-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, sQ67hP//MEDKkaLqZU32GEFMz3ATATv/jALF3BFGHXWQmPd5DO2v7H28LFyXXV3s MM5ZslB583tyf13/D8hp7Q== 0000950124-95-000661.txt : 19950615 0000950124-95-000661.hdr.sgml : 19950615 ACCESSION NUMBER: 0000950124-95-000661 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950310 SROS: MSE SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNDSTRAND CORP /DE/ CENTRAL INDEX KEY: 0000095395 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT PART & AUXILIARY EQUIPMENT, NEC [3728] IRS NUMBER: 361840610 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05358 FILM NUMBER: 95520020 BUSINESS ADDRESS: STREET 1: 4949 HARRISON AVE STREET 2: P O BOX 7003 CITY: ROCKFORD STATE: IL ZIP: 61125 BUSINESS PHONE: 8152266000 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-5358 SUNDSTRAND CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 36-1840610 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4949 HARRISON AVENUE P.O. BOX 7003 ROCKFORD, ILLINOIS 61125-7003 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (815) 226-6000 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON WHICH THE COMMON TITLE OF EACH CLASS STOCK AND RIGHTS ARE REGISTERED Common stock -$.50 par value New York Stock Exchange Common stock purchase rights Chicago Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------------- --------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. $1,414,834,872 as of February 1, 1995.* *For purposes of this calculation, the Registrant has assumed that its directors and executive officers are affiliates. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 31,638,773 shares of common stock outstanding at February 1, 1995. DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes. DOCUMENT FORM 10-K REFERENCE Portions of Registrant's Annual Parts I and II; Part III, Report to Stockholders for the Item 10; and Part IV, Item 14(a)(1) fiscal year ended December 31, 1994 Portions of Registrant's Proxy Part III Statement for Annual Meeting of Stockholders to be held April 18, 1995 1 2 CROSS-REFERENCE TABLE OF CONTENTS Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1994, and Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held April 18, 1995, including all information required in Parts I, II and III of Form 10-K and a portion of Part IV (Item 14(a)(1)). The Cross-Reference Table of Contents set forth below identifies the source of incorporated material for each of the Form 10-K items included in Parts I, II, III and IV (Item 14(a)(1)). Only those sections of the Annual Report to Stockholders and the Proxy Statement cited in the Cross-Reference Table are part of this Form 10-K and filed with the Securities and Exchange Commission.
FORM 10-K ITEM NO. INCORPORATED BY REFERENCE FROM: PART I. Item 1. Business (a) General Development of Business Annual Report to Stockholders, information regarding the restructuring of the Aerospace segment on pages 4, 28, 32, 41 and 48, information regarding the acquisition by Milton Roy Company of HMD Group Limited and the business of The Kontro Company, Inc. on pages 8, 20, 27, 28 and 29, information on foreign operations and activity on pages 28-29, information regarding the Company's joint venture with Labinal, Inc. on page 29, and information regarding date of incorporation on page 49. (b) Financial Information About Annual Report to Stockholders, information by business Industry Segments segment on pages 27-28 and 38-39. (c) Narrative Description of Business Annual Report to Stockholders, pages 6-32, information on foreign operations and activity on pages 8, 28-29 and 38-39, information on unfilled orders on pages 29 and 50-51, information regarding the development of the auxiliary power unit products on pages 16 and 29, information regarding environmental matters on pages 47-48, information regarding significant customers on pages 29, 31 and 38, information regarding research and development expenditures on pages 31 and 47, information regarding contracts with or for the government on pages 31-32 and 48, information regarding materials and supplies, intellectual property rights and competition on page 49, and information regarding the number of employees on pages 50-51. (d) Financial Information About Annual Report to Stockholders, information on foreign Foreign and Domestic Operations operations and activity on pages 8, 28-29 and 38-39, and Export Sales information on acquisitions and dispositions on page 29, information regarding foreign and domestic operations on pages 38-39, and information regarding foreign earnings and assets on pages 39 and 44. Item 2. Properties Annual Report to Stockholders, information regarding reduction of Aerospace plant capacity on pages 4 and 32, information regarding properties on page 49.
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FORM 10-K ITEM NO. INCORPORATED BY REFERENCE FROM: Item 3. Legal Proceedings Annual Report to Stockholders, information regarding environmental matters on pages 47-48, information regarding certain government contracting matters on pages 31-32 and 48, and information regarding income tax matters on pages 44-45. Item 4. Submission of Matters to a Vote of (Not Applicable). Security Holders Executive officers of the Registrant Annual Report to Stockholders, information regarding officers on page 53. PART II. Item 5. Market for the Registrant's Common Annual Report to Stockholders, information regarding Equity and Related Stockholder Matters restrictions on dividend payments on page 45, information regarding dividends on pages 48 and 50-51, information regarding Registrant's Common Stock price range on pages 48 and 50-51, information regarding the number of common stockholders on pages 50-51, and information regarding exchange listings on page 54. Item 6. Selected Financial Data Annual Report to Stockholders, pages 50-51, information regarding the restructuring of the aerospace segment on pages 4, 28, 32, 41 and 48, information regarding a reduction of depreciation expense related to a change in depreciable lives on pages 27, 41 and 50, information regarding the sale of Sundstrand Data Control Division to AlliedSignal, Inc. on pages 27, 29, 30, 31, 41, 42 and 43, information regarding the changes in accounting standards on pages 42-43 and 44, information regarding the acquisition of the Electrical Systems Division of Westinghouse Electric Corporation on pages 28, 29, 30 and 41, and information regarding provisions for interest for asserted tax deficiencies on page 45. Item 7. Management's Discussion and Analysis Annual Report to Stockholders, pages 27-32. of Financial Condition and Results of Operations Item 8. Financial Statements and Annual Report to Stockholders, pages 33-48 and 50-51. Supplementary Data Item 9. Changes in and Disagreements with (Not Applicable). Accountants on Accounting and Financial Disclosure
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FORM 10-K ITEM NO. INCORPORATED BY REFERENCE FROM: PART III. Item 10. Directors and Executive Officers of the Annual Report to Stockholders, pages 52-53, except J. Registrant P. Bolduc's title on page 52 is changed to read "Former President and Chief Executive Officer, W. R. Grace & Co.;" Proxy Statement, pages 2-6, and information under the caption "Section 16 Compliance" on pages 24-25, except the phrase regarding Mr. Bolduc on page 2 which reads "a director and since January 1, 1993, President and Chief Executive Officer of W. R. Grace & Co.," is deleted and replaced with "a director and between January 1, 1993, to March 3, 1995, President and Chief Executive Officer of W. R. Grace & Co." Item 11. Executive Compensation Proxy Statement, information regarding director compensation on page 8, information regarding Don R. O'Hare's consulting agreement with the Registrant on pages 8-9, information under the caption "Compensation Committee Interlocks and Insider Participation" on page 11, and information under the captions "Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Retirement Plans" and "Employment Agreements" on pages 17-23. Item 12. Security Ownership of Certain Proxy Statement, information under the caption Beneficial Owners and Management "Ownership of Sundstrand Common Stock" on pages 7-8. Item 13. Certain Relationships and Related Proxy Statement, information under the caption "Loans" Transactions on pages 23-24. PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements Annual Report to Stockholders, the following Consolidated Financial Statements of Registrant and subsidiaries on pages 33 through 48. Management's Report Independent Auditor's Report Consolidated Statement of Earnings for the years ended December 31, 1994, 1993, and 1992 Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1993, and 1992 Consolidated Balance Sheet as of December 31, 1994 and 1993 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1994, 1993, and 1992 Information by Business Segment for the years ended December 31, 1994, 1993, and 1992 Quarterly Results (Unaudited) for 1994 and 1993 Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules The schedules have been omitted as the required information is not applicable, or not required.
4 5 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 3. Exhibits (3) Articles of Incorporation and By-Laws (a) Registrant's Restated Certificate of Incorporation as effective December 19, 1991 (filed as Exhibit (3)(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-5358, and incorporated herein by reference). (b) Registrant's By-Laws, including all amendments, as effective January 2, 1995. (c) Text of resolution adopted by the Board of Directors of Registrant on January 2, 1995, amending Registrant's By-Laws. (4) Instruments Defining the Rights of Security Holders, including Indentures (a) Credit Agreement dated as of January 28, 1993, among Registrant and seven banking institutions including Morgan Guaranty Trust Company of New York, as Agent (filed as Exhibit (4)(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-5358, and incorporated herein by reference). (b) Amendment No. 1 dated October 15, 1993, and Amendment No. 2 dated October 31, 1994, to Credit Agreement dated as of January 28, 1993, among Registrant and seven banking institutions. (c) Amended and Restated Rights Agreement dated December 4, 1987, and Amendment thereto dated March 5, 1990 (filed as Exhibit 4(a) and 4(b) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-5358, and incorporated herein by reference). (d) Lease dated as of December 14, 1987, between Registrant and Greyhound Real Estate Investment Six, Inc. (filed as Exhibit (4)(f) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, File No. 1-5358, and incorporated herein by reference). (e) Note Agreement of Registrant dated May 15, 1991 (filed as Exhibit (19)(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, File No. 1-5358, and incorporated herein by reference). (f) Amendment effective December 31, 1991, to Registrant's Note Agreement dated as of May 15, 1991 (filed as Exhibit (19)(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-5358, and incorporated herein by reference). (g) Amendment and Restatement dated May 15, 1991, of Registrant's Note Agreement dated January 18, 1980 (filed as Exhibit (19)(d) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, File No. 1-5358, and incorporated herein by reference). (h) Amendment effective December 31, 1991, to Registrant's May 15, 1991, Amended and Restated Note Agreement (filed as Exhibit (19)(d) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-5358, and incorporated herein by reference). (i) Note Agreement of Registrant dated October 31, 1991 (filed as Exhibit (4)(l) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-5358, and incorporated herein by reference). (j) Note Agreement of Registrant dated December 2, 1991 (filed as Exhibit (4)(m) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-5358, and incorporated herein by reference). (10) Material Contracts (a) Employment Agreement dated October 3, 1994, between Registrant and Don R. O'Hare, Registrant's Chairman of the Board and Chief Executive Officer (filed as Exhibit (10)(b) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, File No. 1-5358, and incorporated herein by reference).* (b) Consulting Agreement dated October 1, 1989, between Registrant and Don R. O'Hare, Registrant's Chairman of the Board and Chief Executive Officer (filed as Exhibit (10)(d) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-5358, and incorporated herein by reference).* (c) Amendments dated August 20, 1991, and November 1, 1991, to Consulting Agreement dated October 1, 1989, between Registrant and Don R. O'Hare, Registrant's Chairman of the Board and Chief Executive Officer (filed as Exhibit (10)(c) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-5358, and incorporated herein by reference).* *Management contract or compensatory plan. 5 6 (d) Amendment dated August 20, 1993, to Consulting Agreement dated October 1, 1989, between Registrant and Don R. O'Hare, Registrant's Chairman of the Board and Chief Executive Officer (filed as Exhibit (10)(d) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-5358, and incorporated herein by reference.)* (e) Agreement dated September 24, 1994, between Registrant and Harry C. Stonecipher, Registrant's former Chairman of the Board, President and Chief Executive Officer, providing for Mr. Stonecipher's early retirement from his employment with the Registrant (filed as Exhibit (10)(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, File No. 1-5358, and incorporated herein by reference).* (f) Agreement dated June 19, 1988, between Registrant and Paul Donovan, Registrant's Executive Vice President and Chief Financial Officer, regarding Registrant's repurchase of shares of restricted stock (filed as Exhibit (10)(h) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-5358, and incorporated herein by reference).* (g) Amended and Restated Employment Agreement dated August 18, 1992, between Registrant and Robert J. Smuland, Registrant's Executive Vice President and Chief Operating Officer, Aerospace (filed as Exhibit (19)(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-5358, and incorporated herein by reference).* (h) Form of Employment Agreement, including amendment thereto, between Registrant and each of Paul Donovan, Registrant's Executive Vice President and Chief Financial Officer, Berger G. Wallin, Registrant's Executive Vice President for Special Projects, Richard M. Schilling, Registrant's Vice President and General Counsel and Secretary, and DeWayne J. Fellows, Registrant's Vice President and Controller (filed as Exhibit (10)(g) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-5358, and incorporated herein by reference).* (i) Employment Agreement dated March 14, 1991, between Registrant and Gary J. Hedges, Registrant's Vice President, Personnel and Public Relations (filed as Exhibit (10)(p) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-5358, and incorporated herein by reference).* (j) Employment Agreement dated February 21, 1995, between Registrant and Patrick L. Thomas, Registrant's Executive Vice President and Chief Operating Officer, Industrial.* (k) Amended and Restated Labinal/Sundstrand APU Agreement dated October 3, 1994, between Registrant and Turbomeca Engine Corporation regarding a jointly owned sales company that markets and sells auxiliary power units for commercial aerospace applications. (l) Stock, Note and Real Property Purchase Agreement dated July 14, 1993, between Registrant and AlliedSignal Inc. providing for Registrant's sale to AlliedSignal Inc. of Registrant's Data Control division (filed as Exhibit (10)(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 1-5358, and incorporated herein by reference). (m) Registrant's Stock Incentive Plan effective December 1, 1992 (filed as Exhibit (10)(l) to Registrant's Annual Report for the fiscal year ended December 31, 1992, File No. 1-5358, and incorporated herein by reference).* (n) Registrant's Nonemployee Director Stock Option Plan effective August 1, 1994, subject to stockholder approval of the plan at the April 18, 1995, Annual Meeting of Stockholders (filed as Exhibit A to Registrant's Proxy Statement dated March 7, 1995, File No. 1-5358, and incorporated herein by reference).* (o) Registrant's Nonemployee Director Compensation Plan effective August 1, 1994 (filed as Exhibit B to Registrant's Proxy Statement dated March 7, 1995, File No. 1-5358, and incorporated herein by reference.)* (p) Registrant's 1989 Restricted Stock Plan as adopted April 20, 1989, by the stockholders of Registrant (filed as Exhibit (10)(v) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-5358, and incorporated herein by reference).* (q) Registrant's 1982 Restricted Stock Plan as adopted on April 15, 1982, by the stockholders of Registrant, including all amendments through April 16, 1986 (filed as Exhibit (10)(c) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1982, File No. 1-5358, and incorporated herein by reference).* *Management contract or compensatory plan. 6 7 (r) Text of resolution adopted by the Board of Directors of Registrant on April 17, 1986, amending Registrant's 1982 Restricted Stock Plan (filed as Exhibit (10)(c) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, File No. 1- 5358, and incorporated herein by reference).* (s) Text of resolution adopted by the Board of Directors of Registrant on August 7, 1990, amending Registrant's 1982 and 1989 Restricted Stock Plans (filed as Exhibit (19)(f) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-5358, and incorporated herein by reference).* (t) Text of resolution adopted by the Board of Directors of Registrant on November 30, 1989, and December 1, 1989, establishing an Officer Incentive Compensation Plan (filed as Exhibit (10)(cc) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-5358, and incorporated herein by reference).* (u) Text of resolution adopted by the Board of Directors of Registrant on February 19, 1991, amending Registrant's Officer Incentive Compensation Plan (filed as Exhibit (10)(hh) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-5358, and incorporated herein by reference).* (v) Text of resolution adopted by the Board of Directors of Registrant on July 16, 1989, adopting a Director Emeritus Retirement Plan and copy of such plan as effective July 20, 1989 (filed as Exhibit (10)(dd) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-5358, and incorporated herein by reference).* (w) Text of resolution adopted by the Board of Directors of Registrant on October 17, 1984, establishing a 1984 Elected Officers' Loan Program (filed as Exhibit (10)(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1984, File No. 1-5358, and incorporated herein by reference).* (x) Text of resolution adopted by the Board of Directors of Registrant on October 15, 1991, amending the 1984 Elected Officers' Loan Program (filed as Exhibit (10)(ff) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-5358, and incorporated herein by reference).* (11) Computation of Fully Diluted Earnings Per Share (Unaudited) for the quarters ended December 31, 1994 and 1993, and for the years ended December 31, 1994 and 1993. (13) Annual Report to Stockholders for the year ended December 31, 1994. (21) Subsidiaries of Registrant (23) Consents of Experts and Counsel (a) Consent of Independent Auditors (Ernst & Young LLP). (24) Powers of Attorney (27) Financial Data Schedule (99) Additional Exhibits (a) Undertakings (filed as Exhibit (28)(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1982, File No. 1-5358, and incorporated herein by reference). (b) Reports on Form 8-K None *Management contract or compensatory plan. 7 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 10th day of March, 1995. SUNDSTRAND CORPORATION (Registrant) By /s/ Paul Donovan ----------------------------------- PAUL DONOVAN EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Don R. O'Hare ) Chairman of the Board ) and Chief Executive Officer ) ) Paul Donovan ) Executive Vice President ) and Chief Financial Officer ) ) DeWayne J. Fellows ) Vice President and Controller ) ) Gerald Grinstein ) Director ) ) Charles Marshall ) March 10, 1995 Director ) ) Klaus H. Murmann ) Director ) ) Donald E. Nordlund ) Director ) ) Thomas G. Pownall ) Director ) ) Ward Smith ) Director ) ) Robert J. Smuland ) Director ) ) Berger G. Wallin ) Director )
