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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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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<S> <C>
DELAWARE 36-1840610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4949 HARRISON AVENUE
P.O. BOX 7003
ROCKFORD, ILLINOIS 61125-7003
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (815) 226-6000
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON WHICH THE COMMON
TITLE OF EACH CLASS STOCK AND RIGHTS ARE REGISTERED
Common stock-$.50 par value New York Stock Exchange
Common stock purchase rights Chicago Stock Exchange
Pacific Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$2,927,079,891 as of February 24, 1999.*
*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.
53,962,426 shares of common stock outstanding at February 24, 1999.
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 the 1999 Annual Part III
Meeting of Stockholders
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SUNDSTRAND CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
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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......... 7
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 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 19
Item 8. Financial Statements and Supplementary Data................. 21
Item 9. Disagreements with Accountants on Accounting and Financial
Disclosure.................................................. 45
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 46
Signatures.............................................................. 51
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CROSS-REFERENCE TABLE OF CONTENTS
Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders,
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 operating 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 1998, the Registrant's Aerospace segment acquired
Keystone Engineering Company and Shannon Aircraft Motor Works and the
Registrant's Industrial segment acquired Ansimag, Inc., the Mining Services
Division of A. Goninan & Co. Limited, Maso Process-Pumpen GmbH, Robin Industries
S.A., and Williams Instrument Company, Inc. See the Acquisitions section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 13 for additional information on 1998 acquisitions.
On February 21, 1999, Sundstrand entered into an Agreement and Plan of
Merger with United Technologies Corporation (the "Merger Agreement"). See the
Subsequent Event footnote on page 45 in the notes to consolidated financial
statements.
STRATEGY
The Registrant intends to grow its revenues and market share by introducing
new products, entering new markets, and by making acquisitions (such acquisition
activity currently being limited by terms of the Merger Agreement). 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
continued in 1998 with most of the remaining businesses in both the Aerospace
and Industrial segments being organized into product orientated enterprises.
Reliability of the Registrant's products is also very important. To this end,
the Registrant has devoted and will continue to devote significant efforts to
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 OPERATING SEGMENTS
The financial information on operating segments can be found on pages 26
and 27.
AEROSPACE SEGMENT
The Registrant's Aerospace business designs, develops and manufactures
systems and components for aircraft, space and defense applications. Through its
Electric Systems, Mechanical Systems, and Power Systems product lines, the
business provides highly engineered solutions to the aerospace industry for
applications such as: primary, secondary and emergency power generation,
distribution and management; actuation; aircraft environmental control
(primarily cooling fans); and fuel and lube/scavenge pumps. In addition to
having components supplied by a common set of manufacturing sites, each of the
Aerospace segment's product lines serve common customers that include airframe
manufacturers, the United States government, and most of the world's airlines.
Key indicators of the Aerospace segment's business include the production rates
of airframe manufacturers and the trend in airline revenue passenger miles.
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The Electric Systems product line consists of electric power generating,
distribution, and control systems including generators, solid state power
controls and integrated drive generators. The Registrant's systems are installed
on every current commercial aircraft platform offered by Airbus Industrie and
Boeing (except for the MD-90), 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, 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 International Corporation's Automated Power Management
System (APMS) product line and electrical load management technology in 1997
extended Sundstrand's capabilities for generating and managing aircraft electric
power. The Electric Systems product line accounted for more than 60 percent of
Aerospace segment sales in 1998 and more than 50 percent of segment sales in
1997 and 1996.
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. The
APU business is growing successfully as a result of the Airbus Industrie A320
aircraft, on which the Registrant's APUs are a listed option, and as a result of
its APUs being sole sourced on the Embraer 135/145 regional jet and the Boeing
717 aircraft. Power Systems achieved break-even operating results in the second
quarter of 1998.
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; similar 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 businesses 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
process 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
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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 and portable compressors are sold through a
network of distributors and to a select group of end user customers.
Sundstrand Fluid Handling Corporation is a multinational manufacturer of
engineered, high-speed, centrifugal pumps and compressors 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, and sold to end users and engineering contractors.
Milton Roy Company serves the worldwide market with high-quality metering
pumps and related equipment, specialty pumps and industrial mixing equipment.
These products are used in municipal and industrial water and waste water
treatment, chemical and hydrocarbon processing, oil and gas production, minerals
processing and pulp and paper applications. Larger capacity pumps are sold
through independent agents and by a direct sales force and in limited
situations, to end users and engineering contractors who often incorporate them
into chemical injection systems. Smaller electronic pumps, controllers, and
monitoring systems are stocked and sold through industrial distribution channels
for small industrial water and waste water treatment applications.
INTERNATIONAL
For information related to the Registrant's international activities see
the Foreign Operations and Activity discussion on page 14 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 Operating Segment on pages 26 and 27.
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 page 14.
INTELLECTUAL PROPERTY RIGHTS
The Registrant owns a large number of pending and granted patents (expiring
through 2019) 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 17, the Boeing Company is a significant customer of the
Registrant's Aerospace segment. Sales in 1998 to Boeing, including sales where
the U.S. government was the ultimate customer, were 10.6 percent of consolidated
sales and 17.3 percent of Aerospace segment sales. Sales in 1997 to Boeing,
including sales where the
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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.
UNFILLED ORDERS
See the discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 12.
GOVERNMENT CONTRACT MATTERS
See the discussion in Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 17 and the Government Contract
Matters footnote on page 44.
COMPETITION
The Registrant has competitors or potential competitors in both of its
operating segments. 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 42.
ENVIRONMENTAL MATTERS
See the Environmental Matters footnote on pages 43 and 44.
ITEM 2. PROPERTIES
The Registrant occupies building space totaling approximately 6.3 million
square feet, which is divided by operating segments as follows: Aerospace, 3.1
million square feet; Industrial, 3.0 million square feet; and corporate offices,
.2 million square feet. All building space is owned by the Registrant, except
approximately .9 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; Los Angeles and San Diego, California; Denver and Grand Junction,
Colorado; Rockford, Illinois; York, Nebraska; and Santa Isabel, Puerto Rico.
Aerospace foreign manufacturing facilities are located in Nordlingen, Germany;
Shannon, Ireland; and the Republic of Singapore.
Industrial domestic manufacturing facilities are located in Auburn,
Alabama; Valencia, California; Arvada, Colorado; Elk Grove Village, Illinois;
Michigan City, Indiana; Acton, Massachusetts; Ivyland, Pennsylvania; and
Milwaukee, Wisconsin. Industrial foreign manufacturing facilities are located in
Broadmeadow, Australia; Eastbourne, England; Dijon, Montbrison, Pont-St-Pierre
and Samoreau, France; Ilsfeld, Germany; 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 43 and 44.
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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 1998.
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 2/24/99 CURRENT OFFICE AND PRINCIPAL OCCUPATION YEARS AS OFFICER
---- --------- --------------------------------------- ----------------
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Robert H. Jenkins........ 55 Chairman of the Board, President and Chief 3
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........ 53 Executive Vice President and Chief Operating 4
Officer, Industrial. Elected Executive Vice
President and Chief Operating Officer,
Industrial January 2, 1995.(2)
Ronald F. McKenna........ 58 Executive Vice President and Chief Operating 3
Officer, Aerospace. Elected Executive Vice
President and Chief Operating Officer, Aerospace
May 6, 1996.(3)
Paul Donovan............. 51 Executive Vice President and Chief Financial 10
Officer. Chief Financial Officer since December
2, 1988; elected to additional position of
Executive Vice President August 7, 1990.
DeWayne J. Fellows....... 54 Vice President and Controller. Controller since 10
February 16, 1989; elected to additional
position of Vice President August 7, 1990.
Mary Ann Hynes........... 51 Vice President, General Counsel and Secretary. 1
Elected Vice President, General Counsel and
Secretary February 26, 1998.(4)
James R. Carlson......... 55 Vice President and Treasurer. Elected Vice 2
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...... 49 Vice President, Tax. Elected Vice President, Tax 2
November 18, 1997. Appointed Vice President, Tax
from January 6, 1997 to November 18, 1997.(6)
Patrick J. Winn.......... 49 Vice President, Corporate Human Resources. 2
Elected Vice President, Corporate Human
Resources November 18, 1997. Appointed Vice
President, Corporate Human Resources from
September 13, 1997 to November 18, 1997.(7)
</TABLE>
(1) Mr. Jenkins was Executive Vice President of Illinois Tool Works, Inc. from
March 1, 1990, to September 30, 1995.
(2) Mr. Thomas was President of Milton Roy Company from April 1, 1991, to
January 1, 1995.
(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.
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(4) Ms. Hynes was General Counsel of Wolters Kluwer U.S., Inc. from January 1996
to February 1998 and General Counsel of CCH 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.
(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
DIVIDEND ------------------------
PAID HIGH LOW
-------- --------- --------
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Quarter
1998
First.............................................. $.17 $62 $46 13/16
Second............................................. .17 71 7/16 53 15/16
Third.............................................. .17 60 7/8 41 5/8
Fourth............................................. .17 55 13/16 44
----
$.68
====
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
====
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For information regarding restrictions on dividend payments see the Notes
Payable and Long-Term Debt footnote on page 36. 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,
----------------------------------------------------
1998 1997(A) 1996(C) 1995(D) 1994(E)
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
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Summary of Operations
Net Sales
Aerospace......................................... $1,229 $1,001 $ 785 $ 726 $ 710
Industrial........................................ 776 751 736 747 663
------ ------ ------ ------ ------
Total........................................ $2,005 $1,752 $1,521 $1,473 $1,373
====== ====== ====== ====== ======
Operating Profit
Aerospace......................................... $ 272 $ 209 $ 138 $ 54 $ 88
Industrial........................................ 118 128 84 121 106
------ ------ ------ ------ ------
Total........................................ $ 390 $ 337 $ 222 $ 175 $ 194
====== ====== ====== ====== ======
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Earnings from continuing operations before income
taxes and cumulative effect of accounting
change............................................ $ 347 $ 294 $ 184 $ 135 $ 149
Net earnings from continuing operations before
cumulative effect of accounting change............ $ 226 $ 188 $ 114 $ 79 $ 96
Net earnings available for common shares............ $ 226 $ 183 $ 114 $ 79 $ 96
Return on average equity, after tax................. 41.6% 34.8% 22.9% 16.2% 19.0%
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Per Share of Common Stock(b)
Basic earnings per share from continuing operations
before cumulative effect of accounting change..... $ 4.02 $ 3.15 $ 1.87 $ 1.25 $ 1.46
Basic earning per share............................. $ 4.02 $ 3.06 $ 1.87 $ 1.25 $ 1.46
Diluted earnings per share from continuing
operations before cumulative effect of accounting
change............................................ $ 3.99 $ 3.13 $ 1.86 $ 1.25 $ 1.46
Diluted earnings per share.......................... $ 3.99 $ 3.04 $ 1.86 $ 1.25 $ 1.46
Cash dividends...................................... $ .68 $ .68 $ .68 $ .60 $ .60
Market value -- high................................ $71.44 $63.06 $42.75 $35.38 $26.00
low................................. $41.63 $39.88 $32.50 $22.25 $20.50
year-end............................ $51.88 $50.38 $42.50 $35.19 $22.75
Book value.......................................... $10.02 $ 9.33 $ 8.49 $ 7.80 $ 7.80
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Year-End Financial Position
Working capital..................................... $ 366 $ 413 $ 375 $ 323 $ 303
Current ratio....................................... 1.7 1.9 1.9 1.7 1.7
Total assets........................................ $1,807 $1,700 $1,595 $1,593 $1,587
Long-term debt...................................... $ 299 $ 222 $ 226 $ 228 $ 247
Total debt.......................................... $ 462 $ 365 $ 344 $ 396 $ 441
Shareholders' equity................................ $ 545 $ 542 $ 513 $ 481 $ 494
Ratio of total debt to total capital................ 45.9% 40.2% 40.1% 45.2% 47.1%
Shares outstanding at year end (in millions)........ 54.4 58.1 60.4 61.7 63.3
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YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997(A) 1996(C) 1995(D) 1994(E)
-------- -------- -------- -------- --------
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Other Data
Orders received
Aerospace......................................... $1,176 $1,266 $ 822 $ 896 $ 736
Industrial........................................ 758 745 735 761 701
------ ------ ------ ------ ------
Total........................................ $1,934 $2,011 $1,557 $1,657 $1,437
====== ====== ====== ====== ======
Unfilled orders
Aerospace......................................... $1,018 $1,071 $ 806 $ 769 $ 599
Industrial........................................ 137 155 161 162 148
------ ------ ------ ------ ------
Total........................................ $1,155 $1,226 $ 967 $ 931 $ 747
====== ====== ====== ====== ======
Property, plant, and equipment:
Additions, at cost................................ $ 109 $ 119 $ 63 $ 62 $ 54
Depreciation...................................... $ 63 $ 58 $ 60 $ 61 $ 61
Approximate number of employees..................... 10,900 10,400 9,400 9,200 9,200
Approximate number of shareholders of record........ 3,400 3,300 3,500 3,700 4,000
</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 28.
(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 Registrant's
former 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).
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 Outlook section of Management's Discussion
and Analysis of Financial Condition and Results of Operations on page 18.
Total sales of the Registrant increased $253 million to $2,005 million in
1998, from $1,752 million in 1997. Net earnings in 1998 were $226 million, or
$3.99 per share assuming dilution, which included period costs related to the
1996 restructuring of approximately $1 million. Excluding the restructuring
related period costs, 1998 net earnings were $227 million, or $4.01 per share
assuming dilution.
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 cumulative effect of a change in accounting principle resulting in a
pretax charge of $9 million. Excluding the
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restructuring 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.
SALES BY OPERATING SEGMENT
<TABLE>
<CAPTION>
1998 1997 1996
SALES (AMOUNTS IN MILLIONS) AND ---------------- ---------------- ----------------
INCREASE (DECREASE) FROM PRIOR YEAR AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE
- --------------------------------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Operating segment
Aerospace -- Commercial.............. $ 903 22.5% $ 737 34.0% $ 550 12.9%
-- Military................ 326 23.5% 264 12.3% 235 (1.7)%
------ ----- ------ ----- ------ -----
-- Total................... 1,229 22.8% 1,001 27.5% 785 8.1%
Industrial........................... 776 3.3% 751 2.0% 736 (1.5)%
------ ----- ------ ----- ------ -----
Total............................. $2,005 14.4% $1,752 15.2% $1,521 3.3%
====== ===== ====== ===== ====== =====
</TABLE>
Aerospace segment sales in 1998 were $1,229 million, which represents a
$228 million increase over 1997 and 61 percent of total company sales.
Commercial sales in 1998 increased by $166 million compared with 1997 due to a
32 percent increase in original equipment manufacturer (OEM) sales and a 15
percent increase in aftermarket sales. The growth in commercial sales reflected
the continued increase in aircraft orders, airline passenger and freight traffic
growth, and continued profitability of the U.S. and European airline industry.
Although the Asia-Pacific economic crisis has negatively impacted the
profitability of the Asian airline industry, the Registrant's overall Aerospace
sales have not been significantly impacted by these events. As a result of
double digit increases in both military OEM and aftermarket sales, total
military sales were $326 million in 1998, a $62 million increase from 1997. The
growth in military sales was due primarily to increased shipments on the program
to provide the propulsion system for the United Kingdom's Royal Navy Spearfish
torpedo. Acquisitions in 1998 were not material to the increase in Aerospace
segment sales.
Aerospace segment sales in 1997 were $1,001 million, which represents a
$216 million increase over 1996 sales and 57 percent of total company sales.
Commercial sales in 1997 increased by $187 million compared with 1996 due to a
44 percent increase in original equipment manufacturer (OEM) sales and a 27
percent increase in aftermarket sales. The growth in commercial sales reflected
the 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.
The Registrant's Electric Systems product line is the largest product line
within the Aerospace segment. This product line accounted for more than 60
percent of Aerospace segment sales in 1998 and more than 50 percent of segment
sales in 1997 and 1996.
Sales in the Industrial segment were $776 million in 1998, representing 39
percent of total company sales, compared with sales of $751 million in 1997.
Fluid Handling and Milton Roy reported moderate growth in sales while sales at
Falk and Sullair approximated 1997 levels. Acquisitions in 1998 added $32
million to Industrial segment sales. Excluding the effect of these acquisitions,
sales in the Industrial segment decreased slightly as a result of the slowdown
in Asia-Pacific economies and lower commodity prices which significantly
softened the petrochemical, paper/pulp, mining, hydrocarbon exploration and
processing markets.
Industrial segment sales were $751 million in 1997, representing 43 percent
of total company sales, compared with 1996 sales of $736 million. Falk, Sullair,
and Milton Roy each reported a 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.
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<PAGE> 12
OPERATING PROFIT BY OPERATING SEGMENT
<TABLE>
<CAPTION>
1998 1997 1996
OPERATING PROFIT (AMOUNTS IN MILLIONS) AND --------------- --------------- ---------------
OPERATING PROFIT AS A PERCENT OF NET SALES AMOUNT % AMOUNT % AMOUNT %
- ------------------------------------------------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Operating segment
Aerospace...................................... $272 22.1% $209 20.9% $138 17.6%
Industrial..................................... 118 15.2% 128 17.0% 84 11.4%
---- ---- ---- ---- ---- ----
Total....................................... $390 19.5% $337 19.2% $222 14.6%
==== ==== ==== ==== ==== ====
</TABLE>
Aerospace segment operating profit in 1998 increased by $63 million to $272
million, or 22.1 percent of sales, compared to operating profit of $209 million,
or 20.9 percent of sales in 1997. Excluding the impact of the $9 million
Aerospace portion of a one-time curtailment gain related to a 1997 amendment to
the Registrant's Retiree Health Insurance Plans, operating profit was $200
million, or 20.0 percent of sales in 1997. The increase in operating profit
margin was due to the incremental profitability on growing sales volume.
Operating profit in the Aerospace segment in 1997 increased by $71 million
to $209 million 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.
Industrial segment operating profit decreased to $118 million in 1998 from
$128 million in 1997. Excluding restructuring related period costs, 1998
operating profit was $120 million, or 15.5 percent of sales, compared with 1997
operating profit of $124 million, or 16.5 percent of sales, excluding $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. The operating profit margin decrease,
excluding the one-time items, was due to higher investments in product
development and market-rate-of-demand manufacturing initiatives, competitive
pricing pressures, and the accounting impact of reduced overhead absorption
caused by inventory reductions.
Operating profit in the Industrial segment in 1997 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.
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
commercial airline transport market. Initial entry into this market 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. 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. As a result of the significant
progress made over the past few years, Power Systems achieved break-even
operating results in the second quarter of 1998 and is expected to remain
profitable in the foreseeable future.
UNFILLED ORDERS
Unfilled orders decreased by $71 million to $1,155 million at December 31,
1998, of which $379 million are not expected to be filled in 1999. Unfilled
orders at December 31, 1997 were $1,226 million. Unfilled
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<PAGE> 13
orders in the Aerospace segment decreased by $53 million or approximately 5
percent from 1997 due to unusually high orders in the fourth quarter of 1997 as
a result of peak OEM order activity and several large, multiple year,
aftermarket orders. Industrial segment unfilled orders decreased $18 million or
by approximately 12 percent which reflects the effects of lower commodity prices
and the Asia-Pacific economic slowdown on the Industrial segment's primary
markets.
RESTRUCTURINGS
During 1996, the Registrant initiated a restructuring plan within its
Industrial segment 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.
Since the charge was recorded in 1996, approximately $13 million has been
paid and charged against the restructuring liability, including costs to
terminate 124 employees. Additionally, restructuring related period costs of $2
million were incurred in both 1998 and 1997. It is anticipated that the sale of
the St. Priest facility will be completed by the end of the second quarter of
1999, at which time the restructuring will be substantially complete.
During 1995, the Registrant initiated 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 cash and non-cash
termination benefits, including recognition of certain long-term retirement
benefits for approximately 350 employees. Also included in the charge was $34
million for the write-down and disposition of assets related to the Lima
facility, Spectronic, and APT. The shutdown of the Lima facility was completed
during 1996 and the disposition of the facility was completed in the first
quarter of 1998. The sale 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
in cash has been paid and charged against the restructuring liability, including
costs to terminate 360 employees. As of March 31, 1998, the planned
restructuring activities from the 1995 restructuring plan were substantially
complete.
ACQUISITIONS
During 1998, the Registrant's Aerospace segment acquired Keystone
Engineering Company (Keystone) and Shannon Aircraft Motor Works (Shannon).
Keystone, located in California, is a manufacturer of light-weight propellant
pressure tanks and domes for commercial satellites and launch vehicles as well
as other components and sub-assemblies for various space applications. The
Keystone acquisition has provided the Registrant an entrance into the growing
commercial space market. Shannon, headquartered in Ireland, is a leader in the
repair and overhaul of aircraft motor and generator components, with additional
facilities in France and Canada. The Shannon acquisition enhances the
Registrant's ability to provide repair services in Europe and nearby markets.
The Registrant's Industrial segment acquired Ansimag, Inc. (Ansimag), the
Mining Services Division of A. Goninan & Co., Limited (Goninan), Maso
Process-Pumpen GmbH (Maso), Robin Industries S.A. (Robin), and Williams
Instrument Company, Inc. (Williams) during 1998. Ansimag, located in Illinois,
is a manufacturer of non-metallic, magnetically driven, sealless pumps used in
the chemical and general process industries. Goninan, located in Australia, is a
manufacturer of steel and iron ring gears and enclosed gear drives used in the
mining, steel, cement and other heavy industries. Maso, located in Germany,
designs,
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<PAGE> 14
develops and manufactures pumps used in the food, beverage and pharmaceutical
industries, using the same technology as the Sine(R) pump product line of the
Registrant. Robin, located in France, manufactures industrial mixing equipment
used in the chemical and mineral processing, pulp and paper, water treatment and
pharmaceutical industries. Williams, located in California, manufactures
pneumatically powered mechanical pumps for the oil and gas production industry.
All of these acquisitions enhance the Registrant's current product lines and the
Goninan, Maso, and Robin acquisitions increase the Registrant's access to
foreign markets and its global presence.
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 exchange 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 exchange
contracts see the Summary of Significant Accounting Policies note beginning on
page 28 and the Financial Instruments with Off-Balance-Sheet Risk note on page
39.
The Registrant continues to explore a variety of strategies to expand its
international presence, including joint ventures and distribution arrangements
(such activity currently being limited by terms of the Merger Agreement).
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. In general,
Asian economies continue to experience on-going economic uncertainty which has
slowed the Registrant's growth in this region. Although the Registrant believes
these uncertainties will continue in the near term, it also believes that the
long-term growth prospects of this region are strong and as a result, the
Registrant will continue to explore growth strategies in this region. The
expected impact of continued weakness in the Asia-Pacific region has been
factored into the Registrant's 1999 forecast which is discussed in the Outlook
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations on page 18.
EURO CONVERSION
On January 1, 1999, eleven of fifteen member countries of the European
Union established fixed conversion rates between their existing currencies and
adopted the euro as their new common currency. The euro will trade on currency
exchanges and the legacy currencies will remain legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. Beginning on January 1, 2002, euro denominated bills and coins
will be issued and legacy currencies will be withdrawn from circulation. The
Registrant has assessed the impact on its operations and has established plans
to accommodate the euro conversion and its related impact on customer and vendor
transactions, currency exchange risks, and accounting systems. The Registrant
does not expect the euro conversion to have a material impact on its financial
condition or results of operations.
IMPACT OF YEAR 2000
The Registrant is working to correct it's 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, manufacture product, 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,
production facilities and environmental systems), suppliers/customers, and
products. Following is the current status of each category.
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<PAGE> 15
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. In
the event that modifications and conversions 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 modification and replacement plan efforts are approximately
80 percent complete as of December 31, 1998 and anticipates that all remaining
critical systems will be revised or replaced by July 1999.
Other Operating Systems
The Registrant has completed its assessment of Year 2000 Issues associated
with other operating critical systems, such as manufacturing machinery, test
equipment and environmental systems with date sensitive software and embedded
microprocessors. This assessment has identified no significant operational
issues and the Registrant expects to complete all necessary revisions or
replacements of these systems by June 1999.
Suppliers / Customers
The Registrant has initiated communications with its significant suppliers,
customers, and other relevant third parties to determine the extent to which the
Registrant's operations may be vulnerable to those third parties' failure to
resolve their own Year 2000 Issues. In addition, the Registrant has conducted
eight symposiums at which more than 200 significant suppliers attended, and some
visits have taken place with suppliers and customers. This activity will
continue until the Registrant believes its significant suppliers and customers
are Year 2000 ready.
Due to the difficulty in determining whether third-parties have resolved
their Year 2000 issues, the Registrant is in the process of developing
contingency plans, which it considers necessary, such as identifying alternative
suppliers and/or implementing inventory management steps such as stock-piling
purchased materials, in order to minimize any adverse effect to the Registrant's
operations. An area of concern, which the Registrant is monitoring, involves
utility suppliers, principally electric power suppliers. The inability of
electric power suppliers to become Year 2000 compliant in a timely manner could
result in wide-spread power outages or rolling brown-outs. Failures of third
parties to adequately address their Year 2000 Issues and any failure of the
Registrant to develop timely and effective contingency plans could adversely
effect the Registrant's operations, the extent of which is currently not known.
Products
The Registrant has performed an assessment of its exposure to contingencies
related to the Year 2000 Issue for the products it has previously sold. Based
upon this assessment, the Registrant does not believe there is any exposure that
would have a material adverse affect on the Registrant's financial position,
results of operations or liquidity.
Summary
The Registrant's total cost to make modifications to resolve Year 2000
issues is estimated to be between $9 million and $14 million and is being funded
through operating cash flows. To date, the Registrant has incurred approximately
$7 million related to operating systems modifications.
The costs of the project and the dates 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
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<PAGE> 16
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. The
Registrant could also be subject to litigation for the failure of computer
systems, equipment shutdowns and product delivery delays. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
ENVIRONMENTAL MATTERS
For a detailed discussion, see the Environmental Matters footnote on pages
43 and 44.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $366 million at December 31, 1998, compared with $413
million at December 31, 1997. The $47 million decrease was due primarily to an
increase in notes payable, resulting from the Registrant's acquisitions and
share repurchase activity, a decrease in inventories and a decrease in other
assets partially offset by an increase in accounts receivable resulting from
higher year over year fourth quarter sales volume in 1998.
Net cash provided by operating activities increased to $333 million in 1998
from $252 million in 1997. The increase was due primarily to higher net
earnings, a reduction in inventories, and a decrease in other assets as benefits
were paid from a previously funded trust for incurred but not reported health
care claims. This increase was partially offset by higher accounts receivable
resulting from higher year over year fourth quarter sales volume in 1998.
Inventories decreased as a result of the Registrant's focus on inventory
reduction programs and the on-going implementation of market-rate-of-demand
manufacturing.
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
inventories and lower restructuring liabilities.
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 1998, the Registrant used $203 million of cash for investing activities,
primarily for the purchase of fixed assets and acquisitions. The Registrant also
used $123 million for financing activities in 1998, primarily for the payment of
dividends and the repurchase of common stock. An increase in notes payable and
long-term debt partially offset the cash used for the payment of dividends and
the repurchase of common stock.
During 1997, the Registrant used $121 million of cash for investing
activities, primarily for the purchase of fixed assets. In 1997, the Registrant
used $140 million of cash for financing activities, primarily to repurchase its
common stock and pay dividends, partially offset by additional borrowings.
In 1996, the Registrant used $86 million of cash for investing activities,
primarily for the purchase of fixed assets and for acquisitions. During 1996,
the Registrant used $144 million of cash for financing activities, primarily to
repay short-term borrowings, repurchase its common stock, and pay dividends.
At December 31, 1998, the Registrant had unsecured revolving domestic
credit facilities totaling $435 million that were being provided by seven banks.
At December 31, 1998, there were no outstanding balances under these lines of
credit and the entire unused portion of these credit facilities was available
under the Registrant's most restrictive debt covenants. These credit facilities
will expire during the fourth quarter of 1999 and the Registrant expects to
replace or renew these facilities with credit lines that are similar in
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<PAGE> 17
amount or less than the current facilities. 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, 1998 and
1997, the Registrant had $45 million and $143 million of commercial paper
outstanding, respectively.
On February 8, 1996 and December 7, 1998, the Registrant filed shelf
registration statements on Form S-3 with the Securities and Exchange Commission
for the public issuance of debt in the amounts of $150 million and $100 million,
respectively, for a total of $250 million. In December 1998 and January 1999,
$198 million and $52 million was issued, respectively, under this facility with
the proceeds used to pay down the revolving credit facilities and commercial
paper.
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 20 million shares through December 31,
1998 at a total purchase price of $634 million. In addition, approximately
440,000 shares have been repurchased through February 24, 1999. Funds for the
repurchases were provided by the Registrant's operating activities, 4(2)
commercial paper program and public debt issuance. 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 45.9 percent at the end of
1998, compared with 40.2 percent at the end of 1997, and 40.1 percent at the end
of 1996.
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 for the years 1998, 1997, and 1996 were $109 million,
$119 million, and $64 million, respectively. Capital expenditures consist of
normal replacements of property, plant, and equipment and continued investment
in machinery and equipment related to increasing volume and the implementation
of market-rate-of-demand manufacturing processes.
