impairment of
goodwill would be recorded in accordance with the Registrant's policy. As a
result of the Sullair Europe restructuring discussed on pages 38 and 39, a $7
million impairment charge was taken as part of the 1996 restructuring charge.
STOCK-BASED COMPENSATION is recorded based on the intrinsic value method in
accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees." The Stock-Based Compensation footnote on pages
36 through 38 contains a summary of the pro forma effects to reported net income
and earnings per share for 1997, 1996 and 1995 as if the Registrant had elected
to recognize compensation cost based on the fair value of the options granted at
the grant date as prescribed by Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation."
DERIVATIVE FINANCIAL INSTRUMENTS in the form of foreign currency forward
contracts are entered into by the Registrant to mitigate exposure to foreign
currency volatility. These contracts limit the Registrant's exposure to both
favorable and unfavorable currency fluctuations. Financial instruments are not
held or issued for trading purposes. On contracts which qualify for hedge
accounting of a firm commitment, a net investment in a foreign entity, or an
intercompany loan of a long-term nature, gains and losses are deferred and
included in the measurement of the hedged transaction upon settlement. Foreign
currency forward contracts that do not qualify for hedge accounting are
marked-to-market and unrealized gains and losses are included in current period
net income.
The Registrant has strict controls regarding the use of derivative
financial instruments. The required level of authorization for the use of
derivative instruments increases based on their relative risk characteristics.
The use of leveraged derivatives is prohibited. In order to manage credit risk
related to foreign currency forward contracts, the Registrant utilizes only
highly rated commercial banks or financial institutions for such purposes.
Compliance with this policy is monitored on an ongoing basis, and is reviewed
and approved annually by the Finance Committee of the Registrant's Board of
Directors.
INFORMATION BY BUSINESS SEGMENT is presented on pages 25 and 26.
QUARTERLY RESULTS are presented on page 26.
CHANGES IN ACCOUNTING PRINCIPLES
In the fourth quarter of 1997, the Registrant adopted Emerging Issues Task
Force Issue No. 97-13 (EITF Issue No. 97-13), "Accounting for Costs Incurred in
Connection with a Consulting Contract That Combines Business Process
Reengineering and Information Technology Transformation." EITF Issue No. 97-13,
which was issued and effective on November 20, 1997, requires that reengineering
costs previously capitalized be written-off and displayed as a cumulative effect
of a change in accounting principle during the quarter that includes November
20, 1997 (the Registrant's fourth quarter). Future reengineering costs are
required to be expensed as incurred. As a result of this adoption, the
Registrant recorded a pretax charge of $9 million ($5 million after taxes or
$.09 per share) as a cumulative effect of a change in accounting principle in
the consolidated statement of earnings. Other than the cumulative effect, this
change did not have a significant impact on the Registrant's net earnings during
1997.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share." Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement No. 128
requirements.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This statement requires public enterprises to report
financial and descriptive information about operating segments, defined as
components of an enterprise about which separate financial information is
available and is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The statement
must be adopted no later than fiscal year end 1998. The Registrant is currently
evaluating the effect that implementation of the new standard will have on its
segment reporting disclosures.
ACQUISITIONS
During 1997, the Registrant purchased the remaining portions of the Leach
International Corporation's Automated Power Management System (APMS) product
line. The electrical load management technology and some related business was
purchased from Leach during 1996. Also during 1996, the Registrant acquired
Labinal S.A.'s interest in and related assets of APIC, a joint venture formed in
1989 by Sundstrand and Labinal to market and sell auxiliary power units to the
commercial transport airline market.
STOCK SPLIT
On February 20, 1996, the Registrant's Board of Directors authorized a
two-for-one stock split payable as a 100 percent stock dividend which was
distributed on March 19, 1996, to shareholders of record on March 5, 1996.
Shareholders' equity has been restated to give retroactive recognition to the
stock split in prior periods by reclassifying from retained earnings to common
stock the par value of the additional shares arising from the split. All
references to the number of shares and per share amounts of the Registrant's
common stock have been restated to reflect the split.
ACCOUNTS RECEIVABLE, NET
The components of net accounts receivable at December 31, 1997 and 1996,
were:
<TABLE>
<CAPTION>
1997 1996
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
U.S. government
Amounts billed.......................................... $ 23 $ 30
Unbilled costs and accrued profits...................... 13 16
---- ----
36 46
Commercial................................................ 290 267
---- ----
$326 $313
==== ====
</TABLE>
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
The components of inventories at December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Raw materials............................................. $ 59 $ 45
Work in process........................................... 160 151
Finished goods and parts.................................. 260 199
---- ----
479 395
Less progress payments.................................... 17 17
---- ----
$462 $378
==== ====
</TABLE>
Prior to the application of progress payments, the inventories shown above
included costs of $82 million and $65 million at December 31, 1997 and 1996,
respectively, related to long-term contracts.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1997 and 1996, was
classified as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Land and improvements..................................... $ 39 $ 39
Buildings and improvements................................ 231 226
Machinery and equipment................................... 900 822
------ ------
1,170 1,087
Less accumulated depreciation............................. 698 660
------ ------
$ 472 $ 427
====== ======
</TABLE>
PENSION BENEFITS
The Registrant has defined benefit pension plans covering substantially all
U.S. employees. Pay-related plans generally provide pension benefits that are
based on the employee's highest compensation during a three-year period or the
employee's average career compensation, prior to retirement. Nonpay-related
plans provide benefits of stated amounts for each year of service. Pension plans
for U.S. employees have been funded at amounts equal to or greater than the
minimum required by ERISA.
Net periodic pension cost for 1997, 1996, and 1995 included:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Service cost of current period........................ $ 17 $19 $ 16
Interest cost on projected benefit obligation......... 48 47 47
Less recognized gain on plan assets................... 174 87 130
Net amortization and deferral......................... 120 35 79
---- --- ----
Net periodic pension cost............................. $ 11 $14 $ 12
==== === ====
</TABLE>
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The funded status of the plans at December 31, 1997 and 1996, was:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
ASSETS IN ACCUMULATED ASSETS IN ACCUMULATED
EXCESS OF BENEFITS EXCESS OF BENEFITS
ACCUMULATED IN EXCESS ACCUMULATED IN EXCESS
BENEFITS OF ASSETS BENEFITS OF ASSETS
----------- ----------- ----------- -----------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Benefit obligation liability:
Vested benefits.............................. $ 502 $ 9 $ 448 $ 7
Nonvested benefits........................... 61 2 54 1
----- --- ----- ---
Accumulated benefit obligation............... 563 11 502 8
Effect of projected future compensation
levels.................................... 112 3 106 2
----- --- ----- ---
Projected benefit obligation................. 675 14 608 10
Less plan assets at market value............... 854 - 715 -
----- --- ----- ---
Projected benefit obligation in excess of (less
than) plan assets............................ (179) 14 (107) 10
Adjustments for deferrals of benefit obligation
liability not yet recognized in cost:
Net experience gain (loss)................... 200 (4) 127 (1)
Initial net obligation....................... (14) - (17) -
Prior service cost due to plan amendments.... (3) (3) (2) (2)
Adjustment required to recognize minimum
liability.................................... - 4 - 1
----- --- ----- ---
Accrued pension liability...................... $ 4 $11 $ 1 $ 8
===== === ===== ===
</TABLE>
The year end measures of benefit obligation are based on an actuarial
measurement date of October 1 of the respective years. The projected benefit
obligation was determined using an assumed discount rate of 7.50 percent at
December 31, 1997, and 7.75 percent at December 31, 1996. The assumed
weighted-average long-term rate of compensation increase was 4.25 percent at
December 31, 1997 and 4.5 percent at December 31, 1996. The assumed long-term
rate of return on plan assets was 9.0 percent at December 31, 1997, 1996, and
1995. Plan assets consist principally of common stocks and fixed income
investments. During 1997, one-year arrangements were executed limiting the
Registrant's exposure to investment gains and losses on plan assets.
The Registrant also sponsors four defined contribution retirement benefit
plans that cover substantially all U.S. and Puerto Rican employees. All of these
plans are subject to ERISA. Three of the plans are intended to be maintained
under the provisions of the Internal Revenue Code of 1986, as amended, and one
plan is intended to be maintained under the Puerto Rico Income Tax Act of 1954,
as amended. Two of these plans provide that the employer will match certain
portions of the employee-directed contributions. The Registrant's matching
contributions to the above plans were $3 million in 1997, $1 million in 1996 and
less than $1 million in 1995.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Registrant provides health and life insurance benefits for retired
employees and certain dependents when employees become eligible for these
benefits by satisfying plan provisions, which include certain age and/or service
requirements. Health and life insurance benefits for retirees of domestic
operations are provided through insurance contracts, a group benefit trust or
general assets of the Registrant. Health and life insurance benefits for
retirees of foreign operations, where applicable, are provided through
government-sponsored plans to which contributions by the Registrant are
required. The health insurance plans covering substantially all U.S. employees
are contributory, with contributions adjusted annually, and these plans contain
other cost-sharing features such as deductibles and coinsurance. Currently, the
Registrant
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
requires contributions, which are adjusted annually, primarily from employees
who retired subsequent to 1991. The Registrant has the right to modify or
terminate any of these plans in the future.
The components of post-retirement benefit cost for 1997, 1996, and 1995
were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 4 $ 4 $ 3
Interest cost............................................. 21 21 21
Net amortization and deferral............................. (8) (4) (7)
--- --- ---
Postretirement benefit cost............................... $17 $21 $17
=== === ===
</TABLE>
The funded status of the plans at December 31, 1997 and 1996, was:
<TABLE>
<CAPTION>
1997 1996
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................ $190 $215
Eligible active plan participants....................... 14 13
Other active plan participants.......................... 33 57
---- ----
237 285
Plan assets at market value............................... - -
---- ----
Accumulated postretirement benefit obligation in excess of
plan assets............................................. 237 285
Unrecognized prior period gain............................ 104 85
Unrecognized prior service gain........................... 33 19
---- ----
Postretirement benefit liability recognized in the balance
sheet................................................... $374 $389
==== ====
</TABLE>
The year end measures of benefit obligation are based on an actuarial
measurement date of October 1 of the respective years. The assumed
weighted-average annual rate of increase in the per capita cost of medical and
prescription drug benefits (applicable only to employees who retired prior to
1992) is 5.5 percent for 1998 and is assumed to decrease gradually each year
from 1998 to 2000 and remain level at 5 percent thereafter. The assumed
weighted-average annual rate of increase in the per capita cost of dental
benefits (applicable only to employees who retired prior to 1992) is 5 percent
in 1998 and is expected to remain level at that rate thereafter. These rates
have no effect on the Registrant's costs for employees retiring after 1991 as
the Registrant's policy is to increase retiree contributions so that the
Registrant's annual per capita cost increases at the general inflation rate. The
assumed annual rate of increase in the general inflation rate (applicable to
employees retiring after 1991) is 4 percent.
A 1 percent increase in the annual health care trend rates would have
increased the accumulated post-retirement benefit obligation at December 31,
1997 and 1996, by $15 million and $18 million, respectively, and increased
post-retirement benefit expense for 1997, 1996, and 1995 by $1 million in each
year. The weighted-average discount rate used to estimate the accumulated
post-retirement benefit obligation was 7.75 percent at December 31, 1997, and
8.0 percent at December 31, 1996.
Effective September 1997, the Registrant amended its Retiree Health
Insurance Plans to modify the period in which the service requirements could be
fulfilled. This amendment resulted in a $15 million curtailment gain in 1997. It
also reduced the net periodic postretirement cost by $3 million for 1997.
During 1996, the Registrant closed its Lima, Ohio, facility at which time a
$6 million curtailment gain was recognized. The decision to close this facility
was made in 1995 and a $12 million curtailment loss was
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recognized at that time. Both amounts have been reflected in the restructuring
charge line in their respective years. For more information related to this
charge see the Restructurings note on pages 38 and 39.
NOTES PAYABLE AND LONG-TERM DEBT
Notes payable, consisting of commercial paper and bank borrowings, were
$143 million and $118 million at an average interest rate of 7.1 percent and 6.2
percent at December 31, 1997 and 1996, respectively. At December 31, 1997, the
Registrant maintained a $335 million committed domestic revolving credit
facility. Commitment fees incurred were not material. The Registrant also
maintained uncommitted foreign lines of credit for use by its foreign operations
totaling the equivalent of approximately $10 million at December 31, 1997.
Under a long-term debt agreement in place at December 31, 1997, payments of
dividends are limited by the requirement to maintain a minimum level of net
worth. At December 31, 1997, net worth exceeded the maintenance level by
$314 million.
The composition of long-term debt at December 31, 1997 and 1996, was:
<TABLE>
<CAPTION>
1997 1996
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
9.48% notes due 2001...................................... $100 $100
9.15% notes due 2003...................................... 50 50
9.34% notes due 2006...................................... 50 50
Other, including $17 million of variable rate debt,
weighted average rate of 4.3% at December 31, 1997...... 22 26
---- ----
222 226
Less amount due within one year........................... 9 4
---- ----
Long-term debt (less current portion)..................... $213 $222
==== ====
</TABLE>
In 1996, the Registrant filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission for the public issuance of up to $150 million
of unsecured debt of the Registrant. As of December 31, 1997, no debt of the
Registrant has been issued under this facility.
Total principal payments required under long-term debt agreements for the
five years subsequent to December 31, 1997, are $9 million in 1998, less than $1
million in 1999, $1 million in 2000, $100 million in 2001, and $3 million in
2002.
INCOME TAXES
Income tax expense for the three years ended December 31, 1997, consisted
of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Current income tax expense........................... $152 $ 78 $ 69
Deferred income tax benefit.......................... (50) (8) (13)
---- ---- ----
Total income tax expense........................... $102 $ 70 $ 56
==== ==== ====
Total income tax expense includes:
State tax.......................................... $ 12 $ 10 $ 7
Foreign tax........................................ $ 7 $ - $ 8
</TABLE>
State income taxes for 1997, 1996, and 1995 were principally current.
Foreign income taxes were principally current for 1997 and 1995, while 1996
included $9 million of current tax expense offset by $9 million of deferred tax
benefit.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total income tax expense for each year varied from the amount computed by
applying the statutory U.S. federal income tax rate to earnings before income
taxes for the reasons set forth in the following reconciliation:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Income tax expense at the statutory rate................ $100 $ 64 $ 47
Increases (reductions) in taxes resulting from:
State taxes based on income, net of federal income
taxes.............................................. 8 7 5
Adjustments to prior year accruals.................... 3 - 3
Book/tax difference on sale of stock.................. - - 5
Nondeductible goodwill write-off...................... - 2 -
FSC tax benefits...................................... (9) (6) (5)
Miscellaneous other items............................. - 3 1
---- ---- ----
Actual income tax expense........................ $102 $ 70 $ 56
==== ==== ====
"Effective" tax rate............................. 36.0% 38.0% 41.8%
==== ==== ====
</TABLE>
Significant components of the net deferred tax assets at December 31, 1997
and 1996, were:
<TABLE>
<CAPTION>
1997 1996
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Deferred Tax Assets Arising From:
Retiree medical......................................... $144 $151
Employee benefit plans.................................. 13 10
Warranty reserve........................................ 13 9
Inventories............................................. 8 6
Restructuring........................................... 7 15
Environmental reserves.................................. 7 9
Net operating losses.................................... 3 10
Recoverable taxes....................................... 3 6
Other................................................... 29 30
---- ----
Total Deferred Tax Assets.......................... 227 246
---- ----
Deferred Tax Liabilities Arising From:
Property, plant, and equipment.......................... 40 37
Taxes provided on unremitted foreign earnings........... 21 24
Other................................................... 83 54
---- ----
Total Deferred Tax Liabilities..................... 144 115
---- ----
Net Deferred Tax Assets............................ $ 83 $131
==== ====
</TABLE>
Domestic and foreign earnings/(loss) before income taxes and the cumulative
effect of accounting change for the three years ended December 31, 1997, as
shown below, exclude profits recorded on intercompany sales. Net interest
expense is allocated between geographic segments based on non-cash assets.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Domestic................................................ $307 $206 $121
Foreign................................................. (13) (22) 14
---- ---- ----
Earnings before income taxes and cumulative
effect of accounting change................... $294 $184 $135
==== ==== ====
</TABLE>
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Profits recorded on intercompany sales from foreign entities excluded above
were $19 million in 1997, 1996, and 1995, and were earned primarily by the
Registrant's Singapore subsidiaries.