By: /s/ Paul Donovan ---------------------------------------------------- PAUL DONOVAN, ATTORNEY-IN-FACT 8 EX-3.(B) 2 BY-LAWS 1 EXHIBIT (3)(b) BY-LAWS OF SUNDSTRAND CORPORATION (A Delaware Corporation) Effective January 2, 1995 ARTICLE I OFFICES Section 1.1. PRINCIPAL OFFICE. The principal office of the Corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. Section 1.2. OTHER OFFICES. The Corporation may also have offices at such other places, either within or without the State of Delaware, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II STOCKHOLDERS' MEETINGS Section 2.1. PLACE OF MEETINGS. All annual and special meetings of the stockholders shall be held at such place, either within or without the State of Delaware, as may be fixed by the Board and specified in the notice of the meeting. Section 2.2. ANNUAL MEETINGS. An annual meeting of stockholders shall be held on such date and at such hour as may be fixed by the Board and specified in the notice of the meeting, when they shall elect by a plurality vote a Board of Directors and transact such other business as may properly be brought before the meeting. Section 2.3. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The original or duplicate stock ledger shall be the only evidence as to who are the stockholders entitled to examine such list or stock ledger or transfer book or to vote in person or by proxy at any meeting of stockholders. Section 2.4. SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute, may be called by the Chairman of the Board and shall be called by the Chairman of the Board or Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning eighty percent or more in amount of the entire capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 2.5. NOTICE OF MEETINGS. Except as otherwise expressly provided by law or by the Certificate of Incorporation or these By- Laws, written or printed notice of each annual or special meeting of stockholders shall be given by mail at least ten but not more than sixty days before the meeting to the stockholders of record entitled to vote thereat. Every such notice shall be directed to a stockholder at his address as it shall appear on the transfer books of the Corporation; shall state the date, time and place of the meeting; and, in the case of a special meeting, shall state briefly the purposes thereof. Business transacted at all special meetings shall be confined to the purposes stated in the notice thereof. Section 2.6. QUORUM AND ADJOURNMENTS. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall be necessary and sufficient to constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute, by the Certificate of Incorporation, or by these By-Laws. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted 2 which might have been transacted at the meeting as originally notified. The absence from any meeting of the number required by law or by the Certificate of Incorporation or these By-Laws for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting if the number required in respect of such other matter or matters shall be present. Once a quorum is present at a meeting, it shall be deemed to be acting thereafter throughout the meeting, irrespective of any withdrawals. Nothing in these By-Laws shall affect the right to adjourn where a quorum is present. Section 2.7. VOTING BY STOCKHOLDERS. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation or of these By-Laws a different vote is required, in which case such express provision shall govern and control the decision of such question. At any meeting of the stockholders every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing, subscribed by such stockholder or by his attorney or agent thereunto authorized in writing, and bearing a date not more than three years prior to said meeting, unless said instrument provides for a longer period. Except as otherwise provided by the Certificate of Incorporation, each stockholder present in person or by proxy at any meeting shall have, on each matter on which stockholders are entitled to vote, one vote for each share of stock having voting power, registered in his name on the books of the Corporation. Section 2.8. NEW BUSINESS PROPOSALS AT ANNUAL MEETINGS. Only such new business shall be conducted, and only such proposals shall be acted upon at an annual meeting of stockholders, as shall have been properly brought before such annual meeting (a) by, or at the direction of, the Board of Directors, or (b) by any stockholder of the Corporation who complies with the notice procedures set forth in this Section 2.8. A stockholder who wishes to bring a proposal before an annual meeting shall give timely notice thereof in writing to the Secretary of the Corporation. Such notice, to be timely, shall be delivered to, or mailed and received by the Secretary at the principal executive offices of the Corporation at least sixty days but not more than ninety days prior to the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than seventy days' notice or prior public disclosure of the date of the scheduled annual meeting is given or made, such notice by a stockholder to be timely shall be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which notice of the scheduled annual meeting was mailed or the day on which public disclosure thereof was made. Each such stockholder notice shall set forth as to each proposal to be brought before the annual meeting (a) a brief description of the proposal and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the transfer books of the Corporation, of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting the proposal, (c) the class and number of shares of the Corporation's stock which are beneficially owned by the stockholder on the date of such stockholder notice and by any other stockholders known by such stockholder to be supporting such proposal, and (d) any financial interest of the stockholder in such proposal. The Board of Directors may reject any stockholder proposal not timely made in accordance with the terms of this Section 2.8. If the Board of Directors, or a designated committee thereof, determines that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 2.8 in any material respect, the Secretary shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within five days from the date such notice of deficiency is given to the stockholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the stockholder, together with the information previously provided, does not satisfy the requirements of this Section 2.8 in any material respect, then the Board of Directors may reject such proposal. The Secretary shall notify the stockholder in writing whether his proposal has been made in accordance with the time and informational requirements of this Section 2.8. Notwithstanding the procedure set forth in this Section 2.8, if neither the Board of Directors nor such committee makes a determination as to the validity of any stockholder proposal, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether the stockholder proposal was made in accordance with the terms of this Section 2.8. If the presiding officer determines that the stockholder's proposal was not made in accordance with the terms of this Section 2.8, he shall so declare at the annual meeting and any such proposal shall not be acted upon at the annual meeting. This Section 2.8 shall not prevent the consideration and approval or disapproval at an annual meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed and received as herein provided. 3 ARTICLE III DIRECTORS Section 3.1. NUMBER, ELECTION AND TERMS OF OFFICE OF DIRECTORS. The number of directors which shall constitute the whole Board shall be eleven in number. Directors need not be stockholders in the Corporation. Except as provided in Section 3.3, the directors shall be elected at the annual meeting of the stockholders, and each director elected shall hold office until his successor is elected and qualified or until his earlier resignation. The directors shall be divided into three classes: Class I, Class II and Class III. Such classes shall be as nearly equal in number as possible. The term of office of the initial Class I directors shall expire at the annual meeting of stockholders in 1971, the term of office of the initial Class II directors shall expire at the annual meeting of stockholders in 1972, and the term of office of the initial Class III directors shall expire at the annual meeting of stockholders in 1973, or thereafter in each case when their respective successors are elected and qualified. At each annual election held after classification and the initial election of directors according to classes, the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed and shall be elected for a term expiring at the third succeeding annual meeting or thereafter when their respective successors in each case are elected and qualified. Section 3.2. CORPORATE RECORDS. The directors may keep the books of the Corporation, except such as are required by law to be kept within the State of Delaware, outside of Delaware at such place or places as they may from time to time determine. Section 3.3. VACANCIES. Vacancies occurring in the Board of Directors and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, and any director so chosen shall hold office until his successor is elected and qualified. A director elected to fill a vacancy shall be elected for the unexpired portion of the term of his predecessor in office. A director elected to fill a newly created directorship shall serve for the term provided herein for the class of directors for which such director was elected. Section 3.4. GENERAL POWERS. The business and affairs of the Corporation shall be managed by its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Section 3.5. PLACE OF MEETINGS. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 3.6. ANNUAL MEETINGS. The first meeting of each newly elected Board shall constitute the annual meeting of said Board and shall be convened as soon as is conveniently possible but in no event more than two weeks after the date of the annual meeting of stockholders in each year at such time and place as shall be fixed by the Chairman of the Board. Section 3.7. REGULAR MEETINGS. Regular meetings of the Board shall be held upon notice, or without notice, at least quarterly, at such time and place as shall from time to time be determined by the Board. Section 3.8. SPECIAL MEETINGS. Special meetings of the Board may be called by the Chairman of the Board or any four directors. Notice of each special meeting of the Board may be given by mail, telegraph or cable, personal delivery or telephone. Notice by mail shall be given at least three days before the meeting; notice by any other means shall be given a reasonable period of time before the time of such meeting but in no event shall such notice be given less than one hour before such meeting. If notice is by telephone, such notice shall be promptly confirmed by telegraph or cable to each director. Section 3.9. QUORUM. At all meetings of the Board, the presence of a majority of the full number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation or by these By-Laws. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 4 Section 3.10. ACTION BY BOARD WITHOUT MEETING. Notwithstanding anything contained in these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any Committee thereof may be taken without a meeting, if a written consent thereto is signed by all members of the Board or of such Committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or the Committee. Section 3.11. COMPENSATION OF DIRECTORS. The Board of Directors, by resolution adopted by a majority of the whole Board, may establish reasonable compensation of all directors for services to the Corporation as directors, officers or otherwise. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of any Committee may be allowed like compensation for their services to the Corporation. Section 3.12. INTERESTED DIRECTORS. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or Committee which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the Committee, and the Board or Committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, Committee, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or of the Committee which authorizes the contract or transaction. Section 3.13. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more Committees, each Committee to consist of two or more of the directors of the Corporation. Any such Committee, to the extent provided in the resolution not inconsistent with the provisions of the Statutes of Delaware, shall have and may exercise the powers and authority of the Board of Directors in the management of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. A majority of the members of the Committee then holding office shall constitute a quorum at all meetings and each such Committee shall keep regular minutes of its proceedings and report the same to the whole Board. Section 3.14. NOMINATION FOR ELECTION OF DIRECTORS. Nominations for the election of Directors shall be properly made by the Board of Directors or a nominating committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of Directors generally; provided, however, that any such stockholder may nominate one or more persons for election as Directors at a meeting only if such stockholder has given written notice of such stockholder's intent, either by personal delivery or by United States mail, postage prepaid, to the Secretary not later than (1) with respect to an election to be held at an annual meeting of stockholders, ninety days prior to the anniversary date of the immediately preceding annual meeting, and (2) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address, as they appear on the transfer books of the Corporation, of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission as then in effect; and (e) the consent of each nominee to serve as a director of the Corporation if so elected. The presiding officer of any meeting at which a stockholder or its representative attempts to nominate one or more persons for election as directors may refuse to acknowledge the nomination of any person not made in compliance with the provisions of this Section 3.14. 5 ARTICLE IV OFFICERS Section 4.1. DESIGNATION: NUMBER. The officers of the Corporation shall consist of a Chairman of the Board and Chief Executive Officer; an Executive Vice President and Chief Financial Officer; an Executive Vice President and Chief Operating Officer, Aerospace; an Executive Vice President and Chief Operating Officer, Industrial; an Executive Vice President for Special Projects; a Vice President, Personnel and Public Relations; a Vice President and General Counsel; one or more other Vice Presidents; a Secretary; a Treasurer; and a Controller, all of whom shall be elected by the Board of Directors and shall hold office until their successors are duly elected and qualified. In addition, the Chairman of the Board and Chief Executive Officer may appoint a Tax Director, one or more Assistant Secretaries, Assistant Treasurers and Assistant Controllers and such other officers and agents as the Chairman of the Board and Chief Executive Officer may deem necessary or desirable, who shall hold their offices for such terms and shall have such authority and perform such duties as shall be determined by the Chairman of the Board and Chief Executive Officer from time to time. Any Executive Vice President or Vice President designated by a resolution of the Board of Directors or by delegation of the Chairman of the Board and Chief Executive Officer shall have authority to sign contracts and any other documents as specifically authorized by the Board of Directors or the Chairman of the Board and Chief Executive Officer or which are within the ordinary course of the business of the Corporation. Section 4.2. NON-CORPORATE OFFICERS. The Chairman of the Board and Chief Executive Officer shall have authority to appoint from time to time officers of divisions, product groups or other segments of the Corporation's business for such terms, with such authority and at such salary as the Chairman of the Board and Chief Executive Officer in his sole discretion shall determine; provided, however, such appointed officer shall under no circumstances have authority to bind any other division, product group or other segment of the Corporation's business nor to bind the Corporation, except as to the normal and usual business affairs of the division, product group or other segment of the Corporation's business of which he is an officer. Such appointed officer, as such, shall not be construed as an officer of the Corporation. Section 4.3. SALARIES. The salaries of the officers elected pursuant to Section 4.1 above shall be determined by the Board of Directors. The salaries of all other officers and agents of the Corporation appointed by the Chairman of the Board and Chief Executive Officer shall be determined by the Board of Directors or the Chairman of the Board and Chief Executive Officer. Section 4.4. REMOVAL. Any officer elected by the Board of Directors and any officer or agent appointed by the Chairman of the Board and Chief Executive Officer, as the case may be, may be removed at any time by the Board of Directors or the Chairman of the Board and Chief Executive Officer, respectively, whenever in its or his judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any vacancy occurring in any elected office of the Corporation shall be filled by the Board of Directors. Section 4.5. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. The Chairman of the Board and Chief Executive Officer shall be the chief executive officer of the Corporation. The Chairman of the Board and Chief Executive Officer shall preside at all meetings of stockholders and of the Board and shall see that all orders and resolutions of the Board are carried into effect. Subject to the control of the Board, the Chairman of the Board and Chief Executive Officer shall have general supervision, control and management of the affairs and business of the Corporation. The Chairman of the Board and Chief Executive Officer and/or the Executive Vice President and Chief Financial Officer shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Section 4.6. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. The Executive Vice President and Chief Financial Officer shall be the chief financial officer of the Corporation and shall be in charge of the financial, accounting, taxation, administration, personnel and public relations activities of the Corporation and shall be under the direction and report to the Chairman of the Board and Chief Executive Officer. He and/or the Chairman of the Board and Chief Executive Officer shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. 