TAX ISSUES
For a detailed discussion, see the Income Taxes footnote on pages 37 and
38.
GOVERNMENT CONTRACT MATTERS
A portion of the Registrant's business results from contracts with or for
government agencies. Military sales in 1998 were $332 million, of which 57
percent and 43 percent were from prime contracts and subcontracts, respectively.
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. In addition, sales where the final customer was
the U.S. government represented 64 percent, 65 percent, and 72 percent of total
military sales in 1998, 1997, and 1996, respectively.
For additional discussions on government contract matters, see the
Government Contract Matters footnote on page 44.
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<PAGE> 18
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 (such product acquisition activity
currently being limited by terms of the Merger Agreement). 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 product orientated enterprises will
be used to implement customized improvements in work flow, cycle time
reductions, and customer responsiveness.
OUTLOOK
Overall sales are expected to grow at a slower rate in 1999 compared to the
prior year as a result of lower increases in commercial aircraft order rates,
continued economic uncertainty in Asia and Latin America, and the continued
effect of low commodity prices on the Industrial segment's primary markets. The
Registrant projects that sales will increase approximately 5 percent and
operating profit should be in the 20 percent of sales range in 1999. As a
result, the Registrant expects to generate diluted earnings per share of between
$4.25 and $4.55, excluding any additional share repurchases. For 1999, the
Registrant plans to expend approximately $132 million on research and
development, of which $43 million will be funded by customers, and invest $100
million to $110 million in capital expenditures. Operating cash flow before
capital expenditures is expected to range between $330 million and $370 million
in 1999. 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 intends to manage its total-debt-to-total-capital
ratio within a range of 40 percent to 50 percent in 1999.
Total Aerospace sales are projected to increase between 5 percent and 10
percent for 1999. Commercial sales, both OEM and aftermarket, are expected to
increase between 5 percent and 10 percent as a result of continued strength in
commercial aircraft order rates coupled with continued airline passenger and
freight traffic growth. Military sales are expected to remain consistent
relative to 1998 levels. The Aerospace segment is expected to generate an
operating profit margin in the range of 22 percent to 23 percent of sales in
1999.
The Registrant does not anticipate improvements in primary market
conditions for the Industrial segment in 1999. Despite these difficult market
conditions, sales are expected to increase up to 5 percent with operating profit
margins up to 15 percent of sales as a result of the full-year impact of current
year acquisitions, product/market growth initiatives and cost efficiencies
gained from operating improvement programs.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
When used in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, the terms "anticipate," "believe," "estimate,"
"expect," "forecast," "goal," "outlook," "plan," "project," "should" and similar
expressions are intended to identify "forward-looking" statements. These
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. Such risks and uncertainties include the Registrant's successful
execution of internal strategic initiatives, including implementation of
business unit or enterprise concepts; governmental export and import policies;
factors that result in significant and prolonged disruption to air travel
worldwide; overall expenditures for capital equipment and infrastructure
development; relations with the Registrant's employees; competitive pricing
pressures; global trade policies; worldwide political stability and economic
conditions, particularly Asia and Latin America; termination of and/or
difficulties related to significant government programs (particularly military
procurement programs serviced by the Registrant); and potential risks associated
with efforts by the Registrant, its suppliers and customers to modify their
information systems to be ready for the year 2000.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant is exposed to interest rate risk, foreign currency risk, and
equity market risk in the normal course of business and these risks are
mitigated from time to time by derivative financial instruments. Fluctuations in
the market values of such derivative instruments are generally offset by
reciprocal changes in the underlying economic exposures that the instruments are
intended to hedge. Because derivative instruments are used solely as hedges and
not for speculative trading purposes, they do not represent incremental risk to
the Registrant. For further discussion of derivative financial instruments,
refer to the Summary of Significant Accounting Policies, Notes Payable and
Long-Term Debt, Financial Instruments with Off-Balance-Sheet Risk, and Fair
Value of Financial Instruments sections in the notes to consolidated financial
statements.
Interest Rate Risk
The Registrant's earnings are affected by changes in interest rates as a
result of its issuance of floating rate notes payable and short-term commercial
paper; however, the Registrant limits its exposure to changes in interest rates
through the use of pay fixed/receive floating interest rate swap contracts on a
portion of its floating rate debt. At December 31, 1998 and 1997, the Registrant
had $192 million and $160 million, respectively, of outstanding floating rate
debt obligations and $132 million and $0 million, respectively, of interest rate
swap contracts. If market rates would have averaged 10% higher than actual
levels in either 1998 or 1997, the effect on the Registrant's interest expense
and net earnings, after considering the effects of the interest rate swap
contracts, would not have been material.
The registrant also utilizes fixed rate notes payable and long-term debt to
finance operations. As the interest rates on these obligations are fixed, the
Registrant's interest expense and net earnings are not exposed to fluctuations
in interest rates; however, the fair value of these obligations is affected by
changes in interest rates. The fair value of fixed rate debt obligations,
although not recognized for book purposes, is an important measure of the
approximate cost to the Registrant of settling its debt before scheduled
maturity. At December 31, 1998 and 1997, the Registrant had outstanding fixed
rate debt obligations of $270 million and $205 million, respectively. The fair
value of these obligations was $301 million and $236 million at December 31,
1998 and 1997, respectively. The potential loss in fair value on such debt
obligations from a hypothetical 10% adverse change in interest rates would not
be material.
At December 31, 1998 the Registrant had $200 million of outstanding
interest rate lock contracts as hedges of the U.S. Treasury rate to be used as
the pricing benchmark in an intended future debt issue. The gain or loss on
these contracts will be deferred and recognized over the life of the debt issue.
If the Registrant does not proceed with the intended debt issue, the gain or
loss on termination of the interest rate lock contracts would be recognized in
current period net income. At December 31, 1998, the fair value asset of the
interest rate lock contracts was approximately $3 million. The potential loss in
fair value on such financial instruments from a hypothetical 10% adverse change
in interest rates on 10 year U.S. treasury bonds would not be material to the
financial position of the Registrant. The Registrant had no outstanding rate
lock contracts at December 31, 1997.
Foreign Currency Risk
A substantial majority of the Company's revenue, expense, and capital
purchasing activities are transacted in U.S. dollars; however, the Registrant is
exposed to fluctuations in foreign currencies for transactions denominated in
other currencies, primarily the British pound sterling, French franc, and
Singapore dollar. The Registrant uses foreign currency forward exchange
contracts to reduce such exposure on specific assets, liabilities, and certain
cash flows denominated in foreign currencies. At December 31, 1998 the
Registrant had outstanding contracts to purchase and sell an equivalent of $11
million and $70 million of foreign currencies, respectively, with a net fair
value liability of approximately $4 million. At December 31, 1997 the Registrant
had outstanding contracts to purchase and sell an equivalent of $53 million and
$72 million of foreign currencies, respectively, with a net fair value liability
of approximately $3 million. The potential loss in fair value for such financial
instruments from a hypothetical 10% adverse change in quoted
19
<PAGE> 20
foreign currency exchange rates would not have been material to the financial
position of the Registrant at December 31, 1998 or 1997.
Equity Market Risk
The Registrant is exposed to equity price risk on certain employee benefit
plan assets that are invested in available-for-sale marketable securities
consisting of an S&P 500 Index mutual fund. The Registrant uses equity index
costless collars to reduce its exposure to equity market volatility on a portion
of these investments. At December 31, 1998, the Registrant had
available-for-sale marketable securities with a fair value of approximately $11
million and equity index costless collars with a notional amount of $5 million.
The potential loss in fair value on these investments, assuming a hypothetical
10% adverse change in the S&P 500 Index from its December 31, 1998 level and
after considering the effects of the equity index costless collars, would not be
material to the financial position of the Registrant at December 31, 1998. The
Registrant did not have investments in marketable securities at December 31,
1997.
20
<PAGE> 21
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.
<TABLE>
<S> <C>
/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 25, 1999
</TABLE>
- --------------------------------------------------------------------------------
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, 1998 and 1997 and the related
statements of earnings, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 25, 1999,
Except for the footnote entitled "Subsequent Event," as to which our report is
dated February 21, 1999.
21
<PAGE> 22
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------ ------ ------
(AMOUNTS IN MILLIONS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $2,005 $1,752 $1,521
Costs and expenses:
Costs of products sold.................................... 1,316 1,148 990
Marketing and administration.............................. 317 286 300
Restructuring charges, net................................ - - 24
------ ------ ------
1,633 1,434 1,314
------ ------ ------
Earnings before other income (deductions)................... 372 318 207
Other income (deductions):
Interest expense.......................................... (35) (30) (29)
Interest income........................................... 4 6 5
Other, net................................................ 6 - 1
------ ------ ------
(25) (24) (23)
------ ------ ------
Earnings before income taxes and cumulative effect of
accounting change......................................... 347 294 184
Less income taxes........................................... 121 106 70
------ ------ ------
Net earnings before cumulative effect of accounting
change.................................................... 226 188 114
Cumulative effect of change in method of accounting for
certain consulting costs, net of taxes.................... - (5) -
------ ------ ------
Net earnings................................................ $ 226 $ 183 $ 114
====== ====== ======
Weighted-average number of common shares outstanding........ 56.2 59.8 61.0
Weighted-average number of common shares outstanding --
assuming dilution......................................... 56.6 60.2 61.3
Basic earnings per share:
Earnings before cumulative effect of accounting change.... $ 4.02 $ 3.15 $ 1.87
Cumulative effect of change in accounting................. - (.09) -
------ ------ ------
Net earnings.............................................. $ 4.02 $ 3.06 $ 1.87
====== ====== ======
Diluted earnings per share:
Earnings before cumulative effect of accounting change.... $ 3.99 $ 3.13 $ 1.86
Cumulative effect of change in accounting................. - (.09) -
------ ------ ------
Net earnings.............................................. $ 3.99 $ 3.04 $ 1.86
====== ====== ======
Cash dividends per common share............................. $ .68 $ .68 $ .68
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE> 23
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
------ ------ -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Cash flow from operating activities:
Net earnings.............................................. $ 226 $ 183 $114
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation........................................... 63 58 61
Amortization........................................... 17 15 12
Deferred income taxes.................................. 11 51 6
Change in operating assets and liabilities excluding
the effects of acquisitions:
Accounts receivable.................................. (48) (13) (18)
Inventories.......................................... 68 (75) (37)
Other assets......................................... 19 (20) 5
Accounts payable..................................... 1 23 (4)
Accrued expenses..................................... (7) 23 20
Other.................................................. (17) 7 9
----- ----- ----
Total adjustments...................................... 107 69 54
----- ----- ----
Net cash provided by operating activities................... 333 252 168
----- ----- ----
Cash flow from investing activities:
Cash paid for property, plant, and equipment.............. (109) (119) (64)
Proceeds from the sale of assets.......................... 9 15 2
Cash paid for acquisitions, net of cash acquired.......... (94) (18) (29)
Cash paid for available-for-sale marketable securities.... (10) - -
Other investing activities................................ 1 1 5
----- ----- ----
Net cash used for investing activities...................... (203) (121) (86)
----- ----- ----
Cash flow from financing activities:
Net borrowings (payments) supported by lines of credit.... (98) 25 (50)
Issuance of short-term notes payable...................... 118 - -
Issuance of long-term debt................................ 80 - -
Principal payments on long-term debt...................... (7) (4) (7)
Additional debt for acquisitions.......................... 4 - -
Proceeds from stock options exercised..................... 4 5 3
Purchase of treasury stock................................ (186) (125) (49)
Dividends paid............................................ (38) (41) (41)
----- ----- ----
Net cash used for financing activities...................... (123) (140) (144)
----- ----- ----
Effect of exchange rate changes on cash..................... (5) 4 5
----- ----- ----
Increase (decrease) in cash and cash equivalents.......... 2 (5) (57)
Cash and cash equivalents at January 1.................... 13 18 75
----- ----- ----
Cash and cash equivalents at December 31.................... $ 15 $ 13 $ 18
===== ===== ====
Supplemental cash flow information:
Interest paid............................................. $ 33 $ 29 $ 31
Income taxes paid......................................... $ 78 $ 74 $ 55
</TABLE>
See Notes to Consolidated Financial Statements
23
<PAGE> 24
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
------- -------
(AMOUNTS IN MILLIONS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 15 $ 13
Accounts receivable, net.................................. 381 326
Inventories, net of progress payments..................... 401 462
Deferred income taxes..................................... 53 49
Other current assets...................................... 15 30
------ ------
Total current assets................................... 865 880
Property, Plant, and Equipment, net......................... 527 472
Intangible Assets, net...................................... 332 265
Deferred Income Taxes....................................... 22 34
Other Assets................................................ 61 49
------ ------
$1,807 $1,700
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable............................................. $ 163 $ 143
Long-term debt due within one year........................ 4 9
Accounts payable.......................................... 128 124
Accrued salaries, wages, and commissions.................. 29 26
Accrued postretirement benefits other than pensions....... 18 17
Other accrued liabilities................................. 157 148
------ ------
Total current liabilities.............................. 499 467
Long-Term Debt.............................................. 295 213
Accrued Postretirement Benefits Other Than Pensions......... 344 357
Other Liabilities........................................... 124 121
------ ------
1,262 1,158
------ ------
SHAREHOLDERS' EQUITY
Common stock, par value $.50 per share; authorized
150,000,000 shares; issued 1998 and 1997 -- 75,686,028
shares (including shares in treasury).................. 38 38
Additional contributed capital............................ 165 160
Retained earnings......................................... 1,007 819
Common stock in treasury (at cost); 1998 -- 21,284,447
shares and 1997 -- 17,598,391 shares................... (645) (456)
Unamortized value of restricted stock issued.............. (6) (10)
------ ------
559 551
------ ------
Accumulated foreign currency translation adjustment....... (11) (9)
Unrealized gains on marketable securities................. 1 -
Minimum pension liability adjustment...................... (4) -
------ ------
Accumulated other comprehensive earnings.................. (14) (9)
------ ------
545 542
------ ------
$1,807 $1,700
====== ======
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE> 25
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNAMORTIZED ACCUMULATED
ADDITIONAL COMMON VALUE OF OTHER
COMMON CONTRIBUTED RETAINED STOCK IN RESTRICTED COMPREHENSIVE
TOTAL STOCK CAPITAL EARNINGS TREASURY STOCK ISSUED EARNINGS
----- ------ ----------- -------- -------- ------------ -------------
(AMOUNTS IN MILLIONS EXCEPT SHARE DATA )
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996........ $481 $ 38 $151 $ 604 $(287) $(14) $(11)
Comprehensive income:
Net earnings.................... 114 - - 114 - - -
Other comprehensive earnings
(net of taxes) -- Foreign
currency translation
adjustment.................... 3 - - - - - 3
----
Comprehensive income.............. 117 - - - - - -
----
Stock issued and acquired under
employee stock plans, net....... 5 - 4 - 1 - -
Cash dividends paid............... (41) - - (41) - - -
Purchase of 1,372,074 shares for
treasury........................ (51) - - - (51) - -
Net amortization of deferred
compensation under employee
stock plans..................... 2 - - - - 2 -
---- ---- ---- ------ ----- ---- ----
Balance at December 31, 1996...... 513 38 155 677 (337) (12) (8)
Comprehensive income:
Net earnings.................... 183 - - 183 - - -
Other comprehensive earnings
(net of taxes) --
Foreign currency translation
adjustment.................. (1) - - - - - (1)
----
Comprehensive income.............. 182 - - - - - -
----
Stock issued and acquired under
employee stock plans, net....... 8 - 5 - 5 (2) -
Cash dividends paid............... (41) - - (41) - - -
Purchase of 2,506,132 shares for
treasury........................ (124) - - - (124) - -
Net amortization of deferred
compensation under employee
stock plans..................... 4 - - - - 4 -
---- ---- ---- ------ ----- ---- ----
Balance at December 31, 1997...... 542 38 160 819 (456) (10) (9)
Comprehensive income:
Net earnings...................... 226 - - 226 - - -
Other comprehensive earnings, (net
of taxes) --
Unrealized gain on marketable
securities.................. 1 - - - - - 1
Foreign currency translation
adjustment.................. (2) - - - - - (2)
Minimum pension liability
adjustment ($2)............. (4) - - - - - (4)
----
Comprehensive income.............. 221 - - - - - -
----
Stock issued and acquired under
employee stock plans, net....... 6 - 4 - 2 - -
Cash dividends paid............... (38) - - (38) - - -
Purchase of 3,701,700 shares for
treasury........................ (189) - - - (189) - -
Conversion of 132,700 shares of
restricted stock to restricted
stock units..................... - - 1 - (2) 1 -
Net amortization of deferred
compensation under employee
stock plans..................... 3 - - - - 3 -
---- ---- ---- ------ ----- ---- ----
Balance at December 31, 1998...... $545 $ 38 $165 $1,007 $(645) $ (6) $(14)
==== ==== ==== ====== ===== ==== ====
</TABLE>
See Notes to Consolidated Financial Statements
25
<PAGE> 26
SUNDSTRAND CORPORATION AND SUBSIDIARIES
INFORMATION BY OPERATING SEGMENT
The Registrant has two reportable segments: Aerospace and Industrial. The
Registrant's reportable segments are strategic business groups that offer
different products and services. They are managed separately based on the
fundamental differences in their operations.
The Aerospace segment designs, develops and manufactures systems and
components for aircraft, space and defense applications. Through its electric
systems, mechanical systems, and power systems product lines the business
provides highly engineered solutions to the aerospace industry for applications
such as: primary, secondary and emergency power generation, distribution and
management; actuation; aircraft environmental control; and fuel and
lube/scavenge pumps. In addition to having components supplied by a common set
of manufacturing sites, each of the Aerospace segment's product lines serve
common customers that include airframe manufacturers, the United States
government, and most of the world's airlines.
The Industrial segment 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, customer industries, and
distribution channels. Products consist of mechanically engineered, rotating
equipment sold through manufacturer representatives and distributors to
customers primarily in the raw material processing, bulk material handling,
direct manufacturing and construction industries.
Among other considerations, the Registrant evaluates performance and
allocates resources based on profit from operations before corporate general
allocations, net interest expense and income taxes (referred to as operating
profit). The accounting policies of the reportable segments are the same as
those described in the Summary of Significant Accounting Policies section of the
notes to consolidated financial statements beginning on page 28.
Financial data with respect to the Aerospace and Industrial operating
segments are set forth below and should be read in conjunction with the
Restructurings section of the notes to consolidated financial statements on page
42. Intersegment sales are immaterial and have been eliminated. Certain prior
year amounts have been reclassified to conform with the 1998 presentation.
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Net sales
Aerospace................................................. $1,229 $1,001 $ 785
Industrial................................................ 776 751 736
------ ------ ------
$2,005 $1,752 $1,521
====== ====== ======
The above includes:
Military sales (final customer is primarily the U.S.
government)............................................ $ 332 $ 267 $ 240
====== ====== ======
- ------------------------------------------------------------------------------------------
Operating profit
Aerospace................................................. $ 272 $ 209 $ 138
Industrial................................................ 118 128 84
------ ------ ------
Total operating profit.................................... 390 337 222
Interest expense............................................ (35) (30) (29)
Interest income............................................. 4 6 5
General corporate expenses.................................. (17) (19) (14)
Other....................................................... 5 - -
------ ------ ------
Earnings before income taxes and cumulative effect of
accounting change...................................... $ 347 $ 294 $ 184
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements
26
<PAGE> 27
SUNDSTRAND CORPORATION AND SUBSIDIARIES
INFORMATION BY OPERATING SEGMENT (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Assets
Aerospace................................................. $1,051 $ 952 $ 846
Industrial................................................ 645 578 558
Corporate................................................. 111 170 191
------ ------ ------
$1,807 $1,700 $1,595
====== ====== ======
Capital expenditures
Aerospace................................................. $ 78 $ 74 $ 36
Industrial................................................ 30 35 28
Corporate................................................. 1 10 -
------ ------ ------
$ 109 $ 119 $ 64
====== ====== ======
Depreciation and amortization
Aerospace................................................. $ 53 $ 49 $ 48
Industrial................................................ 26 22 23
Corporate................................................. 1 2 2
------ ------ ------
$ 80 $ 73 $ 73
====== ====== ======
Geographic Areas
Net sales
Asia/Pacific Rim.......................................... $ 163 $ 183 $ 164
Europe.................................................... 413 332 276
North America (excluding the United States)............... 130 110 106
South America............................................. 58 53 34
United States............................................. 1,174 1,020 897
Other..................................................... 67 54 44
------ ------ ------
$2,005 $1,752 $1,521
====== ====== ======
Operating profit (loss)
Domestic.................................................. $ 370 $ 317 $ 241
Foreign................................................... 20 20 (19)
------ ------ ------
$ 390 $ 337 $ 222
====== ====== ======
Assets
Domestic.................................................. $1,630 $1,543 $1,432
Foreign................................................... 177 157 163
------ ------ ------
$1,807 $1,700 $1,595
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements
27
<PAGE> 28
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 subsystems 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, the United States government, and most of the world's
airlines. 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
44.
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 which approximates the first-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.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Marketable Securities consist of investments in a publicly traded index
fund that are held in an irrevocable Rabbi Trust that will be used to fund
certain obligations under the Registrant's employee benefit plans. Marketable
securities are reviewed by the Registrant for appropriate classification at the
time of purchase and reevaluated as of each balance sheet date. All of the
Registrant's marketable securities are classified as available-for-sale as of
the balance sheet date and are reported at fair value, with unrealized gains and
losses, net of tax, recorded in accumulated other comprehensive earnings.
Realized gains or losses and declines in value, if any, judged to be other than
temporary, on available-for-sale securities are reported in other income or
expense. At December 31, 1998, the fair value of the Registrant's marketable
securities was $11 million which includes $1 million in unrealized gains. The
change in net unrealized gains included in comprehensive income for 1998 was $1
million. There were no realized gains or losses on these marketable securities
during 1998. The Registrant did not hold any marketable securities at December
31, 1997. Marketable securities are classified as other assets on the balance
sheet.
Intangible Assets of $332 million and $265 million at December 31, 1998 and
1997, respectively (net of accumulated amortization of $121 million and $108
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, 1998. 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 page 42, 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
40 through 42 contains a summary of the pro forma effects to reported net income
and earnings per share for 1998, 1997 and 1996 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
exchange contracts, interest rate swaps, interest rate locks and equity index
costless collars are entered into by the Registrant to manage foreign currency
exchange rate, interest rate, and equity market risks associated with underlying
assets, liabilities, firm commitments, or anticipated transactions. The
Registrant's derivative financial instruments are not held or issued for
speculative or trading purposes. Accounting policies for these instruments are
based on the Registrant's designation of such instruments as hedging
transactions under generally accepted accounting principles. Criteria used in
designating an instrument as a hedge includes the effectiveness of the
instrument in reducing the associated risk of the underlying position. Gains and
losses on foreign currency forward exchange contracts that are designated as and
are effective as hedges of firm commitments, net investments in a foreign
entities, or intercompany loans of a long-term nature, are deferred and included
in the measurement of the hedged position upon settlement. Foreign currency
forward exchange contracts that do not qualify for hedge accounting are
marked-to-market and unrealized gains and losses are included in current period
income or expense. Payments and receipts under interest rate swaps are accrued
as an adjustment to interest expense on the underlying debt. Gains and losses on
interest rate locks are deferred and will be included as an adjustment to
interest expense on intended future debt issuances. Gains and losses on equity
index costless collars are deferred and recorded as an adjustment to the
carrying amount of the underlying investments. Gains and losses on terminations
of hedge contracts are recognized as income or expense when terminated in
conjunction with the termination of the underlying hedged position, or to the
extent that such underlying hedged position is still outstanding, deferred and
recognized in income upon settlement of the underlying hedged position.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Registrant has strict controls regarding the use of derivative
financial instruments. The required level of authorization for the use of
derivative financial instruments increases based on their relative risk
characteristics. The use of leveraged derivatives is prohibited. In order to
manage credit risk related to derivative financial instruments, 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.
Reclassification of certain prior year amounts have been made to conform
with the presentation in 1998.
Information by Operating Segment is presented on pages 26 and 27.
Quarterly Results are presented on page 45.
CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Registrant adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income." Statement
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no impact
on the Registrant's net income or shareholders' equity. Statement No. 130
requires foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on available-for-sale marketable
securities, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
No. 130. During 1998, 1997, and 1996, total comprehensive income amounted to
$221 million, $182 million, and $117 million, respectively.
Effective January 1, 1998 the Registrant adopted Financial Accounting
Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information." Statement No. 131 supersedes Financial Accounting
Standards Board Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise." Statement No. 131 establishes new standards for the way
that public business enterprises report financial and descriptive information
about operating segments in the annual and interim financial statements.
Statement No. 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
Statement No. 131 had no impact on net earnings or shareholders' equity but did
effect the disclosure of certain segment information. See the Information by
Operating Segment section of the consolidated financial statements on pages 26
and 27.
Effective January 1, 1998 the Registrant adopted Financial Accounting
Standards Board Statement No. 132, "Employers Disclosures about Pensions and
Other Postretirement Benefits." Statement No. 132 establishes new disclosure
requirements for pension and other postretirement benefit information in the
notes to the financial statements. The adoption of Statement No. 132 had no
impact on net earnings or shareholders' equity but did effect the disclosure of
certain pension and other postretirement information. See the Pension and Other
Postretirement Benefits section of the notes to the consolidated financial
statements on pages 33 through 35.
During the fourth quarter 1998, the Registrant adopted American Institute
of Certified Public Accountants Statement of Position 98-5 (SOP 98-5),
"Reporting on the Cost of Start-Up Activities." SOP 98-5 requires costs related
to start-up activities, including organizational expenses, that were previously
capitalized to be written-off and displayed as a cumulative effect of a change
in accounting principle in the quarter adopted. The Registrant currently
expenses such costs as incurred; as a result, the adoption of SOP 98-5 had no
impact on net earnings or shareholders' equity in 1998.
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
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 in 1997. Other
than the cumulative effect, this change did not have a significant impact on the
Registrant's net earnings during 1997.
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 STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed for or Obtained for Internal Use." The Registrant
plans to adopt SOP 98-1 on January 1, 1999. SOP 98-1 requires the capitalization
of certain internal costs incurred after the date of adoption in connection with
developing or obtaining software for internal use. The Registrant currently
expenses some costs as incurred that are eligible for capitalization under SOP
98-1. Based upon an assessment of the Registrant's internal use software
projects, the adoption of SOP 98-1 will not have a material impact on net
earnings or shareholder's equity.
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in fiscal years beginning after
June 15, 1999. The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Registrant expects to adopt the new
Statement effective January 1, 2000. The Statement will require the Registrant
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings, or
deferred and recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will immediately be recognized in earnings. Based upon the Registrant's
derivative positions at December 31, 1998, the Registrant estimates the adoption
of Statement No. 133 will not have a material impact on net earnings or
shareholder's equity.
ACQUISITIONS
During the first quarter 1998, the Industrial segment acquired Ansimag
Inc., a manufacturer and distributor of non-metallic magnet drive sealless pumps
used in the chemical and general process industries; Maso Process Pumpen GmbH, a
manufacturer of Sine(R) rotor pumps used in the food, beverage and
pharmaceutical industries; and Robin Industries S.A., a manufacturer of
industrial mixing equipment used in the chemical and mineral processing, pulp
and paper, water treatment and pharmaceutical industries.
During the third quarter 1998, the Industrial segment acquired Williams
Instrument Company, Inc., a manufacturer of pneumatically powered mechanical
pumps for the oil and gas production industry; and the Mining Services Division
of A. Goninan & Co., Limited, a manufacturer of steel and iron ring gears and
enclosed gear drives used in the mining, steel, cement and other heavy
industries.
During the fourth quarter 1998, the Aerospace segment acquired Keystone
Engineering, a manufacturer of light-weight propellant pressure tanks and domes
for commercial satellite and launch vehicles; and Shannon Aircraft Motor Works,
a leader in the repair and overhaul of aircraft motor and generator components.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All of the 1998 acquisitions were accounted for under the purchase method.
Accordingly, the purchase price for each acquisition was allocated to the
respective assets and liabilities based on their estimated fair values as of the
date of the acquisition. The excess of the purchase price over the fair values
of the net assets acquired was allocated to goodwill. The results of the
acquired businesses are included in the Registrant's consolidated financial
statements as of the respective acquisition dates. The aggregate purchase price
for all of these acquisitions was $90 million in cash plus the assumption of $4
million in debt. Of the total purchase price, $65 million was allocated to
goodwill which is being amortized on a straight-line basis over periods of 15 to
25 years. The combined impact of these acquisitions was not material in relation
to the Registrant's results of operations. Consequently, pro forma information
is not presented.
The Keystone and Shannon Aircraft Motor Works acquisitions occurred late in
1998; as a result, purchase price allocations have been made based on
preliminary estimates of fair values of acquired assets and assumed liabilities
and may be adjusted in 1999 when the Registrant completes its integration plans
for these acquisitions and when final fair value information becomes available.
The final adjustments to the purchase price allocations are not expected to be
material to the consolidated financial statements.
During the fourth quarter of 1997, the Aerospace segment 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. This acquisition
was accounted for under the purchase method and was not material to the
Registrant's results of operations in 1997.