As of December 31, 1997 and 1996, the Registrant had not provided federal
income taxes on $65 million and $55 million, respectively, of undistributed
earnings recorded by certain subsidiaries outside the United States, since these
earnings were deemed permanently invested.
The 1984 and 1985 issue related to certain intercompany loans between the
Registrant and its Sunpac subsidiary in Singapore has been resolved with no
material impact to the Registrant.
In 1994, the IRS informed the Registrant that it was disallowing a
deduction for $115 million in payments pursuant to the agreement dated August
29, 1988, which settled the previously disclosed government contracts dispute.
This issue is currently in the process of final resolution with the IRS and the
Registrant does not expect the settlement to have a material impact on its
operations.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(AMOUNTS IN MILLIONS EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share --
Net earnings........................................ $ 183 $ 114 $ 79
===== ===== =====
Denominator:
Denominator for basic earnings per share --
Weighted-average shares.......................... 59.8 61.0 62.7
Effect of dilutive securities -- Employee stock
options.......................................... 0.4 0.3 0.2
----- ----- -----
Denominator for diluted earnings per share --
adjusted weighted-average shares................. 60.2 61.3 62.9
===== ===== =====
Basic earnings per share.............................. $3.06 $1.87 $1.25
===== ===== =====
Diluted earnings per share............................ $3.04 $1.86 $1.25
===== ===== =====
</TABLE>
Additional disclosures regarding employee stock options are presented on
pages 36 through 38.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Registrant is party to financial
instruments with off-balance-sheet risk to meet financing needs and to reduce
its own exposure to fluctuations in exchange rates. These financial instruments
include financial guarantees and forward exchange contracts. These instruments
may involve elements of credit and/or exchange rate risk in excess of the amount
recognized in the financial statements.
Financial guarantees are conditional commitments issued by the Registrant
to guarantee the payment of certain liabilities of unconsolidated affiliates and
unaffiliated entities to third parties. These guarantees are issued primarily to
support borrowing arrangements, and are scheduled to expire from 1998 to 2000.
The Registrant's exposure for financial guarantees is equal to the contractual
amount of these guarantees. Both the contractual amounts and the maximum credit
loss in the event of non-performance were $6 million at December 31, 1997.
Forward exchange contracts are contracts for delivery or purchase of
foreign currencies at specified future dates. The contract amounts represent
currency exposure if the counterparty fails to perform under the contract. At
December 31, 1997, the Registrant had forward exchange contracts maturing
primarily during 1998 to sell the equivalent of $72 million and to purchase the
equivalent of $53 million in foreign currencies.
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1996, the Registrant had forward exchange contracts maturing
primarily during 1997 to sell the equivalent of $94 million and to purchase the
equivalent of $66 million in foreign currencies. These included $89 million and
$129 million in contracts, as of December 31, 1997 and 1996, respectively, which
the Registrant used to limit its exposure to foreign currency fluctuations
related to specific assets and liabilities denominated in foreign currencies,
primarily the French franc and the British pound sterling. The remaining $36
million and $31 million in contracts as of December 31, 1997 and 1996,
respectively, was used to limit the effects of foreign currency fluctuations on
anticipated Singapore dollar cash requirements, based on forecasted monthly
expenditures. The expected cash requirements relate to obligations of the
Registrant's Singapore operations such as payroll and payments to vendors.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Registrant in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates their fair value.
Foreign currency exchange contracts: The fair value of the Registrant's
foreign exchange contracts is estimated based on quoted market prices of
comparable contracts.
Short- and long-term debt: The carrying amounts of the Registrant's
borrowings under its commercial paper programs, its short-term revolving credit
agreements, and variable rate long-term debt instruments approximate their fair
value. The fair value of the Registrant's other long-term debt is estimated
using discounted cash flow analyses, based on the Registrant's current
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Registrant's financial
instruments at December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 13 $13 $ 18 $ 18
Foreign exchange contracts...................... (4) (3) - -
Short-term debt................................. 143 143 118 118
Long-term debt.................................. 222 253 226 257
</TABLE>
LEASE ARRANGEMENTS AND RENT EXPENSE
Rent and lease expense for the years 1997, 1996, and 1995 was $13 million,
$13 million, and $15 million, respectively. The Registrant leases certain
facilities and equipment under operating leases, many of which contain renewal
options and escalation clauses. Minimum future rental commitments under
noncancelable operating leases which extend beyond one year are payable as
follows: 1998, $7 million; 1999, $5 million; 2000, $5 million; 2001, $4 million;
2002, $4 million; and after 2002, $1 million. Facilities and equipment under
capital leases, minimum future rentals receivable under subleases, and
contingent rental expenses were not significant for the years 1997, 1996, and
1995.
STOCK-BASED COMPENSATION
The Registrant maintains five plans for the administration of stock-based
compensation: the Stock Incentive Plan, the Management Stock Performance Plan,
the 1982 Restricted Stock Plan, the 1989 Restricted Stock Plan, and the
Nonemployee Director Stock Option Plan. The Stock Incentive Plan permits
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
up to a maximum of 6.6 million shares of common stock to be granted as
nonqualified and incentive stock options and restricted stock to managerial,
supervisory, and professional employees. The Management Stock Performance Plan
is similar in nature and permits up to 3 million shares to be granted. The 1982
and 1989 Restricted Stock Plans permit up to 2 million shares of restricted
stock be granted; while the Nonemployee Director Stock Option Plan permits up to
264,000 stock options to be granted.
In all plans offering stock options, the options are granted at fair market
value for a term of 10 years and become exercisable in increments of 25 percent
of an individual grant on each of the second through fifth anniversary dates of
the grant. In all plans offering restricted stock, the restricted stock may not
be sold by the employee until the restrictions placed on the shares expire. The
restrictions lapse in increments of 20 percent of an individual grant on each of
the fifth through ninth anniversary dates of the grant. The amount of
compensation represented by the grants of restricted stock is being amortized
over a nine-year vesting period. Total compensation expense recognized for
restricted stock in 1997, 1996 and 1995 was $4 million, $2 million and $3
million, respectively. The following table summarizes information about the
Registrant's restricted stock grants for the years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Restricted shares granted......................... 50,500 51,600 234,200
Weighted average fair value per share............. $ 51.42 $ 38.16 $ 32.06
</TABLE>
In accordance with the provisions of SFAS No. 123, the Registrant applies
APB Opinion 25 and related Interpretations in accounting for stock options
issued under these plans and accordingly, does not recognize compensation
expense related to these options. If the Registrant had elected to recognize
compensation expense based on the fair value of the options granted at the grant
date as prescribed by SFAS No. 123, pro forma net income and earnings per share
would have been:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(IN MILLIONS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net earnings -- as reported.............................. $ 183 $ 114 $ 79
Net earnings -- pro forma................................ 180 113 78
Basic earnings per share -- as reported.................. 3.06 1.87 1.25
Basic earnings per share -- pro forma.................... 3.01 1.85 1.25
Diluted earnings per share -- as reported................ 3.04 1.86 1.25
Diluted earnings per share -- pro forma.................. 2.99 1.84 1.25
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
5.86%, 6.05% and 6.02%; dividend yields of 1.3%, 1.6% and 1.7%; stock price
volatility factors of 20.8%, 20.0% and 21.1%; assumed forfeiture rate of 3.0%;
and expected life of the options of seven years. Because the SFAS No. 123 method
of accounting has not been applied to options granted prior to January 1, 1995,
the resulting pro forma compensation cost may not be representative of that to
be expected in future years. The weighted-average fair value of options granted
in 1997, 1996 and 1995 was $14.87, $10.75 and $8.97, respectively.
37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Transactions involving stock options for the incentive stock plan are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
STOCK OPTIONS OPTIONS PRICE
- ---------------------------------------------------------- --------- --------
<S> <C> <C>
Outstanding December 31, 1994............................. 1,301,528 $20.88
Granted................................................. 236,400 32.30
Canceled................................................ (35,112) 20.96
Exercised............................................... (159,982) 19.36
--------- ------
Outstanding December 31, 1995............................. 1,342,834 23.07
Granted................................................. 698,350 38.87
Canceled................................................ (29,100) 21.91
Exercised............................................... (176,629) 19.85
--------- ------
Outstanding December 31, 1996............................. 1,835,455 29.41
Granted................................................. 751,250 51.24
Canceled................................................ (38,451) 31.91
Exercised............................................... (225,803) 21.19
--------- ------
Outstanding December 31, 1997............................. 2,322,451 $37.23
========= ======
Exercisable December 31, 1997............................. 658,723 $24.48
========= ======
</TABLE>
The following summarizes information about the Registrant's stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
TOTAL OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -------------------------------
WEIGHTED AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$15 to $25................ 663,026 6.2 years $21.44 485,400 $21.06
$25 to $35................ 234,175 7.8 years $32.30 129,923 $32.50
$35 to $45................ 675,100 8.9 years $38.87 43,400 $38.64
$45 to $57................ 750,150 9.9 years $51.25 - -
</TABLE>
RESEARCH AND DEVELOPMENT
The Registrant performs research and development under both Company-funded
programs and under contracts with others, principally the U.S. government.
Company-funded programs include bid and proposal work for both military and
commercial products and research and development. All Company-funded research
and development is expensed as incurred or expensed in accordance with the
Registrant's policy on contract accounting; customer-funded research and
development is accounted for under the Registrant's contract accounting policy.
Total research and development expenditures for the years 1997, 1996, and 1995
were $117 million, $98 million, and $113 million, respectively, of which $44
million, $43 million, and $47 million, respectively, was funded by customers.
RESTRUCTURINGS
In December 1996, the Registrant initiated a restructuring plan related
primarily to the operations of Sullair Europe S.A. which resulted in a pretax
charge of $32 million. The charge is reflected in the restructuring charge line
on the statement of earnings. The restructuring was undertaken as a result of
continuing losses at this operation, weakness in the European economy, and
significant competitive pressures in the European markets. The charge included
$11 million in cash termination benefits for approximately 140 employees,
primarily consisting of workers at Sullair Europe's St. Priest, France,
facility. The charge also
38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
included $14 million for the partial write-down of assets of Sullair Europe and
$7 million (primarily cash related charges) for disposition of the St. Priest
facility and professional fees. Operations previously at the St. Priest facility
were transferred to other Sullair plant sites in Europe and the United States.
The shutdown of the St. Priest facility and the termination or transfer of the
employees was completed during 1997, and it is anticipated that the sale of the
facility will be completed by the end of 1999.
Since the charge was recorded in 1996, approximately $8 million has been
paid and charged against the restructuring liability, including costs to
terminate 118 employees. Additionally, restructuring related period costs of $2
million were incurred during 1997.
During 1995, the Registrant's Board of Directors approved a restructuring
plan which resulted in a pretax charge of $58 million. The charge was taken to
reduce excess Aerospace manufacturing capacity caused by reductions in
manufacturing volume and increases in manufacturing productivity, and to
write-down the assets of the Industrial segment's Spectronic Instruments
business (Spectronic) and the Aerospace segment's Advanced Power Technology,
Inc. (APT) in anticipation of their divestiture. The charge included $24 million
in termination benefits ($9 million in cash related charges and $15 million in
non-cash related charges), including recognition of certain long-term retirement
benefits, for approximately 350 employees, primarily consisting of workers at
the Registrant's Lima, Ohio, facility. Also included in the charge was $29
million for the write-down of the assets of the Lima facility, Spectronic, and
APT, as well as $5 million (cash related charges) for disposition of the Lima
facility. The shutdown of the Lima facility was completed during 1996. The
disposition of the Lima facility is expected to be completed in the first
quarter of 1998 and the sales of Spectronic and a majority interest in APT were
completed in the third quarter of 1995.
Since the 1995 restructuring charge was recorded, approximately $10 million
has been paid and charged against the restructuring liability, including costs
to terminate 360 employees. During 1996, as a result of the Lima plant shutdown,
future pension and other post-retirement benefits for the terminated Lima
employees were fixed causing recognition of curtailment and settlement gains
totaling $8 million, which are reflected in the restructuring charge line on the
statement of earnings. Additionally, during 1996 approximately $13 million was
charged to costs of products sold related primarily to the movement of equipment
from the Lima facility to other manufacturing sites.
ENVIRONMENTAL MATTERS
The Registrant must comply with numerous environmental laws and regulations
and is exposed to liabilities and compliance costs arising from its past and
current handling, processing, storing, and disposal of hazardous substances and
wastes. The Registrant continually monitors its operations with respect to
potential environmental issues and, where appropriate, has established reserves
for onsite and offsite environmental investigation and remediation costs. The
amount reserved with respect to any site reflects the Registrant's estimate of
its degree of responsibility, the anticipated cost of remediation and, when
applicable, an assessment of the ability of other potentially responsible
parties (PRPs) to pay their share of such costs. Although the Registrant
believes its experience provides a reasonable basis for estimating its
liability, the ultimate outcome may differ from the Registrant's estimates. As
additional information becomes available to the Registrant, the reserves are
adjusted as necessary.
The Registrant's expenditures from its reserves for investigation and
remediation costs over the past three years are as follows: 1997 -- $1 million;
1996 -- $5 million; and 1995 -- $3 million. In addition to this spending,
approximately $1 million was expensed and added to the reserves during this
three-year period. It is anticipated that expenditures from the environmental
reserves will be $4 million in 1998 and $2 million in 1999.
Although the Registrant believes that its environmental reserves are
adequate, due to changed circumstances or the discovery of new sites at which
the Registrant is liable, additional accruals could be required in the future
that could have a material effect on the results of operations in a particular
quarter or annual period.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
However, the Registrant believes it is unlikely that there would be any material
adverse effect on the Registrant's overall financial position.
Environmental expenditures that relate to the day-to-day activities of
current operations are expensed or capitalized as appropriate. These
expenditures are in addition to the above reserve spending for investigation and
remediation. Such expenditures in 1997, 1996, and 1995 were not material and are
not expected to be material in 1998 or 1999.
At the present and former plant sites where the Registrant is presently
conducting remediations, the established reserves are believed to be adequate to
complete the required remediation. At certain present and former plant sites,
the Registrant is in the process of evaluating whether remediation will be
required or whether the existing contamination is attributable to the
Registrant's activities. The Registrant is presently unable to determine whether
the applicable reserves will need to be adjusted.
Under the Superfund laws, the Registrant participates as a PRP at 27 sites
where environmental remediation is being or will be conducted. At 23 of these
sites, the Registrant anticipates that it will be able to conclude its
participation by settling as a de minimis PRP and that the reserves are adequate
to satisfy these liabilities. At two sites, the Registrant will not qualify as a
de minimus PRP. However, based upon the Registrant's evaluation of its exposure
and the information available from its activity as a PRP, the Registrant
believes its reserves are adequate to satisfy its liabilities related to these
sites.