6 Section 4.7. EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER, AEROSPACE. The Executive Vice President and Chief Operating Officer, Aerospace shall be the chief operating officer of the Corporation's aerospace businesses. He shall assist the Chairman of the Board and Chief Executive Officer in the general supervision, control and management of the affairs and business of the Corporation's aerospace businesses and the Corporation's government contracts and compliance activities. Section 4.8. EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER, INDUSTRIAL. The Executive Vice President and Chief Operating Officer, Industrial shall be the chief operating officer of the Corporation's industrial businesses. He shall assist the Chairman of the Board and Chief Executive Officer in the general supervision, control and management of the affairs and business of the Corporation's industrial businesses. Section 4.9. EXECUTIVE VICE PRESIDENT FOR SPECIAL PROJECTS. The Executive Vice President for Special Projects shall assist the Chairman of the Board and Chief Executive Officer in managing strategic business issues for the Corporation and shall perform such other duties as may be prescribed by the Chairman of the Board and Chief Executive Officer. Section 4.10. VICE PRESIDENT, PERSONNEL AND PUBLIC RELATIONS. The Vice President, Personnel and Public Relations shall be in charge of the personnel functions of the Corporation and shall be directly responsible in such capacity for labor relations involving the Corporation and its employees. He shall also be in charge of the public relations activities of the Corporation. He shall be under the direction of and report to the Executive Vice President and Chief Financial Officer. Section 4.11. VICE PRESIDENT AND GENERAL COUNSEL. The Vice President and General Counsel shall be the chief legal officer of the Corporation, shall be responsible for all legal matters involving the Corporation and shall direct the Corporation's legal staff. He shall be under the direction of and report to the Chief Executive Officer. Section 4.12. OTHER VICE PRESIDENTS. The other Vice Presidents shall perform such duties as may be prescribed by the Board of Directors or the Chairman of the Board and Chief Executive Officer. Section 4.13. SECRETARY AND ASSISTANT SECRETARIES. (a) The Secretary shall attend all sessions of the Board of Directors and all meetings of the stockholders and record the minutes of all proceedings in a book to be kept for that purpose, and shall perform like duties for Committees of the Board when required. He shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the Chairman of the Board and Chief Executive Officer. He shall keep in safe custody the seal of the Corporation, and affix the same to any instrument requiring it, and when affixed it shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary. (b) The Assistant Secretaries in the order of their seniority shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary, and shall perform such other duties as the Chairman of the Board and Chief Executive Officer shall prescribe. Section 4.14. TREASURER AND ASSISTANT TREASURERS. (a) The Treasurer shall, subject to the direction of the Executive Vice President and Chief Financial Officer, have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all money and other valuable effects in the name and to the credit of the Corporation, in such depositories as may be designated by the Board of Directors. (b) He shall disburse the funds of the Corporation when proper to do so, taking proper vouchers for such disbursements, and shall render to the Executive Vice President and Chief Financial Officer, the Chairman of the Board and Chief Executive Officer and the Board of Directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. (c) If required by the Board of Directors, he shall give the Corporation a bond in such sum, and with such surety or sureties as shall be satisfactory to the Board, for the faithful performance of the duties of his office, and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. (d) The Treasurer shall be under the direction of and report to the Executive Vice President and Chief Financial Officer. (e) The Assistant Treasurers in the order of their seniority shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as the Board of Directors or the Executive Vice President and Chief Financial Officer shall prescribe. 7 Section 4.15. CONTROLLER AND ASSISTANT CONTROLLERS. (a) The Controller shall be the chief accounting officer of the Corporation and shall be responsible for the installation and supervision of all accounting records, including the preparation and interpretation of financial statements, the continuous audit of accounts and records, and such other duties usually incident to the office of Controller. He shall be under the direction of the Executive Vice President and Chief Financial Officer and shall, in addition to the foregoing duties, perform such other duties as may be assigned to him by the Board of Directors or the Executive Vice President and Chief Financial Officer. (b) The Assistant Controllers in the order of their seniority shall, in the absence or disability of the Controller, perform the duties and exercise the powers of the Controller and shall perform such other duties as the Board of Directors or the Executive Vice President and Chief Financial Officer shall prescribe. Section 4.16. TAX DIRECTOR. The Tax Director shall be responsible for the preparation and signing of all federal and state tax returns, consents, elections, closing agreements and all other documents related to the determination of any federal or state tax liability of the Corporation, and as such shall be under the direction of and report to the Executive Vice President and Chief Financial Officer. ARTICLE V SHARES AND THEIR TRANSFER Section 5.1. CERTIFICATES OF STOCK. Certificates for shares of stock of the Corporation shall be in such form as shall be approved by the Board, and during the period while more than one class of stock or more than one series of any class of the Corporation is authorized, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificates which the Corporation shall issue to represent such class or series of stock, or else there shall appear on the certificates a statement that the Corporation shall furnish such information to a stockholder without charge if it be requested. They shall exhibit the holder's name and number of shares, and, with respect to each class of stock of the Corporation, or series thereof, if there be more than one class or series thereof, shall bear a distinguishing letter, and each class or series thereof, if any, shall be numbered serially and be issued in consecutive order. They shall bear the Corporate seal or a facsimile thereof and shall be signed by the Chairman of the Board and Chief Executive Officer, an Executive Vice President, or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. If such certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or, (2) by a registrar other than the Corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 5.2. TRANSFER OF STOCK. Upon surrender to the Corporation or its transfer agent of a certificate representing shares, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto, and the old certificate cancelled, and the transaction recorded upon the books of the Corporation. Section 5.3. LOST, STOLEN OR DESTROYED CERTIFICATES. Any person, claiming a certificate for shares of the Corporation to be lost, stolen or destroyed, shall make affidavit of the fact and lodge the same with the Secretary of the Corporation accompanied by a signed application for a new certificate. Such person shall also give the Corporation a bond of indemnity with one or more sureties satisfactory to the Board of Directors, and in an amount which in their judgment shall be sufficient to save the Corporation from loss, or shall qualify under such blanket bond as may from time to time be approved by the Board of Directors, and thereupon the proper officers may cause to be issued a new certificate of like tenor with the one alleged to be lost, stolen or destroyed. Section 5.4. RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. 8 Section 5.5. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. Section 5.6. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may from time to time appoint a transfer agent and registrar in one or more cities; may require all certificates evidencing shares of stock of the Corporation to bear the signatures of a transfer agent and registrar; and may provide that such certificates shall be transferable in more than one city. ARTICLE VI INDEMNIFICATION OF OFFICERS AND DIRECTORS The Corporation shall, to the fullest extent to which it is empowered to do so by the General Corporation Law of Delaware, or any other applicable laws, as from time to time in effect, indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Corporation or a division thereof, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. The provisions of this Article shall be deemed to be a contract between the Corporation and each director or officer who serves in any such capacity at any time while this Article and the relevant provisions of the General Corporation Law of Delaware or other applicable law, if any, are in effect, and any repeal or modification of any such law or of this Article shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. The Corporation shall, to the fullest extent to which it is empowered to do so by the General Corporation Law of Delaware, and with respect to the Employee Retirement Income Security Act of 1974, or any other applicable laws, as from time to time in effect, indemnify any officer, director or employee of the Corporation or an affiliated corporation, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was serving at the request of the Corporation as an individual Trustee, Committee member, administrator or fiduciary of a pension or other benefit plan for employees of the Corporation, or of an affiliated corporation or other enterprise. Persons who are not covered by the foregoing provisions of this Article and who are or were employees or agents of the Corporation or a division thereof, or are or were serving at the request of the Corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the Board of Directors of the Corporation. The indemnification provided or permitted by this Article shall not be deemed exclusive of any other rights to which those indemnified may be entitled by law or otherwise, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. The Corporation shall, to the fullest extent to which it is empowered to do so by the General Corporation Law of Delaware, or any other applicable laws, as from time to time in effect, pay expenses, including attorneys' fees, incurred in defending any action, suit or proceeding, in advance of the final disposition of such action, suit or proceeding, to any person who is or was a party or is threatened to be made a party to any such threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Corporation, upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized by applicable laws. 9 ARTICLE VII MISCELLANEOUS PROVISIONS Section 7.1. CHECKS, DRAFTS AND OTHER INSTRUMENTS; SECURITY VOTING AND PROXIES. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness, issued in the name of the Corporation shall be signed by such officer or officers, or such other person or persons, as the Board of Directors may from time to time designate. In the absence of specific action by the Board of Directors, the Chairman of the Board and Chief Executive Officer or any Executive Vice President or Vice President shall have the authority to grant proxies to vote, or vote, on behalf of the Corporation the securities of other corporations, both domestic and foreign, held by the Corporation. Section 7.2. SEAL. The corporate seal of the Corporation shall be in such form as the Board of Directors may determine and shall include the name of the Corporation and the words "Corporate Seal, Delaware." The seal may be used by causing it, or a facsimile thereof, to be impressed or affixed or in any manner reproduced. Section 7.3. FISCAL YEAR. The fiscal year of the Corporation shall commence on the first day of January in each year and end on the following 31st day of December. Section 7.4. NOTICES. Notice by mail shall be deemed to have been given at the time the same shall be mailed. Notice by telegraph shall be deemed to have been given when the same shall have been delivered for prepaid transmission into the custody of a company ordinarily engaged in the transmission of such messages. Section 7.5. WAIVER OF NOTICE. Whenever any notice whatever is required to be given under the provisions of the laws of the State of Delaware or under the provisions of the Certificate of Incorporation or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Except as may be otherwise specifically provided by law, any waiver by mail, telegraph, cable or wireless bearing the name of the person entitled to notice shall be deemed a waiver in writing duly signed. The presence of any person at any meeting either in person or by proxy shall be deemed the equivalent of a waiver in writing duly signed, except where the person attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Section 7.6. DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of law and of the Certificate of Incorporation. Section 7.7. CREATION OF RESERVES. Before payment of any dividend or making any distribution of profits, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board from time to time, in its absolute discretion, may think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Board shall think conducive to the interest of the Corporation, and the Board may at any time modify or abolish any such reserve in the manner in which it was created. Section 7.8. AMENDMENTS. These By-Laws may be altered or repealed by the affirmative vote of the majority of the entire number of directors specified from time to time in the restated Certificate of Incorporation at any regular meeting of the Board or at any special meeting of the Board, if notice of the proposed alteration or repeal be contained in the notice of such special meeting; provided, however, that any provisions of these By-Laws resulting from such alteration or repeal shall at all times be in conformance with the Restated Certificate of Incorporation and the laws of the State of Delaware. EX-3.(C) 3 AMENDMENTS TO BY-LAWS 1 EXHIBIT (3)(c) AMENDMENTS TO THE BY-LAWS RESOLVED, by the Board of Directors of Sundstrand Corporation, that the By-Laws of the Corporation be, and they hereby are, amended effective January 2, 1995, as follows: 1. The first sentence of Section 3.1 is amended by changing the word "ten" to "eleven" where it appears in such sentence. 2. All references in the By-Laws to the title "Chairman of the Board, President and Chief Executive Officer" are changed to "Chairman of the Board and Chief Executive Officer". 3. The first sentence of Section 4.1 is amended to add the words "an Executive Vice President for Special Projects;" after the word "Industrial;". 4. Sections 4.9 through 4.15 are renumbered as Sections 4.10 through 4.16, respectively. 5. A new Section 4.9 is added reading as follows: "Section 4.9. EXECUTIVE VICE PRESIDENT FOR SPECIAL PROJECTS. The Executive Vice President for Special Projects shall assist the Chairman of the Board and Chief Executive Officer in managing strategic business issues for the Corporation and shall perform such other duties as may be prescribed by the Chairman of the Board and Chief Executive Officer." EX-4.(B)1 4 AMENDMENT NO. 1 TO CREDIT AGREEMENT 1 EXHIBIT (4)(b)1 AMENDMENT NO. 1 TO CREDIT AGREEMENT AMENDMENT dated as of October 15, 1993 among SUNDSTRAND CORPORATION (the "Borrower"), the BANKS listed on the signature pages hereof (the "Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S S E T H : WHEREAS, the parties hereto have heretofore entered into a Credit Agreement dated as of January 28, 1993 (the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement to modify the rates of interest and fees payable thereunder. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement shall have the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall from and after the date hereof refer to the Agreement as amended hereby. SECTION 2. Amendment of the Agreement. The Agreement is amended as follows: (a) The figure "0.5375%" appearing in the definition of "Leverage Margin" in Section 1.01 is changed to "0.5000%". (b) The figure "0.3375%" appearing in the definition of "CD Margin" in Section 2.07(b) is changed to "0.375%". (c) The figure "0.2125%" appearing in the definition of "Euro-Dollar Margin" in Section 2.07(c) is changed to "0.25%". (d) The figure ".0625%" appearing in the first sentence of Section 2.08(a) is changed to "0.05%", and the following proviso is added at the end of such sentence: ", provided that if at the last day of any fiscal quarter, the Leverage Ratio is greater than 0.55, commitment fees for the next succeeding fiscal quarter shall accrue at the rate of 0.0625% per annum". (e) The figure "0.1875%" appearing in the first sentence of Section 2.08(b) is changed to "0.15%". 2 SECTION 3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 4. Counterparts; Effectiveness. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of the date hereof when the Agent shall have received duly executed counterparts hereof signed by the Borrower and each of the Banks (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. SUNDSTRAND CORPORATION By /s/ James F. Ricketts ------------------------------------ Title: Vice President and Treasurer MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Michael J. Ciszewski ------------------------------------ Title: Vice President J.P. MORGAN DELAWARE By /s/ David J. Morris ------------------------------------ Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ Patricia DelGrande ------------------------------------ Title: Vice President 3 M&I MARSHALL & ILSLEY BANK By /s/ Stephen F. Geimer ---------------------------- Title: Vice President MELLON BANK, N.A. By /s/ William R. Browne ---------------------------- Title: Vice President THE BANK OF NOVA SCOTIA By /s/ A.S. Norsworthy ---------------------------- Title: Assistant Agent THE FIRST NATIONAL BANK OF CHICAGO By /s/ Lynn R. Dillon ---------------------------- Title: Vice President UNION BANK OF SWITZERLAND By /s/ Martin Frey ---------------------------- Title: Assistant Treasurer By /s/ Robert H. Riley III ---------------------------- Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ Michael J. Ciszewski ---------------------------- Title: Vice President EX-4.(B)2 5 AMENDMENT NO. 2 TO CREDIT AGREEMENT 1 EXHIBIT (4)(b)2 AMENDMENT NO. 2 TO CREDIT AGREEMENT AMENDMENT dated as of October 31, 1994 among SUNDSTRAND CORPORATION (the "Borrower"), the BANKS listed on the signature pages hereof (the "Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S S E T H : WHEREAS, the parties hereto have heretofore entered into a Credit Agreement dated as of January 28, 1993 (as amended, the "Agreement"); and WHEREAS, the parties hereto desire to amend the Agreement to modify the rates of interest and fees payable thereunder and to extend the term thereof. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Agreement shall have the meaning assigned to such term in the Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Agreement shall from and after the date hereof refer to the Agreement as amended hereby. SECTION 2. Amendment of the Agreement. The Agreement is amended as follows: (a) The schedule appearing in the definition of "Leverage Margin" in Section 1.01 is changed to read as follows: 2
Leverage Ratio Leverage Margin - -------------- --------------- Less than 0.475 0 0.475 or More but Less Than 0.525 0.10% 0.525 or More but Less Than 0.55 0.225% 0.55 or More 0.35%
(b) The date "January 31, 1996" appearing in the definition of "Termination Date" in Section 1.01 is changed to "January 28, 1998". (c) The following definition is added to Section 1.01 in its appropriate alphabetical position: "Commitment Fee Rate" means, for each day during any fiscal quarter of the Company, the percentage set forth in the table below corresponding to the Company's Leverage Ratio as of the last day of the immediately preceding fiscal quarter:
Leverage Ratio Commitment Fee Rate -------------- ------------------- Less than 0.475 0 0.475 or More but Less Than 0.525 0.025% 0.525 or More but Less Than 0.55 0.075% 0.55 or More 0.10%
