-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QiMyH8FOVoYPSyzn6gCpGazWftrJpd0wmi0G0Yl4Uxio7VUb3cO3lKU4gGZ6L662 TYa6iBnSs3FxOjt6KAIl/Q== 0001047469-98-010406.txt : 19980319 0001047469-98-010406.hdr.sgml : 19980319 ACCESSION NUMBER: 0001047469-98-010406 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HONEYWELL INC CENTRAL INDEX KEY: 0000048305 STANDARD INDUSTRIAL CLASSIFICATION: AUTO CONTROLS FOR REGULATING RESIDENTIAL & COMML ENVIRONMENT [3822] IRS NUMBER: 410415010 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20629 FILM NUMBER: 98568428 BUSINESS ADDRESS: STREET 1: HONEYWELL PLZ STREET 2: 2701 4TH AVE S CITY: MINNEAPOLIS STATE: MN ZIP: 55408 BUSINESS PHONE: 6129511000 MAIL ADDRESS: STREET 1: PO BOX 524 CITY: MINEAPOLIS STATE: MN ZIP: 55440-0524 FORMER COMPANY: FORMER CONFORMED NAME: MINNEAPOLIS HONEYWELL REGULATOR CO DATE OF NAME CHANGE: 19670213 10-K 1 FORM 10-K 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from.......... to.................................... Commission file number 1-971 HONEYWELL INC. (Exact name of registrant as specified in its charter) DELAWARE 41-0415010 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) HONEYWELL PLAZA, MINNEAPOLIS, MINNESOTA 55408 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 612-951-1000 Securities registered pursuant to section 12(b) of the act: Name of each exchange on which Title of each class registered - ---------------------------------- ---------------------------------- Common Stock, par value $1.50 per New York Stock Exchange share Preferred Stock Purchase Rights New York Stock Exchange 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 (Section 229.405 of this chapter) 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. [ ] Based on the closing sales price of $75.625 on February 20, 1998, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $9,515,691,983. As of February 20, 1998, the number of shares outstanding of the registrant's common stock, par value $1.50 per share, was 126,307,784 shares. DOCUMENTS INCORPORATED IN PART BY REFERENCE Incorporated Documents Location in Form 10-K - -------------------------------------------------------- --------------------- Honeywell Notice of 1998 Annual Meeting and Proxy Part III Statement - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Honeywell Inc., a Delaware corporation incorporated in 1927, is a Minneapolis-based international controls company that supplies automation and control systems, components, software, products and services for homes and buildings, industry, and space and aviation. The purpose of the company is to develop and supply advanced-technology products, systems and services that conserve energy and protect the environment, improve productivity, enhance comfort and increase safety. INDUSTRY SEGMENT INFORMATION Honeywell's businesses are classified by management into three primary industry segments: (i) Home and Building Control, (ii) Industrial Control, and (iii) Space and Aviation Control. Financial information relating to these industry segments is set forth in Part II, Item 6 at page 13. HOME AND BUILDING CONTROL Honeywell's Home and Building Control segment provides products and services intended to create efficient, safe, comfortable environments. These products and services include controls for heating, ventilation, humidification and air-conditioning equipment; security and fire alarm systems; home automation systems; energy-efficient lighting controls; building management systems and services; and home comfort consumer products. Home and Building Control manufactures, markets and installs mechanical, pneumatic, electrical and electronic control products and systems for heating, ventilation and air conditioning in homes, and commercial, industrial and public buildings. These systems, which may be generic or specifically designed for each application, may include panels and control systems to centralize mechanical and electrical functions. Home and Building Control also produces building management systems for commercial buildings, and controls for a variety of applications, including: burner and boiler, lighting, thermostatic radiators, pressure regulators for water systems, thermostats, actuators, humidistats, relays, contactors, transformers, air-quality products, and gas valves and ignition controls for homes and commercial buildings. Sales of these products are made directly to original equipment manufacturers, including manufacturers of heating and air conditioning equipment; and through wholesalers, distributors, dealers, contractors, hardware stores, home-care centers and Honeywell's nationwide sales and service organization. In addition, Home and Building Control produces standalone consumer products such as fans, heaters, humidifiers, and air and water filtration products. These products are sold through retailers such as hardware stores and home-care centers. Home and Building Control provides indoor air-quality services, and central-station burglary and fire protection services for homes and commercial buildings; video surveillance, and access control and entry management services for commercial buildings; contract maintenance services for commercial building mechanical and control systems; automated management of building operations for building complexes; and energy management and energy retrofit services. INDUSTRIAL CONTROL Honeywell's Industrial Control segment serves the automation and control needs of its worldwide industrial customers by supplying products, systems and services ranging from sensors to integrated systems designed for specific applications, to help customers improve productivity and meet increasingly stringent environmental and safety requirements. 1 Industrial Control provides process control systems, and associated application software and services to customers in a broad range of markets, including process industries such as: refining oil and gas, petrochemical, bulk and fine chemical, pulp-and-paper; as well as the electric utility, food and consumer goods, pharmaceutical, metals and transportation industries. Industrial Control has an extensive customer base worldwide, including most of the leading oil refiners, pulp and paper manufacturers and chemical companies. Industrial Control also designs and manufactures process instruments, process controllers, recorders, programmers, programmable controllers, transmitters and other field instruments, that may be sold as stand-alone products or integrated into control systems. These products are generally used in indicating, recording and automatically controlling process variables in manufacturing processes. Under the MICRO SWITCH trademark, Industrial Control manufactures solid-state sensors (including position, pressure, airflow, temperature and current sensors), sensor interface devices, manual controls, explosion-proof switches and precision snap-acting switches, photoelectric and mercury switches, and lighted/unlighted pushbuttons. These products are used in industrial, commercial and business equipment, and in consumer, medical, automotive, aerospace and computer applications. Other Industrial Control products include optoelectronic devices, and fiber-optic systems and components, as well as microcircuits, sensors, transducers, and high-accuracy noncontact measurement and detection products for factory automation, quality inspection and robotics applications. Industrial Control also furnishes industrial customers with: product and component testing services; project management, engineering and installation services; instrument maintenance, repair and calibration services; various contract services for industrial control equipment, including third-party maintenance for CAD/CAM and other industrial control equipment; advanced control, networking and optimization services; as well as training, customized products for customer applications and a range of other customer support services. Industrial Control services are generally sold directly to users on a monthly or annual contract basis. Products are customarily sold on a delivered, supervised or installed basis directly to end users, equipment manufacturers and contractors, or through third-party channels such as distributors and systems houses. SPACE AND AVIATION CONTROL Honeywell's Space and Aviation Control segment supplies a full-line of avionics for the commercial, military and space markets. The company designs, manufactures, services and markets a variety of sophisticated electronic control systems and components for commercial and business aircraft, military aircraft and spacecraft. Products manufactured for aircraft use include: integrated avionics systems, ring laser gyro-based inertial flight reference systems, navigation and guidance systems, flight control systems, flight management systems, severe weather avoidance systems, inertial sensors, air data computers, radar altimeters, automatic test equipment, cockpit display systems, and other communication and flight instrumentation. Space and Aviation Control products and services have been involved in every major U.S. space mission since the mid-1960s. These products and services include guidance systems for launch and re-entry vehicles, flight and engine control systems for manned spacecraft, precision components for strategic missiles, surveillance and warning systems, and on-board data processing. Other products include spacecraft attitude and positioning systems, and precision pointing and isolation systems. 2 Space and Aviation Control's avionics have been purchased by leading airframe manufacturers for use in aircraft throughout the world, including: the Boeing 777, the McDonnell Douglas MD-11 and MD 90, the GulfStream IV and V, the Cessna Citation X, the Bombardier Global Express; and by international, national and regional airlines. In the military and space markets, where customers include NASA, prime U.S. defense contractors and the U.S. Department of Defense, Space and Aviation Control solutions are found on key platforms, including the F-15 and the F-16 military jets, and Space Station Alpha. Space and Aviation Control products are sold through an integrated international marketing organization, with customer service centers providing international service for commercial and business aviation users. OTHER PRODUCTS In addition to the three segments described above, Honeywell has two research and development operations that promote technology and products to both external customers and operating units. The Honeywell Technology Center provides systems analysis, and applied research and development on systems and products, including, application software, sensors and advanced electronics. Solid State Electronics Center, a semiconductor facility in Minnesota, designs and manufactures integrated circuits and sensors for Honeywell, government customers and selected external customers. Honeywell, through its operations in Germany, develops, markets and sells to European countries, among other things, military avionics, and electro-optic devices for flight control and nautical systems, including sonar transducers and echo sounders. GENERAL INFORMATION RAW MATERIALS Honeywell experienced no significant or unusual problems in the purchase of raw materials and commodities in 1997. Although it is impossible to predict what effects shortages or price increases may have in the future, at present management has no reason to believe a shortage of raw materials will cause any material adverse impact during 1998. PATENTS, TRADEMARKS, LICENSES AND DISTRIBUTION RIGHTS Honeywell owns, or is licensed under, a large number of patents, patent applications and trademarks acquired over a period of many years, which relate to many of its products or improvements thereon and are of importance to its business. From time to time, new patents and trademarks are obtained, and patent and trademark licenses and rights are acquired from others. In addition, Honeywell has distribution rights of varying terms in a number of products and services produced by other companies. In the judgment of management, such rights are adequate for the conduct of the business being done by Honeywell. See Item 3 at page 8 for information concerning litigation relating to patents in which Honeywell is involved. SEASONALITY Although Honeywell's core businesses are not seasonal in the traditional sense, revenues and earnings have tended to concentrate to some degree in the fourth quarter of each calendar year, reflecting the tendency of customers to increase ordering and spending for capital goods late in the year. 3 MAJOR CUSTOMER Honeywell provides products and services to the United States government as a prime contractor or subcontractor, the majority of which are described under the heading "Space and Aviation Control" on page 2. Such business is significant because of its volume and its contribution to Honeywell's technical capabilities, but Honeywell's dependence upon individual programs is minimized by the large variety of products and services it provides. Contracts and subcontracts for all of such sales are subject to standard provisions permitting the government to terminate for convenience or default. BACKLOG The total dollar amount of backlog of Honeywell's orders believed to be firm was approximately $4,244 million at December 31, 1997, and $3,919 million at December 31, 1996. All but approximately $902 million of the 1997 backlog is expected to be delivered within the current fiscal year. Backlog is not a reliable indicator of Honeywell's future revenues because a substantial portion of backlog represents the value of orders that can be canceled at the customer's option. COMPETITION Honeywell is subject to active competition in substantially all product and service areas. Competitors generally are engaged in business on a national or an international scale. Honeywell is the largest producer of control systems and products used to regulate and control heating and air conditioning in commercial buildings, and of systems to control industrial processes worldwide. Honeywell is also a leading supplier of commercial aviation, space and avionics systems. Honeywell's automation and control businesses compete worldwide, supported by a strong distribution network with manufacturing and/or marketing capabilities, for at least a portion of these businesses, in 95 countries. Competitive conditions vary widely among the thousands of products and services provided by Honeywell, and vary as well from country to country. Markets, customers and competitors are becoming more international in their outlook. In those areas of environmental and industrial components and controls where sales are primarily to equipment manufacturers, price/performance is probably the most significant competitive factor, but customer service and applied technology are also important. Competition is increasingly being applied to government procurements to improve price and product performance. In service businesses, quality, reliability and promptness of service are the most important competitive factors. Service must be offered from many areas because of the localized nature of such businesses. In engineering, construction, consulting and research activities, technological capability and a record of proven reliability are generally the principal competitive factors. Although in a small number of highly specialized products and services Honeywell may have relatively few significant competitors, in most markets there are many competitors. RESEARCH AND DEVELOPMENT During 1997, Honeywell spent approximately $769.1 million on research and development activities, including $322.5 million in customer-funded research relating to the development of new products or services, or the improvement of existing products or services. Honeywell spent $694.7 million in 1996 and $659.8 million in 1995, on research and development activities, including $341.4 million and $336.6 million, respectively, in customer-funded research. ENVIRONMENTAL PROTECTION Compliance with current federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and in the opinion of management will not have, a material effect on Honeywell's financial position, net 4 income, capital expenditures or competitive position. See Item 7 at page 16 for further information concerning environmental matters. EMPLOYEES Honeywell employed approximately 57,500 persons in total operations as of December 31, 1997. GEOGRAPHIC AREAS Honeywell engages in material operations in foreign countries. A large majority of Honeywell's foreign business is in Western Europe, Canada and the Asian Pacific Rim. Although there are risks attendant to foreign operations, such as potential nationalization of facilities, currency fluctuation and restrictions on movement of funds, Honeywell has taken action to mitigate such risks. Financial information related to geographic areas is included in Note 19 to the financial statements in Part II, Item 8 at page 48. 5 EXECUTIVE OFFICERS OF THE REGISTRANT
POSITION HELD AGE AT NAME OFFICE SINCE 3/1/98 - --------------------------- ---------------------------------------------------------------- ------------- ----------- M. R. Bonsignore (1) Chairman of the Board and Chief Executive Officer 1993 56 G. Ferrari (2) President and Chief Operating Officer 1997 58 J. K. Gilligan (3) President, Solutions and Services Business, Home and Building 1997 43 Control E. D. Grayson (4) Vice President and General Counsel 1992 59 W. M. Hjerpe (5) President, Honeywell Europe 1997 46 P. M. Palazzari (6) Vice President and Controller 1994 50 J. T. Porter (7) Vice President and Chief Administrative Officer 1996 46 D. K. Schwanz (8) President, Space and Aviation Control 1997 53 L. W. Stranghoener (9) Vice President and Chief Financial Officer 1997 43 M. I. Tambakeras (10) President, Industrial Control 1997 46 A. Weiss (11) President, Products Business, Home and Building Control 1997 46
Officers are elected by the Board of Directors to terms of one year and until their successors are elected and qualified. - ------------------------ (1) Mr. Bonsignore was elected to this position effective April 20, 1993. (2) Mr. Ferrari was elected to this position effective April 15, 1997. From January 1992 to March 1997, he was President, Honeywell Europe S.A. (3) Mr. Gilligan was elected to this position effective September 16, 1997. From May 1994 to September 1997, he was Vice President and General Manager of Honeywell Home and Building Control's North American Region. From October 1992 to May 1994, he was Vice President of the Building Control business in Europe. (4) Mr. Grayson was elected to this position effective April 1, 1992. (5) Mr. Hjerpe was elected to this position effective March 1, 1997. From October 1994 to January 1997, he was Vice President and Chief Financial Officer of the company. From February 1992 to October 1994, he was Vice President and Controller of the company. (6) Mr. Palazzari was elected to this position effective October 16, 1994. From May 1993 to October 1994, he was Vice President, Finance, Home and Building Control. (7) Mr. Porter was elected to this position effective January 1, 1998. From May 1993 to December 1997, he was Corporate Vice President, Human Resources. (8) Mr. Schwanz was elected to this position effective January 1, 1997. From September 1993 to December 1996, he was Vice President and General Manager of Space and Aviation Control's Air Transport Systems division. From March 1992 to August 1993, he was Vice President of Marketing for Air Transport Systems. (9) Mr. Stranghoener was elected to this position effective February 1, 1997. From March 1996 to January 1997, he was Vice President, Business Development. From July 1993 to February 1996, he was Vice President, Finance, Industrial Automation and Control. From April 1992 to June 1993, he was Director, Corporate Financial Planning and Business Analysis. 6 (10) Mr. Tambakeras was elected to this position effective February 1, 1997. From February 1995 to January 1997, he was President, Industrial Automation and Control. From January 1992 to February 1995, he was President, Honeywell Asia Pacific. (11) Mr. Weiss was elected to this position effective September 16, 1997. From January 1991 to September 1997, he was Vice President, Home and Building Control Europe. ITEM 2. PROPERTIES Honeywell and its subsidiaries operate facilities worldwide comprising approximately 18,716,800 square feet of space for use as manufacturing, office and warehouse space, of which approximately 10,644,950 square feet is owned and approximately 8,071,850 square feet is leased. In the judgment of management, the facilities used by Honeywell are adequate and suitable for the purposes they serve. Facilities allocated for corporate use in the United States, including sales offices, comprise approximately 1,391,500 square feet of space, of which approximately 1,342,000 square feet is owned and approximately 49,500 square feet is leased. These figures include Honeywell's principal executive offices in Minneapolis, Minnesota which comprise approximately 957,400 square feet, all of which is owned. A summary of properties held by each segment of Honeywell is set forth below, showing major plants, their location, size and type of holding. The descriptions include approximately 714,500 square feet of space owned or leased by Honeywell's operations in the United States that has been leased or subleased to third parties. In addition, approximately 3,632,000 square feet of previously leased space in the United States is under assignment to third parties (including 2,009,800 square feet, 435,000 square feet and 60,800 square feet which is assigned to Alliant Techsystems Inc., Federal Systems Inc. and Bull HN Information Systems, Inc., respectively, all of which were formerly affiliates of the company). HOME AND BUILDING CONTROL Home and Building Control occupies approximately 3,197,400 square feet of space for operations in the United States, of which approximately 1,396,300 square feet is owned and approximately 1,801,100 square feet is leased. Outside the United States, Home and Building Control operations occupy approximately 3,372,600 square feet, of which approximately 1,029,350 square feet is owned and approximately 2,343,250 square feet is leased. Principal facilities operated outside the United States are located in Canada, China, Germany, The Netherlands, the United Kingdom and Australia. Facilities in the United States comprising 300,000 square feet or more are listed below.
APPROXIMATE OWNED OR LOCATION MAJOR USE OF FACILITY SQUARE FEET LEASED - ------------------------ ------------------------------------ ------------ --------- Golden Valley, Minn. Manufacturing 1,185,300 Owned Memphis, Tenn. Warehouse/Distribution Center 500,000 Leased
INDUSTRIAL CONTROL Industrial Control occupies approximately 3,422,800 square feet of space for operations in the United States, of which approximately 2,640,300 square feet is owned and approximately 782,500 square feet is leased. Outside the United States, Industrial Control operations occupy approximately 2,806,650 square feet, of which approximately 1,018,700 square feet is owned and approximately 1,787,950 square feet 7 is leased. Principal facilities operated outside the United States are located in the United Kingdom, Australia, Canada, Switzerland, France, Germany, Belgium and The Netherlands. Facilities in the United States comprising 300,000 square feet or more are listed below.
MAJOR USE OF APPROXIMATE OWNED OR LOCATION FACILITY SQUARE FEET LEASED - ----------------- ------------------ ------------ --------- Cupertino, Ca. Office 360,000 Owned Freeport, Ill. Manufacturing 365,000 Owned Freeport, Ill. Office 316,000 Owned Phoenix, Az. Manufacturing 550,000 Owned
SPACE AND AVIATION CONTROL Space and Aviation Control occupies approximately 4,419,800 square feet of space for operations in the United States, of which approximately 3,179,300 square feet is owned and approximately 1,240,500 square feet is leased. Outside the United States, Space and Aviation Control operations occupy approximately 106,050 square feet, of which approximately 39,000 square feet is owned and approximately 67,050 square feet is leased. Principal facilities operated outside the United States are located in Canada, the United Kingdom, France and Germany. Facilities in the United States comprising 300,000 square feet or more are listed below.
MAJOR USE OF APPROXIMATE OWNED OR LOCATION FACILITY SQUARE FEET LEASED - ----------------------- ------------------ ------------ --------- Albuquerque, N.M. Manufacturing 526,600 Owned Clearwater, Fla. Manufacturing 914,800 Owned Minneapolis, Minn. Manufacturing 550,000 Owned Phoenix, Ariz. Manufacturing 939,000 Owned St. Petersburg, Fla. Manufacturing 304,000 Leased
ITEM 3. LEGAL PROCEEDINGS On March 13, 1990, Litton Systems, Inc. filed a legal action against Honeywell in U.S. District Court, Central District of California, Los Angeles, (the "trial court") with claims that were subsequently split into two separate cases. One alleges patent infringement under federal law for using an ion-beam process to coat mirrors incorporated in Honeywell's ring laser gyroscopes, and tortious interference under state law for interfering with Litton's prospective advantage with customers and contractual relationships with an inventor and his company, Ojai Research, Inc. The other case alleges monopolization and attempted monopolization under federal antitrust laws by Honeywell in the sale of inertial reference systems containing ring laser gyroscopes into the commercial aircraft market. Honeywell generally denied Litton's allegations in both cases. In the patent/tort case, Honeywell also contested the validity as well as the infringement of the patent, alleging, among other things, that the patent had been obtained by Litton's inequitable conduct before the United States Patent and Trademark Office. PATENT/TORT CASE U.S. District Court Judge Mariana Pfaelzer presided over the patent infringement and tortious interference trial and on August 31, 1993, a jury returned a verdict in favor of Litton, awarding damages against Honeywell in the amount of $1.2 billion. Honeywell filed post-trial motions contesting the verdict and damage award. On January 9, 1995, the trial court set them aside, ruling, among other things, that the Litton patent was invalid due to obviousness, unenforceable because of Litton's inequitable conduct before the Patent and Trademark Office, and in any case, not infringed 8 by Honeywell's current process. It further ruled that the state tort claims were not supported by sufficient evidence. The trial court also held that if its rulings concerning liability were vacated or reversed on appeal, Honeywell should be granted a new trial on the issue of damages because the jury's award was inconsistent with the clear weight of the evidence and based upon a speculative damage study. Litton appealed to the U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit"), and on July 3, 1996, in a two to one split decision, a three judge panel of that court reversed the trial court's rulings of patent invalidity, unenforceability and non-infringement, and also found Honeywell to have violated California law by intentionally interfering with Litton's consultant contracts and customer prospects. However, the panel upheld two trial court rulings favorable to Honeywell, namely that Honeywell was entitled to a new trial for damages on all claims and also to a grant of intervening patent rights which are to be defined and quantified by the trial court. After unsuccessfully requesting an "en banc" rehearing of the panel's decision by the full Federal Circuit appellate court, Honeywell filed a petition for "certiorari" with the U.S. Supreme Court on November 26, 1996, seeking review of the panel's decision. In the interim, Litton filed a motion and briefs with the trial court seeking injunctive relief. After Honeywell and certain aircraft manufacturers filed briefs and made oral arguments opposing the injunction, the trial court denied Litton's motion on public interest grounds on December 23, 1996, and then scheduled the patent/tort damages retrial for May 6, 1997. On March 17, 1997, the U.S. Supreme Court granted Honeywell's petition for review in the patent/tort case and vacated the July 3, 1996 Federal Circuit panel decision. The case was then remanded to the Federal Circuit panel for reconsideration in light of a recent decision by the U.S. Supreme Court in the WARNER-JENKINSON V. HILTON DAVIS case, which refined the law concerning patent infringement under the doctrine of equivalents. On March 21, 1997, Litton also filed a notice of appeal to the Federal Circuit of the trial court's December 23, 1996 decision to deny injunctive relief, but the Federal Circuit stayed any briefing or consideration of that matter until such time as it completes the reconsideration of liability issues ordered by the U.S. Supreme Court. Following the submission of briefs, the parties argued the liability issues before the same three judge Federal Circuit panel on September 30, 1997, and that panel has not indicated when it will issue a decision. The panel could rule, in whole or in part, for Honeywell or in favor of Litton, and any such ruling could be subject to further appeal by either party. The damages only retrial for the patent and tort claims, originally scheduled to commence in May 1997, was postponed indefinitely pending the decision of the Federal Circuit on liability. Before that postponement occurred Litton had submitted a revised damage study to the trial court, seeking damages as high as $1.9 billion. Honeywell believes that Litton's damage study remains flawed and speculative for a number of reasons, and depending upon the outcome of the appeal concerning liability, it may be necessary for Litton to further revise its study. It is not possible at this time to predict the outcome of appeals in this case, or the verdict in any retrial which may occur thereafter, but certain potential judgments could be material to Honeywell. Honeywell believes, however, that any award of damages for infringement or interference should be based upon a reasonable royalty reflecting the value of the ion-beam coating process, and further that such an award would not be material to Honeywell's financial position or results of operations. No provision has been made in the financial statements with respect to this contingent liability. ANTITRUST CASE Preparations for, and conduct of, the antitrust case have generally followed the completion of comparable proceedings in the patent/tort case. Trial did not begin in the antitrust case until November 20, 1995. Judge Pfaelzer also presided over this trial, but it was held before a different jury. At the close of evidence and before jury deliberations began, the trial court dismissed, for failure of proof, 9 Litton's contentions that Honeywell had illegally monopolized and attempted to monopolize by engaging in below-cost predatory pricing; tying and bundling product offerings under packaged pricing; misrepresenting its products and disparaging Litton products; and acquiring the Sperry Avionics business in 1986. On February 2, 1996, the case was submitted to the jury on the remaining allegations that Honeywell had illegally monopolized and attempted to monopolize by entering into certain long-term exclusive dealing and penalty arrangements with aircraft manufacturers and airlines to exclude Litton from the commercial aircraft market, and by failing to provide Litton with access to proprietary software used in the cockpits of certain business jets. On February 29, 1996, the jury returned a $234 million single damages verdict against Honeywell for illegal monopolization which verdict would have been automatically trebled. On March 1, 1996, the jury indicated that it was unable to reach a verdict on damages for attempted monopolization, and a mistrial was declared as to that claim. Honeywell subsequently filed a motion for judgment as a matter of law and a motion for a new trial, contending, among other things, that the jury's partial verdict should be overturned because Honeywell was prejudiced at trial, and Litton failed to prove essential elements of liability or submit competent evidence to support its speculative, all-or-nothing $298.5 million damage claim. Litton filed a motion for entry of judgment and a motion for injunctive relief. On July 24, 1996, the trial court denied Honeywell's alternative motions for judgment as a matter of law or a complete new trial, but concluded that Litton's damage study was seriously flawed and granted Honeywell a retrial on damages only. The court also denied Litton's two motions. At that time, Judge Pfaelzer was expected to conduct the retrial of antitrust damages sometime following the retrial of patent/tort damages. These retrials will be held before two new, and different, juries. However, after the U.S. Supreme Court remanded the patent/tort case to the Federal Circuit in March 1997, Litton moved to have the trial court expeditiously schedule the antitrust damages retrial. In September 1997, the trial court rejected that motion, indicating that it wished to know the outcome of the current patent/tort appeal before scheduling retrials of any type. Honeywell believes there are questions concerning the identity and nature of the business arrangements and conduct which were found by the antitrust jury in 1996 to be anti-competitive and damaging to Litton, and that consequently any damages retrial will also require a reappraisal of liability in some respects by the next antitrust jury. Following this retrial, Honeywell will have the right to appeal the eventual judgment, as to both liability and damages, to the U.S. Court of Appeals for the Ninth Circuit. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability. Honeywell further believes that it would be inappropriate for Litton to obtain recovery of the same damages, e.g. losses it suffered due to Honeywell's sales of ring laser gyroscope-based inertial systems to OEMs and airline customers, under multiple legal theories and claims, and that eventually no duplicative recovery will be permitted in and among the patent/tort and antitrust cases. In the fall of 1996, Litton and Honeywell commenced a court ordered mediation of the patent, tort and antitrust claims. No claim was resolved or settled, and the mediation is currently in recess. Honeywell is a party to other various claims, legal and governmental proceedings, including claims relating to previously reported environmental matters. It is the opinion of management that any losses in connection with these matters and the resolution of the environmental claims will not have a material effect on net income, financial position or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1997. 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS The principal U.S. market for Honeywell's common stock is the New York Stock Exchange. Dividends are paid by Honeywell on its common stock on a quarterly basis. The high and low sales prices for Honeywell's common stock, within the two most recent fiscal years, as reported by the consolidated transaction reporting system, as well as quarterly dividends paid by Honeywell during such period, are as follows:
COMMON STOCK PRICE (NEW YORK STOCK EXCHANGE COMPOSITE) ----------------------- DIVIDENDS HIGH LOW PER SHARE --------- ---------- ----------- 1997 First Quarter...................... $ 76 5/8 $ 63 7/8 $ .27 Second Quarter..................... 78 3/4 65 1/2 .27 Third Quarter...................... 80 3/8 66 7/16 .27 Fourth Quarter..................... 76 3/16 64 15/16 .28 1996 First Quarter...................... $ 57 1/2 $ 44 3/8 $ .26 Second Quarter..................... 56 5/8 49 3/8 .26 Third Quarter...................... 65 7/8 48 1/4 .27 Fourth Quarter..................... 69 7/8 59 7/8 .27
Information regarding Honeywell's share repurchase plans is set forth in Part II, Item 7 at page 23. Shareowners of record on February 20, 1998 totaled 30,850, excluding individual participants in security position listings. 11 ITEM 6. SELECTED FINANCIAL DATA HONEYWELL INC. AND SUBSIDIARIES (DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- -------- Results of Operations Sales................................................ $8,027.5 $7,311.6 $6,731.3 $6,057.0 $5,963.0 $6,222.6 Sales growth rate.................................. 9.8% 8.6% 11.1% 1.6% (4.2)% 0.5% -------- -------- -------- -------- -------- -------- Cost of sales........................................ 5,425.1 4,975.4 4,584.2 4,082.1 4,019.6 4,195.3 Research and development............................. 446.6 353.3 323.2 319.0 337.4 312.6 Selling, general and administrative.................. 1,359.4 1,313.1 1,263.1 1,173.8 1,075.7 1,196.8 Litigation settlements (1)........................... (32.6) (287.9) Special charges...................................... 90.7 62.7 51.2 128.4 Interest -- net...................................... 92.5 72.9 68.9 60.2 51.0 58.5 Gain on sale of businesses........................... (77.1) Equity income........................................ (12.9) (13.3) (13.6) (10.5) (17.8) (15.8) -------- -------- -------- -------- -------- -------- 7,324.3 6,701.4 6,225.8 5,687.3 5,484.5 5,587.9 -------- -------- -------- -------- -------- -------- Income from continuing operations before income taxes............................................... 703.2 610.2 505.5 369.7 478.5 634.7 Provision for income taxes (2)....................... 232.2 207.5 171.9 90.8 156.3 234.8 -------- -------- -------- -------- -------- -------- Income from continuing operations.................... 471.0 402.7 333.6 278.9 322.2 399.9 Extraordinary item (3)............................... (8.6) Cumulative effect of accounting changes (4).......... (144.5) -------- -------- -------- -------- -------- -------- Net income........................................... $ 471.0 $ 402.7 $ 333.6 $ 278.9 $ 322.2 $ 246.8 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income growth rate............................. 17.0% 20.7% 19.6% (13.4)% 30.6% (25.5)% Basic Earnings Per Common Share Continuing operations................................ $ 3.71 $ 3.18 $ 2.62 $ 2.15 $ 2.40 $ 2.88 Extraordinary item (3)............................... (0.06) Cumulative effect of accounting changes (4).......... (1.04) -------- -------- -------- -------- -------- -------- Net income........................................... $ 3.71 $ 3.18 $ 2.62 $ 2.15 $ 2.40 $ 1.78 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Basic earnings per share growth rate............... 16.7% 21.4% 21.9% (10.4)% 34.8% (24.3)% Diluted Earnings Per Common Share.................... $ 3.65 $ 3.11 $ 2.58 $ 2.15 $ 2.38 $ 1.76 Diluted earnings per share growth rate............. 17.4% 20.5% 20.0% (9.7)% 35.2% (24.1)% Cash Dividends Per Common Share...................... $ 1.09 $ 1.06 $ 1.01 $ 0.97 $ 0.91 $ 0.84 Dividend growth rate............................... 2.8% 5.0% 4.1% 6.6% 8.3% 9.1% Financial Position Current assets....................................... $3,258.2 $2,981.2 $2,766.9 $2,649.4 $2,550.2 $2,707.8 Current liabilities.................................. $2,318.9 $2,066.9 $2,022.5 $2,071.8 $1,856.1 $1,969.2 -------- -------- -------- -------- -------- -------- Working capital...................................... $ 939.3 $ 914.3 $ 744.4 $ 577.6 $ 694.1 $ 738.6 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Current ratio........................................ 1.4 1.4 1.4 1.3 1.4 1.4 Short-term debt...................................... $ 146.4 $ 252.4 $ 312.4 $ 360.6 $ 187.9 $ 188.4 Long-term debt....................................... $1,176.8 $ 715.3 $ 481.0 $ 501.5 $ 504.0 $ 512.1 -------- -------- -------- -------- -------- -------- Total debt........................................... $1,323.2 $ 967.7 $ 793.4 $ 862.1 $ 691.9 $ 700.5 Shareowners' equity.................................. $2,389.2 $2,204.9 $2,040.1 $1,854.7 $1,773.0 $1,790.4 -------- -------- -------- -------- -------- -------- Capitalization....................................... $3,712.4 $3,172.6 $2,833.5 $2,716.8 $2,464.9 $2,490.9 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