Both of the remaining Superfund sites are located in Rockford, Illinois. At
one of these sites, the PRP group in which the Registrant participates, has
entered into consent decrees with the Illinois Environmental Protection Agency
relating to certain investigations and interim remediations which are
substantially complete and the Registrant has fully reserved for its share of
the allocated costs. The PRP group is currently finalizing the results of the
feasibility study and determining the scope of remediation. Although the
Registrant has established reserves for the clean-up based upon its evaluation
of its exposure and presently available information, until the clean-up method
has been determined and costs allocated among the PRP group, the Registrant
cannot determine whether the reserves are adequate.
The second Superfund site relates to a regional area of groundwater
contamination, much of which is located in a highly industrialized area. The
contamination appears to be the result of multiple sources resulting from over
100 years of industrial activity. The Registrant could be linked to the site
through potential contamination at one of its plant sites and through testimony
indicating that some of its waste could have been disposed at one of the known
sources of contamination. The City of Rockford and the U.S. Department of
Justice have reached a settlement relating to groundwater remediation. The City
is also coordinating meetings to resolve the payment of other costs relating to
the site, including the EPA's claim for approximately $11 million of past costs.
It is not known whether the settlement efforts and discussions will be
successful. In the event they fail, the Registrant believes it has sound legal
and factual defenses to the EPA's cost recovery efforts. Based upon available
information, the Registrant has established reserves which anticipate a
negotiated settlement which it believes is likely. In the event these efforts
fail, the Registrant can not currently determine whether the reserves will be
adequate.
GOVERNMENT CONTRACT MATTERS
U.S. Government contracts generally provide for the termination or the
adjustment of material terms of such contracts at the election of the
government, and the government may pursue contractual, administrative, civil,
and criminal remedies for improper or illegal activities associated with
obtaining and performing government contracts. Administrative remedies include
the suspension, debarment, or ineligibility of all or part of a company from
receiving government contracts and government-approved subcontracts. As is the
case with any company that performs material amounts of business with the
federal government, any such action by the government could have a material
impact upon the Registrant's business. Management is not currently aware of any
such situations.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None.
40
<PAGE> 41
PART III
The information required by Items 10 through 13 of Part III of this report,
with the exception of the information on the Executive Officers which appears at
the end of Part I, is incorporated by reference from the Registrant's Proxy
Statement for its 1998 Annual Meeting of Stockholders.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Proxy Statement, information under the captions "Nominees for Election to
Board for Terms Expiring in 2001," "Directors Whose Terms Expire in 1999" and
"Directors Whose Terms Expire in 2000" on pages 2 and 3; and information under
the caption "Section 16 Compliance" on page 17.
ITEM 11. EXECUTIVE COMPENSATION
Proxy Statement, information regarding director compensation on pages 4 and
5; information under the caption "Compensation Committee Interlocks and Insider
Participation" on page 5; and information under the captions "Compensation
Committee Report on Executive Compensation," "Summary Compensation Table,"
"Option Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values," "Retirement Plans," and "Employment
Agreements" on pages 5 through 16.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Proxy Statement, information under the caption "Ownership of Sundstrand
Common Stock" on page 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Proxy Statement, information under the caption "Transactions and Loans with
Management" on page 16.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
(a) 1. Consolidated Financial Statements Included in Part II
Management's Report....................................... 20
Independent Auditors' Report.............................. 20
Consolidated Statement of Earnings, Years Ended December 21
31, 1997, 1996,
and 1995...............................................
Consolidated Statement of Cash Flows, Years Ended December 22
31, 1997, 1996,
and 1995...............................................
Consolidated Balance Sheet, December 31, 1997 and 1996.... 23
Consolidated Statement of Shareholders' Equity, Years 24
Ended December 31, 1997, 1996, and 1995................
Information by Business Segment for the Years Ended 25
December 31, 1997, 1996, and 1995......................
Quarterly Results (Unaudited) for 1997 and 1996........... 26
Notes to Consolidated Financial Statements................ 27
</TABLE>
41
<PAGE> 42
(a) 2. Financial Statement Schedules
The schedules have been omitted as the required information is not
applicable or not required.
(a) 3. Exhibits
(3) Articles of Incorporation and By-Laws
(a) Registrant's Restated Certificate of Incorporation as effective
December 19, 1991 (filed as Exhibit (3)(a) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1991, File No. 1-5358, and incorporated herein by
reference).
(b) Registrant's By-Laws, including all amendments, as effective
November 18, 1997.
(4) Instruments Defining the Rights of Security Holders, including
Indentures
(a) Credit Agreement dated as of January 28, 1993, among Registrant
and seven banking institutions including Morgan Guaranty Trust
Company of New York, as Agent (filed as Exhibit (4)(a) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, File No. 1-5358, and incorporated
herein by reference); Amendment No. 1 dated October 15, 1993,
and Amendment No. 2 dated October 31, 1994, to the Credit
Agreement (filed as Exhibit (4)(b) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, File No. 1-5358, and incorporated herein by reference);
and Amendment No. 3 dated November 30, 1995, to the Credit
Agreement (filed as Exhibit (4)(c) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995, File No. 1-5358, and incorporated herein by reference);
and Amended and Restated Credit Agreement dated December 16,
1996, to the Credit Agreement (filed as Exhibit (4)(a) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, File No. 1-5358, and incorporated
herein by reference).
(b) Second Amended and Restated Rights Agreement between Registrant
and Harris Trust and Savings Bank, as Rights Agent, dated
November 21, 1995 (filed as Exhibit 1 to Registrant's Form
8-A/A (Amendment No. 2) dated November 27, 1995, File No.
1-5358, and incorporated herein by reference); and First
Amendment to Second Amended and Restated Rights Agreement,
dated February 20, 1996 (filed as Exhibit (4)(e) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File No. 1-5358, and incorporated
herein by reference).
(c) Lease dated as of December 14, 1987, between Registrant and
Greyhound Real Estate Investment Six, Inc. (filed as Exhibit
(4)(f) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, File No. 1-5358, and
incorporated herein by reference).
(d) Note Agreement of Registrant dated May 15, 1991 (filed as
Exhibit (19)(c) to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1991, File No. 1-5358, and
incorporated herein by reference); and Amendment effective
December 31, 1991, to the Note Agreement (filed as Exhibit
(19)(c) to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992, File No. 1-5358, and
incorporated herein by reference).
(e) Note Agreement of Registrant dated October 31, 1991 (filed as
Exhibit (4)(l) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, File No. 1-5358, and
incorporated herein by reference); and Amendment dated December
1, 1995, to the Note Agreement (filed as Exhibit (4)(l) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, File No. 1-5358, and incorporated
herein by reference).
(f) Note Agreement of Registrant dated December 2, 1991 (filed as
Exhibit (4)(m) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, File No. 1-5358, and
incorporated herein by reference).
42
<PAGE> 43
(g) Amendment dated December 11, 1995, to Registrant's Note
Agreement dated May 15, 1991, as amended December 31, 1991, and
to Registrant's Note Agreement dated December 2, 1991 (filed as
Exhibit (4)(n) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, File No. 1-5358, and
incorporated herein by reference).
(10) Material Contracts
(a) Employment Agreement dated September 19, 1995, between
Registrant and Robert H. Jenkins, Registrant's Chairman of the
Board, President and Chief Executive Officer, effective October
1, 1995 (filed as Exhibit (10)(a) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995,
File No. 1-5358, and incorporated herein by reference).*
(b) Agreement dated June 19, 1988, between Registrant and Paul
Donovan, Registrant's Executive Vice President and Chief
Financial Officer, regarding Registrant's repurchase of shares
of restricted stock (filed as Exhibit (10)(h) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1989, File No. 1-5358, and incorporated herein by
reference).*
(c) Form of Employment Agreement, including all amendments thereto,
between Registrant and each of Paul Donovan, Registrant's
Executive Vice President and Chief Financial Officer; Patrick
L. Thomas, Registrant's Executive Vice President and Chief
Operating Officer, Industrial; Ronald F. McKenna, Registrant's
Executive Vice President and Chief Operating Officer,
Aerospace; Richard M. Schilling, Registrant's Retired Vice
President and General Counsel and Secretary; and DeWayne J.
Fellows, Registrant's Vice President and Controller (filed as
Exhibit (10)(g) to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, File No. 1-5358, and
incorporated herein by reference).*
(d) Termination agreement dated June 7, 1996, between Registrant
and Robert J. Smuland (filed as Exhibit (1) to Registrant's
Current Report on Form 8-K dated June 10, 1996, File No.
1-5358, and incorporated herein by reference).*
(e) Termination agreement dated August 7, 1996, between Registrant
and James F. Ricketts (filed as Exhibit (10)(a) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, File No. 1-5358, and incorporated herein by
reference).*
(f) Registrant's Stock Incentive Plan effective December 1, 1992
(filed as Exhibit (10)(l) to Registrant's Annual Report for the
fiscal year ended December 31, 1992, File No. 1-5358, and
incorporated herein by reference).*
(g) Text of resolution adopted by the Board of Directors of
Registrant on April 18, 1995, amending Registrant's Stock
Incentive Plan (filed as Exhibit (10)(b) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1995, File No. 1-5358, and incorporated herein by reference).*
(h) First Amendment to Registrant's Stock Incentive Plan effective
as of November 19, 1996 (filed as Exhibit (10)(j) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, File No. 1-5358, and incorporated
herein by reference).*
(i) Registrant's Nonemployee Director Stock Option Plan effective
August 1, 1994 (filed as Exhibit A to Registrant's Proxy
Statement dated March 7, 1995, File No. 1-5358, and
incorporated herein by reference).*
(j) Registrant's Nonemployee Director Compensation Plan effective
August 1, 1994 (filed as Exhibit B to Registrant's Proxy
Statement dated March 7, 1995, File No. 1-5358, and
incorporated herein by reference).*
(k) First Amendment to Registrant's Nonemployee Director
Compensation Plan (now known as the Director Compensation Plan)
effective as of April 21, 1998.*
(l) Registrant's 1989 Restricted Stock Plan as adopted April 20,
1989, by the stockholders of Registrant (filed as Exhibit
(10)(v) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989, File No. 1-5358, and
incorporated herein by reference).*
*Management contract or compensatory plan.
43
<PAGE> 44
(m) Registrant's 1982 Restricted Stock Plan as adopted on April 15,
1982, by the stockholders of Registrant, including all
amendments through April 16, 1986 (filed as Exhibit (10)(c) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1982, File No. 1-5358, and incorporated
herein by reference).*
(n) Text of resolution adopted by the Board of Directors of
Registrant on April 17, 1986, amending Registrant's 1982
Restricted Stock Plan (filed as Exhibit (10)(c) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1986, File No. 1-5358, and incorporated herein by
reference).*
(o) Text of resolution adopted by the Board of Directors of
Registrant on August 7, 1990, amending Registrant's 1982 and
1989 Restricted Stock Plans (filed as Exhibit (19)(f) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990, File No. 1-5358, and incorporated
herein by reference).*
(p) Text of resolution adopted by the Board of Directors of
Registrant on July 16, 1989, adopting a Director Emeritus
Retirement Plan and copy of such plan as effective July 20,
1989 (filed as Exhibit (10)(dd) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989, File
No. 1-5358, and incorporated herein by reference).*
(q) First Amendment to Registrant's Director Emeritus Retirement
Plan effective as of April 21, 1998.*
(r) Text of resolution adopted by the Board of Directors of
Registrant on October 17, 1984, establishing a 1984 Elected
Officers' Loan Program (filed as Exhibit (10)(i) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1984, File No. 1-5358, and incorporated
herein by reference).*
(s) Text of resolution adopted by the Board of Directors of
Registrant on October 15, 1991, amending the 1984 Elected
Officers' Loan Program (filed as Exhibit (10)(ff) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991, File No. 1-5358, and incorporated
herein by reference).*
(t) Registrant's Management Stock Performance Plan effective as of
November 19, 1996 (filed as Exhibit (10)(t) to Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1996, File No. 1-5358, and incorporated herein by
reference).*
(u) Registrant's Supplemental Retirement plan effective as of
December 10, 1975, including all amendments (filed as Exhibit
(10)(u) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, File No. 1-5358, and
incorporated herein by reference).*
(v) Registrant's Officer Performance Compensation Plan effective as
of January 1, 1997 (filed as Exhibit A to Registrant's Proxy
Statement dated March 5, 1997, File No. 1-5358, and
incorporated herein by reference).*
(w) Amended and Restated Deferred Compensation Plan of Registrant
effective as of December 19, 1997.*
(x) Consulting Agreement dated April 15, 1997, between Registrant
and Don R. O'Hare, Registrant's retired Chairman of the Board,
effective April 15, 1997 (filed as Exhibit (10)(a) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, File No. 1-5358, and incorporated herein
by reference).*
(y) Consulting agreement dated September 22, 1997, between
Registrant and Richard M. Schilling, Registrant's retired Vice
President, General Counsel and Secretary, effective December
31, 1997.*
(21) Subsidiaries of Registrant
(23) Consents of Experts and Counsel
(a) Consent of Independent Auditors (Ernst & Young LLP).
*Management contract or compensatory plan.
44
<PAGE> 45
(24) Powers of Attorney
(27) Financial Data Schedule
(99) Additional Exhibits
(a) Undertakings (filed as Exhibit (28)(a) to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1982, File No. 1-5358, and incorporated herein by reference).
(b) Reports on Form 8-K
None
*Management contract or compensatory plan.
45
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 10th day of
March, 1998.
SUNDSTRAND CORPORATION
(Registrant)
By: /s/ PAUL DONOVAN
------------------------------------
Paul Donovan
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Robert H. Jenkins
Chairman of the Board, President
and Chief Executive Officer
Paul Donovan
Executive Vice President
and Chief Financial Officer
DeWayne J. Fellows
Vice President and Controller
Richard A. Abdoo
Director
J. P. Bolduc
Director
Ilene S. Gordon } March 10, 1998
Director
Gerald Grinstein
Director
Charles Marshall
Director
Klaus H. Murmann
Director
Ward Smith
Director
Berger G. Wallin
Director
By: /s/ PAUL DONOVAN
----------------------------------
Paul Donovan, Attorney-in-Fact
46
<PAGE> 1
Exhibit (3)(b)
BY-LAWS
OF
SUNDSTRAND CORPORATION
(A Delaware Corporation)
Effective November 18, 1997
ARTICLE I
OFFICES
Section 1.1. PRINCIPAL OFFICE. The principal office of the Corporation in
the State of Delaware shall be in the City of Wilmington, County of New Castle.
Section 1.2. OTHER OFFICES. The Corporation may also have offices at such
other places, either within or without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
ARTICLE II
STOCKHOLDERS' MEETINGS
Section 2.1. PLACE OF MEETINGS. All annual and special meetings of the
stockholders shall be held at such place, either within or without the State of
Delaware, as may be fixed by the Board and specified in the notice of the
meeting.
Section 2.2. ANNUAL MEETINGS. An annual meeting of stockholders shall be
held on such date and at such hour as may be fixed by the Board and specified
in the notice of the meeting, when they shall elect by a plurality vote a Board
of Directors and transact such other business as may properly be brought before
the meeting.
Section 2.3. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall
be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and
kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present. The original or duplicate
stock ledger shall be the only evidence as to who are the stockholders entitled
to examine such list or stock ledger or transfer book or to vote in person or
by proxy at any meeting of stockholders.