(d) The figure "0.375%" appearing in the definition of "CD Margin" in Section 2.07(b) is changed to "0.40%". (e) The figure "327.3(d)" appearing in the definition of "Assessment Rate" in Section 2.07(b) is changed to "327.3(e)". (f) The figure "0.25%" appearing in the definition of "Euro-Dollar Margin" in Section 2.07(c) is changed to "0.275%". 2 3 (g) The first sentence of Section 2.08(a) is amended to read in its entirety as follows: During the Revolving Credit Period, the Company shall pay to the Agent for the account of the Banks ratably in proportion to their Commitments a commitment fee at the Commitment Fee Rate on the daily amount by which the aggregate amount of the Commitments exceeds the aggregate outstanding principal amount of the Loans. (h) The figures "0.15%" and "0.25%" appearing in the first sentence of Section 2.08(b) are changed to "0.125%" and "0.20%", respectively. SECTION 3. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 4. Counterparts; Effectiveness. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Amendment shall become effective as of the date hereof when the Agent shall have received duly executed counterparts hereof signed by the Borrower and each of the Banks (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party). 3 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. SUNDSTRAND CORPORATION By /s/ James F. Ricketts ------------------------------------- Title: Vice President and Treasurer MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ Michael Ciszewski ------------------------------------- Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ Patricia P. DelGrande ------------------------------------- Title: Vice President M&I MARSHALL & ILSLEY BANK By /s/ Stephen F. Geimer ------------------------------------- Title: Vice President MELLON BANK, N.A. By /s/ Blake A. McKim ------------------------------------- Title: Vice President 4 5 THE BANK OF NOVA SCOTIA By /s/ F.C.H. Ashby --------------------------------------- Title: Senior Manager Loan Operations THE FIRST NATIONAL BANK OF CHICAGO By /s/ Lynn R. Dillon --------------------------------------- Title: Vice President UNION BANK OF SWITZERLAND By /s/ Robert H. Riley III --------------------------------------- Title: First Vice President By /s/ Douglas R. Elliott --------------------------------------- Title: Assistant Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ Michael J. Ciszewski --------------------------------------- Title: Vice President 5 EX-10.(J) 6 EMPLOYMENT AGREEMENT 1 EXHIBIT (10)(j) EMPLOYMENT AGREEMENT THIS AGREEMENT entered into as of the 21st day of February, 1995, by and between Sundstrand Corporation (the "Company"), and Patrick L. Thomas, an individual (the "Executive") (hereinafter collectively referred to as "the parties"). WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined in Section 8(e)) exists and that the threat of or the occurrence of a Change in Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and its stockholders to retain the services of the Executive in the event of a threat or occurrence of a Change in Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company, particularly in the event of a threat of or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Employment Term. (a) The "Employment Term" shall commence on the first date during the Protected Period (as defined in Section 1(c) below) on which a Change in Control occurs (the "Effective Date") and shall expire on the third anniversary of the Effective Date; provided, however, that on each anniversary of the Effective Date, the Employment Term shall automatically be extended for one (1) year unless either the Company or the Executive shall have given written notice to the other at least ninety (90) days prior thereto that the Employment Term shall not be so extended; and provided, further, that the Employment Term shall in no event extend beyond the first day of the month following the month in which the Executive attains age sixty-five (65). (b) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to the Effective Date and the Executive reasonably demonstrates that such termination (1) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (2) otherwise occurred in connection with or in anticipation of a Change in Control, then for all purposes of this Agreement, the Effective Date shall mean the date immediately prior to the date of such termination of the Executive's employment. 2 -2- (c) For purposes of this Agreement, the "Protected Period" shall be the two (2) year period commencing on February 21, 1995, provided, however, that the Protected Period shall be automatically extended for one (1) year on February 21, 1996 and on each February 21 thereafter unless the Company shall have given written notice to the Executive at least ninety (90) days prior thereto that the Protected Period shall not be so extended; and provided, further, that notwithstanding any such notice by the Company not to extend, the Protected Period shall not end if prior to the expiration thereof any third party has indicated an intention or taken steps reasonably calculated to effect a Change in Control, in which event the Protected Period shall end only after such third party publicly announces that it has abandoned all efforts to effect a Change in Control. 2. Employment. (a) Subject to the provisions of Section 8 hereof, the Company agrees to continue to employ the Executive and the Executive agrees to remain in the employ of the Company during the Employment Term. During the Employment Term, the Executive shall be employed as Executive Vice President and Chief Operating Officer, Industrial, of the Company or in such other senior executive capacity as may be mutually agreed to in writing by the parties. The Executive shall perform the duties, undertake the responsibilities and exercise the authority customarily performed, undertaken and exercised by persons situated in a similar executive capacity. He shall also promote, by entertainment or otherwise, the business of the Company. (b) Excluding periods of vacation and sick leave to which the executive is entitled, during the Employment Term the Executive agrees to devote reasonable attention and time during usual business hours to the business and affairs of the Company to the extent necessary to discharge the responsibilities assigned to the Executive hereunder. The executive may (i) serve on corporate, civil or charitable boards or committees (ii) manage personal investments and (iii) deliver lectures and teach at educational institutions, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities hereunder. 3. Base Salary. During the Employment Term, the Company agrees to pay or cause to be paid to the Executive during the term of this Agreement a base salary at the rate of $300,000 per annum or such larger amount as the Company may from time to time determine (hereinafter referred to as the "Base Salary"). Such Base Salary shall be payable in accordance with the Company's customary practices applicable to its executives. 4. Employee Benefits. During the Employment Term, the Executive shall be entitled to participate in all employee benefit plans, practices and programs maintained by the Company and made available to employees generally including, without limitation all pension, retirement, profit sharing, savings, medical, hospitalization, disability, dental, life or travel accident 3 -3- insurance benefit plans. The Executive's participation in such plans, practices and programs shall be on the same basis and terms as are applicable to employees of the Company generally. 5. Executive Benefits. During the Employment Term, the Executive shall be entitled to participate in all executive benefit or incentive compensation plans now maintained or hereafter established by the Company for the purpose of providing compensation and/or benefits to executives of the Company including, but not limited to, the Company's 1989 Restricted Stock Plan, the Sundstrand Corporation Stock Incentive Plan, the Officer Incentive Plan, and any supplemental retirement, salary continuation, stock option, deferred compensation, supplemental medical or life insurance or other bonus or incentive compensation plans. Unless otherwise provided herein, the Executive's participation in such plans shall be on the same basis and terms as other similarly situated executives of the Company, but in no event on a basis less favorable in terms of benefit levels or reward opportunities applicable to the Executive as in effect on the Effective Date. No additional compensation provided under any of such plans shall be deemed to modify or otherwise affect the terms of this Agreement or any of the Executive's entitlements hereunder. 6. Other Benefits. (a) Fringe Benefits and Perquisites. During the Employment Term, the Executive shall be entitled to all fringe benefits and perquisites (e.g. physical examinations, financial planning and tax preparation services) made available by the Company to similarly situated executives. (b) Expenses. During the Employment Term, the Executive shall be entitled to receive prompt reimbursement of all expenses reasonably incurred by him in connection with the performance of his duties hereunder or for promoting, pursuing or otherwise furthering the business or interests of the Company. (c) As of the Effective Date, all restrictions on any outstanding award (including restricted stock awards) granted to the Executive shall lapse and such awards shall become fully (100%) vested immediately, and all stock options and stock appreciation rights granted to the Executive shall become fully (100%) vested and shall become immediately exercisable. 7. Vacation and Sick Leave. During the Employment Term, at such reasonable times as the Board shall in its discretion permit, the Executive shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment under this Agreement, provided that: (a) The Executive shall be entitled to annual vacation in accordance with the policies as periodically established by the Board for similarly situated executives of the Company. 4 -4- (b) The Executive shall be entitled to sick leave (without loss of pay) in accordance with the Company's policies as in effect from time to time. 8. Termination. During the Employment Term, the Executive's employment hereunder may be terminated under the following circumstances: (a) Disability. The Company may terminate the Executive's employment after having established the Executive's Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties under this Agreement, which continues for a period of at least one hundred eighty (180) consecutive days and which cannot be reasonably accommodated by the Company. The Executive shall be entitled to the compensation and benefits provided for under this Agreement for any period during the term of this Agreement and prior to the establishment of the Executive's Disability during which the Executive is unable to work due to a physical or mental infirmity. Notwithstanding anything contained in this Agreement to the contrary, until the Termination Date specified in a Notice of Termination (as each term is hereinafter defined) relating to the Executive's Disability, the Executive shall be entitled to return to his position with the Company as set forth in this Agreement in which event no Disability of the Executive will be deemed to have occurred. (b) Cause. The Company may terminate the Executive's employment for "Cause." A Termination for Cause is a termination evidenced by a resolution adopted in good faith by a majority of the Board that the Executive (i) willfully and continually failed to substantially perform his duties with the Company (other than a failure resulting from the Executive's incapacity due to physical or mental illness) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Executive specifying the manner in which the Executive has failed to substantially perform, or (ii) willfully engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise; provided, however, that no termination of the Executive's employment shall be for Cause as set forth in clause (ii) above until (x) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of the conduct set forth in clause (ii) and specifying the particulars thereof in detail, and (y) the Executive shall have been provided an opportunity to be heard by the Board (with the assistance of the Executive's counsel if the Executive so desires). No act, nor failure to act, on the Executive's part, shall be considered "willful" unless he has acted or failed to act, with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the 5 -5- Executive after Notice of Termination is given by the Executive shall constitute Cause for purposes of this Agreement. (c) (1) Good Reason. The Executive may terminate his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control (as hereinafter defined in this Section 8(e)) of any of the events or conditions described in Subsections (i) through (vii) hereof: (i) a change in the Executive's status, title, position or responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, does not represent a promotion from his status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive's reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect him to any of such positions, except in connection with the termination of his employment for Disability, Cause, as a result of his death or by the Executive other than for Good Reason; (ii) a reduction in the Executive's Base Salary or any failure to pay the Executive any compensation or benefits to which he is entitled within five (5) days of the date due; (iii) the failure by the Company to (A) continue in effect any material compensation or benefit plan in which the Executive was participating at the time of the Change in Control, including, but not limited to, the Company's 1989 Restricted Stock Plan, the Sundstrand Corporation Stock Incentive Plan, and the Officer Incentive Compensation Plan or (B) provide the Executive with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each employee benefit plan, program and practice as in effect immediately prior to the Change in Control (or as in effect following the Change in Control, if greater); (iv) the insolvency or the filing (by any party, including the Company) of a petition for bankruptcy, of the Company; (v) any material breach by the Company of any provision of this Agreement; (vi) any purported termination of the Executive's employment for Cause by the Company which does not comply with the terms of Section 8 of this Agreement; and 6 -6- (vii) the failure of the Company to obtain an agreement, satisfactory to the Executive, from any successor or assign of the Company to assume and agree to perform this Agreement, as contemplated in Section 12 hereof. (2) Any event or condition described in this Section 8(c)(i) through (vii) which occurs prior to the Effective Date but which the Executive reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control, or (ii) otherwise arose in connection with or in anticipation of a Change in Control, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Effective Date. (3) The Executive's right to terminate his employment pursuant to this Section (8)(c) shall not be affected by his incapacity due to physical or mental illness. (d) Voluntary Termination. The Executive may voluntarily terminate his employment hereunder at any time. If the Executive voluntarily terminates his employment for any reason or without reason during the sixty (60) day period which commences on the date which is six (6) months following the Effective Date, it shall be referred to as a "Limited Period Termination". (e) Change in Control. For purposes of this Agreement, a "Change in Control" shall mean any of the following events: (1) The acquisition (other than from the Company) by any person (as such term is defined in Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of thirty-three percent (33%) or more of the combined voting power of the Company's then outstanding voting securities; (2) The individuals who, as of the date hereof, are members of the Board (the "Incumbent Board"), cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the Company stockholders, of any new director was approved by a vote of a majority of the Incumbent Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; or (3) Approval by stockholders of the Company of (i) a merger or consolidation involving the Company if the stockholders of the Company, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in 7 -7- substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation or (ii) a complete liquidation or dissolution of the Company or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to Section 8(e)(l), solely because thirty-three percent (33%) or more of the combined voting power of the Company's then outstanding securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (ii) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (f) Notice of Termination. Any purported termination by the Company or by the Executive shall be communicated by written Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, no such purported termination of employment shall be effective without such Notice of Termination. (g) Termination Date, Etc. "Termination Date" shall mean in the case of the Executive's death, his date of death, or in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by the Company for Cause or due to Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Executive, provided that in the case of Disability the Executive shall not have returned to the full-time performance of his duties during such period of at least thirty (30) days; and (2) If the Executive's employment is terminated for Good Reason or is a Limited Period Termination, the date specified in the Notice of Termination shall not be more than sixty (60) days from the date the Notice of Termination is given to the Company. 