- ------------------------------ (1) In 1993, the settlement of the lawsuits against Unisys Corporation and other parties in connection with Honeywell's 1986 purchase of the Sperry Aerospace Group resulted in a gain of $22.4. Litigation settlements in 1993 and 1992 in the amounts of $10.2 and $287.9, respectively, are one-time settlements, after associated expenses, reached with various camera manufacturers for their use of Honeywell's patented automatic focus camera technology. (2) Financial Accounting Standard No. 96, "Accounting for Income Taxes," was adopted in 1988 and had the effect of increasing the Provision for Taxes and the net loss by approximately $20.0 (0.12 per share). (3) Extraordinary item resulting from the loss on early redemption of debt. (4) The cumulative effect of accounting changes is the result of adopting Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which reduced net income by $151.3 ($1.09 per share); SFAS No. 109, "Accounting for Income Taxes," which increased net income by $31.4 ($0.23 per share); and SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which reduced net income by $24.6 ($0.18 per share). 12 HONEYWELL INC. AND SUBSIDIARIES (DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- --------- Sales Home and Building Control....................... $ 3,386.6 $ 3,327.1 $ 3,034.7 $ 2,664.5 $ 2,424.3 $ 2,393.6 Industrial Control.............................. 2,547.1 2,199.6 2,035.9 1,835.3 1,691.5 1,743.9 Space and Aviation Control...................... 1,956.9 1,640.0 1,527.4 1,432.0 1,674.9 1,933.1 Other........................................... 136.9 144.9 133.3 125.2 172.3 152.0 --------- --------- --------- --------- --------- --------- Total sales..................................... $ 8,027.5 $ 7,311.6 $ 6,731.3 $ 6,057.0 $ 5,963.0 $ 6,222.6 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating Profit (1)(2)(3) Home and Building Control....................... $ 290.2 $ 345.8 $ 308.6 $ 236.5 $ 232.7 $ 193.4 Industrial Control.............................. 309.2 254.9 233.8 206.6 189.7 156.9 Space and Aviation Control...................... 255.7 163.3 127.6 80.9 148.1 175.8 Other........................................... 18.8 6.2 2.8 (1.8) (9.5) --------- --------- --------- --------- --------- --------- Total operating profit.......................... 873.9 770.2 672.8 524.0 568.7 516.6 Operating profit as a percent of sales.......... 10.9% 10.5% 10.0% 8.7% 9.5% 8.3% Interest expense................................ (101.9) (81.4) (83.3) (75.5) (68.0) (89.9) Litigation settlements.......................... 32.6 287.9 Equity income................................... 12.9 13.3 13.6 10.5 17.8 15.8 General corporate expense....................... (81.7) (91.9) (97.6) (89.3) (72.6) (95.7) --------- --------- --------- --------- --------- --------- Income before income taxes...................... $ 703.2 $ 610.2 $ 505.5 $ 369.7 $ 478.5 $ 634.7 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Assets Home and Building Control....................... $ 2,179.4 $ 2,144.3 $ 1,727.2 $ 1,529.8 $ 1,327.3 $ 1,302.4 Industrial Control.............................. 2,047.2 1,376.1 1,307.2 1,273.3 1,059.8 1,057.5 Space and Aviation Control...................... 1,065.6 1,037.3 971.1 1,174.9 1,219.6 1,403.6 Corporate and Other............................. 1,119.2 935.6 1,054.7 907.9 991.4 1,106.6 --------- --------- --------- --------- --------- --------- Total assets.................................... $ 6,411.4 $ 5,493.3 $ 5,060.2 $ 4,885.9 $ 4,598.1 $ 4,870.1 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Additional information Average number of common shares outstanding..... 127.1 126.6 127.1 129.4 134.2 138.5 Return on average shareowners' equity........... 20.8% 19.7% 17.1% 15.6% 18.4% 13.8% Shareowners' equity per average common share.... $ 18.80 $ 17.44 $ 16.09 $ 14.57 $ 13.48 $ 13.10 Price/Earnings ratio (4)........................ 18.5 20.7 18.6 14.7 14.3 11.5 Percent of debt to total capitalization......... 36% 31% 28% 32% 28% 28% Research and development Honeywell-funded.............................. $ 446.6 $ 353.3 $ 323.2 $ 319.0 $ 337.4 $ 312.6 Customer-funded............................... $ 322.5 $ 341.4 $ 336.6 $ 340.5 $ 404.8 $ 390.5 Capital expenditures............................ $ 298.3 $ 296.5 $ 238.1 $ 262.4 $ 232.1 $ 244.1 Depreciation and amortization................... $ 319.6 $ 287.5 $ 292.9 $ 287.4 $ 284.9 $ 292.7 Employees at year-end........................... 57,500 53,000 50,100 50,800 52,300 55,400
- -------------------------- (1) Operating profit in 1997 includes $77.1 gain on sale of businesses as follows: Home and Building Control, $5.7 and Industrial Control, $71.4. (2) Operating profit is net of special charges amounting to $90.7, $62.7, $51.2 and $128.4 in 1997, 1994, 1993 and 1992, respectively, as follows: Home and Building Control, $46.9, $28.7, $9.9 and $42.7; Industrial Control, $40.8, $14.4, $9.0 and $38.6; Space and Aviation Control, $0.0, $19.6, $7.4 and $34.9; Other, $3.0, $0.0, $16.4 and $2.6; and General Corporate Expense, $0.0, $0.0, $8.5 and $9.6. (3) Operating profit is net of the additional operating expense impact of adopting SFAS 106 and SFAS 112 amounting to $16.4 and $3.8, respectively, in 1992 as follows: Home and Building Control, $4.3 and $1.0; Industrial Control, $4.0 and $0.9; Space and Aviation Control, $7.0 and $1.6; Other, $0.5 and $0.1; and General Corporate Expense, $0.6 and $0.2. (4) Price/Earnings ratio calculated using earnings from continuing operations. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATIONS SALES Honeywell's sales increased 10 percent to $8.028 billion in 1997, compared with $7.312 billion in 1996 and $6.731 billion in 1995. The 1997 sales growth was negatively affected by three percent due to the strengthening of the U.S. dollar relative to the currencies in countries where Honeywell does business. Sales in the United States of $4.844 billion were up eight percent, primarily as a result of increased volume in Space and Aviation Control and Industrial Control. International sales of $3.184 billion increased 19 percent in local currency terms, and 12 percent after consideration of the stronger dollar. U.S. export sales, including exports to foreign affiliates, were $1.165 billion in 1997, compared with $973 million in 1996 and $839 million in 1995. In 1997, the deterioration of some Asian economies had a minimal effect on the results of operations. We expect that a continued Asian economic decline would reduce the demand for U.S. exports in 1998 resulting in lower growth rates in Southeast Asia. At this time, the impact of a decline is not quantifiable, but the effect on sales is not anticipated to be material. COST OF SALES Cost of sales was $5.425 billion in 1997, or 67.6 percent of sales, compared with $4.975 billion (68.0 percent) in 1996 and $4.584 billion (68.1 percent) in 1995. In 1997, cost as a percentage of sales decreased due to a mix of higher margin products, primarily in the Space and Aviation business. Cost as a percentage of sales decreased slightly in 1996 compared to 1995 due to improved gross-margins in the commercial Space and Aviation business. RESEARCH AND DEVELOPMENT Honeywell spent $447 million, or 5.6 percent of sales, on research and development in 1997, compared with $353 million (4.8 percent) in 1996 and $323 million (4.8 percent) in 1995. The additional spending in 1997 was a result of increased investment in Industrial Control and Space and Aviation Control as we continue to invest in our market leading technology platforms. Honeywell expects to maintain or slightly decrease its current rate of R&D spending in 1998. Honeywell also received $323 million in funds for customer-funded research and development in 1997, compared with $341 million in 1996 and $337 million in 1995. OTHER EXPENSES AND INCOME Selling, general and administrative expenses were $1.359 billion, or 16.9 percent of sales in 1997, compared with $1.313 billion (18.0 percent) in 1996 and $1.263 billion (18.8 percent) in 1995. Selling, general and administrative expenses have declined almost 200 basis points since 1995 as a result of the continued emphasis on improving processes, automation and productivity. Net interest expense was $93 million in 1997, $73 million in 1996 and $69 million in 1995. Interest expense was 7.8 percent of average debt in 1997, compared with 8.3 and 9.5 percent in 1996 and 1995, respectively. Net interest expense decreased as a percent of average debt in 1997 largely due to lower interest rates on the $550 million of note issuances and Honeywell's practice of managing interest rates through its swap portfolio. Information concerning Honeywell's exposure to, and management of, interest rate risk through the use of derivative financial instruments is provided on page 24 and in Notes 6, 14 and 15 to Financial Statements on pages 37, 40 and 42, respectively. 14 Earnings of companies owned 20 percent to 50 percent (primarily Yamatake-Honeywell Co., Ltd.), which are accounted for using the equity method, were $13 million in 1997, $13 million in 1996 and $14 million in 1995. SPECIAL CHARGES In the second half of 1997, Honeywell's management, with the approval of the Board of Directors, committed itself to a plan of action and recorded special charges of $90.7 million intended to reduce operating costs and improve margins. The actions to be undertaken include productivity initiatives and the rationalization of the Honeywell and Measurex product lines. The special charges were recorded by the Home and Building Control business segment ($46.9 million) to maintain competitiveness in a rapidly changing marketplace and the Industrial Control business segment ($40.8 million) to rationalize product lines, R&D facilities, and the work force to streamline the Industrial Automation and Control business after the Measurex integration. An additional $3.0 million of special charges were recorded by an operation included in the Other operating segment. Special charges include costs for work force reductions, worldwide facilities consolidations, organizational changes, and other cost accruals. The work force reduction costs of $74.2 million primarily include severance costs related to involuntary termination programs instituted to improve efficiency and reduce costs. Approximately 1,600 employees have been or will be terminated. Facility consolidation costs amounting to $8.3 million are primarily associated with the closing of facilities in California and Germany, and other cost accruals total $8.2 million. For more information on the special charges, see Note 3 to the Financial Statements on page 35. SALE OF BUSINESSES In September, Honeywell sold the net assets of Industrial Control's solenoid valve business for approximately $102 million, resulting in a gain of $64.3 million. While this business, with its major facilities in Connecticut and Switzerland, made contributions to Honeywell's success over the years, it was not closely aligned with the future strategies and ambitions for the core business. In the fourth quarter of 1997, Honeywell also sold the control valve business of the Industrial Control business segment and a small security monitoring business related to Home and Building Control for approximately $24 million of cash and receivables and a gain of $12.8 million. INCOME TAXES The provision for income taxes was $232 million in 1997 or 33 percent, compared with $208 million in 1996 (34 percent) and $172 million in 1995 (34 percent). The 1997 effective income tax rate was reduced as a result of favorable settlements with the U.S. tax authorities on previously questioned items. Further information about income taxes is provided in Note 5 to the Financial Statements on page 36. NET INCOME Honeywell's net income increased 17 percent in 1997, primarily due to increased sales volume, a mix of higher margin products and lower operating expenses. Net income was $471 million in 1997, compared with $403 million in 1996 and $334 million in 1995. Honeywell achieved a 17 percent increase in its Basic Earnings per Share in 1997 despite an after-tax provision for special charges of $60.8 million ($0.48 per share) and integration expenses associated with over $650 million of acquisitions. These one-time charges were only partially offset by the after-tax gains on the sale of various businesses of $51.7 million ($0.41 per share). Basic and Diluted Earnings per Share were $3.71 and $3.65, respectively, in 1997, compared with $3.18 and $3.11 in 1996 and $2.62 and $2.58 in 1995. 15 RETURN MEASUREMENTS Return on Equity (ROE) was 20.8 percent in 1997, 19.7 percent in 1996 and 17.1 percent in 1995. Return on Investment (ROI) was 14.6 percent in 1997, 15.1 percent in 1996 and 13.5 percent in 1995. Return on Investment declined slightly in 1997 due to a larger investment base resulting from the acquisition of the Measurex Corporation. Economic Value Added (EVA), calculated by subtracting a cost of capital from operating profits net of tax, increased to $95 million in 1997, compared to $92 million in 1996, and $44 million in 1995. Honeywell increased its EVA in 1997 despite the additional investment and integration expenses associated with the acquisition of Measurex. OTHER OPERATING SEGMENTS The "other" category which generated revenues of $137, $145 and $133 million in 1997, 1996 and 1995, respectively, is primarily the result of Honeywell's research operations. Operating profit for the other operations totaled $19 million in 1997, compared to $6 million in 1996 and $3 million in 1995. The increase in 1997 was driven primarily from improved performance in the research centers and lower environmental remediation costs associated with discontinued businesses. CURRENCY The U.S. dollar strengthened over 10 percent in 1997 compared with 1996, based on the weighted-average of profits denominated in the principal foreign currencies in countries where Honeywell products are sold. A stronger dollar has a negative effect on international results because foreign-exchange denominated transactions translate into fewer U.S. dollars. Although the stronger dollar had a three percent negative impact on total revenues in 1997, Honeywell managed the exposure to earnings through its hedging strategies. Therefore, the stronger dollar had a minimal impact on 1997 net income. In 1998, Honeywell anticipates that a continued strong U.S. dollar may have a negative impact on earnings. This negative impact is expected to be offset by the 1997 productivity initiatives including the restructuring activities. Information about Honeywell's exposure to, and management of, currency risk through the use of derivative financial instruments is provided on page 24 and in Notes 6, 14 and 15 to Financial Statements on pages 37, 40 and 42, respectively. INFLATION Highly competitive market conditions have minimized inflation's impact on the selling prices of Honeywell's products and the cost of its purchased materials. Productivity improvements and cost-reduction programs have largely offset the effects of inflation on other costs and expenses. EMPLOYMENT Honeywell employed 57,500 people worldwide at year-end 1997, compared with 53,000 people in 1996 and 50,100 people in 1995. Approximately 31,800 employees work in the United States, with 25,700 employed in other regions, primarily in Europe. Total compensation and benefits in 1997 were $3.0 billion, or 41 percent of total costs and expenses. Sales per employee were $139,600 in 1997, compared with $138,500 in 1996 and $132,800 in 1995. ENVIRONMENTAL MATTERS Honeywell is committed to protecting the environment, both through its products and in its manufacturing operations. Honeywell's use and release of chemicals to the environment continues to decline steadily, and releases of toxic and ozone-depleting chemicals are being phased out well ahead of regulatory requirements. Honeywell has increased its commitment to pollution prevention: reducing, 16 reusing and recycling to minimize wastes, while decreasing the costs of managing wastes. For more information on these environmental matters, see Note 22 to the Financial Statements on page 54. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings Per Share," which is effective for financial statements for both interim and annual periods ending after December 15, 1997. The statement requires the disclosure of Basic and Diluted Earnings per Share on the face of the income statement. All prior year Earnings per Share have been restated in accordance with the provisions of SFAS 128. The new calculations of Basic and Diluted Earnings per Share do not differ materially from the Earnings per Share Honeywell has historically disclosed. For additional information, see Notes 1 and 4 to the Financial Statements on pages 32 and 35. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which will be effective for Honeywell beginning January 1, 1998. SFAS No. 130 requires the disclosure of comprehensive income and its components in the general-purpose financial statements. Honeywell anticipates the effect of SFAS No. 130 will result in the disclosure of foreign currency translation adjustments, unrealized gains in securities, minimum pension liability adjustments and other comprehensive income on the face of the income statement. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," which will be effective for Honeywell beginning January 1, 1998. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. Honeywell has not yet completed its analysis of operating segments on which it will report. However, a preliminary analysis has concluded the current reportable segments are consistent with the "management approach" methodology outlined in SFAS 131. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." This SOP provides guidance on specific accounting issues that are present in the recognition, measurement, display and disclosure of environmental remediation liabilities. The provisions of this SOP were adopted by Honeywell in 1997 and did not have a material effect on the results of operations or financial position. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." This SOP provides guidance on specific accounting issues that are present in the recognition and measurement of software revenue. The provisions of the SOP are effective for fiscal years beginning after December 15, 1997, and the adoption by Honeywell in 1998 is not expected to have a material effect on results of operations or financial position. SAFE HARBOR CAUTIONARY STATEMENT Statements in this report regarding Honeywell's outlook for its businesses and their respective markets, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends and other matters, are forward-looking statements, some of which may be identified by such words or phrases as "will likely result," "are expected to," "will continue," "outlook," "is anticipated," "estimate," "project" or similar expressions. No assurance can be given that the results in any forward-looking statement will be achieved and actual results could be affected by one or more factors which could cause them to differ materially. For these statements, Honeywell 17 claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The following is a summary of certain factors, the results of which, if markedly different from Honeywell's planning assumptions, could cause Honeywell's future results to differ materially from those expressed in any forward-looking statements contained in this report: - foreign currency translations of sales denominated in other currencies; - economic conditions, including changes in trade and monetary policies, and customer demand for products and services, in regions throughout the world in which Honeywell does business; - risks pertaining to performance and energy retrofit contracts, including dependence on the performance of third parties; - various competitive pressures, such as new technologies, industry consolidation and deregulation of certain industries; - the availability of intellectual property rights for newly developed products or key technologies; and - significant acquisitions or divestitures. Please refer to Exhibit 99(i) of this report, and subsequent quarterly reports on Form 10-Q, as filed with the Securities and Exchange Commission, for a more detailed discussion of these and other factors that could cause Honeywell's actual results in future periods to differ materially from those projected in such forward-looking statements. DISCUSSION AND ANALYSIS BY SEGMENT HOME AND BUILDING CONTROL Home and Building Control is a global leader in providing comfortable, healthy, safe and energy-efficient indoor environments. Customer loyalty to our brand is based on more than 3,500 products, a broad range of systems and services, and an unmatched distribution network that supports our customer solutions worldwide. THREE-YEAR SALES OVERVIEW Sales in 1997 were $3.387 billion compared with $3.327 billion in 1996 and $3.035 billion in 1995. Home and Building Control Products Business experienced strong sales growth from the international market in 1997, driven by strong demand in our water products and combustion control businesses, while cooler weather softened demand in North America. Our strategic partnerships with Sears and other mass merchandisers enabled Honeywell to expand its retail market through the "store-within-a-store" concept across the country, which features Honeywell home environment products. Since the centers opened, Sears has reported an almost 50 percent increase in sales for Honeywell air cleaners. Strategic initiatives, which were focused on growing the energy retrofit business, resulted in several key contract awards. Honeywell was chosen as the sole supplier for energy systems at Ft. Bragg and the Army Reserve Centers, as well as energy savings projects for the U.S. Army facilities around the world. Valued at approximately $150 to $300 million, this is potentially one of the largest performance contracts ever received by Honeywell. We were also among the limited number of vendors selected by the U.S. Department of Energy to upgrade energy systems in hundreds of federal buildings in the southeast and western United States. Selected companies will be eligible for up to $750 million of business over the next few years. Other multi-million dollar contracts with Boeing, Caterpillar, Sweetheart Cup and NASA represent key wins in the industrial marketplace. 18 Honeywell secured its first fan coil unit service contract for guest rooms at the Pan Pacific Hotel through an excellent track record with service of the hotel's air handling units. Other faithful customers such as the Sheraton Towers and Boeing continue to choose Honeywell as their preferred energy services strategic partner for improved energy and operating efficiency. We continue to grow through alliances forged with utilities and with customers. The European Bank for Reconstruction and Redevelopment signed a "multi-project facility" contract worth up to $70 million to help Honeywell establish operating energy service companies to provide retrofits for industrial buildings and district heating plants in Poland, the Czech Republic, Slovakia and Hungary. Honeywell's Centra factory in Schoenaich, Germany, received several major quality awards in 1997, including the highest rating in the Ludwig Erhard Prize competition, the German equivalent to the Baldrige award. In 1996, sales growth resulted from expansion through strategic acquisitions, new product introductions and customer alliances. Sales in 1995 benefited from acquisitions, trade and retail business, product additions, and the energy retrofit and service business. THREE-YEAR OPERATING PROFIT OVERVIEW Home and Building Control 1997 operating profit was $290 million, including special charges of $47 million and a gain of $6 million on the sale of a small international security monitoring business, compared with $346 million in 1996 and $309 million in 1995. Excluding the impact of the gain and special charges, operating profit declined due to the mix of lower margin products business and lower than expected volume in building control. In 1996, profits in the Products Business improved through volume increases and cost reductions. Profits in the Solutions and Services Business declined due to a competitive energy retrofit business and investment in programs to enhance productivity. In 1995, operating profit rose 16 percent, primarily from strong international volume increases, new products and cost reductions. BUSINESS STRATEGIES We are well-positioned for strong sales growth and market penetration as we capitalize on our strategic acquisitions which include Lincold, a United Kingdom-based refrigeration services company. In 1997, we announced the intent to purchase Phoenix Controls, the world's leading producer of laboratory airflow control solutions. These acquisitions will enhance Honeywell's worldwide products, solutions and services portfolio. Late in the third quarter, Honeywell announced a restructuring of the Home and Building Control business to realign North American operations and improve financial results. The new structure allows for greater focus and establishes specific responsibility for each of the businesses. INDUSTRIAL CONTROL Industrial Control is a global leader in automation solutions from sensors to integrated systems. Industrial Automation and Control provides one-stop, integrated automation solutions including systems, products, and services for process industries such as hydrocarbon processing, chemicals and pulp and paper. Sensing and Control manufactures switches and sensors for use in vehicles, consumer products, data communication and industrial applications, as well as smart position-sensing devices and systems used in factories and package distribution systems. The acquisition of the Measurex Corporation in March 1997 transformed Honeywell into the world leader in control systems for the pulp and paper industry and has provided new opportunities for global growth. 19 THREE-YEAR SALES OVERVIEW Industrial Control sales in 1997 were $2.547 billion, compared with $2.200 billion in 1996 and $2.036 billion in 1995. The 1997 sales benefited from the successful acquisition of Measurex and the introduction of more than 80 new products, including two new system platforms. Sales reflected strong demand for the TotalPlant-Registered Trademark- Solution (TPS) system, the first open Windows NT-based industrial automation system that unifies business and control information throughout a plant or mill. Services were also strong across the board. Industrial Automation and Control introduced the scalable PlantScape-TM- system to enhance the TotalPlant Solution (TPS) portfolio, putting Honeywell's industry-leading process control technology in a cost-effective platform designed specifically for hybrid processes in industries such as pharmaceuticals, chemicals, food and beverage, mining and semiconductors. The 1997 introduction of Uniformance-TM-, a software suite designed to improve plant management and performance, satisfies customer needs through the integration of business and control systems. Another offering, called Plant Reliability Solutions, helps prevent unexpected incidents that inflict annual losses of $20 billion in U.S. process industries alone. Sensing and Control sales continued to strengthen, driven by our strategy of integrating factory floor solutions and intelligent sensors. The Smart Distributed System and our broad portfolio of industrial safety products have created new opportunities to meet customers' automation needs. In September 1997, Honeywell sold its solenoid valve business, which had a minimal effect on sales. In 1996, sales benefited from the successful introduction of new measurement, sensing and control products; the acquisition of Leeds & Northrup; the excellent market reception of our TotalPlant Solution (TPS) system and continued strong demand for upgrades and services that increase the value of our installed control systems. In 1995, Industrial Control sales increased by a strong 11 percent due to worldwide demand for TotalPlant open solutions and strong international sales of commercial sensors and switches. THREE-YEAR OPERATING PROFIT OVERVIEW Industrial Control operating profit in 1997 was $309 million, including special charges of $41 million and a gain of $71 million, primarily on the sale of the solenoid valve business. Operating profit was $255 million in 1996 and $234 million in 1995. Earnings in 1997, excluding one-time charges and gains, have been positively affected by higher volume as well as improvement in the industrial distribution business and ongoing productivity initiatives. The earnings growth was negatively affected by goodwill, intangible amortization and expected expenses related to the Measurex integration and softness in the global pulp and paper market. Operating profits increased in 1996 as a result of continuing strategic actions to reduce overhead, streamline business operations, improve the mix of higher-margin field instruments and automate component manufacturing. In 1995, operating profit increased, spurred by a sharp rise in profitability in Sensing and Control as switch margins improved in the United States and Europe experienced favorable volumes and lower product costs. BUSINESS STRATEGIES Industrial Control's leading industry position is being further enhanced with a focus on operational excellence, including cost reductions. Superior technologies, coupled with a balanced business model of products, systems and services continue to fuel growth and margin expansion, and drive successful partnerships with key customers. Served market expansion and leadership in core markets is bolstered by partnerships and strategic acquisitions like Measurex, which established Honeywell as the leader in the pulp and paper automation market. 20 Alliances and strategic partnerships are providing advanced control technology, solutions, optimization software and training to industries around the world. Honeywell was chosen by a number of industrial customers for strategic alliances in 1997, including British Petroleum Oil, Shell International and Alcoa World Alumina & Chemicals. The introduction of the PlantScape system and an attractive distribution agreement with Rockwell Automation to distribute the system will allow for a quick and profitable volume ramp-up in the next three years. SPACE AND AVIATION CONTROL As a leading supplier of avionics systems and products for the commercial, military and space markets, our Space and Aviation Control business serves customers that range from aircraft manufacturers and business aircraft operators to prime space contractors and the U.S. government. Our systems are on board virtually every commercial aircraft produced in the Western world, and we have also been aboard every manned space flight launched in the United States. THREE-YEAR SALES OVERVIEW In 1997, Space and Aviation Control sales were $1.957 billion, compared with $1.640 billion in 1996 and $1.527 billion in 1995. The 19 percent increase in sales was driven by strong growth in commercial avionics and strengthening of the military and space businesses. The growth in commercial avionics is the result of an increase in air transport deliveries which coincided with expected 1997 build rates and a strong increase in the business jet market. Honeywell has advanced avionics systems on 14 new business and regional aircraft that are either completing or undergoing certification. The latest wins include the Fairchild-Dornier 328 regional commuter jet. In 1997, the Honeywell/Pelorus Satellite Landing System became the first in the world to receive Type Acceptance certification from the Federal Aviation Administration (FAA). Continental Airlines will be the first airline to use the system in revenue service at both Newark and Minneapolis-St. Paul airports in early 1998. The Satellite Landing System increases airport capacity and safety while reducing noise around the airport environment. The FAA plans to implement this technology across the U.S. starting early in the next century. Other countries are establishing implementation plans as well. The Satellite Landing System is the first in a series of products focused on the growing airport market to be offered globally by Honeywell's Airport Control business initiative. In 1997, Commercial Aviation Systems-Sensor Products Operation in Minneapolis received the Minnesota State Quality award, the state's highest recognition of quality processes, based on the criteria of the Malcolm Baldrige National Quality Award. Sales in 1996 increased seven percent from the prior year driven by increased commercial aviation OEM business and our strategies to expand our GPS-based guidance products and systems, pursue retrofit opportunities and bring our Boeing 777 technology to all market segments worldwide. Sensor and Guidance Products orders were up sharply, driven by guidance and navigation system retrofits and tactical "smart guidance" munitions programs. Sales in 1995 increased moderately, driven by the recovery in the business jet and commuter aircraft market, strength in the retrofit and repair business, and increased sales from the International Space Station program. THREE-YEAR OPERATING PROFIT OVERVIEW Space and Aviation Control 1997 operating profit was $256 million compared to $163 million in 1996 and $128 million in 1995. In 1997, operating profits increased over 50 percent, driven by the mix of higher margin commercial aviation business coupled with high profit programs in military avionics. Operating margins increased to a record 13.1 percent, up 310 basis points from 1996. 21 Operating profit in 1996 and 1995 increased due to improved margins in commercial aviation systems, lower development expenses and productivity improvements. BUSINESS STRATEGIES The commercial aircraft industry is poised for strong growth in 1998 and beyond. Five growth strategies have been identified to mitigate cyclicality in the commercial aviation industry: communication, navigation, surveillance (CNS)/air traffic management (ATM); aviation services; airport control; commercial space; and tactical guidance. Early success with these initiatives is positioning Honeywell for the future in aviation technology. FINANCIAL POSITION FINANCIAL CONDITION At year-end 1997, Honeywell's capital structure was comprised of $146 million of short-term debt, $1.177 billion of long-term debt and $2.389 billion of shareowners' equity. The ratio of debt-to-total capital was 36 percent, compared with 31 percent in 1996 and 28 percent at year-end 1995. Honeywell demonstrated its financial strength in 1997, by acquiring seven companies worth over $650 million, increasing the quarterly dividend by four percent, and lowering the outstanding share count through its share repurchase program, all while maintaining its preferred debt-to-capital ratio of 30-40 percent. Shareowners' equity increased $184 million in 1997 driven by net income of $471 million and stock option exercises and employee stock plan issuances of $118 million. The gross increase of $589 million was offset by a $110 million decrease in accumulated foreign currency translation, $139 million of dividends, $154 million of treasury stock purchases, and a $2 million change in the pension liability adjustment. CASH GENERATION AND DEPLOYMENT In 1997, $645 million of cash was generated from operating activities, compared with $494 million in 1996, and $573 million in 1995. The increase in 1997 was largely due to working capital. In 1997, cash generated from investing and financing activities included $598 million from the issuance of debt, $101 million of proceeds from the sale of various businesses, net of taxes paid, $77 million of proceeds from the sale of other assets and $45 million of proceeds from the exercise of stock options. These funds were used to support $598 million in acquisitions net of cash acquired, $298 million of capital expenditures, $140 million of dividend payments, $154 million of payments for share repurchases and $256 million of debt repayments. Cash balances increased $7 million in 1997. CONTROLLED WORKING CAPITAL Cash used for increases in "controlled working capital," which consists of trade and long-term receivables and inventories, offset by accounts payable and customer advances, was $45 million in 1997, compared with $195 million in 1996. Average working capital as a percentage of sales was 24.7 percent in 1997 compared with 24.6 percent in 1996 and 25.2 percent in 1995. The increase in controlled working capital as a percent of sales in 1997 was primarily driven by the Measurex acquisition. INVESTMENT Honeywell continues to invest in its businesses at levels it believes to be necessary to maintain its technological leadership position. Capital expenditures for property, plant and equipment were $298 million in 1997, compared with $296 million in 1996 and $238 million in 1995, while depreciation 22 charges were $246 million in 1997. Honeywell invested an additional $650 million in complementary business acquisitions in 1997. (For more information on these acquisitions refer to Note 2 to the Financial Statements on page 34). Honeywell also invested $447 million in research and development activities in 1997 compared with $353 in 1996 and $323 in 1995. SHARE REPURCHASE PROGRAMS In July 1995, the Board of Directors authorized an open-ended program to repurchase $250 million of Honeywell shares which was completed in the fourth quarter of 1997. In October 1997, the Board of Directors authorized a new program to repurchase $350 million of Honeywell shares of which $116 million was used during 1997. The purpose of the repurchase program is to acquire shares to be issued as part of the 1997 Honeywell Stock and Incentive Plan and other issuances as described in Note 17 to the Financial Statements on page 44. Honeywell repurchased a total of $154 million of shares in 1997, $163 million in 1996 and $129 million in 1995. At year-end 1997, Honeywell had issued 188 million shares, of which 126 million were outstanding. On December 31, 1997, there were 30,821 shareowners of record. At year-end 1996, Honeywell had 188 million shares issued, 126 million shares outstanding and 31,734 shareowners of record. DIVIDENDS Honeywell has paid a quarterly dividend since 1932 and has increased the annual payout per share in each of the last 22 years. In July 1996, the Board of Directors approved a four percent increase in the regular annual dividend to $1.08 per share effective in the third quarter 1996. In October 1997, the Board of Directors approved an additional four percent increase in the dividend to $1.12 per share effective in the fourth quarter 1997. Honeywell paid $1.09 per share in dividends in 1997, compared with $1.06 per share in 1996 and $1.01 in 1995. EMPLOYEE STOCK PROGRAM In 1997, Honeywell contributed 542,406 shares of Honeywell common stock to U.S. employees under the Honeywell Savings and Stock Ownership Plan. The number of shares contributed under this program is based on employee savings levels and company performance. PENSION CONTRIBUTIONS Cash contributions to Honeywell's pension and retirement plans amounted to $215 million in 1997, $201 million in 1996 and $172 million in 1995. TAXES In 1997, Honeywell paid $204 million in taxes compared to $113 million in 1996. The amount Honeywell accrued for income taxes and related interest increased $27 million from 1996. LIQUIDITY Short-term debt at year-end 1997 was $146 million, consisting of $43 million of commercial paper, $39 million of notes payable and $64 million of current maturities of long-term debt. Short-term debt at year-end 1996 totaled $253 million, consisting of $87 million of commercial paper, $67 million of notes payable and $99 million of current maturities of long-term debt. Through its banks, Honeywell has access to various credit facilities, including committed credit lines for which Honeywell pays commitment fees and uncommitted lines provided by banks on a non-committed, best-efforts basis. Available general-purpose lines of credit at year-end 1997 increased to $1.683 billion. This consisted of $1.325 billion of committed credit lines to meet Honeywell's financing 23 requirements, including support of commercial paper and bank note borrowings, and $358 million of uncommitted credit lines available to certain foreign subsidiaries. This compared with $1.128 billion of available credit lines at year-end 1996, consisting of $725 million of committed credit lines for general financing requirements and $403 million of uncommitted credit lines available to certain foreign subsidiaries. On March 12, 1997, Honeywell issued $550 million of fixed-rate long-term debt through an underwritten offering with maturities of five and ten years. In August 1997, Honeywell and its wholly-owned subsidiaries, Honeywell Canada Limited and Honeywell Finance B.V., filed a shelf registration statement which provides for the issuance of up to $500 million, in the aggregate, of debt securities by Honeywell or such subsidiaries, with the guarantee of Honeywell. At December 31, 1997, no debt had been issued under this program. Long-term debt maturities consist of $64 million in 1998, $124 million in 1999, and $77 million in 2000. In addition, Honeywell has an agreement with a major financial institution whereby it may convert designated pools of trade accounts receivable to cash up to approximately $35 million on an ongoing basis (see Note 8 to the Financial Statements on page 38). Cash and short-term investments totaled $159 million at year-end 1997 and $136 million at year-end 1996. Honeywell believes its available cash, committed credit lines, receivable program, and access to the public debt markets, through its debt securities and commercial paper programs, provide adequate short-term and long-term liquidity. RISK MANAGEMENT Honeywell is exposed to market risk from changes in interest rates and foreign currency exchange rates. To mitigate the risk from these exposures, Honeywell enters into various hedging transactions through derivative financial instruments that have been authorized pursuant to its corporate policy. Honeywell policy prohibits the use of derivative financial instruments for trading or other speculative purposes, and Honeywell is not a party to leveraged financial instruments. FOREIGN EXCHANGE Honeywell primarily uses foreign exchange forwards and purchased options to hedge exposures to adverse changes in foreign exchange rates (see Notes 6 and 15 on pages 37 and 42). Such exposures result from cross-border transactions principally in Belgian francs and Deutsche marks. Foreign exchange contracts reduce Honeywell's overall exposure to exchange rate movements, since gains and losses on these contracts offset losses and gains on the underlying exposures. Transactions that are hedged include foreign currency net asset and net liability exposures on the balance sheet, firm purchase orders and firm sales commitments. At year-end 1997, the notional amount of outstanding foreign exchange contracts was $1.214 billion. INTEREST RATES Honeywell manages its exposure to interest rate movements and the cost of borrowing through the use of interest rate swaps by maintaining a proportionate relationship of fixed rate debt to total debt between a minimum and maximum percentage as set by corporate policy. To manage this mix in a cost efficient manner, Honeywell enters into interest rate swap agreements, in which it agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principle amount (see Notes 14 and 15 on pages 40 and 42). At year-end 1997, the notional amount of outstanding interest rate swaps was $1.340 billion. 24 VALUE AT RISK To estimate the maximum potential loss that may arise from adverse market movements in foreign exchange rates and interest rates, Honeywell uses a "value at risk" statistical model. The value at risk estimation utilizes weighted historical foreign exchange rates and interest rates to estimate the volatility of these rates in the future. The calculated volatility is used to estimate the potential loss in the current value of the instruments at a specified probability level. The value at risk methodology used by Honeywell uses variance-covariance statistical modeling and includes debt, interest rate swaps and foreign exchange hedges. The estimated value at risk amounts represent the maximum potential loss that Honeywell may incur from adverse changes in foreign exchange rates and interest rates based on a five-day time horizon and a 95 percent confidence level on December 31, 1997. The value at risk for the combined portfolio was $6.8 million at December 31, 1997, which includes the diversification benefit of analyzing the value at risk including the interest rates and foreign exchange on a combined basis as compared to individually, as changes in market conditions affect interest rates and foreign exchange differently. The value at risk for the combined portfolio and the individual components are as follows: VALUE AT RISK (IN MILLIONS) Combined Portfolio................................................... $ 6.8 Foreign Exchange................................................... $ 6.1 Interest Rates..................................................... $ 2.3