ACCOUNTS RECEIVABLE, NET
The components of net accounts receivable at December 31, 1998 and 1997,
were:
<TABLE>
<CAPTION>
1998 1997
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
U.S. government
Amounts billed.......................................... $ 26 $ 23
Unbilled costs and accrued profits...................... 25 13
---- ----
51 36
Commercial................................................ 330 290
---- ----
$381 $326
==== ====
</TABLE>
INVENTORIES
The components of inventories at December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
1998 1997
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Raw materials............................................. $ 59 $ 59
Work in process........................................... 143 160
Finished goods and parts.................................. 247 260
---- ----
449 479
Less progress payments.................................... 48 17
---- ----
$401 $462
==== ====
</TABLE>
Prior to the application of progress payments, the inventories shown above
included costs of $75 million and $82 million at December 31, 1998 and 1997,
respectively, related to long-term contracts.
32
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1998 and 1997, was
classified as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Land and improvements..................................... $ 40 $ 39
Buildings and improvements................................ 241 231
Machinery and equipment................................... 988 900
------ ------
1,269 1,170
Less accumulated depreciation............................. 742 698
------ ------
$ 527 $ 472
====== ======
</TABLE>
PENSION AND OTHER POSTRETIREMENT 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.
The Registrant also provides health and life insurance benefits for retired
employees and certain dependents when employees become eligible for these
benefits by satisfying plan provisions, which include certain age and/or service
requirements. Health and life insurance benefits for retirees of domestic
operations are provided through insurance contracts, a group benefit trust or
general assets of the Registrant. Health and life insurance benefits for
retirees of foreign operations, where applicable, are provided through
government-sponsored plans to which contributions by the Registrant are
required. The health insurance plans covering substantially all U.S. employees
are contributory, with contributions adjusted annually, and these plans contain
other cost-sharing features such as deductibles and coinsurance. Currently, the
Registrant requires contributions, which are adjusted annually, primarily from
employees who retired subsequent to 1991. The Registrant has the right to modify
or terminate any of these plans in the future.
Net periodic benefit cost for 1998, 1997, and 1996 included:
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
-------------------- --------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Service cost of current period.......... $ 20 $ 17 $ 19 $ 5 $ 4 $ 4
Interest cost on benefit obligation..... 52 48 47 18 21 21
Expected gain on plan assets............ (64) (58) (57) - - -
Amortization of transition obligation... 4 4 4 - - -
Amortization of prior service cost...... 1 1 1 (5) (5) (2)
Recognized actuarial loss (gain)........ (1) (1) - (10) (3) (2)
Settlement loss (gain).................. (3) - (4) - - -
Curtailment loss (gain)................. - - (2) - (15) (6)
---- ---- ---- ---- ---- ---
Net periodic benefit cost............... $ 9 $ 11 $ 8 $ 8 $ 2 $15
==== ==== ==== ==== ==== ===
</TABLE>
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Benefit obligation, fair value of plan assets, funded status, net pension
and net other postretirement benefit liability information for 1998 and 1997
includes:
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- ----------------
1998 1997 1998 1997
----- ----- ----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Change in the benefit obligation:
Benefit obligation at beginning of year................. $ 689 $ 618 $ 237 $ 285
Service cost............................................ 20 17 5 4
Interest cost........................................... 52 48 18 21
Plan amendments......................................... 5 4 - (31)
Actuarial loss (gain)................................... 61 55 12 (24)
Settlements............................................. (26) (2) - -
Benefits paid........................................... (31) (51) (20) (18)
----- ----- ----- -----
Benefit obligation at end of year....................... 770 689 252 237
----- ----- ----- -----
Change in plan assets:
Fair value of plan assets at beginning of year.......... 854 715 - -
Actual return on plan assets............................ 22 183 - -
Employer contributions.................................. 1 9 20 18
Settlements............................................. (26) (2) - -
Benefits paid........................................... (31) (51) (20) (18)
----- ----- ----- -----
Fair value of plan assets at end of year................ 820 854 - -
----- ----- ----- -----
Funded status............................................. 50 165 (252) (237)
Unrecognized transition obligation........................ 10 14 - -
Unrecognized prior service costs.......................... 12 6 (27) (33)
Unrecognized actuarial gain............................... (91) (196) (83) (104)
----- ----- ----- -----
Net liability recognized on balance sheet................. $ (19) $ (11) $(362) $(374)
===== ===== ===== =====
Net liability recognized on balance sheet consists of:
Prepaid benefit cost.................................... $ 10 $ 15 $ - $ -
Accrued benefit liability............................... (39) (30) (362) (374)
Intangible asset........................................ 4 4 - -
Deferred income taxes................................... 2 - - -
Accumulated other comprehensive income.................. 4 - - -
----- ----- ----- -----
Net liability recognized on balance sheet................. $ (19) $ (11) $(362) $(374)
===== ===== ===== =====
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of the plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $23 million, $19 million and $0,
respectively, as of December 31, 1998 and $14 million, $11 million and $0,
respectively, as of December 31, 1997.
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The year end measures of benefit obligation are based on an actuarial
measurement date of October 1 of the respective years. The assumptions used in
determining the benefit obligations in 1998 and 1997 were:
<TABLE>
<CAPTION>
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
1998 1997 1998 1997
------ ---- ---- ----
<S> <C> <C> <C> <C>
Discount Rate................................. 6.75% 7.50% 7.00% 7.75%
Expected return on plan assets................ 9.00% 9.00% - -
Rate of compensation increase................. 3.50% 4.25% - -
</TABLE>
For postretirement benefits, the assumed 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 5.25 percent for 1999 and is assumed to
decrease to 5.0 percent in 2000 and remain level thereafter. The assumed annual
rate of increase in the per capita cost of dental benefits (applicable only to
employees who retired prior to 1992) is 5.0 percent in 1999 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) was 3 percent and 4 percent for 1998 and 1997, respectively.
A one percent increase in the annual health care trend rates would have
increased the accumulated post-retirement benefit obligation by $15 million at
both December 31, 1998 and 1997, and increased the service and interest cost for
1998 and 1997 by $1 million in each year. A one percent decrease in the annual
health care trend rates would have decreased the accumulated post-retirement
benefit obligation by $15 million at both December 31, 1998 and 1997, and
decreased the service and interest cost for 1998 and 1997 by $1 million in each
year.
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 postretirement benefit curtailment gain
of $15 million in 1997. It also reduced the net periodic postretirement benefit
cost by $3 million for 1997.
During 1996, the Registrant closed its Lima, Ohio, facility at which time
an $8 million pension and other postretirement benefit curtailment gain was
recognized. The decision to close this facility was made in 1995 and a $12
million curtailment loss was 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 footnote on pages 42
and 43.
Pension plan assets consist principally of common stocks and fixed income
investments. During 1998 and 1997, one-year arrangements were executed limiting
the Registrant's exposure to investment gains and losses on plan assets.
The Registrant also sponsors seven defined contribution retirement benefit
plans that cover substantially all U.S. and Puerto Rican employees. All of these
plans are subject to ERISA. Six 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. Four of these plans provide that the employer will match certain
portions of the employee-directed contributions. The maximum employer match as a
percentage of salary under these plans was 2 percent, 1 percent, and 0.5 percent
for 1998, 1997 and 1996, respectively. The Registrant's matching contributions
to the above plans were $6 million in 1998, $3 million in 1997 and $1 million in
1996.
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTES PAYABLE AND LONG-TERM DEBT
The composition of notes payable at December 31, 1998 and 1997, was:
<TABLE>
<CAPTION>
1998 1997
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Commercial paper(a)....................................... $ 45 $143
Floating rate notes due 1999(b)........................... 62 -
5.60% notes due 1999...................................... 56 -
---- ----
Notes payable............................................. $163 $143
==== ====
</TABLE>
(a) Average rate of 5.6 percent and 7.1 percent at December 31, 1998 and 1997,
respectively.
(b) Floating rate of 5.8 percent at December 31, 1998 swapped to a fixed rate of
5.6 percent through the maturity date of the notes.
At December 31, 1998, the Registrant maintained committed domestic
revolving credit facilities totaling $435 million, including a $100 million
facility arranged in 1998. Commitment fees on these facilities were not
material.
The composition of long-term debt at December 31, 1998 and 1997, was:
<TABLE>
<CAPTION>
1998 1997
----- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Floating rate notes due 2000(a)........................... $70 $ -
5.59% notes due 2000...................................... 10 -
9.48% notes due 2001...................................... 100 100
9.15% notes due 2003...................................... 50 50
9.34% notes due 2006...................................... 50 50
Other, including $15 million of variable rate debt,
weighted average rate of 4.8% at December 31, 1998...... 19 22
---- ----
299 222
Less amount due within one year........................... 4 9
---- ----
Long-term debt (less current portion)..................... $295 $213
==== ====
</TABLE>
(a) Floating rate of 5.9 percent at December 31, 1998 swapped to a fixed rate of
5.6 percent through the maturity date of the notes.
Total principal payments required under long-term debt agreements for the
five years subsequent to December 31, 1998, are $4 million in 1999, $81 million
in 2000, $100 million in 2001, $3 million in 2002, and $50 million in 2003.
In 1998, the Registrant filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission for the public sale of up to $100 million of
debt securities, increasing the Registrant's previously registered facility for
the issuance of such debt securities to $250 million. Under this facility in
1998, the Registrant issued $62 million of floating rate notes due in 1999, $56
million of 5.60 percent notes due in 1999, $70 million of floating rate notes
due in 2000, and $10 million of 5.59 percent notes due in 2000. The notes due in
1999 are classified as notes payable. Proceeds from the issuance of these notes
were used to repay short-term bank loans. In January 1999, the Registrant issued
the remaining $52 million available under this facility in the form of floating
rate notes due in 2000. The proceeds were used to pay down commercial paper.
Under a long-term debt agreement in place at December 31, 1998, payments of
dividends are limited by the requirement to maintain a minimum level of net
worth. At December 31, 1998, net worth exceeded the maintenance level by $302
million.
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Income tax expense for the three years ended December 31, 1998, consisted
of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Current income tax expense........................... $130 $152 $ 78
Deferred income tax benefit.......................... (9) (50) (8)
---- ---- ----
Total income tax expense........................... $121 $102 $ 70
==== ==== ====
Total income tax expense includes:
State tax.......................................... $ 13 $ 12 $ 10
Foreign tax........................................ $ 7 $ 7 $ -
</TABLE>
State income taxes for 1998, 1997 and 1996 were principally current.
Foreign income taxes were principally current for 1998 and 1997, while 1996
included $9 million of current tax expense offset by $9 million of deferred tax
benefit.
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>
1998 1997 1996
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Income tax expense at the statutory rate................ $121 $100 $ 64
Increases (reductions) in taxes resulting from:
State taxes based on income, net of federal income
taxes.............................................. 8 8 7
Adjustments to prior year accruals.................... - 3 -
FSC tax benefits...................................... (12) (9) (6)
Miscellaneous other items............................. 4 - 5
---- ---- ----
Actual income tax expense.......................... $121 $102 $ 70
==== ==== ====
"Effective" tax rate............................... 35.0% 36.0% 38.0%
==== ==== ====
</TABLE>
Significant components of the net deferred tax assets at December 31, 1998
and 1997, were:
<TABLE>
<CAPTION>
1998 1997
------ ------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Deferred tax assets arising from:
Retiree medical......................................... $140 $144
Employee benefit plans.................................. 25 13
Warranty reserve........................................ 17 13
Inventories............................................. 8 8
Restructuring........................................... 4 7
Environmental reserves.................................. 7 7
Net operating losses.................................... 11 3
Other................................................... 20 32
---- ----
Total deferred tax assets.......................... 232 227
---- ----
Deferred tax liabilities arising from:
Property, plant, and equipment.......................... 45 40
Taxes provided on unremitted foreign earnings........... 18 21
Other................................................... 94 83
---- ----
Total deferred tax liabilities..................... 157 144
---- ----
Net deferred tax assets............................ $ 75 $ 83
==== ====
</TABLE>
37
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Domestic and foreign earnings/(loss) before income taxes and the cumulative
effect of accounting change for the three years ended December 31, 1998, as
shown below, exclude profits recorded on intercompany sales. Net interest
expense is allocated between geographic segments based on non-cash assets.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
Domestic................................................ $330 $276 $206
Foreign................................................. 17 18 (22)
---- ---- ----
Earnings before income taxes and cumulative effect of
accounting change.................................. $347 $294 $184
==== ==== ====
</TABLE>
Profits recorded on intercompany sales from foreign entities excluded above
were $21 million, $19 million, and $19 million in 1998, 1997 and 1996,
respectively, and were earned primarily by the Registrant's Singapore
subsidiaries.
As of December 31, 1998 and 1997, the Registrant had not provided federal
income taxes on $82 million and $65 million, respectively, of undistributed
earnings recorded by certain subsidiaries outside the United States, since these
earnings were deemed permanently invested.
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.
During 1998, this issue was resolved with no material impact to the Registrant.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(AMOUNTS IN MILLIONS EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share --
net earnings........................................ $ 226 $ 183 $ 114
===== ===== =====
Denominator:
Denominator for basic earnings per share --
Weighted-average shares.......................... 56.2 59.8 61.0
Effect of dilutive securities -- Employee stock
options and restricted stock units............... 0.4 0.4 0.3
----- ----- -----
Denominator for diluted earnings per share --
adjusted weighted-average shares................. 56.6 60.2 61.3
===== ===== =====
Basic earnings per share.............................. $4.02 $3.06 $1.87
===== ===== =====
Diluted earnings per share............................ $3.99 $3.04 $1.86
===== ===== =====
</TABLE>
Additional disclosures regarding employee stock options are presented on
pages 40 through 42.
38
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Registrant is party to financial
instruments with off-balance-sheet risk for the purpose of meeting financing
needs and reducing exposure to fluctuations in capital markets. These financial
instruments include financial guarantees, foreign currency forward exchange
contracts, interest rate swaps, interest rate locks and equity index costless
collars. These instruments may involve elements of credit 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, primarily borrowing
arrangements, of unconsolidated affiliates and unaffiliated entities to third
parties. At December 31, 1998, the Registrant's had outstanding financial
guarantees totaling $5 million scheduled to expire in 1999 and 2000.
Foreign currency forward exchange contracts provide for the purchase or
sale of foreign currencies at specified future dates and at specified exchange
rates. At December 31, 1998, the Registrant had contracts maturing primarily
during 1999 to purchase and sell the equivalent of $11 million and $70 million
in foreign currencies, respectively. At December 31, 1997, the Registrant had
contracts maturing primarily during 1998 to purchase and sell the equivalent of
$53 million and $72 million in foreign currencies, respectively. All of the
foreign exchange contracts were used by the Registrant to reduce the impact of
foreign currency fluctuations on specific assets, liabilities and certain cash
flows denominated in foreign currencies, primarily the French franc and the
British pound sterling. Had counterparties failed to perform under the contracts
and assuming all the contracts matured on December 31, 1998, the Registrant's
cash loss would have been $3 million.
Interest rate swaps are contracts in which two parties agree to pay
interest to each other on a notional principal amount, with one party paying a
fixed rate and the other party paying a floating rate. Such swaps eliminate
interest rate risk on floating rate debt by enabling the Registrant to pay a
fixed interest rate and receive a floating payment exactly equal to the interest
due on the floating rate debt. At December 31, 1998, the Registrant had interest
rate swap contracts eliminating interest rate risk on $132 million of floating
rate debt with maturities to March 2000. The Registrant was not party to such
contracts at December 31, 1997.
An interest rate lock contract is a notional forward sale of a U.S.
Treasury bond at a specified price on a specified future date. Interest rate
lock contracts protect against fluctuations in the U.S. Treasury rate to be used
as the pricing benchmark in an intended future debt issue. If the U.S. Treasury
rate rises or falls during the term of the contract, the contract will produce a
gain or a loss, respectively, which will be deferred and amortized into interest
expense over the life of the debt issue. At December 31, 1998, the Registrant
had outstanding interest rate lock contracts with an aggregate notional amount
of $200 million maturing in 1999. The Registrant was not party to such contracts
at December 31, 1997.
An equity index costless collar is a simultaneous combination of put and
call options on a specified equity market index. Under an equity index costless
collar, the price paid for the put option is exactly offset by the amount
received from the sale of the call option. The put option provides for a cash
payment to the Registrant if the index is below the put strike level at
expiration, and the call option requires the Registrant to make a cash payment
if the index exceeds the call strike level. If the index is between the put
strike and the call strike levels at expiration, there will be no cash payment
to or from the Registrant. The Registrant uses such collars to limit the
exposure on certain available-for-sale marketable securities to fluctuations in
the S&P 500 Index. At December 31, 1998, the Registrant was a party to S&P 500
Index collars expiring in 1999 with notional amounts totaling $5 million. The
S&P 500 Index level at December 31, 1998 was within the collars. The Registrant
was not party to such contracts at December 31, 1997.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Notes payable and long-term debt: The carrying amounts of the Registrant's
borrowings under its commercial paper programs, its short-term revolving credit
agreements, floating rate notes payable and 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.
Derivative instruments: The fair value of the Registrant's derivative
instruments, including foreign currency forward exchange contracts, interest
rate swaps, interest rate locks and equity index costless collars, is estimated
based on quoted market prices of comparable contracts.
The carrying amounts and fair values of the Registrant's financial
instruments at December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 15 $15 $ 13 $ 13
Notes payable................................... 163 163 143 143
Long-term debt.................................. 299 330 222 253
Derivative instruments:
Foreign currency forward exchange contracts... - (4) (4) (3)
Interest rate swaps........................... - - - -
Interest rate locks........................... - 3 - -
Equity index costless collars................. - - - -
</TABLE>
LEASE ARRANGEMENTS AND RENT EXPENSE
Rent and lease expense for the years 1998, 1997, and 1996 was $12 million,
$13 million, and $13 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: 1999, $8 million; 2000, $6 million; 2001, $6 million; 2002, $5 million;
2003, $1 million; and after 2003, $1 million. Facilities and equipment under
capital leases, minimum future rentals receivable under subleases, and
contingent rental expenses were not significant for the years 1998, 1997, and
1996.
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 1989 Restricted Stock Plan, the Nonemployee Director Stock Option Plan, and
the Director Compensation Plan. The Stock Incentive Plan permits up to a maximum
of 6.6 million shares of common stock to be granted as nonqualified and
incentive stock options and restricted stock to managerial, supervisory, and
professional employees. The Management Stock Performance Plan is similar in
nature and permits up to 3 million shares to be granted. No further grants are
permitted under the 1989 Restricted Stock Plan, however, approximately 800,000
shares of restricted stock have previously been granted. The Nonemployee
Director Stock Option Plan permits up to 264,000 stock options to
40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
be granted. The Director Compensation Plan permits grants of up to 192,692
shares of restricted stock in lieu of cash for director fees and retainers.
During 1998, the Stock Incentive Plan, Management Stock Performance Plan,
the 1989 Restricted Stock Plan, and the Director Compensation Plan were amended
to allow the grant of restricted stock units. This amendment also allows
employees and the Registrant to convert outstanding shares of restricted stock
to restricted stock units. As a result of this amendment, 71,000 restricted
stock units were granted in 1998 and 132,700 shares of restricted stock were
converted to restricted stock units in 1998.
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.
Likewise, in all plans offering restricted stock units, the restricted stock
units may not be sold by the employee during the vesting period. The
restrictions on restricted stock and restricted stock units 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 and restricted stock units is being amortized over a
nine-year vesting period. Total compensation expense recognized for restricted
stock and restricted stock units in 1998, 1997 and 1996 was $3 million, $4
million and $2 million, respectively. The following table summarizes information
about the Registrant's restricted stock and restricted stock units grants for
the years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Restricted stock units granted..................... 71,000 - -
Restricted shares granted.......................... 5,804 50,500 51,600
Weighted average fair value per share/unit......... $ 51.18 $ 51.42 $ 38.16
</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>
1998 1997 1996
----- ----- -----
(IN MILLIONS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net earnings -- as reported.............................. $ 226 $ 183 $ 114
Net earnings -- pro forma................................ 222 180 113
Basic earnings per share -- as reported.................. 4.02 3.06 1.87
Basic earnings per share -- pro forma.................... 3.95 3.01 1.85
Diluted earnings per share -- as reported................ 3.99 3.04 1.86
Diluted earnings per share -- pro forma.................. 3.92 2.99 1.84
</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 1998, 1997 and 1996 respectively: risk-free interest rates of
4.63%, 5.86% and 6.05%; dividend yields of 1.3%, 1.3% and 1.6%; stock price
volatility factors of 22.3%, 20.8% and 20.0%; 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 1998, 1997 and 1996 was $13.70, $14.87 and $10.75, respectively.
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
STOCK OPTIONS OPTIONS PRICE
- ---------------------------------------------------------- --------- --------
<S> <C> <C>
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
Granted................................................. 848,100 50.85
Canceled................................................ (13,800) 43.95
Exercised............................................... (165,941) 22.15
--------- ------
Outstanding December 31, 1998............................. 2,990,810 $41.90
========= ======
Exercisable December 31, 1998............................. 792,323 $28.24
========= ======
</TABLE>
The following summarizes information about the Registrant's stock options
outstanding as of December 31, 1998:
<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................ 509,347 5.2 years $21.48 422,163 $21.28
$25 to $35................ 227,013 6.8 years $32.46 167,513 $32.66
$35 to $45................ 663,200 7.9 years $38.88 198,947 $38.87
$45 to $55................ 1,560,450 9.4 years $50.84 3,700 $51.31
$55 to $65................ 30,800 9.1 years $61.28 - -
</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 1998, 1997, and 1996
were $141 million, $117 million, and $98 million, respectively, of which $49
million, $44 million, and $43 million, respectively, was funded by customers.
RESTRUCTURINGS
In December 1996, the Registrant's Industrial segment 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
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
Since the charge was recorded in 1996, approximately $13 million has been
paid and charged against the restructuring liability, including costs to
terminate 124 employees. Additionally, restructuring related period costs of $2
million were incurred in both 1998 and 1997. It is anticipated that the sale of
the St. Priest facility will be completed by the end of the second quarter of
1999, at which time the restructuring will be substantially complete.
During 1995, the Registrant initiated 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 cash and non-cash
termination benefits, including recognition of certain long-term retirement
benefits for approximately 350 employees. Also included in the charge was $34
million for the write-down and disposition of assets related to the Lima
facility, Spectronic, and APT. The shutdown of the Lima facility was completed
during 1996 and the disposition of the facility was completed in the first
quarter of 1998. 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
in cash has been paid and charged against the restructuring liability, including
costs to terminate 360 employees. As of March 31, 1998, the planned
restructuring activities from the 1995 restructuring plan were substantially
complete.
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 level 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 at any site may differ from the Registrant's
estimate. As additional information becomes available, the Registrant adjusts
its reserves as it determines to be appropriate.
The Registrant's reserve spending for investigation and remediation costs
over the past three years is as follows: 1998 -- $2 million; 1997 -- $1 million;
and 1996 -- $5 million. It is anticipated that its expenditures from the
environmental reserve will be $4 million in 1999 and $3 million in 2000.
Although the Registrant believes its environmental reserve is adequate, due
to changed circumstances or the discovery of new sites at which the Registrant
is liable, additional accruals could be required in the future that could have a
material effect on the results of operations in a particular quarter or annual
period. However, the Registrant believes it is unlikely that there would be any
material adverse effect on the Registrant's long-term 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. Such expenditures in
1998, 1997, and 1996 were not material and are not expected to be material in
1999 or 2000.
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. With respect to one former plant site, the Registrant
has recently been advised that an investigation is being conducted at closed
wastewater treatment lagoon formerly owned and operated by a local government
authority to determine the extent to which contamination may be present and may
have affected the groundwater. The Registrant discharged process water to the
treatment facility and accordingly is a potentially responsible party. At the
time the plantsite was sold, an environmental reserve was established. The
Registrant is presently unable to determine whether adjustment to this reserve
or those established with respect to other present and former plantsites will be
required.
Under the Superfund laws, the Registrant participates as a PRP at 27 sites
where environmental remediation is being or will be conducted. At 22 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 three 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 potential liability
at each of these sites.
The two 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 believes it has fully reserved for its allocated
share of the 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 the costs allocated among the PRP group, the Registrant
cannot determine the adequacy of its reserve for this site.
The second Superfund site relates to a regional area of groundwater
contamination, much of which is located in a highly industrialized area. A
Consent Order has been signed between the City of Rockford and the U.S.
Department of Justice that settles the major issues at this site. The Registrant
has participated in the settlement. As a result of the Consent Order, the
Registrant now believes that the reserve which it previously established is
adequate to meet its remaining liability.
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.
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Quarterly Results (unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30(A) DECEMBER 31(B)
-------- ------- --------------- --------------
(AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Net sales...................................... $485 $ 490 $ 498 $ 532
Gross profit................................... $166 $ 169 $ 172 $ 182
Net earnings................................... $ 51 $ 57 $ 57 $ 61
Basic earnings per share....................... $.89 $1.00 $1.02 $1.12
Diluted earnings per share..................... $.88 $ .99 $1.02 $1.11
1997
Net sales...................................... $389 $ 440 $ 433 $ 490
Gross profit................................... $132 $ 149 $ 151 $ 172
Net earnings................................... $ 35 $ 43 $ 55 $ 50
Basic earnings per share....................... $.58 $ .71 $ .92 $ .85
Diluted earnings per share..................... $.58 $ .71 $ .91 $ .84
</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.
SUBSEQUENT EVENT
On February 21, 1999, the Registrant entered into an Agreement and Plan of
Merger with United Technologies Corporation. Pursuant to this agreement, the
Registrant will be merged with and into the Hamilton Standard division of United
Technologies with the new merged entity being named "Hamilton Sundstrand
Corporation." This agreement is subject to approval by the Registrant's
shareholders and certain United States and European regulatory agencies and is
expected to be completed by mid-year 1999.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
None
45
<PAGE> 46
PART III
As allowed by SEC regulations, 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, are incorporated by
reference to the Registrant's definitive proxy statement. If the Registrant's
definitive proxy statement is not filed within 120 days after the end of the
fiscal year covered by this Form 10-K, the Items comprising the Part III
information will be filed as an amendment to the Form 10-K, not later than the
end of the 120 day period.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Proxy Statement, information under the captions "Nominees for Election to
Sundstrand Board for Terms Expiring in 2002," "Directors Whose Terms Expire in
2000," "Directors Whose Terms Expire in 2001" and "Section 16 (a) Beneficial
Ownership Reporting Compliance".
ITEM 11. EXECUTIVE COMPENSATION
Proxy Statement, information regarding director compensation 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".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Proxy Statement, information under the caption "Ownership of Sundstrand
Common Stock".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Proxy Statement, information under the caption "Transactions and Loans with
Management".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C> <C>
(a) 1. Consolidated Financial Statements Included in Part II
Management's Report....................................... 21
Independent Auditors' Report.............................. 21
Consolidated Statement of Earnings, Years Ended December 22
31, 1998, 1997, and 1996...............................
Consolidated Statement of Cash Flows, Years Ended December 23
31, 1998, 1997, and 1996...............................
Consolidated Balance Sheet, December 31, 1998 and 1997.... 24
Consolidated Statement of Shareholders' Equity, Years 25
Ended December 31, 1998, 1997, and 1996................
Information by Operating Segment for the Years Ended 26
December 31, 1998, 1997, and 1996......................
Notes to Consolidated Financial Statements................ 30
Quarterly Results (Unaudited) for 1998 and 1997........... 45
</TABLE>
46
<PAGE> 47
(a) 2. Financial Statement Schedules
The schedules have been omitted as the required information is not
applicable or not required.
(a) 3. Exhibits
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation, or
Succession
(a) Agreement and Plan of Merger, dated as of February 21, 1999
among the Registrant, United Technologies and HSSail Inc.
(filed as Exhibit 2.1 to Registrant's Report on Form 8-K
dated February 23, 1999, File No 1-5358, and incorporated
herein by reference).
(3) Articles of Incorporation and By-Laws
(a) Registrant's Restated Certificate of Incorporation as
effective December 19, 1991 (filed as Exhibit (3)(a) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991, File No. 1-5358, and incorporated
herein by reference).
(b) Registrant's By-Laws, including all amendments, as effective
September 22, 1998 (filed as Exhibit (3)(a) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, File No. 1-5358, and incorporated herein by
reference).
(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) Credit Agreement dated, as of October 1, 1998, between the
Registrant and the First National Bank of Chicago (filed as
Exhibit (4)(a) to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, File No. 1-5358,
and incorporated herein by reference).
(c) 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).
(d) 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).
(e) 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).
47
<PAGE> 48
(f) 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).
(g) 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).
(h) 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 June 1, 1998, between Registrant
and Robert H. Jenkins, Registrant's Chairman of the Board,
President and Chief Executive Officer (filed as Exhibit
(10)(a) to Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, File No. 1-5358, and
incorporated herein by reference).*
(b) Form of Employment Agreement 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; Mary Ann Hynes,
Registrant's Vice President and General Counsel and
Secretary; and DeWayne J. Fellows, Registrant's Vice
President and Controller (filed as Exhibit (10)(b) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, File No. 1-5358, and incorporated herein
by reference).*
(c) Amendment and Restatement of Registrant's Stock Incentive
Plan effective September 22, 1998.*
(d) First Amendment to Registrant's amended and restated Stock
Incentive Plan effective January 15, 1999.*
(e) 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).*
(f) Text of resolution adopted by the Board of Directors of
Registrant on February 20, 1996, amending Registrant's
Nonemployee Director Stock Option Plan, which amendment
became effective April 16, 1996, upon stockholder approval.*
(g) Second Amendment to Registrant's Nonemployee Director Stock
Option Plan effective as of December 8, 1998.