9. Compensation Upon Termination. Upon termination of the Executive's employment during the Employment Term, the Executive shall be entitled to the following benefits: 8 -8- (a) If the Executive's employment is terminated by the Company for Cause or Disability or by the Executive (other than for Good Reason or a Limited Period Termination), or by reason of the Executive's death, the Company shall pay the Executive all amounts earned or accrued hereunder through the Termination Date but not paid as of the Termination Date, including Base Salary, vacation pay, bonuses or incentive compensation and any previous compensation which the Executive has previously deferred (including any interest earned or credited thereon) (collectively, "Accrued Compensation"). In addition to the foregoing, if the Executive's employment is terminated by the Company for Disability or by reason of the Executive's death, the Company shall pay to the Executive or his beneficiaries an amount equal to the bonus or incentive award that the Executive would have been entitled to receive in respect of the fiscal year in which the Executive's Termination Date occurs had he continued in employment until the end of such fiscal year, calculated as if the maximum bonus payable to the Executive had been earned for such year, multiplied by a fraction the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is 365 (a "Pro Rata Bonus"). The Executive's entitlement to any other compensation or benefits shall be determined in accordance with the Company's employee benefit plans and other applicable programs and practices then in effect. (b) If the Executive's employment by the Company shall be terminated (1) by the Company other than for Cause, death or Disability, (2) by the Executive for Good Reason, or (3) by the Executive as a Limited Period Termination, then the Executive shall be entitled to the benefits provided below: (i) the Company shall pay the Executive all Accrued Compensation and a Pro Rata Bonus; (ii) the Company shall pay the Executive as severance pay and in lieu of any further salary for periods subsequent to the Termination Date, in a single payment an amount in cash equal to three (3) times the sum of (A) the Executive's Base Salary at the highest rate in effect at any time within the ninety (90) day period ending on the date the Notice of Termination is given (or if the Executive's employment is terminated after a Change in Control, the Executive's Base Salary immediately prior to the Change in Control, if greater) and (B) the "Bonus Amount" (as defined below). Notwithstanding the foregoing, the amount to be paid under this Subsection (ii) shall be multiplied by a fraction (which in no event shall be greater than one (1)) the numerator of which shall be the number of months (for this purpose any partial month shall be considered as a whole month) remaining until the Executive's 65th birthday and the denominator of which shall be thirty-six (36). The term "Bonus Amount" shall mean (x) the greatest amount of any cash bonus or incentive 9 -9- compensation received by the Executive during the three fiscal years immediately preceding the Termination Date or (y) if no such bonus was received by the Executive during any of such three years, then an amount equal to the Executive's maximum bonus which could be awarded for the fiscal year in which the Termination Date occurs had he continued in employment until the end of such fiscal year. (iii) for a number of months equal to the lesser of (A) thirty-six (36) or (B) the number of months remaining until the Executive's 65th birthday, the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries the life insurance, disability, medical, dental and hospitalization benefits which were being provided to the Executive at the time Notice of Termination is given (or, if the Executive is terminated following a Change in Control, the benefits provided to the Executive at the time of the Change in Control, if greater). The benefits provided in this Section 9(b)(iii) shall be no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage provided the Executive under the plans providing such benefits at the time of Notice of Termination is given (or, if the Executive is terminated following a Change in Control, at the time of the Change in Control if more favorable to the Executive). The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverage of the combined benefit plans is no less favorable to the Executive, in terms of amounts and deductibles and costs to him, than the coverage required to be provided hereunder. This Subsection (iii) shall not be interpreted so as to limit any benefits to which the Executive or his dependents may be entitled under any of the Company's employee benefit plans, programs or practices following the Executive's termination of employment, including without limitation, retiree medical and life insurance benefits; (iv) the Company shall pay in a single payment an amount in cash equal to the excess of (A) the actuarial equivalent of the aggregate retirement benefit the Executive would have been entitled to receive under the Company's supplemental and excess retirement plans and under the Sundstrand Corporation Retirement Plan-Aerospace had (x) the executive remained employed by the Company for an additional three (3) complete years of credited service (or until his 65th birthday if earlier), (y) his annual 10 -10- compensation during such period been equal to his Base Salary (at the rate used for purposes of Section 9(b)(ii)) and the Bonus Amount, and (z) he been fully (100%) vested in his benefit under each such retirement plan, over (B) the actuarial equivalent of the aggregate retirement benefit the Executive is actually entitled to receive under such retirement plans. For purposes of this Subsection (iv), "actuarial equivalent" shall be determined in accordance with the actuarial assumptions used for the calculation of benefits under the Sundstrand Corporation Retirement Plan-Aerospace as applied prior to the Termination Date in accordance with such plan's past practices (but shall in any event take into account the value of any subsidized early retirement benefit); (v) the eligibility requirements for the Company's Retiree Health Insurance Plan shall be waived, and commencing on the Executive's termination of employment, he shall be provided with the same health care coverage as provided to other eligible retirees; and (vi) the age 62 and 30-year requirements of the Executive Life Insurance Program for retirees are waived, and commencing on the Executive's termination of employment, he shall be provided with a life insurance benefit of one time his annual base salary at the time of his termination of employment. (c) The amounts provided for in Sections 9(a) and 9(b)(i), (ii) and (iv) shall be paid within five (5) days after the Executive's Termination Date. (d) The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment. 10. Excise Tax Payments. (a) Notwithstanding anything contained in this Agreement to the contrary, in the event that any payment (within the meaning of Section 28OG(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), or distribution to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with the Company (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, the 11 -11- Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) An initial determination shall be made as to whether a Gross-Up Payment is required pursuant to this Section 10 and the amount of such Gross-Up Payment shall be made by a national independent accounting firm selected by the Executive (the "Accounting Firm"). All fees, costs and expenses (including, but not limited to, the cost of retaining experts) of the Accounting Firm shall be borne by the Company and the Company shall pay such fees, costs and expenses as they become due. The Accounting Firm shall provide detailed supporting calculations, acceptable to the Executive, both to the Company and the Executive within fifteen (15) business days of the Termination Date, if applicable, or such other time as requested by the Company or by the Executive (provided the Executive reasonably believes that any of the Payments may be subject to the Excise Tax). The Gross-Up Payment, if any, as determined pursuant to this Section 10(b) shall be paid by the Company to the Executive within five (5) business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Payment or Payments, it shall furnish the Executive with an unqualified opinion that no Excise Tax will be imposed with respect to any such Payment or Payments. Any such initial determination by the Accounting Firm of the Gross-Up Payment shall be binding upon the Company and the Executive subject to the application of Section 10(c). (c) As a result of the uncertainty in the application of Section 4999 and 28OG of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Overpayment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred upon notice (formal or informal) to the Executive from any governmental taxing authority that the tax liability of the Executive (whether in respect of the then current taxable year of the Executive or in respect of any prior taxable year of the Executive) may be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment. An Overpayment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Payment or Payments with respect to which the Executive had previously received a Gross-Up Payment. A Final Determination shall be deemed to have occurred when the Executive has received from the applicable governmental taxing authority a refund of taxes or other reduction in his tax liability by reason of the Overpayment and upon either (i) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and 12 -12- either all appeals have been taken and finally resolved or the time for all appeals has expired or (ii) the statute of limitations with respect to the Executive's applicable tax return has expired. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall pay to the Executive at least five (5) business days prior to the date on which the applicable governmental taxing authority has requested payment, an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties imposed on the Underpayment. If an Overpayment occurs, the amount of the Overpayment shall be treated as a loan by the Company to the Executive and the Executive shall, within ten (10) business days of the occurrence of such Overpayment, pay the Company the amount of the Overpayment plus interest at an annual rate equal to the rate provided for in Section 1274(b)(2)(B) of the Code from the date the Gross-Up Payment (to which the Overpayment relates) was paid to the Executive. (d) Notwithstanding anything contained in this Agreement to the contrary, in the event it is determined that an Excise Tax will be imposed on any Payment or Payments, the Company shall pay to the applicable governmental taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Payment or Payments. 11. Unauthorized Disclosure. The Executive shall not make any Unauthorized Disclosure. For purposes of this Agreement, "Unauthorized Disclosure" shall mean disclosure by the Executive without the consent of the Board to any person, other than an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Company or as may be legally required, of any confidential information obtained by the Executive while in the employ of the Company (including, but not limited to, any confidential information with respect to any of the Company's customers or methods of distribution) the disclosure of which he knows or has reason to believe will be materially injurious to the Company; provided, however, that such term shall not include the use or disclosure by the Executive, without consent, of any information known generally to the public (other than as a result of disclosure by him in violation of this Section 11) or any information not otherwise considered confidential by a reasonable person engaged in the same business as that conducted by the Company. 12. Successors and Assigns. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and the Company shall require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. The term "the Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring all 13 -13- or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representative. 13. Fees and Expenses. As of the Effective Date, the Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) reasonably incurred by the Executive as they become due as a result of (i) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), (ii) the Executive's hearing before the Board as contemplated in Section (8)(b) of this Agreement, (iii) the Executive's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company under which the Executive is or may be entitled to receive benefits, or (iv) a dispute between the Executive and the Internal Revenue Service (or any other taxing authority) with regard to an "Underpayment" (as defined in Section 10 of this Agreement). 14. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 15. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company or any of its subsidiaries. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its subsidiaries shall be payable in accordance with such plan or program, except as explicitly modified by this Agreement. 14 -14- 16. Settlement of Claims. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 17. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. 18. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Illinois without giving effect to the conflict of law principles thereof. 19. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 20. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, The Company has caused this Agreement to be executed by its duly authorized officer and the Executive has executed this Agreement as of the day and year first above written. SUNDSTRAND CORPORATION By: /s/ Don R. O'Hare --------------------------- Title: Chairman of the Board ATTEST: and Chief Executive Officer /s/ Richard M. Schilling - ------------------------ Secretary By: /s/ Patrick L. Thomas ------------------------- Patrick L. Thomas EX-10.(K) 7 APU AGREEMENT 1 EXHIBIT (10)(K) AMENDED AND RESTATED LABINAL/SUNDSTRAND APU AGREEMENT 2 INDEX
ARTICLES PAGE - -------- ---- RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE I - SCOPE, PRODUCTS, GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE II - FORMATION OF THE SALES CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE III - MANAGEMENT ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE IV - PRODUCT MARKETING AND SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE V - PRICING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE VI - PRODUCT SERVICES AND SUPPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE VII - BUSINESS TRANSACTIONS BETWEEN AND AMONG THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE VIII - WITHDRAWAL OF A PARTY FROM APU PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 ARTICLE IX - LIABILITIES TO PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ARTICLE X - DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE XI - LIABILITIES BETWEEN THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 ARTICLE XII - TECHNICAL INFORMATION AND DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE XIII - DATA WARRANTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ARTICLE XIV - PATENT INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 ARTICLE XV - INVENTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ARTICLE XVI - GOVERNMENT REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 ARTICLE XVII - EXPORT/IMPORT AUTHORIZATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ARTICLE XVIII - APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE XIX - SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE XX - EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE XXI - OBLIGATIONS SURVIVING EXPIRATION OR TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE XXII - DURATION, TERMINATION AND DISSOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 ARTICLE XXIII - WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 ARTICLE XXIV - ASSIGNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 ARTICLE XXV - FINANCIAL RESPONSIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 ARTICLE XXVI - NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 ARTICLE XXVII - RELEASE OF INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ARTICLE XXVIII - ENTIRE AGREEMENT - MODIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 ARTICLE XXIX - DESIGNATED AFFILIATE OR SUBSIDIARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
-i- 3 AMENDED AND RESTATED LABINAL/SUNDSTRAND APU AGREEMENT This Amended and Restated Labinal/Sundstrand APU Agreement (the "Agreement") is made and entered into as of the 3rd day of October, 1994, by and between SUNDSTRAND CORPORATION, a Delaware corporation with its principal office in Rockford, Illinois ("SUNDSTRAND", which term will include any designated affiliate or subsidiary of SUNDSTRAND) and, TURBOMECA ENGINE CORPORATION, a Delaware corporation with its principal office in Grand Prairie, Texas ("TEC", which term will include any designated affiliate or subsidiary of TEC). RECITALS WHEREAS: SUNDSTRAND and LABINAL, INC., a Delaware corporation and the parent company of TEC, have entered into the Labinal/Sundstrand APU Agreement, dated as of November 16, 1989 (the "APU Agreement"), pursuant to which the parties agreed to integrate their independent programs for marketing, selling and supporting gas turbine driven auxiliary power units ("APUs") for use on commercial aircraft, including, without limitation, commercial air transport, commuter aircraft and business aircraft (collectively hereinafter called "Commercial Aircraft") to result in improved marketing and economies for the benefit of customers which neither Party could achieve independently; and 4 -2- WHEREAS: LABINAL, INC. assigned its interest in the APU Agreement to TEC, its wholly-owned subsidiary; and WHEREAS: the worldwide competitive conditions for APUs have resulted in a change in business strategy for the design, development, manufacture, marketing and sale of APUs; and WHEREAS: SUNDSTRAND and TEC (the "Parties") jointly own the corporation established under the name Auxiliary Power International Corporation, which is referred to in the APU Agreement as the Sales Corporation; and WHEREAS: the Parties have agreed to restructure the activities of the Sales Corporation, resulting in the establishment of a new corporation (hereinafter referred to as the "Sales Corporation"), formed under the name of APIC, Inc., which name will be changed to Auxiliary Power International Corporation, which corporation will be jointly owned and equally controlled by the Parties, which will succeed to certain of the functions of the original Sales Corporation under the APU Agreement and which will effectuate the purposes described herein; and WHEREAS: the purpose of the Sales Corporation will continue to be to coordinate APU program management services and to market, sell and support APUs worldwide for use on 5 -3- Commercial Aircraft, utilizing on an equal basis to the fullest extent possible the existing resources available from both Parties and avoiding duplication of existing capabilities; and WHEREAS: each Party will continue to design, develop and manufacture certain APUs, APU subassemblies and APU parts, provide services in connection with the marketing, sale and support of APUs and sell such products and services to the Sales Corporation; and WHEREAS: the Sales Corporation will be owned fifty percent (50%) by each Party, and the revenues from the marketing, sale and support of APUs by the Sales Corporation are intended to be divided on an equal basis between the Parties; and WHEREAS: the Parties intend to work together and with the Sales Corporation in good faith to conduct a successful and mutually rewarding business; and WHEREAS: the Parties desire to amend and restate the APU Agreement to reflect the change in business organization resulting from changes in business conditions; and WHEREAS: The Parties agree to restate the functions and duties of the Sales Corporation; and 6 -4- WHEREAS: the Parties agree to conduct the operations of the Sales Corporation in accordance with the following general principles: 1. Business and program decisions will be made by the Parties emphasizing the overall long term best interests of the Sales Corporation and the Parties; 2. The Parties will exert their best efforts to resolve any differences between themselves without resort to termination of this Agreement or use of third party arbitration; 3. The Parties' participation in the Sales Corporation is not dependent on governmental support of their independent design, development or manufacture of APUs; 4. Emphasis will be placed on transferring APU activities between the Parties to achieve the desired 50/50 balance of participation contemplated by this Agreement; 5. This Agreement does not constitute a profit-sharing joint venture, nor should this Agreement be so construed. Each Party's net income, if any, derived from its sales and services rendered in connection with any APU program is not within the control or scope of this Agreement. Neither Party is empowered to make contractual commitments which bind the other with respect to third parties. 7 -5- 6. The Sales Corporation will be responsible for the marketing and sales functions for the APUs and for setting product support policy, as more fully described hereinafter. NOW, THEREFORE, the Parties agree as follows: ARTICLE I - SCOPE, PRODUCTS, GENERAL 1-A. SCOPE This Agreement is expressly aimed at expanding the marketability of APU products, either existing, currently in development or contemplated by either Party, so as to establish the Sales Corporation and the Parties as leaders in the design, development, manufacture, marketing, sale and support of APUs for use on Commercial Aircraft. Except as otherwise provided in this Agreement, the Parties agree that all such APU products will be marketed and sold by the Sales Corporation exclusively. 1-B. PRODUCTS 1-B(1) Existing Products 1-B(1)(a) The existing APS-2000 and APS-3200 models, as well as all future derivatives thereof, will be marketed, sold and supported by the Sales Corporation. 8 -6- 1-B(1)(b) Other existing APU models of either Party for Commercial Aircraft will be marketed or otherwise represented, sold and supported by such Party, unless the Party requests and the Board of Directors of the Sales Corporation determines after analysis on a case-by-case basis that the existing APU model should be marketed or otherwise represented and sold by the Sales Corporation. 