The value at risk amounts presented above do not consider the potential effect of favorable movements in market factors nor does the value at risk model include all of the underlying exposures that the hedges are designed to cover. Anticipated transactions, firm commitments and receivables and accounts payable denominated in foreign currencies, which certain of these instruments are intended to hedge, were excluded from the model. Since Honeywell utilized foreign exchange contracts to hedge anticipated foreign currency transactions, a loss in fair value for these instruments is generally offset by increases in the value of the underlying anticipated transaction. The quantitative information generated by the value at risk model is limited by the parameters built into the model. Consequently, Honeywell relies on the experience and expertise of management's regular review of its financial instruments and the current market environment to manage its exposure to foreign exchange rates and interest rates. YEAR 2000 COMPLIANCE Computer programs which were written using two digits (rather than four) to define the applicable year may recognize a date using "00" as the year 1900 rather than the year 2000, a result commonly referred to as the "Year 2000" problem. This could result in a system failure or miscalculations. In 1996, Honeywell initiated a program to evaluate whether internally developed and purchased computer programs that utilize embedded date codes may experience operational problems when the year 2000 is reached. The scope of this effort addressed internal computer systems, products sold and supplier capabilities. Honeywell is completing an extensive review of each of its businesses to determine whether or not purchased or internally developed computer programs are Year 2000 compliant, as well as the remedial action and related costs associated with required modifications or replacements. A significant amount of information has been collected and analyzed as part of this review; however, the process will not be completed until the end of the second quarter of 1998. Honeywell plans to complete all 25 remediation efforts for its critical systems prior to the year 2000. Based on its evaluation to date, management currently believes that, while Honeywell will incur internal and external costs to address the Year 2000 problem, such costs will not have a material impact on the operations, cash flows or financial condition of Honeywell and its subsidiaries, taken as a whole, in future periods. EURO CURRENCY Beginning in January 1999, the European Monetary Union (EMU) will enter into a three-year transition phase during which a common currency called the EURO will be introduced in participating countries. Initially, this new currency will be used for financial transactions, and progressively, it will replace the old national currencies that will be withdrawn by July 2002. The transition to the EURO currency will involve changing budgetary, accounting and fiscal systems in companies and public administrations, as well as the simultaneous handling of parallel currencies and conversion of legacy data. Uncertainty exists as to the effects the EURO currency will have on the marketplace. Additionally, all of the final rules and regulations have not yet been defined and finalized by the European Commission with regard to the EURO currency. Honeywell has initiated a program to evaluate whether internally developed and purchased computer programs will experience operational problems when the Euro is introduced. Further, Honeywell is monitoring the rules and regulations as they become known in order to make any changes to its computer programs that Honeywell deems necessary to comply with such rules and regulations. Although Honeywell believes that it will be able to accommodate any required EURO currency changes in its computer programs, there can be no assurance that once the final rules and regulations are completed that Honeywell's computer programs will contain all of the necessary changes or meet all of the EURO currency requirements. Based on its evaluation to date, management currently believes that, while Honeywell will incur internal and external costs to address the EURO currency issue, such costs will not have a material impact on the operations, cash flows or financial condition of Honeywell and its subsidiaries, taken as a whole, in future periods. LITIGATION On March 13, 1990, Litton Systems, Inc. filed a legal action against Honeywell in U.S. District Court, Central District of California, Los Angeles, with claims that were subsequently split into two separate cases. One alleges patent infringement under federal law for using an ion-beam process to coat mirrors incorporated in Honeywell's ring laser gyroscopes, and tortious interference under state law for interfering with Litton's prospective advantage with customers and contractual relationships with an inventor and his company, Ojai Research, Inc. The other case alleges monopolization and attempted monopolization under federal antitrust laws by Honeywell in the sale of inertial reference systems containing ring laser gyroscopes into the commercial aircraft market. Honeywell generally denied Litton's allegations in both cases. In the patent/tort case, Honeywell also contested the validity as well as the infringement of the patent, alleging, among other things, that the patent had been obtained by Litton's inequitable conduct before the United States Patent and Trademark Office. Trials were held for both cases and at the conclusion of each, juries awarded Litton significant monetary damages. However, the awards were set aside by the trial court judge and new trials ordered on the issue of damages in each case. Following appeals by both parties of various issues related to these cases, the U.S. Supreme Court remanded the patent/tort case to the U.S. Court of Appeals for the Federal Circuit for further proceedings, and the retrial of damages in the antitrust case was postponed indefinitely pending the outcome of the Federal Circuit proceeding. For a detailed discussion of this litigation, see Note 22 to Financial Statements on page 54. 26 CREDIT RATINGS As of December 31, 1997, Honeywell's credit ratings for long-term and short-term debt, respectively, were A/A-1 by Standard and Poor's Corporation, A2/P1 by Moody's Investors Service, Inc. and A/Duff by Duff and Phelps Corporation. STOCK PERFORMANCE The market price of Honeywell stock ranged from $63 7/8 to $80 3/8 in 1997, and was $68 1/2 at year-end. Book value per common share at year-end was $18.80 in 1997, $17.44 in 1996 and $16.09 in 1995. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT To the Shareowners of Honeywell Inc.: We have audited the statement of financial position of Honeywell Inc. and subsidiaries as of December 31, 1997 and 1996, and the related statements of income and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed as Part IV, Item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We have 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 that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Honeywell Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. Deloitte & Touche LLP Minneapolis, Minnesota February 10, 1998 28 INCOME STATEMENT HONEYWELL INC. AND SUBSIDIARIES (DOLLARS AND SHARES IN MILLIONS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31 --------------------------------- 1997 1996 1995 --------- ---------- ---------- Sales......................................................................... $ 8,027.5 $ 7,311.6 $ 6,731.3 Costs and Expenses Cost of sales............................................................... 5,425.1 4,975.4 4,584.2 Research and development.................................................... 446.6 353.3 323.2 Selling, general and administrative......................................... 1,359.4 1,313.1 1,263.1 Gain on sale of businesses.................................................. (77.1) Special charges............................................................. 90.7 --------- ---------- ---------- Total Costs and Expenses...................................................... 7,244.7 6,641.8 6,170.5 --------- ---------- ---------- Interest Interest expense............................................................ 101.9 81.4 83.3 Interest income............................................................. 9.4 8.5 14.4 --------- ---------- ---------- Net Interest.................................................................. 92.5 72.9 68.9 --------- ---------- ---------- Equity Income................................................................. 12.9 13.3 13.6 --------- ---------- ---------- Income before Income Taxes.................................................... 703.2 610.2 505.5 Provision for Income Taxes.................................................... 232.2 207.5 171.9 --------- ---------- ---------- Net Income.................................................................... $ 471.0 $ 402.7 $ 333.6 --------- ---------- ---------- --------- ---------- ---------- Basic Earnings Per Common Share............................................... $ 3.71 $ 3.18 $ 2.62 --------- ---------- ---------- --------- ---------- ---------- Average Number of Basic Common Shares Outstanding............................. 127.1 126.6 127.1 --------- ---------- ---------- --------- ---------- ---------- Diluted Earnings Per Common Share............................................. $ 3.65 $ 3.11 $ 2.58 --------- ---------- ---------- --------- ---------- ---------- Average Number of Diluted Common Shares Outstanding........................... 129.2 129.5 129.5 --------- ---------- ---------- --------- ---------- ----------
See accompanying Notes to Financial Statements. 29 STATEMENT OF FINANCIAL POSITION HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS) ASSETS
DECEMBER 31 ----------------------- 1997 1996 ---------- ----------- Current Assets Cash and cash equivalents............................................................. $ 134.3 $ 127.1 Short-term investments................................................................ 24.9 8.6 Receivables........................................................................... 1,837.8 1,714.7 Inventories........................................................................... 1,028.0 937.6 Deferred income taxes................................................................. 233.2 193.2 ---------- ----------- Total Current Assets................................................................ 3,258.2 2,981.2 Investments and Advances................................................................ 243.8 247.6 Property, Plant and Equipment Property, plant and equipment......................................................... 3,045.0 2,973.6 Less accumulated depreciation......................................................... 1,916.3 1,839.4 ---------- ----------- Total Property, Plant and Equipment................................................. 1,128.7 1,134.2 Other Assets Long-term receivables................................................................. 39.2 25.7 Goodwill.............................................................................. 786.0 507.7 Intangibles........................................................................... 376.0 183.2 Deferred income taxes................................................................. 41.7 33.0 Other................................................................................. 537.8 380.7 ---------- ----------- Total Assets........................................................................ $ 6,411.4 $ 5,493.3 ---------- ----------- ---------- ----------- LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities Short-term debt....................................................................... $ 146.4 $ 252.4 Accounts payable...................................................................... 572.9 584.8 Customer advances..................................................................... 269.7 202.0 Accrued compensation and benefit costs................................................ 301.6 287.8 Accrued income taxes.................................................................. 344.2 316.9 Deferred income taxes................................................................. 11.3 21.9 Other accrued liabilities............................................................. 672.8 401.1 ---------- ----------- Total Current Liabilities........................................................... 2,318.9 2,066.9 Long-Term Debt.......................................................................... 1,176.8 715.3 Other Liabilities Accrued benefit costs................................................................. 435.9 412.9 Deferred income taxes................................................................. 51.4 46.0 Other................................................................................. 39.2 47.3 ---------- ----------- Total Liabilities................................................................... 4,022.2 3,288.4 Shareowners' Equity Common stock -- $1.50 par value Authorized -- 250,000,000 shares Issued -- 1997 -- 187,633,023 shares.................................................. 281.5 1996 -- 187,809,512 shares................................................... 281.7 Additional paid-in capital............................................................ 608.4 528.8 Retained earnings..................................................................... 3,407.0 3,074.7 Treasury stock -- 1997 -- 61,433,075 shares........................................... (1,879.3) 1996 -- 61,360,813 shares............................................ (1,763.5) Accumulated foreign currency translation.............................................. (21.4) 88.2 Pension liability adjustment.......................................................... (7.0) (5.0) ---------- ----------- Total Shareowners' Equity........................................................... 2,389.2 2,204.9 ---------- ----------- Total Liabilities and Shareowners' Equity........................................... $ 6,411.4 $ 5,493.3 ---------- ----------- ---------- -----------
See accompanying Notes to Financial Statements. 30 STATEMENT OF CASH FLOWS HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS)
YEARS ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- Cash Flows from Operating Activities Net income..................................................................... $ 471.0 $ 402.7 $ 333.6 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation................................................................. 246.0 236.1 236.1 Amortization of intangibles.................................................. 73.6 51.4 56.8 Deferred income taxes........................................................ (19.5) 38.5 67.2 Equity income, net of dividends received..................................... (10.3) (10.8) (11.0) Gain on sale of businesses................................................... (77.1) (Gain) Loss on sale of assets................................................ (7.3) (12.0) 7.2 Contributions to employee stock plans........................................ 48.9 38.2 27.4 Increase in receivables...................................................... (60.7) (203.0) (38.4) Increase in inventories...................................................... (67.1) (89.9) (27.6) Increase (decrease) in accounts payable...................................... (20.3) 51.8 50.1 Increase (decrease) in accrued income taxes and interest..................... 49.7 57.4 (35.4) Other changes in working capital, excluding short-term investments and short-term debt............................................................. 216.8 81.4 (99.1) Other noncurrent items -- net................................................ (199.1) (148.0) 5.6 --------- --------- --------- Net Cash Flows from Operating Activities......................................... 644.6 493.8 572.5 --------- --------- --------- Cash Flows from Investing Activities Proceeds from sale of assets................................................... 77.2 90.3 18.7 Proceeds from sale of businesses............................................... 100.6 Capital expenditures........................................................... (298.3) (296.5) (238.1) Investment in acquisitions..................................................... (598.4) (376.2) (37.7) (Increase) decrease in short-term investments.................................. 0.4 (0.2) (1.4) Other -- net................................................................... 5.6 0.4 (5.2) --------- --------- --------- Net Cash Flows from Investing Activities......................................... (712.9) (582.2) (263.7) --------- --------- --------- Cash Flows from Financing Activities Net increase (decrease) in short-term debt..................................... (73.4) 18.8 (101.0) Proceeds from issuance of long-term debt....................................... 597.7 340.4 167.5 Repayment of long-term debt.................................................... (182.3) (188.8) (156.4) Purchase of treasury stock..................................................... (154.3) (163.2) (137.3) Proceeds from exercise of stock options........................................ 44.7 57.3 60.4 Dividends paid................................................................. (140.1) (133.5) (127.5) --------- --------- --------- Net Cash Flows from Financing Activities......................................... 92.3 (69.0) (294.3) --------- --------- --------- Effect of Exchange Rate Changes on Cash.......................................... (16.8) (7.1) 9.7 --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents................................. 7.2 (164.5) 24.2 Cash and Cash Equivalents at Beginning of Year................................... 127.1 291.6 267.4 --------- --------- --------- Cash and Cash Equivalents at End of Year......................................... $ 134.3 $ 127.1 $ 291.6 --------- --------- --------- --------- --------- ---------
See accompanying Notes to Financial Statements. 31 NOTES TO FINANCIAL STATEMENTS HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 1 -- ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements and accompanying data comprise Honeywell Inc. and subsidiaries. All material intercompany transactions are eliminated. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires Honeywell to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results can differ from estimates. SALES Product sales are recorded when title is passed to the customer, which usually occurs at the time of delivery or acceptance. Sales under long-term contracts are recorded on the percentage-of-completion method measured on the cost-to-cost basis for engineering-type contracts and the units-of-delivery basis for production-type contracts. Provisions for anticipated losses on long-term contracts are recorded in full when such losses become evident. EARNINGS PER COMMON SHARE In 1997, Honeywell adopted Statement of Financial Accounting Standard No. 128 (SFAS 128), "Earnings Per Share". SFAS 128 requires the disclosure of Basic and Diluted Earnings Per Share (EPS). Basic EPS is calculated using income available to common shareowners divided by the weighted average of common shares outstanding during the year. Diluted EPS is similar to Basic EPS except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, such as options, had been issued. The treasury stock method is used to calculate dilutive shares which reduces the gross number of dilutive shares by the number of shares purchaseable from the proceeds of the options assumed to be exercised. All prior year Earnings per Share have been restated in accordance with the provisions of SFAS 128. Adoption of SFAS 128 did not have a material effect on Honeywell's historically disclosed Earnings Per Share. See Note 4 on page 35 for more information regarding the earnings per share calculations. STATEMENT OF CASH FLOWS Cash equivalents are all highly liquid, temporary cash investments with an original maturity of three months or less. Cash flows from purchases and maturities of held-to-maturity securities are classified as cash flows from investing activities. Cash flows from contracts used to hedge cash dividend payments from subsidiaries are classified as part of the effect of exchange rate changes on cash. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the weighted-average method. Market is based on net realizable value. 32 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 1 -- ACCOUNTING POLICIES (CONTINUED) Payments received from customers relating to the uncompleted portion of contracts are deducted from applicable inventories. INVESTMENTS Investments in companies owned 20 to 50 percent are accounted for using the equity method. PROPERTY Property is carried at cost and depreciated primarily using the straight-line method over estimated useful lives of 10 to 40 years for buildings and improvements, and three to 15 years for machinery and equipment. INTANGIBLES Intangibles are carried at cost and amortized using the straight-line method over their estimated useful lives of 15 to 40 years for goodwill, four to 17 years for patents, licenses and trademarks, and three to 24 years for software and other intangibles. Intangibles also include the asset resulting from recognition of the defined benefit pension plan minimum liability, which is amortized as part of net periodic pension cost. DERIVATIVES Derivative financial instruments are used by Honeywell to manage interest rate and foreign exchange risks. These financial exposures are managed in accordance with Corporate polices and procedures. Honeywell does not hold or issue derivative financial instruments for trading purposes. Foreign exchange contracts are accounted for as hedges to the extent they are designated as, and are effective as, hedges of firm foreign currency commitments. Other such foreign exchange contracts are marked-to-market on a current basis and are included in selling, general and administrative expenses on the income statement. Interest rate contracts designated and effective as a hedge of underlying debt obligations are not marked-to-market, but cash flow from such contracts results in adjustments to interest expense recognized over the life of the underlying debt agreement. Gains and losses from terminated contracts are deferred and amortized over the remaining period of the original contract. Open interest rate contracts are reviewed regularly to ensure that they remain effective as hedges of interest rate exposure. FOREIGN CURRENCY Foreign currency assets and liabilities are generally translated into U. S. dollars using the exchange rates in effect at the statement of financial position date. Results of operations are generally translated using the average exchange rates throughout the period. The effects of exchange rate fluctuations on translation of assets, liabilities and hedges of cash dividend payments from subsidiaries are reported as accumulated foreign currency translation and increased/(reduced) shareowners' equity: $(109.6) in 1997, $(52.7) in 1996, and $33.5 in 1995. 33 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 1 -- ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS Honeywell evaluates the carrying value of the long-lived assets using discounted cash flows when events and circumstances warrant such a review. STOCK BASED COMPENSATION In 1996, Honeywell adopted Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation". As permitted under this standard, Honeywell will continue to apply the recognition and measurement principles of Accounting Principles Board (APB) No. 25 to its stock options and other stock-based employee compensation awards. The disclosure of the pro forma net income and pro forma earnings per share as if the fair value method of SFAS 123 had been applied can be found in Note 17 to the Financial Statements on page 44. BASIS OF PRESENTATION Certain prior year amounts have been reclassified to conform with the current year presentation. NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS Honeywell acquired seven companies in 1997, 17 companies in 1996, and nine companies in 1995 for $650.2, $411.2, and $37.7 in cash, respectively. These acquisitions were accounted for as purchases, and accordingly, the assets and liabilities of the acquired entities have been recorded at their estimated fair values at the dates of acquisition. The excess of purchase price over the estimated fair values of the net assets acquired, in the amount of $323.7 in 1997, $294.7 in 1996, and $32.4 in 1995, has been recorded as goodwill and is amortized over estimated useful lives. The largest acquisition in 1997, consisting of approximately $600 in cash, was Measurex Corporation, a supplier of computer-integrated measurement, control and information systems and services. The allocation of the purchase price for Measurex resulted in goodwill of $305.9 and intangibles, including patents/developed technology, work force value, and customer lists, of $202.5 which will be amortized over an average of approximately 26 years. Honeywell assumed approximately 1.8 million options to purchase Measurex common stock and converted such options to Honeywell options to acquire approximately 671,000 shares of Honeywell stock with an average exercise price of $52.24 and a range of exercise prices from $34.58 to $72.85. The value of the options assumed is included in the purchase price and as a component of shareowners equity in the consolidated financial statements. The options are included in the stock option discussion and analysis in Note 17 on page 44. The pro forma results for 1997, 1996, and 1995, assuming these acquisitions had been made at the beginning of the year, would not be materially different from reported results. On September 27, 1997, Honeywell sold the net assets of its solenoid valve business in the Industrial Control business segment for approximately $102.0 in cash and a $64.3 gain. This sale had a minimal impact on revenues in 1997. In the fourth quarter of 1997, Honeywell sold the control valve business of Industrial Control and an international Home and Building Control security monitoring business for approximately $24.1 in cash and receivables and a gain of $12.8. The sum of these gains are included as gain on sale of businesses on the income statement. Proceeds from the sale of other assets, including facilities located in the United Kingdom; San Jose, California; and Denver, Colorado, amounted to $77.2 in 1997. Proceeds from asset sales in 1996 34 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 2 -- ACQUISITIONS AND SALE OF ASSETS (CONTINUED) and 1995 were $90.3 and $18.7, respectively. Gains and losses from asset sales were not material in any year and are included in selling, general and administrative expenses on the income statement. NOTE 3 -- SPECIAL CHARGES In 1997, Honeywell's management, with the approval of the board of directors, committed itself to a plan of action and recorded special charges of $90.7. Honeywell remains committed to efforts to reduce operating costs and improve margins. Special charges include costs for work force reductions, worldwide facilities consolidations, organizational changes, and other cost accruals. The Home and Building Control business segment recorded special charges of $46.9 to strengthen the Company's competitiveness in a rapidly changing marketplace. Industrial Control recorded $40.8 to rationalize product lines, consolidate research and development facilities, restructure the organization, and complete other activities associated with the integration of Measurex. A total of $3.0 was recorded in the Other business segment. Work force reduction costs of $74.2 primarily include severance costs related to involuntary termination programs instituted to improve efficiency and reduce costs. Approximately 1,600 employees, consisting largely of sales, marketing, factory and other administrative personnel, have been or will be terminated. Facility consolidation costs of $8.3 are primarily associated with the closing of facilities in California and Germany, and other cost accruals total $8.2. The charges are included as special charges on the income statement. Expenditures will be funded with cash generated from operations and were $34.3 for workforce reductions, $0.9 for facilities, and $0.7 for other restructuring expense in 1997. NOTE 4 -- EARNINGS PER SHARE
1997 1996 1995 ------------- -------------- -------------- BASIC EARNINGS PER SHARE: Income: Income available to common shareowners................ $ 471.0 $ 402.7 $ 333.6 Shares: Weighted Average Shares Outstanding................... 127,051,613 126,632,082 127,138,774 Basic EPS............................................... $ 3.71 $ 3.18 $ 2.62 DILUTED EARNINGS PER SHARE: Income: Income available to common shareowners................ $ 471.0 $ 402.7 $ 333.6 Shares: Weighted Average Shares Outstanding................... 127,051,613 126,632,082 127,138,774 Dilutive shares issuable in connection with stock plans.................................................. 4,767,393 6,286,392 7,326,033 Less: Shares purchaseable with proceeds................. (2,626,784) (3,437,695) (4,961,681) ------------- -------------- -------------- Total Shares........................................ 129,192,222 129,480,779 129,503,126 ------------- -------------- -------------- ------------- -------------- -------------- Diluted EPS............................................. $ 3.65 $ 3.11 $ 2.58
35 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 4 -- EARNINGS PER SHARE (CONTINUED) Options to purchase 1.4 million shares of common stock at a range of $69.43 to $78.91 were outstanding during 1997 but were not included in the computation of the diluted EPS because the options' exercise price was greater than the average market price of the common shares. NOTE 5 -- INCOME TAXES The components of income before income taxes consist of the following:
1997 1996 1995 --------- --------- --------- Domestic.................................................................. $ 377.3 $ 349.4 $ 285.4 Foreign................................................................... 325.9 260.8 220.1 --------- --------- --------- $ 703.2 $ 610.2 $ 505.5
The provision for income taxes on that income is as follows:
1997 1996 1995 --------- --------- --------- Current tax expense United States........................................................... $ 124.9 $ 60.8 $ 39.8 Foreign................................................................. 101.6 84.7 59.9 State and local......................................................... 27.1 27.2 8.9 --------- --------- --------- Total current........................................................... 253.6 172.7 108.6 --------- --------- --------- Deferred tax expense United States........................................................... (13.9) 27.4 41.7 Foreign................................................................. (5.6) 4.0 17.5 State and local......................................................... (1.9) 3.4 4.1 --------- --------- --------- Total deferred.......................................................... (21.4) 34.8 63.3 --------- --------- --------- Provision for income taxes................................................ $ 232.2 $ 207.5 $ 171.9
A reconciliation of the provision for income taxes to the amount computed using U.S. federal statutory rates is as follows:
1997 1996 1995 --------- --------- --------- Taxes on income at U.S. federal statutory rates........................... $ 246.1 $ 213.6 $ 176.9 Tax effects of foreign income............................................. (17.6) (15.9) (11.7) State taxes............................................................... 15.7 21.1 9.9 Goodwill.................................................................. 10.6 4.3 1.7 Other..................................................................... (22.6) (15.6) (4.9) --------- --------- --------- Provision for income taxes................................................ $ 232.2 $ 207.5 $ 171.9
Interest costs related to prior years' tax issues are included in the provision for income taxes. Taxes paid were $203.7 in 1997, $113.1 in 1996 and $128.3 in 1995. 36 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 5 -- INCOME TAXES (CONTINUED) Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of Honeywell's assets and liabilities. Temporary differences comprising the net deferred taxes shown on the statement of financial position are:
1997 1996 --------- --------- Employee benefits................................................................... $ 54.7 $ 64.9 Miscellaneous accruals.............................................................. 107.0 85.1 Excess of tax over book depreciation/amortization................................... (3.0) (2.4) Asset valuation reserves............................................................ 44.0 36.3 Long-term contracts................................................................. 12.0 14.0 State taxes......................................................................... 24.9 20.9 Pension liability adjustment........................................................ 4.4 3.4 Other............................................................................... (31.8) (63.9) --------- --------- $ 212.2 $ 158.3
The components of net deferred taxes shown in the statement of financial position are:
1997 1996 --------- --------- Deferred tax assets................................................................. $ 506.8 $ 458.8 Deferred tax liabilities............................................................ 294.6 300.5
Provision has not been made for U.S. or additional foreign taxes on $868.4 of undistributed earnings of international subsidiaries, as those earnings are considered to be permanently reinvested in the operations of those subsidiaries. It is not practicable to estimate the amount of tax that might be payable on the eventual remittance of such earnings. At December 31, 1997, foreign subsidiaries had tax operating loss carryforwards of $15.2. NOTE 6 -- FOREIGN CURRENCY Honeywell has entered into various foreign currency exchange contracts (primarily Belgian francs, Deutsche marks and Canadian dollars) designed to manage its exposure to exchange rate fluctuations on foreign currency transactions. Foreign exchange contracts reduce Honeywell's overall exposure to exchange rate movements, since the gains and losses on these contracts offset losses and gains on the assets, liabilities, and transactions being hedged. Honeywell hedges a significant portion of all known foreign exchange exposures, including non-functional currency receivables and payables and foreign currency imports and exports. The notional amount of Honeywell's outstanding foreign currency contracts, consisting of forwards, purchased options and swaps, was approximately $1,213.7 and $1,111.2 at December 31, 1997, and 1996, respectively. These contracts generally have a term of less than one year. 37 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 7 -- INVESTMENTS IN DEBT AND EQUITY SECURITIES Honeywell's investments in held-to-maturity securities are reported at amortized cost in the statement of financial position as follows:
1997 1996 --------- --------- Cash equivalents....................................................................... $ 27.7 $ 42.9 Short-term investments................................................................. 8.0 8.6 Investments and advances............................................................... 5.7 5.5 --------- --------- $ 41.4 $ 57.0
Held-to-maturity securities generally mature within one year and include the following:
1997 1996 --------- --------- Time deposits with financial institutions.............................................. $ 34.8 $ 40.5 Commercial paper....................................................................... 0.1 0.0 Other.................................................................................. 6.5 16.5 --------- --------- $ 41.4 $ 57.0
Honeywell's purchases of held-to-maturity securities, consisting primarily of commercial paper, amounted to $1,809.0 and $4,128.0 in 1997 and 1996, respectively. Proceeds from maturities of held-to-maturity securities amounted to $1,812.5 in 1997 and $4,248.5 in 1996. Honeywell has no investments in trading securities, and available-for-sale securities are not material. The estimated aggregate fair value of these securities approximates their carrying amounts in the statement of financial position. Gross unrealized holding gains and losses were not material in any year. NOTE 8 -- RECEIVABLES Receivables have been reduced by an allowance for doubtful accounts as follows:
1997 1996 --------- --------- Receivables, current................................................................... $ 38.5 $ 33.5 Long-term receivables.................................................................. 2.7 0.7
Receivables include approximately $16.5 in 1997 and $19.8 in 1996 billed to customers but not paid pursuant to contract retainage provisions. These balances are due upon completion of the contracts, generally within one year. Unbilled receivables related to long-term contracts amount to $331.0 and $360.5 at December 31, 1997, and 1996, respectively, and are generally billable and collectible within one year. Long-term, interest-bearing notes receivable from the sale of assets have been reduced by valuation reserves of $1.5 in 1997 and $1.7 in 1996 to an amount that approximates realizable value. Honeywell entered into an agreement with a large international banking institution whereby it could sell an undivided interest in a designated pool of trade accounts receivable up to a maximum of $50.0 on an ongoing basis and without recourse. As collections reduce accounts receivable sold, Honeywell could sell an additional undivided interest in new receivables to bring the amount sold up to the $50.0 maximum. Proceeds received from the sale of receivables amounted to $238.0 in 1997, 38 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 8 -- RECEIVABLES (CONTINUED) $238.8 in 1996 and $22.4 in 1995. The uncollected balance of receivables sold amounted to $0.0 and $7.0 at December 31, 1997, and 1996, respectively, and averaged $19.7 and $23.2 during those respective years. This agreement was terminated in December 1997. In 1996, Honeywell entered into an asset securitization program with a large financial institution to sell, with recourse, certain eligible trade receivables up to a maximum of $50.0 Canadian dollars (approximately $34.8 and $36.5 U.S. Dollars at December 31, 1997 and 1996, respectively). As receivables transferred to the trust are collected, Honeywell may transfer additional receivables up to the predetermined facility limits. Gross receivables transferred to the trust amounted to $292.6 in 1997 and $31.5 in 1996. Honeywell retains the right to repurchase transferred receivables under the program, and included on the statement of financial position at year end are $27.7 and $31.5 in 1997 and 1996, respectively, of uncollected receivables held in trust. NOTE 9 -- INVENTORIES
1997 1996 --------- --------- Finished goods.................................................................... $ 379.3 $ 386.5 Inventories related to long-term contracts........................................ 151.4 122.7 Work in process................................................................... 211.3 185.8 Raw materials and supplies........................................................ 286.0 242.6 --------- --------- $ 1,028.0 $ 937.6
Inventories related to long-term contracts are net of payments received from customers relating to the uncompleted portions of such contracts in the amounts of $43.5 and $60.7 at December 31, 1997, and 1996, respectively. NOTE 10 -- GROSS PROPERTY, PLANT AND EQUIPMENT
1997 1996 --------- ---------- Land............................................................................ $ 68.7 $ 71.6 Buildings and improvements...................................................... 557.4 600.7 Machinery and equipment......................................................... 2,336.4 2,208.7 Construction in progress........................................................ 82.5 92.6 --------- ---------- $ 3,045.0 $ 2,973.6
NOTE 11 -- FOREIGN SUBSIDIARIES The following is a summary of financial data pertaining to foreign subsidiaries:
1997 1996 1995 --------- ---------- ---------- Net income.......................................................... $ 235.6 $ 172.9 $ 142.9 Assets.............................................................. $ 2,114.8 $ 1,847.8 $ 1,849.4 Liabilities......................................................... 1,019.0 838.5 802.8 --------- ---------- ---------- Net assets.......................................................... $ 1,095.8 $ 1,009.3 $ 1,046.6
39 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 11 -- FOREIGN SUBSIDIARIES (CONTINUED) Insofar as can be reasonably determined, there are no foreign-exchange restrictions that materially affect the financial position or the operating results of Honeywell and its subsidiaries. NOTE 12 -- INVESTMENTS IN OTHER COMPANIES Following is a summary of financial data pertaining to companies 20 to 50 percent owned. The principal company included is Yamatake-Honeywell Co., Ltd., located in Japan, of which Honeywell owned 21.7 and 23.3 percent of the outstanding common stock at December 31, 1997 and 1996, respectively. This investment had a market value of $216.9 and $329.8 at December 31, 1997, and 1996, respectively.