Section 2.4. SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute, may be called by the Chairman of the Board, President and Chief
Executive Officer and shall be called by the Chairman of the Board, President
and Chief Executive Officer or Secretary at the request in writing of a
majority of the Board of Directors, or at the request in writing of
stockholders owning eighty percent or more in amount of the entire capital
stock of the Corporation issued and outstanding and entitled to vote. Such
request shall state the purpose or purposes of the proposed meeting.
Section 2.5. NOTICE OF MEETINGS. Except as otherwise expressly provided
by law or by the Certificate of Incorporation or these By-Laws, written or
printed notice of each annual or special meeting of stockholders shall be given
by mail at least ten but not more than sixty days before the meeting to the
stockholders of record entitled to vote thereat. Every such notice shall be
directed to a stockholder at his address as it shall appear on the transfer
books of the Corporation; shall state the date, time and place of the meeting;
and, in the case of a special meeting, shall state briefly the purposes
thereof. Business transacted at all special meetings shall be confined to the
purposes stated in the notice thereof.
Section 2.6. QUORUM AND ADJOURNMENTS. The holders of a majority of the
stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall be necessary and sufficient to
constitute a quorum at all meetings of the stockholders for the transaction of
business, except as otherwise provided by statute, by the Certificate of
Incorporation, or by these By-Laws. If, however, such quorum shall not be
present or represented at any meeting of the
<PAGE> 2
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting, at which a quorum
shall be present or represented, any business may be transacted which might
have been transacted at the meeting as originally notified. The absence from
any meeting of the number required by law or by the Certificate of
Incorporation or these By-Laws for action upon any given matter shall not
prevent action at such meeting upon any other matter or matters which may
properly come before the meeting if the number required in respect of such
other matter or matters shall be present. Once a quorum is present at a
meeting, it shall be deemed to be acting thereafter throughout the meeting,
irrespective of any withdrawals. Nothing in these By-Laws shall affect the
right to adjourn where a quorum is present.
Section 2.7. VOTING BY STOCKHOLDERS. When a quorum is present at any
meeting, the vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question brought
before such meeting, unless the question is one upon which by express provision
of the statutes or of the Certificate of Incorporation or of these By-Laws a
different vote is required, in which case such express provision shall govern
and control the decision of such question.
At any meeting of the stockholders every stockholder having the right to
vote shall be entitled to vote in person, or by proxy appointed by an
instrument in writing, subscribed by such stockholder or by his attorney or
agent thereunto authorized in writing, and bearing a date not more than three
years prior to said meeting, unless said instrument provides for a longer
period. Except as otherwise provided by the Certificate of Incorporation, each
stockholder present in person or by proxy at any meeting shall have, on each
matter on which stockholders are entitled to vote, one vote for each share of
stock having voting power, registered in his name on the books of the
Corporation.
Section 2.8. NEW BUSINESS PROPOSALS AT ANNUAL MEETINGS. Only such new
business shall be conducted, and only such proposals shall be acted upon at an
annual meeting of stockholders, as shall have been properly brought before such
annual meeting (a) by, or at the direction of, the Board of Directors, or (b)
by any stockholder of the Corporation who complies with the notice procedures
set forth in this Section 2.8. A stockholder who wishes to bring a proposal
before an annual meeting shall give timely notice thereof in writing to the
Secretary of the Corporation. Such notice, to be timely, shall be delivered
to, or mailed and received by the Secretary at the principal executive offices
of the Corporation at least sixty days but not more than ninety days prior to
the scheduled annual meeting, regardless of any postponements, deferrals or
adjournments of that meeting to a later date; provided, however, that if less
than seventy days' notice or prior public disclosure of the date of the
scheduled annual meeting is given or made, such notice by a stockholder to be
timely shall be so delivered or received not later than the close of business
on the tenth day following the earlier of the day on which notice of the
scheduled annual meeting was mailed or the day on which public disclosure
thereof was made.
Each such stockholder notice shall set forth as to each proposal to be
brought before the annual meeting (a) a brief description of the proposal and
the reasons for conducting such business at the annual meeting, (b) the name
and address, as they appear on the transfer books of the Corporation, of the
stockholder proposing such business and any other stockholders known by such
stockholder to be supporting the proposal, (c) the class and number of shares
of the Corporation's stock which are beneficially owned by the stockholder on
the date of such stockholder notice and by any other stockholders known by such
stockholder to be supporting such proposal, and (d) any financial interest of
the stockholder in such proposal.
The Board of Directors may reject any stockholder proposal not timely made
in accordance with the terms of this Section 2.8. If the Board of Directors, or
a designated committee thereof, determines that the information provided in a
stockholder's notice does not satisfy the informational requirements of this
Section 2.8 in any material respect, the Secretary shall promptly notify such
stockholder of the deficiency in the notice. The stockholder shall have an
opportunity to cure the deficiency by providing additional information to the
Secretary within five days from the date such notice of deficiency is given to
the stockholder, as the Board of Directors or such committee shall reasonably
determine. If the deficiency is not cured within such period, or if the Board
of Directors or such committee determines that the additional information
provided by the stockholder, together with the information previously provided,
does not satisfy the requirements of this Section 2.8 in any material respect,
then the Board of Directors may reject such proposal. The Secretary shall
notify the stockholder in writing whether his proposal has been made in
accordance with the time and informational requirements of this Section 2.8.
Notwithstanding the procedure set forth in this Section 2.8, if neither the
Board of Directors nor such committee makes a determination as to the validity
of any stockholder proposal, the presiding officer of the annual meeting shall
determine and declare at the annual meeting whether the stockholder proposal was
made in accordance with the terms of this Section 2.8. If the presiding officer
determines that the stockholder's proposal was not made in accordance with the
terms of this Section 2.8, he shall so declare at the annual meeting and any
such proposal shall not be acted upon at the annual meeting.
<PAGE> 3
This Section 2.8 shall not prevent the consideration and approval or
disapproval at an annual meeting of reports of officers, directors and
committees of the Board of Directors, but, in connection with such reports, no
new business shall be acted upon at such annual meeting unless stated, filed
and received as herein provided.
ARTICLE III
DIRECTORS
Section 3.1. NUMBER, ELECTION AND TERMS OF OFFICE OF DIRECTORS. The
number of directors which shall constitute the whole Board shall be nine in
number. Directors need not be stockholders in the Corporation. Except as
provided in Section 3.3, the directors shall be elected at the annual meeting
of the stockholders, and each director elected shall hold office until his
successor is elected and qualified or until his earlier resignation. The
directors shall be divided into three classes: Class I, Class II and Class III.
Such classes shall be as nearly equal in number as possible. The term of
office of the initial Class I directors shall expire at the annual meeting of
stockholders in 1971, the term of office of the initial Class II directors
shall expire at the annual meeting of stockholders in 1972, and the term of
office of the initial Class III directors shall expire at the annual meeting of
stockholders in 1973, or thereafter in each case when their respective
successors are elected and qualified. At each annual election held after
classification and the initial election of directors according to classes, the
directors chosen to succeed those whose terms then expire shall be identified
as being of the same class as the directors they succeed and shall be elected
for a term expiring at the third succeeding annual meeting or thereafter when
their respective successors in each case are elected and qualified.
Section 3.2. CORPORATE RECORDS. The directors may keep the books of the
Corporation, except such as are required by law to be kept within the State of
Delaware, outside of Delaware at such place or places as they may from time to
time determine.
Section 3.3. VACANCIES. Vacancies occurring in the Board of Directors and
newly created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in
office, although less than a quorum, and any director so chosen shall hold
office until his successor is elected and qualified. A director elected to
fill a vacancy shall be elected for the unexpired portion of the term of his
predecessor in office. A director elected to fill a newly created directorship
shall serve for the term provided herein for the class of directors for which
such director was elected.
Section 3.4. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by its Board of Directors which may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by statute
or by the Certificate of Incorporation or by these By-Laws directed or required
to be exercised or done by the stockholders.
Section 3.5. PLACE OF MEETINGS. The Board of Directors of the Corporation
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 3.6. ANNUAL MEETINGS. The first meeting of each newly elected
Board shall constitute the annual meeting of said Board and shall be convened
as soon as is conveniently possible but in no event more than two weeks after
the date of the annual meeting of stockholders in each year at such time and
place as shall be fixed by the Chairman of the Board, President & Chief
Executive Officer.
Section 3.7. REGULAR MEETINGS. Regular meetings of the Board shall be
held upon notice, or without notice, at least quarterly, at such time and place
as shall from time to time be determined by the Board.
Section 3.8. SPECIAL MEETINGS. Special meetings of the Board may be
called by the Chairman of the Board, President and Chief Executive Officer or
any four directors. Notice of each special meeting of the Board may be given
by mail, telegraph or cable, personal delivery or telephone. Notice by mail
shall be given at least three days before the meeting; notice by any other
means shall be given a reasonable
period of time before the time of such meeting but in no event shall such
notice be given less than one hour before such meeting. If notice is by
telephone, such notice shall be promptly confirmed by telegraph or cable to
each director.
Section 3.9. QUORUM. At all meetings of the Board, the presence of a
majority of the full number of directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute or by the Certificate of Incorporation or by these By-Laws. If a
quorum shall not be present at any meeting
<PAGE> 4
of the Board of Directors, the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 3.10. ACTION BY BOARD WITHOUT MEETING. Notwithstanding anything
contained in these By-Laws, any action required or permitted to be taken at any
meeting of the Board of Directors or of any Committee thereof may be taken
without a meeting, if a written consent thereto is signed by all members of the
Board or of such Committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board of Directors or the
Committee.
Section 3.11. COMPENSATION OF DIRECTORS. The Board of Directors, by
resolution adopted by a majority of the whole Board, may establish reasonable
compensation of all directors for services to the Corporation as directors,
officers or otherwise. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of any Committee may be allowed like compensation for their
services to the Corporation.
Section 3.12. INTERESTED DIRECTORS. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board or Committee which authorizes the
contract or transaction, or solely because his or their votes are counted for
such purpose, if (1) the material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the Board of
Directors or the Committee, and the Board or Committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (2) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or (3) the contract or transaction is
fair as to the Corporation as of the time it is authorized, approved or
ratified, by the Board of Directors, Committee, or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at
a meeting of the Board or of the Committee which authorizes the contract or
transaction.
Section 3.13. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more Committees, each
Committee to consist of two or more of the directors of the Corporation. Any
such Committee, to the extent provided in the resolution not inconsistent with
the provisions of the Statutes of Delaware, shall have and may exercise the
powers and authority of the Board of Directors in the management of the
Corporation and may authorize the seal of the Corporation to be affixed to all
papers which may require it. A majority of the members of the Committee then
holding office shall constitute a quorum at all meetings and each such
Committee shall keep regular minutes of its proceedings and report the same to
the whole Board.
Section 3.14. NOMINATION FOR ELECTION OF DIRECTORS. Nominations for the
election of Directors shall be properly made by the Board of Directors or a
nominating committee appointed by the Board of Directors or by any stockholder
entitled to vote in the election of Directors generally; provided, however,
that any such stockholder may nominate one or more persons for election as
Directors at a meeting only if such stockholder has given written notice of
such stockholder's intent, either by personal delivery or by United States
mail, postage prepaid, to the Secretary not later than (1) with respect to an
election to be held at an annual meeting of stockholders, ninety days prior to
the anniversary date of the immediately preceding annual meeting, and (2) 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, as they appear on the
transfer books of the Corporation, 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 Corporation 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 Corporation if so
elected.
The presiding officer of any meeting at which a stockholder or its
representative attempts to nominate one or more persons for election as
directors may refuse to acknowledge the nomination of any person not made in
compliance with the provisions of this Section 3.14.
<PAGE> 5
ARTICLE IV
OFFICERS
Section 4.1. DESIGNATION: NUMBER. The officers of the Corporation shall
consist of a Chairman of the Board, President and Chief Executive Officer; an
Executive Vice President and Chief Financial Officer; an Executive Vice
President and Chief Operating Officer, Aerospace; an Executive Vice President
and Chief Operating Officer, Industrial; a Vice President and General Counsel;
a Vice President, Corporate Human Resources; a Vice President, Tax; one or more
other Vice Presidents; a Secretary; a Treasurer; and a Controller, all of whom
shall be elected by the Board of Directors and shall hold office until their
successors are duly elected and qualified. In addition, the Chairman of the
Board, President and Chief Executive Officer may appoint one or more Assistant
Secretaries, Assistant Treasurers and Assistant Controllers and such other
officers and agents as the Chairman of the Board, President and Chief Executive
Officer may deem necessary or desirable, who shall hold their offices for such
terms and shall have such authority and perform such duties as shall be
determined by the Chairman of the Board, President and Chief Executive Officer
from time to time. Any Executive Vice President or Vice President designated
by a resolution of the Board of Directors or by delegation of the Chairman of
the Board, President and Chief Executive Officer shall have authority to sign
contracts and any other documents as specifically authorized by the Board of
Directors or the Chairman of the Board, President and Chief Executive Officer
or which are within the ordinary course of the business of the Corporation.
Section 4.2. NON-CORPORATE OFFICERS. The Chairman of the Board, President
and Chief Executive Officer shall have authority to appoint from time to time
officers of divisions, product groups or other segments of the Corporation's
business for such terms, with such authority and at such salary as the Chairman
of the Board, President and Chief Executive Officer in his sole discretion
shall determine; provided, however, such appointed officer shall under no
circumstances have authority to bind any other division, product group or other
segment of the Corporation's business nor to bind the Corporation, except as to
the normal and usual business affairs of the division, product group or other
segment of the Corporation's business of which he is an officer. Such
appointed officer, as such, shall not be construed as an officer of the
Corporation.
Section 4.3. SALARIES. The salaries of the officers elected pursuant to
Section 4.1 above shall be determined by the Board of Directors. The salaries
of all other officers and agents of the Corporation appointed by the Chairman
of the Board, President and Chief Executive Officer shall be determined by the
Board of Directors or the Chairman of the Board, President and Chief Executive
Officer.
Section 4.4. REMOVAL. Any officer elected by the Board of Directors and
any officer or agent appointed by the Chairman of the Board, President and
Chief Executive Officer, as the case may be, may be removed at any time by the
Board of Directors or the Chairman of the Board, President and Chief Executive
Officer, respectively, whenever in its or his judgment the best interests of
the Corporation will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed. Any
vacancy occurring in any elected office of the Corporation shall be filled by
the Board of Directors.
Section 4.5. CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER.
The Chairman of the Board, President and Chief Executive Officer shall be the
chief executive officer of the Corporation. The Chairman of the Board,
President and Chief Executive Officer shall preside at all meetings of
stockholders and of the Board and shall see that all orders and resolutions of
the Board are carried into effect. Subject to the control of the Board, the
Chairman of the Board, President and Chief Executive Officer shall have general
supervision, control and management of the affairs and business of the
Corporation. The Chairman of the Board, President and Chief Executive Officer
and/or the Executive Vice President and Chief Financial Officer shall execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly delegated
by the Board of Directors to some other officer or agent of the Corporation.
Section 4.6. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. The
Executive Vice President and Chief Financial Officer shall be the chief
financial officer of the Corporation and shall be in charge of the financial,
accounting, taxation, and administration activities of the Corporation and
shall be under the direction of and report to the Chairman of the Board,
President and Chief Executive Officer. He and/or the Chairman of the Board,
President and Chief Executive Officer shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where
required by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation.
<PAGE> 6
Section 4.7. EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER,
AEROSPACE. The Executive Vice President and Chief Operating Officer, Aerospace
shall be the chief operating officer of the Corporation's aerospace businesses.