1-B(2) New Products Unless the Board of Directors of the Sales Corporation determines otherwise, after analysis on a case-by-case basis, all new APU products of the Parties, including derivatives of existing products including those which fall within the scope of Paragraph 1-B(1)(b) above, for use on Commercial Aircraft will fall within the scope of this Agreement. 1-C GENERAL 1-C(1) All APU products marketed and sold by the Sales Corporation will bear an appropriate nameplate identifying the Sales Corporation as the seller of the product and a serial number identifying each product. 1-C(2) Except as expressly provided herein, to the extent practicable, the Parties will each perform fifty (50) percent of the required activity on any given APU program or group 9 -7- of programs, in a manner mutually agreed upon by the Parties to enable the Parties to share equally in the revenues realized by the Sales Corporation. 1-D Excluding any limits imposed by the Parties' respective governments, the Parties will share engineering and manufacturing technology with each other and the Sales Corporation as necessary to design, develop, certify, qualify, manufacture and support those products which will be marketed, sold and supported by the Sales Corporation. In order to facilitate the sharing of technology, the Parties and the Sales Corporation have entered into a Technology Exchange Agreement in the form attached hereto as Exhibit 1. ARTICLE II - FORMATION OF THE SALES CORPORATION 2-A. INCORPORATION The Parties have caused the formation of the Sales Corporation in the State of Delaware, United States, as set forth in the Certificate of Incorporation and By-Laws attached hereto as Exhibits 2 and 3, respectively. The Parties may establish one or more additional sales corporations in other jurisdictions, including France. 2-B. NAME The name of the Sales Corporation will be Auxiliary Power International Corporation. 10 -8- 2-C. LOCATION The principal office of the Sales Corporation is located in San Diego, California or such other location as the Parties may decide. SUNDSTRAND agrees to make space available to the Sales Corporation at the premises identified as 4450 Ruffin Road, San Diego, California 92193 subject to the terms and conditions of a Lease attached hereto as Exhibit 4. Should there be a need for more than one location for the Sales Corporation in the United States, or elsewhere, branch offices or other appropriate entities can be established to meet such needs, with the Sales Corporation maintaining managerial control. 2-D. CAPITALIZATION - PERSONNEL The Parties agree to provide the Sales Corporation with adequate capitalization and personnel to discharge properly the functions of the Sales Corporation. The foregoing will not be construed to provide the officers or other personnel of the Sales Corporation the authority or right to direct the Parties or their personnel except as specifically agreed by the Parties and the Sales Corporation. 2-E EQUITY 2-E(1) Ownership. Unless otherwise agreed, each Party shall maintain an equal equity ownership (a "Shareholder Interest") in the Sales Corporation as follows: 11 -9- TEC currently owns 500 Class A Shares of Common Stock of the Sales Corporation and 500 Class A Shares of Preferred Stock of the Sales Corporation; and SUNDSTRAND currently owns 500 Class B Shares of Common Stock of the Sales Corporation and 500 Class B Shares of Preferred Stock of the Sales Corporation. In the event the Board of Directors of the Sales Corporation determines that the Sales Corporation requires additional working capital, each of the Parties will contribute additional amounts of capital, make advances or loans or extend guarantees to support financial accommodations to the Sales Corporation, in each instance in equal amounts or on an equal basis. 2-E(2) Transfer of Shareholder Interest Unless otherwise agreed, neither Party will be entitled, directly or indirectly, to sell, transfer, pledge, assign or otherwise dispose of or mortgage, hypothecate or otherwise encumber or permit or suffer an encumbrance on its shares of stock of the Sales Corporation except as provided in Paragraphs 2-E(2)(a) through 2-E(2)(e) below. 2-E(2)(a) Each Party may transfer all of its shares of stock of the Sales Corporation to any subsidiary more than fifty (50) percent owned by it, provided the remaining shares of such subsidiary are not owned by an entity engaged in a business competitive with the business 12 -10- conducted by the Sales Corporation and provided further that any such transferee will have agreed in writing to be bound by the terms of this Agreement. 2-E(2)(b) In the event any Party (1) no longer intends to engage in the business of designing, developing and manufacturing APUs for use on Commercial Aircraft (the "APU Business"), or (2) is adjudicated bankrupt or insolvent or becomes subject to voluntary or involuntary dissolution, such Party ("First Party") will give written notice of such intention or the occurrence of such condition to the other Party ("Second Party"). For a period of sixty (60) days after receipt by the Second Party of such notice, the Second Party will have the right to notify the First Party of its intent to purchase all of the shares of stock of the Sales Corporation (the "Offered Shares") and the APU Business of the First Party. The Second Party may exercise such right by giving, prior to the expiration of the sixty (60) day period, written notice to the First Party stating its intention to purchase the Offered Shares and the APU Business. The purchase price will be the fair market value of the Offered Shares and the APU Business as determined by a valuation expert of recognized international standing selected by the Parties as provided in Paragraph 2-E(2)(e) below or the purchase price offered in writing by a bona fide third party purchaser for the Offered Shares and the APU Business, in the event such a third party offer has been made to the First Party. The Second Party's obligation to proceed with the purchase of the First Party's Offered Shares and the APU Business will be subject to the Second Party's approval of the purchase price as determined by the valuation expert or the third party purchase price and 13 -11- such approval and intention to proceed will be confirmed by written notice to the First Party within twenty (20) days of the Second Party's receipt of the appraisal report or copy of the bona fide third party offer. Unless a different place or time is agreed upon by the Parties, within forty (40) days after receipt by the First Party of such confirming notice, the First Party will deliver to the Second Party at the principal offices of the Sales Corporation the certificate or certificates evidencing the Offered Shares, properly endorsed, and such other documents as shall be necessary and appropriate to transfer the APU Business, and the Second Party will make payment therefor in cash or by certified check, or by such other means as may be mutually agreed by the Parties. 2-E(2)(c) In the event that the Second Party referred to in 2-E(2)(b) above does not exercise its right to purchase the Offered Shares and the APU Business under Paragraph 2-E(2)(b), the First Party may transfer all of the Offered Shares and the APU Business to a third party provided that the third party (1) has agreed to purchase the Offered Shares and all or substantially all of the APU Business at the price determined by the valuation expert or by the bona fide third party offer as notified by the First Party to the Second Party, (2) will have agreed in writing to be bound by the terms of this Agreement, and (3) has a net worth substantially equal to, or greater than, the net worth, as of the date of this Agreement, of the First Party, which, in the case of TEC, means Labinal, SA. 14 -12- 2-E(2)(d) Each Party acknowledges and agrees that the restrictions on transfer of shares of stock of the Sales Corporation are reasonable. 2-E(2)(e) The selection of a valuation expert of recognized international standing will, for purposes of Paragraph 2-E(2)(b) above, be such an expert as is mutually agreed to by the Parties. If within twenty (20) days after delivery of the notice by the Second Party under Paragraph 2-E(2)(b) of its intention to purchase the Offered Shares and APU Business no agreement on the selection of a valuation expert can be reached by the Parties, each Party will select within twenty (20) days one valuation expert of recognized international standing and then within ten (10) days thereafter the two experts will select a third expert of recognized international standing who will be the appraiser. In the event a valuation expert is not selected by one of the Parties within twenty (20) days after delivery of the notice by the Second Party under Paragraph 2-E(2)(b), the valuation expert selected by the other Party will be the appraiser. The appraiser will deliver an appraisal report to the Parties setting forth the fair market value of the Offered Shares and the APU Business within sixty (60) days after having been selected. The cost of the appraisal will be borne equally by the Parties and the result of the appraisal will be binding on the Parties. 15 -13- 2-F. OFFICIAL LANGUAGE Normally with customers, the English language will be the official language for written communications, including, but not limited to, technical data in documents. As among the Parties and the Sales Corporation, when it is considered necessary or useful for the precise understanding of the written communication, each may use its own language. ARTICLE III - MANAGEMENT ORGANIZATION 3-A. BOARD OF DIRECTORS 3-A(1) Composition The Board of Directors of the Sales Corporation will be composed of ten Directors. Each Party will appoint five Directors. The Board will be chaired by two Co-Chairmen, one of whom will be appointed by each Party. In the event a Director resigns, dies or is otherwise removed, the Board of Directors may take no action, until such Director is replaced with a Director of the class from which the vacancy occurred in accordance with the By-Laws of the Sales Corporation, which Director will be appointed no later than thirty (30) days after the date the vacancy occurred. There will be an Executive Committee of the Board of Directors composed of four Directors, two of whom will be appointed by each Party. The Executive Committee will provide advice and counsel to the President of the Sales Corporation on matters other than those requiring 16 -14- action and approval by the Board of Directors as provided in Paragraph 3-A(2) below. All advice and opinions of the Executive Committee must be unanimous, failing which, the matter must be referred to the Board of Directors for resolution. The Board of Directors and the Executive Committee will consult with the President from time to time in order to insure that items for discussion suggested by the President are included in the agendas for meetings of the Board and Executive Committee. 3-A(2) Specific Powers of the Board of Directors In addition to such powers as the Board of Directors may not delegate under the laws of Delaware, the Board of Directors will reserve to itself final approval in the following areas: 3-A(2)(a) Annual operating budgets, forecasts and business and strategic plans, including permissible deviation therefrom which the President may exercise with the affirmative advice of the Executive Committee. 3-A(2)(b) Appointment, removal and replacement of officers, and any salaries and expenses of the officers to be paid by the Sales Corporation. 3-A(2)(c) Designation of signatory power over the bank accounts of the Sales Corporation and authorization of all borrowings from banks or other financial institutions. 17 -15- 3-A(2)(d) Initial commitments to third party customers including negotiating latitude on the terms of sale to be exercised by the President with the prior affirmative advice of the Executive Committee. 3-A(2)(e) Changes in the scope of activities of the Sales Corporation, such as undertaking marketing, sale and support of APU products not covered by this Agreement or procuring APU products or services from sources other than TEC and SUNDSTRAND. 3-A(2)(f) Resolution of differences in both technical and non-technical areas where either TEC or SUNDSTRAND does not agree with the decision of the President involving their activities. 3-A(2)(g) Initiation of any certification program for APU products. 3-A(2)(h) Initiation of the manufacture of APU products for any program. 3-A(2)(i) Any proposed Sales Corporation action which may require amendment to this Agreement. 18 -16- 3-A(2)(j) Other areas which may from time to time be specified by the Board of Directors. 3-B. EXECUTIVE COMMITTEE The Executive Committee by affirmative vote of all of its members, unless otherwise determined by the Board of Directors, must approve the following: 3-B(1) Changes in any APU program schedule which result in a change in forecast of the certification schedule for APU models. 3-B(2) Changes in the relative 50/50 development sharing between the Parties. 3-B(3) Changes in a Party's respective production share of an APU program. 3-B(4) Changes in either Party's development responsibility for parts or components. 3-B(5) Changes in either Party's production responsibility for parts or components. 3-B(6) Changes in approved annual operating expenditures. 19 -17- 3-B(7) Retention by the President of outside consultants to assist in marketing APU products in certain foreign countries, in all cases consistent with all applicable laws. 3-B(8) Such other actions as may from time to time be specified by the Board of Directors and/or requested by the Executive Committee. 3-C. PRESIDENT AND CHIEF EXECUTIVE OFFICER Subject to the authority reserved to the Board of Directors and the Executive Committee, the President will be the Chief Executive Officer of the Sales Corporation and he will have overall authority and responsibility for its business and operation, including the following specific responsibilities: 3-C(1) Managing and directing the activities of the Sales Corporation with responsibility for its operations and for the overall results of any APU program covered by this Agreement. 3-C(2) Developing the worldwide market for APUs, negotiating and contracting sales (using the Parties' support as required), and maintaining customer satisfaction. 20 -18- 3-C(3) Integrating and coordinating the design, development, production, delivery, marketing and field support of APU products with the Parties to support the APU programs, setting policies for customers and product support to be implemented uniformly by the Parties' product support organizations, making suitable trade-offs, where necessary. 3-C(4) Keeping the Board of Directors fully informed of the status and progress of each APU program and bringing to the attention of the Board items requiring its attention and action on a timely basis, and keeping the Executive Committee of the Board informed concerning the day-to-day status and progress of the Sales Corporation, including any problem areas and progress toward solution of such problems. 3-C(5) Conducting periodic program reviews jointly with TEC and SUNDSTRAND (at least quarterly until certification) in order to achieve the most competitive APU design, taking into account such aspects as development status, flight safety, reliability, maintainability, noise, performance, weight, methodology of production and cost. 3-C(6) Retaining outside consultants to assist in marketing APU products in certain foreign countries, in all cases consistent with all applicable laws, and subject to approval of the Executive Committee. 21 -19- 3-C(7) Establishing a program to inform the officers and all other employees of the Sales Corporation, and all employees of the Parties who perform services for the Sales Corporation, of the content of the Sundstrand Corporation Business Conduct and Ethics Code and any similar code established by TEC and insuring compliance with such Code in all activities of the Sales Corporation. 3-C(8) Obtaining and maintaining appropriate liability insurance for protecting the Sales Corporation to the extent commercially available and reasonably possible against claims of third parties, including liability insurance described in Paragraph 9-D hereof, and other insurance for protecting the assets of the Sales Corporation. 3-D. OTHER OFFICERS The Sales Corporation will have the following additional officers as provided in the By-Laws with the responsibilities set forth therein: Vice President-Customer Service, Treasurer and Secretary. ARTICLE IV - PRODUCT MARKETING AND SALES 4-A. MARKETING 4-A(1) The Sales Corporation will be responsible for the coordination of the overall marketing operations for the services and products to be sold by the Sales Corporation, 22 -20- and will maximize the use of the marketing and sales operations of the Parties. Unless otherwise agreed to in writing by the Parties, the cost associated with providing the services indicated above will be reflected in the transfer price for products. 4-A(2) The Sales Corporation will be responsible for developing and maintaining a strategic plan for the marketing of APU products to be sold by the Sales Corporation. 4-A(3) The Sales Corporation will establish and maintain a data base for all customer marketing, sales and product support information. 4-A(4) The Sales Corporation will establish a marketing budget which will include, among other things, an advertising budget. Advertising of APU products by the Sales Corporation will be approved by the Executive Committee. 4-B. SALES 4-B(1) Sales Orders. The Sales Corporation will have the sole responsibility for the sale of products, overhaul and repair of products, including spare parts therefor, to commercial customers, including airframers, airlines and/or independent maintenance operators, whether such sales are direct or through sales agents. The Sales Corporation will make duly authorized commitments and sign 23 -21- contracts with customers. The Sales Corporation will utilize the contract staff of the Parties to be the primary interface with customers. The Sales Corporation and the Parties will jointly be responsible for insuring that the products or services comply with contract specifications and are within the quoted prices and schedules stated in the contracts. 4-B(2) Direct Government Sales. In the event either the French or U.S. government expresses a desire to purchase APU products and/or services sold by the Sales Corporation, efforts will be made to make such sales through the Sales Corporation under the terms of this Agreement. However, should either government insist on purchasing directly from TEC or SUNDSTRAND, such Party may make such direct sales outside the scope of this Agreement. To enable such government sales, each Party agrees to enter into appropriate license agreements and technical assistance agreements on a reasonable basis, subject to applicable governmental export control laws and regulations and any other governmental restrictions. TEC and SUNDSTRAND will negotiate fees for such agreements in good faith in accordance with normal commercial practice, taking into account such factors as the extent of the rights granted, and the degree of technical assistance and information provided. In the event of such direct government sales, the selling Party will attempt to subcontract with the other Party to the extent practicable for the parts and components which would otherwise be provided by such other Party under this Agreement. 24 -22- 4-B(3) Sales Concessions. If not incurred by the Sales Corporation, the Parties will share on a 50/50 basis the expenses, mutually agreed upon in advance, incurred as a result of sales concessions such as advertising and tooling allowances, expenses incident to customer equipment disposition, and other factors required to meet overall business objectives. 