1997 1996 1995 --------- ---------- ---------- Sales............................................................... $ 1,971.5 $ 1,949.2 $ 2,065.1 Gross profit........................................................ 662.7 688.8 743.5 Net income.......................................................... 58.7 51.8 54.2 Equity in net income................................................ 12.9 13.3 13.6 Current assets...................................................... $ 1,427.8 $ 1,576.9 $ 1,400.6 Noncurrent assets................................................... 332.8 421.1 598.8 --------- ---------- ---------- 1,760.6 1,998.0 1,999.4 --------- ---------- ---------- Current liabilities................................................. 706.7 853.5 742.6 Noncurrent liabilities.............................................. 123.2 181.4 327.8 --------- ---------- ---------- 829.9 1,034.9 1,070.4 --------- ---------- ---------- Net assets.......................................................... $ 930.7 $ 963.1 $ 929.0 Equity in net assets................................................ $ 238.0 $ 241.0 $ 236.8
NOTE 13 -- INTANGIBLE ASSETS Intangible assets have been reduced by accumulated amortization as follows:
1997 1996 --------- --------- Goodwill.................................................................. $ 134.8 $ 74.9 Intangibles............................................................... 305.3 272.5
NOTE 14 -- DEBT SHORT-TERM DEBT Honeywell had general purpose lines of credit available totaling $1,683.1 at December 31, 1997. Committed revolving credit lines with 17 banks total $1,325.0, which management believes is adequate to meet its financing requirements, including support of commercial paper and bank note borrowings. These lines have commitment fee requirements. There were no borrowings on these lines at December 31, 1997. The remaining credit facilities of $358.1 have been arranged by non-U.S. subsidiaries in accordance with customary lending practices in their respective countries of operation. Borrowings against these lines amounted to $11.3 at December 31, 1997. The weighted-average interest rate on short-term borrowings outstanding at December 31, 1997, and 1996, respectively, was 40 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 14 -- DEBT (CONTINUED) as follows: commercial paper, 6.8 percent and 4.2 percent; and notes payable, 5.2 percent and 3.9 percent. Short-term debt consists of the following:
1997 1996 --------- --------- Commercial paper........................................................ $ 43.0 $ 86.5 Notes payable........................................................... 38.9 67.2 Current maturities of long-term debt.................................... 64.5 98.7 --------- --------- $ 146.4 $ 252.4
LONG-TERM DEBT
1997 1996 --------- --------- Honeywell Inc. 6.25% Deutsche mark bonds due 1997.................................... $ $ 96.6 7.15% to 7.71% due 1998............................................... 50.0 50.0 7.36% to 7.46% due 1999............................................... 70.5 70.5 7.35% due 2000........................................................ 75.0 75.0 6.60% due 2001........................................................ 100.0 100.0 6.75% due 2002........................................................ 200.0 8.63% due 2006........................................................ 100.0 100.0 7.00% due 2007........................................................ 350.0 7.13% due 2008........................................................ 200.0 200.0 7.45% to 10.50% due 2001 to 2010...................................... 24.4 27.1 Subsidiaries 3.0% to 10.0% due 1998 to 2008, various currencies.................... 71.4 94.8 --------- --------- 1,241.3 814.0 Less amount included in short-term debt................................. 64.5 98.7 --------- --------- $ 1,176.8 $ 715.3
The 6.25 percent Deutsche mark bonds matured in January 1997 and were linked to a currency exchange agreement that converted principal and interest payments into fixed U.S. dollar obligations with an interest cost of 8.17 percent. In May 1996, Honeywell established a $500.0 medium-term note program whereby it may issue notes with maturities beyond nine months in U.S. dollars or foreign currencies with fixed or variable interest rates. This facility was fully utilized in March 1997, as Honeywell issued $550.0 of new debt, primarily to fund the acquisition of Measurex Corporation. Of this new debt, $200.0 has a five year maturity and an interest rate of 6.75 percent. The remaining $350.0 is due 10 years from the issuance with an interest rate of seven percent. In August 1997, Honeywell filed a shelf registration statement which provides for the issuance of up to $500.0 of debt securities. At December 31, 1997, no debt had been issued against this facility. 41 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 14 -- DEBT (CONTINUED) Honeywell uses interest rate swaps to manage its interest rate exposures and its mix of fixed and floating interest rates. In 1994, Honeywell entered into interest rate swap agreements effectively converting $50.0 of the $70.5 of medium-term notes due in 1999 to floating-rate debt based on three-month LIBOR rates. In 1995, interest rate swap agreements were initiated to effectively convert $40.0 of medium-term notes back to fixed-rate debt. In 1996, Honeywell entered into interest rate swap agreements converting the $100.0 of bonds due in 2001 and $200.0 of bonds due in 2008 to floating-rate debt based on six-month LIBOR rates. In 1997, Honeywell entered into swap agreements converting the new $550.0 of debt from fixed-rate to floating-rate debt based on six-month LIBOR. In addition, $420.0 of debt and previous swaps were converted to fixed-rate debt. The swap agreements outstanding at December 31, 1997, expire as follows:$40.0 in 1998, $100.0 in 1999, $100.0 in 2001, $400.0 in 2002, $450.0 in 2007 and $250.0 in 2008. Annual sinking-fund and maturity requirements for the next five years on long-term debt outstanding at December 31, 1997, are as follows: 1998...................................................... $ 64.5 1999...................................................... 124.4 2000...................................................... 76.7 2001...................................................... 116.2 2002...................................................... 210.2 2003 and beyond........................................... 649.3 --------- Total long-term debt...................................... $ 1,241.3
Interest paid amounted to $95.0, $77.3 and $86.0 in 1997, 1996 and 1995, respectively. NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS All financial instruments are held for purposes other than trading. The estimated fair values of all nonderivative financial instruments approximate their carrying amounts in the statement of financial position with the exception of long-term debt. The estimated fair value of long-term debt is based on quoted market prices for the same or similar issues or on current rates available to Honeywell for debt of the same remaining maturities. The carrying amount of long-term debt was $1,241.3 and $814.0 at December 31, 1997, and 1996, respectively; and the fair value was $1,291.3 and $833.4 at December 31, 1997, and 1996, respectively. The estimated fair value of interest rate swaps, foreign currency contracts, and option contracts, which is the net unrealized market gain or loss, is based primarily on quotes obtained from various financial institutions that deal in these types of instruments. The following table summarizes the 42 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) notional value, carrying value and fair value of Honeywell's derivative financial instruments on and off the balance sheet.
AT DECEMBER 31, 1997 At December 31, 1996 --------------------------------- ---------------------------------- NOTIONAL CARRYING FAIR Notional Carrying Fair VALUE VALUE VALUE Value Value Value --------- ----------- --------- ---------- ----------- --------- Interest rate swaps............ $ 1,340.0 $ 0.0 $ 38.5 $ 390.0 $ 0.0 $ 7.2 Currency contracts............. 1,213.7 0.0 6.7 1,111.2 17.6 22.9 --------- --- --------- ---------- ----- --------- Total.......................... $ 2,553.7 $ 0.0 $ 45.2 $ 1,501.2 $ 17.6 $ 30.1 --------- --- --------- ---------- ----- --------- --------- --- --------- ---------- ----- ---------
Honeywell is exposed to credit risk to the extent of nonperformance by the counterparties to the foreign currency contracts and the interest rate swaps shown above. However, the credit ratings of the counterparties, which consist of a diversified group of financial institutions, are regularly monitored and risk of default is considered remote. NOTE 16 -- LEASING ARRANGEMENTS As lessee, Honeywell has minimum annual lease commitments outstanding at December 31, 1997, with the majority of the leases having initial periods ranging from one to 10 years. Following is a summary of operating lease information.
OPERATING LEASES ----------- 1998..................................................................... $ 139.5 1999..................................................................... 109.0 2000..................................................................... 77.0 2001..................................................................... 53.7 2002..................................................................... 34.5 2003 and beyond.......................................................... 154.8 ----------- $ 568.5
Rent expense for operating leases was $141.6 in 1997, $153.7 in 1996, and $143.4 in 1995. Substantially all leases are for plant, warehouse, office space and automobiles. A number of the leases contain renewal options ranging from one to 10 years. 43 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 17 -- CAPITAL STOCK
ADDITIONAL COMMON PAID-IN TREASURY STOCK CAPITAL STOCK ----------- ----------- ----------- Balance December 31, 1994................................. $ 282.4 $ 446.9 $ (1,576.5) Purchase of treasury stock -- 3,090,400 shares........................................ (129.3) Issued for Honeywell Foundation Pledge -- 1,000,000 treasury shares............................... 13.4 21.7 Issued for employee stock plans -- 1,814,714 shares........................................ 27.6 33.9 159,296 shares canceled................................. (0.2) (6.6) ----------- ----------- ----------- Balance December 31, 1995................................. $ 282.2 $ 481.3 $ (1,650.2) Purchase of treasury stock -- 2,904,000 shares........................................ (163.2) Issued for Honeywell Foundation Pledge -- 450,000 treasury shares................................. 8.3 9.2 Issued for employee stock plans -- 2,399,438 shares........................................ 55.8 40.7 317,192 shares canceled................................. (0.5) (16.6) ----------- ----------- ----------- Balance December 31, 1996................................. $ 281.7 $ 528.8 $ (1,763.5) Purchase of treasury stock -- 2,250,600 shares........................................ (154.3) Issued for Honeywell Foundation Pledge -- 285,700 treasury shares................................. 7.9 5.7 Issued for employee stock plans -- 1,892,638 shares........................................ 84.4 32.8 176,489 shares canceled................................. (0.2) (12.7) ----------- ----------- ----------- Balance December 31, 1997................................. $ 281.5 $ 608.4 $ (1,879.3)
STOCK-BASED COMPENSATION PLANS FOR KEY EMPLOYEES In 1997, the Board of Directors adopted, and the shareowners approved, the 1997 Honeywell Stock and Incentive Plan. The 1997 plan replaces the 1993 Honeywell Stock and Incentive Plan. Awards currently outstanding under the 1993 plan were not affected. The 1997 plan which terminates on April 15, 2002, provides for the award of up to 7,500,000 shares of common stock. The 1997 plan is intended to facilitate ownership and increase the interest of key employees in the growth and performance of Honeywell and motivate them to contribute to the Company's future success, thus enhancing the value of the Company for the benefit of shareowners. Also in 1997, the Board of Directors approved the 1997 Honeywell Employee Stock and Incentive Plan. This plan, which provides for the award of up to 2,000,000 shares of common stock, is primarily intended to retain and recognize non-executive employees for their contributions to Honeywell's success. 44 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 17 -- CAPITAL STOCK (CONTINUED) The 1993 Honeywell Stock and Incentive Plan, which expired with the adoption of the 1997 plan, provided for the award of up to 7,500,000 shares of common stock. Awards made under any of the above plans may be in the form of stock options, restricted stock or other stock-based awards. At December 31, 1997 there were 14,845,277 shares reserved for all employee plans. In 1996, Honeywell adopted Statement of Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based Compensation". As permitted by SFAS 123, Honeywell has elected to continue following the guidance of APB 25 for measurement and recognition of stock-based transactions with employees (See Note 1 on page 32). The compensation cost that has been charged against income, for the restricted stock and other stock-based awards, was $11.2, $12.2 and $3.2 in 1997, 1996 and 1995, respectively. No compensation cost has been recognized for the awards made in the form of stock options. If compensation cost for Honeywell's stock-based compensation plans had been determined based on the fair value at the grant dates for awards under those plans, consistent with the method provided in FAS 123, Honeywell's net income and basic earnings per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 --------- --------- --------- Net Income............................ As reported $ 471.0 $ 402.7 $ 333.6 Pro forma $ 456.2 $ 392.6 $ 329.7 Basic Earnings Per Share.............. As reported $ 3.71 $ 3.18 $ 2.62 Pro forma $ 3.59 $ 3.10 $ 2.59
FIXED STOCK OPTIONS Stock option grants are reviewed and approved by the Personnel Committee of the Board of Directors. Stock options are granted periodically at the fair market value of Honeywell common stock on the date of the grant and are typically exercisable one year from the grant date. In July 1997, Honeywell introduced an international stock purchase plan. This plan allows eligible employees the option to purchase Honeywell shares in July 2000, at an option price of $54.72. The number of shares estimated to be issued from this program are 133,614 and have been included in the fixed options numbers below. 45 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 17 -- CAPITAL STOCK (CONTINUED) A summary of the status of the fixed stock options as of December 31, 1997, 1996 and 1995 and changes during the years ending on those dates is presented below:
1997 1996 1995 ------------------------ ------------------------ ------------------------ WEIGHTED Weighted Weighted AVERAGE Average Average SHARES EXERCISE Shares Exercise Shares Exercise (000) PRICE (000) Price (000) Price --------- ------------- --------- ------------- --------- ------------- Fixed Options Outstanding at beginning of year................ 4,507 $ 39 5,963 $ 35 5,346 $ 30 Granted......................................... 1,784 $ 73 423 $ 54 1,891 $ 43 Assumed......................................... 671 $ 52 Exercised....................................... 1,287 $ 37 1,821 $ 31 1,248 $ 28 Forfeited....................................... 192 $ 67 58 $ 42 26 $ 39 Outstanding at end of year...................... 5,483 $ 51 4,507 $ 39 5,963 $ 35 Options exercisable at year-end................. 3,820 $ 41 4,088 $ 37 4,087 $ 31 Weighted average fair value of options granted during the year................................ $ 18.91 $ 14.19 $ 10.43
The weighted average fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model and represents the difference between the fair market value on the date of grant and the estimated market value on the exercise date. The following weighted-average assumptions are used in the Black Scholes model for grants in 1997, 1996 and 1995, respectively: dividend yield of two percent for all years; expected volatility of 24, 27 and 24 percent, risk-free interest rates of 5.6, 6.3 and 6.0 percent, and expected life of four years for all options except the international stock purchase plan which has a three year life. The "Assumed" line identifies the options Honeywell assumed in the acquisition of Measurex and converted to options to purchase Honeywell shares. For more information of these shares, see Note 2 on page 34. The following table summarizes information about fixed stock options outstanding at December 31, 1997. The fixed options outstanding include options issued under the new 1997 plans as well as the 1993 Honeywell Stock and Incentive Plan and the previous plans which the 1993 plan replaced.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ---------------------------------- SHARES SHARES OUTSTANDING AT REMAINING EXERCISABLE AT RANGE OF 12/31/97 CONTRACTUAL WEIGHTED AVERAGE 12/31/97 WEIGHTED AVERAGE EXERCISE PRICES (000) LIFE EXERCISE PRICE (000) EXERCISE PRICE - ------------------- --------------- ----------- ----------------- --------------- ----------------- $16-$24 114 1.7 yrs $ 21 114 $ 21 $25-$36 1,061 5.0 yrs $ 32 1,061 $ 32 $37-$54 2,331 7.4 yrs $ 44 2,331 $ 44 $55-$80 1,977 8.6 yrs $ 71 313 $ 60
RESTRICTED STOCK AWARDS Restricted shares of common stock are issued to certain key employees as compensation and as incentives tied to Honeywell performance. Restricted shares issued as compensation are awarded with a fixed restriction period ranging from three to six years. In 1993, shares were issued and tied to 46 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 17 -- CAPITAL STOCK (CONTINUED) performance goals which restricted the shares until the earlier to occur of: (i) the achievement of performance goals within a specified measurement period, not more than three years, or (ii) nine years. The vesting of performance shares awarded in 1996 to senior executives was established at not more than two years. Owners of restricted shares have the rights of shareowners, including the right to receive cash dividends and the right to vote. Restricted shares forfeited revert to Honeywell at no cost. Restricted shares issued totaled 237,009 in 1997, 371,917 in 1996 and 212,781 in 1995. At December 31, restricted shares outstanding under key employee plans totaled 913,667 in 1997, 835,443 in 1996 and 665,005 in 1995, with a weighted average grant date fair value of $55 and $46 in 1997 and 1996, respectively. EMPLOYEE STOCK MATCH PLANS In 1990, Honeywell adopted Stock Match and Performance Stock Match plans under which Honeywell matches, in the form of Honeywell common stock, certain eligible U.S. employee savings plan contributions. Employees are vested in the shares after three years of employment. Shares issued under the stock match plans totaled 542,406 in 1997, 394,534 in 1996 and 571,905 shares in 1995 at a cost of $37.9, $23.4 and $24.2, respectively. There were 204,889 shares reserved for employee stock match plans at December 31, 1997. STOCK PLEDGE In 1993, Honeywell pledged to the Honeywell Foundation a five-year option to purchase 2,000,000 shares of common stock at $33 per share. This option is transferable to charitable organizations and exercisable in whole or in part, subject to certain conditions, from time to time during its term. Shares purchased under the option totaled 285,700 in 1997, 450,000 in 1996 and 1,000,000 in 1995. PREFERENCE STOCK Twenty-five million preference shares with a par value of $1 have been authorized. None have been issued at December 31, 1997. NOTE 18 -- RETAINED EARNINGS
1997 1996 1995 --------- ---------- ---------- Balance January 1......................................... $ 3,074.7 $ 2,805.8 $ 2,600.4 Net income................................................ 471.0 402.7 333.6 Dividends 1997-$1.09 PER SHARE.................................... (138.7) 1996-$1.06 per share.................................... (133.8) 1995-$1.01 per share.................................... (128.2) --------- ---------- ---------- Balance December 31....................................... $ 3,407.0 $ 3,074.7 $ 2,805.8
Included in retained earnings are undistributed earnings of companies 20 to 50 percent owned, amounting to $165.5 at December 31, 1997. 47 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 19 -- SEGMENT INFORMATION Honeywell is a global controls company focused on creating value through control technology. Honeywell serves customers worldwide through operations engaged in the design, development, manufacture, marketing and service of control solutions in three industry segments -- Home and Building Control, Industrial Control and Space and Aviation Control. Honeywell's broad range of products, systems, and services provide solutions worldwide as our customers look to improve productivity, energy efficiency and environmental protection, increase safety, and enhance comfort. Home and Building Control provides products and services to create efficient, safe, comfortable environments by offering controls for heating, ventilation, humidification and air-conditioning equipment; security and fire alarm systems; home automation systems; energy-efficient lighting controls; building management systems and services; and home comfort consumer products. Customers include building managers and owners; distributors and wholesalers; heating, ventilation and air conditioning manufacturers; home builders; home owners; and original equipment manufacturers. Industrial Control produces systems for the automation and control of process operations in industries such as oil refining, oil and gas drilling, pulp and paper manufacturing, food processing, chemical manufacturing and power generation; solid-state sensors for position, pressure, air flow, temperature and current; precision electromechanical switches; manual controls; advanced vision-based sensors; and fiber-optic components. Customers include appliance manufacturers; automotive companies; food processing companies; oil and gas producers; refining and petrochemical companies; pharmaceutical companies; paper companies; and utilities. Space and Aviation Control is a full-line avionics supplier and systems integrator for commercial, military and space applications, providing automatic flight control systems, electronic cockpit displays, flight management systems, navigation, surveillance and warning systems, severe weather avoidance systems and flight reference sensors. Customers include airframe manufacturers; international, national and regional airlines; NASA; prime U.S. defense contractors; and the U.S. Department of Defense. In addition to the three industry segments, Honeywell has two research and development operations that promote technology and products to both external customers and operating units. The results of these research operations comprise primarily the "other" category. Information concerning Honeywell's sales, operating profit and identifiable assets by industry segment can be found on pages 12 and 13. This information for 1997, 1996 and 1995 is an integral part of these financial statements. Sales include external sales only. Intersegment sales are not significant. Corporate and other assets include the assets of the entities in the "other" category and cash, short-term investments, investments, property and deferred taxes held by corporate. 48 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 19 -- SEGMENT INFORMATION (CONTINUED) Following is additional financial information relating to industry segments:
1997 1996 1995 --------- --------- --------- Capital expenditures Home and Building Control..................................... $ 117.8 $ 106.8 $ 87.2 Industrial Control............................................ 76.1 74.8 73.0 Space and Aviation Control.................................... 59.7 55.8 42.9 Corporate and other........................................... 44.7 59.1 35.0 --------- --------- --------- $ 298.3 $ 296.5 $ 238.1 Depreciation and amortization Home and Building Control..................................... $ 86.3 $ 98.4 $ 87.4 Industrial Control............................................ 71.6 72.3 69.3 Space and Aviation Control.................................... 55.3 84.0 109.7 Corporate and other........................................... 32.8 32.8 26.5 --------- --------- --------- $ 246.0 $ 287.5 $ 292.9
Honeywell is a global company and as such engages in material operations in countries worldwide. Geographic areas of operation include Europe, Canada, Mexico, Asia, Australia, and South America. Following is financial information relating to geographic areas:
1997 1996 1995 --------- ---------- ---------- External sales United States........................................... $ 4,843.5 $ 4,477.9 $ 4,087.5 Europe.................................................. 2,136.1 1,981.7 1,858.9 Other areas............................................. 1,047.9 852.0 784.9 --------- ---------- ---------- $ 8,027.5 $ 7,311.6 $ 6,731.3 Transfers between geographic areas United States........................................... $ 410.8 $ 364.4 $ 318.6 Europe.................................................. 79.6 73.2 67.1 Other areas............................................. 102.8 77.5 61.5 --------- ---------- ---------- $ 593.2 $ 515.1 $ 447.2 Total sales United States........................................... $ 5,254.3 $ 4,842.3 $ 4,406.1 Europe.................................................. 2,215.7 2,054.9 1,926.0 Other areas............................................. 1,150.7 929.5 846.4 Eliminations............................................ (593.2) (515.1) (447.2) --------- ---------- ---------- $ 8,027.5 $ 7,311.6 $ 6,731.3
49 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 19 -- SEGMENT INFORMATION (CONTINUED)
1997 1996 1995 --------- ---------- ---------- Operating profit United States........................................... $ 528.5 $ 484.2 $ 425.4 Europe.................................................. 234.1 203.0 191.7 Other areas............................................. 111.3 83.0 55.7 --------- ---------- ---------- Operating profit........................................ 873.9 770.2 672.8 Interest expense........................................ (101.9) (81.4) (83.3) Equity income........................................... 12.9 13.3 13.6 General corporate expense............................... (81.7) (91.9) (97.6) --------- ---------- ---------- Income before income taxes.............................. $ 703.2 $ 610.2 $ 505.5 Identifiable Assets United States........................................... $ 3,195.6 $ 2,828.3 $ 2,331.1 Europe.................................................. 1,542.8 1,479.9 1,375.0 Other areas............................................. 617.8 444.9 461.4 Corporate............................................... 1,055.2 740.2 892.7 --------- ---------- ---------- $ 6,411.4 $ 5,493.3 $ 5,060.2
Honeywell transfers products from one geographic region for resale in another. These transfers are priced to provide both areas with an equitable share of the overall profit. In 1997, Honeywell committed itself to a plan of action and recorded special charges of $90.7 to reduce operating costs and improve margins. At December 31, 1997, $35.9 had been paid and was funded by cash flows from operations. Operating profit is net of provisions for special charges amounting to $90.7 in 1997 as follows: United States, $61.3; Europe, $27.7; other areas, $1.7. NOTE 20 -- PENSION PLANS Honeywell and its subsidiaries have noncontributory defined benefit pension plans that cover a substantial majority of their U.S. employees. The plan covering non-union employees provides pension benefits based on employee average earnings during the highest paid 60 consecutive calendar months of employment during the 10 years prior to retirement. The plan covering union employees provides pension benefits of stated amounts for each year of credited service. Funding for these plans is provided solely through contributions from Honeywell determined by the Board of Directors after consideration of recommendations from the plans' independent actuary. Such recommendations are based on actuarial valuations of benefits payable under the plans. 50 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 20 -- PENSION PLANS (CONTINUED) The components of net periodic pension cost for U.S. defined benefit pension plans are as follows:
U.S. Defined 1997 1996 1995 - ------------------------------------------------------------- --------- --------- --------- Service cost of benefits earned during the period............ $ 54.2 $ 55.6 $ 50.5 Interest cost of projected benefit obligation................ 236.9 226.3 222.8 Actual return on assets...................................... (721.0) (339.1) (400.8) Net amortization and deferral................................ 489.8 130.6 228.9 --------- --------- --------- $ 59.9 $ 73.4 $ 101.4
Following is a summary of assumptions used in the accounting for the U.S. defined benefit plans.
U.S. Defined 1997 1996 1995 - --------------------------------------------------------------------- ---------- ----------- ----------- Discount rate used in determining present values..................... 7.5% 7.8% 7.5% Annual increase in future compensation levels........................ 4.4% 4.7% 4.4% Expected long-term rate of return on assets.......................... 9.5% 9.5% 8.5%
Employees in foreign countries who are not U.S. citizens are covered by various retirement benefit arrangements, some of which are considered to be defined benefit pension plans for accounting purposes. The net cost of all foreign pension plans amounted to $15.7 in 1997, $10.9 in 1996, and $(3.6) in 1995. The components of net periodic pension cost for foreign defined benefit pension plans governed by Financial Accounting Standard No. 87 are as follows:
Foreign Defined 1997 1996 1995 - -------------------------------------------------------------- --------- --------- --------- Service cost of benefits earned during the period............. $ 33.7 $ 33.6 $ 31.2 Interest cost of projected benefit obligation................. 58.0 58.3 55.7 Actual return on assets....................................... (127.9) (102.8) (90.6) Net amortization and deferral................................. 50.4 19.6 (3.2) --------- --------- --------- $ 14.2 $ 8.7 $ (6.9)
Assumptions used in the accounting for foreign defined benefit plans were:
Foreign Defined 1997 1996 1995 - -------------------------------------------------------- ---------- ----------- ------------ Discount rate used in determining present values........ 4.5-8.5% 4.5-9.0% 4.5-9.5% Annual increase in future compensation levels........... 2.0-6.8% 2.0-7.0% 2.0-7.25% Expected long-term rate of return on assets............. 5.5-9.0% 5.5-9.0% 5.5-9.0%
51 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 20 -- PENSION PLANS (CONTINUED) The plans' funded status as of September 30, adjusted for fourth quarter contributions, and amounts recognized in Honeywell's statement of financial position for its pension plans are summarized below.
Plans Whose Assets Plans Whose Exceed Accumulated Accumulated Benefits 1997 (U.S. and Foreign) Benefits Exceed Assets - ------------------------------------------------------------------------------------- ------------ ------------- Actuarial present value of benefit obligations: Vested benefit obligation.......................................................... $ (3,318.6) $ (162.3) Accumulated benefit obligation..................................................... $ (3,610.9) $ (182.6) Projected benefit obligation....................................................... $ (3,973.1) $ (204.3) Plan assets at fair value............................................................ 4,525.2 118.4 ------------ ------------- Projected benefit obligation (in excess of) less than plan assets.................... 552.1 (85.9) Remaining unrecognized net transition (asset) obligation............................. (63.0) 34.1 Unrecognized prior service cost...................................................... 206.9 7.9 Unrecognized net (gain) loss......................................................... (332.5) 30.2 Fourth-quarter 1997 contributions to plans........................................... 20.0 1.0 Adjustment to recognize maximum liability............................................ (50.5) ------------ ------------- Overfunded (unfunded) pension asset (liability) recognized in the statement of financial position.................................................................. $ 383.5 $ (63.2)
Plans Whose Plans Whose Assets Accumulated Exceed Benefits Accumulated Exceed 1996 (U.S. and Foreign) Benefits Assets - ------------------------------------------------------------------------------------- ------------ ------------ Actuarial present value of benefit obligations: Vested benefit obligation.......................................................... $ (3,193.1) $ (163.0) Accumulated benefit obligation..................................................... $ (3,462.2) $ (192.5) Projected benefit obligation....................................................... $ (3,798.9) $ (211.3) Plan assets at fair value............................................................ 3,845.0 118.9 ------------ ------------ Projected benefit obligation (in excess of) less than plan assets.................... 46.1 (92.4) Remaining unrecognized net transition (asset) obligation............................. (81.1) 41.4 Unrecognized prior service cost...................................................... 233.2 9.0 Unrecognized net loss................................................................ 40.5 25.0 Other................................................................................ 0.1 (1.3) Fourth-quarter 1996 contributions to plans........................................... 20.3 0.6 Adjustment to recognize minimum liability............................................ (17.8) ------------ ------------ Overfunded (unfunded) pension asset (liability) recognized in the statement of financial position.................................................................. $ 259.1 $ (35.5)
Adjustments recorded to recognize the minimum liability required for defined benefit pension plans whose accumulated benefits exceed assets amounted to $50.5 in 1997 and $17.8 in 1996. 52 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 20 -- PENSION PLANS (CONTINUED) A corresponding amount was recognized as an intangible asset to the extent of unrecognized prior service cost and unrecognized transition obligation. At December 31, 1997, $11.3 of excess minimum liability resulted in a reduction in shareowners' equity, net of income taxes, of $6.9. At December 31, 1996, $8.0 of excess minimum liability resulted in a reduction in shareowners' equity, net of income taxes, of $4.9. Plan assets are held by trust funds devoted to servicing pension benefits and are not available to Honeywell until all covered benefits are satisfied after a plan is terminated. The assets held by the trust funds consist primarily of a diversified portfolio of fixed-income investments and equity securities. NOTE 21 -- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Substantially all of Honeywell's domestic and Canadian employees who retire from Honeywell between the ages of 55 and 65 with 10 or more years of service are eligible to receive medical benefits, until age 65, identical to those available to active employees. Honeywell funds postretirement benefits on a pay-as-you-go basis. The components of net periodic postretirement benefit cost are as follows:
1997 1996 1995 --------- --------- --------- Service cost of benefits earned during the period................... $ 8.2 $ 13.0 $ 11.5 Interest cost on accumulated postretirement benefit obligation...... 18.3 22.4 23.1 Net amortization.................................................... (7.1) 0.9 1.1 --------- --------- --------- $ 19.4 $ 36.3 $ 35.7
Unrecognized net gains or losses in excess of 10 percent of the accumulated postretirement benefit obligation are amortized over ten years. The amounts recognized in Honeywell's statement of financial position are as follows:
1997 1996 --------- --------- Accumulated postretirement benefit obligation: Retirees................................................................ $ 72.9 $ 78.9 Fully eligible active plan participants................................. 46.4 60.2 Other active plan participants.......................................... 127.0 148.3 --------- --------- Subtotal................................................................ 246.3 287.4 Unrecognized prior service cost......................................... (4.3) (6.0) Unrecognized net gain................................................... 82.4 41.0 --------- --------- Accrued postretirement benefit cost....................................... $ 324.4 $ 322.4
The discount rate used in determining the APBO was 7.5 percent in 1997 and 1996. The assumed health-care cost trend rate used in measuring the APBO was 5.0 percent in 1997 and 1996. The health-care cost trend rate assumption has a significant effect on the amounts reported. For example, a one percent increase in the health-care trend rate would increase the APBO by 9.2 percent at September 30, 1997, and the service and interest cost components of the net periodic benefit cost by 12.0 percent for 1997. 53 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 22 -- CONTINGENCIES LITTON LITIGATION On March 13, 1990, Litton Systems, Inc. filed a legal action against Honeywell in U.S. District Court, Central District of California, Los Angeles, (the "trial court") with claims that were subsequently split into two separate cases. One alleges patent infringement under federal law for using an ion-beam process to coat mirrors incorporated in Honeywell's ring laser gyroscopes, and tortious interference under state law for interfering with Litton's prospective advantage with customers and contractual relationships with an inventor and his company, Ojai Research, Inc. The other case alleges monopolization and attempted monopolization under federal antitrust laws by Honeywell in the sale of inertial reference systems containing ring laser gyroscopes into the commercial aircraft market. Honeywell generally denied Litton's allegations in both cases. In the patent/tort case, Honeywell also contested the validity as well as the infringement of the patent, alleging, among other things, that the patent had been obtained by Litton's inequitable conduct before the United States Patent and Trademark Office. PATENT/TORT CASE U.S. District Court Judge Mariana Pfaelzer presided over the patent infringement and tortious interference trial and on August 31, 1993, a jury returned a verdict in favor of Litton, awarding damages against Honeywell in the amount of $1.2 billion. Honeywell filed post-trial motions contesting the verdict and damage award. On January 9, 1995, the trial court set them aside, ruling, among other things, that the Litton patent was invalid due to obviousness, unenforceable because of Litton's inequitable conduct before the Patent and Trademark Office, and in any case, not infringed by Honeywell's current process. It further ruled that the state tort claims were not supported by sufficient evidence. The trial court also held that if its rulings concerning liability were vacated or reversed on appeal, Honeywell should be granted a new trial on the issue of damages because the jury's award was inconsistent with the clear weight of the evidence and based upon a speculative damage study. Litton appealed to the U.S. Court of Appeals for the Federal Circuit (the "Federal Circuit"), and on July 3, 1996, in a two to one split decision, a three judge panel of that court reversed the trial court's rulings of patent invalidity, unenforceability and non-infringement, and also found Honeywell to have violated California law by intentionally interfering with Litton's consultant contracts and customer prospects. However, the panel upheld two trial court rulings favorable to Honeywell, namely that Honeywell was entitled to a new trial for damages on all claims and also to a grant of intervening patent rights which are to be defined and quantified by the trial court. After unsuccessfully requesting an "en banc" rehearing of the panel's decision by the full Federal Circuit appellate court, Honeywell filed a petition for "certiorari" with the U.S. Supreme Court on November 26, 1996, seeking review of the panel's decision. In the interim, Litton filed a motion and briefs with the trial court seeking injunctive relief. After Honeywell and certain aircraft manufacturers filed briefs and made oral arguments opposing the injunction, the trial court denied Litton's motion on public interest grounds on December 23, 1996, and then scheduled the patent/tort damages retrial for May 6, 1997. On March 17, 1997, the U.S. Supreme Court granted Honeywell's petition for review in the patent/tort case and vacated the July 3, 1996 Federal Circuit panel decision. The case was then remanded to the Federal Circuit panel for reconsideration in light of a recent decision by the U.S. 54 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 22 -- CONTINGENCIES (CONTINUED) Supreme Court in the WARNER-JENKINSON V. HILTON DAVIS case, which refined the law concerning patent infringement under the doctrine of equivalents. On March 21, 1997, Litton also filed a notice of appeal to the Federal Circuit of the trial court's December 23, 1996 decision to deny injunctive relief, but the Federal Circuit stayed any briefing or consideration of that matter until such time as it completes the reconsideration of liability issues ordered by the U.S. Supreme Court. Following the submission of briefs, the parties argued the liability issues before the same three judge Federal Circuit panel on September 30, 1997, and that panel has not indicated when it will issue a decision. The panel could rule, in whole or in part, for Honeywell or in favor of Litton, and any such ruling could be subject to further appeal by either party. The damages only retrial for the patent and tort claims, originally scheduled to commence in May 1997, was postponed indefinitely pending the decision of the Federal Circuit on liability. Before that postponement occurred Litton had submitted a revised damage study to the trial court, seeking damages as high as $1.9 billion. Honeywell believes that Litton's damage study remains flawed and speculative for a number of reasons, and depending upon the outcome of the appeal concerning liability, it may be necessary for Litton to further revise its study. It is not possible at this time to predict the outcome of appeals in this case, or the verdict in any retrial which may occur thereafter, but certain potential judgments could be material to Honeywell. Honeywell believes, however, that any award of damages for infringement or interference should be based upon a reasonable royalty reflecting the value of the ion-beam coating process, and further that such an award would not be material to Honeywell's financial position or results of operations. No provision has been made in the financial statements with respect to this contingent liability. ANTITRUST CASE Preparations for, and conduct of, the antitrust case have generally followed the completion of comparable proceedings in the patent/tort case. Trial did not begin in the antitrust case until November 20, 1995. Judge Pfaelzer also presided over this trial, but it was held before a different jury. At the close of evidence and before jury deliberations began, the trial court dismissed, for failure of proof, Litton's contentions that Honeywell had illegally monopolized and attempted to monopolize by engaging in below-cost predatory pricing; tying and bundling product offerings under packaged pricing; misrepresenting its products and disparaging Litton products; and acquiring the Sperry Avionics business in 1986. On February 2, 1996, the case was submitted to the jury on the remaining allegations that Honeywell had illegally monopolized and attempted to monopolize by entering into certain long-term exclusive dealing and penalty arrangements with aircraft manufacturers and airlines to exclude Litton from the commercial aircraft market, and by failing to provide Litton with access to proprietary software used in the cockpits of certain business jets. On February 29, 1996, the jury returned a $234 million single damages verdict against Honeywell for illegal monopolization which verdict would have been automatically trebled. On March 1, 1996, the jury indicated that it was unable to reach a verdict on damages for attempted monopolization, and a mistrial was declared as to that claim. Honeywell subsequently filed a motion for judgment as a matter of law and a motion for a new trial, contending, among other things, that the jury's partial verdict should be overturned because Honeywell was prejudiced at trial, and Litton failed to prove essential elements of liability or submit 55 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 22 -- CONTINGENCIES (CONTINUED) competent evidence to support its speculative, all-or-nothing $298.5 million damage claim. Litton filed a motion for entry of judgment and a motion for injunctive relief. On July 24, 1996, the trial court denied Honeywell's alternative motions for judgment as a matter of law or a complete new trial, but concluded that Litton's damage study was seriously flawed and granted Honeywell a retrial on damages only. The court also denied Litton's two motions. At that time, Judge Pfaelzer was expected to conduct the retrial of antitrust damages sometime following the retrial of patent/tort damages. These retrials will be held before two new, and different, juries. However, after the U.S. Supreme Court remanded the patent/tort case to the Federal Circuit in March 1997, Litton moved to have the trial court expeditiously schedule the antitrust damages retrial. In September 1997, the trial court rejected that motion, indicating that it wished to know the outcome of the current patent/tort appeal before scheduling retrials of any type. Honeywell believes there are questions concerning the identity and nature of the business arrangements and conduct which were found by the antitrust jury in 1996 to be anti-competitive and damaging to Litton, and that consequently any damages retrial will also require a reappraisal of liability in some respects by the next antitrust jury. Following this retrial, Honeywell will have the right to appeal the eventual judgment, as to both liability and damages, to the U.S. Court of Appeals for the Ninth Circuit. As a result of the uncertainty regarding the outcome of this matter, no provision has been made in the financial statements with respect to this contingent liability. Honeywell further believes that it would be inappropriate for Litton to obtain recovery of the same damages, e.g. losses it suffered due to Honeywell's sales of ring laser gyroscope-based inertial systems to OEMs and airline customers, under multiple legal theories and claims, and that eventually no duplicative recovery will be permitted in and among the patent/tort and antitrust cases. In the fall of 1996, Litton and Honeywell commenced a court ordered mediation of the patent, tort and antitrust claims. No claim was resolved or settled, and the mediation is currently in recess. ENVIRONMENTAL MATTERS Honeywell's manufacturing sites generate both hazardous and nonhazardous wastes, the treatment, storage, transportation and disposal of which are subject to various local, state and federal laws relating to protection of the environment. Honeywell is in varying stages of investigation or remediation of potential, alleged or acknowledged contamination at currently or previously owned or operated sites and at off-site locations where its wastes were taken for treatment or disposal. In connection with the cleanup of various off-site locations, Honeywell, along with a large number of other entities, has been designated a potentially responsible party (PRP) by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act or by state agencies under similar state laws (Superfund), which potentially subject PRPs to joint and several liability for the costs of such cleanup. In addition, Honeywell is incurring costs relating to environmental remediation pursuant to the federal Resource Conservation and Recovery Act. Based on Honeywell's assessment of the costs associated with its environmental responsibilities, compliance with federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had and, in the opinion of Honeywell management, will not have a material effect on Honeywell's financial position, net income, capital expenditures or competitive position. Honeywell's opinion with regard to Superfund matters is based 56 NOTES TO FINANCIAL STATEMENTS (CONTINUED) HONEYWELL INC. AND SUBSIDIARIES (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS) NOTE 22 -- CONTINGENCIES (CONTINUED) on its assessment of the predicted investigation, remediation and associated costs, its expected share of those costs, and the availability of legal defenses. In October 1996, The American Institute of Certified Public Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." This SOP provides guidance on specific accounting issues that are present in the recognition, measurement, display and disclosure of environmental remediation liabilities. The provisions of the SOP were adopted by Honeywell in 1997 and the discounted liabilities were not materially different from the undiscounted environmental liability. OTHER MATTERS Honeywell is a party to a large number of other legal proceedings, some of which are for substantial amounts. It is the opinion of management that any losses in connection with these matters will not have a material effect on Honeywell's net income, financial position or liquidity. Honeywell has entered into letter of credit agreements with various financial institutions to support certain financing instruments and insurance policies aggregating approximately $204.8 at December 31, 1997. NOTE 23 -- QUARTERLY DATA (UNAUDITED)
1997 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. - -------------------------------------------- ---------- ---------- ---------- ---------- Sales....................................... $ 1,685.7 $ 1,977.3 $ 2,038.7 $ 2,325.8 Cost of sales............................... 1,149.7 1,359.1 1,390.3 1,526.0 Net income.................................. 75.6 98.4 118.9 178.1 Basic earnings per share.................... 0.60 0.77 0.93 1.41 Diluted earnings per share.................. 0.59 0.76 0.92 1.38
1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. - -------------------------------------------- ---------- ---------- ---------- ---------- Sales....................................... $ 1,619.5 $ 1,771.6 $ 1,803.1 $ 2,117.4 Cost of sales............................... 1,109.0 1,222.6 1,221.7 1,422.1 Net income.................................. 65.1 83.3 101.1 153.2 Basic earnings per share.................... 0.51 0.66 0.80 1.21 Diluted earnings per share.................. 0.50 0.65 0.78 1.18
Shareowners of record on January 30, 1998, totaled 30,819. The fourth quarter of 1997 includes a $16.8 gain from the sale of businesses ($11.5 after-tax) and special charges of $30.3 ($20.8 after-tax). 57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No report on Form 8-K reporting a change in Honeywell's certifying independent accountants has been filed within the 24 months prior to the date of the most recent financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pages 8 through 12 of the Honeywell Notice of 1998 Annual Meeting and Proxy Statement are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Pages 15 through 23 of the Honeywell Notice of 1998 Annual Meeting and Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Page 14 of the Honeywell Notice of 1998 Annual Meeting and Proxy Statement are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 58 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS A PART OF THIS REPORT 1. FINANCIAL STATEMENTS The financial statements required to be filed as part of this Annual Report on Form 10-K are listed below with their location in this report.