(h) Registrant's 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).*
(i) First Amendment to Registrant's Director Compensation Plan
effective as of April 21, 1998 (filed as Exhibit (10)(k) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, File No. 1-5358 and incorporated
herein by reference).*
(j) Second Amendment to Registrant's Director Compensation Plan
effective as of December 8, 1998.*
(k) 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).*
(l) Text of resolution adopted by the Board of Directors of
Registrant on August 7, 1990, amending Registrant's 1989
Restricted Stock Plan (filed as Exhibit (19)(f) to
*Management contract or compensatory plan.
48
<PAGE> 49
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1990, File No. 1-5358, and incorporated
herein by reference).*
(m) Text of resolution adopted by the Board of Directors of
Registrant on November 21, 1995, amending Registrant's 1989
Restricted Stock Plan.*
(n) Third Amendment to Registrant's 1989 Restricted Stock Plan
effective as of June 1, 1998.*
(o) Fourth Amendment to Registrant's 1989 Restricted Stock Plan
effective as of September 22, 1998.*
(p) Fifth Amendment to Registrant's 1989 Restricted Stock Plan
effective as of January 15, 1999.*
(q) Text of resolution adopted by the Board of Directors of
Registrant on July 16, 1989, adopting a Director Emeritus
Retirement Plan and copy of such plan as effective July 20,
1989 (filed as Exhibit (10)(dd) to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1989,
File No. 1-5358, and incorporated herein by reference).*
(r) First Amendment to Registrant's Director Emeritus Retirement
Plan effective as of April 21, 1997 (filed as Exhibit
(10)(q) to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, File No. 1-5358 and
incorporated herein by reference).*
(s) 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).*
(t) 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).*
(u) Amendment and Restatement of Registrant's Management Stock
Performance Plan effective as of September 22, 1998.*
(v) First Amendment to Registrant's amended and restated
Management Stock performance Plan effective January 15,
1999.*
(w) 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).*
(x) Fifth Amendment to Registrant's Supplemental Retirement Plan
effective as of December 8, 1998.*
(y) 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.).*
(z) Amended and Restated Deferred Compensation Plan of Registrant
effective as of December 19, 1997 (filed as Exhibit (10)(w)
to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, File No. 1-5358, and
incorporated herein by reference).
(aa) First Amendment to Registrant's amended and restated Deferred
Compensation Plan effective as of April 21, 1998.*
(bb) Second Amendment to Registrant's amended and restated
Deferred Compensation Plan effective as of June 1, 1998.*
(cc) Third Amendment to Registrant's amended and restated Deferred
Compensation Plan effective as of September 22, 1998.*
(dd) Fourth Amendment to Registrant's amended and restated
Deferred Compensation Plan effective as of December 8, 1998.*
*Management contract or compensatory plan.
49
<PAGE> 50
(ee) 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).*
(ff) 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 (filed as Exhibit (10)(y) to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-5358, and incorporated herein
by reference).
(21) Subsidiaries of Registrant
(23) Consents of Experts and Counsel
(a) Consent of Independent Auditors (Ernst & Young LLP).
(24) Power 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 Form 8-K dated February 23, 1999, regarding an
Agreement and Plan of Merger between the Registrant and United Technologies
Corporation.
*Management contract or compensatory plan.
50
<PAGE> 51
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 26th day of
March, 1999.
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
Director
Gerald Grinstein
Director
Charles Marshall
Director
Klaus H. Murmann
Director
Ward Smith
Director
Berger G. Wallin
Director
March 26, 1999
By: /s/ PAUL DONOVAN
----------------------------------
Paul Donovan, Attorney-in-Fact
51
<PAGE> 1
Exhibit (10)(c)
SUNDSTRAND CORPORATION
STOCK INCENTIVE PLAN
As Amended and Restated September 22, 1998
WHEREAS, the Sundstrand Corporation Stock Incentive Plan (the "Plan")
was established effective as of December 1, 1992; and
WHEREAS, the Plan has been amended on four prior occasions as follows:
a) by resolution of the Board of Directors of the Company
adopted on April 18, 1995;
b) by resolution of the Board of Directors of the Company
adopted on September 19, 1995;
c) by a First Amendment to the Plan effective as of November
19, 1996, part of which amendment was subject to shareholder
approval which was obtained on April 15, 1997; and
d) by a Second Amendment to the Plan made effective as of June
1, 1998, pursuant to a resolution of the Board of Directors
of the Company adopted at its April 21, 1998, meeting; and
WHEREAS, the Board of Directors at its September 28, 1998, meeting
authorized the further amendment of the Plan to include restricted stock units
and make other changes not inconsistent with such authorization; and
WHEREAS, it has been determined that it is appropriate in connection
with the amendment to include restricted stock units to also amend and restate
the Plan in its entirety to incorporate into a single document each of the prior
amendments and to otherwise make limited changes to improve the readability of
the Plan;
NOW THEREFORE, the Sundstrand Corporation Stock Incentive Plan is
hereby amended and restated effective as of September 22, 1998, to provide as
follows:
ARTICLE 1. PURPOSE, AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Sundstrand Corporation, a Delaware
corporation (the "Company), maintains this incentive compensation plan, known as
the "Sundstrand Corporation Stock Incentive Plan" (the "Plan"). The Plan permits
the grant of Nonqualified Stock Options, Incentive Stock Options, Restricted
Stock and Restricted Stock Units, and is maintained so as to comply with Section
16 of the Exchange Act and the rules thereunder.
The Plan was originally established effective as of December 1, 1992 (the
"Effective Date"), and shall remain in effect as provided in Section 1.3 herein.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success
and enhance the value of the Company by linking the personal interests of
Participants to those of Company shareholders, and by providing Participants an
incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Participants upon whose
judgment, interest, and special effort the successful conduct of its operations
are largely dependent.
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<PAGE> 2
1.3 DURATION OF THE PLAN. Subject to the right of the Board of Directors of
the Company to terminate the Plan at any time pursuant to Article 13 herein, the
Plan shall remain in effect until all Shares subject to the Plan shall have been
purchased or acquired according to the Plan's provisions. In no event may an
Award be granted under the Plan on or after January 1, 2007.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meaning set
forth below:
(a) "Award" means, individually or collectively, a grant under this Plan
of Nonqualified Stock Options, Incentive Stock Options, Restricted
Stock or Restricted Stock Units.
(b) "Board" means the Board of Directors of the Company.
(c) "Change in Control" means any of the following events:
(i) The acquisition (other than from the Company) by any person (as
such term is defined in Sections 13(d) or 14(d) of the Securities
Exchange Act of 1934, as amended (the "1934 Act")) of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
1934 Act) of twenty-five percent (25%) or more of the combined
voting power of the Company's then outstanding voting securities;
(ii) The individuals who, as of the date hereof, are members of the
Board (the "Incumbent Board"), cease for any reason to constitute a
majority of the Board, unless the election, or nomination for
election by the Company stockholders, of any new director was
approved by a vote of a majority of the Incumbent Board, and such
new director shall, for purposes of this Plan, be considered as a
member of the Incumbent Board; or
(iii) (A) A merger or consolidation involving the Company (or any
direct or indirect subsidiary of the Company) or (B) the issuance of
shares of capital stock of the Company in connection with a merger
or consolidation involving the Company (or any direct or indirect
subsidiary of the Company) if, in the case of clause (A) or clause
(B), the stockholders of the Company immediately before such merger
or consolidation, do not, as a result of such merger or
consolidation, own, directly or indirectly, immediately following
such merger or consolidation, more than sixty-seven percent (67%) of
the combined voting power of the then outstanding voting securities
of the person issuing securities in the merger or consolidation in
substantially the same proportion as their ownership of the combined
voting power of the voting securities of the Company outstanding
immediately before such merger or consolidation; provided, however,
that for purposes of clause (A) and clause (B), voting securities of
the Company issued in connection with the merger or consolidation,
including securities to cover stock options or cure "tainted" shares
(whether issued in the merger or consolidation or pursuant to a
public or private offering related thereto), shall be treated as
having been issued in such merger or consolidation and not as having
been outstanding immediately prior to such merger or consolidation
or (C) a complete liquidation or dissolution of the Company or
consummation of the sale or other disposition of all or
substantially all of the assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur pursuant to clause (i) of this paragraph (c) of
Article 2, solely because twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding voting
securities is acquired by (I) a trustee or other fiduciary holding
securities under one or more employee benefit plans maintained by
the Company or any of its subsidiaries or (II) any corporation
which, immediately prior to such acquisition, is owned directly or
indirectly by the stockholders of the Company in the same proportion
as their ownership of stock in the Company immediately prior to such
acquisition.
(d) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
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<PAGE> 3
(e) "Committee" means the committee specified in Article 3.
(f) "Disability" means a permanent and total disability, within the
meaning of Code Section 22(e)(3), as determined by the Committee in
good faith, upon receipt of sufficient competent medical advice from
one or more individuals, selected by the Committee, who are qualified
to give professional medical advice.
(g) "Early Retirement" shall mean an Employee's eligibility to receive an
early retirement benefit from any retirement plan maintained by the
Company or any Subsidiary Entity.
(h) "Employee" means any full-time managerial, supervisory or professional
employee of the Company or of the Company's Subsidiary Entities.
(i) "Fair Market Value" means the average of the highest and lowest quoted
selling prices for Shares on the relevant date, or (if there were no
sales on such date) the weighted average of the means between the
highest and lowest quoted selling prices for Shares on the nearest day
before and the nearest day after the relevant date, as determined by
the Committee.
(j) "Incentive Stock Option" or "ISO" means an option to purchase Shares
granted under Article 6 herein, which is designated as an Incentive
Stock Option and is intended to meet the requirements of Section 422
of the Code.
(k) "Insider" shall mean an Employee who is, on the relevant date, an
officer of the Company, as defined under Rule 16a-1 of the Exchange
Act as determined by the General Counsel of the Company or such
person's designee.
(l) "Noninsider" means an Employee who is not, on the relevant date, an
Insider, as determined by the General Counsel of the Company or such
person's designee.
(m) "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares granted under Article 6 herein, which is not intended to be an
Incentive Stock Option.
(n) "Normal Retirement" shall mean an Employee's eligibility to receive a
normal retirement benefit from any retirement plan maintained by the
Company or by any Subsidiary Entity.
(o) "Option" means an Incentive Stock Option or a Nonqualified Stock
Option.
(p) "Option Certificate" means a certificate setting forth the terms and
provisions applicable to Options granted to a Participant.
(q) "Option Price" means the price at which a Share may be purchased by a
Participant pursuant to an Option.
(r) "Participant" means an Employee of the Company who has an Award
granted under the Plan outstanding.
(s) "Period of Restriction" means (i) with respect to Shares of Restricted
Stock the period during which the transfer of Shares of Restricted
Stock is limited in some way, as provided in the Plan, and (ii) with
respect to Restricted Stock Units, the period during which the
transfer of Stock Units is limited in some way, as provided in the
Plan and, subject to Section 8.8, upon the expiration or termination
of which, together with the satisfaction of any other conditions
prescribed by the Committee applicable to such Restricted Stock Units,
the holder thereof shall receive the number of Shares subject thereto.
(t) "Restricted Stock" means an Award granted under Article 7 herein.
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<PAGE> 4
(u) "Restricted Stock Certificate" means a certificate setting forth the
terms and provisions applicable to Restricted Stock granted to a
Participant.
(v) "Restricted Stock Price" means the price at which a Share may be
purchased by a participant pursuant to a Restricted Stock grant.
(w) "Restricted Stock Unit" means an Award granted under Article 8 herein.
(x) "Restricted Stock Unit Certificate" means a certificate setting forth
the terms and provisions applicable to Restricted Stock Units granted
to a Participant.
(y) "Shares" means shares of common stock of the Company.
(z) "Subsidiary Entity" means any corporation in which the Company owns,
directly, or indirectly, through subsidiaries, at least fifty percent
(50%) of the total combined voting power of all classes of stock, or
any other entity (including, but not limited to, partnerships and
joint ventures) in which the Company owns at least fifty percent (50%)
of the combined equity thereof.
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Compensation
Committee of the Board or by any other Committee appointed by the Board
consisting of not less than three nonemployee members of the Board. The
Committee shall be comprised solely of Directors who are eligible to administer
the Plan pursuant to Rule 16b-3(b) under the Exchange Act.
3.2 AUTHORITY OF THE COMMITTEE. The Committee shall have full power except
as limited by law or by the Certificate of Incorporation or Bylaws of the
Company, and subject to the provisions herein, to determine the size and types
of Awards; to determine the terms and conditions of such Awards in a manner
consistent with the Plan; to construe and interpret the Plan and any agreement
or instrument entered into under the Plan; to establish, amend, or waive rules
and regulations for the Plan's administration; and, subject to the provisions of
Article 13 herein, to amend the terms and conditions of any outstanding Award
consistent with the Plan. The Committee may make arrangements for the cashless
exercise of any Options issued hereunder. The Committee may delegate its
authority as permitted hereunder. In the provisions of the Plan where action by
the Company is contemplated, the Committee shall undertake to perform such
action.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board shall be final, conclusive, and binding on all persons,
including the Company and its successors or assigns, and on its stockholders,
Employees, Participants, and their respective estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.2
herein, the total number of Shares authorized for grant under the Plan is
6,146,155 Shares. Such Shares may be either authorized but unissued, reacquired
or a combination thereof.
4.2 ADJUSTMENTS IN AVAILABLE SHARES, OPTIONS, RESTRICTED STOCK AND
RESTRICTED STOCK UNITS. In the event of any merger, reorganization,
consolidation, recapitalization, separation, liquidation, stock dividend,
split-up, Share combination, or other change in the capital structure of the
Company affecting the Shares (a "Transaction"), such adjustment shall be made in
the number of Shares which may be granted under the Plan, in the maximum number
of Options, the maximum number of Shares of Restricted Stock and the maximum
number of Restricted Stock Units that the Committee can authorize the CEO to
grant in the aggregate or grant to any one Employee in any calendar year, in the
maximum number of Options,
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<PAGE> 5
Shares of Restricted Stock and Restricted Stock Units which may be granted to an
elected officer in any calendar year, and in the number of and/or price of
Shares subject to outstanding Options, outstanding Shares of Restricted Stock
granted and outstanding Restricted Stock Units granted (including, but not
limited to, Shares which are subject to outstanding Restricted Stock Units, the
receipt of which has been deferred in accordance with Section 8.8 hereof) under
the Plan, as may be determined to be appropriate and equitable by the Committee,
in its sole discretion, to prevent dilution or enlargement of rights; provided
that the number of Shares subject to any Award shall always be a whole number.
In the event of a Transaction, Options, Shares of Restricted Stock and
Restricted Stock Units shall continue in effect in accordance with their terms
and the holder thereof shall be entitled to receive in respect of all Shares
subject thereto (upon exercise in the case of Options), the same number and kind
of stock, securities, cash, property or other consideration that such Shares
were entitled to receive in the Transaction; provided, however, that such stock,
securities, cash, property or other consideration shall remain subject to all of
the conditions and restrictions which were applicable to the Options, Shares of
Restricted Stock or Restricted Stock Units immediately prior to the consummation
of the Transaction; and provided, further, however, that in the event the
Transaction constitutes a Change in Control, a holder of Options and a holder of
Restricted Stock Units with respect to which a deferral election is in effect
pursuant to Section 8.8, may make an election that such Options and such units
shall remain outstanding following the Transaction (in accordance with the
applicable deferral election in the case of a holder of Restricted Stock Units
and entitle the holder thereof to receive in respect thereof shares of common
stock of the entity (or an affiliate thereof) which effected the Transaction
(i.e. the same number and kind of stock that such units would have been entitled
to receive in the Transaction or such Options would have been entitled to
receive in the Transaction if exercised at the time of the Transaction), if any,
provided the shares of such stock are publicly traded on a national securities
exchange.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. Persons eligible to participate in this Plan are such
Employees as are determined by the Committee to be eligible or who otherwise
have received Shares under the Plan.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees, those to
whom Awards shall be granted.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Employees at any time and from time to time as shall
be determined by the Committee. The Committee shall have discretion in
determining the number and type of Options granted to each Participant. In no
event may the number of Options granted to an elected officer of the Company in
any calendar year exceed 150,000 Options.
The Committee may delegate to the Chief Executive Officer of the Company
("CEO") the authority to grant to Noninsiders Options, the terms and provisions
of which have been set by the Committee. During any calendar year the aggregate
number of Options available for grant by the CEO pursuant to this Section 6.1
may not exceed 600,000, with the number of Options which may be granted by the
CEO to any one Employee during any calendar year limited to 10,000.
6.2 OPTION CERTIFICATE. Each Option grant shall be evidenced by an Option
Certificate that shall specify the Option Price, the Option duration, the number
of Shares to which the Option pertains, whether the Option is intended to be an
ISO or a NQSO, and such other provisions as the Committee shall determine.
6.3 OPTION PRICE. The Option Price for each grant of an Option shall be
determined by the Committee; provided that the Option Price shall not be less
than one hundred percent (100%) of the Fair Market Value of a Share on the date
the Option is granted.
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<PAGE> 6
6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that, except
as provided in subsections (a), (b), (c) and (d) of Section 6.8, no Option shall
be exercisable later than the tenth (10th) anniversary date of its grant.
6.5 EXERCISE OF OPTIONS. Subject to the provisions of Section 6.10, Options
granted under the Plan shall be exercisable at such times and be subject to such
restrictions and conditions as the Committee shall in each instance approve,
which need not be the same for each grant or for each Participant. However, no
Option granted under this Plan shall be exercisable prior to the expiration of
six (6) months following the date of its grant.
6.6 PAYMENT. Subject to such other method(s) as may have been established by
the Company, Options shall be exercised by the delivery of a written notice of
exercise to the Secretary of the Company, setting forth the number of Shares
with respect to which the Option is to be exercised, accompanied by full payment
for the Shares (or by cashless exercise as arranged by the Committee as provided
in Section 3.2).
The Option Price upon exercise of any Option shall be payable to the Company
in full either: (a) in cash or its equivalent, or (b) by tendering previously
acquired Shares having an aggregate Fair Market Value at the time of exercise
equal to the total Option Price (provided that the Shares which are tendered
must have been held by the Participant for at least six (6) months prior to
their tender to satisfy the Option Price), (c) by cashless exercise to the
extent authorized by the Committee or (d) by a combination of (a), (b) and (c).
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the name or
names designated by the Participant, Share certificates in an appropriate amount
based upon the number of Shares purchased under the Option(s).
6.7 SPECIAL RESTRICTIONS ON SHARES ACQUIRED PURSUANT TO THE EXERCISE OF AN
OPTION. The Committee may impose such restrictions on Shares acquired pursuant
to the exercise of an Option under the Plan as it may deem advisable.
6.8 TERMINATION OF EMPLOYMENT.
(a) Termination by Normal Retirement or Early Retirement at Age 60. In the
event the employment of a Participant is terminated by reason of
Normal Retirement or Early Retirement at or after attaining age 60,
all outstanding Options granted to that Participant shall immediately
become exercisable, and shall remain exercisable at any time prior to
their expiration date, or for one (1) year after the date of such
retirement, whichever period is longer.
(b) Termination by Early Retirement Prior to Age 60. In the event the
employment of a Participant is terminated by reason of Early
Retirement prior to attainment of age 60, the Committee, in its sole
discretion, shall have the right to cause all or any portion of such
outstanding Options granted to that Participant to immediately become
exercisable, in which event such Options shall remain exercisable at
any time prior to their expiration date, or for one (1) year after the
date of such Early Retirement, whichever period is longer.
(c) Termination by Death. In the event the employment of a Participant is
terminated by reason of death, all outstanding Options granted to that
Participant shall immediately become exercisable, and shall remain
exercisable at any time prior to their expiration date, or for one (1)
year after the date of death, whichever period is longer. Such Options
shall be exercisable by such person or persons who shall have been
named as the Participant's beneficiary, or if no beneficiary has been
named, by such persons who have acquired the Participant's rights
under the Option by will or by the laws of descent and distribution.
(d) Termination by Disability. In the event the employment of a
Participant is terminated by reason of Disability, all outstanding
Options granted to that Participant shall immediately become
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<PAGE> 7
exercisable as of the date the Committee determines the definition of
Disability to have been satisfied, and shall remain exercisable at any
time prior to their expiration date, or for one (1) year after the
date that the Committee determines the definition of Disability to
have been satisfied, whichever period is longer.
(e) Employment Termination Followed by Death. In the event that a
Participant's employment terminates by reason of Normal Retirement,
Early Retirement or Disability and within the exercise period
following such termination the Participant dies, then the remaining
exercise period under outstanding Options shall be any time prior to
their expiration date, or for one (1) year following death, whichever
period is shorter. Such Options shall be exercisable by such person or
persons who shall have been named as the Participant's beneficiary, or
if no beneficiary has been named, by such persons who have acquired
the Participant's rights under the Option by will or by the laws of
descent and distribution.
(f) Termination of Employment for Other Reasons. If the employment of a
Participant shall terminate for any reason other than the reasons set
forth in subsections (a)-(d) of this Section 6.8, the Committee, in
its sole discretion, shall have the right to cause all or any portion
of such outstanding Options granted to that Participant to immediately
become exercisable, subject to such terms as the Committee, in its
sole discretion, deems appropriate. Options which are or become
exercisable as of the effective date of employment termination shall
remain exercisable any time prior to their expiration date, or for
three (3) months after the date of employment termination, whichever
period is shorter.
6.9 FORFEITURE OF OPTIONS. Options held by a Participant which are not
exercisable as of the effective date of employment termination and which do not
become exercisable pursuant to the provisions of Section 6.8 shall be forfeited
immediately.
6.10 ALTERNATE EXERCISABILITY FOLLOWING TERMINATION. With respect to Options
held either by Noninsiders or Insiders as of the date of any employment
termination, the provisions of Section 6.8 regarding the exercisability of
Options as of the date of employment termination and the provisions regarding
the length of the exercise period following employment termination
notwithstanding, the Committee may, in its sole discretion, provide for
accelerated exercisability of all Options and an extended period of
exercisability following termination, upon such terms and provisions as it deems
appropriate; provided, however, that the period of extended exercisability shall
not extend beyond the period specified in Section 6.4 herein.
With respect to Options held by Noninsiders as of the date of employment
termination, the Committee may delegate to the CEO the authority to modify the
terms and provisions regarding acceleration of exercisability and extension of
the period of exercisability following termination, subject to the limitations
of Section 6.4 herein.
6.11 TRANSFERABILITY OF OPTIONS. Except as otherwise provided in this
Section 6.11, options granted under the Plan may only be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated in accordance with the
Participant's beneficiary designation, by will, or by the laws of descent and
distribution. The Committee, in its sole discretion, may provide for the
transferability of Options granted under the Plan, by a Participant to persons
or entities on terms and conditions as may be determined by the Committee, in
its sole discretion. The Committee, with respect to an Option granted under the
Plan which is not transferable, may, in its sole discretion, provide for the
transferability of such an Option by the Participant to persons or entities on
terms and conditions as may be determined by the Committee, in its sole
discretion. Any determination by the Committee to provide for the
transferability of an Option by any one Participant under the Plan shall not be
deemed to provide to any other Participant under the Plan a right of
transferability with respect to an Option granted under the Plan to such other
Participant.
ARTICLE 7. RESTRICTED STOCK
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7.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the
Plan, including the provision of Article 9 herein, the Committee, at any time
and from time to time, may grant Shares of Restricted Stock to eligible
Employees in such amounts as the Committee shall determine. In no event may a
grant of Restricted Stock be made in any calendar year to an elected officer of
the Company if the limitation contained in Section 9.2 has not been met.
The Committee may delegate to the CEO the authority to grant to Noninsiders
Shares of Restricted Stock, the terms and provisions of which have been set by
the Committee.
7.2 RESTRICTED STOCK CERTIFICATE. Each Restricted Stock grant shall be
evidenced by a Restricted Stock Certificate that shall specify the Period or
Periods of Restriction, the number of Shares of Restricted Stock granted, and
such other provisions as the Committee shall determine.
7.3 RESTRICTED STOCK PRICE. The Restricted Stock Price for each grant of
Restricted Stock shall be determined by the Committee. The Restricted Stock
Price may be less than the par value of a Share on the date of the Restricted
Stock grant.
7.4 RESTRICTIONS ON TRANSFERABILITY AND VESTING. Except as otherwise
provided in this Article 7, the Shares of Restricted Stock granted herein may
not be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated until the end of the applicable Period of Restriction established
by the Committee in its sole discretion and specified in the Restricted Stock
Certificate, or upon the earlier satisfaction of any other conditions as
specified by the Committee in its sole discretion and set forth in the
Restricted Stock Certificate.
7.5 OTHER RESTRICTIONS. The Committee shall impose such other restrictions
on any Shares of Restricted Stock granted pursuant to the Plan as it may deem
advisable.
7.6 ESCROW OR LEGEND. In order to enforce the restrictions imposed upon
Shares of Restricted Stock issued hereunder, the Committee may require any
Participant to enter into an escrow agreement providing that the certificates
representing Shares of Restricted Stock issued pursuant to this Article 7 shall
remain in the physical custody of an escrow holder until any or all of the
restrictions imposed pursuant to this Article 7 have terminated and the
Committee may cause a legend or legends to be placed on any certificates
representing Shares issued pursuant to this Article 7, which legend or legends
shall make appropriate reference to the restrictions imposed hereunder.
7.7 VOTING RIGHTS. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
7.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares. If any such dividends or distributions are paid in Shares, the
Shares shall be subject to the same restrictions on transferability and
forfeitability as the Shares of Restricted Stock with respect to which they were
paid.
7.9 TERMINATION OF EMPLOYMENT; COMPANY REACQUISITION RIGHTS.
(a) Termination by Reason of Normal Retirement, Death or Disability. In
the event the employment of a Participant who has been granted Shares
of Restricted Stock hereunder terminates because of Normal Retirement,
death or Disability, then the Company shall not have the right to
reacquire any of such Shares of Restricted Stock granted hereunder to
such Participant and all restrictions applicable to such Shares shall
immediately terminate.
(b) Termination by Reason Other than Normal Retirement, Death or
Disability. In the event the employment of a Participant who has been
granted Shares of Restricted Stock hereunder terminates for any reason
other than Normal Retirement, death or Disability, the Company shall
have the option for ninety (90) days following such termination of
employment to reacquire at his or her cost for cash all or any part of
the terminating Participant's nonvested Shares of Restricted Stock.
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<PAGE> 9
(c) Alternate Treatment of Restricted Stock. Notwithstanding anything
contained in subsections (a) and (b) of this Section 7.9 to the
contrary, the Committee shall in its sole discretion have the
authority to modify the treatment of those Shares of Restricted Stock
held by Participants as of the date of employment termination on which
the restrictions have not terminated, upon such terms as the Committee
deems appropriate. With respect to nonvested Shares of Restricted
Stock that were granted pursuant to Section 7.1 and are held by
Noninsiders as of the date of employment termination, the Committee
may delegate to the CEO the authority to modify the terms regarding
the termination of restrictions.
ARTICLE 8. RESTRICTED STOCK UNITS
8.1 GRANT OF RESTRICTED STOCK UNITS. Subject to the terms and provisions of
the Plan including the provision of Article 9 herein, the Committee, at any time
and from time to time, may grant Restricted Stock Units to eligible Employees in
such amounts as the Committee shall determine. In no event may a grant of
Restricted Stock Units be made in any calendar year to an elected officer of the
Company if the limitation contained in Section 9.2 has not been met.
The Committee may delegate to the CEO the authority to grant to Noninsiders
Restricted Stock Units, the terms and provisions of which have been set by the
Committee.
8.2 RESTRICTED STOCK UNIT CERTIFICATE. Each Restricted Stock Unit shall be
evidenced by a Restricted Stock Unit Certificate that shall specify the number
of Restricted Stock Units to which it applies, the Period or Periods of
Restriction, and any other provisions as the Committee shall determine.
8.3 RESTRICTIONS. At or prior to the time a grant of Restricted Stock Units
is made, the Committee shall establish a Period of Restriction applicable to
such Restricted Stock Units. Each grant of Restricted Stock Units may be subject
to a different Period of Restriction. The Committee may, in its sole discretion,
at or prior to the time a grant of Restricted Stock Units is made, prescribe
such restrictions in addition to the Period of Restriction as it may deem
advisable.
8.4 RESTRICTIONS ON TRANSFERABILITY. Except as otherwise provided in this
Article 8, Restricted Stock Units may not be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated.
8.5 RIGHTS OF HOLDERS OF RESTRICTED STOCK UNITS. Unless the Committee
otherwise provides in a Restricted Stock Unit Certificate, a Restricted Stock
Unit shall confer no rights as a stockholder of the Company on the holder
thereof. The holder of a Restricted Stock Unit shall be entitled to receive,
upon payment by the Company of a cash dividend on its outstanding Shares, a cash
payment from the Company for each Restricted Stock Unit then held by such
Participant equal to the per Share dividend paid on the outstanding Shares.