He shall assist the Chairman of the Board, President and Chief Executive
Officer in the general supervision, control and management of the affairs and
business of the Corporation's aerospace businesses and the Corporation's
government contracts and compliance activities.
Section 4.8. EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER,
INDUSTRIAL. The Executive Vice President and Chief Operating Officer,
Industrial shall be the chief operating officer of the Corporation's industrial
businesses. He shall assist the Chairman of the Board, President and Chief
Executive Officer in the general supervision, control and management of the
affairs and business of the Corporation's industrial businesses.
Section 4.9. VICE PRESIDENT AND GENERAL COUNSEL. The Vice President and
General Counsel shall be the chief legal officer of the Corporation, shall be
responsible for all legal and environmental matters involving the Corporation
and shall direct the Corporation's legal and environmental affairs staffs. He
shall be under the direction of and report to the Chairman of the Board,
President and Chief Executive Officer.
Section 4.10. VICE PRESIDENT, CORPORATE HUMAN RESOURCES. The Vice
President, Corporate Human Resources shall be in charge of the personnel and
public relations activities of the Corporation and shall be under the direction
of and report to the Chairman of the Board, President and Chief Executive
Officer.
Section 4.11. VICE PRESIDENT, TAX. The Vice President, Tax shall be
responsible for the tax affairs of the Corporation, including the preparation
and signing of all federal and state tax returns, consents, elections, closing
agreements and all other documents related to the determination of any federal
or state tax liability of the Corporation. The Vice President, Tax shall be
under the direction of and report to the Executive Vice President and Chief
Financial Officer.
Section 4.12. OTHER VICE PRESIDENTS. The other Vice Presidents shall
perform such duties as may be prescribed by the Board of Directors or the
Chairman of the Board, President and Chief Executive Officer.
Section 4.13. SECRETARY AND ASSISTANT SECRETARIES.
(a) The Secretary shall attend all sessions of the Board of Directors and
all meetings of the stockholders and record the minutes of all proceedings in a
book to be kept for that purpose, and shall perform like duties for Committees
of the Board when required. He shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or the
Chairman of the Board, President and Chief Executive Officer. He shall keep in
safe custody the seal of the Corporation, and affix the same to any instrument
requiring it, and when affixed it shall be attested by his signature or by the
signature of the Treasurer or an Assistant Secretary.
(b) The Assistant Secretaries in the order of their seniority shall, in
the absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary, and shall perform such other duties as the Chairman of
the Board, President and Chief Executive Officer shall prescribe.
Section 4.14. TREASURER AND ASSISTANT TREASURERS.
(a) The Treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all money
and other valuable effects in the name and to the credit of the Corporation, in
such depositories as may be designated by the Board of Directors. The
Treasurer shall be under the direction of the Executive Vice President and
Chief Financial Officer.
(b) He shall disburse the funds of the Corporation when proper to do so,
taking proper vouchers for such disbursements, and shall render to the Chairman
of the Board, President and Chief Executive Officer and the Board of Directors,
at the regular meetings of the Board, or whenever they may require it, an
account of all his
transactions as Treasurer and of the financial condition of the Corporation.
(c) If required by the Board of Directors, he shall give the Corporation a
bond in such sum, and with such surety or sureties as shall be satisfactory to
the Board, for the faithful performance of the duties of his office, and for
the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in his possession or under his control
belonging to the Corporation.
(d) The Assistant Treasurers in the order of their seniority shall, in the
absence or disability of the Treasurer, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties as the Board of
Directors shall prescribe.
Section 4.15. CONTROLLER AND ASSISTANT CONTROLLERS.
(a) The Controller shall be the chief accounting officer of the
Corporation and shall be responsible for the installation and supervision of
all accounting records, including the preparation and interpretation of
financial statements, the continuous
<PAGE> 7
audit of accounts and records, and such other duties usually incident to the
office of Controller. He shall be under the direction of the Executive Vice
President and Chief Financial Officer and shall, in addition to the foregoing
duties, perform such other duties as may be assigned to him by the Board of
Directors or the Executive Vice President and Chief Financial Officer.
(b) The Assistant Controllers in the order of their seniority shall, in
the absence or disability of the Controller, perform the duties and exercise
the powers of the Controller and shall perform such other duties as the Board
of Directors or the Executive Vice President and Chief Financial Officer shall
prescribe.
ARTICLE V
SHARES AND THEIR TRANSFER
Section 5.1. CERTIFICATES OF STOCK. Certificates for shares of stock of
the Corporation shall be in such form as shall be approved by the Board, and
during the period while more than one class of stock or more than one series of
any class of the Corporation is authorized, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificates which the Corporation shall
issue to represent such class or series of stock, or else there shall appear on
the certificates a statement that the Corporation shall furnish such
information to a stockholder without charge if it be requested. They shall
exhibit the holder's name and number of shares, and, with respect to each class
of stock of the Corporation, or series thereof, if there be more than one class
or series thereof, shall bear a distinguishing letter, and each class or series
thereof, if any, shall be numbered serially and be issued in consecutive order.
They shall bear the Corporate seal or a facsimile thereof and shall be signed
by the Chairman of the Board, President and Chief Executive Officer, an
Executive Vice President, or a Vice President, and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation. If such certificate is countersigned (1) by a transfer agent
other than the Corporation or its employee, or, (2) by a registrar other than
the Corporation or its employee, any other signature on the certificate may be
a facsimile. In case any officer, transfer agent, or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent, or registrar before such certificate
is issued, it may be issued by the Corporation with same effect as if he were
such officer, transfer agent, or registrar at the date of issue.
Section 5.2. TRANSFER OF STOCK. Upon surrender to the Corporation or its
transfer agent of a certificate representing shares, duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate shall be issued to the person entitled thereto, and
the old certificate canceled, and the transaction recorded upon the books of
the Corporation.
Section 5.3. LOST, STOLEN OR DESTROYED CERTIFICATES. Any person, claiming
a certificate for shares of the Corporation to be lost, stolen or destroyed,
shall make affidavit of the fact and lodge the same with the Secretary of the
Corporation accompanied by a signed application for a new certificate. Such
person shall also give the Corporation a bond of indemnity with one or more
sureties satisfactory to the Board of Directors, and in an amount which in
their judgment shall be sufficient to save the Corporation from loss, or shall
qualify under such blanket bond as may from time to time be approved by the
Board of Directors, and thereupon the proper officers may cause to be issued a
new certificate of like tenor with the one alleged to be lost, stolen or
destroyed.
Section 5.4. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty nor less than ten days before
the date of such meeting, nor more than sixty days prior to any other action.
Section 5.5. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
Section 5.6. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may
from time to time appoint a transfer agent and registrar in one or more cities;
may require all certificates evidencing shares of stock of the Corporation to
bear the signatures of a transfer agent and registrar; and may provide that
such certificates shall be transferable in more than one city.
<PAGE> 8
ARTICLE VI
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Corporation shall, to the fullest extent to which it is empowered to
do so by the General Corporation Law of Delaware, or any other applicable laws,
as from time to time in effect, indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director or officer of
the Corporation or a division thereof, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding.
The provisions of this Article shall be deemed to be a contract between
the Corporation and each director or officer who serves in any such capacity at
any time while this Article and the relevant provisions of the General
Corporation Law of Delaware or other applicable law, if any, are in effect, and
any repeal or modification of any such law or of this Article shall not affect
any rights or obligations then existing with respect to any state of facts then
or theretofore existing or any action, suit or proceeding theretofore or
thereafter brought or threatened based in whole or in part upon any such state
of facts.
The Corporation shall, to the fullest extent to which it is empowered to
do so by the General Corporation Law of Delaware, and with respect to the
Employee Retirement Income Security Act of 1974, or any other applicable laws,
as from time to time in effect, indemnify any officer, director or employee of
the Corporation or an affiliated corporation, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he is or was serving at the request of the
Corporation as an individual Trustee, Committee member, administrator or
fiduciary of a pension or other benefit plan for employees of the Corporation,
or of an affiliated corporation or other enterprise.
Persons who are not covered by the foregoing provisions of this Article
and who are or were employees or agents of the Corporation or a division
thereof, or are or were serving at the request of the Corporation as employees
or agents of another corporation, partnership, joint venture, trust or other
enterprise, may be indemnified to the extent authorized at any time or from
time to time by the Board of Directors of the Corporation.
The indemnification provided or permitted by this Article shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
by law or otherwise, and shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article.
The Corporation shall, to the fullest extent to which it is empowered to
do so by the General Corporation Law of Delaware, or any other applicable laws,
as from time to time in effect, pay expenses, including attorneys' fees,
incurred in defending any action, suit or proceeding, in advance of the final
disposition of such action, suit or proceeding, to any person who is or was a
party or is threatened to be made a party to any such threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director
or officer of the Corporation, upon receipt of an undertaking
by or on behalf of such person to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the
Corporation as authorized by applicable laws.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1. CHECKS, DRAFTS AND OTHER INSTRUMENTS; SECURITY VOTING AND
PROXIES. All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness, issued in the name of the Corporation shall be
signed by such officer or officers, or such other person or persons, as the
Board of Directors may from time to time designate. In the absence of specific
action by the Board of Directors, the Chairman of the Board, President and
Chief Executive Officer or any Executive Vice President or Vice President shall
have the authority to grant proxies to vote, or vote, on behalf of the
Corporation the securities of other corporations, both domestic and foreign,
held by the Corporation.
<PAGE> 9
Section 7.2. SEAL. The corporate seal of the Corporation shall be in such
form as the Board of Directors may determine and shall include the name of the
Corporation and the words "Corporate Seal, Delaware." The seal may be used by
causing it, or a facsimile thereof, to be impressed or affixed or in any manner
reproduced.
Section 7.3. FISCAL YEAR. The fiscal year of the Corporation shall
commence on the first day of January in each year and end on the following 31st
day of December.
Section 7.4. NOTICES. Notice by mail shall be deemed to have been given
at the time the same shall be mailed. Notice by telegraph shall be deemed to
have been given when the same shall have been delivered for prepaid
transmission into the custody of a company ordinarily engaged in the
transmission of such messages.
Section 7.5. WAIVER OF NOTICE. Whenever any notice whatever is required
to be given under the provisions of the laws of the State of Delaware or under
the provisions of the Certificate of Incorporation or these By-Laws, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto. Except as may be otherwise specifically provided by law, any waiver
by mail, telegraph, cable or wireless bearing the name of the person entitled
to notice shall be deemed a waiver in writing duly signed. The presence of any
person at any meeting either in person or by proxy shall be deemed the
equivalent of a waiver in writing duly signed, except where the person attends
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened.
Section 7.6. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the
capital stock, subject to the provisions of law and of the Certificate of
Incorporation.
Section 7.7. CREATION OF RESERVES. Before payment of any dividend or
making any distribution of profits, there may be set aside out of any funds of
the Corporation available for dividends such sum or sums as the Board from time
to time, in its absolute discretion, may think proper as a reserve or reserves
to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for such other purpose as the
Board shall think conducive to the interest of the Corporation, and the Board
may at any time modify or abolish any such reserve in the manner in which it
was created.
Section 7.8. AMENDMENTS. These By-Laws may be altered or repealed by the
affirmative vote of the majority of the entire number of directors specified
from time to time in the restated Certificate of Incorporation at any regular
meeting of the Board or at any special meeting of the Board, if notice of the
proposed alteration or repeal be contained in the notice of such special
meeting; provided, however, that any provisions of these By-Laws resulting from
such alteration or repeal shall at all times be in conformance with the
Restated Certificate of Incorporation and the laws of the State of Delaware.
<PAGE> 1
Exhibit (10)(k)
FIRST AMENDMENT TO THE SUNDSTRAND CORPORATION
NONEMPLOYEE DIRECTOR COMPENSATION PLAN
WHEREAS, the Sundstrand Corporation Nonemployee Director Compensation Plan
(the "Plan") was established effective as of August 1, 1994, with respect to
nonemployee Directors of the Corporation to provide for the payment in the
Corporation's common stock of the annual retainer to nonemployee Directors for
serving on the Board of Directors of the Corporation; and
WHEREAS, it has been determined that it is in the best interest of the
Corporation to amend the Plan to provide that the annual retainer may be paid
in the form of common stock for those nonemployee Directors who elect payment
of the annual retainer in such form and to further provide that the annual
retainer to be paid in place of a retirement benefit under the former Director
Emeritus Retirement Plan or otherwise shall be paid under the Plan to both
employee and nonemployee Directors in the form of restricted common stock of
the Corporation.
NOW, THEREFORE, effective as of April 21, 1998, the Sundstrand Corporation
Nonemployee Director Compensation Plan is amended as follows:
1. The name of the Plan is changed to be the "Sundstrand
Corporation Director Compensation Plan," and each place in the
Plan where the name of the Plan is used shall be changed to such
new name.
2. The second sentence of Section 1.1 of the Plan is changed
by deleting the word "shall" therefrom and in its place inserting
the word "may" and by changing the word "Nonemployee" to
"nonemployee."
3. Section 1.2 of the Plan is changed by deleting the word
"Nonemployee" where it appears in such Section.
4. The word "Nonemployee" where it appears in pargaraph (a)
of Article 2 of the Plan is changed to "nonemployee" and the
definition "Nonemployee Director" which appears in Article 2 of
the Plan is changed as follows:
"(d) "Director" means any member of the Board."
5. Article 2 of the Plan is further changed by adding a new
definition thereto, which shall provide as follows:
"(g) "Additional Annual Retainer" means the
amount in excess of the Annual Retainer which is paid to
both employee and nonemployee Directors for serving on
the Board and which generally is in place of any
retirement benefit heretofore
<PAGE> 2
paid to Directors, but shall not include any Board or
Board committee meeting attendance fees.
6. Articles 3 and 5 of the Plan are changed by deleting the
word "Nonemployee" where it appears in such Articles.
7. Article 6 of the Plan is changed to provide as follows:
"Article 6. Payment of or Conversion to Shares
"6.1 Subject to the terms and provisions of
the Plan, the Annual Retainer of a nonemployee Director
who, with respect to the period following an Annual
Meeting of Stockholders of the Company, has selected to
have such Annual Retainer paid in Shares, shall be paid
as of the date of such Annual Meeting in Shares, the Fair
Market Value of which on the date of such Annual Meeting,
together with the amount of cash necessary to prevent the
issuance of any fractional Share, shall equal the Annual
Retainer.
"6.2 Subject to the terms and provisions of
the Plan, the Additional Annual Retainer of a Director
with respect to the period following an Annual Meeting of
Shareholders of the Company commencing with the 1998
Annual Meeting, shall be converted as of the date of such
Annual Meeting into Shares, the Fair Market Value of
which on the date of such Annual Meeting, together with
the amount of cash necessary to prevent the issuance of
any fractional Share, shall equal the Additional Annual
Retainer."
8. Article 7 of the Plan is changed to provide as follows:
"Article 7. Restrictions on Shares
"7.1 All Shares issued under Section 6.1 of
the Plan may not be transferred for a period of six
months from the date of grant.
"7.2 Shares issued under Section 6.2 of the
Plan shall be subject to the following restrictions:
(a) the payment of Shares awarded
with respect to any period following an Annual
Meeting of Shareholders may only be made at the time
the Director ceases to be a Director of the Company
provided that if at the time such payment is to be
made the requirements of Section 7.2 (b) are not
met, payment shall be made at the first time
thereafter that such requirements are met; and
- 2 -
<PAGE> 3
(b) at the time payment of the
Shares awarded with respect to any period following
an Annual Meeting of Shareholders is to be made, the
cumulative annual return on equity of the Company
for the period since the date of award shall not be
less than 12%.