PAGE --------- Honeywell Inc. and Subsidiaries: Independent Auditors' Report....................................................... 28 Income Statement................................................................... 29 Statement of Financial Position.................................................... 30 Statement of Cash Flows............................................................ 31 Notes to Financial Statements...................................................... 32
2. FINANCIAL STATEMENT SCHEDULES The schedules required to be filed as part of this Annual Report on Form 10-K are listed below with their location in this report. PAGE ---- Honeywell Inc. and Subsidiaries: Independent Auditors' Report.................... 28 Schedules for the Years Ended December 31, 1997, 1996 and 1995: II -- Valuation Reserves................ 63 All schedules, other than indicated above, are omitted because of the absence of the conditions under which they are required or because the information required is shown in the financial statements or notes thereto. 59 3. EXHIBITS Documents Incorporated by Reference: (3)(i) Restated Certificate of Incorporation of Honeywell Inc. dated June 18, 1991 is incorporated by reference to Exhibit 3(a) to Honeywell Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission file number 1-971. (4)(i) Rights Agreement between Honeywell Inc. and Chemical Mellon Shareholder Services L.L.C., as Rights Agent, dated as of January 16, 1996 is incorporated by reference to Exhibit 4 to Honeywell's Current Report on Form 8-K dated January 31, 1996. (4)(ii)(a) Indenture, dated as of August 1, 1994, between Honeywell Inc. and The Chase Manhattan Bank (National Association), as Trustee for Honeywell Inc. Medium-Term Notes, Series A is incorporated by reference to Exhibit (4)(b) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (4)(ii)(b) Indenture, dated as of July 15, 1996, between Honeywell Inc., as Guarantor, Honeywell Canada Limited, Honeywell N.V. and The Chase Manhattan Bank (National Association), as Trustee for Honeywell Inc., Honeywell Canada Limited, Honeywell N.V. is incorporated by reference to Exhibit 4.2 to Honeywell's Current Report on Form 8-K dated July 18, 1996. (10)(i)(a) Credit Agreement dated as of April 15, 1997 among Honeywell Inc., Morgan Guaranty Trust Company of New York, as Documentation Agent, Citicorp USA, Inc., Chase Securities Inc. and J.P. Morgan Securities Inc., as Co-Arrangers and The Chase Manhattan Bank, as Administrative Agent is incorporated by reference to Exhibit 99(ii) to Honeywell's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1997. (10)(iii)(a) Honeywell Key Employee Severance Plan, as amended is incorporated by reference to Exhibit (10)(iii)(a) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.* (10)(iii)(b) Honeywell Supplementary Executive Retirement Plan for Mid-Career Hires, as amended is incorporated by reference to Exhibit (10)(iii)(b) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.* (10)(iii)(c) Honeywell-Norwest Rabbi Trust Agreement, as amended is incorporated by reference to Exhibit (10)(iii)(c) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.* (10)(iii)(d) 1993 Honeywell Stock and Incentive Plan, is incorporated by reference to Exhibit (10)(iii)(d) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.* (10)(iii)(e) 1988 Honeywell Stock and Incentive Plan, is incorporated by reference to Exhibit (10)(iii)(e) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.* (10)(iii)(g) Honeywell Corporate Executive Compensation Plan, as amended is incorporated by reference to Exhibit (10)(iii)(g) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.* (10)(iii)(h) Honeywell Supplementary Executive Retirement Plan for Compensation in Excess of $200,000, as amended is incorporated by reference to Exhibit (10)(iii)(h) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.*
60 (10)(iii)(i) Honeywell Supplementary Executive Retirement Plan for CECP Participants, as amended is incorporated by reference to Exhibit (10)(iii)(i) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.* (10)(iii)(j) Honeywell Supplementary Retirement Plan, as amended is incorporated by reference to Exhibit (10)(iii)(j) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.* (10)(iii)(k) Honeywell Supplementary Executive Retirement Plan for Benefits in Excess of Limits Under Tax Reform Act of 1986, as amended is incorporated by reference to Exhibit (10)(iii)(k) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.* (10)(iii)(l) Honeywell Executive Life Insurance Agreement, is incorporated by reference to Exhibit 10(iii)(m) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.* (10)(iii)(m) Form of Executive Termination Contract is incorporated by reference to Exhibit (10)(iii)(m) to Honeywell's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.* (10)(iii)(n) Honeywell Senior Management Performance Incentive Plan is incorporated by reference to Exhibit (10)(iii)(o) to Honeywell's Annual Report on Form 10-K for the fiscal year ended 1996.* (99)(ii) Honeywell Notice of 1998 Annual Meeting and Proxy Statement.** Exhibits submitted herewith: (3)(ii) By-laws of Honeywell Inc., as amended through April 15, 1997. (10)(iii)(f) Honeywell Non-Employee Directors Fee and Stock Unit Plan, as amended through June 17, 1997.* (10)(iii)(o) 1997 Honeywell Stock and Incentive Plan.* (11) Computation of Earnings Per Share. (12) Computation of Ratios of Earnings to Fixed Charges. (21) Subsidiaries of Honeywell. (23) Consent of Independent Auditors. (24) Powers of Attorney. (27) Financial Data Schedule. (99)(i) Cautionary Statements for Purposes of the Safe Harbor Provisions of The Private Securities Litigation Reform Act of 1995.
(B) REPORTS ON FORM 8-K None - ------------------------ *Management contract or compensatory plan or arrangement. **Only the portions of Exhibit (99)(ii) specifically incorporated by reference are deemed filed with the Commission. 61 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. HONEYWELL INC. By: /s/ KATHLEEN M. GIBSON ----------------------------------------- Kathleen M. Gibson, VICE PRESIDENT AND CORPORATE SECRETARY Dated: March 17, 1998 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 dates indicated.
SIGNATURE TITLE - ----------------------------- ---------------------------------------------------------------------------- M. R. BONSIGNORE Chairman of the Board and Chief Executive Officer, and Director L.W. STRANGHOENER Vice President and Chief Financial Officer P. M. PALAZZARI Vice President and Controller, and Principal Accounting Officer A. J. BACIOCCO, JR. Director E. E. BAILEY Director W. H. DONALDSON Director G. FERRARI Director R. D. FULLERTON Director J. J. HOWARD Director B. E. KARATZ Director A. B. RAND Director S. G. ROTHMEIER Director M. W. WRIGHT Director
By: /s/ KATHLEEN M. GIBSON ------------------------- Kathleen M. Gibson, ATTORNEY-IN-FACT March 17, 1998 62 SCHEDULE II HONEYWELL INC. AND SUBSIDIARIES VALUATION RESERVES FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN MILLIONS)
BALANCE AT ADDITIONS DEDUCTIONS BALANCE BEGINNING CHARGED TO FROM AT CLOSE OF YEAR INCOME RESERVES OF YEAR ----------- ----------- ------------ --------- Reserves deducted from assets to which they apply -- allowance for doubtful accounts: RECEIVABLES -- CURRENT Year ended December 31, 1997.................................... $ 33.5 $ 14.1 (1) $ 9.1 (2) $ 38.5 Year ended December 31, 1996.................................... 34.5 10.5 (1) 11.5 (2) 33.5 Year ended December 31, 1995.................................... 31.1 10.4 (1) 7.0 (2) 34.5 LONG-TERM RECEIVABLES Year ended December 31, 1997.................................... 0.7 2.0 -- 2.7 Year ended December 31, 1996.................................... 0.7 -- -- 0.7 Year ended December 31, 1995.................................... 0.7 -- -- 0.7 Reserves deducted from assets to which they apply -- valuation reserve: LONG-TERM NOTES RECEIVABLE Year ended December 31, 1997.................................... 1.7 (0.2)(1) -- 1.5 Year ended December 31, 1996.................................... 1.8 (0.1)(1) -- 1.7 Year ended December 31, 1995.................................... 1.9 (0.1)(1) -- 1.8
- ------------------------ Notes: (1) Represents amounts included in selling, general and administrative expense. (2) Represents uncollectible accounts written off, less recoveries, translation adjustments, and reserves acquired. 63 EX-3.(III) 2 EXHIBIT 3(III) BY-LAWS OF HONEYWELL INC. --------------------------------------------------------- --------------------------------------------------------- HONEYWELL INC. ------------------ INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE OCTOBER 27, 1927 ------------------------ BY-LAWS AS ADOPTED OCTOBER 27, 1927, AND AMENDED THROUGH APRIL 15, 1997 ---------------------------------------------------- ---------------------------------------------------- INDEX OF BY-LAWS
PAGE ARTICLE I. MEETINGS OF STOCKHOLDERS................................................................... 1 Section 1. Annual Meetings................................................................. 1 Section 2. Advance Notice of Stockholder- Proposed Business at Annual Meetings........................................... 1 Section 3. Special Meetings................................................................ 2 Section 4. Place of Meeting................................................................ 3 Section 5. Notices of Meetings............................................................. 3 Section 6. Quorum.......................................................................... 4 Section 7. Organization.................................................................... 5 Section 8. Order of Business............................................................... 5 Section 9. Voting.......................................................................... 5 Section 10. List of Stockholders............................................................ 7 Section 11. Inspectors of Election.......................................................... 8 ARTICLE II. CONSENTS TO CORPORATE ACTION.................................................... 8 Section 1. Consent of Stockholders in Lieu of Meeting...................................... 8 Section 2. Record Date..................................................................... 9 Section 3. Procedures...................................................................... 10
ii ARTICLE III. BOARD OF DIRECTORS.............................................................. 11 Section 1. General Powers.................................................................. 11 Section 2. Number, Qualifications and Term of Office................................................................. 11 Section 3. Nominations of Directors........................................................ 11 Section 4. Election of Directors........................................................... 12 Section 5. Organization.................................................................... 13 Section 6. Resignations.................................................................... 13 Section 7. Qualifications and Retirement................................................... 13 Section 8. Vacancies....................................................................... 15 Section 9. Place of Meeting, etc........................................................... 15 Section 10. First Meeting................................................................... 15 Section 11. Regular Meetings................................................................ 16 Section 12. Special Meetings; Notice........................................................ 16 Section 13. Quorum and Manner of Acting..................................................... 17 Section 14. Removal of Directors............................................................ 17 Section 15. Compensation.................................................................... 17 Section 16. Committees...................................................................... 18 Section 17. Indemnification of Employees, Officers and Directors............................ 19 Section 18. Action Without Meeting.......................................................... 21 Section 19. Presence at Meetings............................................................ 21
iii ARTICLE IV. OFFICERS........................................................................ 22 Section 1. Number.......................................................................... 22 Section 2. Election, Term of Office and Qualifications..................................... 23 Section 3. Removal......................................................................... 23 Section 4. Resignations.................................................................... 23 Section 5. Vacancies....................................................................... 23 Section 6. The Chairman of the Board of Directors............................................................. 24 Section 7. The Vice Chairman of the Board of Directors............................................................. 24 Section 8. The President of the Corporation................................................ 25 Section 9. Authority and Duties of the Business Presidents, Executive Vice Presidents, Senior Vice Presidents, and Vice Presidents.................................... 25 Section 10. The Treasurer................................................................... 26 Section 11. The Secretary................................................................... 27 Section 12. Assistant Treasurers, Assistant Secretaries and Attesting Secretaries........... 28 Section 13. Salaries........................................................................ 29 Section 14. Subordinate Positions, etc...................................................... 29 ARTICLE V. CONTRACTS, LOANS, CHECKS, DEPOSITS, ETC......................................... 29 Section 1. Contracts, etc. How Executed.................................................... 29 Section 2. Loans........................................................................... 30 Section 3. Checks, Drafts, etc............................................................. 30 Section 4. Deposits........................................................................ 30 Section 5. General and Special Bank Accounts............................................... 31 ARTICLE VI. SHARES AND THEIR TRANSFER....................................................... 31 Section 1. Shares.......................................................................... 31 Section 2. Certificates for Shares of Stocks............................................... 31 Section 3. Transfer of Shares.............................................................. 32 Section 4. Lost, Stolen, Destroyed, or Mutilated Certificates...................................................... 33 Section 5. Transfer and Registry Agents.................................................... 33 Section 6. Regulations..................................................................... 34 Section 7. Statements Relating to Uncertificated Securities................................ 34 Section 8. Record Date..................................................................... 37
iv ARTICLE VII. OFFICES......................................................................... 38 Section 1. Registered Office............................................................... 38 Section 2. Other Offices................................................................... 39 ARTICLE VIII. DIVIDENDS, SURPLUS, ETC......................................................... 39 ARTICLE IX. SEAL............................................................................ 40 ARTICLE X. FISCAL YEAR AND AUDIT........................................................... 40 Section 1. Fiscal Year..................................................................... 40 Section 2. Audit of Books and Accounts..................................................... 40 ARTICLE XI. WAIVER OF NOTICES............................................................... 40 ARTICLE XII. NATIONAL EMERGENCY.............................................................. 41 Section 1. Definition and Application...................................................... 41 Section 2. Meetings, etc................................................................... 41 Section 3. Amendment....................................................................... 42 Section 4. Chief Executive Officer......................................................... 42 Section 5. Substitute Directors............................................................ 43 ARTICLE XIII. AMENDMENTS...................................................................... 43 CERTIFICATION.................................................................................... 44
BY-LAWS OF HONEYWELL INC. --------- ARTICLE I. MEETINGS OF STOCKHOLDERS SECTION 1. ANNUAL MEETINGS. The annual meeting of the stockholders of Honeywell Inc. (hereinafter called the Corporation) for the election of directors and for the transaction of any other proper business, notice of which is given in the notice of the meeting, shall be held on such date and at such hour as may be determined from time to time by the Board of Directors, which date and hour shall be designated in the notice thereof. If any annual meeting for the election of directors shall not be held on the date designated therefor, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. SECTION 2. ADVANCE NOTICE OF STOCKHOLDER-PROPOSED BUSINESS AT ANNUAL MEETINGS. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, otherwise properly brought before the meeting by or at the direction of the Board, or otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary, Honeywell Inc. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the 2 Corporation, not less than 50 days nor more than 75 days prior to the meeting; provided, however, that in the event that less than 65 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2, PROVIDED, HOWEVER, that nothing in this Section 2 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with said procedure. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. SECTION 3. SPECIAL MEETINGS. A special meeting of the stockholders for any purpose or purposes may be called at any time by the Board of Directors, or by the Chairman of the 3 Board of Directors, or by the President of the Corporation, or as otherwise prescribed by statute or by the Certificate of Incorporation of the Corporation. SECTION 4. PLACE OF MEETING. Meetings of the stockholders (including annual meetings, special meetings, meetings for the election of directors, and any and all other meetings of stockholders) may be held at such places, within or without the State of Delaware, as may be designated from time to time by the Board of Directors or in the notices thereof. The Board of Directors is authorized to and shall fix the place of meeting. Such action by the Board of Directors may be taken from time to time and may fix different places from time to time. SECTION 5. NOTICES OF MEETINGS. Every stockholder shall furnish the Secretary of the Corporation with an address at which notices of meetings and all other corporate communications may be served on or mailed to him. Except in special cases with respect to which other provision is made by statute or by the Certificate of Incorporation of the Corporation, and except in those situations in which action is to be taken pursuant to Section 1 of Article II, written or printed notice of each meeting of the stockholders, whether annual or special, shall be given, not less than ten (10) nor more than fifty (50) days before the date on which the meeting is to be held, to each stockholder of record of the Corporation entitled to vote at such meeting by delivering such notice thereof to him personally or by depositing such notice in the United States mail, in a postage-prepaid envelope directed to him at the post office address furnished by him to the Secretary of the Corporation for such purpose, or, if he shall not have furnished to the Secretary of the Corporation his address for such purpose, then at his address as it shall otherwise appear on the records of the Corporation. Except in special cases where other provision is made by statute, no publication of any notice of a meeting of stockholders shall be required. Every notice of a 4 meeting of stockholders shall state the place, date and hour of the meeting and the purpose or purposes for which the meeting is called. Nevertheless, notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy except a stockholder who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Except where otherwise required by statute, notice of any adjourned meeting of the stockholders of the Corporation shall not be required to be given if the time and place thereof are announced at the meeting which is adjourned. SECTION 6. QUORUM. At all meetings of the stockholders of the Corporation, except where other provision is made by statute, stockholders of the Corporation holding of record a majority of the shares of stock of the Corporation entitled to vote thereat shall be present in person or by proxy to constitute a quorum for the transaction of business. In the absence of a quorum at any meeting or any adjournment thereof, a majority in voting interest of those present in person or by proxy and entitled to vote may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum may be present any business may be transacted which might have been transacted at the meeting as originally called. The absence from any meeting of stockholders holding the number of shares of stock of the Corporation required by statute or by the Certificate of Incorporation of the Corporation or by these by-laws for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting, if there shall be present thereat in person or by proxy stockholders holding the number of shares of stock of the Corporation required in respect of such other matter or matters. 5 SECTION 7. ORGANIZATION. At each meeting of the stockholders the Chairman of the Board of Directors, or in his absence the Vice Chairman of the Board of Directors, or in their absence the President of the Corporation, or in the absence of the Chairman of the Board, the Vice Chairman of the Board and the President of the Corporation, a chairman (who shall be one of the other Executive Vice Presidents or Vice Presidents, if any of them be present) chosen by a majority in voting interest of the stockholders present in person or by proxy and entitled to vote, shall act as chairman; and the Secretary of the Corporation or, in his absence, an Assistant Secretary or, in the absence of the Secretary and Assistant Secretaries of the Corporation, any person whom the chairman of the meeting shall appoint, shall act as secretary of the meeting. SECTION 8. ORDER OF BUSINESS. The order of business at all meetings of the stockholders shall be determined by the chairman of the meeting, but such order of business may be changed by the vote of a majority in voting interest of those present or represented at said meeting and entitled to vote thereat. SECTION 9. VOTING. Each stockholder of the Corporation entitled to vote at a meeting of stockholders or entitled to give consent in writing to corporate action without a meeting shall have one vote in person or by proxy for each share of stock having voting rights held by him and registered in his name on the books of the Corporation: (a) on the date fixed pursuant to the provisions of Subsection (a) of Section 8 of Article VI of these by-laws as the record date for the determination of stockholders who shall be entitled to notice of and to vote at such meeting or to give consent in writing to corporate action without a meeting, or 6 (b) if no such record date shall have been so fixed, then as provided by the provisions of Subsection (b) of Section 8 of Article VI of these by-laws. Shares of its own capital stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the Corporation, shall not be entitled to vote. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held, and persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent said stock and vote thereon. If shares shall stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons shall have the same fiduciary relationship respecting the same shares, unless the Secretary of the Corporation shall have been given written notice to the contrary and have been furnished with a copy of the instrument of order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) if only one shall vote, his act shall bind all, (ii) if more than one shall vote, the act of the majority so voting shall bind all, or (iii) if more than one shall vote, but the vote shall be evenly split on any particular matter, then, except as otherwise required by statute, each faction may vote the shares in question proportionally. If the instrument so filed shall show that any such tenancy is held in unequal interests, a majority or even-split for the purpose of the next preceding sentence shall be a majority or 7 even-split in interest. Any vote on stock of the Corporation may be given by the stockholder entitled thereto in person or by his proxy appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized and delivered to the secretary of the meeting; provided, however, that no proxy shall be voted or acted upon after three years from its date unless said proxy provides for a longer period. Except as provided in Section 1 of Article II and Section 13 of Article III of these by-laws, and except also in special cases where otherwise made mandatory by statute or by the Certificate of Incorporation of the Corporation, all matters coming before the stockholders shall be decided by the vote of a majority in voting interest of the stockholders of the Corporation present in person or by proxy at a meeting and entitled to vote thereat, a quorum being present. SECTION 10. LIST OF STOCKHOLDERS. It shall be the duty of the Secretary, or other officer of the Corporation who shall have charge of the stock ledger, either directly or through a transfer agent appointed by the Board of Directors, to prepare and make, at least ten days before every meeting of stockholders, a complete list of stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Upon the wilful neglect or refusal of the directors to produce such a list at any meeting for the election of directors, they shall be ineligible for election to any office at 8 such meeting. The stock ledger shall be the only evidence as to who are stockholders entitled to examine the stock ledger, such list or the books of the Corporation, or to vote in person or by proxy, at any meeting of stockholders. SECTION 11. INSPECTORS OF ELECTION. At each meeting of the stockholders, the chairman of such meeting may appoint two Inspectors of Election to act thereat. Each Inspector of Election so appointed shall first subscribe an oath or affirmation faithfully to execute the duties of an Inspector of Election at such meeting with strict impartiality and according to the best of his ability. Such Inspectors of Election, if any, shall take charge of the ballots at such meeting and after the balloting thereat on any question shall count the ballots cast thereon and shall make a report in writing to the secretary of such meeting of the results thereof. An Inspector of Election need not be a stockholder of the Corporation, and any officer or employee of the Corporation may be an Inspector of Election on any question other than a vote for or against his election to any position with the Corporation or on any other question in which he may be directly interested. ARTICLE II. CONSENTS TO CORPORATE ACTION SECTION 1. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. The election of directors and any other action required by the General Corporation Law of the State of Delaware or these by-laws to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the 9 minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Separate written consents may be signed by stockholders severally. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION 2. RECORD DATE. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be as fixed by the Board or as otherwise established under this Section. Any person seeking to have the stockholders authorize or take corporate action by written consent without a meeting may, by written notice addressed to the Secretary and delivered to the Company as set forth below, request that a record date be fixed for such purpose. The record date for determining stockholders entitled to consent in writing without a meeting to corporate action for which no prior action by the Board is required under the General Corporation Law of the State of Delaware shall be (i) the date fixed by the Board or (ii) if no record date has been so fixed prior to the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Company by delivery to its registered office in Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded, then such first date. The record date for determining stockholders entitled to consent in writing without a meeting to corporate action for which prior action by the Board is required under the General Corporation Law of the State of Delaware shall be (i) the date fixed by the Board or (ii) if the Board has not taken action to fix the record date then such record date shall be the close of business on the date upon which the Board adopts the resolution taking such prior action. In connection with a record date fixed by the Board, in 10 no case shall such record date (i) precede or (ii) be fixed more than 10 days after the date upon which the resolution fixing the record date is adopted by Board. SECTION 3. PROCEDURES. In the event of the delivery to the Corporation of a written consent or consents purporting to authorize or take corporate action and/or related revocations (each such written consent and related revocation is referred to in this Article II as a "Consent"), the Secretary of the Corporation shall provide for the safe-keeping of such Consent and shall promptly conduct such ministerial review of the sufficiency of the consents and of the validity of the action to be taken by stockholder consent as he deems necessary or appropriate including, determining whether the holders of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent; PROVIDED, HOWEVER, that if the corporate action to which the Consent relates is the removal or replacement of one or more members of the Board, the Secretary of the Corporation shall designate two persons, who may not be members of the Board, to serve as Inspectors with respect to such Consent and such Inspectors shall discharge the functions of the Secretary of the Corporation under this Section 3. If after such investigation the Secretary or the Inspectors (as the case may be) shall determine that the Consent is valid and that the action purported to be authorized or taken has been validly authorized, that fact shall be noted on the records of the Corporation kept for the purpose of recording the proceedings of meetings of stockholders, and the Consent shall be filed in such records, at which time the Consent shall become effective as stockholder action. In conducting the investigation required by this Section 3, the Secretary or the Inspectors (as the case may be) may, at the expense of the Corporation, retain special legal counsel and other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate, to assist them. 11 ARTICLE III. BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. The property, affairs and business of the Corporation shall be managed by the Board of Directors. SECTION 2. NUMBER, QUALIFICATIONS AND TERM OF OFFICE. The number of directors shall be eleven, but the number may be increased, or diminished to not less than three, by amendment of these by-laws. Directors need not be stockholders. Each of the directors of the Corporation shall hold office until the annual meeting held next after his election and shall qualify, or until his earlier death or his earlier resignation or removal in the manner hereinafter provided. SECTION 3. NOMINATIONS OF DIRECTORS. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors by any nominating committee or person appointed by the Board or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary, Honeywell Inc. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 50 days nor more than 75 days prior to the meeting; PROVIDED, HOWEVER, that in the event that less than 65 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the 12 stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934, as amended; and (b) as to the stockholder giving the notice (i) the name and record address of stockholder and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth herein. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 4. ELECTION OF DIRECTORS. At each meeting of stockholders for the election of directors at which a quorum is present, the persons receiving the largest number of votes (up to and including the number of directors to be elected) shall be directors. If directors are to be elected by consent in writing of the stockholders without a meeting pursuant to Section 1 of 13 Article II of these by-laws, those persons receiving the consent in writing of the largest number of shares in the aggregate and constituting not less than a majority of the total outstanding shares entitled to give consent in writing thereon (up to and including the number of directors to be elected) shall be directors. SECTION 5. ORGANIZATION. At each meeting of the Board of Directors, the Chairman of the Board of Directors, or in his absence, the President of the Corporation, or in his absence an Executive Vice President, if a member of the Board of Directors, or in the absence of all of said officers, a Vice President, if a member of the Board of Directors, or in the absence of all of said officers, a chairman chosen by the majority of the directors present, shall preside. The Secretary of the Corporation, or in his absence, an Assistant Secretary, if any, or, in the absence of both the Secretary and Assistant Secretaries, any person whom the chairman shall appoint, shall act as secretary of the meeting. Any person so appointed as secretary of the meeting shall, if so required by the Board of Directors, be sworn to the faithful discharge of his duties before entering thereupon. SECTION 6. RESIGNATIONS. Any director of the Corporation may resign at any time by giving written notice to the Chairman of the Board of Directors or to the President of the Corporation or to the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, or, if the time be not specified, upon receipt thereof by the Chairman of the Board of Directors, the President of the Corporation or the Secretary, as the case may be; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 7. QUALIFICATIONS AND RETIREMENT. (a) CHIEF EXECUTIVE OFFICERS OF HONEYWELL. A director who is also the Chief Executive Officer of the Company shall 14 no longer be qualified to act as a director and his or her term of office shall expire at the time he or she ceases to hold that position; PROVIDED, HOWEVER, that in the event the Nominating Committee determines that it will be in the best interests of the Company for the former Chief Executive Officer to continue as a director, the Committee may ask him or her to continue as a director through the completion of any remaining part of his or her current, regular term of office as a director and, in addition to any such partial year, may nominate the former Chief Executive Officer to be a director for a single term of one year. (b) OTHER INSIDE DIRECTORS. Any director who is an officer of the Company, other than the Chief Executive Officer, shall no longer be qualified to act as a director and his or her term of office shall expire on the earliest to occur of: (i) the time of a diminution in his or her duties or responsibilities as an officer unless the Nominating Committee at its sole discretion determines such officer continues to be qualified to act as a director, (ii) the time he or she ceases to be an employee of the Corporation for any reason, or (iii) on his or her sixty-fifth birthday. (c) OUTSIDE DIRECTORS. Any director who is not and has not been an officer of the Company (an Outside Director) shall not be nominated for re-election as a director at the next annual meeting following either (i) fifteen years service as a director or (ii) the director's seventieth birthday. At the time an Outside Director retires from or changes the principal occupation engaged in when initially elected as a director, he or she shall notify the Nominating Committee of his or her change of position together with an indication of whether or not he or she is willing to stand for election as a director at the next annual meeting; thereafter the Nominating Committee at 15 its discretion will determine whether or not to ask that director to stand for re-election to the Board, provided the director shall not be permitted to stand for re-election beyond the age and years-of-service limits set forth above. (d) INTERPRETATION. The Nominating Committee in its sole discretion shall have the responsibility for interpretation of qualifications for directors identified in this Section 7. SECTION 8. VACANCIES. Except as otherwise provided by law, any vacancy in the Board of Directors (whether because of death, resignation, removal, an increase in the number of directors or any other cause) may be filled by a majority of the directors then in office, though less than a quorum; and each director so chosen shall hold office until the next annual election and until his successor shall be duly elected and qualified, unless sooner displaced. SECTION 9. PLACE OF MEETING, ETC. The Board of Directors may hold its meetings at such place or places within or without the State of Delaware as the Board may from time to time determine, or as shall be specified or fixed in the respective notices or waivers of notice thereof. The Corporation may have one or more offices, and may keep its books and records at such place or places within or without the State of Delaware as the Board shall from time to time determine. SECTION 10. FIRST MEETING. As soon as practicable after each annual election of directors and on the same day, the Board of Directors may meet for the purposes of organization and of choosing the officers of the Corporation and for the transaction of other business at the place where regular meetings of the Board of Directors are held. Notice of such meeting need not be given. Such first meeting may be held at any other time or place which shall be specified in a notice given as hereinafter provided for special meetings of the Board, or in a consent and waiver of notice thereof signed by all the directors. 