8.6 TERMINATION OF EMPLOYMENT.
(a) Termination by Reason of Normal Retirement, Death or Disability. In
the event the employment of a Participant who has been granted
Restricted Stock Units hereunder terminates because of Normal
Retirement, death or Disability, the Period of Restriction and all
other applicable restrictions with respect to the Restricted Stock
Units then held by such Participant shall immediately terminate.
(b) Termination by Reason Other than Normal Retirement, Death or
Disability. In the event the employment of a Participant who has been
granted Restricted Stock Units hereunder terminates for any reason
other than Normal Retirement, death or Disability, the Company shall
have the option for ninety (90) days following such termination of
employment to cancel all or any part of
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<PAGE> 10
the Restricted Stock Units then held by such Participant on which the
Period of Restriction or other applicable restrictions have not
lapsed.
(c) Alternate Treatment of Restricted Stock Units. Notwithstanding
anything contained in subsections (a) and (b) of this Section 8.6 to
the contrary, the Committee shall in its sole discretion have the
authority to modify the treatment of those Restricted Stock Units held
by Participants as of the date of employment termination with respect
to which the Period of Restriction and any other applicable
restrictions shall not have lapsed, upon such terms as the Committee
deems appropriate. With respect to Restricted Stock Units held by
Noninsiders as of the date of employment termination with respect to
which the Period of Restriction and any other applicable restrictions
shall not have lapsed, the Committee may delegate to the CEO the
authority to modify the terms regarding the termination of
restrictions.
8.7 PAYMENT IN RESPECT OF RESTRICTED STOCK UNITS. Subject to Section 8.8
hereof, on the date of the expiration or termination of the Period of
Restriction and the satisfaction of any other conditions prescribed by the
Committee applicable to a Restricted Stock Unit, each Restricted Stock Unit
shall entitle the holder thereof to receive one Share.
8.8 DEFERRAL OF RESTRICTED STOCK UNITS. The holder of Restricted Stock
Units may elect to defer the issuance of any Share underlying a Restricted Stock
Unit until such date as such holder shall choose, so long as such election is
made in or prior to the calendar year preceding the calendar year in which such
Shares would otherwise have been issued, but in no event less than six (6)
months prior to the date such Shares would otherwise have been issued; provided,
however, that notwithstanding the foregoing, upon the occurrence of a Potential
Change in Control, the Company shall notify in writing each Participant of the
occurrence of such event and each Participant shall have the right within 14
days of the Potential Change in Control to elect to defer the issuance of any
Share underlying a Restricted Stock Unit until such date as such holder shall
choose. For purposes of this Section 8.8, a "Potential Change in Control" means:
(a) The execution by the Company of a written agreement which, if
consummated, would constitute a Change in Control.
(b) A public announcement (including any filing with the Securities and
Exchange Commission) by any "person" (within the meaning of Sections
13(d) and 14(d)(2) of the 1934 Act), including any corporation or
group of associated firms acting in concert, other than (i) the
Company and/or (ii) any employee pension benefit plan (within the
meaning of Section 3(2) of the Employee Retirement Income Security
Act of 1974, as amended) of the Company, including a trust
established pursuant to such plan, of an intention to take or
consider taking actions which, if consummated, would constitute a
Change in Control.
(c) The acquisition, whether directly, indirectly, beneficially (within
the meaning of Rule 13d-3 of the 1934 Act), or of record, of
securities of the Company representing fifteen percent (15%) or more
in number of any class of its then-outstanding voting securities by
any "person" (within the meaning of Sections 13(d) and 14(d)(2) of the
1934 Act), including any corporation or group of associated persons
acting in concert, other than (i) the Company and/or (ii) an employee
pension benefit plan (within the meaning of Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended) of the
Company, including a trust established pursuant to any such plan. For
this purpose, the ownership of record of fifteen percent (15%) or more
in number of any class of the then-outstanding voting securities of
the Company by a person engaged in the business of acting as a nominee
for unrelated beneficial owners shall not in and of itself be deemed
to constitute a Potential Change in Control.
(d) The occurrence of any other event that the Board determines is a
Potential Change in Control.
8.9 WITHDRAWAL. The holder of Restricted Stock Units who has elected to
defer the receipt of Shares pursuant to Section 8.8 hereof, may, at his or her
discretion, at any time prior to the time such Shares would otherwise be issued
to such holder, but in no event prior to the time at which the Shares
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<PAGE> 11
underlying such Restricted Stock Units would otherwise have been issued had the
holder not made an election to defer the issuance of such Shares as provided in
this Article 8, on ten (10) days' prior written notice to the Company elect to
receive any or all of the Shares such holder has deferred, provided that 10% of
the number of Shares the receipt of which is being accelerated shall be
forfeited to the Company.
ARTICLE 9. LIMITATIONS ON RESTRICTED STOCK SHARE AND
UNIT GRANTS; THRESHOLD PARAMETER
9.1 LIMITATION ON AGGREGATE NUMBER OF RESTRICTED STOCK SHARES AND UNITS
THAT CAN BE GRANTED DURING ANY YEAR.
(a) During any calendar year, the aggregate number of Shares of
Restricted Stock and of Restricted Stock Units available for grant by
the CEO pursuant to Sections 7.1 and 8.1 herein may not exceed
300,000, with the total number of Shares of Restricted Stock and of
Restricted Stock Units which may be granted by the CEO to any one
Employee during any calendar year limited to 4,000.
9.2 Limitation on Grants Applicable to Elected Officers.
(a) Threshold Parameters. Notwithstanding anything to the contrary
contained in the Plan, the Committee shall select, not later than the
90th day after the commencement of each plan year, one or more of the
following performance elements and the performance level to be
achieved as the threshold parameter:
(a) generation of free cash
(b) earnings per share
(c) revenues
(d) market share
(e) stock price
(f) cash flow
(g) retained earnings
(h) results of customer satisfaction surveys
(i) aggregate product price and other product price measures
(j) safety record
(k) acquisition activity
(l) management succession planning
(m) improved asset management
(n) improved gross margins
(o) increased inventory turns
(p) product development and liability
(q) research and development integration
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<PAGE> 12
(r) proprietary protections
(s) legal effectiveness
(t) handling of SEC and environmental matters
(u) manufacturing efficiencies
(v) system review and improvement
(w) service reliability and cost management
(x) operating expense ratios
(y) total stockholder return
(z) return on sales
(aa) return on equity
(bb) return on capital
(cc) return on assets
(dd) return on investments
(ee) net income
(ff) operating income
(gg) working capital
(hh) comparative performance of one or more of the above criteria
to the performance of other corporations.
(b) Awards of Shares of Restricted Stock and Restricted Stock Units. No
Shares of Restricted Stock nor Restricted Stock Units will be awarded
under the Plan to any elected officer of the Company with respect to a
plan year unless the threshold parameter for such plan year is
achieved, as determined by the Committee. In determining actual
performance under any performance element selected, adjustments will
be made to exclude (i) all items determined in accordance with
standards published by opinion No. 30 of the Accounting Principles
Board ("APB Opinion No. 30") to be extraordinary or unusual in nature,
infrequent in occurrence, related to disposal of a segment of a
business or related to a change in accounting principles; (ii) all
items related to discontinued operations that do not qualify as a
segment of a business as defined under APB Opinion No. 30; and (iii)
all restructuring charges recorded in accordance with Emergency Issues
Task Force Issue No. 94-3. Prior to granting any Shares of Restricted
Stock or any Restricted Stock Units with respect to a plan year, the
Committee shall confirm that the threshold parameter has been
satisfied.
If the threshold parameter is achieved, the total number of Shares of
Restricted Stock and Restricted Stock Units awarded to an elected
officer with respect to such plan year shall not exceed 50,000;
provided that the Committee, in its sole discretion, may cancel or
reduce the number of Shares of Restricted Stock and Restricted Stock
Units which are awarded based on such criteria as the Committee in its
sole discretion shall determine.
ARTICLE 10. BENEFICIARY DESIGNATION
10.1 BENEFICIARY DESIGNATION. Each Participant under the Plan may, from time
to time, name any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under
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<PAGE> 13
the Plan shall accrue in case of his or her death. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the
Participant in writing with the Secretary of the Company during the
Participant's lifetime. In the absence of any such designation, benefits
remaining at the Participant's death shall accrue to the Participant's estate.
ARTICLE 11. RIGHTS OF EMPLOYEES
11.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, or confer upon any Participant any right to continue in the employ of the
Company.
For purposes of the Plan, transfer of employment of a Participant between
the Company and any one of its Subsidiary Entities (or between Subsidiary
Entities) shall not be deemed a termination of employment.
11.2 PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having once been selected, have a right to
again be selected to receive a future Award.
ARTICLE 12. CHANGE IN CONTROL
12.1 OCCURRENCE OF A CHANGE OF CONTROL. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited by the terms of applicable law
or regulation:
(a) Any and all Options granted hereunder shall become immediately
exercisable;
(b) Any Periods of Restriction and other restrictions imposed on Shares of
Restricted Stock or Restricted Stock Units shall immediately
terminate; and
(c) Subject to Article 13 herein, the Committee, before the effective date
of the Change in Control, shall have the authority to make any
modifications to the Awards and any modifications to a deferral of
Restricted Stock Units as determined by the Committee, after
consultation with the holder of the Award or deferred Restricted Stock
Units, to be appropriate.
ARTICLE 13. AMENDMENT, MODIFICATION, AND TERMINATION
13.1 AMENDMENT, MODIFICATION AND TERMINATION. The Board at any time from
time to time may amend, modify or terminate the Plan. No such amendment,
modification or termination, however, may change the Plan in a way that (i)
impairs any benefit theretofore accrued hereunder by any Participant and (ii) in
the event of a Change in Control, is adverse to the rights of any Participant,
in the case of either (i) or (ii) without the Participant's prior written
consent. The immediately preceding sentence may not under any circumstances be
amended at any time after September 22, 1998 and any effort to change such
sentence shall be null, void and of no force or effect. In addition, no such
amendment, modification or termination of the Plan may occur without the
approval of the shareholders of the Company, if shareholder approval for such
amendment, modification or termination is required by the federal securities
laws, any national securities exchange or system on which the Shares are then
listed or reported, or a regulatory body having jurisdiction with respect
thereto.
ARTICLE 14. WITHHOLDING
14.1 TAX WITHHOLDING. The Company shall have the power and the right as set
forth in this Article 14 to deduct or withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy any and all Federal,
state, and local taxes (including the Participant's FICA obligation) required by
law to be withheld with respect to any taxable event arising out of or as a
result of this Plan.
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<PAGE> 14
14.2 SHARE WITHHOLDING. With respect to tax withholding required upon the
exercise of Options, upon the termination of restrictions on Restricted Stock or
Restricted Stock Units, or upon any other taxable event hereunder, a Participant
may elect, subject to the approval of the Committee, to satisfy the withholding
requirement, in whole or in part, by having the Company withhold a number of
Shares or Restricted Stock Units, as applicable, the Fair Market Value of which
Shares or the underlying Shares related to Restricted Stock Units, in itself or
when added to a cash payment made by the Participant to the Company, equals the
minimum statutory total tax.
ARTICLE 15. SUCCESSORS
15.1 SUCCESSORS. All obligations of the Company under the Plan, with respect
to Awards granted hereunder, shall be binding on any successor to the Company,
whether the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation or otherwise, of all or substantially all of the
business and/or assets of the Company.
ARTICLE 16. LEGAL CONSTRUCTION
16.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
16.2 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
16.3 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions under
this Plan are intended to comply with all applicable conditions of Rule 16b-3 or
its successors under the Exchange Act.
16.4 FOREIGN EMPLOYEES. To the extent permissible under applicable law, the
Company may grant Awards to eligible Employees who are employed in locations
outside of the United States. The Committee shall have the authority to modify
the terms of Awards granted to such Employees in order to ensure compliance with
applicable local and national law.
16.5 GOVERNING LAW. To the extent not preempted by Federal law (or foreign
law, in the case of grants to Employees who are not United States residents),
the Plan, and any agreement hereunder, shall be construed in accordance with and
governed by the laws of the State of Delaware.
16.6 SEVERABILITY. In the event any provision of the Plan or any action
taken thereunto shall be held illegal or invalid for any reason, the illegality
or invalidity shall not affect the remaining parts of the Plan, and the Plan
shall be construed and enforced as if the illegal or invalid provision had not
been included, and the illegal or invalid action shall be deemed null and void.
Executed at Rockford, Illinois as of the 22nd day of September, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
----------------------------
Paul Donovan
Its: Executive Vice President and
Chief Financial Officer
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<PAGE> 1
Exhibit (10)(d)
FIRST AMENDMENT TO THE SUNDSTRAND CORPORATION
STOCK INCENTIVE PLAN
(As Amended and Restated effective September 22, 1998)
WHEREAS, the Sundstrand Corporation Stock Incentive Plan (the "Plan")
was established effective as of December 1, 1992; and
WHEREAS, the Plan was amended and restated effective as of September
22, 1998, to include restricted stock units, to make certain other changes, and
to incorporate therein all prior amendments to the Plan and to make other
changes to improve readability of the Plan; and
WHEREAS, it has been determined that it is appropriate to further
amend the Plan;
NOW, THEREFORE, the Sundstrand Corporation Stock Incentive Plan, as
amended and restated September 22, 1998, is hereby amended effective as of
January 15, 1999 as follows:
1. Section 7.4 of Article 7 of the Plan is amended by changing the
title thereof to "Restrictions on Transferability and Vesting; Termination of
Restrictions." and by adding the following new paragraph at the end thereof,
which new paragraph shall be applicable to all Restricted Stock outstanding on
January 15, 1999, or thereafter issued under the Plan:
"Notwithstanding anything to the contrary contained in the Plan or in
any `Terms and Conditions' specified in a Restricted Stock Certificate
relating to the issuance of Restricted Stock Awards under the Plan, the
termination of restrictions on shares of Restricted Stock granted under
the Plan which would otherwise terminate at any time during the three
(3) month period which follows the month in which a quarterly or annual
earnings press release of the Company is issued shall terminate on the
third business day after the day on which such applicable quarterly or
annual earnings press release is issued."
2. Section 8.4 of Article 8 of the Plan is amended by changing the
title thereof to "Restrictions of Transferability; Termination of Restrictions."
and by adding the following new paragraph at the end thereof:
"Notwithstanding anything to the contrary contained in the Plan or in
any terms and conditions specified in any Restricted Stock Unit
Certificate relating to the issuance of Restricted Stock Units under
the Plan, the termination of restrictions on Restricted Stock Units
granted under the Plan which would otherwise terminate at any time
during the three (3) month period which follows the month in which a
quarterly or annual earnings press release of the Company is issued
shall terminate on the third business day after the day on which such
applicable quarterly or annual earnings press release is issued."
Executed at Rockford, Illinois as of the 15th day of January.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
---------------------------------
Paul Donovan
Title: Executive Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit (10)(f)
AMENDMENT OF NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
RESOLVED, by the Board of Directors of Sundstrand
Corporation, that Section 6.5 of the Sundstrand Corporation
Nonemployee Director Stock Option Plan, be, and it hereby is,
amended, subject to stockholder approval, to read as follows:
Section 6.5 Retirement. In the event of the Retirement
of a Nonemployee Director, all outstanding Options
granted to such Nonemployee Director shall immediately
become exercisable by the Nonemployee Director, or as
applicable, his or her beneficiaries, heirs or estate,
and shall remain exercisable for the longer period of
the Option Duration of each such Option grant, or one
(1) calendar year after the date of Retirement.
FURTHER RESOLVED, by the Board of Directors of
Sundstrand Corporation that, Section 6.3 of the Sundstrand
Corporation Nonemployee Director Stock Option Plan be, and it hereby
is, amended subject to stockholder approval, to read as follows:
Section 6.3 Exercise of Options. Options shall be
exercisable at the Option Price on and after the Option
Purchase Date applicable to such Options, and except as
otherwise provided in the Plan, shall continue to be
exercisable during the Option Duration or any extension
thereof as provided in Section 6.5.
FURTHER RESOLVED, that with the approval of the Board of
Directors, the proposed amendments to Section 6.5 and Section 6.3 of
the Plan shall be submitted to the Corporation's stockholders at the
1996 Annual Meeting for approval, and, if approved, shall be
effective with respect to options granted on or after the approval
date.
<PAGE> 1
Exhibit (10)(g)
SECOND AMENDMENT
TO THE SUNDSTRAND CORPORATION
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
WHEREAS, the Sundstrand Corporation Nonemployee Director Stock Option
Plan was established effective as of August 1, 1994; and
WHEREAS, the Plan has heretofore been amended on one occasion by a
resolution adopted at the Board of Director's meeting on February 20, 1996; and
WHEREAS, it has been determined that it is in the best interest of the
Corporation to amend the Plan further to make it consistent with other plans
maintained by the Corporation.
NOW, THEREFORE, effective as of December 8, 1998, the Sundstrand
Corporation Nonemployee Director Stock Option Plan is hereby amended as follows:
1. Section (a) of Article 2. of the Plan is amended to provide as
follows:
(a) "Change in Control" means any of the following events:
(i) The acquisition (other than from the Company) by any
person (as such term is defined in Sections 13(d) or
14(d) of the Exchange Act of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of twenty-five percent (25%) or
more of the combined voting power of the Company's
then outstanding voting securities;
(ii) The individuals who, as of the date hereof, are
members of the Board (the "Incumbent Board"), cease
for any reason to constitute a majority of the Board,
unless the election, or nomination for election by
the Company stockholders, of any new director was
approved by a vote of a majority of the Incumbent
Board, and such new director shall, for purposes of
this Plan, be considered as a member of the Incumbent
Board; or
(iii) (A) A merger or consolidation involving the Company
(or any direct or indirect subsidiary of the Company)
or (B) the issuance of shares of capital stock of the
Company in connection with a merger or consolidation
involving the Company (or any direct or indirect
subsidiary of the Company) if, in the case of clause
(A) or clause (B), the stockholders of the Company
immediately before such merger or consolidation, do
not, as a result of such merger or consolidation,
own, directly or indirectly, immediately following
such merger or consolidation, more than sixty-seven
percent (67%) of the combined voting power of the
then outstanding voting securities of the person
issuing securities in the merger or
<PAGE> 2
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consolidation in substantially the same proportion as
their ownership of the combined voting power of the
voting securities of the Company outstanding
immediately before such merger or consolidation;
provided, however, that for purposes of clause (A)
and clause (B), voting securities of the Company
issued in connection with the merger or
consolidation, including securities to cover stock
options or cure "tainted" shares (whether issued in
the merger or consolidation or pursuant to a public
or private offering related thereto), shall be
treated as having been issued in such merger or
consolidation and not as having been outstanding
immediately prior to such merger or consolidation or
(C) a complete liquidation or dissolution of the
Company or consummation of the sale or other
disposition of all or substantially all of the assets
of the Company.
Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur pursuant to clause (i)
of this paragraph (c) of Article 2, solely because
twenty-five percent (25%) or more of the combined
voting power of the Company's then outstanding voting
securities is acquired by (I) a trustee or other
fiduciary holding securities under one or more
employee benefit plans maintained by the Company or
any of its subsidiaries or (II) any corporation
which, immediately prior to such acquisition, is
owned directly or indirectly by the stockholders of
the Company in the same proportion as their ownership
of stock in the Company immediately prior to such
acquisition."
2. Section (h) of Article 2. of the Plan is amended to provide as
follows:
h) 'Option Price' means the price at which a Share may
be purchased pursuant to an Option, which price shall
be the Fair Market Value of a Share as of the fifth
business day prior to the date the Option is
granted."
3. Section 4.2 of Article 4. of the Plan is amended to provide as
follows:
4.2 In the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend,
split-up, Share combination, or other change in the capital
structure of the Company affecting the Shares (a
"Transaction"), such adjustment shall be made in the number of
Shares available for grant under the Plan, in the maximum
number of Options which may be granted under the Plan, and in
the number of and/or price of Shares subject to outstanding
Options under the Plan, as may be determined to be appropriate
and equitable by the Committee, in its sole discretion, to
prevent dilution or enlargement of rights; provided that the
number of Shares subject to any Option shall always be a whole
number.
In the event of a Transaction, Options shall continue in
effect and in accordance with their terms and the holder
thereof shall be entitled upon exercise to receive in respect
of all Shares subject thereto, the same number and kind of
stock,
<PAGE> 3
-3-
securities, cash, property or other consideration that such
Shares were entitled to receive in the Transaction; provided,
however, that such stock, securities, cash, property or other
consideration shall remain subject to all of the conditions
and restrictions which were applicable to the Options
immediately prior to the consummation of the Transaction; and
provided, further, however, that in the event the Transaction
constitutes a Change in Control, a holder of Options may make
an election that such Options shall remain outstanding
following the Transaction and entitle the holder thereof to
receive in respect thereof share of common stock of the entity
(or an affiliate thereof) which effected the Transaction
(i.e., the same number and kind of stock that such Options
would have been entitled to receive in the Transaction if
exercised at the time of the Transaction), if any, provided
the shares of such stock are publicly traded on a national
securities exchange.
4. Article 8. of the Plan is amended to provide as follows:
Article 8. Change in Control.
Upon the occurrence of a Change in Control, unless otherwise
specifically prohibited by the terms of applicable law or regulation:
(a) Any and all Options granted hereunder shall become immediately
exercisable; and
(b) Subject to Article 9 herein, the Committee, before the
effective date of the Change in Control, shall have the
authority to make any modifications to the Options as
determined by the Committee, after consultation with the
holder of such Options, to be appropriate.
5. Article 9. of the Plan is amended to provide as follows:
Article 9. Amendment, Modification, and Termination.
The Board at any time from time to time may amend, modify or terminate
the Plan. No such amendment, modification or termination, however, may
change the Plan in a way that (i) impairs any benefit theretofore
accrued hereunder by any Nonemployee Director and (ii) in the event of
a Change in Control, is adverse to the rights of any Nonemployee
Director, in the case of either (i) or (ii) without the Nonemployee
Director's prior written consent. The immediately preceding sentence
may not under any circumstances be amended at any time after December
8, 1998 and any effort to change such sentence shall be null, void and
of no force or effect. In addition, no such amendment, modification of
termination of the Plan may occur without the approval of the
shareholders of the Company, if shareholder approval for such
amendment, modification or termination is required by the federal
securities laws, any national securities exchange or system on which
the Shares are then listed or reported, or a regulatory body having
jurisdiction with respect thereto."
<PAGE> 4
-4-
Executed at Rockford, Illinois as of the 8th day of December, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
----------------------
Paul Donovan
Its: Executive Vice President and Chief
Financial Officer
<PAGE> 1
Exhibit (10)(j)
SECOND AMENDMENT TO THE SUNDSTRAND CORPORATION
DIRECTOR COMPENSATION PLAN
WHEREAS, the Sundstrand Corporation Director Compensation Plan was
established effective as of August 1, 1994; and
WHEREAS, the Plan has heretofore been amended on one occasion by an
amendment adopted November 18, 1997, but made effective as of April 21, 1998;
and
WHEREAS, it has been determined that it is in the best interest of the
Corporation to amend the Plan further to make it consistent with other plans
maintained by the Corporation and to make it easier to administer.
NOW, THEREFORE, effective as of December 8, 1998, the Sundstrand
Corporation Director Compensation Plan is amended as follows:
1. The second sentence of Section 1.1 of Article 1. of the Plan is
amended by inserting after the words "Common Stock" where they appear therein
the words "or in Restricted Stock Units".
2. Section (c) of Article 2 of the Plan is changed to provide as
follows:
"'Fair Market Value' means the average of the highest and lowest quoted
selling prices for Shares on the relevant date, or (if there were no
sales on such date) the average of the means between the highest and
lowest quoted selling prices for Shares on the nearest day before and
the nearest day after the relevant date, as determined by the Committee
(as defined in Section 3.1 hereof).
3. Article 2 of the Plan is changed by adding new Sections (h), (i) and
(j) which shall provide as follows:
"(h) 'Change in Control' means any of the following events:
(i) The acquisition (other than from the Company) by any
person (as such term is defined in Section 13(d) or
14(d) of the Securities Exchange Act of 1934, as
amended (the '1934 Act')) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of twenty-five percent (25%) or more of
the combined voting power of the Company's then
outstanding voting securities;
(ii) The individuals who, as of the date hereof, are
members of the Board (the 'Incumbent Board'), cease
for any reason to constitute a majority of the Board,
unless the election, or nomination for election by
the Company stockholders, of any new director was
approved by a vote of a majority of
<PAGE> 2
-2-
the Incumbent Board, and such new director shall, for
purposes of this Plan, be considered as a member of
the Incumbent Board; or
(iii) (A) A merger or consolidation involving the Company
(or any direct or indirect subsidiary of the Company)
or (B) the issuance of shares of capital stock of the
Company in connection with a merger or consolidation
involving the Company (or any direct or indirect
subsidiary of the Company) if, in the case of clause
(A) or clause (B), the stockholders of the Company
immediately before such merger or consolidation, do
not, as a result of such merger or consolidation,
own, directly or indirectly, immediately following
such merger or consolidation, more than sixty-seven
percent (67%) of the combined voting power of the
then outstanding voting securities of the person
issuing securities in the merger or consolidation in
substantially the same proportion as their ownership
of the combined voting power of the voting securities
of the Company outstanding immediately before such
merger or consolidation; provided, however, that for
purposes of clause (A) and clause (B), voting
securities of the Company issued in connection with
the merger or consolidation, including securities to
cover stock options or cure 'tainted' shares (whether
issued in the merger or consolidation or pursuant to
a public or private offering related thereto), shall
be treated as having been issued in such merger or
consolidation and not as having been outstanding
immediately prior to such merger or consolidation or
(C) a complete liquidation or dissolution of the
Company or consummation of the sale or other
disposition of all or substantially all of the assets
of the Company.
Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur pursuant to clause (i)
of this paragraph (h) of Article 2, solely because
twenty-five percent (25%) or more of the combined
voting power of the Company's then outstanding voting
securities is acquired by (I) a trustee or other
fiduciary holding securities under one or more
employee benefit plans maintained by the Company or
any of its subsidiaries or (II) any corporation
which, immediately prior to such acquisition, is
owned directly or indirectly by the stockholders of
the Company in the same proportion as their ownership
of stock in the Company immediately prior to such
acquisition.
(i) 'Restricted Stock Unit' means an Award granted under Article __
herein.
(j) 'Restricted Stock Unit Certificate' means a certificate
setting forth the terms and provisions applicable to
Restricted Stock Units granted to a Director."
4. Section 3.2 of Article 3. of the Plan is amended to provide as
follows:
<PAGE> 3
-3-
"Administration. The Committee shall have the full power,
discretion and authority to interpret and administer the Plan
consistent with Plan provisions; provided, however, in no
event shall the Committee have the power to determine the
persons eligible to participate in the Plan, or the number,
price or timing of Shares or Restricted Stock Units to be
issued under the Plan, all such determinations being automatic
pursuant to Plan provisions. Any action taken by the Committee
with respect to the administration of the Plan which would
result in any Director ceasing to be a 'disinterested person'
for purposes of any other plan maintained by the Company
within the meaning of Rule 16b-3 of the Exchange Act, shall be
null and void."
5. Article 6 of the Plan is changed to provide as
follows:
"Article 6. Payment of or Conversion to Shares or Restricted
Stock Units
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 elected 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 fifth business
day prior to the date of such Annual Meeting, shall equal the
Annual Retainer. The foregoing notwithstanding, in the event
the conversion of the Annual Retainer into Shares would result
in the issuance of a fractional share, the Annual Retainer
shall be increased by the amount necessary to eliminate the
need to issue such fractional Share.
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 fifth business day prior
to the date of such Annual Meeting, shall equal the Additional
Annual Retainer. The foregoing notwithstanding, in the event
the conversion of the Additional Annual Retainer into Shares
would result in the issuance of a fractional share, the
Additional Annual Retainer shall be increased by the amount
necessary to eliminate the need to issue such fractional
Share.
6. Article 8 of the Plan is changed to provide as
follows:
"Article 8. Amendment, Modification and Termination
The Board has the authority at any time to amend, modify or
terminate the Plan; provided, however, that the Plan may not
be amended more than once every six months other than to bring
it into compliance with changes in the Internal Revenue Code,
the Employee Retirement Income Security Act, or the rules
<PAGE> 4
-4-
thereunder. No such amendment, modification or termination,
however, may change the Plan in a way that (i) impairs any
benefit theretofore accrued hereunder by any Director and (ii)
in the event of a Change in Control, is adverse to the rights
of any Director, in the case of either (i) or (ii) without the
Director's prior written consent. The immediately preceding
sentence may not under any circumstances be amended at any
time after September 22, 1998, and any effort to change such
sentence shall be null, void and of no force or effect. In
addition, no such amendment, modification or termination of
the Plan may occur without the approval of the stockholders of
the Company, if stockholder approval for such amendment,
modification or termination is required by the federal
securities laws, any national securities exchange or system on
which the Shares are then listed or reported, or a regulatory
body having jurisdiction with respect thereto.