9. Section 11.3 of the Plan is changed by deleting the word
"Nonemployee" when it appears in such Section.
Executed this 19th day of November, 1997.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
Paul Donovan
Its: Executive Vice President and
Chief Financial Officer
- 3 -
<PAGE> 1
Exhibit (10)(q)
FIRST AMENDMENT TO THE SUNDSTRAND CORPORATION
DIRECTOR EMERITUS RETIREMENT PLAN
WHEREAS, effective as of July 20, 1989, the Sundstrand Corporation
Director Emeritus Retirement Plan (the "Plan") was established with respect to
Directors of Sundstrand Corporation who, on or after July 20, 1989, retire, die
or otherwise terminate their service as a Director of Sundstrand Corporation;
and
WHEREAS, it has been determined that it is in the best interest of the
Corporation to discontinue the accrual of additional benefits under the Plan
effective as of April 21, 1998, but to not otherwise change the Plan or the
circumstances under which benefits accrued prior to April 21, 1998, will be
paid.
NOW, THEREFORE, effective as of April 21, 1998, the Sundstrand Corporation
Director Emeritus Retirement Plan is amended as follows:
1. Notwithstanding anything to the contrary contained in the
Plan, the accrual of additional benefits under the Plan shall
cease.
2. With respect to all benefits which have accrued under the
Plan through April 21, 1998, such accrued benefits shall be paid
at such times and under such circumstances as would otherwise have
been paid if it were assumed the Plan continued without change
after such date.
Executed this 19th day of November, 1997.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
Paul Donovan
Its: Executive Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit (10)(w)
AMENDED AND RESTATED
SUNDSTRAND CORPORATION
DEFERRED COMPENSATION PLAN
EFFECTIVE DECEMBER 19, 1997
WHEREAS, effective as of January 1, 1995, Sundstrand Corporation, a
Delaware corporation, established the Sundstrand Corporation Deferred
Compensation Plan (the "Plan"); and
WHEREAS, the Plan has heretofore been amended and restated effective as of
December 31, 1997, and it is the intention that this amendment and restatement
shall be effective as of December 19, 1997, and shall supersede the prior
amendment and restatement which was to be effective December 31, 1997; and
WHEREAS, Effective as of December 31, 1997, the Sundstrand Corporation
Supplemental Savings Plan is being terminated and the balances of the accounts
for nonqualified deferred contributions and for nonqualified matching
contributions are being transferred to the Sundstrand Corporation Deferred
Compensation Plan as provided in Appendix A hereto; and
WHEREAS, certain employees covered under the Sundstrand Corporation
Employee Savings Plan, due to various tax provisions limiting deferrals, are
not able to fully avail themselves of the Company match on contributions under
the Sundstrand Corporation Employee Savings Plan; and
WHEREAS, Sundstrand Corporation desires to allow the employees referred to
in the preceding paragraph the opportunity under this plan to fully avail
themselves of the Company's match on contributions; and
WHEREAS, effective with the Company's Annual Meeting of Stockholders in
1998, nonemployee members of the Company's Board of Directors will be able to
defer payment of all or a portion of the annual retainer fee and Board and
Committee meeting attendance fees;
NOW, THEREFORE, effective December 19, 1997, the Sundstrand Corporation
Deferred Compensation Plan (the "Plan") is amended and restated to provide as
follows (this amendment and
<PAGE> 2
restatement to supersede the prior amended and restated plan which was to
become effective as of December 31, 1997).
ARTICLE I
NAME, PURPOSE, AND DEFINITIONS
Section 1.1. Name. This Plan shall be known as the
"Sundstrand Corporation Deferred Compensation Plan."
Section 1.2. Purpose.
(a) To provide Executives the opportunity to temporarily defer a portion
of their compensation and/or part or all of a lump sum distribution from the
Sundstrand Corporation Supplemental Retirement Plan.
(b) To retain and attract to the Corporation's employment and the
employment of its subsidiaries Executives of outstanding competence.
(c) To provide a select group of management and/or highly compensated
employees of the Corporation covered under the Sundstrand Corporation Employee
Savings Plan the opportunity to accumulate deferred compensation which cannot
be accumulated under the Sundstrand Corporation Employee Savings Plan because
of the limitations on deferrals under Code (defined below) Section 402(g) (the
"Deferral Limit"), the limitations on annual additions under Code Section 415
(the "415 Limit"), and the limitations on compensation to be taken into account
for tax-qualified pension plan benefits under Code Section 401(a)(17) (the "Pay
Cap") and/or because Deferral Contributions (defined below) and Matching
Contributions (defined below) which could not be made under the Sundstrand
Corporation Employee Savings Plan because of the nondiscrimination rules under
Code Sections 401(m)(3) ("ADP [Actual Deferral Percentage] Restrictions") or
401(m)(2) ("ACP [Actual Contribution Percentage] Restrictions"). The Plan is
intended to meet the requirements of Section 114 of Title 4, Chapter 4 of
United States Code.
(d) To provide nonemployee Directors of the Company the opportunity to
temporarily defer all or a portion of their annual retainer fee and all or a
portion of their Board and Committee meeting attendance fees.
Section 1.3. Limitations.
<PAGE> 3
(a) This Plan is intended to be "a plan which is unfunded and maintained
by an employer primarily for the purpose of providing deferred compensation for
a select group of management or highly compensated employees" within the
meaning of Sections 201(2) and 301(a)(3) of the Employee Retirement Income
Security Act of 1974 ("ERISA"), and is intended to be unfunded for purposes of
the Code, and shall be interpreted and administered in a manner consistent with
that intent.
(b) The Executives who participate in this Plan shall be members of a
select group of management or highly compensated employees of the Corporation.
(c) The Directors who participate in this Plan shall be nonemployee
members of the Board of Directors of the Corporation.
Section 1.4. Definitions. Whenever used in this Plan, the following
words and phrases shall have the meanings ascribed to them in this Section,
unless otherwise specifically defined or unless the context clearly otherwise
requires:
(a) "Account": Those separate accounts established and maintained under
the Plan in the name of each Executive or Director, pursuant to the provisions
of Article V.
(b) "Basic Plan": The Sundstrand Corporation Employee Savings Plan.
(c) "Beneficiary": The beneficiary or beneficiaries designated by the
Executive or Director to receive the amount payable after the death of the
Executive or Director, as provided in Section 7.3 hereof.
(d) "Board": The Board of Directors of Sundstrand Corporation.
(e) "Code": The Internal Revenue Code of 1986, as amended and now in
effect and as it may be amended from time to time. All citations to sections
of the Code are to such sections as they may from time to time be amended or
renumbered.
(f) "Committee": The Compensation Committee of the Board of Directors of
Sundstrand Corporation.
<PAGE> 4
(g) "Compensation": (i) "Compensation" described at Sections 1.5(b)(i),
(ii) and (iii) of the Basic Plan, plus for any applicable Executive the
"Incentive Compensation Award" as used in the Sundstrand Corporation Officer
Incentive Plan or as used in the Sundstrand Corporation Management Incentive
Plan and (ii) with respect to any Director the annual retainer fee and any
Board and Committee meeting attendance fees.
(h) "Corporation": Sundstrand Corporation, provided that for purposes of
determining Executives eligible to participate in this Plan "Corporation"
includes both Sundstrand Corporation and any corporation that is a "Related
Corporation" as defined in Section 1.29 of the Basic Plan, and any company
which is a successor as a result of merger, consolidation, liquidation,
transfer of assets, or other reorganization.
(i) "Deferral Contribution": (i) Compensation that is earned and which
would otherwise be paid to an Executive, which the Executive elects to defer
under the Plan, determined without regard to the Deferral Limit, the 415 Limit,
the Pay Cap or the ADP Restrictions under the Basic Plan, and which is credited
to the Deferred Contribution Account of the Executive pursuant to the
provisions of Section 5.1 and (ii) Compensation that is earned and which would
otherwise by paid to a Director, which the Director elects to defer under the
Plan and which is credited to the Deferred Contribution Account of the Director
pursuant to the provisions of Section 5.1.
(j) "Deferral Election Form": The form whereby an Executive or Director
designates the portion of his Compensation and/or part or all of a lump sum
distribution from the Sundstrand Corporation Supplemental Retirement Plan to be
deferred, as set forth in Section 3.2 of this Plan and on which the Executive
or Director makes certain other designations as required. Such form shall be
the form from time to time provided by the Corporation for such purpose.
(k) "Deferred Compensation Account": The account maintained for each
Executive and each Director pursuant to Section 5.1 of the Plan.
(l) "Director": A person who is a nonemployee member of the Board of
Directors of the Corporation (collectively the "Directors" and individually a
"Director").
<PAGE> 5
(m) "EBC": The Employee Benefit Committee of Sundstrand Corporation.
(n) "Executive": A person employed by the Corporation who is determined
by the Corporation to be a member of a select group of management or highly
compensated employees, who is designated by the Corporation to be eligible to
participate in the Plan (collectively the "Executives" and individually an
"Executive").
(o) "Matching Contribution": Those contributions by the Corporation to
the Basic Plan for a Plan Year on account of the Qualified Deferral
Contributions made during that Plan Year for an Executive in the Basic Plan.
(p) "Nonqualified Matching Contribution": An amount credited to the
Nonqualified Matching Contribution Account of an Executive pursuant to the
provisions of Sections 4.1 and 5.2.
(q) "Nonqualified Matching Contribution Account": The account maintained
for certain Executives pursuant to Section 5.2 of the Plan.
(r) "Plan Year": Any calendar year.
(s) "Qualified Deferral Contribution": Those contributions by the
Corporation to the Basic Plan for a Plan Year on behalf of and on account of
the qualified cash or deferral elections within the meaning of Code Section
401(k) made by the Executives in the Basic Plan.
(t) "Unanticipated Emergency": Severe financial hardship to an Executive
or a Director resulting from a sudden and unexpected illness or accident of the
Executive or Director or of a dependent of the Executive or Director, loss of
the Executive's or Director's property due to casualty, or other similar
extraordinary and unanticipated circumstances due to events beyond the control
of the Executive or Director.
ARTICLE II
ADMINISTRATION AND INTERPRETATION OF THE PLAN, NONASSIGNABILITY
Section 2.1. Interpretation. Except as otherwise provided in the Plan,
the Committee shall have full power and discretionary authority to interpret,
apply, and administer the
<PAGE> 6
provisions of this Plan, determine any questions of fact under this Plan,
resolve any ambiguities under this Plan, and make all decisions and
determinations necessary under this Plan or in connection with its
administration, interpretation, and application. Decisions by the Committee
shall be final and binding upon all parties.
Section 2.2. Contractual Nature of Plan. The payment of any amount under
this Plan to an Executive or to any Beneficiary thereof shall be made from
assets which shall be a part of the general assets of the Corporation. No
Executive or Director nor any person having a claim under or through an
Executive or Director shall have or acquire any interest in any specific assets
by virtue of the provisions of this Plan. Each Executive, each Director and
each Beneficiary shall only have the rights of general unsecured creditor of
the Corporation. The Plan constitutes a mere promise by the Corporation to
make transfers, distributions and/or benefit payments in the future.
Section 2.3. No Assignment. Neither any Executive's, nor any Director's
nor any Beneficiary's interest in this Plan or any rights related thereto shall
be subject in any manner to (a) any claims of any creditor of the Executive,
Director or Beneficiary, (b) the debts, contracts, liabilities or torts of the
Executive, Director or Beneficiary, or (c) voluntary or involuntary transfers
to, on behalf of, or on account of, any creditor of the Executive, Director or
Beneficiary. No right, expectancy, distribution or payment pursuant to this
Plan to the Executive, Director or Beneficiary, shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge, whether voluntary or involuntary, and any attempt to so anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge the same shall be
void; provided, that the foregoing notwithstanding, any Executive or Director
may assign any right, expectancy, distribution or payment under the Plan to any
member of his or her immediate family or to a family partnership, family trust
or other family entity that benefits one or more members of the Executive's
immediate family. If any person or entity attempts to take any action contrary
to this Section, such action will have no effect, and the Corporation and the
Executive, Director or Beneficiary will disregard the action, will not in any
manner be bound by it, and will not incur any liability on account of it or the
disregard of it.
For purposes of this Section the term "immediate family" shall mean an
Executive or a Director's spouse, children and
<PAGE> 7
grandchildren (including stepchildren, adopted children and grandchildren),
parents, brothers, sisters (including step- and half-brothers and sisters), and
nieces and nephews.
ARTICLE III
ELIGIBILITY, DEFERRAL ELECTION AND CONTRIBUTIONS
Section 3.1. Eligibility. Participation shall be limited to Directors
and to those Executives who are determined by the Corporation to be eligible to
participate in the Plan.
Section 3.2. Notification, Participation, and Election.
(a) Prior to the beginning of a Plan Year, the Corporation shall notify
those individuals, if any, who will be eligible Executives or Directors, for
the next Plan Year and succeeding Plan Years. After notification, an Executive
or Director who desires to participate in the Plan shall, prior to January 1 of
the Plan Year, execute a Deferral Election Form, and such other forms and
documents as the Corporation may require from time to time, and the Executive
or Director shall be bound by all of the terms and provisions thereof. Once
made, such election shall be irrevocable with respect to the Plan Year.
(b) With respect to an Executive who is hired by the Corporation during a
Plan Year, the Corporation shall notify the Executive within thirty days of
commencement of such employment of his or her eligibility to participate in the
Plan. Within ten days after receipt of notification, such an Executive who
desires to participate in the Plan shall execute a Deferral Election Form, and
such other forms and documents as the Corporation may require from time to
time, and the Executive shall be bound by all of the terms and provisions
thereof. Once made, such election shall be irrevocable with respect to the
Plan Year.
(c) With respect to a Director whose first term of office as a Director
commences during a Plan Year, the Corporation shall notify the Director within
ten days of commencement of such term of office of his or her eligibility to
participate in the Plan. Within ten days after receipt of notification, such
Director, if he or she desires to participate in the Plan shall execute a
Deferral Election Form, and such other forms and documents as the Corporation
may require from time to time, and the Director shall be bound by all of the
terms
<PAGE> 8
and provisions thereof. Once made, such election shall be irrevocable with
respect to the Plan Year.
Section 3.3. Deferral Contributions. Deferral Contributions for
Executives shall be made through payroll deductions. Deferral Contributions
for Directors shall be made by deducting the amount of any deferral from the
annual retainer fee and from Board and Committee fees as they become payable.
An Executive or Director may change the amount of the Deferral Contribution by
delivering to the Corporation prior to the beginning of any Plan Year a new
Deferral Election Form, with such change being first effective for Compensation
to be earned in that Plan Year. Once made, a Deferral Contribution deduction
election shall continue in force indefinitely, until changed by the Executive
or Director on a subsequent Deferral Election Form delivered to the
Corporation.
ARTICLE IV
NONQUALIFIED MATCHING CONTRIBUTIONS FOR EXECUTIVES
Section 4.1. Nonqualified Matching Percentage. The Corporation shall
make a Nonqualified Matching Contribution in the amount that is 100% of the
lesser of (a) the Executive's combined Qualified Deferral Contribution and
Deferral Contribution, or (b) 2% of the Executive's Compensation for the Plan
Years 1998 and 1999 and 3% of the Executive's Compensation for the Plan Years
following 1999; less the Matching Contribution made in the Plan Year.
ARTICLE V
PLAN ACCOUNTS
Section 5.1. Deferred Compensation Account. The Corporation shall
establish an account to which are credited an Executive's or Director's
Deferral Contributions, plus any interest accrued with respect to such
contributions.