16 SECTION 11. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such times as the Board of Directors shall by resolution from time to time determine. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting shall be held at the same hour and place on the next succeeding secular day not a legal holiday. Notice of regular meetings need not be given, except of the regular meetings at which it is proposed to alter or repeal these by-laws or to adopt one or more new by-laws, of each of which meetings a notice, which shall state at least the substance of the proposed change, shall be given in the same manner as is required for a special meeting. SECTION 12. SPECIAL MEETINGS; NOTICE. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board of Directors or by the President of the Corporation or by any two of the directors. A notice shall be given as hereinafter in this section provided of each such special meeting, in which shall be stated the time and place of such meeting, but, except as otherwise expressly provided by law or by these by-laws, the purposes thereof need not be stated in such notice. Except in special cases where other provision is made by statute, notice of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least two days before the day on which the meeting is to be held, or shall be sent to him at such place by telegraph or cable or be delivered personally or by telephone not later than the day before the day on which the meeting is to be held. Any meeting of the Board of Directors shall be a legal meeting without any notice thereof having been given if all the directors shall be present thereat or if notice thereof shall be waived either before or after such meeting in writing or by telegraph or cable by all absentees therefrom provided a quorum be present thereat. Notice of any adjourned meeting need not be given. 17 SECTION 13. QUORUM AND MANNER OF ACTING. One third of the directors in office at the time of any regular or special meeting of the Board of Directors shall be present in person at such meeting in order to constitute a quorum for the transaction of business and, except as specified in Sections 8, 16 and 17 of this Article III and Section 4 of Article IV of these by-laws, and except also in special cases where other provision is made by statute, the vote of a majority of the directors present at any such meeting, at which a quorum is present, shall be the act of the Board of Directors. In the absence of a quorum, a majority of directors present at any meeting may adjourn the same from time to time until a quorum be had. The directors shall act only as a board and the individual directors shall have no power as such. SECTION 14. REMOVAL OF DIRECTORS. Any director may be removed for cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote for the election of directors, given at a special meeting of such stockholders called for the purpose; and the vacancy in the Board of Directors caused by such removal shall be filled by such stockholders at such meeting, or, if the stockholders shall fail to fill such vacancy, by the Board of Directors. SECTION 15. COMPENSATION. Directors and members of any committee of the Corporation contemplated by these by-laws or otherwise provided for by resolution of the Board of Directors, who are not salaried officers of the Corporation, shall receive such fixed sum per meeting attended, or such annual sum or sums, as shall be determined from time to time by resolution of the Board of Directors. All directors and members of any such committee shall receive their expenses, if any, of attendance at meetings of the Board of Directors or of such committee. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity, and receiving proper compensation therefor. 18 SECTION 16. COMMITTEES. (a) There shall be an Executive Committee which shall have such powers and authority provided by resolution passed by a majority of the Board of Directors. (b) The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, in addition to the Executive Committee, which, to the extent provided in said resolution, shall have and may exercise the powers and authority of the Board in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. (c) Each committee, for which provision is made by paragraph (a) or (b) of this Section 16, shall consist of one or more directors of the Corporation who shall be appointed by the Chairman of the Board of Directors provided, however, that each such appointment shall be reported promptly to the Board of Directors and no member of a committee shall participate in any action by a committee which shall constitute an exercise of a power of the Board until the appointment of such member has been ratified by a majority of the full Board. Any vacancy on a committee shall be filled by appointment by the Chairman of the Board of Directors in the same manner in which original appointments to such committee were made. The chairman of each committee shall be designated by the Chairman of the Board of Directors. A majority of those entitled to vote at any meeting of any committee shall constitute a quorum for the transaction of business at that meeting. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. 19 SECTION 17. INDEMNIFICATION OF EMPLOYEES, OFFICERS AND DIRECTORS. (a) Any person who is or was an employee, officer or director of the Corporation, or of any other corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, which he served as such at the request of the Corporation, shall, unless prohibited by law, be indemnified by the Corporation in accordance with paragraph (b) below, against reasonable expenses, paid or incurred by him in connection with or resulting from any claim, action, suit or proceeding (whether brought by or in the right of the Corporation or otherwise), civil, criminal, administrative or investigative, including any appeal therein in which he may be involved, or threatened to be involved, as a party or otherwise, by reason of the fact he is or was an employee, officer or director, provided such person acted, in good faith, in what he reasonably believed to be in or not opposed to the best interest of the Corporation or such other corporation or organization and, in addition, with respect to any criminal actions or proceedings, had no reasonable cause to believe his conduct was unlawful, provided further the Corporation shall indemnify any such person in connection with a claim, action, suit or proceeding initiated by such person only if such matter was authorized by the Board of Directors, and provided further no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court 20 shall deem proper. The termination of any claim, action, suit or proceeding, by judgment, settlement (whether with or without court approval), adverse decision or conviction after trial or upon a plea of guilty or of NOLO CONTENDERE, or its equivalent, shall not create a presumption that such person did not meet the standards of conduct set forth in this paragraph (a). As used in this Section 17 the term "expenses" shall include, but not be limited to, counsel fees and disbursements, amounts of judgments, fines or penalties against, and amounts paid in settlement by, such person. (b) To the extent that any person claiming indemnification under paragraph (a) of this Section 17 has been successful, on the merits or otherwise, in defense of any claim, action, suit or proceeding of the character described in paragraph (a), he shall be reimbursed by the Corporation for the amounts of all reasonable expenses paid or incurred by him in connection with such successful defense. Any person claiming indemnification under said paragraph (a) shall be reimbursed by the Corporation for his reasonable expenses if (i) the Board of Directors by a majority vote of a quorum consisting of directors who are not parties to such claim, action, suit or proceeding shall deliver to the Corporation its written findings that such person is entitled to reimbursement under the provisions of said paragraph or (ii) if such a quorum is not attainable, or even if obtainable a quorum of disinterested directors so directs, independent legal counsel (who may be regular counsel for the Corporation) selected by the Board of Directors shall deliver to the Corporation written advice that, in their judgment, such person is so entitled. (c) Any expenses incurred by an officer or director with respect to any claim, action, suit or proceeding of the character described in paragraph (a) of this Section 17 may be advanced by the Corporation prior to the final 21 disposition thereof upon receipt of an undertaking by or on behalf of the person to repay such amount if it is ultimately determined that he is not to be indemnified under this Section 17. Such expenses incurred by other employees may be so paid upon such terms and conditions, if any, as the Board of Directors shall determine to be appropriate. (d) The rights of indemnification provided in this Section 17 shall be in addition to any other rights to which any such person may otherwise be entitled by contract or as a matter of law; and such rights shall continue as to a person who has ceased to be an employee, officer or director and, in the event of such person's death, shall extend to his heirs and legal representatives. SECTION 18. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or of such committee. SECTION 19. PRESENCE AT MEETINGS. Members of the Board of Directors or of any committee designated by it may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 19 shall constitute presence in person at such meeting. 22 ARTICLE IV. OFFICERS SECTION 1. NUMBER. The officers of the Corporation shall be a Chairman of the Board of Directors who shall be chosen by the directors from their own number, one or more Vice Chairmen of the Board of Directors if the Board of Directors shall so determine, a President of the Corporation if the Board of Directors shall so determine, one or more Presidents of the businesses of the Corporation if the Board of Directors shall so determine, one or more Vice Presidents, a Treasurer, a Secretary and such other officers as may be appointed in accordance with the provisions of this Article. The Board of Directors may designate one or more Vice Presidents to be an Executive Vice President or Senior Vice President. The Board of Directors, by resolution, the Chairman of the Board of Directors, the President of the Corporation, or the Treasurer may create the offices of and appoint one or more Assistant Treasurers. The Board of Directors, by resolution, the Chairman of the Board of Directors, the President of the Corporation, or the Secretary may create the offices of and appoint one or more Assistant Secretaries and one or more Attesting Secretaries. The term of office for each Assistant Treasurer, each Assistant Secretary and Attesting Secretary appointed by any of the foregoing officers shall be determined by the officer making such appointment but shall not in any event exceed twelve months. No more than three Assistant Treasurers and three Assistant Secretaries may be appointed by those officers at any one time. The officer making the appointment shall give to the Secretary written notification of each such appointment. The notification shall be placed in the book containing the proceedings of the Board of Directors. 23 Any two or more of the above-mentioned offices may be held by the same person. SECTION 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. Except for Assistant Treasurers, Assistant Secretaries and Attesting Secretaries appointed by the Chairman of the Board of Directors, the President of the Corporation, the Treasurer, or the Secretary, the officers of the Corporation shall be chosen annually by the Board of Directors at the first meeting thereof held after each annual meeting of stockholders for the election of directors and shall hold office until his successor shall have been duly chosen and shall qualify, or until his earlier death or his earlier resignation or removal in the manner hereinafter provided. SECTION 3. REMOVAL. Any officer may be removed, either with or without cause, at any time, by resolution adopted by a majority of the whole Board of Directors at a special meeting of the Board called for that purpose, or, except in the case of any officer elected or appointed by the stockholders or by the Board of Directors, by any committee or superior officer upon whom such power of removal may be conferred by the Board of Directors. SECTION 4. RESIGNATIONS. Any officer may resign at any time by giving written notice of his resignation to the Board of Directors, or to the Chairman of the Board of Directors, or to the President of the Corporation, or to the Secretary of the Corporation. Any such resignation shall take effect at any time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, 24 shall be filled for the unexpired portion of the term in the manner prescribed in these by-laws for regular appointments or elections to such office. SECTION 6. THE CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors shall, be the chief executive officer of the corporation and shall have general supervision over the business and affairs of the Corporation and over its several officers and employees, subject, however, to the control of the Board of Directors. He shall, if present, preside at all meetings of the Board of Directors and of the stockholders. The Chairman of the Board of Directors shall see that all orders and resolutions of the Board of Directors are carried into effect and shall from time to time report to the Board of Directors all matters within his knowledge which the interests of the Corporation may require to be brought to their notice. The Chairman of the Board of Directors may sign, execute and deliver in the name of the Corporation, certificates for shares of the capital stock of the Corporation, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors shall have authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board or by these by-laws to some other officer or agent of the Corporation or shall be required by law otherwise to be signed or executed. In general, the Chairman of the Board of Directors shall perform all duties incident to the office of the Chairman of the Board of Directors, and such other duties as from time to time may be assigned by the Board of Directors. SECTION 7. THE VICE CHAIRMAN OF THE BOARD OF DIRECTORS. In the absence of the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors shall, if present, preside at meetings of the Board of Directors, and shall perform such other duties that may be assigned to him by the Board of Directors. 25 SECTION 8. THE PRESIDENT OF THE CORPORATION. The President of the Corporation shall be the chief operating officer of the Corporation and shall perform the duties assigned to him from time to time by the Chairman of the Board of Directors or by the Board of Directors. In the absence of the Chairman of the Board of Directors or a Vice Chairman of the Board of Directors (if that position has been filled by the Board of Directors) the President of the Corporation shall, if present, preside at meetings of the Board of Directors. The President of the Corporation may sign, with the Secretary or Treasurer or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the capital stock of the Corporation, any deeds, mortgages, bonds, contracts or other instruments which the Board of Directors shall have authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board or by these by-laws to some other officer or agent of the Corporation or shall be required by law otherwise to be signed or executed; and, in general, shall perform all duties incident to the office of the President of the Corporation. SECTION 9. AUTHORITY AND DUTIES OF THE BUSINESS PRESIDENTS, EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS, AND VICE PRESIDENTS. Any Business President, Executive Vice President, Senior Vice President, or Vice President authorized so to do by the Board of Directors may sign, with the Secretary or the Treasurer or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the capital stock of the Corporation; and shall perform such other duties as from time to time may be assigned to them by the Chairman of the Board of Directors or by the President of the Corporation or by the Board of Directors. 26 SECTION 10. THE TREASURER. The Treasurer shall: (a) Have charge and custody of, and be responsible for, all funds and securities of the Corporation, receive and give receipts for moneys due and payable to the Corporation from any sources whatsoever, and deposit all such moneys in the name of the Corporation in such banks, trust companies or other depositaries as shall be selected in accordance with the provisions of Article V of these by-laws; (b) Have the right to require, from time to time, reports or statements giving such information as he may desire with respect to any and all financial transactions of the Corporation from the officers or agents transacting the same; (c) Render to the Board of Directors, whenever the Board of Directors shall require him so to do, an account of the financial condition of the Corporation and of all of his transactions as Treasurer; (d) Exhibit at all reasonable times his books of account and other records to any of the directors of the Corporation upon application during business hours at the office of the Corporation where such books and records are kept; (e) Sign (unless the Secretary or other proper officer thereunto duly authorized by the Board of Directors shall sign), with the Chairman of the Board of Directors or the President of the Corporation or an Executive Vice President or a Vice President, certificates for shares of the capital stock of the Corporation the issue of which shall have been authorized by resolution of the Board of Directors, provided that the signatures of the officers of the Corporation thereon may be facsimile as provided in Section 1 of Article VI of these by-laws; and 27 (f) In general, perform all the duties incidental to the office of Treasurer and such other duties as from time to time may be assigned to him by the Chairman of the Board of Directors or by the President of the Corporation or by the Board of Directors. SECTION 11. THE SECRETARY. The Secretary shall: (a) Record all the proceedings of the stockholders, the Board of Directors and the Executive Committee in one or more books kept for that purpose; (b) See that all notices are duly given in accordance with the provisions of these by-laws or as required by law; (c) Be custodian of the corporate records and of the seal of the Corporation and see that the seal or a facsimile thereof is affixed to or impressed or reproduced on all stock certificates prior to the issue thereof and to all documents the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these by-laws. Unless the Board of Directors shall otherwise direct in specific instances, the seal of the Corporation when so affixed, impressed or reproduced shall always be attested by the signature of the Secretary, or, if any, of an Assistant Secretary or an Attesting Secretary, provided that signatures on certificates for shares of the capital stock of the Corporation may be facsimile as provided in Section 1 of Article VI of these by-laws; (d) Keep a register of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder in accordance with the provisions of Section 1 of Article II of these by-laws; (e) See that the duties prescribed by Section 9 of Article I of these by-laws are performed; 28 (f) Sign (unless the Treasurer or other proper officer thereunto duly authorized by the Board of Directors shall sign), with the Chairman of the Board of Directors or the President of the Corporation or an Executive Vice President or a Vice President, certificates for shares of the capital stock of the Corporation the issue of which shall have been authorized by resolution of the Board of Directors, provided that the signatures of the officers of the Corporation thereon may be facsimile as provided in Section 1 of Article VI of these by-laws; (g) Have general charge of the stock certificate books of the Corporation and also of the other books and papers of the Corporation and see that the books, reports, statements, certificates and all other documents and records required by law are properly kept and filed; and (h) In general, perform all duties incident to the office of Secretary, and such other duties as from time to time may be assigned to him by the Chairman of the Board of Directors or by the President of the Corporation or by the Board of Directors. SECTION 12. ASSISTANT TREASURERS, ASSISTANT SECRETARIES AND ATTESTING SECRETARIES. The Assistant Treasurers and Assistant Secretaries, if thereunto authorized by the Board of Directors, may sign, with the Chairman of the Board of Directors, or the President of the Corporation, or an Executive Vice President, or a Vice President, certificates for shares of the capital stock of the Corporation the issue of which shall have been authorized by resolution of the Board of Directors and, in general, shall perform such duties as shall be assigned to them by the Treasurer or the Secretary, respectively, or by the Board of Directors. The Assistant Secretaries and Attesting 29 Secretaries shall have the power to affix and attest the corporate seal of the Corporation and to attest the execution of documents on behalf of the Corporation. SECTION 13. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors, or by one or more committees or officers to the extent so authorized from time to time by the Board of Directors, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation. SECTION 14. SUBORDINATE POSITIONS, ETC. The Corporation may provide titles, including the title of Vice President, for other individuals who serve in management positions with the corporate staff, or with group, division or other operational units of the Corporation but who do not perform the function of officer for the Corporation. Individuals in such positions shall hold such titles at the discretion of the appointing officer and shall have such authority and perform such duties as the Chairman of the Board of Directors, or the Vice Chairman of the Board of Directors, or any officer to whom they delegate their authority in this regard, may from time to time determine. ARTICLE V. CONTRACTS, LOANS, CHECKS, DEPOSITS, ETC. SECTION 1. CONTRACTS, ETC. HOW EXECUTED. The Board of Directors, except as in these by-laws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the Board of Directors or by the provisions of these by-laws, no officer, agent or employee other than the Chairman of the Board of Directors and the President shall 30 have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or to any amount. SECTION 2. LOANS. No loans shall be contracted on behalf of the Corporation and no negotiable paper shall be issued in its name, unless authorized by vote of the Board of Directors. When so authorized by the Board of Directors any officer or agent of the Corporation designated by the Board of Directors may effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver bonds, notes and other obligations or evidences of indebtedness of the Corporation, and when authorized as aforesaid, as security for the payment of any and all loans, advances, indebtedness and liabilities of the Corporation and of the interest thereon, may pledge, hypothecate or transfer any and all stocks, securities and other personal property held or owned by the Corporation and to that end endorse, assign and deliver the same. Such authority may be general or confined to specific instances. SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. SECTION 4. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board of Directors may select or as may be selected by any officer or officers, agent or agents of the Corporation to whom such power may from time to time be delegated by the Board of Directors. For the purpose of 31 such deposit, checks, drafts and other orders for the payment of money which are payable to the order of the Corporation may be endorsed, assigned and delivered by the Chairman of the Board of Directors, the President of the Corporation, any Business President, any Executive Vice President, any Vice President, the Treasurer or the Secretary, or by any officer, agent or employee of the Corporation to whom any of said officers, in writing, or the Board of Directors, by resolution, shall have delegated such power. SECTION 5. GENERAL AND SPECIAL BANK ACCOUNTS. The Board of Directors may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositaries as the Board of Directors may select, and may make such special rules and regulations with respect thereto, not inconsistent with the provisions of these by-laws, as they may deem expedient. ARTICLE VI. SHARES AND THEIR TRANSFER SECTION 1. SHARES. The shares of the Corporation may be represented by certificates or may be uncertificated. Each registered owner of shares, upon request to the Corporation, shall be provided with a certificate of stock, representing the number of shares owned by such owner. Absent a specific request for such a certificate by the registered owner or transferee thereof, all shares may be uncertificated upon the original issuance thereof by the Corporation or upon the surrender of the certificate representing such shares to the Corporation. SECTION 2. CERTIFICATES FOR SHARES OF STOCK. The certificates for shares of stock of the Corporation shall be in such 32 form, not inconsistent with the Certificate of Incorporation, as shall be approved by the Board of Directors. All certificates shall be signed by the Chairman of the Board of Directors, the President or a Vice President and by the Secretary or the Treasurer, or by any other proper officer of the Corporation authorized by the Board of Directors, and shall not be valid unless so signed and the seal of the Corporation affixed thereto, provided that the signatures of the officer or officers of the Corporation and the seal may be facsimile, if such certificates are signed by a transfer agent other than the Corporation or an employee of the Corporation or by a registrar other than the Corporation or an employee of the Corporation. The signature on behalf of the transfer agent on any such certificate may also be facsimile, if such certificate is signed by a registrar other than the Corporation or an employee of the Corporation. In case any officer or officers who shall have signed any such certificate or certificates shall cease to be an officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates had not ceased to be an officer or officers of the Corporation. All certificates for shares of stock shall be consecutively numbered as the same are issued. The name of the person owning the shares represented thereby, with the number of such shares and the date of issue thereof, shall be entered on the books of the Corporation. Except as hereinafter provided, all certificates surrendered to the Corporation for transfer shall be canceled and no 33 new certificates or uncertificated shares shall be issued until former certificates for the same number of shares have been surrendered or canceled. SECTION 3. TRANSFER OF SHARES. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, the Corporation may issue or cause to be issued uncertificated shares or, if requested by the appropriate person, a new certificate shall be issued to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated shares, such uncertificated shares shall be canceled and issuance of new equivalent uncertificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the Corporation. SECTION 4. LOST, STOLEN, DESTROYED, OR MUTILATED CERTIFICATES. Whenever a person owning a certificate for shares of stock of the Corporation alleges that it has been lost, stolen, destroyed or mutilated, he shall file in the office of the Corporation an affidavit setting forth, to the best of his knowledge and belief, the time, place and circumstances of the loss, theft, destruction or mutilation, and, if required by the Board of Directors or the transfer agent of the Corporation, a bond of indemnity or other indemnification sufficient in the opinion of the Board of Directors or such transfer agent to indemnify the Corporation, such transfer agent and their agents against any claim that may be made against it or them on account of the alleged loss, theft, destruction or mutilation of any such certificate or the issuance of a new, replacement certificate. Thereupon the Corporation may cause to be issued to such person uncertificated shares or, if requested by such person, a new certificate in replacement for the certificate alleged to have been lost, stolen, destroyed or mutilated. Upon the stub of 34 every new certificate so issued shall be noted the fact of such issue and the number, date and the name of the registered owner of the lost, stolen, destroyed or mutilated certificate in lieu of which the new certificate is issued. Uncertificated shares or a new certificate may be issued without requiring any bond when, in the judgment of the Board of Directors, it is proper to do so. SECTION 5. TRANSFER AND REGISTRY AGENTS. The Corporation may maintain a transfer office or agency where its stock shall be directly transferable and a registry office, which may be identical with the transfer office or agency, where its stock shall be registered; and the Corporation may, from time to time, maintain one or more other transfer offices or agencies, and registry offices; and the Board of Directors may from time to time, define the duties of such transfer agents and registrars and make such rules and regulations as it may deem expedient, not inconsistent with these by-laws, concerning the issue, transfer and registration of uncertificated shares or certificates for shares of the capital stock of the Corporation. SECTION 6. REGULATIONS. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of uncertificated shares or certificates for shares of stock of the Corporation. SECTION 7. STATEMENTS RELATING TO UNCERTIFICATED SECURITIES. Within two business days after an issuance, transfer, pledge or release from a pledge of uncertificated shares has been registered, the Corporation shall send to the registered owner thereof and, if shares are or were subject to a registered pledge, to the registered pledgee, a written notice, signed in the same manner as a certificate for shares may be signed in accordance with Section 2 of this Article VI, stating (a) that the Corporation shall furnish to such person(s) upon request 35 and without charge a full statement of the designation, relative rights, preferences and limitations of the shares of each class of the Corporation's stock authorized to be issued and the designation, relative rights, preferences and limitations of each series of preferred stock so far as the same has been fixed and the authority of the Board of Directors to designate and fix the relative rights, preferences and limitations of other series; (b) that the Corporation is formed under the laws of the State of Delaware; (c) the number of shares and a description of the issue of which such shares are a part, including the class of shares, and the designation of the series, if any, which have been issued, transferred, pledged or released from a pledge, as the case may be, (d) the name, address and taxpayer identification number, if any, of the person or persons to which such shares have been issued or transferred, and, in the case of registration of a pledgee or a release from a pledge, of the registered owner and the registered pledgee whose interest is being granted or released; (e) any liens or restrictions of the Corporation, and any adverse claims, (i) which are embodied in a restraining order, injunction or other legal process served upon the Corporation at a time and in a manner which afforded it a reasonable opportunity to act on it in accordance with applicable law, (ii) of which the Corporation has received written notification from the registered owner or the registered pledgee at a time and in a manner which afforded it a reasonable opportunity to act on it in accordance with applicable law, (iii) to which the registration of transfer to the present registered owner was subject and so noted in a statement sent to such person under this paragraph, including restrictions on transfer not imposed by the Corporation and (iv) of which the Corporation is charged with notice from a controlling instrument which the Corporation has elected to require as assurance that a necessary endorsement or instruction is genuine and effective, to which the shares are subject, or a statement that there are no such liens, restrictions or 36 adverse claims; and (f) the date the issuance, transfer, pledge or release from a pledge, as the case may be, was registered. The Corporation shall also maintain a printed copy of the most recent statement sent to a person with respect to uncertificated shares. Within two business days after a transfer of uncertificated shares has been registered, the Corporation shall send to the former registered owner and the former registered pledgee, if any, a written notice stating (a) the number of shares and a description of the issue of which such shares are a part, including the class of shares, and the designation of the series, if any, which have been transferred, (b) the name, address and taxpayer identification number, if any, of the former registered owner and of the former registered pledgee, if any, and (c) the date the transfer was registered. The Corporation shall send to each registered holder and registered pledgee of uncertificated shares, no less frequently than annually, and at any time upon the reasonable written request of any such person, a dated written notice stating (a) if such notice is to the registered owner, the number of shares and a description of the issue of which such shares are a part, including the class of shares, and the designation of the series, if any, registered in the name of such registered owner on the date of the statement, (b) the name, address and taxpayer identification number, if any, of the registered owner, (c) the name, address and taxpayer identification number, if any, of any registered pledgee and the number of shares subject to the pledge, and (d) any liens or restrictions of the Corporation and any adverse claims (i) which are embodied in a restraining order, injunction or other legal process served upon the Corporation at a time and in a manner which afforded it a reasonable opportunity to act on it in accordance with applicable law, (ii) of which the Corporation has received written notification from the registered owner or the registered pledgee at a time and in a manner which afforded it a reasonable opportunity to 37 act on it in accordance with applicable law, (iii) to which the registration of transfer to the present registered owner was subject and so noted in a statement sent to such person under this paragraph, including restrictions on transfer not imposed by the Corporation and (iv) of which the Corporation is charged with notice from a controlling instrument which the Corporation has elected to require as assurance that a necessary endorsement or instruction is genuine and effective, to which the shares are subject, or a statement that there are no such liens, restrictions or adverse claims. Each notice sent pursuant to this Section 7 shall bear a conspicuous legend reading substantially as follows: "This statement is merely a record of the rights of the addressee as of the time of its issuance. Delivery of the statement, of itself, confers no rights onto the recipient. This statement is neither a negotiable instrument nor a security." SECTION 8. RECORD DATE. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, as the case may be, the Board of Directors may fix, in advance, a record date, which shall not be more than 38 sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. (b) If no record date is fixed: (1) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (2) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. (3) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. (c) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE VII. OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the Corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, and the registered agent of the Corporation in said State is Corporation Trust 39 Company of America. The Corporation's "principal office or place of business" in said State and its "resident agent" in said State shall be deemed to mean said registered office and registered agent, respectively. SECTION 2. OTHER OFFICES. The Corporation shall also have an office in the City of Minneapolis, State of Minnesota, and at such other places as the Board of Directors may from time to time appoint or the business of the Corporation require. ARTICLE VIII. DIVIDENDS, SURPLUS, ETC. Subject to the provisions of law, of the Certificate of Incorporation of the Corporation and of these by-laws, the Board of Directors may declare and pay dividends upon the shares of stock of the Corporation either (a) out of its surplus as defined in and computed in accordance with the provisions of the laws of the State of Delaware or (b) in case there shall be no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year, whenever, and in such amounts as, in its opinion, the condition of the affairs of the Corporation shall render it advisable. Subject as aforesaid, the Board of Directors in its discretion may use and apply any of the surplus or net profits of the Corporation applicable for such purpose in purchasing or acquiring any of the shares of the capital stock of the Corporation in accordance with law, or any of its bonds, debentures, notes, scrip or other securities or evidences of indebtedness, or from time to time may set aside from such surplus or net profits such sum or sums as it, in its absolute discretion, may think proper, as a reserve fund to meet contingencies, or for the purpose of maintaining or increasing the 40 property or business of the Corporation, or for any other purpose it may think conducive to the best interests of the Corporation. ARTICLE IX. SEAL The Board of Directors shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that it was incorporated in the State of Delaware in the year 1927. ARTICLE X. FISCAL YEAR AND AUDIT SECTION 1. FISCAL YEAR. The fiscal year of the Corporation shall end on the thirty-first day of December in each year. SECTION 2. AUDIT OF BOOKS AND ACCOUNTS. The books and accounts of the Corporation shall be audited at least once in each fiscal year, by certified public accountants of good standing selected by the Board of Directors. ARTICLE XI. WAIVER OF NOTICES Whenever any notice whatever is required to be given by these by-laws or the Certificate of Incorporation of the Corporation or any of the corporate laws of the State of Delaware, a 41 waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. ARTICLE XII. NATIONAL EMERGENCY SECTION 1. DEFINITION AND APPLICATION. For the purposes of this Article XII the term "national emergency" is defined as an emergency situation resulting from an attack upon the United States, a nuclear disaster within the United States, a catastrophe, or other emergency condition, as a result of which attack, disaster, catastrophe or emergency condition a quorum of the Board of Directors cannot readily be convened for action. Persons not directors of the Corporation may conclusively rely upon a determination by the Board of Directors of the Corporation, at a meeting held or purporting to be held pursuant to this Article XII that a national emergency as hereinabove defined exists regardless of the correctness of such determination made or purporting to be made as hereinafter provided. During the existence of a national emergency the provisions of this Article XII shall become operative, but, to the extent not inconsistent with such provisions, the other provisions of these by-laws shall remain in effect during any national emergency and upon its termination the provisions of this Article XII shall cease to be operative. SECTION 2. MEETINGS, ETC. When it is determined in good faith by any director that a national emergency exists, special meetings of the Board of Directors may be called by such director. The director calling any such special meeting shall make a reasonable effort to notify all other directors of the time and place of such special meeting, and such effort shall be deemed to constitute the giving of notice of such special meeting, and every director shall be deemed to have 42 waived any requirement, of law or otherwise, that any other notice of such special meeting be given. At any such special meeting two directors shall constitute a quorum for the transaction of business including, without limiting the generality hereof, the filling of vacancies among directors and officers of the Corporation and the election of additional Vice Presidents, Assistant Secretaries and Assistant Treasurers. The act of a majority of the directors present thereat shall be the act of the Board of Directors. If at any such special meeting of the Board of Directors there shall be only one director present, such director present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given of any such adjournment. The directors present at any such special meeting shall make reasonable effort to report any action taken thereat to all absent directors, but failure to give such report shall not affect the validity of the action taken at any such meeting. All directors, officers, employees and agents of, and all persons dealing with, the Corporation, if acting in good faith, may conclusively rely upon any action taken at any such special meeting. SECTION 3. AMENDMENT. The Board of Directors shall have the power to alter, amend, or repeal any of these by-laws by the affirmative vote of at least two-thirds (2/3) of the directors present at any special meeting attended by two (2) or more directors and held in the manner prescribed in Section 2 of this Article, if it is determined in good faith by said two-thirds (2/3) that such alteration, amendment or repeal would be conducive to the proper direction of the Corporation's affairs. SECTION 4. CHIEF EXECUTIVE OFFICER. If, during the existence of a national emergency, the Chairman of the Board of Directors of the Corporation becomes incapacitated, cannot by reasonable effort be located or otherwise is unable or 43 unavailable to perform the duties of his office, the Vice Chairman of the Board of Directors of the Corporation is hereby designated as Chairman of the Board of Directors. If the Vice Chairman of the Board of Directors is unable or unavailable to perform the duties of the Chairman of the Board, unless otherwise determined by the Board of Directors in accordance with the provisions of this Article XII, the senior available officer of the Corporation is hereby designated as Chairman of the Board of Directors of the Corporation, the seniority of such officer to be determined in order of rank of office and within the same rank by the date on which he was first elected or appointed to such office. SECTION 5. SUBSTITUTE DIRECTORS. To the extent required to constitute a quorum at any meeting of the Board of Directors during a national emergency, the officers of the Corporation who are present shall be deemed, in order of rank of office and within the same rank in order of election or appointment to such offices, directors for such meeting. ARTICLE XIII. AMENDMENTS The Board of Directors of the Corporation is expressly authorized (except as otherwise provided in these by-laws) to make by-laws for the Corporation and from time to time to alter or repeal by-laws so made but the by-laws made or altered by the Board of Directors may be altered or repealed by the stockholders at any annual or special meeting thereof, provided that notice of the proposal so to alter or repeal such by-laws be included in the notice of such meeting. EX-10.(III)(F) 3 EXHIBIT 10(III)(F) HONEYWELL NON-EMP DIR F&S PLAN HONEYWELL NON-EMPLOYEE DIRECTORS FEE AND STOCK UNIT PLAN 1. PURPOSE OF THE PLAN. The purpose of the Honeywell Non-Employee Directors Fee and Stock Unit Plan ("Plan") is to grant Awards of Stock Units to non-employee directors of the Company in order to align their compensation with the equity interests of the Company's stockholders. The Plan provides for compensation through the payment of Directors' Annual Retainer and Meeting Fees in cash or Stock Units, or for the deferral of such fees. The Plan shall become effective on the date ("Effective Date") the Plan is approved by the stockholders or such later date as may be established by the Board. 2. DEFINITIONS. "Alliant Restricted Stock" shall mean Restricted Stock (as defined in the Prior Plans) of Alliant Techsystems, Inc. "Annual Meeting" shall mean an annual meeting of stockholders of the Company. "Annual Retainer" shall mean the retainer fee, established by the Board, paid to a Director for services on the Board for a Director Year. "Award" shall mean an award of Stock Units pursuant to the Plan. "Board" shall mean the Board of Directors of the Company. "Canadian Director" shall mean a Director who is a citizen of Canada. "Change in Control" of the Company shall have occurred if: (i) any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company or any of its subsidiaries; any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries; an underwriter temporarily holding securities pursuant to an offering of such securities; or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or -2- (ii) during any period of not more than two consecutive years (not including any period prior to the execution of this amendment to the Plan), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as hereinabove defined) acquires more than 30% of the combined voting power of the Company's then outstanding securties; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition of the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). "Change in Control Price" of the Stock shall equal the higher of (i) if applicable, the price paid for the Stock in the transaction constituting Change in Control and (ii) the reported closing price of the Stock on the New York Stock Exchange on the last trading day preceding the date of the Change in Control. "Committee" shall mean the Nominating and Governance Committee of the Board or such other committee as may be designated by the Board. "Company" shall mean Honeywell Inc. "Company Restricted Stock" shall mean Restricted Stock (as defined in the Prior Plans) of the Company. -3- "Deferred Account" shall mean the account established and maintained by the Company for specified deferrals by a Director in accordance with Section 5(c). "Director" shall mean a non-employee director of the Company. "Director Year" shall mean the fiscal year commencing on the date of the Company's Annual Meeting and ending on the date immediately preceding the next Annual Meeting. "Dividend Equivalent Rights" shall mean a right, described in Section 7 hereof, of a holder of Stock Units with respect to certain dividends paid on outstanding shares of Stock. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Fair Market Value" of the Stock on a particular date shall equal the average of the reported closing prices for the Stock on the New York Stock Exchange for the ten (10) consecutive trading days immediately preceding such date. "Fees" shall mean the sum, for any Director Year, of the Annual Retainer, the Meeting Fees and Per Diem Fees, if any. "Meeting Fees" shall mean the fees, established by the Board, paid to a Director for attending a meeting of the Board or a committee of the Board. This term shall include all fees paid to a Director for extraordinary or special Board and/or committee meetings. "Per Diem Fee" shall mean a fee, established by the Board, authorized by the Chief Executive Officer of the Company, in his or her sole discretion, to a Director who is asked to work on Board issues for a significant part of a day outside of normal Board or committee meetings. "Prior Plans" shall mean the Honeywell Restricted-Stock Retirement Plan for Non-Employee Directors and the Honeywell Inc. Compensation Plan for Outside Directors. "Rule 16b-3" shall mean Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. -4- "Stock" shall mean shares of Common Stock, par value $1.50 per share, of the Company. "Stock Unit" shall mean a right to receive payment, in accordance with the conditions set forth herein, of the Fair Market Value of a share of Stock. "Termination Date" shall mean the date the Director's service on the Board terminates for any reason. 3. STOCK SUBJECT TO THE PLAN. The maximum number of shares of Stock reserved for issuance pursuant to the Plan shall be 300,000 shares, subject to adjustment as provided in Section 11 of the Plan. 4. ANNUAL STOCK UNIT AWARDS. On the date of each Annual Meeting, commencing with the 1996 Annual Meeting, each person who has served as a Director during the preceding Director Year shall receive an Award of Stock Units (including fractional Stock Units) with respect to Stock having a Fair Market Value equal to one-half the Fees earned by the Director for the immediately preceding Director Year. 5. FEES. Each Director shall be entitled to receive Fees with respect to each Director Year in accordance with the provisions of this Section 5. Each Director shall be given an opportunity by the Company on an annual basis to elect ("Annual Election") to receive his or her Annual Retainer and Meeting Fees: (i) in cash, (ii) in Stock Units, or (iii) in a combination of cash and Stock Units. In addition a Director may elect to defer receipt of the Annual Retainer and Meeting Fees that the Director has the opportunity to earn during the next succeeding Director Year, which would otherwise be payable in cash. (a) The Annual Election must be in writing and shall be delivered to the Secretary of the Company no later than the tenth day preceding the date of the Annual Meeting. (The Annual Election shall be irrevocable after the tenth day preceding the date of the Annual Meeting.) The Annual Election shall specify the applicable percentage of the Annual Retainer and Meeting Fees that such Director elects to receive in cash, or Stock Units, or to defer. (b) If a Director elects to receive Fees in cash, cash payment for the Annual Retainer shall be paid as soon as practicable after the beginning of a Director Year, and cash payment for Meeting Fees shall be paid as soon as practicable after a meeting. If a Director elects to receive Stock Units in lieu of all or a portion of the Annual Retainer, the Director shall receive Stock Units (including fractional Stock Units) with respect to Stock having a -5- Fair Market Value (on the date of the Company's Annual Meeting) equal to 110% of the portion of the Annual Retainer payable in Stock Units. If a Director elects to receive Stock Units in lieu of all or a portion of the Meeting Fees, then with respect to all meetings occurring within a calendar quarter, the Director shall receive Stock Units (including fractional Stock Units) with respect to Stock having a Fair Market Value (determined as of the last trading day for such quarter) equal to 110% of the portion of such Meetings Fees payable in Stock Units. (c) If a Director elects to defer all or a portion of the Fees, such deferred Fees shall be credited to the Deferred Account established for each Director. Interest shall be credited to each Deferred Account annually, as of December 31, and at the time of distribution of the entire balance of the Deferred Account, on the daily average balance of such Deferred Account for such year or portion thereof at an interest rate equal to 120% of the long-term Applicable Federal Rate. (d) Any person who becomes a Director following an Annual Meeting, whether by appointment or election as a director (or by change in status from a full-time employee), shall receive an Annual Retainer prorated for the balance of that Director Year. In the event a Director voluntarily resigns from the Board during a Director Year, (i) the Director shall return to the Company any cash payment covering the prorated portion of the Annual Retainer for the balance of that Director Year, (ii) any Stock Units awarded, and any Fees credited to the Deferred Account, in respect of the prorated portion of the Annual Retainer for the balance of that Director Year shall be forfeited. No return of any portion of the Annual Retainer shall be required in the event a Director leaves the Board as the result of retirement, incapacity or death. 6. CONVERSION OF PRIOR AWARDS. As of the Effective Date, all Company Restricted Stock and all Alliant Restricted Stock outstanding under the Prior Plans which is held by Directors who are not Canadian Directors shall be cancelled. Each Director who, immediately prior to the Effective Date, holds Company Restricted Stock or Alliant Restricted Stock, which shall be cancelled in accordance with the immediately preceding sentence, shall receive, in consideration for such cancellation, an Award of Stock Units with respect to the number of shares of Stock equal to the sum of (i) number of such Director's cancelled Company Restricted Stock and (ii) the total value, as of the Effective Date, of the stock underlying such Director's Alliant Restricted Stock divided by the Fair Market Value per share of Stock on the Effective Date. Prior to the Effective Date (but in no event later than the tenth day preceding the Effective Date), each Director may elect to cancel, as of the Effective Date, all or a portion -6- of such Director's Fees then held in the Director's deferred compensation account under the Prior Plans in exchange for an Award of Stock Units with respect to the number of shares of Stock equal to the amount so cancelled divided by the Fair Market Value per share of Stock on the Effective Date. Any such election shall be irrevocable. 7. DIVIDEND EQUIVALENT RIGHTS. Outstanding Stock Units shall be credited with Dividend Equivalent Rights based upon dividends paid on outstanding shares of Stock between the date such Stock Units are granted and the date of payment in respect of such Stock Units. Such Dividend Equivalent Rights, once credited, shall be converted into an equivalent number of Stock Units (including fractional Stock Units). If a dividend is paid in cash, each Director shall be credited, as of each dividend payment date, in accordance with the following formula: (A x B) / C in which "A" equals the number of Stock Units held by the Director on the dividend payment date, "B" equals the cash dividend per share and "C" equals the Fair Market Value per share of Stock on the dividend payment date. If a dividend is paid in property other than cash, Dividend Equivalent Rights shall be credited, as of the dividend payment date, in accordance with the formula set forth above, except that "B" shall equal the fair market value per share of the property which the Director would have received in respect of the number of shares of Stock equal to the number of Stock Units held by the Director as of the dividend payment date, had such shares been owned as of the record date for such dividend. 8. TIME OF PAYMENT. Unless otherwise provided herein, all payments in respect of a Director's Stock Units and in settlement of a Director's Deferred Account shall be made as soon as practicable after the earlier of: (I) the occurrence of a Change in Control; and (II) the Termination Date; provided, however, that no payment in respect of a Canadian Director's Stock Units and in settlement of a Canadian Director's Deferred Account shall be made prior to such Canadian Director's Termination Date. 9. FORM OF PAYMENT. (a) Except as described in Section 9 (c), payment in respect of Stock Units shall be made in Stock. -7- (b) Payment in settlement of the Director's Deferred Account shall be made in cash. (c) Any payment made upon an occurrence of a Change in Control, whether in respect of Stock Units or in settlement of the Deferred Account (including Stock Units of Deferred Accounts with respect to which one or more installment payments have previously been made), shall be made in a single lump sum cash payment. For purposes of the preceding sentence, the amount of cash delivered in full or partial payment of Stock Units shall equal the Change in Control Price of the number of shares of Stock relating to the Stock Units with respect to which such cash payment is being made. (d) Except as described in sections 9(c) or 17, payments with respect to Stock Units or in settlement of Deferred Accounts shall be paid in annual installments over a specified period of time or in a lump sum, all at such time and over such period as the Director may elect and subject to change from time to time; provided however, that unless determined otherwise by the Committee, no such election, change or revocation will be given effect if it is made less than one year in advance of the Director's Termination Date; and, provided, further that any payment with respect to a Canadian Director's Stock Units or in settlement of a Canadian Director's Deferred Accounts shall be made in a single lump sum as soon as practicable after, and in any case in the same calendar year as, the Termination Date. (e) The Company shall not issue fractions of shares. Whenever under the terms of the Plan, a fractional share would otherwise be required to be issued, the Director shall be paid in cash for such fractional share. 10. STATEMENT OF ACCOUNT. Each director shall receive an annual statement showing the number of Stock Units that have been awarded to the director under the Plan. 11. CHANGE IN CAPITAL STRUCTURE. In the event of any change in the Stock by reason of any stock dividend, split, combination of shares, exchange of shares, warrants or rights offering to purchase Stock at a price below its fair market value, reclassification, recapitalization, merger, consolidation or other change in capitalization, appropriate adjustment shall be made by the Committee in the number and kind of shares subject to the Plan and any other relevant provisions of the Plan, whose determination shall be binding and conclusive on all persons. -8- 12. NONTRANSFERABILITY. Unless determined otherwise by the Committee, Stock Units shall not be transferable by a Director except by will or the laws of descent and distribution. 13. RIGHTS. Except to the extent otherwise set forth herein, the Directors shall not have any of the rights of a stockholder with respect to the Stock Units. 14. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. The Committee shall have full power, discretion and authority to interpret and administer the Plan, except that the Committee shall have no power to (a) determine the eligibility for Awards or the number of Stock Units or timing or value of Awards to be granted to any Director, or (b) take any action specifically delegated to the Board under the Plan. The Committee's interpretations and actions shall, except as otherwise determined by the Board, be final, conclusive and binding on all persons for all purposes. 15. AMENDMENT OR TERMINATION OF THE PLAN. The Board may, at any time, amend or terminate the Plan; but no amendment or termination shall, without the written consent of a Director, reduce the Director's rights under previously granted Awards or with respect to any Fees previously earned. 16. NO RIGHT TO RENOMINATION. Nothing in the Plan or in any Award shall confer upon any Director the right to be nominated for reelection to the Board. 17. PAYMENTS UPON DEATH. In the event of a Director's death, payments with respect to any Stock Units or in settlement of any Deferred Account (including Stock Units or Deferred Account with respect to which one or more installment payments have previously been made) shall be made in a single lump sum payment (in Stock with respect to the Stock Units and in cash with respect to the Deferred Account) to the beneficiary designated by the Director (which beneficiary, for any Canadian Director, must be a relative or a dependent of the Canadian Director), or in the absence of an executed beneficiary form, to the person legally entitled thereto, as designated under his or her will, or to such heirs as determined under the laws of intestacy for the state of his or her domicile. 18. GOVERNING LAW. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Minnesota. EX-10.(III)(O) 4 EX 10(III) 1997 HONEYWELL STOCK & INCENTIVE PLAN 1997 HONEYWELL STOCK AND INCENTIVE PLAN ARTICLE 1. PURPOSE AND DURATION 1.1 PURPOSE. The purpose of the 1997 Honeywell Stock and Incentive Plan is to further the growth, development and financial success of Honeywell and its Subsidiaries by aligning the personal interests of key employees, through the ownership of shares of the Honeywell common stock and through other incentives, to those of its shareholders. The Plan is further intended to provide flexibility to Honeywell in its ability to compensate key employees and to motivate, attract and retain the services of those who have the ability to contribute to the success of Honeywell and its Subsidiaries. The Plan also provides for incentive awards to key employees of Affiliates in those cases where the success of Honeywell or its Subsidiaries may be enhanced by the award of incentives to such persons. Stock Options, Stock Appreciation Rights and Other Stock Based Awards may be granted under the Plan. 1.2 DURATION. Upon approval by the Board of Directors of Honeywell, subject to ratification by an affirmative vote of a majority of the Shares present and entitled to vote at the annual meeting of shareholders of Honeywell to be held on April 15, 1997, or at any adjournment thereof, the Plan, if so approved, shall become effective April 16, 1997, and shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 10 herein, until April 15, 2002 (the "Termination Date"). ARTICLE 2. DEFINITIONS 2.1 DEFINITIONS. Capitalized terms used throughout the Plan shall have the meanings set forth below unless otherwise defined elsewhere in the Plan: (a) "AFFILIATE" means any corporation (other than a Subsidiary), partnership, association, joint venture or other entity in which Honeywell or any Subsidiary participates directly or indirectly in the decisions regarding the management thereof or the production or marketing of products or services. (b) "AWARD" means, individually or collectively, the grant of a Stock Option, Stock Appreciation Right or Other Stock Based Award under this Plan. (c) "AWARD AGREEMENT" means the document which evidences an Award and which sets forth the terms, conditions and limitations relating to such Award. (d) "BOARD OF DIRECTORS" means the Board of Directors of Honeywell. (e) "CHANGE IN CONTROL" shall have the meaning set forth in Article 9 herein. (f) "CHANGE IN CONTROL VALUE" means the highest price paid for a Share by a third party in connection with a Change in Control. 1 (g) "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor Code thereto. (h) "COMMITTEE" means the group of individuals administering the Plan, which shall be the Personnel Committee of the Board or any other committee of the Board performing similar functions as appointed from time to time by the Board. (i) "EFFECTIVE DATE" means April 16, 1997. (j) "ELIGIBLE EMPLOYEE" means any executive, managerial, professional, technical or administrative employee of Honeywell, any Subsidiary or any Affiliate who is expected to contribute to its success. (k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor Act thereto. (l) "FAIR MARKET VALUE" means, with respect to any particular date, the average of the highest and lowest price of a Share as reported on the consolidated tape for New York Stock Exchange listed securities (or other principal reporting system, as determined by the Committee). (m) "INCENTIVE STOCK OPTION" means a Stock Option, which is designated as an Incentive Stock Option and meets the requirements of Section 422 of the Code. (n) "HONEYWELL" means Honeywell Inc., a Delaware corporation. (o) "NONQUALIFIED STOCK OPTION" means a Stock Option, which is not an Incentive Stock Option. (p) "OTHER STOCK BASED AWARD" means an Award, granted under Article 6 herein, other than a Stock Option or Stock Appreciation Right, that is paid with, valued in whole or in part by reference to, or is otherwise based on Shares. (q) "PARTICIPANT" means an Eligible Employee selected by the Committee to receive an Award under the Plan. (r) "PLAN" means the 1997 Honeywell Stock and Incentive Plan. (s) "SHARES" means the issued or unissued shares of the common stock, par value $1.50 per share, of Honeywell. (t) "STOCK APPRECIATION RIGHT" means the grant, under Article 6 herein, of a right to receive a payment from Honeywell, in the form of Shares, cash or a combination of both, equal to the difference between the Fair Market Value of one or more Shares and the exercise price of such Shares under the terms of such grant. (u) "STOCK OPTION" means the grant, under Article 6 herein, of a right to purchase a specified number of Shares during a specified period at a designated price, which may be an Incentive Stock Option or a Nonqualified Stock Option. 2 (v) "SUBSIDIARY" means a corporation as defined in Section 425(f) of the Code with Honeywell being treated as the employer corporation for purposes of this definition. (w) "TERMINATION DATE" means the earlier of: the date on which all Shares subject to the Plan have been purchased or acquired according to the Plan's provisions, the date the Plan is terminated pursuant to Article 10, or April 15, 2002. (x) "WITHHOLDING EVENT" means an event related to an Award which results in the Participant being subject to taxation at the federal, state, local or foreign level. ARTICLE 3. ADMINISTRATION 3.1 AUTHORITY. The Committee shall administer the Plan and shall have full and exclusive power, except as limited by law or by the Restated Certificate of Incorporation or By-laws of Honeywell, and subject to the provisions herein, to: (a) select Eligible Employees to whom Awards are granted; (b) determine the size and types of Awards and the terms and conditions thereof in a manner consistent with the Plan; (c) determine whether, to what extent and under what circumstances, Awards may be: settled, paid or exercised in cash, Shares, other Awards, or other property; or canceled, forfeited or suspended; (d) construe and interpret the Plan and any agreement or instrument entered into under the Plan; (e) amend (subject to the provisions of Section 4.2(f) and Article 10 herein) the terms and conditions, other than price, of any outstanding Award to the extent such terms and conditions are within its discretion; and (f) establish, amend or waive rules and regulations for the Plan's administration and make all other determinations which may be necessary or advisable for the administration of the Plan; provided, however, that the Board of Directors may from time to time assume, in its sole discretion, administration of the Plan. All Awards shall be made by the Committee, provided however, that Awards may be made by the Chief Executive Officer of Honeywell, or a designee approved by the Committee other than during the normal period for granting Awards, subject to ratification by the Committee or satisfaction of a six-month holding period following the date of grant. 3.2 DECISIONS BINDING. All determinations and decisions made by the Committee related to the Plan, and all related orders or resolutions of the Board of Directors shall be final, conclusive and binding on all persons, including Honeywell, its Subsidiaries and Affiliates, its shareholders, Participants, and their estates and beneficiaries. 3 ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.2 herein, no more than 7,500,000 Shares may be issued under the Plan, of which a maximum of fifty percent (50%) of such Shares may be issued pursuant to Other Stock Based Awards. These Shares may consist in whole or in part, of authorized and unissued Shares, or of treasury Shares. No fractional Shares shall be issued under the Plan; however, cash may be paid in lieu of any fractional Shares in settlement of Awards under the Plan. 4.2 ADJUSTMENTS. For purposes of determining the number of Shares available for issuance under the Plan: (a) The grant of an Award shall reduce the authorized pool of Shares by the number of Shares subject to such Award while such Award is outstanding. If any Award granted under the Plan is canceled, terminates, expires or lapses for any reason, any Shares subject to such Award shall be credited to the authorized pool of Shares and again be available for the grant of an Award under the Plan; except, however, to the extent that such Award was granted in tandem with another Award, any Shares issued pursuant to the exercise or settlement of such other Award shall not be credited back. (b) Any Shares tendered, either actually or by attestation, in payment of the price of a Stock Option or stock option exercised under any other Honeywell plan shall be credited to the authorized pool of Shares. (c) To the extent that any Shares covered by Stock Appreciation Rights are not issued upon the exercise of such Stock Appreciation Rights, the authorized pool of Shares shall be credited for such number of Shares. (d) To the extent that an Award is settled in cash or any form other than Shares, the authorized pool of Shares shall be credited with the appropriate number of Shares represented by such settlement of the Award, as determined at the sole discretion of the Committee. (e) If Shares are used to pay dividends and dividend equivalents in conjunction with outstanding Awards, an equivalent number of Shares shall be deducted from the Shares available for issuance. (f) Subject to Article 9 herein, in the event of any merger, reorganization, consolidation, recapitalization, separation, spin-off, liquidation, stock dividend, split-up, Share combination or other change in the corporate or capital structure of Honeywell affecting the Shares, such adjustment shall be made in the number and class of Shares which may be delivered under the Plan, and in the number and class of and/or price of Shares subject to outstanding Awards granted 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. 4 4.3 EFFECT OF ACQUISITION. The Committee may authorize Awards to be issued under the Plan in substitution for awards or rights issued by a company whose shares or assets are acquired by Honeywell or a Subsidiary. These Awards shall not reduce the number of Shares available for grant under the Plan. ARTICLE 5. PARTICIPATION 5.1 SELECTION OF PARTICIPANTS. The Committee may, from time to time, select from all Eligible Employees, those to whom Awards shall be granted and shall determine the nature and amount of each Award. Nothing herein shall confer upon any Eligible Employee, the right to receive an Award under the Plan, or, if selected to receive an Award, the right to continue to receive same. Further, no Participant shall have any right, by reason of the grant of any Award under the Plan, to continued employment by Honeywell or any Subsidiary or Affiliate. There is no obligation for uniformity of treatment of Participants under the Plan. 5.2 AWARD AGREEMENT. All Awards shall be evidenced by an Award Agreement unless otherwise specified by the Committee. The Award Agreement shall specify such terms, conditions, limitations, and other provisions applicable to the Award as determined by the Committee. ARTICLE 6. AWARDS Awards may be granted as Stock Options, Stock Appreciation Rights or Other Stock Based Awards, and except as otherwise provided for in Section 3.1 herein, may be granted by the Committee to Eligible Employees at any time, and from time to time as the Committee shall determine. The Committee shall have complete discretion in determining the number of Awards to grant (subject to the Share limitations set forth in Sections 4.1 and 6 herein) and, consistent with the provisions of the Plan, the terms, conditions and limitations pertaining to such Awards. No Participant may be granted Stock Options or Stock Appreciation Rights representing in the aggregate, more than 500,000 Shares, in any given year. No Award may be granted on or after the Termination Date, but Awards made prior to the Termination Date may be exercised, vested or otherwise effectuated beyond that date unless otherwise limited. 6.1 STOCK OPTIONS. Stock Options may be granted at an exercise price which shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date the Stock Option is granted. A Stock Option may be exercised at such times and subject to such conditions as may be specified in an Award Agreement in whole or in installments, which may be cumulative and shall expire at such time as the Committee shall determine at the time of grant; provided that no Stock Option shall be exercisable later than ten (10) years after the date it is granted. Prior to the exercise of a Stock Option, the holder thereof shall not have any rights of a shareholder with respect to any of the Shares covered by the Stock Option. 5 A Stock Option shall be exercised by the delivery of a written notice of exercise to the Director of Executive Compensation of Honeywell or such other person specified by the Committee, setting forth the number of Shares with respect to which the Stock Option is to be exercised, accompanied by full payment of the total Stock Option price and any required withholding taxes. Payment shall be made either (a) in cash or its equivalent, (b) by tendering, either actually or by attestation, previously acquired Shares having a Fair Market Value at the time of exercise equal to the total price of the Stock Option, or (c) by a combination of (a) and (b). The Committee also may allow exercises to be made with the delivery of payment as permitted under Federal Reserve Board Regulation T, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the Plan's purpose and applicable law. The Committee may provide that the exercise of a Stock Option, by tendering previously acquired shares, will entitle the exercising Participant to receive another Stock Option covering the same number of shares tendered and with a price of no less than the Fair Market Value on the date of grant of such other option. 6.2 STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted at an exercise price which shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date the Stock Appreciation Right is granted, in tandem with a Stock Option, such that the exercise of the Stock Appreciation Right or related Stock Option will result in a forfeiture of the right to exercise the related Stock Option for an equivalent number of shares, or independently of any Stock Option. A Stock Appreciation Right may be exercised at such times as may be specified in an Award Agreement, in whole or in installments, which may be cumulative and shall expire at such time as the Committee shall determine at the time of grant; provided that no Stock Appreciation Right shall be exercisable later than ten (10) years after the date it is granted. Stock Appreciation Rights shall be exercised by the delivery of a written notice of exercise to the Director of Executive Compensation of Honeywell or such other person specified by the Committee, setting forth the number of Shares with respect to which the Stock Appreciation Right is to be exercised. 