4-C. CUSTOMER BILLING The Sales Corporation will be responsible for timely and accurate billing of customers for products or services rendered, as provided herein. Terms and conditions of payment for the Sales Corporation's products and services will be established by the Executive Committee. ARTICLE V - PRICING 5-A. INTERNAL PRICING FACTORS 5-A(1) Decimal Equivalents For each APU program, the APU will be analyzed by each Party to determine the decimal value ("Decimal Equivalent Value") of each component (including assembly and test) in proportion to the total APU having a value of one (1). The Parties will negotiate to reach agreement on the Decimal Equivalent Value of each component. 25 -23- 5-A(2) Forecast A forecast of the number of APUs, APU spare parts and APU subassemblies required for each APU program for a predetermined period of time (e.g., annual) will be prepared regularly for each APU program jointly by the Parties and the Sales Corporation to identify and adjust supply requirements from the Parties consistent with the provisions of this Agreement. 5-A(3) Purchase Revenue The Sales Corporation will provide the Parties with anticipated sales prices of APUs, APU spare parts and APU subassemblies. The volume of APUs, APU spare parts and APU subassemblies forecast for each program as described in Paragraph 5-A(2) above will be multiplied by the anticipated sales prices of same to calculate anticipated total revenue ("Total Revenue"). The Sales Corporation will also provide the Parties with the anticipated gross sales margin of the Sales Corporation. By deducting from Total Revenue the anticipated gross sales margin, the expected revenue ("Purchase Revenue") available for the purchase of APUs, APU spare parts and APU subassemblies from the Parties will be determined. 5-A(4) Dollar Value A "Total Decimal Equivalent Value" of APUs, APU spare parts and APU subassemblies requirements will be determined by multiplying the requirements forecast determined in Paragraph 5-A(2) above by the respective Decimal Equivalent Values determined in Paragraph 26 -24- 5-A(1) above. The Total Decimal Equivalent Value so determined, divided into the total Purchase Revenue as determined in Paragraph 5-A(3) above, will produce a dollar value ("Dollar Value") for a Decimal Equivalent Value of one for the period covered by the forecast of Paragraph 5-A(2) above. 5-A(5) Purchase Price for Parts The purchase price for any part ("Purchase Part Price") supplied by either Party for the account of the Sales Corporation will be calculated by multiplying the Dollar Value (Paragraph 5-A(4) above) by the Decimal Equivalent Value for that part (Paragraph 5-A(1) above) for the appropriate period. 5-A(6) Payments to the Parties At the time that APUs, APU spare parts or APU subassemblies are shipped to the Sales Corporation or its customer, the Parties will invoice the Sales Corporation. Payments to the Parties by the Sales Corporation will be made within thirty (30) days after payments are received by the Sales Corporation from customers. 27 -25- 5-A(7) Periodic Review Periodic (at least semi-annual) forecast reviews will be made by the Sales Corporation to enable the Parties to adjust work share values to assure appropriate distribution of relative contributions of the Parties and the Purchase Revenues of the Sales Corporation. 5-A(8) Warranty and Overhaul Services Warranty and overhaul services will be provided by the Parties on behalf of the Sales Corporation. Warranty evaluation and overhaul pricing used individually by the Parties will be set by the Sales Corporation to assure no unfair advantage to either Party and to assure that product maintenance costs are as low as possible. The Sales Corporation will assure appropriate overhaul pricing by: 5-A(8)(a) allowing only parts sold to the Sales Corporation at the Purchase Part Price to be used by the Parties in the performance of the overhaul; 5-A(8)(b) using prices for labor established by the Sales Corporation; and 5-A(8)(c) setting specified allowed labor hours for specific repairs. 28 -26- 5-B. MANUFACTURING SOURCE 5-B(1) The Parties agree to establish an equal 50/50 participation in the production and supply of APUs, APU spare parts and APU subassemblies in each APU program. Between sixty (60) per cent and eighty (80) per cent of the total parts to be provided should be identified as "Charter Source" parts to be supplied respectively by the Parties based upon, but not limited to: 5-B(1)(a) the Party selected to have design responsibility; 5-B(1)(b) the Party having existing manufacturing capability; 5-B(1)(c) the Party having optimum access to vendor base; and 5-B(1)(d) any other pertinent considerations. 5-B(2) The remainder of the parts, twenty (20) percent to forty (40) percent of the total, called "Swing Parts", will be allocated between the Parties to achieve the desired equal participation in the APU program. Review of participation will be made at least annually and appropriate adjustments will be made in Swing Parts responsibility. If the Swing Parts at any 29 -27- given time are insufficient to achieve equal participation, responsibility for Charter Source parts will be re-allocated between the Parties. 5-B(3) Notwithstanding the work split delineated in Paragraphs 5-B(1) and 5-B(2) above, SUNDSTRAND shall have the primary responsibility for the production and supply, for the APS-2000 program and derivatives, of APUs, APU spare parts and APU subassemblies, and TEC shall have primary responsibility for the production and supply, for the APS-3200 program and derivatives, of APUs, APU spare parts and APU subassemblies; provided, however, that this responsibility, with the approval of the Executive Committee, can be altered to comply with customer requirements. 5-C. VARIATIONS IN ECONOMIC CONDITIONS 5-C(1) Currency Changes The Parties' cost and pricing decisions for their participation in an APU program will initially be based upon (a) the respective Parties' assumptions with respect to costs, and (b) the then-current value of the U.S. Dollar as compared to the French Franc. In consideration of the differences in currency used by the Parties in the normal course of their respective businesses, the Parties will endeavor to establish a pricing policy which takes these differences into account. Annually, prior to December 1 of each year, or more frequently if the Parties determine it to be necessary, the Sales Corporation will prepare a forecast by calendar quarter of anticipated orders 30 -28- to be placed with TEC for the following calendar year. The forecast will be based on firm orders the Sales Corporation has received from its customers as well as its reasonable estimate of future business. The forecast will be expressed in U.S. Dollars and will indicate anticipated shipping dates by calendar quarter. Subtracted from the forecast will be an estimate of commissions, if, any, expressed in U.S. Dollars, due the Sales Corporation from TEC for orders booked. Additionally, other transactions, as the Parties from time to time may agree, will be similarly forecasted. Based upon the foregoing, TEC will provide to SUNDSTRAND's Treasurer for concurrence, its strategy for minimizing its French Franc/U.S. Dollars exchange risk. The Parties contemplate that this strategy will involve TEC's entering into hedging arrangements having a maximum duration of twelve months, or longer by mutual agreement of the Parties, such agreement not to be unreasonably withheld. As such arrangements expire or mature, they will be rolled over or renewed as necessary, if the French Franc/U.S. Dollar exchange risk remains outstanding. This strategy may be changed as the Parties, from time to time, agree. TEC will issue invoices to the Sales Corporation for reimbursement of premiums (or issue a credit memorandum in the case of discounts) on hedging arrangements, including rollovers and renewals as contemplated above, and will issue invoices to the Sales Corporation for reimbursement of costs actually incurred, if any, in hedging arrangements, provided such 31 -29- premiums, discounts or costs are incurred in accordance with the hedging strategy set forth in the preceding paragraph or as the strategy may be changed by the Parties from time to time as provided herein. The Sales Corporation will pay such invoices (or TEC will pay such credit memos) in U.S. Dollars within thirty (30) days of receipt. Invoices (or credit memos) will be issued at the time premiums, discounts, or other reimbursable costs are realized. Currency exchange gains and losses arising from any hedging arrangement, except as provided in this paragraph and the following paragraph, will be solely for the account of TEC. The Treasurers of TEC and SUNDSTRAND will review, on a quarterly basis, the Sales Corporation's projected revenue flows, outstanding hedging arrangements and, at such time as the Parties agree, TEC's strategy for minimizing its French Franc/U.S. Dollar exchange risk. Based upon the contemplated review, additional hedging arrangements may be entered into or outstanding hedging arrangements may be cancelled. Currency exchange gains or losses on hedging arrangements cancelled as a result of such periodic reviews will be for the account of the Sales Corporation. Invoices or credit memoranda, as the case may be, will be issued by TEC and paid by the Sales Corporation or TEC, as appropriate, in U.S. Dollars within thirty (30) days of receipt of the invoice by the Sales Corporation. Upon the reasonable request of TEC, and in support of the foregoing, the Sales Corporation will, as appropriate, issue supporting documentation and will provide additional 32 -30- information, such as: the total value of the purchase orders or contracts, including transfer price adjustments, if any; commission fees and costs of purchase; the country of destination; the customer; the terms of payment; the delivery schedule; and competition, if any, to satisfy the requirements of any French government agency or banking institution with which TEC may enter into a hedging arrangement to cover the foreign currency risk. The Sales Corporation shall take all reasonable steps to provide such documentation and information in a form acceptable to such government agency or banking institution. Notwithstanding any of the foregoing, TEC is under no obligation to enter into any hedging arrangement, nor is it prohibited from entering into any hedging arrangement, provided, however, that any premiums, discounts, or other costs associated with hedging arrangements which are not consistent with the strategy agreed upon by the Parties to minimize the French Franc/U.S. Dollar exchange risk of TEC as set forth above or any loss resulting from a failure to hedge will be for the account of TEC. 5-C(2) Significant Adverse Conditions, Customer or Government Requested or Required Changes Additional adjustments may be made with respect to the relative contributions of the Parties to an APU program in the event: 33 -31- 5-C(2)(a) significant economic factors beyond a Party's control, including without limitation significant increases in costs of procuring parts or raw materials, affect adversely the Party's participation in an APU program; or 5-C(2)(b) a customer or government entity requests or requires a change in an APU product, and such a request or requirement is accepted by the Parties. 5-C(3) Effective Date of Adjustments Any such adjustments will be effective at the date agreed upon by the Parties. 5-D. NON-PRODUCTION WORK/COST SHARING Each of the Parties will perform and bear an equal share of the development, certain marketing, product support and other support costs individually and independent of the Sales Corporation. The Parties will review the shares at least annually and establish methods to maintain an equal sharing ratio. 34 -32- 5-E. PRICING TO CUSTOMERS 5-E(1) APU Pricing The President of the Sales Corporation will recommend to the Executive Committee, for approval by the Board of Directors, the prices at which APUs will be sold. The APU pricing structure will include consideration of all factors typically included in proposals to customers. 5-E(2) Spare Parts Pricing 5-E(2)(a) The President of the Sales Corporation will recommend to the Executive Committee, for approval by the Board of Directors, the prices at which spare parts will be sold. 5-E(2)(b) After approval by the Board of Directors, the Sales Corporation will issue a Spare Parts Price List, which will be updated on an annual basis. ARTICLE VI - PRODUCT SERVICES AND SUPPORT 6-A. DEFINITION The Parties agree that after-sales support is a critical factor in establishing a successful business in marketing and selling APUS for use on Commercial Aircraft. Accordingly, the Parties agree to utilize the most appropriate resources residing within their respective companies, 35 -33- and to make such resources available to the Sales Corporation as required. The Parties intend to participate on an equal basis in after-sales support and will undertake to achieve and maintain this result as expeditiously as possible. 6-B. STAFFING To meet the demands of supporting APUs in a worldwide market, the Parties agree to work together to develop a product support capability. In this connection, the Parties will staff the service and support functions with such personnel and at such locations as required. 6-C. CUSTOMER INTERFACE While the Sales Corporation is the primary interface with the customer, utilizing such resources that already reside in the Parties' organizations, the Parties understand and agree that they will be providing additional support to the Sales Corporation in order to maintain customer satisfaction and to resolve field problems expeditiously. In this connection, overall responsibility for customer service will be assumed by SUNDSTRAND and TEC and organized by the Parties as appropriate. 36 -34- 6-D.. OVERHAUL AND REPAIR Each Party will be responsible for developing repair and overhaul procedures and capabilities in order to satisfactorily support Sales Corporation customers operating the Sales Corporation's products. 6-E.. WARRANTY POLICY A Sales Corporation product warranty policy and procedure will be developed for APUs, subassemblies and parts sold by the Sales Corporation to customers, consistent with the business and strategic objectives of the Sales Corporation and the Parties. Warranty administration will be carried out by the Parties, in cooperation with the Sales Corporation, in accordance with agreed policies and procedures. All warranty expenses will be borne equally by the Parties. All expenses of the Sales Corporation associated with promotional programs and/or customer concessions to maintain customer satisfaction will be incurred by the Sales Corporation or will be shared equally by the Parties. In the event that either Party is of the opinion that there is a potential of significant liability on the part of the Sales Corporation as a result of gross negligence by the other Party, such matter will be referred to the Board of Directors of the Sales Corporation for resolution. 37 -35- ARTICLE VII - BUSINESS TRANSACTIONS BETWEEN AND AMONG THE PARTIES AND THE SALES CORPORATION 7-A. REVENUE SHARING - DEFINITION AND INTENT The Parties intend that the APU programs associated with the Sales Corporation will commit the Parties to support the Sales Corporation, customers and each other over a period of many years due to the nature of the business and the long life that the business products normally achieve. In recognition of the inherently complex nature of the business transactions contemplated by this Agreement, the Parties agree to extend every effort to simplify the business transactions that will be a normal part of this Agreement, and to establish policies and procedures that will be adhered to by the Sales Corporation, SUNDSTRAND and TEC personnel, to insure that the concept of "simplicity" will endure. The Parties intend that this Agreement create a revenue sharing arrangement based on the premise that each Party will contribute fifty (50) percent of the input to the Sales Corporation, whether in funds, technical support or manufacturing operations, and the Parties will share equally in the revenues realized by the Sales Corporation from the sales of their products and services. 38 -36- 7-B. MINIMIZING COSTS The ability of each of the Parties to realize profit on its efforts will be determined solely by that Party's ability to provide its share of the products and services at a cost below its share of the revenues earned by the Sales Corporation. Without in any way modifying the foregoing, if and when the activities of one Party under this Agreement in providing its share of products or services may have a direct and significant impact upon the costs of the other Party's products or services or upon the costs of the Sales Corporation, the Parties agree to use their best efforts to cooperate with each other to explore what actions or procedures may be taken which could minimize any adverse impact upon such costs. 7-C. RESPONSIBILITIES OF THE PARTIES 7-C(1) APU products, subassemblies and parts will be assembled and tested at the facilities of either Party, depending on the conditions of sale established by the Sales Corporation. Each of the Parties will supply to or on behalf of the Sales Corporation APU products, subassemblies and parts for which it has product responsibility, and perform assembly, testing, and preparation for shipment services, all at prices established as provided in Paragraph 5-A(5) and subject to terms and conditions agreed upon from time to time with the Sales Corporation to enable the Sales Corporation to meet its customer commitments. The Party not performing assembly and testing will deliver to the assembling Party the necessary subassemblies and parts meeting the technical requirements and quality criteria required for assembly. In the event APUs, 39 -37- subassemblies or parts are shipped by one Party to the other Party for assembly or other purposes, such APUs, subassemblies or parts will be shipped, delivered and held in accordance with the terms and conditions of Schedule 1 attached hereto. All costs incurred for freight and custom duties for APUs, subassemblies and parts transferred between the Parties will be budgeted and borne by the Sales Corporation. Except as required by contracts or support agreements with customers, no APUs, APU spare parts or APU subassemblies will be held in inventory by the Sales Corporation. 7-C(2) Each of the Parties will invoice the Sales Corporation for products, subassemblies, parts or services it provides to or on behalf of the Sales Corporation in accordance with prior agreements between the Parties regarding the contribution of each Party to that product, subassembly, part or service. The transfer of title for all manufactured products, subassemblies or parts so shipped to or on behalf of the Sales Corporation will take place at the time of shipment to the Sales Corporation or its customer as set forth in Schedule 1. 7-C(3) If and when the Parties agree to undertake jointly supported design or development programs aimed at eventual production of new products, the Parties will establish the work scope and content to be assigned to each and agree on the value of each Party's contribution, so that the objective of maintaining equal input by each Party can be objectively evaluated. 40 -38- 7-C(4) If and when joint development programs are initiated, the Parties will agree, beforehand, on the responsibility of each Party to carry out investigative, assurance and/or certification/qualification testing at each Party's facility or a facility of its choice. Such testing will be conducted in accordance with the overall engineering development program established and agreed upon by the Parties at the time the program is initiated. 7-C(5) If and when products sold to the Sales Corporation are required to undergo testing for purposes of certification, the Parties will develop, under the direction of the Sales Corporation, a plan to support such activity and assign responsibility for carrying out that support to appropriate personnel of either Party or both Parties. 