Section 5.2. Nonqualified Matching Contribution Account for Executives.
The Corporation shall establish an account to which are credited an Executive's
Matching Contributions, plus any interest accrued with respect to such
contributions.
<PAGE> 9
ARTICLE VI
VESTING
Section 6.1. Deferral Contributions. Executives and Directors shall be
one hundred percent (100%) vested in their respective Deferred Compensation
Accounts.
Section 6.2. Nonqualified Matching Contributions for Executives. An
Executive shall have the same vesting percentage in his or her Nonqualified
Matching Contribution Account as in such Executive's Matching Contribution
account under the Basic Plan
ARTICLE VII
CREDITING OF INTEREST, PAYMENT OF DEFERRED AMOUNTS AND BENEFICIARY DESIGNATION
Section 7.1. Crediting of Interest to Accounts. Each account maintained
for an Executive or a Director will have two interest components, as follows:
"Interest Component A" which will be calculated at 100% of the Moody Average
(as defined below), and "Interest Component B" which will be calculated at 30%
of the Moody Average.
Distributions to Executives who have reached age 55, become disabled, or die
shall include both Interest Components. Distributions to Executives who are
actively employed by the Corporation and have not attained age 55 shall include
only Interest Component A, with Interest Component B being paid to such
participants upon their attainment of age 55, disability or death if then
employed by the Corporation, or forfeited if they do not attain age 55 while so
employed.
Distributions to Directors shall always include both Interest Components.
Irrespective of the Plan Year in which any deferrals are made, interest will
accrue at the same rate in any given Plan Year for current and past deferrals.
Interest shall be compounded annually.
For purposes of the Plan, the "Moody Average" means the average rate under the
Moody's Long-Term Corporate Bond Yield Averages for the 12-month period ending
on the last business day in
<PAGE> 10
EXHIBIT (10)(W)
September of the Plan Year preceding the year in which such rate shall be used.
Section 7.2. Payment of Deferred Amounts. In the year prior to the
elected distribution date, the Executive or Director must complete the
Compensation Payment Election Form to indicate the desired payment option or to
elect to redefer payment. (The redeferral option is available only to
Executives who at such time are active employees and only to Directors who at
such time are sitting members of the Board.) Unless otherwise provided by
action authorized in Section 9.1 hereof, or as otherwise provided pursuant to
the terms of this Plan, the Corporation shall pay an amount in accordance with
the payment option specified on the Executive's or Director's Compensation
Payment Election Form. Payments will be made in January of the specified
distribution year and will be in one or more annual payments over a period
not to exceed ten years. After the Corporation has paid an amount equal to the
Executive's or Director's Deferred Compensation Account, the Corporation shall
have no further obligation under this Plan. In the event the Executive leaves
the Corporation or the Director ceases to be an active Board member before the
specified distribution year, payment will be made as indicated on the
appropriate Deferral Election Form. In all cases, appropriate taxes on the
deferral payments are the responsibility of the payee.
Section 7.3. Beneficiary. Executives and Directors may designate a
Beneficiary, to receive the amounts as provided herein after the Executive's or
Director's death, by delivering to the Corporation a written designation on the
form provided by the Corporation for such purpose. In the event of Executive's
or Director's death prior to receipt of payment as provided in Section 7.2
hereof, the Corporation shall pay such amount to the Beneficiary or, absent
such designation, to the Executive's or Director's estate as applicable.
Payment will be made in January in the year or years following death according
to the payment option selected by the Executive or Director; provided, however,
that the Beneficiary may, prior to January 1 of the year in which payment to
such Beneficiary commences, make an alternative election on a Compensation
Payment Election Form.
Section 7.4. Payment Upon Hardship. In the event of a hardship of the
Executive or of a Director, the Executive or Director may apply to the
Corporation for the distribution of all or any part of his or her accounts.
Withdrawals of amounts because of an unanticipated emergency must only be
permitted to
<PAGE> 11
the extent reasonably needed to satisfy the hardship need after cessation of
deferrals under the Plan. Whether a hardship distribution is allowed shall be
determined by the Corporation in the same manner, and under the same terms and
conditions, as under the Basic Plan. Upon a finding of hardship, the
Corporation shall make the appropriate distribution to the Executive or
Director.
Section 7.5. Change of Control. In the event of a "Change of Control"
(as defined in the Sundstrand Corporation Management Stock Performance Plan),
(i) if termination of an Executive's employment occurs within 12 months after
such Change in Control, the affected Executive will receive payment of his or
her account balances at the time of his or her termination of employment, or
(ii) if a Director ceases to be a Director of the Corporation or of the entity
acquiring control of the Corporation, the affected Director will receive
payment of his or her account balance at the time he or she cases to be a
Director of the Corporation or of the entity acquiring control of the
Corporation.
Section 7.6. Withdrawal. An Executive or a Director may, in his or her
discretion, withdraw all of his or her account balances at any time provided
that:
a) if the Executive is then employed by the Corporation or the Director is
a current member of the Board, 6% of the amount withdrawn shall be forfeited to
the Corporation and the Executive or Director may not again become a
participant in the Plan prior to the one-year anniversary date of such
withdrawal; and
b) if the Executive is no longer employed by the Corporation or the
Director has ceased being a member of the Board, 6% of the amount withdrawn
shall be forfeited to the Corporation.
Section 7.7. Early Payment. Early payment of an Executive's account
balances may be permitted under such other circumstances as are determined by
the EBC to warrant such early payment.
<PAGE> 12
ARTICLE VIII
AMENDMENT AND TERMINATION OF PLAN
Section 8.1. Amendment and Termination of the Plan. At any time and from
time to time, by action of either the Board or by the Compensation Committee of
the Board, the Corporation shall have the right to (a) amend this Plan in any
respect, (b) replace this Plan with another deferred compensation arrangement
or (c) terminate this Plan, in each such case subject to the Executive's or
Director's rights at such time pursuant to the applicable Deferral Election
Form and this Plan.
ARTICLE IX
MISCELLANEOUS
Section 9.1. Additional Information and Cooperation. Each Executive and
Director shall furnish to the Corporation such documents or other information
as is necessary or desirable for the purpose of this Plan, and it shall be a
condition of participation in this Plan that each Executive or Director furnish
such information promptly and sign such documents as the Corporation may
require before any benefit becomes payable under this Plan. An Executive or a
Director on the one hand and the Corporation on the other will take such
actions as are necessary and appropriate to carry out the provisions of this
Plan, with the intention of establishing a deferred compensation arrangement
between the Executive and the Corporation or the Director and the Corporation,
as applicable.
Section 9.2. Notice. Any notice, consent or demand required or permitted
to be given under the provisions of this Plan shall be in writing, and shall be
signed by the party giving or making the same. If such notice, consent or
demand is mailed, it shall be sent by United States certified or registered
mail, postage prepaid, addressed to such party's last known address as shown on
the records of the Corporation. The date of such mailing shall be deemed the
date of notice, consent or demand.
Section 9.3. No Guarantee of Employment for an Executive. Neither this
Plan nor any action taken hereunder shall be construed as a contract of
employment between the Corporation and the Executive, to be a consideration
for, or an inducement or condition of, the employment of the Executive, or as
giving the Executive any rights to be retained in the employ of the
<PAGE> 13
Corporation, or to interfere with the right of the Corporation to discharge the
Executive at any time.
Section 9.4. Litigation. Except as may be otherwise required by law, in
any action or judicial proceeding affecting the Plan, no Participant or
Beneficiary shall be entitled to any notice or service of process, and any
final judgment entered in such action shall be binding on all persons
interested in, or claiming under, the Plan.
Section 9.5. Fees and Expenses. All fees and expenses incurred in the
administration and operation of the Plan shall be borne by the Corporation.
Section 9.6. Claims Procedure. The claims procedure under the Plan is as
follows:
(a) Any Executive, Director or Beneficiary, or the duly authorized
representative of an Executive, Director or Beneficiary, may file with the
Corporation's Corporate Manager, Human Resources (the "Manager"), or such other
party as the EBC may designate, a claim for a Plan benefit. Such a claim must
be in writing and delivered to the Manager. Within 90 days of receipt thereof,
the Manager shall send to the claimant, by mail, postage prepaid, a notice of
the granting or the denying, in whole or in part, of the claim, unless special
circumstances require an extension of time for processing the claim. In no
event may the extension exceed 90 days from the end of the initial period. If
such an extension is necessary, the claimant will be given a written notice to
this effect prior to the expiration of the initial 90-day period. The Manager
shall have full discretion to deny or grant a claim in whole or in part in
accordance with the terms of the Plan. A claim denial shall be written in a
manner calculated to be understood by the claimant, shall state the specific
reason or reasons for the denial, shall reference the pertinent part of the
Plan upon which the denial is based, shall contain a description of any
additional material or information necessary for the claimant to perfect the
claim and an explanation as to why such material or information is necessary,
and shall explain the Plan's appeal procedure. If notice of the denial of a
claim is not furnished in accordance with this Section, the claim shall be
denied and the claimant shall be permitted to exercise the right of appeal
stated in subsection (b) of this Section.
<PAGE> 14
(b) Within 60 days after receipt by the claimant of notification of the
denial of a claim, the claimant or the claimant's representative may request
the EBC's review of the Manager's claim denial by written application made to
the EBC's Secretary, who will cause the appeal request to be placed upon the
agenda for the EBC's next scheduled meeting. If the request for appeal is
filed within 30 days preceding the date of such meeting, a decision will be
made by no later than the date of the second meeting following the Secretary's
receipt of the appeal request. If special circumstances require a further
extension of time, claimant shall be so notified and the decision shall be
rendered not later than the third meeting of the EBC following the Plan's
receipt of the appeal request. The decision on appeal shall be written in a
manner calculated to be understood by the claimant and shall include specific
reasons for the decision and specific references to the pertinent Plan
provisions on which the decision is based.
Section 9.7. Gender and Number. For purposes of this Plan document, the
masculine pronouns shall be construed to include the feminine, the feminine
shall be construed to include the masculine, the singular to include the
plural, and the plural to include the singular.
Section 9.8. Applicable Law. This Plan and all rights hereunder shall be
construed, regulated, and administered under the laws of the State of Illinois
(without regard to its conflict of law rules).
<PAGE> 1
Exhibit (10)(y)
[SUNDSTRAND CORPORATION LETTERHEAD]
September 22, 1997
Mr. Richard M. Schilling
1637 Coachman Drive
Rockford, Illinois 61107
Dear Dick:
The purpose of this letter agreement is to set forth terms and conditions
relating to certain aspects of your retirement from Sundstrand Corporation (the
"Company") effective December 31, 1997. Your signing below will indicate your
agreement with the provisions of this letter agreement, which supersedes all
prior negotiations, understandings and agreements and constitutes the entire
agreement between the Company and you, with both parties intending to be
legally bound and acknowledging that modifications hereto may be made only in
writing.
Your execution of this letter agreement will acknowledge your election to
retire effective December 31, 1997 (the "Retirement Date"). You will continue
to serve in your current capacities as Vice President and General Counsel and
Secretary of the Company for the remainder of 1997 or until a successor is
named by the Company, whichever is earlier. If your service in those
capacities ends earlier than December 31, 1997, you will still remain an
employee of the Company through December 31, 1997 with full continuation of
your benefits including accrued vacation and with continuation of your salary
at the rate provided for by this letter agreement. At the time requested by
the Company, you will announce, in a manner reasonably designated by the
Company, your intention to retire on December 31, 1997. Effective as of the
Retirement Date, you will resign from all offices, directorships and other
positions you hold with the Company and its subsidiaries and affiliates
(collectively, with the Company, the "Companies"), and you will thereafter
receive all retiree and other benefits to which you are entitled under the
applicable terms and conditions of all of the compensation and benefit plans,
programs and arrangements of the Companies, including but not limited to
retiree medical benefits and payment, in accordance with the terms of deferral,
of any compensation previously deferred by you. Your restricted stock awards
and your stock option awards will fully vest on December 31, 1997 without any
further approval or other action being required, and the continued
exercisability of your stock options will be governed by the relevant plans as
applicable to retirees. You will be paid $116,566 in February 1998,
representing your bonus earned in 1997 (from which the Company will withhold
federal and state income taxes and applicable payroll taxes).
As additional post-retirement benefits, the Company will reimburse you for
expenses which you incur in 1998 for (i) income tax return preparation and tax
and financial planning services, up to a limit of $4,700 and (ii) physical
examinations for you and your wife,
<PAGE> 2
Mr. Richard M. Schilling
September 22, 1997
Page 2
including transportation and other expenses, in accordance with the policies of
the Company which are in effect for 1998 for executive physical examinations.
During the post-retirement period from January 1, 1998 through June 30,
1999, you will remain available to consult with the Company regarding matters
as to which you have special knowledge or experience, including litigation
matters which are pending as of the time of your retirement. Those consulting
services will not require more than 20 hours of working time from you during
any calendar month, and the specific scheduling of your consulting will be as
reasonably agreed upon between you and the Company. In addition, during the
months of January, February and March, 1998, the Company will provide you with
up to eight hours per month of secretarial support. That support will be
provided by Marie Lynch, and the specific scheduling of her work for you will
be subject to her availability.
In connection with your transition to retirement, you will not receive
additional awards of restricted stock or stock options during the rest of 1997.
In addition, your travel on behalf of the Company (including your use of the
Company airplane) will be as approved in advance by the Chief Executive Officer
of the Company. Finally, your salary for the period from September 27, 1997
through December 31, 1997 will be reduced to $2,800 per biweekly pay period,
but that reduction will be offset by compensation included in the monthly
payments described in the following paragraph.
As consideration for the consulting services referred to above and for the
release and the noncompetition covenant set forth in this letter agreement, the
Company will make an initial payment in the amount of $70,000 on January 2,
1998 and thereafter an additional eighteen (18) monthly payments at the
beginning of each month in the amount of $25,000 each, commencing with the
month of January 1998 and ending with the month of June 1999; provided that if
at any time prior to receipt of such a monthly payment you have materially
breached any of the terms of this letter agreement, you shall not be entitled
to any further monthly payments; and provided further that you shall be
entitled to notice of any breach and offered 30 days in which to cure said
breach. If you fail to cure said breach within said 30 days, your remaining
payments shall be forfeited. Any dispute as to whether a breach has occurred
shall be subject to determination by a court of competent jurisdiction.
If, not later than November 30, 1997, you elect in writing to receive your
pension benefits from the Company not as a lump sum payable in January 1998 but
as a monthly retirement benefit (with a joint and survivor feature) commencing
in July 1999, (i) the amount of the monthly payments to be made to you as
described in the preceding paragraph of this letter agreement will be $29,250
instead of $25,000 and (ii) the Company will pay you a supplemental monthly
retirement benefit (with a joint and survivor feature) in the amount of
$781.86, commencing in July 1999. If you elect to receive your pension
benefits as a lump sum payable in January 1998, the Company will pay you a
supplemental monthly retirement benefit (with a joint and survivor feature) in
the amount of $176.05, commencing in July 1999. Either of such supplemental
monthly retirement benefits shall be payable for the
<PAGE> 3
Mr. Richard M. Schilling
September 22, 1997
Page 3
period you would have otherwise received a regular monthly pension payment
under the terms of the pension plan.
You acknowledge that the payment of taxes with respect to any payments or
benefits provided by the Company is your sole responsibility, whether or not
income taxes are withheld by the Company, and you agree to hold the Company
harmless from any obligation in connection therewith, including interest and
penalties.