7. The Plan is changed by adding a new Article 12. to follow Article
11. which shall provide as follows:
"12.1 Occurrence of a Change of Control. Upon the occurrence of a
Change in Control, unless otherwise specifically prohibited by
the terms of applicable law or regulation:
(a) Any Periods of Restriction and other restrictions
imposed on Shares of Restricted Stock or Restricted
Stock Units shall immediately terminate; and
(b) Subject to Article 8 herein, the Committee, before
the effective date of the Change in Control, shall
have the authority to make any modifications to the
Awards and any modifications to a deferral of
Restricted Stock Units as determined by the
Committee, after consultation with the holder of the
Award or deferred Restricted Stock Units, to be
appropriate.
Executed at Rockford, Illinois as of the 8th day of December, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
----------------------------
Paul Donovan
Its: Executive Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit (10)(m)
AMENDMENT OF THE 1989 RESTRICTED STOCK PLAN
RESOLVED, by the Board of Directors of Sundstrand Corporation, that the
Sundstrand Corporation 1989 Restricted Stock Plan be, and the same here by is,
amended by the addition of the following provision to subsection (d) of Article
6:
"Notwithstanding the foregoing, a participant may elect to
defer the removal of the restrictions imposed upon shares
purchased by such participant hereunder pursuant to guidelines
established by the Compensation Committee of the Board of
Directors of Sundstrand."
<PAGE> 1
Exhibit (10)(n)
THIRD AMENDMENT OF THE SUNDSTRAND CORPORATION
1989 RESTRICTED STOCK PLAN
WHEREAS, the Sundstrand Corporation 1989 Restricted Stock Plan (the
"Plan") was approved by the stockholders of the Corporation at the Corporation's
April 20, 1989 annual meeting; and
WHEREAS, the Plan has previously been amended on two prior occasions
by resolutions adopted by the Corporation's Board of Directors, the first one
being adopted at the Board's meeting on August 7, 1990, and the second one being
adopted at the Board's meeting on November 21, 1995; and
WHEREAS, by the second amendment adopted by the Corporation's Board
of Directors at its November 21, 1995, meeting participants in the Plan were
granted an election to defer the removal of restrictions imposed on restricted
shares granted under the Plan pursuant to guidelines to be established by the
Compensation Committee of the Board, which guidelines have not been established;
and
WHEREAS, the Compensation Committee of the Board of Directors of
Sundstrand Corporation at its meeting of November 19, 1996, adopted an
administrative rule providing for the vesting of restricted shares granted under
the Plan as of the first day of each month; and
WHEREAS, it has been determined that it is appropriate to further
amend the Plan to modify the "Change in Control" provisions and to specifically
limit the ability to amend the Plan with respect to certain participants who
have entered into agreements with the Corporation.
NOW, THEREFORE, the Sundstrand Corporation 1989 Restricted Stock Plan
is hereby amended by this Third Amendment effective June 1, 1998, as follows:
1. Subparagraph (f) of Section 6 of the Plan is amended to read
as follows:
"(f) Notwithstanding any other terms and conditions contained in the
Plan, the restrictions provided in this Section 6 shall automatically
cease in the event of a Change in Control described below in this
subparagraph:
'Change in Control' shall mean any of the following events:
(i) The acquisition (other than from Sundstrand) by any
person (as such term is defined in Sections 13(d) or
14(d) of the Securities Exchange Act of 1934, as
amended (the "1934 Act")) of beneficial ownership
(within the meaning of rule 13d-3 promulgated under
the1934 Act) of twenty-five percent (25%) or more of
the combined voting power of Sundstrand's then
outstanding voting securities;
<PAGE> 2
2
(ii) The individuals who, as of the date hereof, are
members of the Board of Directors of Sundstrand (the
"Incumbent Board"), cease for any reason to
constitute a majority of the Board of Directors of
Sundstrand, unless the election, or nomination for
election by Sundstrand stockholders, of any new
director was approved by a vote of a majority of the
Incumbent Board, and such new director shall, for
purposes of this Plan, be considered as a member of
the Incumbent Board; or
(iii) (A) A merger or consolidation involving Sundstrand
(or any direct or indirect subsidiary of Sundstrand)
or (B) the issuance of shares of capital stock of
Sundstrand in connection with a merger or
consolidation involving Sundstrand (or any direct or
indirect subsidiary of Sundstrand) if, in the case of
clause (A) or clause (B), the stockholders of
Sundstrand immediately before such merger or
consolidation, do not, as a result of such merger or
consolidation, own, directly or indirectly,
immediately following such merger or consolidation,
more than sixty-seven percent (67%) of the combined
voting power of the then outstanding voting
securities of the person issuing securities in the
merger or consolidation in substantially the same
proportion as their ownership of the combined voting
power of the voting securities of Sundstrand
outstanding immediately before such merger or
consolidation; provided, however, that for purposes
of clause (A) and clause (B), voting securities of
Sundstrand issued in connection with the merger or
consolidation, including securities to cover stock
options or cure "tainted" shares (whether issued in
the merger or consolidation or pursuant to a public
or private offering related thereto), shall be
treated as having been issued in such merger or
consolidation and not as having been outstanding
immediately prior to such merger or consolidation or
(C) a complete liquidation or dissolution of
Sundstrand or consummation of the same or other
disposition of all or substantially all of the assets
of Sundstrand.
Notwithstanding the foregoing, a Change in Control shall not
be deemed to occur pursuant to clause (i) of this subparagraph (f) of
Section 6, solely because twenty-five percent (25%) or more of the
combined voting power of Sundstrand's then outstanding voting
securities is acquired by (I) a trustee or other fiduciary holding
securities under one or more employee benefit plans maintained by
Sundstrand or any of its subsidiaries or (II) any corporation which,
immediately prior to such acquisition, is owned directly or indirectly
by the stockholders of Sundstrand in the same proportion as their
ownership of stock in Sundstrand immediately prior to such
acquisition."
2.The first paragraph of Section 9 of the Plan is amended to read as
follows:
"This Plan may be amended at any time by the Board of Directors of
Sundstrand, provided that since this Plan was approved by the Company's
stockholders no such amendment may increase the maximum number of
shares that may be issued pursuant to this Plan, except pursuant to
<PAGE> 3
3
Section 4 hereof, without the further approval of the Company's
stockholders; and, provided, further, that no such amendment may change
the Plan in any way that (i) negatively impacts any benefit theretofore
granted or accrued hereunder to any participant who is a party to an
Agreement (as defined below) or (ii) in the event of a Change in
Control, is adverse in any way to the rights of any participant who is
a party to an Agreement (as defined below), in the case of either (i)
or (ii) without the participant's prior written consent. The
immediately preceding sentence may not under any circumstances be
amended at any time after June 1, 1998 and any effort to amend such
sentence shall be null, void and of no force or effect.
The term "Agreement" means an employment, severance or other similar
agreement between the Company and any of the individuals listed on an
Exhibit which shall be prepared by and kept on file for such purpose
with the Company's Vice President, Corporate Human Resources or any
successor to such person filling the same or an equivalent position."
Executed at Rockford, Illinois as of the 1st day of June, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
---------------------------
Title: Paul Donovan
Executive Vice President and
Chief Financial Officer
<PAGE> 4
EXHIBIT
MAINTAINED PURSUANT TO SECTION 4 OF THE
SUNDSTRAND CORPORATION 1989 RESTRICTED STOCK PLAN
James R. Carlson
James A. Cherry
William R. Coole
Paul Donovan
DeWayne J. Fellows
Mary Ann Hynes
Robert H. Jenkins
Ronald F. McKenna
Gean B. Stalcup
Patrick L. Thomas
Neil D. Traubenberg
David K. Whitehouse
Patrick J. Winn
<PAGE> 1
Exhibit (10)(o)
FOURTH AMENDMENT OF THE SUNDSTRAND CORPORATION
1989 RESTRICTED STOCK PLAN
WHEREAS, the Sundstrand Corporation 1989 Restricted Stock Plan (the
"Plan") was approved by the stockholders of the Corporation at the Corporation's
April 20, 1989 annual meeting; and
WHEREAS, the plan has previously been amended on three occasions, twice
by resolutions adopted by the Corporation's Board of Directors (August 7, 1990
and November 2, 1995) and once by a formal amendment which was made effective as
of June 1, 1998; and
WHEREAS, the Compensation Committee of the Board of Directors of the
Corporation, pursuant to the November 21, 1995, resolution amending the Plan was
authorized to adopt, but has not adopted, guidelines relating to the deferral of
the removal of restrictions imposed on restricted shares granted under the Plan,
and at its meeting of November 19, 1996, adopted an administrative rule relating
to the vesting of restricted shares as of the first day of each month; and
WHEREAS, it has been determined that it is appropriate to further amend
the Plan to provide for a new form of benefit under the Plan to be called
restricted stock units and to authorize restricted stock previously granted to
participants to be converted into restricted stock unit grants.
NOW, THEREFORE, the Sundstrand Corporation 1989 Restricted Stock Plan
is hereby amended by this Fourth Amendment effective as of September 22, 1998,
as follows:
1. Section 4 of the Plan is amended by adding three new paragraphs to
the end thereof which shall provide as follows:
"In the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, split-up,
share combination, or other change in the capital structure of the
Company affecting the shares of the Company's common stock (a
"Transaction"), such adjustment shall be made in the number of
outstanding restricted stock grants under the Plan and in the number of
outstanding restricted stock units held by a participant under the Plan
(including, but not limited to, shares which are subject to outstanding
restricted stock units, the receipt of which has been deferred in
accordance with Section 11 hereof) as may be determined to be
appropriate and equitable by the Committee, in its sole discretion, to
prevent dilution or enlargement of rights; provided that the number of
shares subject to any grant shall always be a whole number.
In the event of a Transaction which does not constitute a "Change of
Control," shares granted to a participant under the Plan and restricted
stock units held by a participant under the Plan shall continue in
effect in accordance with their terms and the holder thereof shall be
entitled to receive in respect of such shares and restricted stock
units, the same number and kind of stock, securities, cash, property or
other consideration that such shares or restricted stock units were
entitled to receive in the Transaction; provided, however, that such
stock, securities, cash, property or other consideration shall remain
<PAGE> 2
2
subject to the same conditions and restrictions as were applicable to
the shares granted to a participant hereunder or restricted stock units
held by a participant hereunder as existed immediately prior to the
consummation of the Transaction.
In the event of a Transaction which constitutes a Change in Control,
any and all restrictions then applicable to shares granted to a
participant or applicable to restricted stock units held by a
participant shall immediately terminate as provided in Subparagraph (f)
of Section 6; provided that a holder of restricted stock units
hereunder, may make an election as provided in Section 11 hereof that
such units shall remain outstanding following the Transaction in
accordance with such election and the holder thereof shall be entitled
to receive in respect thereof shares of common stock or other
securities of the entity (or an affiliate thereof) which effected the
Transaction, if any, provided such shares of common stock or other
securities are publicly traded on a national securities exchange."
2. The portion of Subparagraph (f) of Section 6 of the Plan which
precedes the "Change in Control" definition shall be changed to provide as
follows:
"(f) The restrictions provided in this Section 6 on shares and the
restrictions provided in Section 11 on restricted stock units shall
automatically cease in the event of a Change in Control described below
in this subparagraph."
3. The Plan is amended by adding a new Section 11 which will follow
Section 10 and provide as follows:
"11. RESTRICTED STOCK UNITS.
(a) Effective as of September 22, 1998, any participant who
has purchased shares under the Plan may, at such participant's sole
discretion, have such shares converted into restricted stock units,
which units shall be subject to the terms and conditions hereinafter
set forth in this Section 11 of the Plan.
(b) Each restricted stock unit shall be evidenced by a
certificate that shall specify the number of restricted stock units to
which it applies, the period of restriction, and any other provisions
as the Committee shall determine.
(c) Each restricted stock unit shall be subject to the same
restrictions as were applicable to the share held by the participant
under the Plan which was replaced by such restricted stock unit.
(d) Except as otherwise provided in this Section 11,
restricted stock units may not be sold, transferred, pledged, assigned
or otherwise alienated or hypothecated.
(e) Unless the Committee otherwise provides in a restricted
stock unit certificate, a restricted stock unit shall confer no rights
as a stockholder of the Company on the holder thereof. The holder of a
restricted stock unit shall be entitled to receive, upon payment by the
Company of a cash dividend on its outstanding shares of Sundstrand
Common Stock, a cash payment from the Company for each restricted stock
<PAGE> 3
3
unit then held by such participant equal to the per share dividend paid
on the outstanding shares of Sundstrand Common Stock.
(f) In the event the employment of a participant who holds
restricted stock units hereunder terminates the following shall apply:
(i) if the reason for employment termination is
because of normal retirement, death, total disability or
early retirement with the consent of the Sundstrand Board of
Directors or of the Committee, the restrictions with respect
to the restricted stock units then held by such participant
shall immediately terminate; or
(ii) if the reason for employment termination is
for any reason other than normal retirement, death, total
disability or early retirement with the consent of the
Sundstrand Corporation Board of Directors or of the
Committee, the Company shall have the option for ninety (90)
days following such termination of employment to cancel all
or any part of the restricted stock units then held by such
terminating participant on which the restrictions have not
lapsed.
(g) Subject to Subparagraph (h) of this Section 11, on the
date of the expiration or termination of the restrictions and the
satisfaction of any other conditions prescribed by the Committee
applicable to a restricted stock unit, each restricted stock unit shall
entitle the holder thereof to receive one share.
(h) The holder of restricted stock units may elect to defer
the issuance of any share underlying such restricted stock unit until
such date as such holder shall choose, so long as such election is made
in or prior to the calendar year preceding the calendar year in which
such share would otherwise have been issued, but in no event less than
six (6) months prior to the date on which such share would otherwise
have been issued. The foregoing notwithstanding, upon the occurrence of
each Potential Change in Control, the Company shall notify in writing
each participant of the occurrence of such event and each Participant
shall have the right within the 14 day period following receipt of such
notice but in no event prior to the effective date of the "Change in
Control" to which such notice relates to elect (i) in the case of
restricted stock units on which the restrictions applicable to such
units will terminate as the result of the Change in Control either to
receive the underlying shares relating to such units or to defer the
issuance of the shares underlying such units to such date as such
holder shall choose, or (ii) in the case of restricted stock units on
which the restrictions have previously lapsed but the issuance of the
underlying shares has been deferred to either then receive the
underlying shares or to defer the issuance of the shares underlying the
restricted stock unit until such date as such shares would otherwise
have been issued. For purposes of this Section 8.8, a "Potential Change
in Control" means:
(i) The execution by the Company of a written
agreement which, if consummated, would constitute a Change in
Control;
<PAGE> 4
4
(ii) A public announcement (including any filing with
the Securities and Exchange Commission) by any "person"
(within the meaning of Sections 13(d) and 14(d)(2) of the 1934
Act), including any corporation or group of associated firms
acting in concert, other than (i) the Company and/or (ii) any
employee pension benefit plan (within the meaning of Section
3(2) of the Employee Retirement Income Security Act of 1974,
as amended) of the Company, including a trust established
pursuant to any such plan, of an intention to take or consider
taking actions which, if consummated, would constitute a
Change in Control;
(iii) The acquisition, whether directly, indirectly,
beneficially (within the meaning of Rule 13d-3 of the 1934
Act), or of record, of securities of the Company representing
fifteen percent (15%) or more in number of any class of its
then-outstanding voting securities by any "person" (within the
meaning of Sections 13(d) and 14(d)(2) of the 1934 Act),
including any corporation or group of associated persons
acting in concert, other than (i) the Company and/or (ii) an
employee pension benefit plan (within the meaning of Section
3(2) of the Employee Retirement Income Security Act of 1974,
as amended) of the Company, including a trust established
pursuant to any such plan. For this purpose, the ownership of
record of fifteen percent (15%) or more in number of any class
of the then-outstanding voting securities of the Company by a
person engaged in the business of acting as a nominee for
unrelated beneficial owners shall not in and of itself be
deemed to constitute a Potential Change in Control; or
(iv) The occurrence of any other event that the Board
of Directors of Sundstrand determines is a Potential Change in
Control.
(i) The holder of restricted stock units who has elected to
defer the receipt of shares pursuant to Subparagraph (h) of this
Section 11, may, at his or her discretion, at any time prior to the
time such shares would otherwise be issued to such holder, on ten (10)
days' prior written notice to the Company, elect to receive any or all
of the shares such holder has deferred, provided that 10% of the number
of shares the receipt of which is being accelerated shall be forfeited
to the Company.
Executed at Rockford, Illinois as of the 22nd day of September, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
------------------------------
Title: Paul Donovan
Executive Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit (10)(p)
FIFTH AMENDMENT TO THE SUNDSTRAND CORPORATION
1989 RESTRICTED STOCK PLAN
WHEREAS, the Sundstrand Corporation 1989 Restricted Stock Plan (the
"Plan") was approved by the stockholders of the Corporation at the Corporation's
April 20, 1989 annual meeting; and
WHEREAS, the Plan has previously been amended on four occasions, twice
by resolutions adopted by the Corporation's Board of Directors (August 7, 1990
and November 21, 1995) and twice by formal amendments (the Third and Fourth
Amendments), the most recent of which (the Fourth Amendment) was made effective
as of September 22, 1998; and
WHEREAS, the Compensation Committee of the Board of Directors of the
Corporation pursuant to the November 21, 1995, resolution amending the Plan was
authorized to adopt, but has not adopted, guidelines relating to the deferral of
the removal of restrictions imposed on restricted shares granted under the Plan,
and at its meeting of November 19, 1996, adopted an administrative rule relating
to the vesting of restricted shares as of the first day of each month, which
rule, as the result of this Fifth Amendment is no longer in effect; and
WHEREAS, it has been determined that it is appropriate to further amend
the Plan to provide for the removal of restrictions on stock and restricted
stock units granted under the Plan, which restrictions would otherwise be
removed during specified periods, as of the beginning of the related period
commonly referred to as the "window period" of the Corporation, and to provide
for tax withholding with respect to shares and restricted stock units on which
restrictions are removed.
NOW, THEREFORE, the Sundstrand Corporation 1989 Restricted Stock Plan
is hereby amended by this Fifth Amendment effective as of January 15, 1999, as
follows:
1. Subparagraph (d) of Section 6 of the Plan is amended by adding the
following new paragraph which shall be applicable to all presently outstanding
shares and outstanding restricted stock units subject to the Plan:
"The removal of the restrictions imposed upon shares purchased by a
participant hereunder or upon restricted stock units held by a
participant hereunder, which would otherwise occur at any time during
the three months which follows the month in which a quarterly or annual
earnings press release of the Company is issued shall be removed on the
third business day after the day on which such applicable quarterly or
annual earnings press release is issued."
2. The Plan is amended by adding a new Section 12 which will follow
Section 11 and provide as follows:
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12. Tax Withholding.
(a) The Company shall have the power and the right as set
forth in this Section 12 to deduct or withhold, or require a
participant to remit to the Company, an amount sufficient to satisfy
any and all Federal, state and local taxes (including the participant's
FICA obligation) required by law to be withheld with respect to any
taxable event arising out of or as a result of this Plan.
(b) With respect to tax withholding required upon the
termination of restrictions on any shares purchased by a participant
hereunder or upon restricted stock units held by a participant
hereunder, or upon any other taxable event hereunder, a participant may
elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company
withhold a number of shares or restricted stock units, as applicable,
the Fair Market Value of which shares or the underlying shares related
to restricted stock units, in itself or when added to a cash payment
made by the participant to the Company, equals the minimum statutory
total tax.
For purposes of this subparagraph (b) the term "Fair Market
Value" means the average of the highest and lowest quoted selling
prices for the Common Stock of the Company on the relevant date, or (if
there were no sales on such date) the weighted average of the means
between the highest and lowest quoted selling prices for the Common
Stock of the Company on the nearest day before and the nearest day
after the relevant date.
Executed at Rockford, Illinois as of the 15th day of January, 1999.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
-----------------------------
Title: Paul Donovan
Executive Vice President and
Chief Financial Officer
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Exhibit (10)(u)
SUNDSTRAND CORPORATION
MANAGEMENT STOCK PERFORMANCE PLAN
AS AMENDED AND RESTATED SEPTEMBER 22, 1998
WHEREAS, the Sundstrand Corporation Management Stock Performance
Plan (the "Plan") was established effective as of November 19, 1996; and
WHEREAS, the Plan has been amended by a First Amendment made
effective as of June 1, 1998, pursuant to a resolution of the Board of Directors
of the Corporation adopted at its April 21, 1998, meeting; and
WHEREAS, the Board of Directors at its September 22, 1998, meeting
authorized the further amendment of the Plan to include restricted stock units
and make other changes not inconsistent with such authorization; and
WHEREAS, it has been determined that it is appropriate in connection
with the amendment to include restricted stock units to amend and restate the
Plan in its entirety to incorporate into a single document the prior amendment
and to otherwise make limited changes to improve the readability of the Plan;
NOW THEREFORE, the Sundstrand Corporation Management Stock
Performance Plan is hereby amended and restated effective as of September 22,
1998, to provide as follows:
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Sundstrand Corporation, a Delaware corporation
(the "Company), maintains this stock performance compensation plan, known as the
"Sundstrand Corporation Management Stock Performance Plan" (the "Plan"). The
Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options,
Restricted Stock and Restricted Stock Units.
The Plan was originally established effective as of November 19, 1996
(the "Effective Date"), and shall remain in effect as provided in Section 1.3
herein.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success and
enhance the value of the Company by linking the personal interests of
Participants to those of Company shareholders, and by providing Participants an
incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in
its ability to motivate, attract, and retain the services of Participants upon
whose judgment, interest, and special effort the successful conduct of its
operations are largely dependent.
1.3 DURATION OF THE PLAN. Subject to the right of the Board of Directors of the
Company to terminate the Plan at any time pursuant to Article 13 herein, the
Plan shall remain in effect until all Shares subject to the Plan shall have been
purchased or acquired according to the Plan's provisions. In no event may an
Award be granted under the Plan on or after November 19, 2006.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meaning
set forth below:
(a) "Award" means, individually or collectively, a grant under
this Plan of Nonqualified Stock Options, Incentive Stock
Options, Restricted Stock or Restricted Stock Units.
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(b) "Board" means the Board of Directors of the Company.
(c) "CEO" means the Chief Executive Officer of the Company.
(d) "Change in Control" means any of the following events:
(i) The acquisition (other than from the Company) by any
person (as such term is defined in Sections 13(d) or
14(d) of the Securities Exchange Act of 1934, as
amended (the "1934 Act")) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of twenty-five percent (25%) or more of
the combined voting power of the Company's then
outstanding voting securities;
(ii) The individuals who, as of the date hereof, are
members of the Board (the "Incumbent Board"), cease
for any reason to constitute a majority of the Board,
unless the election, or nomination for election by
the Company stockholders, of any new director was
approved by a vote of a majority of the Incumbent
Board, and such new director shall, for purposes of
this Plan, be considered as a member of the Incumbent
Board; or
(iii) (A) A merger or consolidation involving the Company
(or any direct or indirect subsidiary of the Company)
or (B) the issuance of shares of capital stock of the
Company in connection with a merger or consolidation
involving the Company (or any direct or indirect
subsidiary of the Company) if, in the case of clause
(A) or clause (B), the stockholders of the Company
immediately before such merger or consolidation, do
not, as a result of such merger or consolidation,
own, directly or indirectly, immediately following
such merger or consolidation, more than sixty-seven
percent (67%) of the combined voting power of the
then outstanding voting securities of the person
issuing securities in the merger or consolidation in
substantially the same proportion as their ownership
of the combined voting power of the voting securities
of the Company outstanding immediately before such
merger or consolidation; provided, however, that for
purposes of clause (A) and clause (B), voting
securities of the Company issued in connection with
the merger or consolidation, including securities to
cover stock options or cure "tainted" shares (whether
issued in the merger or consolidation or pursuant to
a public or private offering related thereto), shall
be treated as having been issued in such merger or
consolidation and not as having been outstanding
immediately prior to such merger or consolidation or
(C) a complete liquidation or dissolution of the
Company or consummation of the sale or other
disposition of all or substantially all of the assets
of the Company.
Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur pursuant to clause (i)
of this paragraph (d) of Article 2, solely because
twenty-five percent (25%) or more of the combined
voting power of the Company's then outstanding voting
securities is acquired by (I) a trustee or other
fiduciary holding securities under one or more
employee benefit plans maintained by the Company or
any of its subsidiaries or (II) any corporation
which, immediately prior to such acquisition, is
owned directly or indirectly by the stockholders of
the Company in the same proportion as their ownership
of stock in the Company immediately prior to such
acquisition.
(e) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(f) "Committee" means the committee specified in Article 3.
(g) "Disability" means a permanent and total disability, within
the meaning of Code Section 22(e)(3), as determined by the
Committee in good faith, upon receipt of sufficient
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competent medical advice from one or more individuals,
selected by the Committee, who are qualified to give
professional medical advice.
(h) "Early Retirement" shall mean an Employee's eligibility to
receive an early retirement benefit from any retirement plan
maintained by the Company or any Subsidiary Entity.
(i) "Employee" means any full-time managerial, supervisory or
professional employee of the Company or of the Company's
Subsidiary Entities. "Employee" does not include any director
or elected officer of the Company.
(j) "Fair Market Value" means the average of the highest and
lowest quoted selling prices for Shares on the relevant date,
or (if there were no sales on such date) the weighted average
of the means between the highest and lowest quoted selling
prices for Shares on the nearest day before and the nearest
day after the relevant date, as determined by the CEO.
(k) "Incentive Stock Option" or "ISO" means an option to purchase
Shares granted under Article 6 herein, which is designated as
an Incentive Stock Option and is intended to meet the
requirements of Section 422 of the Code.
(l) "Insider" shall mean an Employee who is, on the relevant date,
an elected officer of the Company.
(m) "Noninsider" means an Employee who is not, on the relevant
date, an Insider, as determined by the General Counsel of the
Company or such person's designee.
(n) "Nonqualified Stock Option" or "NQSO" means an option to
purchase Shares granted under Article 6 herein, which is not
intended to be an Incentive Stock Option.
(o) "Normal Retirement" shall mean an Employee's eligibility to
receive a normal retirement benefit from any retirement plan
maintained by the Company or any Subsidiary Entity.
(p) "Option" means an Incentive Stock Option or a Nonqualified
Stock Option.
(q) "Option Certificate" means a certificate setting forth the
terms and provisions applicable to Options granted to a
Participant.
(r) "Option Price" means the price at which a Share may be
purchased by a Participant pursuant to an Option.
(s) "Participant" means an Employee of the Company who has an
Award granted under the Plan outstanding.
(t) "Period of Restriction" means (i) with respect to Shares of
Restricted Stock the period during which the transfer of
Shares of Restricted Stock is limited in some way, as provided
in the Plan, and (ii) with respect to Restricted Stock Units,
the period during which the transfer of Stock Units is limited
in some way, as provided in the Plan and, subject to Section
8.8, upon the expiration or termination of which, together
with the satisfaction of any other conditions prescribed by
the Committee applicable to such Restricted Stock Units, the
holder thereof shall receive the number of Shares subject
thereto.
(u) "Restricted Stock" means an Award granted under Article 7
herein.
(v) "Restricted Stock Certificate" means a certificate setting
forth the terms and provisions applicable to Restricted Stock
granted to a Participant.
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(w) "Restricted Stock Price" means the price at which a Share may
be purchased by a Participant pursuant to a Restricted Stock
grant.
(x) "Restricted Stock Unit" means an Award granted under Article 8
herein.
(y) "Restricted Stock Unit Certificate" means a certificate
setting forth the terms and provisions applicable to
Restricted Stock Units granted to a Participant.
(z) "Shares" means shares of common stock of the Company.
(aa) "Subsidiary Entity" means any corporation in which the Company
owns, directly, or indirectly, through subsidiaries, at least
fifty percent (50%) of the total combined voting power of all
classes of stock, or any other entity (including, but not
limited to, partnerships and joint ventures) in which the
Company owns at least fifty percent (50%) of the combined
equity thereof.
ARTICLE 3. ADMINISTRATION
3.1 AUTHORITY OF THE CEO. The CEO shall have full power, except as limited by
law or by the Certificate of Incorporation or Bylaws of the Company, and subject
to the provisions herein, to determine the size and types of Awards; to
determine the terms and conditions of such Awards in a manner consistent with
the Plan, and subject to the provisions of Article 13 herein, to amend the terms
and conditions of any outstanding Award consistent with the Plan.
3.2 THE COMMITTEE. The Plan shall be administered by the Employee Benefit
Committee which is appointed by the Finance Committee of the Board or by any
other Committee appointed by the Board.
3.3 AUTHORITY OF THE COMMITTEE. The Committee shall have full power, except as
limited by law or by the Certificate of Incorporation or the By-Laws of the
Company, and subject to provisions herein, to construe and interpret the Plan
and any agreement or instrument entered into under the Plan; and to establish,
amend, or waive rules and regulations for the Plan's administration. The
Committee may make arrangements for the cashless exercise of any Options issued
hereunder. The Committee may delegate its authority as permitted hereunder.
3.4 DECISIONS BINDING. All determinations and decisions made by the CEO or the
Committee pursuant to the provisions of the Plan shall be final, conclusive, and
binding on all persons, including the Company and its successors or assigns, and
on its stockholders, Employees, Participants, and their respective estates and
beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.2 herein,
the total number of Shares authorized for grant under the Plan shall be 3.0
million Shares. Such Shares may be either authorized but unissued, reacquired or
a combination thereof.