6.3 OTHER STOCK BASED AWARDS. Other Stock Based Awards may be granted to such Eligible Employees as the Committee may select, at any time and from time to time as the Committee shall determine, in payment of amounts earned under other incentive compensation plans of Honeywell, in satisfaction of performance goals or for other consideration. The Committee shall have complete discretion in determining the number of Shares subject to such Awards (consistent with the Share limitations set forth in Sections 4.1 and 6 herein), the consideration for such Awards and the terms, conditions and limitations pertaining to same including, without limitation, restrictions based upon the achievement of performance goals, and/or restrictions under applicable federal or state securities laws, and conditions under which same will lapse. Performance goals may include individual performance goals established by the Committee or Honeywell's achievement goals established by the Committee based on certain business criteria such as cash flow, debt to equity ratio, earnings per share, economic value added, net income, operating ratio, return on assets, return on equity, return on investment, revenue, 6 shareholder return and working capital. The terms, restrictions and conditions of the Award need not be the same with respect to each Participant. The Committee may, in its sole discretion, direct Honeywell to issue Shares subject to such restrictive legends and/or stop transfer instructions as the Committee deems appropriate. ARTICLE 7. DIVIDENDS AND DIVIDEND EQUIVALENTS The Committee may provide that Awards earn dividends or dividend equivalents. Such dividend equivalents may be paid currently or may be credited to an account established by the Committee under the Plan in the name of the Participant. In addition, dividends or dividend equivalents paid on outstanding Awards or issued Shares may be credited to such account rather than paid currently. Any crediting of dividends or dividend equivalents may be subject to such restrictions and conditions as the Committee may establish, including reinvestment in additional Shares or Share equivalents. ARTICLE 8. DEFERRALS AND SETTLEMENTS Payment of Awards may be in the form of cash, Shares, other Awards, or in such combinations thereof as the Committee shall determine at the time of grant, and with such restrictions as it may impose. Payment may be made in a lump sum or in installments as prescribed by the Committee. The Committee may also require or permit Participants to elect to defer the issuance of Shares or the settlement of Awards in cash under such rules and procedures as it may establish under the Plan. It may also provide that deferred settlements include the payment or crediting of interest on the deferral amounts or the payment or crediting of dividend equivalents on deferred settlements denominated in Shares. The Committee may provide that Shares may be utilized to pay all or any part of the purchase price of the exercise of any Stock Option or option to acquire Shares under any other Honeywell incentive compensation plan, if permitted under such plan. ARTICLE 9. CHANGE IN CONTROL 9.1 DEFINITION. For purposes of this Section 9.1, a Change in Control of Honeywell shall be deemed to have occurred if the conditions set forth in any one or more of the following paragraphs shall have been satisfied: (a) Any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than Honeywell, any subsidiary of Honeywell, any "person" (as hereinabove defined) acting on behalf of Honeywell as underwriter pursuant to an offering who is temporarily holding securities in connection with such offering, any trustee or other fiduciary holding securities under an employee benefit plan of Honeywell or any corporation owned, directly or indirectly, by the shareholders of Honeywell in substantially the same proportions as their ownership of stock of Honeywell), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Honeywell representing 7 thirty percent (30%) or more of the combined voting power of Honeywell's then outstanding securities; or (b) During any period of not more than two consecutive years (not including any period prior to the Effective Date of the Plan), individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with Honeywell to effect a transaction described in paragraphs (a), (c) or (d) of this Section 9.1) whose election by the Board of Directors or nomination for election by Honeywell's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) The shareholders of Honeywell approve a merger or consolidation of Honeywell with any other person, other than (i) a merger or consolidation which would result in the voting securities of Honeywell outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of Honeywell or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of Honeywell (or similar transaction) in which no "person" (as hereinabove defined) acquires more than thirty percent (30%) of the combined voting power of Honeywell's then outstanding securities; or (d) The shareholders of Honeywell approve a plan of complete liquidation of Honeywell or an agreement for the sale or disposition by Honeywell of all or substantially all of Honeywell's assets (or any transaction having a similar effect). 9.2 EFFECT. In the event of a Change in Control of Honeywell,, then, as of the first date that the Change in Control has been deemed to have occurred, (i) any Stock Options not previously exercisable and vested shall become fully exercisable and vested, (ii) restrictions, if any, applicable to Other Stock Based Awards shall lapse and the Shares subject thereto shall become fully vested, and (iii) Other Stock Based Awards shall be paid as described in Section 9.3. 9.3 PAYMENT UPON CHANGE IN CONTROL. Notwithstanding any other provision of the Plan, a Participant shall receive, with respect to each performance period for any Other Stock Based Award in progress at the time of the Change in Control, a lump sum cash amount, within five days after the Change in Control, equal to the "Change in Control Value" of the Other Stock Based Awards the Participant would have earned if 100% of the relevant performance goals were met, multiplied by a fraction, the numerator of which is the number of months (rounded to the nearest whole month) of actual service in the relevant performance period and the denominator being the number of months in the relevant performance period. 8 ARTICLE 10. AMENDMENT, MODIFICATION AND TERMINATION 10.1 AMENDMENT, MODIFICATION AND TERMINATION. Subject to the approval of the Board of Directors, the Committee may terminate, amend or modify the Plan at any time and from time to time, without shareholder approval, except to the extent required by applicable law. The termination, amendment or modification of the Plan may be in response to changes in the Code, the Exchange Act, national securities exchange regulations or for other reasons deemed appropriate by the Committee. However, without the approval of the shareholders of Honeywell, no amendment or modification shall (i) materially increase the total amount of Shares which may be issued under the Plan, except as provided in Sections 4.2(f) and 4.3 herein, (ii) increase the limitation set forth in Article 6 for the number of Stock Options or Stock Appreciation Rights that may be granted to any individual, or (iii) change the minimum Stock Option and Stock Appreciation Right exercise prices set forth in Sections 6.1 and 6.2 herein. 10.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification of the Plan shall in any manner adversely affect any Award previously granted under the Plan, without the written consent of the Participant. ARTICLE 11. WITHHOLDING 11.1 TAX WITHHOLDING. Honeywell shall have the power and the right to deduct or withhold, or require a Participant or any person to whom an Award may be transferred, if permitted by the Committee, to remit to Honeywell, an amount in cash or Shares having a Fair Market Value sufficient to satisfy federal, state and local taxes (including any FICA obligation) required by law to be withheld with respect to any Withholding Event which occurs because of a grant of an Award or exercise or payment made thereunder, or as a result of the Plan. 11.2 SHARE WITHHOLDING. Upon a Withholding Event, the Committee may require one or more classes of Participants or any persons to whom an Award may be transferred, if permitted by the Committee, to satisfy the withholding requirement, in whole or in part, by having Honeywell withhold Shares having a Fair Market Value, on the date the tax is to be determined, equal to the amount of withholding (federal, FICA, state or local) which is required by law. Absent such a mandate, the Committee may allow Participants or such persons to elect Share withholding for tax purposes subject to such terms and conditions as the Committee shall establish. ARTICLE 12. INDEMNIFICATION 12.1 INDEMNIFICATION. Each person who is or shall have been a member of the Committee, or of the Board of Directors, shall be indemnified and held harmless by Honeywell from and against any loss, cost, liability or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by such person in settlement thereof with Honeywell's approval, or paid by such person in satisfaction of any judgment in any such action, suit or proceeding against such person, provided such person shall give Honeywell an 9 opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend it on such person's own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under Honeywell's Restated Certificate of Incorporation or By-laws, as a matter of law, or otherwise, or any power that Honeywell may have to indemnify them or hold them harmless. ARTICLE 13. UNFUNDED PLAN 13.1 UNFUNDED PLAN. The Plan shall be unfunded and Honeywell shall not be required to segregate any assets that may at any time be represented by Awards under the Plan. Any liability of Honeywell to any person with respect to any Award under the Plan shall be based solely upon any contractual obligations that may be effected pursuant to the Plan. No such obligation of Honeywell shall be deemed to be secured by any pledge of, or other encumbrance on, any property or assets of Honeywell. ARTICLE 14. SUCCESSORS 14.1 SUCCESSORS. All obligations of Honeywell under the Plan, with respect to any Awards granted hereunder, shall be binding on any successor to Honeywell, 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 Honeywell. ARTICLE 15. REQUIREMENTS OF LAW 15.1 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. Further, each Award shall be subject to the requirement that, if at any time the Committee shall determine, in its sole discretion, that the listing, registration or qualification of any Shares available for Awards or any Awards upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the issuance of Shares pursuant to an Award, or the granting of such Award or the grant or settlement thereof, such Award may not be exercised or settled in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. 15.2 SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, such 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. 15.3 GOVERNING LAW. To the extent not preempted by federal law, the Plan and all Award Agreements, shall be construed in accordance with and governed by the laws of the State of Minnesota. 10 EX-11 5 EXHIBIT 11 COMPUTATION OF EARNINGS EXHIBIT (11) HONEYWELL INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE FOR THE FIVE YEARS ENDED DECEMBER 31, 1997 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- BASIC EARNINGS PER SHARE: Income: Income available to common shareowners.......... $ 471.0 $ 402.7 $ 333.6 $ 278.9 $ 322.2 Shares: Weighted Average Shares Outstanding............. 127,051,613 126,632,082 127,138,774 129,440,052 134,242,394 Basic EPS......................................... $ 3.71 $ 3.18 $ 2.62 $ 2.15 $ 2.40 DILUTED EARNINGS PER SHARE: Income: Income available to common shareowners.......... $ 471.0 $ 402.7 $ 333.6 $ 278.9 $ 322.2 Shares: Weighted Average Shares Outstanding............. 127,051,613 126,632,082 127,138,774 129,440,052 134,242,394 Dilutive shares issuable in connection with stock plans less shares purchaseable with proceeds.... 2,140,609 2,848,697 2,364,352 541,811 1,069,901 ----------- ----------- ----------- ----------- ----------- Total Shares.................................. 129,192,222 129,480,779 129,503,126 129,981,863 135,312,295 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted EPS....................................... $ 3.65 $ 3.11 $ 2.58 $ 2.15 $ 2.38
64 EX-12 6 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS EXHIBIT (12) HONEYWELL INC. AND SUBSIDIARIES COMBINED WITH PROPORTIONAL SHARES OF 50% OWNED COMPANIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES FOR THE FIVE YEARS ENDED DECEMBER 31, 1997 (DOLLARS IN MILLIONS)
1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Income before income taxes................................ $ 703.26 $ 610.20 $ 505.50 $ 369.70 $ 478.50 Deduct: Equity income........................................... 12.94 13.30 13.60 10.50 17.80 --------- --------- --------- --------- --------- Subtotal................................................ 690.32 596.90 491.90 359.20 460.70 Add (Deduct): Dividends from less than 50% owned companies............ 2.60 2.16 2.58 2.37 2.10 Proportional share of income (loss) before income taxes of 50% owned companies................................. .06 (.93) .41 (2.83) .30 --------- --------- --------- --------- --------- Adjusted income........................................... 692.98 598.13 494.89 358.74 463.10 --------- --------- --------- --------- --------- Fixed charges Interest on indebtedness: Honeywell Inc. and subsidiaries......................... 101.93 76.81 79.66 72.89 65.46 50% owned companies..................................... .11 .05 -- -- -- --------- --------- --------- --------- --------- Subtotal................................................ 102.04 76.86 79.66 72.89 65.46 Amortization of debt expense.............................. 1.50 4.55 3.66 2.61 2.54 Interest portion of rent expense.......................... 47.19 51.24 47.80 45.64 44.75 --------- --------- --------- --------- --------- Total fixed charges....................................... 150.73 132.65 131.12 121.14 112.75 --------- --------- --------- --------- --------- Total available income.................................... $ 843.71 $ 730.78 $ 626.01 $ 479.88 $ 575.85 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to fixed charges........................ 5.60 5.51 4.77 3.96 5.11 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
65 EX-21 7 EX 21 SUBSIDIARIES OF HONEYWELL EXHIBIT 21 HONEYWELL INC. AFFILIATES
A % I COUNTRY OWNED COMPANY* - ------- ----- ------- - ------- ----- ------- I UNITED STATES: 100 HONEYWELL ADVANCED SYSTEMS INC. CALIF A UNITED STATES: 100 HONEYWELL ASIA PACIFIC INC. DEL A CHINA 40 BEIJING HONEYWELL ENERGY SAVING EQUIPMENT COMPANY LTD. [JOINT VENTURE] A UNITED STATES: 100 HONEYWELL BUILDING MANAGEMENT SERVICES INC. DEL A UNITED STATES: 100 HONEYWELL CHINA INC. DEL I UNITED STATES: 100 HONEYWELL COMMUNICATIONS COMPANY MINN I UNITED STATES: 100 HONEYWELL DISC INC. DEL A UNITED STATES: 100 HONEYWELL EUROPE INC. DEL A UNITED STATES: 100 HONEYWELL FINANCE INC. DEL A UNITED STATES: 100 HONEYWELL FINANCE INTERNATIONAL INC. DEL I UNITED STATES: 100 HONEYWELL HIGH-TECH TRADING INC. DEL A BRAZIL 50 HONEYWELL DO BRASIL & CIA. (PARTNERSHIP) [OTHER PARTNER IS HONEYWELL OVERSEAS FINANCE CO., OWNING 50%] A UNITED STATES: 100 HONEYWELL OVERSEAS FINANCE COMPANY DEL A UNITED STATES: 100 HONEYWELL REALTY, INC. DEL A UNITED STATES: 100 HONEYWELL DMC SERVICES, INC. MASS A UNITED STATES: 100 HONEYWELL TCAS INC. DEL A UNITED STATES: 50 CONTROL SYSTEMS CONTRACTING AND CONSULTING LLC DEL [OTHER 50% OWNERSHIP IS HELD BY MINNEAPOLIS-HONEYWELL REGULATOR COMPANY, INC.] A UNITED STATES: 100 HONEYWELL CONSUMER PRODUCTS, INC. A MASS A UNITED STATES: 100 HONEYWELL CONSUMER PRODUCTS (CANADA) INC. MASS A AUSTRIA 100 HONEYWELL AUSTRIA HAUSTECHNIK GmbH A ENGLAND 100 HONEYWELL CONSUMER PRODUCTS LIMITED A GERMANY 100 HONEYWELL HAUSGERATE GmbH A HONG KONG 100 HONEYWELL CONSUMER PRODUCTS (HONG KONG) LIMITED A HONG KONG 100 HONEYWELL CONSUMER PRODUCTS REALTY LIMITED A CHINA 100 DURACRAFT ELECTRICAL (SHENZHEN) CO. LTD. A CHINA 100 DURACRAFT MOULDING (SHANGHAI) CO. LTD. A PORTUGAL 74.3 HONEYWELL IBERICA - PRODUTOS DE CONSUMO, S.A. [ALSO HONEYWELL CONSUMER PRODUCTS, INC. OWNS 25.7%] A UNITED STATES: 100 HONEYWELL-MEASUREX CORPORATION DEL A UNITED STATES: 100 HONEYWELL-MEASUREX SYSTEMS, INC. CALIF A JAPAN 100 HONEYWELL-MEASUREX K.K. I UNITED STATES: 100 MEASUREX AUTOMATION SYSTEMS, INC. CALIF A UNITED STATES: 100 HONEYWELL-MEASUREX DATA MEASUREMENT CORPORATION DEL A ENGLAND 100 DMC (UK) LIMITED A UNITED STATES: 100 INDUSTRIAL GAUGING DISC D.C. A GERMANY 100 DMC MESS & REGELTECHNIK GmbH A UNITED STATES: 100 HONEYWELL-MEASUREX INTERNATIONAL CORPORATION CALIF A UNITED STATES: 100 HONEYWELL-MEASUREX LATIN AMERICA CALIF A MEXICO 51 MEASUREX S.A. DE C.V. [OTHER 49% OWNERSHIP IS HELD BY MEASUREX INTERNATIONAL CORPORATION.] A BRAZIL 100 MEASUREX DO BRAZIL LTDA. A VENEZUELA 100 MEASUREX DE VENEZUELA, C.A. A UNITED STATES: 100 HONEYWELL-MEASUREX ASIA, INC. CALIF A UNITED STATES: 100 HONEYWELL-MEASUREX KOREA, INC. CALIF A UNITED STATES: 100 MEASUREX TAIWAN, INC. CALIF A SINGAPORE 100 MAP RESULTS PTE. LTD. A NEW ZEALAND 100 MEASUREX SYSTEMS N.Z. LTD. A AUSTRALIA 100 MEASUREX PTY. LTD. A IRELAND 100 HONEYWELL-MEASUREX (IRELAND) LTD. A IRELAND 100 HONEYWELL-MEASUREX IRELAND FINANCE A ENGLAND 100 HONEYWELL MEASUREX LIMITED A AUSTRIA 100 MEASUREX INTERNATIONAL GmbH A FRANCE 100 HONEYWELL-MEASUREX S.A.R.L. A GERMANY 100 HONEYWELL-MEASUREX INTERNATIONAL GmbH A AFRICA 100 MEASUREX AFRICA (PTY.) LTD. A NETHERLANDS 100 MEASUREX B.V. A PORTUGAL 70 HONEYWELL PORTUGAL AUTOMACAO E CONTROLE, LDA. [ALSO, HONEYWELL S.A. (SPAIN) OWNS 30%] A PORTUGAL 100 ARCLASSE, SERVICO TOTAL DE CLIMATIZACAO S.A. A ITALY 97.8 HONEYWELL ITALIA S.R.L. [OTHER 2.2% OWNERSHIP IS HONEYWELL-MEASUREX CORPORATION] A NORWAY 100 MEASUREX NORWAY A.S. A TURKEY 100 HONEYWELL-MEASUREX OLCUM ALETLERI TICARET LIMITED SIRKETI A UNITED STATES: 49 FOSTER/HONEYWELL JOINT VENTURE (PARTNERSHIP) IL A UNITED STATES: 100 HUGHEY & PHILLIPS INC. CALIF A UNITED STATES: 50 GE/MICRO SWITCH CONTROL INC. (JOINT VENTURE) DEL I UNITED STATES: 100 MINNEAPOLIS-HONEYWELL REGULATOR COMPANY, INC. DEL A UNITED STATES: 100 PHOENIX CONTROLS CORPORATION MASS A UNITED STATES: 100 PHOENIX CONTROLS INTERNATIONAL SALES CORPORATION V.I. A SWITZERLAND 100 PHOENIX CONTROLS AG A GERMANY 100 PHOENIX CONTROLS GmbH I UNITED STATES: 100 TETRA TECH SYSTEMS, INC. CALIF I UNITED STATES: 100 TETRA TECH MANAGEMENT SERVICES, INC. I CALIF I SAUDI ARABIA 75 SAUDI ARABIAN TETRA TECH LIMITED (JOINT VENTURE) A UNITED STATES: 100 HONEYWELL ELECTRONICS CORPORATION DEL A UNITED STATES: 100 COEUR D'ALENE DEVELOPMENT INC. DEL A ENGLAND 100 HONEYWELL LIMITED A ENGLAND 100 HONEYWELL CONTROL SYSTEMS LIMITED A AFRICA 100 HONEYWELL SOUTHERN AFRICA (PROPRIETARY) LIMITED A AFRICA 100 HONEYWELL BOTSWANA (PTY.) LIMITED A ENGLAND 100 HONEYWELL LINCOLD HOLDINGS LIMITED A ENGLAND 100 HONEYWELL LCL DESIGN & MANAGEMENT LIMITED A ENGLAND 100 HONEYWELL LINCOLD REFRIGERATION SYSTEMS LIMITED A ENGLAND 100 HONEYWELL AVIONICS SYSTEMS LIMITED A ENGLAND 50 INTALOGIK LIMITED (JOINT VENTURE) A ENGLAND 100 HONEYWELL AEROSPACE AND DEFENCE LIMITED A ENGLAND 100 KODEN MAINTENANCE COMPANY LIMITED A ENGLAND 100 HONEYWELL INFORMATION SYSTEMS LIMITED I ENGLAND 100 HONEYWELL LEASING LIMITED A ENGLAND 100 HONEYWELL HI-SPEC SOLUTIONS LIMITED A ENGLAND 100 HONEYWELL PENSION TRUSTEES LIMITED I ENGLAND 100 HONEYWELL I.S. LIMITED A ENGLAND 100 COMFORT COOLING PLC A ENGLAND 100 HONEYWELL FM2 LIMITED A ARGENTINA 100 HONEYWELL S.A.I.C. A AUSTRALIA 100 HONEYWELL HOLDINGS PTY. LTD. A AUSTRALIA 100 A.C.N. 000 371 184 PTY. LIMITED A AUSTRALIA 100 HONEYWELL LIMITED A NEW ZEALAND 100 HONEYWELL HOLDINGS LIMITED A NEW ZEALAND 100 HONEYWELL LIMITED A BELGIUM 100 HONEYWELL S.A. A BELGIUM 99.97 HONEYWELL EUROPE S.A. [OTHER .03% OWNED BY HONEYWELL INC.] A BERMUDA 100 HONEYWELL ASSURANCE LIMITED I BRAZIL 49 EMBRASID S.A. A CANADA 49 COMCEPT CANADA, INC. A CANADA 100 HONEYWELL LIMITED-HONEYWELL LIMITEE A CANADA 100 HONEYWELL-MEASUREX DEVRON INC. A BARBADOS 99 HONEYWELL (BARBADOS) FINANCE AND DEVELOPMENT SRL [OTHER 1% OWNERSHIP IS HELD BY HONEYWELL CANADA LIMITED-HONEYWELL CANADA LIMITEE] A CANADA HONEYWELL CANADA LIMITED-HONEYWELL CANADA LIMITEE A CHILE 100 HONEYWELL CHILE S.A. A CHINA 55 SINOPEC HONEYWELL (TIANJIN) LIMITED (JOINT VENTURE) A CHINA 100 HONEYWELL (TIANJIN) LIMITED A CHINA 100 HONEYWELL TECHNICAL SERVICES (SHANGHAI) CO. LTD. A COLOMBIA 94.8 HONEYWELL COLOMBIA S.A. [ALSO OTHER 5.2% OWNED BY MINNEAPOLIS HONEYWELL REGULATOR COMPANY, INC., HONEYWELL ELECTRONICS CORPORATION, HONEYWELL EUROPE INC., AND HONEYWELL REALTY, INC.] A CYPRUS 99.999% HONEYWELL CONTROLS INTERNATIONAL LIMITED [OTHER .001% OWNED BY HONEYWELL ELECTRONICS CORPORATION] A DENMARK 100 HONEYWELL A/S A DENMARK 100 HONEYWELL EJENDOMSVIRKE A/S I DOMINICAN 100 HONEYWELL DOMINICANA C. POR A. REPUBLIC A ECUADOR 100 HONEYWELL S.A. A FINLAND 100 HONEYWELL OY A FINLAND 100 MEASUREX ROIBOX OY A FINLAND 100 KIINTEISTOHUOLTO MERATEK OY I FINLAND 100 VM-KIINTEISTOHUOLTO OY A FINLAND 100 TULLINTORIN KIINTEISTOPALVELU OY A FRANCE 100 HONEYWELL S.A. A FRANCE 100 DAVILOR TECHNOLOGIE S.A. A FRANCE 100 HONEYWELL AEROSPACE S.A. A FRANCE 100 HONEYWELL TELESURVEILLANCE S.A. A FRANCE 100 HONEYWELL SECURITE S.A. A FRANCE 100 ANJOU SECURITE S.A. A FRANCE 100 HONEYWELL GERDS S.A. A GERMANY 100 HONEYWELL HOLDING AG A GERMANY 100 INGENIEURBETRIEB FUER AUTOMATISIERUNGSTECHNIK GmbH A GERMANY 100 HONEYWELL REGELSYSTEME GmbH A GERMANY 100 HONEYWELL-MEASUREX PAPER MACHINE AUTOMATION CENTER GmbH A GERMANY 100 HONEYWELL SAFETY MANAGEMENT SYSTEMS GmbH A GERMANY 100 METALLWERKE NEHEIM GOEKE & CO. GmbH A FRANCE 100 MNG FRANCE E.U.R.L. A BULGARIA 100 HONEYWELL EOOD A CZECH REPUBLIC 100 HONEYWELL, Spol. sr.o. A HUNGARY 100 HONEYWELL SZABALYOZASTECHNIKAI KFT A POLAND 100 HONEYWELL SP.Z.O.O. A POLAND 100 ENERGY SAVINGS COMPANY SP.Z.O.O. A RUSSIA 100 HONEYWELL AVIATION CONTROL MOSCOW A RUSSIA 100 HONEYWELL HOME AND BUILDING CONTROL A SLOVAK REPUBLIC 100 HONEYWELL Spol. sr.o. A GERMANY 100 HONEYWELL AG A GERMANY 100 HONEYWELL UNTERSTUETZUNGSKASSE GmbH A GERMANY 100 HONEYWELL BRAUKMANN UNTERSTUETZUNGSKASSE GmbH A GERMANY 100 B&S KAELTE-WAERME-KLIMA GmbH A GERMANY 100 ERG BETRIEBSGESELLSCHAFT mbH A GERMANY 100 NORD-ALARM GESELLSCHAFT FUER ALARM-UND SICHERHEITSANLAGEN mbH A GERMANY 100 WSD GEBAEUDETECHNISCHER SERVICE GmbH A AUSTRIA 100 HONEYWELL AUSTRIA Ges.m.b.H. A RUSSIA 70 HONEYWELL-STERCH INDUSTRIAL CONTROL (JOINT VENTURE) A UKRAINE 100 HONEYWELL LIMITED A HONG KONG 80 HONEYWELL LIMITED [OTHER 20% OWNED BY HONEYWELL ELECTRONICS CORPORATION] A INDIA 100 HONEYWELL INDIA SOFTWARE OPERATION PRIVATE LIMITED A INDIA 40.62 TATA HONEYWELL LIMITED (JOINT VENTURE) I INDIA 40 HONEYWELL INDIA LIMITED A INDONESIA 100 P.T. HONEYWELL INDONESIA A ITALY 99.9995 HONEYWELL S.p.A. [OTHER .0005% OWNED BY MINNEAPOLIS-HONEYWELL REGULATOR COMPANY, INC.] A ITALY 100 DATING S.p.A. A ITALY 100 HONEYWELL U.G.V. S.r.l. A ITALY 100 HONEYWELL TECHNICAL SERVICES S.r.l. A ITALY 25 SINTED S.p.A. (JOINT VENTURE) A ITALY 40 SPACE CONTROLS ALENIA-HONEYWELL S.p.A. (JOINT VENTURE) I JAPAN 50 NEC-HONEYWELL SPACE SYSTEMS LTD. A JAPAN 21.7 YAMATAKE-HONEYWELL CO., LTD. (JOINT VENTURE) A JAPAN 76.9 YAMATAKE & CO., LTD. A JAPAN 50 TAISHIN CO., LTD. A JAPAN 100 YAMATAKE KEISO CO., LTD. A JAPAN 100 YAMATAKE ENGINEERING CO., LTD. A JAPAN 100 YAMATAKE CONTROL PRODUCTS CO., LTD. A JAPAN 100 YAMATAKE TECHNO-SYSTEMS CO., LTD. A CHINA 100 DALIAN YAMATAKE CONTROL INSTRUMENTS CO., LTD. A CHINA 60 SHANGHAI YAMATAKE-SIC BUILDING AUTOMATION CO., LTD. A CHINA 52.9 BEIJING YAMATAKE-SIC CONTROL SYSTEMS CO.,LTD. A CHINA 60 SHANGHAI YAMATAKE JINSHAN CONTROL INSTRUMENTS CO., LTD. A THAILAND 49 YAMATAKE-HONEYWELL (THAILAND) CO., LTD. A PHILIPPINES 100 YAMATAKE PHILIPPINES, INC. A INDONESIA 55 PT. YAMATAKE BERCA INDONESIA A UNITED STATES: 100 YCV CORPORATION ARIZONA A KOREA 40 LG-HONEYWELL CO., LTD. [ALSO, YAMATAKE-HONEYWELL CO., LTD. OWNS 10%] (JOINT VENTURE) A MALAYSIA 100 HONEYWELL AUTOMATION AND CONTROLS SDN. BHD. A MALAYSIA 100 HONEYWELL ENGINEERING SDN. BHD. A MALAYSIA 30 BERKAT HONEYWELL SDN. BHD. (JOINT VENTURE) A MEXICO 100 HONEYWELL S.A. DE C.V. A MEXICO 100 HONEYWELL OPTOELECTRONICA, S.A. DE C.V. A MEXICO 100 MEXHON S.A. DE C.V. A MEXICO 100 HONEYWELL MANUFACTURAS DE CHIHUAHUA, S.A. DE C.V. A NETHERLANDS 100 HONEYWELL CAPITAL N.V. A NETHERLANDS 100 HONEYWELL MIDDLE EAST B.V. A KUWAIT 40 HONEYWELL KUWAIT K.S.C. (JOINT VENTURE) A EGYPT 98 HONEYWELL (EGYPT) [ALSO HONEYWELL S.P.A. OWNS 2%] A OMAN 60 HONEYWELL & CO. OMAN LLC. (JOINT VENTURE) A TURKEY 80 HONEYWELL OTOMASYON VE KONTROL SISTEMLERI SAN. VE TIC.A.S. (JOINT VENTURE) A NETHERLANDS 100 HONEYWELL EUROPEAN DISTRIBUTION CENTER B.V. A NETHERLANDS 100 SKINNER EUROPA B.V. A NETHERLANDS 92.6 HONEYWELL B.V. [OTHER 7.4% OWNED BY SKINNER EUROPA B.V.] A NETHERLANDS 100 HONEYWELL HI-SPEC SOLUTIONS B.V. A NETHERLANDS 100 GASMODUL B.V. A NETHERLANDS 50 TURNKIEK PROCESS CONTROL B.V. A NETHERLANDS 100 TURNKIEK BUSINESS IMPROVEMENT B.V. A NETHERLANDS 50 CARA C'AIR B.V. A NETHERLANDS 100 HONEYWELL SAFETY MANAGEMENT SYSTEMS B.V. A GERMANY 100 PROFIMATICS EUROPE GmbH A NETHERLANDS 100 HONEYWELL FOREIGN SALES CORPORATION B.V. A NETHERLANDS 100 HONEYWELL FINANCE B.V. A NORWAY 100 HONEYWELL A/S A NORWAY 100 FLEBU BERGEN A/S A NORWAY 40 NORD VENTILASJON A/S A NORWAY 100 VENTOK A/S A PAKISTAN 100 HONEYWELL (PRIVATE) LIMITED A PANAMA 100 HONEYWELL LATINOAMERICANA, S.A. A VENEZUELA 100 INGENIERIA DE AUTOMATIZACION INDUSTRIAL, COMPANIA DE HONEYWELL A PHILIPPINES 100 HONEYWELL SYSTEMS (PHILIPPINES), INC. A POLAND 100 HONEYWELL ESCO POLSKA A SAUDI ARABIA 50 HONEYWELL TURKI-ARABIA LIMITED A SINGAPORE 100 HONEYWELL PTE. LTD. A SINGAPORE 100 HONEYWELL AEROSPACE PTE. LTD. A SINGAPORE 100 HONEYWELL SAFETY MANAGEMENT SYSTEMS PRIVATE LIMITED A SPAIN 100 HONEYWELL S.A. A SPAIN 99.8 INTERNACIONAL DE MANTENIMIENTO, S.A.[OTHER .2% OWNED BY MANTENIMIENTO Y CONTROL S.A] A SPAIN 99.9 MANTENIMIENTO Y CONTROL S.A. [OTHER .1% OWNED BY INTERNACIONAL DE MANTENIMIENTO, S.A.] A SPAIN 100 SINEL, S.A. A SPAIN 100 HONEYWELL TECNOLOGIA Y CONTROL, S.A. A SWEDEN 100 HONEYWELL AB A SWEDEN 100 INUCONTROL AB A DENMARK 100 INUCONTROL ApS A SWITZERLAND 100 HONEYWELL HOLDING AG A SWITZERLAND 100 HONEYWELL CENTRABUERKLE AG A SWITZERLAND 100 HONEYWELL AG A SWITZERLAND 100 SATRONIC HOLDING AG A ENGLAND 100 SATRONIC CONTROLS (UK) LTD. A HUNGARY 100 FLAMTRONIC KFT A NETHERLANDS 100 SATRONIC NEDERLAND B.V. A SWITZERLAND 100 PERMONTAGGIO S.A. A SWITZERLAND 100 R. LUDI AG A SWITZERLAND 100 SATRONIC AG A GERMANY 61 SATRONIC GmbH [OTHER 39% OWNED BY R. LUDI AG SWITZERLAND] A SWITZERLAND 25 TECURIA ENGINEERING AG A TAIWAN 100 HONEYWELL TAIWAN LIMITED A TAIWAN 99.9 HONEYWELL CONSUMER PRODUCTS TAIWAN LTD. A THAILAND 97.9 HONEYWELL SYSTEMS (THAILAND) LIMITED [OTHER 2.1% EQUALLY OWNED BY MINNEAPOLIS- HONEYWELL REGULATOR COMPANY, INC., HONEYWELL EUROPE INC., HONEYWELL ELECTRONIC INC., HONEYWELL OVERSEAS FINANCE, HONEYWELL REALTY INC., AND HONEYWELL COMMUNICATIONS COMPANY] A VENEZUELA 100 HONEYWELL, C.A. A VENEZUELA 100 SERVICIOS HONEYWELL, C.A. A PANAMA 100 HONEYWELL PANAMA, S.A.
NOTE: A=ACTIVE I =INACTIVE * SUBSIDIARIES OF HONEYWELL INC.s AFFILIATES OR SUBSIDIARIES ARE INDICATED BY THE INDENTATION OF THE NAME BELOW THE NAME OF THE OWNING COMPANY: e.g., HONEYWELL & CO. OMAN LLC. IS 60% OWNED BY HONEYWELL MIDDLE EAST B.V., WHICH IS 100% OWNED BY HONEYWELL CAPITAL N.V., WHICH IS 100% OWNED BY HONEYWELL INC. EX-23 8 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS INDEPENDENT AUDITORS CONSENT We consent to the incorporation by reference in Registration Statements Nos. 2-64351, 2-98660, 33-29442, 33-44282, 33-44283, 33-44284, 33-49819, 33-59355, 33-59357, 33-59359, 333-30121 and 333-30129 on Form S-8, and Nos. 33-57135 and 333-33895 on Form S-3, of our report dated February 10, 1998, appearing in this Annual Report on Form 10-K of Honeywell Inc. for the year ended December 31, 1997. Deloitte & Touche LLP Minneapolis, Minnesota March 16, 1998 66 EX-24 9 EXHIBIT 24 POWERS OF ATTORNEY Exhibit (24) POWERS OF ATTORNEY The undersigned director of HONEYWELL INC., a Delaware corporation, appoints KATHLEEN M. GIBSON and LAWRENCE W. STRANGHOENER, each of them with full power to act without the other, as true and lawful attorneys-in-fact, to sign on my behalf the Annual Report on Form 10-K to be filed for the fiscal year ended December 31, 1997. IN WITNESS WHEREOF, I have signed this Power of Attorney as of the 17th day of March, 1998. /s/ M. R. Bonsignore -------------------- M. R. Bonsignore Chairman of the Board and Chief Executive Officer, and Director /s/ A. J. Baciocco, Jr. ----------------------- A. J. Baciocco, Jr. Director /s/ E. E. Bailey ---------------- E. E. Bailey Director /s/ W. H. Donaldson ------------------- W. H. Donaldson Director /s/ G. Ferrari -------------- G. Ferrari Director /s/ R. D. Fullerton ------------------- R. D. Fullerton Director /s/ J. J. Howard ---------------- J. J. Howard Director /s/ B. E. Karatz ---------------- B. E. Karatz Director /s/ A. B. Rand -------------- A. B. Rand Director /s/ S. G. Rothmeier ------------------- S. G. Rothmeier Director /s/ M. W. Wright ---------------- M. W. Wright Director The undersigned officer of HONEYWELL INC., a Delaware corporation, appoints KATHLEEN M. GIBSON and LAWRENCE W. STRANGHOENER, each of them with full power to act without the other, as true and lawful attorneys-in-fact, to sign on my behalf the Annual Report on Form 10-K to be filed for the fiscal year ended December 31, 1997. /s/ L. W. Stranghoener ---------------------- L. W. Stranghoener Vice President and Chief Financial Officer /s/ P. M. Palazzari ------------------- P. M. Palazzari Vice President and Controller, and Principal Accounting Officer EX-27 10 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INCOME STATEMENT, STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS SET FORTH AT PAGES 29, 30 AND 31 RESPECTIVELY, OF THIS REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 134 25 1,876 38 1,028 3,258 3,045 1,916 6,411 2,319 1,177 0 0 282 2,108 6,411 8,028 8,028 5,425 5,425 1,804 16 102 703 232 471 0 0 0 471 3.71 3.65
EX-99.(I) 11 EXHIBIT 99(I) CAUTIONARY STATEMENT EXHIBIT 99(i) CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Honeywell may occasionally make statements regarding its businesses and their respective markets, such as projections of future performance, statements of management's plans and objectives, future contracts, forecasts of market trends and other matters, which to the extent they are not historical fact, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Statements containing the words or phrases "will likely result", "are expected to," "will continue," "outlook," "is anticipated," "estimate," "project" or similar expressions, which may appear in certain documents, reports (including but not limited to those filed with the Securities and Exchange Commission), press releases, and written or oral presentations made by officers of the company to analysts, shareholders, investors, news organizations and others, identify such forward-looking statements. No assurance can be given that the results in any forward-looking statements will be achieved and actual results could be affected by one or more factors which could cause them to differ materially. Therefore, Honeywell wishes to ensure that any written or oral forward-looking statements made by it or on its behalf, are accompanied by, or referenced to, meaningful cautionary statements in order to maximize to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. All forward-looking statements made by or on behalf of Honeywell are hereby qualified in their entirety by reference to the following important factors, among others, that could affect the company's businesses and cause actual results to differ materially from those projected. Any forward-looking statement speaks only as of the date on which such statement is made, and Honeywell undertakes no obligation to update such statement to reflect events or circumstances arising after such date. FOREIGN SALES. A significant portion of Honeywell's revenues are generated from international business operations. Changes in trade, monetary policies and regulatory requirements of the United States and other nations (e.g. the adoption of the EURO currency by the European Monetary Union), as well as political instability in certain regions may affect Honeywell's international business. Many of Honeywell's sales outside the United States are denominated in local currencies; therefore, exchange rate fluctuations may affect overall financial performance. PROJECT MANAGEMENT. Performance related programs and retrofit projects have increasingly become an integral part of Honeywell's businesses. The success of some of these programs may depend in part on the performance of third parties. Honeywell manages its businesses in such a manner as to minimize the potential impact of performance; nonetheless, bid variances, third party labor disputes, and the availability, quality and timely delivery of supplies are factors that could affect the company's ability to manage these programs within their budgetary guidelines. COMPETITION. Honeywell's businesses are subject to various competitive pressures, including but not limited to, the introduction of new competitive technologies, industry consolidation, the growing acceptance of open systems environments and the deregulation of certain industries. Developments in these areas may influence Honeywell's strategies in certain markets and create new challenges or opportunities. HUMAN RESOURCES. Innovative products and solutions are continuously developed by Honeywell's businesses for application in the markets they serve. Highly trained technical and managerial employees are required for this effort, and Honeywell's ability to manage its businesses successfully depends, in part, on its ability to attract and retain such people. Shortages of skilled personnel or 67 negative compensation trends are factors that can affect the availability of such people or increase Honeywell's costs in attracting and retaining employees. In certain foreign markets, local labor rates and practices may affect Honeywell's operating costs or its ability to conduct business in such areas. REGULATORY ORGANIZATIONS. In many of the domestic and foreign markets in which Honeywell competes, such as aviation, building control, processing and refining, government regulation is extensive. Compliance with safety or environmental standards, may impact Honeywell in those markets by increasing Honeywell's costs or alternately, by providing opportunities for Honeywell to provide solutions for customers affected thereby. Also, certain other regulatory organizations such as the Fair Accounting Standards Board and the American Institute of Certified Professional Accounts, may from time to time, promulgate rules and regulations which may impact the Honeywell's accounting policies in the U.S. and abroad. TECHNOLOGY. Honeywell's products and services are based on innovative technologies developed by the company or licensed from others. To the extent the company can secure intellectual property protection for products it develops, it may be able to enhance its competitive position in certain markets. Honeywell's ability to obtain licenses from third parties for other key technologies, or to develop new technologies or solutions independently or through collaborative efforts can impact the company's businesses. CUSTOMER TRENDS. The demand for Honeywell's products is subject to the demands in major customer markets. For example, the requirements of major airlines for new aircraft may affect the demand for avionics and cockpit controls produced by Honeywell's Space and Aviation Control business; new construction or modernization activity may influence the demand for products and services provided by the Home and Building Control business; the demand for new or modernized processing plants in certain industrial sector markets may affect Honeywell's Industrial Control business. The company endeavors to forecast such demands, but unforeseen general economic conditions in the United States and internationally, as well as industry specific factors, may affect such forecasts. CHARGES RESULTING FROM ACQUISITIONS AND DIVESTITURES. Honeywell continually evaluates the growth potential and profitability of its existing businesses, and equity and other investments. When deemed appropriate, Honeywell will acquire new businesses to expand its product offerings, increase or decrease its investments, and divest assets (e.g., buildings, product lines, etc.) and existing businesses which are no longer considered a strategic fit or do not continue to create value consistent with company objectives. Decisions to sell assets or divest businesses could result in future gains or charges depending on the circumstances. The foregoing factors are not exhaustive and new factors may emerge which impact Honeywell's businesses. It is impossible for management to predict such factors, therefore, forward-looking statements should not be relied upon as a prediction of actual future results. 68 -----END PRIVACY-ENHANCED MESSAGE-----