You acknowledge that you have been a senior executive officer of the
Company and (i) are privy to and have knowledge of trade secrets and other
Confidential Information (defined below), (ii) have developed long term
personal relationships with many of the Companies' customers as a result of
your employment with the Company, and (iii) have occupied a position of trust
and confidence with respect to the Companies' customers and Confidential
Information. For purposes of this letter agreement, "Confidential Information"
shall mean trade secrets and confidential or proprietary information regarding
designs, inventions, existing and proposed new products, processes, techniques,
testing and servicing procedures, know how, programs, equipment, prototypes,
costs, margins and pricing structures, business plans, projections, market
analyses and marketing plans, sales figures and customer relationships,
customer lists, confidential manufacturing and financial data and any other
information regarding the Companies not generally known or a matter of public
knowledge or available from other sources without restrictions and not bound to
any obligation of confidentiality to the Company. You also acknowledge that
the Companies conduct their business worldwide and that your duties and
responsibilities have been worldwide.
You agree that during the period beginning on the date hereof and ending
two years from the Retirement Date you will not directly or indirectly
influence or attempt to influence any of the Companies' customers or
prospective customers in a manner to divert or attempt to divert business away
from the Companies. In addition, you agree that for the period aforestated you
will not own, manage, operate, participate in, perform services for or
otherwise carry on, assist or be connected with any business engaged in the
design, development, manufacture and/or sale of products or services
competitive with any of the present products or services of the Companies,
without the prior written consent of the Company's Chief Executive Officer,
which consent will not be unreasonably withheld; provided, however, that you
may own, directly or indirectly, solely as an investment, publicly traded
securities of any company as long as you do not participate in the management
of that company and you do not, directly or indirectly, own more than one
percent (1%) of any class of securities of that company.
You agree that from and after the date hereof you will not, without the
written consent of the Company's Chief Executive Officer, disclose to others
any trade secrets or other Confidential Information of which you have
knowledge. The foregoing notwithstanding, you agree at all times to comply
with the terms and conditions of that certain "Employee Patent
<PAGE> 4
Mr. Richard M. Schilling
September 22, 1997
Page 4
and Confidential Information Agreement" previously executed by you. You also
agree to turn over to the Company on the Retirement Date all copies of
documents and other written, printed or graphic matter and computer materials
in your possession or control that relate to the Companies' business.
You agree not to divulge or to disclose, without prior written permission
from the Company's Chief Executive Officer, at any time in the future any
information concerning the terms of this letter agreement unless required by
court process or order of court or otherwise as required by law; provided,
however, that you may disclose such information, on a confidential basis, to
members of your immediate family, your attorneys, your tax advisers, and/or
your financial and estate advisers. In view of the positions you held with the
Companies, you agree to favorably promote the Companies, their management and
businesses in your dealings with third parties and, to that end, you further
agree not to engage in any conduct harmful to the Companies or their employees
or businesses and not to publish or otherwise make any statement which is
critical of the Companies, their employees or their businesses or products.
The Company agrees to direct its officers elected by its Board of Directors not
to make disparaging remarks about you.
You hereby unconditionally release and forever discharge the Companies and
their divisions and their directors, officers, employees and agents, and their
respective predecessors, successors, heirs, personal representatives and
assigns, from any and all actions, claims, rights, lawsuits, damages and
expenses (including attorneys' fees) of any kind, known or unknown, fixed or
contingent, liquidated or unliquidated, in law or in equity, and whether
arising from tort, statute or contract, which you or your heirs or personal
representatives now have, or have ever had, arising from your employment and
other relationships with the Companies; provided, however, that this release
and discharge does not apply to any rights or claims arising under this letter
agreement or under any benefit plan of the Company in which you are a vested
participant. This release and discharge includes a waiver of any claim you may
have under local, state or federal law, including but not limited to the
Illinois Human Rights Act, Title VII of the Civil Rights Act of 1964, the
Employee Retirement Income Security Act, the Americans with Disabilities Act,
and the Age Discrimination in Employment Act of 1967, as amended by the Older
Workers Benefit Protection Act, in each case as amended, (the "ADEA") and the
law of defamation, libel, slander, invasion of privacy, intentional infliction
of emotional distress, interference with contractual relations, retaliatory
discharge, breach of contract, wrongful discharge, implied contracts or implied
covenants of good faith, or fair dealing, and any other statute, authority or
law. You agree not to sue the Company or any of the other released entities or
persons with respect to claims covered by the foregoing release. You also
agree that the additional compensation which is referred to in the third, sixth
and seventh paragraphs of this letter agreement will be payable to you only if
you execute and deliver to the Company on or after the Retirement Date a waiver
and release in the form attached hereto as Exhibit A.
By signing below, you acknowledge your understanding that conduct contrary
to the provisions of this letter agreement on your part will constitute a
breach of this letter
<PAGE> 5
EXHIBIT (10)(Y)
Mr. Richard M. Schilling
September 22, 1997
Page 5
agreement by you which is likely to cause irreparable harm to the Company.
Therefore, you hereby acknowledge and agree that, in the event of a breach of
this letter agreement by you, damages constitute an inadequate remedy at law
and that the Company shall be entitled to specific performance of the terms of
this letter agreement, attorneys fees and/or injunctive relief. This letter
agreement shall be construed in accordance with the laws of the State of
Illinois (other than its conflicts of laws principles) applicable to contracts
made and to be performed entirely within Illinois, and you and the Company
agree that courts in Illinois shall have personal jurisdiction over both
parties in any lawsuit with respect to this letter agreement or your employment
and other relationships with the Companies, and venue for any such suit shall
lie in any state or federal court in the City of Rockford, Illinois. You
acknowledge and agree that you would not otherwise be entitled to receive from
the Company the consideration set forth in the third, sixth and seventh
paragraphs of this letter agreement but for the agreement of the Company herein
to provide such consideration. You also acknowledge and agree that this letter
agreement is not in connection with an exit incentive, early retirement, or
other employment termination program offered to a group or class of employees.
As to your release and waiver of rights under the ADEA, you acknowledge
that you are hereby advised to consult with an attorney prior to executing this
release and have been given a period of 21 days within which to consider its
terms. You further acknowledge being informed that for a period of 7 days
following your execution of this letter agreement, you have the right to revoke
said document and that it shall not become effective or enforceable until such
revocation period has expired.
Very truly yours,
SUNDSTRAND CORPORATION
/s/ Robert H. Jenkins
Robert H. Jenkins
President and Chief Executive Officer
I have read and agree to the terms and conditions stated above.
Date: September 22 , 1997
/s/ Richard M. Schilling
Richard M. Schilling
<PAGE> 6
EXHIBIT A
WAIVER AND RELEASE
FOR VALUE RECEIVED, I, Richard M. Schilling, in connection with that certain
letter agreement by and between Sundstrand Corporation (the "Company") and
myself, dated September 22, 1997, with respect to my retirement from employment
with the Company (the "Letter Agreement"), do hereby agree as follows:
1. Release
(a) I hereby unconditionally release and forever discharge the Company
and its subsidiaries and affiliates (collectively, with the Company, the
"Companies") and their divisions and their directors, officers, employees
and agents, and their respective predecessors, successors, heirs, personal
representatives and assigns, from any and all actions, claims, rights,
lawsuits, damages and expenses (including attorneys' fees) of any kind, know
or unknown, fixed or contingent, liquidated or unliquidated, in law or in
equity, and whether arising from tort, statute or contract, which I or my
heirs or personal representatives now have, or have ever had, arising from
my employment and other relationships with the Companies. This includes a
waiver of any claim I may have under local, state or federal law, including
but not limited to the Illinois Human Rights Act, Title VII of the Civil
Rights Act of 1964, the Employee Retirement Income Security Act, the
Americans with Disabilities Act, and the Age Discrimination in Employment
Act of 1967, as amended by the Older Workers Benefit Protection Act, in each
case as amended, (the "ADEA") and the law of defamation, libel, slander,
invasion of privacy, intentional infliction of emotional distress,
interference with contractual relations, retaliatory discharge, breach of
contract, wrongful discharge, implied contracts or implied covenants of good
faith, or fair dealing, and any other statute, authority or law; provided,
however, the foregoing release shall not apply to any claim relating to my
rights and benefits under the Letter Agreement or under any benefit plan of
the Company in which I am a vested participant.
(b) I also acknowledge and agree that by entering into the Letter
Agreement and executing this waiver and release I can never make claim or
demand upon or sue the Companies or any of the other released entities or
persons with respect to claims covered by the foregoing release.
2. Representations and Warranties
I hereby represent and warrant that: (a) I have no pending claims against
the Companies (or any of the other released entities or persons covered by
the foregoing release) with any municipal, state, federal or other
governmental or nongovernmental entity; and (b) that I will not file any
such claims with respect to any events occurring on or before the date
hereof, other than to enforce the Letter Agreement.
<PAGE> 7
3. Acknowledgment
(a) I hereby acknowledge that: (i) the Company has given me adequate time
to review and consider this waiver and release; (ii) that the Company has
advised, and does hereby in writing advise, me to consult with an attorney
before signing this waiver and release; (iii) that I have read this waiver
and release in its entirety; (iv) that I have had ample opportunity to
confer with my own attorney for assistance and advice concerning this waiver
and release; (v) that I understand the terms of this waiver and release;
(vi) that I understand that the terms of this waiver and release are legally
enforceable; (vii) that I have entered into this waiver and release freely
and voluntarily and was in no manner coerced into signing it; (viii) that
neither this waiver and release nor the discussion and negotiation leading
to it are or were, in any manner, discriminatory; and (ix) that I was, and
hereby am, encouraged to discuss any questions, problems, or issues
concerning this waiver and release with the Company before signing it.
(b) I acknowledge that it is my intent that my waiver with regard to ADEA
fully comply with the Older Workers Benefit Protection Act, and,
accordingly, I further acknowledge and agree that: (i) the compensation and
benefits to which I am entitled as a result of the Letter Agreement exceed
in nature and scope those which I otherwise would have been entitled to
receive; (ii) I have been given at least twenty-one (21) days within which
to consider this waiver and release (but I may sign this waiver and release
and return it to the Company before the end of those twenty-one (21) days if
I elect to do so); and (iii) I have the right to revoke this waiver and
release in full within seven (7) calendar days after my execution hereof and
that after such time this waiver and release shall become enforceable and
irrevocable.
4. Continued Applicability of Letter Agreement
Notwithstanding this waiver and release, the terms of the Letter Agreement
are and remain valid, binding and in full force and effect.
<TABLE>
<S> <C>
Dated: ___________________________ _____________________________
Richard M. Schilling
</TABLE>
<PAGE> 1
EXHIBIT (21)
SUBSIDIARIES OF REGISTRANT
The following lists each of the Registrant's significant domestic and
foreign subsidiaries.
<TABLE>
<CAPTION>
PERCENT
JURISDICTION OF VOTING
IN WHICH SECURITIES
NAME OF CORPORATION INCORPORATED OWNED
- ------------------------------------------------------------ ------------ ----------
<S> <C> <C>
Milton Roy Company.......................................... Pennsylvania 100%
The Falk Corporation........................................ Delaware 100%
Sullair Corporation......................................... Indiana 100%
Sundstrand Fluid Handling Corporation....................... Delaware 100%
</TABLE>
47
<PAGE> 1
EXHIBIT (23)(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-29234) pertaining to the Sundstrand Corporation Employee
Savings Plan, the Registration Statement (Form S-8 No. 33-29235) pertaining to
the Sundstrand Corporation Rockford Factory Employee Savings Plan, the
Registration Statement (Form S-8 No. 33-61372) pertaining to the Sundstrand
Corporation Stock Incentive Plan, the Registration Statement (Form S-8 No.
33-58689) pertaining to the Sundstrand Corporation Nonemployee Director Stock
Option Plan and the Sundstrand Corporation Nonemployee Director Compensation
Plan, the Registration Statement (Form S-8 No. 333-23169) pertaining to the
Sundstrand Corporation Management Stock Performance Plan, the Registration
Statement (Form S-8 No. 333-31559) pertaining to the Sundstrand Corporation
Stock Incentive Plan, and the Registration Statement (Form S-3 No. 333-00801) of
our report dated January 27, 1998, with respect to the consolidated financial
statements of Sundstrand Corporation included in the Annual Report (Form 10-K)
for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 10, 1998
48
<PAGE> 1
Exhibit (24)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, SUNDSTRAND
CORPORATION, a Delaware corporation, does hereby nominate, constitute and
appoint ROBERT H. JENKINS and PAUL DONOVAN, and either or both of them, as its
true and lawful attorneys-in-fact, in its name and on its behalf to file with
the Securities and Exchange Commission the Annual Report on Form 10-K of said
Corporation for the year ended December 31, 1997, pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
That each of the undersigned directors and officers of said Corporation
does hereby nominate, constitute and appoint ROBERT H. JENKINS and PAUL
DONOVAN, and either or both of them, as his true and lawful attorneys-in-fact,
in his name and in the capacity indicated below, to execute the aforesaid Form
10-K.
And the undersigned do hereby authorize and direct the said
attorneys-in-fact, and either or both of them, to execute and deliver such
other documents to the Securities and Exchange Commission and to take all such
other action as they or either of them may consider necessary or advisable to
the end that said Form
10-K shall comply with the Securities Exchange Act of 1934 and the applicable
rules, rulings and regulations of the Securities and Exchange Commission.
IN WITNESS WHEREOF, each of the undersigned has subscribed these presents
this 26th day of February, 1998.
SUNDSTRAND CORPORATION
By: /s/ Robert H. Jenkins
------------------------------------
Robert H. Jenkins
Chairman of the Board, President and
Chief Executive Officer
(CORPORATE SEAL)
ATTEST:
/s/ Mary Ann Hynes
-----------------------
Mary Ann Hynes
Secretary
<PAGE> 2
SIGNATURE TITLE
----------------------- ------------------------------------
/s/ Robert H. Jenkins Chairman of the Board, President and
-----------------------
Robert H. Jenkins Chief Executive Officer and Director
/s/ Paul Donovan Executive Vice President and
-----------------------
Paul Donovan Chief Financial Officer
/s/ DeWayne J. Fellows Vice President and Controller
-----------------------
DeWayne J. Fellows
/s/ Richard A. Abdoo Director
-----------------------
Richard A. Abdoo
/s/ J. P. Bolduc Director
-----------------------
J. P. Bolduc
/s/ Ilene S. Gordon Director
---------------------
Ilene S. Gordon
/s/ Gerald Grinstein Director
---------------------
Gerald Grinstein
<PAGE> 3
EXHIBIT (24)
SIGNATURE TITLE
- --------------------- --------
/s/ Charles Marshall Director
- ---------------------
Charles Marshall
/s/ Klaus H. Murmann Director
- ---------------------
Klaus H. Murmann
/s/ Ward Smith Director
- ---------------------
Ward Smith
/s/ Berger G. Wallin Director
- ---------------------
Berger G. Wallin
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 326
<ALLOWANCES> 0
<INVENTORY> 462
<CURRENT-ASSETS> 880
<PP&E> 1,170
<DEPRECIATION> 698
<TOTAL-ASSETS> 1,700
<CURRENT-LIABILITIES> 467
<BONDS> 213
<COMMON> 38
0
0
<OTHER-SE> 504
<TOTAL-LIABILITY-AND-EQUITY> 1,700
<SALES> 1,752
<TOTAL-REVENUES> 1,752
<CGS> 1,148
<TOTAL-COSTS> 1,434
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> 294
<INCOME-TAX> 106
<INCOME-CONTINUING> 188
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 5
<NET-INCOME> 183
<EPS-PRIMARY> 3.06
<EPS-DILUTED> 3.04
</TABLE>