4.2 ADJUSTMENTS IN AVAILABLE SHARES, OPTIONS, RESTRICTED STOCK AND RESTRICTED
STOCK UNITS. In the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, split-up, Share
combination, or other change in the capital structure of the Company affecting
the Shares (a "Transaction"), such adjustment shall be made in the number of
Shares which may be granted under the Plan, in the maximum number of Options and
the maximum number of Shares of Restricted Stock and the maximum number of
Restricted Stock Units that the CEO is authorized to grant in the aggregate or
grant to any one Employee in any calendar year, and in the number of and/or
price of Shares subject to outstanding Options and outstanding Shares of
Restricted Stock granted and outstanding Restricted Stock Units granted
(including but not limited to, Shares which are subject to outstanding
Restricted Stock Units, the receipt of which has been deferred in accordance
with Section 8.8 hereof)
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under the Plan, as may be determined to be appropriate and equitable by the CEO,
in his sole discretion, to prevent dilution or enlargement of rights; provided
that the number of Shares subject to any Award shall always be a whole number.
In the event of a Transaction, Options, Shares of Restricted Stock and
Restricted Stock Units shall continue in effect in accordance with their terms
and the holder thereof shall be entitled to receive in respect of all Shares
subject thereto (upon exercise in the case of Options), the same number and kind
of stock, securities, cash, property or other consideration that such Shares
were entitled to receive in the Transaction; provided, however, that such stock,
securities, cash, property or other consideration shall remain subject to all of
the conditions and restrictions which were applicable to the Options, Shares of
Restricted Stock or Restricted Stock Units immediately prior to the consummation
of the Transaction; and provided, further, however, that in the event the
Transaction constitutes a Change in Control, a holder of Options and a holder of
Restricted Stock Units with respect to which a deferral election is in effect
pursuant to Section 8.8, may make an election that such Options and such units
shall remain outstanding following the Transaction (in accordance with the
applicable deferral election in the case of a holder of Restricted Stock Units
and entitle the holder thereof to receive in respect thereof shares of common
stock of the entity (or an affiliate thereof) which effected the Transaction,
(i.e., the same number and kind of stock that such units would have been
entitled to receive in the Transaction or such Options would have been entitled
to receive in the Transaction if exercised at the time of the Transaction) if
any, provided the shares of such stock are publicly-traded on a national
securities exchange.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. Persons eligible to participate in this Plan are such Employees
as are determined by the CEO to be eligible.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the CEO may,
from time to time, select from all eligible Employees, those to whom Awards
shall be granted.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options
may be granted only to Employees, who are Noninsiders, at any time and from time
to time as shall be determined by the CEO. The CEO shall have discretion in
determining the number and type of Options granted to each Participant.
During any calendar year, the aggregate number of Options available for
grant by the CEO pursuant to this Section 6.1 is limited to 600,000, with the
number of Options which may be granted by the CEO to any one Employee during any
calendar year limited to 10,000.
6.2 OPTION CERTIFICATE. Each Option grant shall be evidenced by an Option
Certificate that shall specify the Option Price, the Option duration, the number
of Shares to which the Option pertains, whether the Option is intended to be an
ISO or a NQSO, and such other provisions as the CEO shall determine.
6.3 OPTION PRICE. The Option Price for each grant of an Option shall be
determined by the CEO; provided that the Option Price shall not be less than one
hundred percent (100%) of the Fair Market Value of a Share on the date the
Option is granted.
6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the CEO shall
determine at the time of grant; provided, however, that except as provided in
subsections Sections (a), (b), (c) and (d) of Section 6.8, no Option shall be
exercisable later than the tenth (10th) anniversary date of its grant.
6.5 EXERCISE OF OPTIONS. Subject to the provisions of Section 6.10, Options
granted under the Plan shall be exercisable at such times and be subject to such
restrictions and conditions as the CEO shall in each instance approve, which
need not be the same for each grant or for each Participant. However, no Option
grants under this Plan shall be exercisable prior to the expiration of six (6)
months following the date of its grant.
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6.6 PAYMENT. Subject to such other method(s) as may have been established by the
Committee, Options shall be exercised by the delivery of a written notice of
exercise to the Secretary of the Company, setting forth the number of Shares
with respect to which the Option is to be exercised, accompanied by full payment
for the Shares (or by cashless exercise as arranged by the Committee as provided
in Section 3.2).
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered must have been held by the Participant for at least six (6) months
prior to their tender to satisfy the Option Price), (c) by cashless exercise to
the extent authorized by the Committee or (d) by a combination of (a), (b) and
(c).
As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in the
name or names designated by the Participant, Share certificates in an
appropriate amount based upon the number of Shares purchased under the
Option(s).
6.7 SPECIAL RESTRICTIONS ON SHARES ACQUIRED PURSUANT TO THE EXERCISE OF AN
OPTION. The CEO may impose such restrictions on Shares acquired pursuant to the
exercise of an Option under the Plan as he may deem advisable.
6.8 TERMINATION OF EMPLOYMENT.
(a) Termination by Normal Retirement or Early Retirement at Age
60. In the event the employment of a Participant is terminated
by reason of Normal Retirement or Early Retirement at or after
attaining age 60, all outstanding Options granted to that
Participant shall immediately become exercisable, and shall
remain exercisable at any time prior to their expiration date,
or for one (1) year after the date of such retirement,
whichever period is longer.
(b) Termination by Early Retirement Prior to Age 60. In the event
the employment of a Participant is terminated by reason of
Early Retirement prior to attainment of age 60, the CEO, in
his sole discretion, shall have the right to cause all or any
portion of such outstanding Options granted to that
Participant to immediately become exercisable, in which event
such Options shall remain exercisable at any time prior to
their expiration date, or for one (1) year after the date of
such Early Retirement, whichever period is longer.
(c) Termination by Death. In the event the employment of a
Participant is terminated by reason of death, all outstanding
Options granted to that Participant shall immediately become
exercisable, and shall remain exercisable at any time prior to
their expiration date, or for one (1) year after the date of
death, whichever period is longer. Such options shall be
exercisable by such person or persons who shall have been
named as the Participant's beneficiary, or, if no beneficiary
has been named, by such persons who have acquired the
Participant's rights under the Option by will or by the laws
of descent and distribution.
(d) Termination by Disability. In the event the employment of a
Participant is terminated by reason of Disability, all
outstanding Options granted to that Participant shall
immediately become exercisable as of the date the CEO
determines the definition of Disability to have been
satisfied, and shall remain exercisable at any time prior to
their expiration date, or for one (1) year after the date that
the CEO determines the definition of Disability to have been
satisfied, whichever period is longer.
(e) Employment Termination Followed by Death. In the event that a
Participant's employment terminates by reason of Normal
Retirement, Early Retirement or Disability and within the
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exercise period following such termination the Participant
dies, then the remaining exercise period under outstanding
Options shall be any time prior to their expiration date, or
for one (1) year following death, whichever period is shorter.
Such Options shall be exercisable by such person or persons
who shall have been named as the Participant's beneficiary, or
if no beneficiary has been named, by such persons who have
acquired the Participant's rights under the Option by will or
by the laws of descent and distribution.
(f) Termination of Employment for Other Reasons. If the employment
of a Participant shall terminate for any reason other than the
reasons set forth in subsections (a)-(d) of this Section 6.8,
the CEO, in his sole discretion, shall have the right to cause
all or any portion of such outstanding Options granted to that
Participant to immediately become exercisable, subject to such
terms as the CEO, in his sole discretion, deems appropriate.
Options which are or become exercisable as of the effective
date of employment termination shall remain exercisable any
time prior to their expiration date, or for three (3) months
after the date of employment termination, whichever period is
shorter.
6.9 FORFEITURE OF OPTIONS. Options held by a Participant which are not
exercisable as of the effective date of employment termination and which do not
become exercisable pursuant to the provisions of Section 6.8 shall be forfeited
immediately.
6.10 ALTERNATE EXERCISABILITY FOLLOWING TERMINATION. With respect to Options
held by a Participant as of the date of any employment termination, the
provisions of Section 6.8 regarding the exercisability of Options as of the date
of employment termination and the provisions regarding the length of the
exercise period following employment termination notwithstanding, the CEO may,
in his sole discretion, provide for accelerated exercisability of all Options
and an extended period of exercisability following termination, upon such terms
and provisions as he deems appropriate; provided, however, that the period of
extended exercisability shall not extend beyond the period specified in Section
6.4 herein.
6.11 TRANSFERABILITY OF OPTIONS. Except as otherwise provided in this Section
6.11, options granted under the Plan may only be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated in accordance with the
Participant's beneficiary designation, by will, or by the laws of descent and
distribution. The CEO, in his sole discretion, may provide for the
transferability of Options granted under the Plan, by a Participant to persons
or entities on terms and conditions as may be determined by the CEO, in his sole
discretion. The CEO, with respect to an Option granted under the Plan which is
not transferable, may, in his sole discretion, provide for the transferability
of such an Option by the Participant to persons or entities on terms and
conditions as may be determined by the CEO, in his sole discretion. Any
determination by the CEO to provide for the transferability of an Option by any
one Participant under the Plan shall not be deemed to provide to any other
Participant under the Plan a right of transferability with respect to an Option
granted under the Plan to such other Participant.
ARTICLE 7. RESTRICTED STOCK
7.1 DISCRETIONARY GRANTS OF RESTRICTED STOCK. The CEO, at any time and from time
to time, may grant Shares of Restricted Stock to eligible Employees in such
amounts as the CEO shall determine.
7.2 RESTRICTED STOCK CERTIFICATE. Each Restricted Stock grant shall be evidenced
by a Restricted Stock Certificate that shall specify the Period or Periods of
Restriction, the number of Shares of Restricted Stock granted, and such other
provisions as the CEO shall determine.
7.3 RESTRICTED STOCK PRICE. The Restricted Stock Price for each grant of
Restricted Stock shall be determined by the CEO. The Restricted Stock Price may
be less than the par value of a Share on the date of the Restricted Stock grant.
7.4 RESTRICTIONS ON TRANSFERABILITY AND VESTING. Except as otherwise provided in
this Article 7, the Shares of Restricted Stock granted herein may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated until the
end of the applicable Period of Restriction established by the CEO in
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his sole discretion and specified in the Restricted Stock Certificate, or upon
the earlier satisfaction of any other conditions as specified by the CEO in his
sole discretion and set forth in the Restricted Stock Certificate.
7.5 OTHER RESTRICTIONS. The CEO shall impose such other restrictions on any
Shares of Restricted Stock granted pursuant to the Plan as he may deem
advisable.
7.6 ESCROW OR LEGEND. In order to enforce the restrictions imposed upon Shares
of Restricted Stock issued hereunder, the Committee may require any Participant
to enter into an escrow agreement providing that the certificates representing
Shares of Restricted Stock issued pursuant to this Article 7 shall remain in the
physical custody of an escrow holder until any or all of the restrictions
imposed pursuant to this Article 7 have terminated and the Committee may cause a
legend or legends to be placed on any certificates representing Shares issued
pursuant to this Article 7, which legend or legends shall make appropriate
reference to the restrictions imposed hereunder.
7.7 VOTING RIGHTS. During the Period of Restriction, Participants holding Shares
of Restricted Stock granted hereunder may exercise full voting rights with
respect to those Shares.
7.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares. If any such dividends or distributions are paid in Shares, the
Shares shall be subject to the same restrictions on transferability and
forfeitability as the Shares of Restricted Stock with respect to which they were
paid.
7.9 TERMINATION OF EMPLOYMENT; COMPANY REACQUISITION RIGHTS.
(a) Termination by Reason of Normal Retirement, Death or
Disability. In the event the employment of a Participant who
has been granted Shares of Restricted Stock hereunder
terminates because of Normal Retirement, death or Disability,
then the Company shall not have the right to reacquire any of
such Shares of Restricted Stock granted hereunder to such
Participant and all restrictions applicable to such Shares
shall immediately terminate.
(b) Termination by Reason Other than Normal Retirement, Death or
Disability. In the event the employment of a Participant who
has been granted Shares of Restricted Stock hereunder
terminates for any reason other than Normal Retirement, death
or Disability, the Company shall have the option for ninety
(90) days following such termination of employment to
reacquire at his or her cost for cash all or any part of the
terminating Participant's nonvested Shares of Restricted
Stock.
(c) Alternate Treatment of Restricted Stock. Notwithstanding
anything contained in subsections (a) and (b) of this Section
7.9 to the contrary, the CEO shall in his sole discretion have
the authority to modify the treatment of those Shares of
Restricted Stock held by Participants as of the date of
employment termination on which the restrictions have not
terminated, upon such terms as the CEO deems appropriate.
ARTICLE 8. RESTRICTED STOCK UNITS
8.1 GRANT OF RESTRICTED STOCK UNITS. Subject to the terms and provisions of the
Plan, the CEO, at any time and from time to time, may grant Restricted Stock
Units to eligible Employees in such amounts as the CEO shall determine.
8.2 RESTRICTED STOCK UNIT CERTIFICATE. Each Restricted Stock Unit shall be
evidenced by a Restricted Stock Unit Certificate that shall specify the number
of Restricted Stock Units to which it applies, the Period or Periods of
Restriction, and such other provisions as the CEO shall determine.
<PAGE> 9
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8.3 RESTRICTIONS. At or prior to the time a grant of Restricted Stock Units is
made, the CEO shall establish a Period of Restriction applicable to such
Restricted Stock Units. Each grant of Restricted Stock Units may be subject to a
different Period of Restriction. The CEO may, in his sole discretion, at or
prior to the time a grant of Restricted Stock Units is made, prescribe such
restrictions in addition to the Period of Restriction as he may deem advisable.
8.4 RESTRICTIONS ON TRANSFERABILITY. Except as otherwise provided in this
Article 8, Restricted Stock Units may not be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated.
8.5 RIGHTS OF HOLDERS OF RESTRICTED STOCK UNITS. Unless the CEO otherwise
provides in a Restricted Stock Unit Certificate, a Restricted Stock Unit shall
confer no rights as a stockholder of the Company on the holder thereof. The
holder of Restricted Stock Units shall be entitled to receive, upon payment by
the Company of a cash dividend on its outstanding Shares, a cash payment from
the Company for each Restricted Stock Unit then held by such Participant equal
to the per Share dividend paid on the outstanding Shares.
8.6 TERMINATION OF EMPLOYMENT.
(a) Termination by Reason of Normal Retirement, Death or
Disability. In the event the employment of a Participant who
has been granted Restricted Stock Units hereunder terminates
because of Normal Retirement, death or Disability, the Period
of Restriction and all other applicable restrictions with
respect to the Restricted Stock Units then held by such
Participant shall immediately terminate.
(b) Termination by Reason Other than Normal Retirement, Death or
Disability. In the event the employment of a Participant who
has been granted Restricted Stock Units hereunder terminates
for any reason other than Normal Retirement, death or
Disability, the Company shall have the option for ninety (90)
days following such termination of employment to cancel all or
any part of the Restricted Stock Units then held by such
Participant on which the Period of Restriction or other
applicable restrictions have not lapsed.
(c) Alternate Treatment of Restricted Stock Units. Notwithstanding
anything contained in subsections (a) and (b) of this Section
8.6 to the contrary, the CEO shall in his sole discretion have
the authority to modify the treatment (including the terms
regarding the termination of restrictions) of those Restricted
Stock Units held by Participants as of the date of employment
termination with respect to which the Period of Restriction
and any other applicable restrictions shall not have lapsed
upon such terms, as the CEO deems appropriate.
8.7 PAYMENT IN RESPECT OF RESTRICTED STOCK UNITS. Subject to Section 8.8 hereof,
on the date of the expiration or termination of the Period of Restriction and
the satisfaction of any other conditions prescribed by the CEO applicable to a
Restricted Stock Unit, each Restricted Stock Unit shall entitle the holder
thereof to receive one Share.
8.8 DEFERRAL OF RESTRICTED STOCK UNITS. The holder of Restricted Stock Units may
elect to defer the issuance of any Share underlying a Restricted Stock Unit
until such date as such holder shall choose, so long as such election is made in
or prior to the calendar year preceding the calendar year in which such Shares
would otherwise have been issued, but in no event less than six (6) months prior
to the date such Shares would otherwise have been issued; provided, however,
that notwithstanding the foregoing, upon the occurrence of a Potential Change in
Control, the Company shall notify in writing each Participant of the occurrence
of such event and each Participant shall have the right within 14 days of the
Potential Change in Control to elect to defer the issuance of any Share
underlying a Restricted Stock Unit until such date as such holder shall choose.
For purposes of this Section 8.8., a "Potential Change in Control" means:
(a) The execution by the Company of a written agreement which, if
consummated, would constitute a Change in Control.
<PAGE> 10
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(b) A public announcement (including any filing with the
Securities and Exchange Commission) by any "person" (within
the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act),
including any corporation or group of associated firms acting
in concert, other than (i) the Company and/or (ii) any
employee pension benefit plan (within the meaning of Section
3(2) of the Employee Retirement Income Security Act of 1974,
as amended) of the Company, including a trust established
pursuant to such plan, of an intention to take or consider
taking actions which, if consummated, would constitute a
Change in Control.
(c) The acquisition, whether directly, indirectly, beneficially
(within the meaning of Rule 13d-3 of the 1934 Act), or of
record, of securities of the Company representing fifteen
percent (15%) or more in number of any class of its
then-outstanding voting securities by any "person" (within the
meaning of Sections 13(d) and 14(d)(2) of the 1934 Act),
including any corporation or group of associated persons
acting in concert, other than (i) the Company and/or (ii) an
employee pension benefit plan (within the meaning of Section
3(2) of the Employee Retirement Income Security Act of 1974,
as amended) of the Company, including a trust established
pursuant to any such plan. For this purpose, the ownership of
record of fifteen percent (15%) or more in number of any class
of the then-outstanding voting securities of the Company by a
person engaged in the business of acting as a nominee for
unrelated beneficial owners shall not in and of itself be
deemed to constitute a Potential Change in Control.
(d) The occurrence of any other event that the Board determines is
a Potential Change in Control.
8.9 WITHDRAWAL. The holder of Restricted Stock Units who has elected to defer
the receipt of Shares pursuant to Section 8.8 hereof, may, at his or her
discretion, at any time prior to the time such Shares would otherwise be issued
to such holder, but in no event prior to the time at which the Shares underlying
such Restricted Stock Units would otherwise have been issued had the holder not
made an election to defer the issuance of such Shares as provided in this
Article 8, on ten (10) days' prior written notice to the Company elect to
receive any or all of the Shares such holder has deferred provided that 10% of
the number of Shares the receipt of which is being accelerated shall be
forfeited to the Company.
ARTICLE 9. LIMITATION ON RESTRICTED STOCK SHARE AND UNIT GRANTS
9.1 During any calendar year, the aggregate number of Shares of Restricted Stock
and of Restricted Stock Units which the CEO may grant pursuant to Sections 7.1
and 8.1 herein may not exceed 300,000 with the total number of Shares of
Restricted Stock and of Restricted Stock Units which may be granted by the CEO
to any one Employee during any calendar year limited to 4,000.
ARTICLE 10. BENEFICIARY DESIGNATION
10.1 BENEFICIARY DESIGNATION. Each Participant under the Plan may, from time to
time, name any beneficiary or beneficiaries (who may be named contingently or
successively) to whom any benefit under the Plan shall accrue in case of his or
her death. Each such designation shall revoke all prior designations by the same
Participant, shall be in a form prescribed by the Company, and will be effective
only when filed by the Participant in writing with the Secretary of the Company
during the Participant's lifetime. In the absence of any such designation,
benefits remaining at the Participant's death shall accrue to the Participant's
estate.
ARTICLE 11. RIGHTS OF EMPLOYEES
11.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way
the right of the Company to terminate any Participant's employment at any time,
or confer upon any Participant any right to continue in the employ of the
Company.
<PAGE> 11
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For purposes of the Plan, transfer of employment of a Participant
between the Company and any one of its Subsidiary Entities (or between
Subsidiary Entities) shall not be deemed a termination of employment.
11.2 PARTICIPATION. No Employee shall have the right to be selected to receive
an Award under this Plan, or, having once been selected, have a right to again
be selected to receive a future Award.
ARTICLE 12. CHANGE IN CONTROL
12.1 OCCURRENCE OF A CHANGE IN CONTROL. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited by the terms of applicable law
or regulation:
(a) Any and all Options granted hereunder shall become immediately
exercisable;
(b) Any Periods of Restriction and other restrictions imposed on
Shares of Restricted Stock or Restricted Stock Units shall
immediately terminate; and
(c) Subject to Article 13 herein, the CEO, before the effective
date of the Change in Control, shall have the authority to
make any modifications to the Awards and any modifications to
a deferral of Restricted Stock Units as determined by the CEO,
after consultation with the holder of the Award or deferred
Restricted Stock Units, to be appropriate.
ARTICLE 13. AMENDMENT, MODIFICATION, AND TERMINATION
13.1 AMENDMENT, MODIFICATION, AND TERMINATION. The Board at any time and from
time to time may amend, modify or terminate the Plan. No such amendment,
modification or termination, however, may change the Plan in a way that (i)
impairs any benefit theretofore accrued by any Participant and (ii) in the event
of a Change in Control, is adverse to the rights of any Participant, in the case
of either (i) or (ii) without the Participant's prior written consent. The
immediately preceding sentence may not under any circumstances be amended at any
time after September 22, 1998 and any effort to change such sentence shall be
null, void and of no force or effect. In addition, no such amendment,
modification termination of the Plan may occur without the approval of the
shareholders of the Company, if shareholder approval for such amendment,
modification or termination is required by the federal securities law, any
national securities exchange or system on which the Shares are then listed or
reported, or a regulatory body having jurisdiction with respect thereto.
ARTICLE 14. WITHHOLDING
14.1 TAX WITHHOLDING. The Company shall have the power and the right as set
forth in this Article 14 to deduct or withhold, or require a Participant to
remit to the Company, an amount sufficient to satisfy any and all Federal,
state, and local taxes (including the Participant's FICA obligation) required by
law to be withheld with respect to any taxable event arising out of or as a
result of this Plan.
14.2 SHARE WITHHOLDING. With respect to tax withholding required upon the
exercise of Options, upon the termination of restrictions on Restricted Stock or
Restricted Stock Units, or upon any other taxable event hereunder, a Participant
may elect, subject to the approval of the CEO, to satisfy the withholding
requirement, in whole or in part, by having the Company withhold a number of
Shares or Restricted Stock Units, as applicable, the Fair Market Value of which
Shares or the underlying Shares related to Restricted Stock Units, in itself or
when added to a cash payment made by the Participant to the Company, equals the
minimum statutory total tax.
ARTICLE 15. SUCCESSORS
15.1 SUCCESSORS. All obligations of the Company under the Plan, with respect to
Awards granted hereunder, shall be binding on any successor to the Company,
whether the existence of such successor is
<PAGE> 12
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the result of a direct or indirect purchase, merger, consolidation or otherwise,
of all or substantially all of the business and/or assets of the Company.
ARTICLE 16. LEGAL CONSTRUCTION
16.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any
masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
16.2 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares
under the Plan shall be subject to all applicable laws, rules and regulations,
and to such approvals by any governmental agencies or national securities
exchanges as may be required.
16.3 FOREIGN EMPLOYEES. To the extent permissible under applicable law, the CEO
may grant Awards to eligible Employees who are employed in locations outside of
the United States. The CEO shall have the authority to modify the terms of
Awards granted to such Employees in order to ensure compliance with applicable
local and national law.
16.4 GOVERNING LAW. To the extent not preempted by Federal law (or foreign law,
in the case of grants to Employees who are not United States residents), the
Plan, and any agreement hereunder, shall be construed in accordance with and
governed by the laws of the State of Delaware.
16.5 SEVERABILITY. In the event any provision of the Plan or any action taken
thereunto shall be held illegal or invalid for any reason, the illegality or
invalidity shall not affect the remaining parts of the Plan, and the Plan shall
be construed and enforced as if the illegal or invalid provision had not been
included, and the illegal or invalid action shall be deemed null and void.
Executed at Rockford, Illinois as of the 22nd day of September, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
--------------------------
Paul Donovan
Its: Executive Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit (10)(v)
FIRST AMENDMENT TO THE SUNDSTRAND CORPORATION
MANAGEMENT STOCK PERFORMANCE PLAN
(As Amended and Restated effective September 22, 1998)
WHEREAS, the Sundstrand Corporation Management Stock Performance Plan
(the "Plan") was established effective as of November 19, 1996; and
WHEREAS, the Plan was amended and restated effective as of September
22, 1998, to include restricted stock units and to make certain other changes,
and to incorporate therein all prior amendments to the Plan and to make other
changes to improve readability of the Plan; and
WHEREAS, it has been determined that it is appropriate to further amend
the Plan;
NOW, THEREFORE, the Sundstrand Corporation Management Stock Performance
Plan, as amended and restated September 22, 1998, is hereby amended effective as
of January 15, 1999 as follows:
1. Section 7.4 of Article 7 of the Plan is amended by changing the
title thereof to "Restrictions on Transferability and Vesting; Termination of
Restrictions." and by adding the following new paragraph at the end thereof,
which new paragraph shall be applicable to all Restricted Stock outstanding on
January 15, 1999, or thereafter issued under the Plan:
"Notwithstanding anything to the contrary contained in the Plan or in
any terms and Conditions specified in a Restricted Stock Certificate
relating to any Restricted Stock awarded under the Plan, the
termination of restrictions on shares of Restricted Stock granted under
the Plan which would otherwise terminate at any time during the three
(3) month period which follows the month in which a quarterly or annual
earnings press release of the Company is issued shall terminate on the
third business day after the day on which such applicable quarterly or
annual earnings press release is issued."
2. Section 8.4 of Article 8 of the Plan is amended by changing the
title thereof to "Restrictions on Transferability and Vesting; Termination of
Restrictions." adding the following new paragraph at the end thereof:
"Notwithstanding anything to the contrary contained in the Plan or in
any terms and conditions specified in a Restricted Stock Unit
Certificate relating to the issuance of Restricted Stock Units under
the Plan, the termination of restrictions on Restricted Stock Units
granted under the Plan which would otherwise terminate at any time
during the three (3) month period which follows the month in which a
quarterly or annual earnings press release of the Company is issued
shall terminate on the third business day after the day on which such
applicable quarterly or annual earnings press release is issued."
Executed at Rockford, Illinois as of the 15th day of January, 1999.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
------------------------------
Paul Donovan
Title: Executive Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit (10)(x)
FIFTH AMENDMENT TO THE SUNDSTRAND CORPORATION
SUPPLEMENTAL RETIREMENT PLAN
WHEREAS, the Sundstrand Corporation Supplemental Retirement Plan (the
"Plan") was established effective as of December 10, 1975;
WHEREAS, the Plan was amended and restated in its entirety effective as
of January 1, 1988; and
WHEREAS, the Plan as amended and restated has heretofore been amended
on four occasions; and
WHEREAS, it has been determined that it is in the best interest of the
Corporation to further amend the Plan;
NOW, THEREFORE, effective as of December 8, 1998, the Sundstrand
Corporation Supplemental Retirement Plan as amended and restated January 1,
1988, is further amended as follows:
1. Section 3.1(a) of Article III of the Plan is amended by adding the
following new subsection (v) after subsection (iv) thereof and by deleting from
subsection (iv) the word "or" at the end thereof:
(v) including in the employee's 'Years of Participation' (used to
determine the amount of any retirement benefit) and 'Years of
Service' (used to determine the eligibility for and vesting of
any retirement benefit) (as those terms are defined and used
in the Qualified Plan) the service determined as provided in
Exhibit A to this Plan, provided such employee is an elected
officer of the Corporation and, other than the Chief Executive
Officer of the Corporation (whose service is required to be
included hereunder), has been selected by the Chief Executive
Officer to have such service included for purposes of
calculating the Supplemental Retirement Benefit, or
2. The Plan is amended by adding at the end thereof an Exhibit A which
shall be in the form attached to this Amendment.
<PAGE> 2
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3. Article VI of the Plan is amended to provide as follows:
ARTICLE VI
AMENDMENT, MODIFICATION OR TERMINATION
The Corporation intends the Plan to be permanent but reserves the right
to amend, modify or terminate the Plan when, in the sole opinion of the
Corporation, such amendment, modification or termination is advisable.
Any such amendment, modification or termination shall be made pursuant
to a resolution of the Board and shall be effective as of the date set
forth in such resolution; provided, however, that no such amendment,
modification or termination, however, may change the Plan in a way that
(i) impairs any Employees, former Employee's or Surviving Spouse's
rights, participation in, or benefits theretofore accrued hereunder and
(ii) in the event of a Change in Control, is adverse to the rights,
participation in, or benefits of any Employee, former Employee or
Surviving Spouse (including without limitation, the amount or form of
payment of any benefits accrued hereunder) in the case of either (i) or
(ii) without the Employee's, former Employee's or Surviving Spouse's
prior written consent. The immediately preceding sentence may not under
any circumstances be amended at any time after December 8, 1998 and any
effort to change such sentence shall be null, void and of no force or
effect. For the purpose of this Article VI, an accrued Supplemental
Retirement Benefit will be determined for each eligible Employee,
former Employee or Surviving Spouse in accordance with the provisions
of the Plan and the accrued benefit provided by the Qualified Plan all
determined as of the effective date of the amendment, modification or
termination. Payment of benefits based on an accrued Supplemental
Retirement Benefit will be made in accordance with the terms of this
Plan to the Employee, or former Employee who retires under the
Qualified Plan, or to such an Employee's or former Employee's Surviving
Spouse if such Employee or former Employee dies and leaves a spouse
eligible for a Qualified Plan Surviving Spouse Benefit under the
Qualified Plan.
For purposes of the preceding paragraph the term "Change in Control"
means: any of the following events:
A) The acquisition (other than from the Corporation) by
any person (as such term is defined in Sections 13(d)
or 14(d) of the Securities Exchange Act of 1934, as
amended (the "1934 Act")) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
1934 Act) of twenty-five percent (25%) or more of the
combined voting power of the Corporation's then
outstanding voting securities;
<PAGE> 3
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B) The individuals who, as of the date hereof, are members
of the Board (the "Incumbent Board"), cease for any
reason to constitute a
majority of the Board, unless the election, or
nomination for election by the Corporation
stockholders, of any new director was approved by a
vote of a majority of the Incumbent Board, and such new
director shall, for purposes of this Plan, be
considered as a member of the Incumbent Board; or
C) (i) A merger or consolidation involving the
Corporation (or any direct or indirect
subsidiary of the Corporation) or (B) the
issuance of shares of capital stock of the
Corporation in connection with a merger or
consolidation involving the Corporation (or
any direct or indirect subsidiary of the
Corporation) if, in the case of clause (A)
or clause (B), the stockholders of the
Corporation immediately before such merger
or consolidation, do not, as a result of
such merger or consolidation, own, directly
or indirectly, immediately following such
merger or consolidation, more than
sixty-seven percent (67%) of the combined
voting power of the then outstanding voting
securities of the person issuing securities
in the merger or consolidation in
substantially the same proportion as their
ownership of the combined voting power of
the voting securities of the Corporation
outstanding immediately before such merger
or consolidation; provided, however, that
for purposes of clause (A) and clause (B),
voting securities of the Corporation issued
in connection with the merger or
consolidation, including securities to cover
stock options or cure "tainted" shares
(whether issued in the merger or
consolidation or pursuant to a public or
private offering related thereto), shall be
treated as having been issued in such merger
or consolidation and not as having been
outstanding immediately prior to such merger
or consolidation or (C) a complete
liquidation or dissolution of the
Corporation or consummation of the sale or
other disposition of all or substantially
all of the assets of the Corporation.
Notwithstanding the foregoing, a Change in
Control shall not be deemed to occur
pursuant to clause (i) of this paragraph (d)
of Article 2, solely because twenty-five
percent (25%) or
<PAGE> 4
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more of the combined voting power of the
Corporation's then outstanding voting
securities is acquired by (I) a trustee or
other fiduciary holding securities under one or
more employee benefit plans maintained by the
Corporation or any of its subsidiaries or (II)
any corporation which, immediately prior to
such acquisition, is owned directly or
indirectly by the stockholders of the
Corporation in the same proportion as their
ownership of stock in the Corporation
immediately prior to such acquisition.
4. Section 7.1 of Article VII of the Plan is amended to provide as
follows:
7.1 Funding. Except as may otherwise be provided in the Sundstrand
Corporation Rabbi Trust, established by Agreement dated January 30,
1996, as the same may have been or may hereafter be amended, between
Sundstrand Corporation and Marshall & Ilsley Trust Company, the Plan
shall be unfunded, and any Supplemental Retirement Benefit or
Supplemental Surviving Spouse Benefit shall be paid only from the
general assets of the Corporation. No Employee, former Employee or
Surviving Spouse or any other person shall have any interest in any
particular assets of the Corporation by reason of the right to receive
a benefit under the Plan and any such Employee, former Employee or
Surviving Spouse or other person shall have only the rights of a
general unsecured creditor of the Corporation with respect to any
rights under the Plan.
Executed at Rockford, Illinois as of the 8th day of December, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
--------------------------
Title: Paul Donovan
Executive Vice President and
Chief Financial Officer
<PAGE> 5
EXHIBIT A
Chief Executive Officer
ELIGIBILITY
Chief Executive Officer
"EXTRA" SERVICE
For years of service while Chief Executive Officer denoted by N
(including years of service credited under an Employment Agreement
pursuant to a Corporate Change in Control), a participant will be
credited with the following number years of "extra" Sundstrand pension
service:
(N times N times 2) / 10
Example - for 7 years of actual service while Chief Executive Officer
and 3 years credited under an Employment Agreement pursuant to a
Corporate Change in Control, the "extra" years of Sundstrand pension
service equals (10 times 10 times 2) / 10 equals 20.000 years.
Such "extra" years of Sundstrand pension service will be added to Chief
Executive Officer's actual years of Sundstrand service.
OFFSET FOR VESTED DEFINED BENEFIT PENSION FROM PRIOR EMPLOYER
The value of the "extra" Sundstrand pension service will be reduced by
the value of any vested defined benefit pension from employment prior
to being hired by Sundstrand. No offset will be applied for any vested
balance from a savings plan or profit sharing plan sponsored by a prior
employer.
VESTING OF "EXTRA" YEARS OF SUNDSTRAND PENSION SERVICE
The "extra" years of Sundstrand service will vest upon the later of (a)
or (b) as follows:
(a) attainment of age 55 while in continued Sundstrand
employment;
(b) five years of service as Chief Executive Officer
In the event of a Corporate Change in Control of Sundstrand
Corporation, the "extra" years of Sundstrand service will immediately
vest regardless of any age or service requirements.
<PAGE> 6
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COORDINATION WITH OTHER SUNDSTRAND CORPORATION SUPPLEMENTAL PENSION
PROMISES
The additional pension benefit provided to the Chief Executive Officer
by this amendment shall be compared to the additional pension benefit
provided by any other individual employment agreement between such
individual and Sundstrand Corporation such that the larger pension
benefit shall be applicable.
Specifically in the case of Robert H. Jenkins pursuant to his
employment agreement with Sundstrand as amended from time to time, he
is entitled to larger of:
- the supplemental pension as described by the formula in this
Exhibit A;
- pension service credit equal to double his actual period of
service with Sundstrand Corporation with no offset for any
pension benefit from a prior employer;
- In the event of a Corporate Change in Control, immediate
pension service credit of 20 years with no offset for any
pension benefit from a prior employer.
* * *
Senior Management Position and Selected by CEO
ELIGIBILITY
- Senior management position
- Selected by Chief Executive Officer
"EXTRA" SERVICE
For years of service while in a senior management position denoted by N
(including years of service credited under an Employment Agreement
pursuant to a Corporate Change in Control), a participant will be
credited with the following number of years of "extra" Sundstrand
pension service:
(N times N) / 15
Example - for 7 years of actual service in a senior management position
and 3 years credited under an Employment Agreement pursuant to a
Corporate Change in Control, the "extra" years of Sundstrand pension
service equals (10 times 10) / 15 equals 6.667 years.
Such "extra" years of Sundstrand pension service will be added to such
senior executive's actual years of Sundstrand service.
<PAGE> 7
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OFFSET FOR VESTED DEFINED BENEFIT PENSION FROM PRIOR EMPLOYER
The value of the "extra" Sundstrand pension service will be reduced by
the value of any vested defined benefit pension from employment prior
to being hired by Sundstrand. No offset will be applied for any vested
balance from a savings plan or profit sharing plan sponsored by a prior
employer.
VESTING OF "EXTRA" YEARS OF SUNDSTRAND PENSION SERVICE
The "extra" years of Sundstrand service will vest upon the later of (a)
or (b) as follows:
(a) attainment of age 55 while in continued Sundstrand
employment;
(b) five years of service in a senior management
position.
In the event of a Corporate Change in Control of Sundstrand
Corporation, the "extra" years of Sundstrand service will immediately
vest regardless of any age or service requirements.
<PAGE> 1
Exhibit (10)(aa)
FIRST AMENDMENT TO THE SUNDSTRAND CORPORATION
DEFERRED COMPENSATION PLAN
(As amended and restated effective December 19, 1997)
WHEREAS, The Sundstrand Corporation Deferred Compensation Plan (the
"Plan") was established effective as of January 1, 1995; and
WHEREAS, the Plan was amended and restated in its entirety effective
as of December 19, 1997 (which amendment and restatement superceded an earlier
amendment and restatement which was to have become effective as of December 31,
1997); and
WHEREAS, it was determined that it was appropriate to further amend
the Plan, which amendment was incorporated in a resolution adopted by the
Sundstrand Corporation Board of Directors at its April 21, 1998 meeting; and
WHEREAS, to facilitate administration of the Plan it has been
determined that it is appropriate to set forth the changes made in the
resolution adopted by the Sundstrand Corporation Board of Directors at its April
21, 1998 meeting in a formal Plan amendment.
NOW, THEREFORE, this First Amendment to the Sundstrand Corporation
Deferred Compensation Plan (as amended and restated effective December 19, 1997)
has been prepared to reflect such changes effective as of April 21, 1998 as
follows:
1. Section 7.2 of Article VII of the Plan is changed to provide as
follows:
"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 one time and, with respect to Directors, only to those
Directors who at such time are either active employees or 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 annually over
the period specified on the Executive's or Director's Compensation
Payment Election Form, provided that the payment period may not extend
beyond the Executive's or Director's seventy-fifth birthday. Annual
payments will be made in January of the specified distribution year.
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 applicable Deferral Election or Compensation Payment
Election Form. In all cases, appropriate taxes on the deferral payments
are the responsibility of the payee."
Executed at Rockford, Illinois as of the 21st day of April, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
----------------------------
Title: Paul Donovan
Executive Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit (10)(bb)
SECOND AMENDMENT TO THE SUNDSTRAND CORPORATION
DEFERRED COMPENSATION PLAN
(As amended and restated effective December 19, 1997)
WHEREAS, The Sundstrand Corporation Deferred Compensation Plan (the
"Plan") was established effective as of January 1, 1995; and
WHEREAS, the Plan was amended and restated in its entirety effective
as of December 19, 1997 (which amendment and restatement superceded an earlier
amendment and restatement which was to have become effective as of December 31,
1997); and
WHEREAS, by resolution of the Board of Directors of Sundstrand
Corporation the Plan was amended effective as of April 21, 1998 and such
amendment was formally incorporated into the Plan by the First Amendment to the
Plan, as amended and restated effective December 19, 1997; and
WHEREAS, at the Sundstrand Corporation Compensation Committee meeting
of May 26, 1998, the Compensation Committee authorized management to amend the
Plan in certain respects so as to be consistent with the intent and purposes of
amendments to the employment and severance agreements with certain employees of
the Corporation.
NOW, THEREFORE, pursuant to the authorization of the Compensation
Committee of the Board of Directors of Sundstrand Corporation the Plan (as
amended and restated effective December 19, 1997) be and it hereby is amended
effective as of June 1, 1998, as follows:
1. Section 7.5 of the Plan is amended to read as follows:
"Section 7.5. Change in Control; Potential Change in
Control.
(a) In the event of a "Change in Control" (as defined
below), (i) if termination of an Executive's employment occurs at any
time 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 ceases to be a Director of the
Corporation or of the entity acquiring control of the Corporation.
For purposes of this Plan, "Change in Control" shall mean
any of the following events:
(i) The acquisition (other than from the
Corporation) by any person (as such term is defined in Sections 13(d)
or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act")) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of twenty-five percent (25% or more of
the combined voting power of the Corporation's then outstanding voting
securities;
(ii) The individuals who, as of the date hereof,
are members of the Board (the "Incumbent Board"), case for any reason
to constitute a majority of the Board, unless the election, or
nomination for election by the Corporation stockholders, of any new
director was approved by a vote of a majority of the Incumbent Board,
and such new director shall, for purposes of this Plan, be considered
as a member of the Incumbent Board; or
<PAGE> 2
-2-
(iii) (1) A merger or consolidation involving the
Corporation (or any direct or indirect subsidiary of the Corporation)
or (2) the issuance of shares of capital stock of the Corporation in
connection with a merger or consolidation involving the Corporation (or
any direct or indirect subsidiary of the Corporation) if, in the case
of clause (1) or clause (2), the stockholders of the Corporation
immediately before such merger or consolidation, do not, as a result of
such merger or consolidation, own, directly or indirectly, immediately
following such merger or consolidation, more than sixty-seven percent
(67%) of the combined voting power of the then outstanding voting
securities of the person issuing securities in the merger or
consolidation in substantially the same proportion as their ownership
of the combined voting power of the voting securities of the
Corporation outstanding immediately before such merger or
consolidation; provided, however, that for purposes of clause (1) and
clause (2), voting securities of the Corporation issued in connection
with the merger or consolidation, including securities to cover stock
options or cure "tainted" shares (whether issued in the merger or
consolidation or pursuant to a public or private offering related
thereto), shall be treated as having been issue din such merger or
consolidation and not as having been outstanding immediately prior to
such merger or consolidation or (3) a complete liquidation or
dissolution of the Corporation or consummation of the sale or other
disposition of all or substantially all of the assets of the
Corporation.
Notwithstanding the foregoing, a Change in Control
shall not be deemed to occur pursuant to clause (a), solely because
twenty-five percent (25%) or more of the combined voting power of the
Corporation's then outstanding voting securities is acquired by (A) a
trustee or other fiduciary holding securities under one or more
employee benefit plans maintained by the Corporation or any of its
subsidiaries or (B) any corporation which, immediately prior to such
acquisition, is owned directly or indirectly by the stockholders of the
Corporation in the same proportion as their ownership of stock in the
Corporation immediately prior to such acquisition."
(b) Upon the occurrence of each Potential Change in Control
(as defined below), the Company shall notify in writing each Executive
and each Director who has made a deferral under the Plan of the
occurrence of such event and each such Executive or such Director shall
have the right within the 14-day period following receipt of such
notice but in no event prior to the effective date of the "Change of
Control" to which such notice relates to elect either to receive
payment of his or her account balances as provided in subparagraph (a)
of this Section 7.5 if the Change in Control occurs or to receive
payment of his or her account balances on such date as such account
balances otherwise would be paid under the Plan. For purposes of this
Subparagraph (b) of this section 7.5, a "Potential Change in Control"
means:
(i) The execution by the Company of a written
agreement which, if consummated, would constitute a Change in Control;
(ii) A public announcement (including any filing
with the Securities and Exchange Commission) by any "person" (within
the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act), including
any corporation or group of associated firms acting in concert, other
than (I) the Company and/or (ii) any employee pension benefit plan
(within the meaning of Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended) of the Company, including a trust
established pursuant to such plan, of an intention to take or consider
taking actions which, if consummated, would constitute a Change in
Control;
<PAGE> 3
-3-
(iii) The acquisition, whether directly,
indirectly, beneficially (within the meaning of Rule 13d-3 of the 1934
Act), or of record, of securities of the Company representing fifteen
percent (15%) or more in number of any class of its then-outstanding
voting securities by any "person" (within the meaning of Sections 13(d)
and 14(d)(2) of the 1934 Act), including any corporation or group of
associated persons acting in concert, other than (i) the Company and/or
(ii) an employee pension benefit plan (within the meaning of Section
3(2) of the Employee Retirement Income Security Act of 1974, as
amended) of the Company, including a trust established pursuant to any
such plan. For this purpose, the ownership of record of fifteen percent
(15%) or more in number of any class of the then-outstanding voting
securities of the Company by a person engaged in the business of acting
as a nominee for unrelated beneficial owners shall not in and of itself
be deemed to constitute a Potential Change in Control; or
(iv) The occurrence of any other event that the
Board determines is a Potential Change in Control."
2. Article VIII of the Plan is amended by deleting Section 8.1 and by
adding the following new Sections 8.1 and 8.2 to provide as follows:
"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,
provided, however, that in no event may any such amendment, replacement
or termination reduce or otherwise impair any benefit provided under
this Plan with respect to amounts theretofore deferred under this Plan
by an Executive who is a party to an Agreement (as defined below) or by
any Director, in either case, without such Executive's or such
Director's prior written consent. Other than to expand coverage, the
immediately preceding sentence and Section 8.2 below may not under any
circumstances be amended at any time after June 1, 1998.
The term "Agreement" means an employment, severance or other
similar agreement between the Company and any of the individuals listed
on an Exhibit which shall be prepared by and kept on file for such
purpose with the Company's Vice President, Corporate Human Resources or
any successor to such person filling the same or an equivalent
position.
Section 8.2. Effect of Amendment, Replacement or Termination
on Prior Deferrals. Notwithstanding anything contained in this Plan to
the contrary, in no event shall any amendment, replacement or
termination of this Plan adversely impact the terms or conditions
applicable to an Executive's (who is a party to an Agreement) or
Director's or, after the death of such Executive or Director, such
Executive's or Director's Beneficiary's, continued participation in or
benefits provided under this Plan with respect to amounts deferred
under this Plan as in effect immediately prior to the date of such
amendment, replacement or termination (including without limitation,
the interest theretofore accrued under the Plan and the formula and
method for accruing interest as in effect immediately prior to the date
of such amendment, replacement or termination which was to be used for
future interest accrual with respect to amounts theretofore deferred
under this Plan) without the applicable Executive's or Director's or,
after the death of such Executive or Director, such Executive's or
Director's Beneficiary's, prior written consent. It is the purpose of
the foregoing to clearly provide that with respect to each Executive
(who is a party to an Agreement) or Director who participates in the
Plan, once a deferral is made by such person under the Plan in any Plan
Year no subsequent amendment, replacement or
<PAGE> 4
-4-
termination of the Plan may in any negative way affect such deferral,
either currently or with respect to any future period, including, but
not limited to, changing the method for determining the applicable
interest rate for each Plan Year, the accrual of interest on each
deferral, the method for allowing such deferral to be redeferred, and
the methods of payment of such deferral, prior to the time such
deferral and all interest theron has been paid in full, without first
obtaining the prior written consent of the person(s) entitled to
receive such deferrals and the interest thereon."
3. Article IX of the Plan is amended by adding a new Section 9.9 at
the end thereof which shall provide as follows:
"9.9. Funding of Deferrals. Notwithstanding anything to the contrary
contained in the Plan:
(a) With respect to each deferral made by an Executive or a
Director under this Plan, the Company shall within 90 days after such deferral
deposit into the Sundstrand Corporation Rabbi Trust established pursuant to an
Agreement dated January 30, 1996, between Sundstrand Corporation and Marshall &
Ilsley Trust Company (the "Rabbi Trust") an amount equal to such deferral and
shall cause the trustee for the Rabbi Trust to allocate to an account
established within the Rabbi Trust in the name of each Executive or Director who
has made such a deferral the amount of such deposit.
(b) Within 90 days after the end of each calendar year the
Company shall deposit into the Rabbi Trust an amount equal to the interest
accrual during the preceding calendar year in accordance with the Plan with
respect to each deferral and shall cause such deposit to be credited to the
applicable account of the Executive or Director.
(c) Each year during the months of April or May the
Company's certified public accounting firm shall take such steps as it
reasonably determines to be necessary to verify that the Company has made the
deposits to the Rabbi Trust required hereunder and has caused such deposits to
be properly credited to the appropriate accounts of each Executive and each
Director. Such accountant, within 30 days after completing the required
verification, shall send a written confirmation to each Executive and each
Director with a deferral under the Plan as to whether the proper amounts have
been deposited to the Rabbi Trust and credited to his or her account and shall
advise as to the amount held under the Rabbi Trust in his or her account. In the
event the Company does not retain any certified public accounting firm or the
Company's certified public accounting firm refuses to perform this verification
and notice, any Executive or Director may petition a federal court of competent
jurisdiction in the location where the Company's main offices are located to
appoint a certified public accounting firm of significant stature to perform
such work. The cost of making such appointment (including, but not limited to,
attorney fees and any other costs) shall be borne by the Company.
(d) In the event the Company fails to meet its funding
obligation as provided in this Section 9.9, any Executive or Director can bring
a legal proceeding before a court of competent jurisdiction (either federal,
sate or local) to enforce such obligation. The costs of any such proceeding,
including, but not limited to, attorney fees and any other costs, shall be borne
by the Company."
<PAGE> 5
-5-
Executed at Rockford, Illinois as of the 1st day of June, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
-------------------------
Title: Paul Donovan
Executive Vice President and
Chief Financial Officer
<PAGE> 6
-6-
EXHIBIT MAINTAINED PURSUANT
TO SECTION 8.1 OF THE
SUNDSTRAND CORPORATION DEFERRED COMPENSATION PLAN
James R. Carlson
James A. Cherry
William R. Coole
Paul Donovan
DeWayne J. Fellows
Mary Ann Hynes
Robert H. Jenkins
Ronald F. McKenna
Gean B. Stalcup
Patrick L. Thomas
Neil D. Traubenberg
David K. Whitehouse
Parick J. Winn
<PAGE> 1
Exhibit (10)(cc)
THIRD AMENDMENT TO THE SUNDSTRAND CORPORATION
DEFERRED COMPENSATION PLAN
(As amended and restated effective December 19, 1997)
WHEREAS, The Sundstrand Corporation Deferred Compensation Plan (the
"Plan") was established effective as of January 1, 1995; and
WHEREAS, the Plan was amended and restated in its entirety effective
as of December 19, 1997 (which amendment and restatement superceded an earlier
amendment and restatement which was to have become effective as of December 31,
1997); and
WHEREAS, the Plan, as amended and restated effective December 19,
1997, has previously been amended on two occasions; and
WHEREAS, at the Sundstrand Corporation Board of Directors meeting of
September 22, 1998, the Board approved an amendment to the Plan (which amendment
was inappropriately referred to in the adopting resolution as the First
Amendment rather than as this Third Amendment).
NOW, THEREFORE, this Third Amendment to the Sundstrand Corporation
Deferred Compensation Plan (as amended and restated effective December 19, 1997)
reflects the changes necessary to reflect its adoption by the Sundstrand
Corporation Board of Directors at its September 22, 1998, meeting and is
effective as of September 22, 1998, as follows:
1. The first sentence of Section 7.2 of Article VII of the Plan is
amended to provide as follows:
"In or prior to the calendar year preceding the elected distribution
date, but in no event less than six (6) months 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."
2. Section 7.6 of Article VII of the Plan is amended to provide as
follows:
"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, 10% 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
<PAGE> 2
-2-
(b) if the Executive is no longer employed by the
Corporation or the Director has ceased being a member of the Board, 10%
of the amount withdrawn shall be forfeited to the Corporation.
Executed at Rockford, Illinois as of the 22nd September, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
-------------------------
Title: Paul Donovan
Executive Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit (10)(dd)
FOURTH AMENDMENT TO THE SUNDSTRAND CORPORATION
DEFERRED COMPENSATION PLAN
(As amended and restated effective December 19, 1997)
WHEREAS, The Sundstrand Corporation Deferred Compensation Plan (the
"Plan") was established effective as of January 1, 1995; and
WHEREAS, the Plan was amended and restated in its entirety effective
as of December 19, 1997 (which amendment and restatement superceded an earlier
amendment and restatement which was to have become effective as of December 31,
1997); and
WHEREAS, the Plan, as amended and restated effective December 19,
1997, has previously been amended on three occasions; and
WHEREAS, it was determined that it was appropriate to further amend
the Plan, which amendment was accomplished pursuant to a resolution adopted by
the Sundstrand Corporation Board of Directors at its meeting of December 8,
1998; and
WHEREAS, to facilitate the administration of the Plan it has been
determined that it is appropriate to set forth the changes contemplated in the
resolution adopted by the Sundstrand Corporation Board of Directors at its
December 8, 1998, meeting in a formal Plan amendment.
NOW, THEREFORE, this Fourth Amendment to the Sundstrand Corporation
Deferred Compensation Plan (as amended and restated effective December 19, 1997)
has been prepared to reflect such changes effective as of December 8, 1998, as
follows:
1. Section 7.2 of Article VII of the Plan is changed by adding a new
paragraph at the end thereof to provide as follows:
"The foregoing provisions of this Section 7.2 notwithstanding, the
Chief Executive Officer of the Company and/or the Chief Financial
Officer of the Company, in his or her sole discretion, may allow an
Executive or a Director who has made a deferral under the Plan (and
irrespective as to whether such deferral has previously been the
subject of a redeferral) the payment of which is to commence after such
Executive's retirement from the Company or such Director's retirement
from the Board of Directors of the Company, the opportunity to make a
final redeferral, provided such final redeferral is made prior to the
time the payment of such deferral would otherwise have commenced; and
provided further that any such redeferral may not extend the payment
period beyond the Executive's or Director's seventy-fifth birthday."
2. Article VIII of the Plan is amended by deleting Sections 8.1 and
8.2 and substituting in place thereof the following new Sections 8.1 and 8.2 to
provide as follows:
"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,
provided, however, that in no event may any such amendment, replacement
or termination reduce or otherwise impair any benefit provided under
this Plan with respect to amounts theretofore deferred under this Plan
by an Executive or by any Director, in either case, without such
Executive's or such Director's prior written consent. Other than to
expand coverage, the immediately preceding sentence and Section 8.2
<PAGE> 2
-2-
below may not under any circumstances be amended at any time after June
1, 1998 and any effort to change such sentence shall be null, void and
of no force or effect.
Section 8.2. Effect of Amendment, Replacement or Termination
on Prior Deferrals. Notwithstanding anything contained in this Plan to
the contrary, in no event shall any amendment, replacement or
termination of this Plan adversely impact the terms or conditions
applicable to an Executive's or Director's or, after the death of such
Executive or Director, such Executive's or Director's Beneficiary's,
continued participation in or benefits provided under this Plan with
respect to amounts deferred under this Plan as in effect immediately
prior to the date of such amendment, replacement or termination
(including without limitation, the interest theretofore accrued under
the Plan and the formula and method for accruing interest as in effect
immediately prior to the date of such amendment, replacement or
termination which was to be used for future interest accrual with
respect to amounts theretofore deferred under this Plan) without the
applicable Executive's or Director's or, after the death of such
Executive or Director, such Executive's or Director's Beneficiary's,
prior written consent. It is the purpose of the foregoing to clearly
provide that with respect to each Executive or Director who
participates in the Plan, once a deferral is made by such person under
the Plan in any Plan Year no subsequent amendment, replacement or
termination of the Plan may in any negative way affect such deferral,
either currently or with respect to any future period, including, but
not limited to, changing the method for determining the applicable
interest rate for each Plan Year, the accrual of interest on each
deferral, the method for allowing such deferral to be redeferred, and
the methods of payment of such deferral, prior to the time such
deferral and all interest theron has been paid in full, without first
obtaining the prior written consent of the person(s) entitled to
receive such deferrals and the interest thereon."
Executed at Rockford, Illinois as of the 8th day of December, 1998.
SUNDSTRAND CORPORATION
By: /s/ Paul Donovan
----------------------------
Title: Paul Donovan
Executive Vice President and
Chief Financial Officer
<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>
52
<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, and the Registration
Statement (Form S-8 No. 333-31559) pertaining to the Sundstrand Corporation
Stock Incentive Plan of our report dated January 25, 1999, except for the
footnote entitled "Subsequent Event," as to which our report is dated February
21, 1999, with respect to the consolidated financial statements of Sundstrand
Corporation included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 26, 1999
53
<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, 1998, 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 25th day of March, 1999.
SUNDSTRAND CORPORATION
By: /s/ ROBERT H. JENKINS
------------------------------------
Robert H. Jenkins
Chairman of the Board, President and
Chief Executive Officer
(CORPORATE SEAL)
ATTEST:
/s/ WILLIAM R. COOLE
- --------------------------------------
William R. Coole
Assistant Secretary
<PAGE> 2
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ ROBERT H. JENKINS Chairman of the Board, President and Chief Executive
- --------------------------------------------- Officer and Director
Robert H. Jenkins
/s/ PAUL DONOVAN Executive Vice President and Chief Financial Officer
- ---------------------------------------------
Paul Donovan
/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
Director
- ---------------------------------------------
Ilene S. Gordon
/s/ GERALD GRINSTEIN Director
- ---------------------------------------------
Gerald Grinstein
/s/ CHARLES MARSHALL Director
- ---------------------------------------------
Charles Marshall
/s/ KLAUS H. MURMANN Director
- ---------------------------------------------
Klaus H. Murmann
Director
- ---------------------------------------------
Ward Smith
Director
- ---------------------------------------------
Berger G. Wallin
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 15
<SECURITIES> 0
<RECEIVABLES> 381
<ALLOWANCES> 0
<INVENTORY> 401
<CURRENT-ASSETS> 865
<PP&E> 1,269
<DEPRECIATION> 742
<TOTAL-ASSETS> 1,807
<CURRENT-LIABILITIES> 499
<BONDS> 295
<COMMON> 38
0
0
<OTHER-SE> 507
<TOTAL-LIABILITY-AND-EQUITY> 1,807
<SALES> 2,005
<TOTAL-REVENUES> 2,005
<CGS> 1,316
<TOTAL-COSTS> 1,633
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 347
<INCOME-TAX> 121
<INCOME-CONTINUING> 226
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 226
<EPS-PRIMARY> 4.02
<EPS-DILUTED> 3.99
</TABLE>