7-C(6) Each Party will be responsible for supplying hardware for any and all test programs in a condition that will satisfy the design intent and/or the customer specifications consistent with the assigned responsibilities established by the Parties at the outset of the program. 7-C(7) In connection with production of an APU, each Party will be responsible for all production requirements, including, without limitation, all capital requirements, quality control and inventory, and for meeting the technical and schedule requirements for that portion of the APU, including spare parts therefor, for which it has design and development 41 -39- responsibility, except as production responsibility may otherwise be agreed upon between the Parties. 7-C(8) The Parties recognize that, as the Sales Corporation develops, new questions, issues and problems will arise that have not been fully or even partially addressed in this Agreement. It will be the responsibility of the officers, the Executive Committee and the Board of Directors of the Sales Corporation to ensure that such issues are brought to the attention of the Parties, and to take whatever action is required to achieve resolution of problems or to modify this Agreement to encompass additional considerations. 7-D. RESPONSIBILITIES OF THE SALES CORPORATION 7-D(1) The Sales Corporation will pay each Party the amount invoiced by that Party within thirty (30) days after receiving payment from the customer for the product, subassembly, part or service covered by the Party's invoice. The Sales Corporation will not be liable to the Parties for the payment of such invoices in the event and to the extent the customer does not pay the invoices of the Sales Corporation. The Sales Corporation will undertake all reasonable action to collect outstanding invoices. 7-D(2) The Sales Corporation and the Parties jointly will be responsible for ensuring that all model specifications, design data, performance data, drawings, process specifications, service bulletins, user manuals and all other documentation relating to a given 42 -40- product are properly maintained and updated in order to meet the Parties' standards for such information, and to be able to provide the customer with accurate information and data to which it is entitled by contract. 7-D(3) The Sales Corporation and the Parties jointly will have prime responsibility for directing the preparation of the data and reports necessary for certification, with tasks assigned to the Parties, so that intelligent utilization is made of each Party's capabilities and facilities. In particular, each Party will conduct any APU, subassembly or part testing and will supply corresponding test data, test reports, and other supporting technical information required for certification as agreed upon by the Parties. 7-D(4) The Sales Corporation and the Parties jointly will establish overall production program requirements and will make integrated production releases to each of the Parties to meet APU and spare parts and warranty requirements and schedules. The Sales Corporation and the Parties will establish overall production planning and configuration control (including changes which impact form, fit, function or certification) to ensure that the activities of each Party and the parts each produces meet customer requirements. However, detailed production planning and configuration control will be performed by each Party for the parts it provides consistent with its overall production planning and configuration control. 43 -41- 7-D(5) Accounting and Reports 7-D(5)(a) The fiscal year of the Sales Corporation will be the calendar year. 7-D(5)(b) True and accurate books of account of the Sales Corporation will be kept and maintained at all times at its principal office unless an alternative location is approved in writing by the Parties. Such books of account will be prepared and maintained in accordance with U.S. Generally Accepted Accounting Principals (GAAP). 7-D(5)(c) Within 90 days after the close of each fiscal year, the Sales Corporation will deliver to each of the Parties financial statements (balance sheet, profit and loss account and changes in financial position) of the Sales Corporation as of the end of such fiscal year, using such format as the Parties reasonably request. Such statements will be prepared in accordance with GAAP. 7-D(5)(d) If requested by one of the Parties, the books of account of the Sales Corporation will be audited, at least annually, by an independent auditing firm selected by the Board of Directors of the Sales Corporation and the report thereof will be distributed to the Parties within five (5) days of receipt by the Sales Corporation. 44 -42- 7-D(5)(e) The Sales Corporation will afford to each of the Parties and their respective counsel, accountants and other representatives, reasonable access to all properties, books, records and other documents of the Sales Corporation and will furnish to each of the Parties such information concerning the Sales Corporation and copies of such documents as each of the Parties may reasonably request. Any such request for access, information or copies will be made only to the Chairman of the Sales Corporation. Each Party will be entitled, at its own expense, to have a firm of independent certified public accountants designated by it review the annual audit of the Sales Corporation. 7-E. SPARE PARTS Subject to Section 5-B. above, each Party will produce those spare parts that are of the same drawing number as the parts the Party manufactured and supplied for the complete APU products sold by the Sales Corporation. 7-F. EXTERNAL PARTICIPATION Either Party may arrange for participation of others in the performance of its portion of any APU program, taking full responsibility for such participation, or both Parties may arrange for participation of others in business activities of the Sales Corporation, for example, in a country where local participation may be required. In the event local participation is required in a country, the Parties will determine the manner in which such requirements will be satisfied, and will share equally the burden and/or cost associated with such requirements. 45 -43- 7-G. COMPENSATED SERVICES 7-G(1) The Sales Corporation may purchase services as may be required to fulfill its functions from TEC and SUNDSTRAND at prices and on terms negotiated between the Sales Corporation and the supplying Party. 7-G(2) The Sales Corporation may sell to SUNDSTRAND and TEC certain services (such as, but not limited to, market research) at fees negotiated with SUNDSTRAND and TEC. Payment for such services will be credited or made by SUNDSTRAND and TEC within thirty (30) days after receipt of the Sales Corporation's invoices. 7-G(3) In the event either Party performs a service for the other (such as, but not limited to, repair of defective parts or incorporation of design changes into parts), prices, compensating effort or other terms applicable thereto will be mutually agreed upon between the Parties. ARTICLE VIII - WITHDRAWAL OF A PARTY FROM APU PROGRAMS 8-A. Neither Party will withdraw from any APU program for Commercial Aircraft which is subject to this Agreement, so long as the Sales Corporation has a commitment outstanding to a customer to supply or support APUs under such program, including any proposal by the Sales 46 -44- Corporation with respect to the supplying of APUs covered by such program, unless a mutually acceptable arrangement can be established between the Parties. 8-B. Neither Party will withdraw from any APU program subject to this Agreement for the purpose of developing a competitive APU. Entering into a sales commitment for a Commercial Aircraft for a competitive APU within five (5) years from the effective date of withdrawal will be presumptive evidence of a purpose to develop a competitive APU on the date of withdrawal. A "competitive APU" is defined as an APU which is directly competitive with an APU program for Commercial Aircraft of the Sales Corporation which was covered by this Agreement prior to a Party's withdrawal. 8-C. As provided in Paragraph 8-A. above, neither Party can withdraw unless a mutual agreement has been reached, which, in the event the non- withdrawing Party wishes to continue the APU program, includes, but is not limited to, the following: 8-C(1) The withdrawing Party being obligated to continue its portion of the APU program for a reasonable time to permit transition of the entire APU program to the continuing Party. The reasonable cost of such continuation by the withdrawing Party will be reimbursed by the continuing Party. 47 -45- 8-C(2) Rights of the continuing Party under Article XII (Technical Information and Data) and XV (Inventions), will continue to the extent reasonably necessary to permit its continuation of the APU program (including the right to work with and sublicense others). Such rights are limited, however, to use on said continuing program and subject to any governmental restrictions, on a non-exclusive, worldwide basis (to the extent the withdrawing Party has the right to do so) for the duration of the program by the continuing Party, without payment of a royalty. 8-C(3) The continuing Party may request and the withdrawing Party will have agreed to provide such technical assistance as is reasonably requested by such continuing Party to permit continuation of the program by the continuing Party, and the orderly transition to the continuing Party of development and manufacturing activities as may be reasonably desired by the continuing Party, all for fair and reasonable compensation (which will not include any recovery of development expense) to the withdrawing Party. 8-C(4) Should the continuing Party desire to transfer development or manufacturing resources of the withdrawing Party to its facilities and the withdrawing Party in its sole discretion agrees to such transfer, then the withdrawing Party will be obligated to make such transfer only if the Parties have reached agreement upon the compensation to be paid to the withdrawing Party therefor. Fair and reasonable compensation for same (not to include recovery of any development expense previously incurred) will be negotiated. 48 -46- 8-C(5) The provisions of Paragraphs B-C(2), 8-C(3) and 8-C(4) above are all subject to any applicable government restrictions. 8-D. If either Party as provided in this Article VIII withdraws from an APU program and no other program is active, this Agreement without further action by either Party will be deemed terminated and the Parties agree to use their best efforts to reach an equitable settlement of all matters outstanding under this Agreement, with each Party bearing its own costs and expenses. In the event a Party withdraws from this Agreement, it agrees to sell its shares of stock of the Sales Corporation to the other Party as provided in Paragraph 2-E(2)(b) of this Agreement. If such other Party does not desire to acquire such shares, the withdrawing Party will hold such shares pending dissolution of the Sales Corporation. ARTICLE IX - LIABILITIES TO PARTIES 9-A. Any and all liabilities, damages, penalties and expenses (including, but not limited to, legal fees and expenses) arising out of any claim(s) (as defined below) by any person or party other than SUNDSTRAND or TEC, including, but not limited to, airline operators, airframe manufacturers and members of the public, against the Sales Corporation, will be the responsibility of the Sales Corporation. 9-B. As used in this Article IX, the word "claim(s)" means claim(s) and demand(s), whether in contract, tort (including negligence), or otherwise: 49 -47- 9-B(1) Arising out of, connected with or resulting from the operation, maintenance, overhaul, repair or use by persons or parties other than SUNDSTRAND, TEC or the Sales Corporation of any APU, subassembly, part or service supplied by the Sales Corporation under this Agreement, whether or not such APU, subassembly, part or service giving rise to the claim, if such be the case, was supplied under this Agreement; or 9-B(2) Arising out of, connected with or resulting from any contract entered into by the Sales Corporation with respect to APUs, subassemblies or parts produced under this Agreement, but not including warranty claims addressed in Paragraph 6-E above. 9-C. Each Party and the Sales Corporation will notify promptly each other of any such claim(s) and will cooperate in the disposition thereof. 9-D. SUNDSTRAND, TEC and the Sales Corporation will establish an insurance program to protect each Party and the Sales Corporation in the most economic and feasible manner. The Sales Corporation will obtain and maintain liability insurance as follows: 1. Directors and Officers Liability 2. Aircraft Products Liability Including Grounding Liability 3. Comprehensive General Liability (Including Broad Form & Contractual Liability Endorsements) 50 -48- 4. Vehicle Liability Including Non-Owned and Hired Vehicles 5. Workers' Compensation/Employers' Liability (If the Sales Corporation has Employees) 6. Any additional coverages as the Board of Directors may determine to be necessary Such insurance will provide that, in addition to the Sales Corporation, SUNDSTRAND and TEC are insured parties, thereby protecting them for all products manufactured for the Sales Corporation and for all services performed for the Sales Corporation. 9-E. SUNDSTRAND and TEC will each be fully and independently responsible for all commitments to third parties (other than the Sales Corporation and its customers) entered into incident to the performance of its respective portion of APU programs including, but not limited to, contracts with vendors. ARTICLE X - DISPUTES 10-A. The Parties and the Sales Corporation will endeavor in good faith to mutually resolve any disputes between them involving the interpretation, application or performance of this Agreement. Any such dispute which cannot be resolved by the personnel immediately involved will be referred to the heads of the commercial, financial or technical services, as the case may be, of the Parties for resolution, or if no resolution, for clear definition of the issue. The issue so defined will be referred in writing to the managements of SUNDSTRAND and TEC and the 51 -49- Sales Corporation (if applicable) for final resolution. Any dispute which cannot be so finally resolved within ninety (90) days of such referral will be referred to arbitration and finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the Rules, who will render a decision based on the law of the State of New York, U.S.A. The place of arbitration will be Paris, France. All arbitrators will be fully conversant with the French and English languages and the opinion will be rendered in English; provided, however, that all documents, briefs, and oral arguments may be presented in the language in which they were prepared. 10-B. The decision of the Arbitrators may be presented by either Party for enforcement in any court of competent jurisdiction in the United States or France. ARTICLE XI - LIABILITIES BETWEEN THE PARTIES 11-A. Neither Party will assert against the other any claim arising out of, connected with, or resulting from this Agreement other than a claim based on an unexcused violation of an express provision of this Agreement. 11-B. Violations of the express provisions of this Agreement will be excused when due to acts of God, natural disasters, fire, floods, explosions or earthquakes, epidemics or quarantine restrictions, or any act of any Government (excluding government actions or omissions with 52 -50- respect to program funding or taxes, fees and charges), war, insurrection or riots, strikes or labor troubles, or any other cause beyond the Party's reasonable control. 11-C. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER FOR THE LATTER'S INCIDENTAL OR CONSEQUENTIAL DAMAGES. 11-D. Any expense accepted and incurred by either SUNDSTRAND or TEC at the direction of the Sales Corporation due to the failure or imminent failure of the other to carry out its responsibilities (whether or not excused) incident to enabling the Sales Corporation to meet a third party customer commitment, after reasonable notice, will be reimbursed by the other. If any such failure or imminent failure cannot be fairly and clearly assigned to a single Party, the resulting expense will be borne equally by SUNDSTRAND and TEC. 11-E. Nothing herein will be construed as a limitation on the obligation of either Party to bear its share of third party liabilities under Article IX hereof. 11-F. Each Party and the Sales Corporation will obtain an appropriate waiver of subrogation from its insurance company or companies so that if there is an insured loss, the insurance company or companies may not seek to recover from the other Party or the Sales Corporation. 53 -51- ARTICLE XII - TECHNICAL INFORMATION AND DATA 12-A. All technical information and data which have been or will be disclosed to or exchanged among the Parties and the Sales Corporation in connection with this Agreement are and will remain the property of the disclosing Party and are furnished solely for use in the performance of this Agreement. All such information and data (including any and all copies and reproductions thereof, in whole or in part) will be promptly returned to the disclosing Party or destroyed, at the disclosing Party's option, upon termination or expiration of this Agreement or withdrawal of the receiving Party ("recipient") under the provisions of Article VIII. The recipient will not at any time reproduce, copy or use such information or data for any other purpose. The recipient will not, except in cases where the disclosing Party first gives its written consent and obtains any necessary governmental approval, disclose such information and data to other parties, except that subject to Article XVI herein, disclosures may be made to customers and users as are normal for proposal and support efforts and disclosure may be made to the U.S. or French government as may be required to obtain government type certifications and airworthiness approvals, or in connection with any proposal to or contract with such government involving the development, production or sale of any APU; provided, however, that such information and data will be marked with any allowable restrictive legend under any applicable governmental procurement, type certification, or airworthiness regulation. Furthermore, disclosure may be made to third party vendors, subject to any necessary U.S. or French government approvals; provided, however, that in all such cases the disclosing party will require acceptance of this provision by each such vendor. The foregoing will not be deemed to affect rights, if any, which 54 -52- the U.S. or French government may have in such data and information. Neither Party to this Agreement nor the Sales Corporation will be liable to the other Party or the Sales Corporation for disclosure of any such information and data if the same: 12-A(1) was in the public domain at the time it was disclosed; 12-A(2) was known to the recipient at the time of receipt; 12-A(3) is disclosed despite the exercise of the same degree of care which the recipient takes to preserve and safeguard its own proprietary data and information; 12-A(4) is independently developed by the recipient; or 12-A(5) becomes known to the recipient, other than under this Agreement and without breach of the obligations of this article by the recipient. 12-B. As among the Parties and the Sales Corporation, the foregoing will supersede the provisions of any restrictive legend carried by such information and data and will exclusively define the recipient's obligation with respect to such information and data. 55 -53- 12-C. Unless otherwise specifically agreed in writing by the Parties, all technical information and data which are the product of any joint engineering effort of the Parties will become the property of the Party responsible for the development but will be made available to the other Party and the Sales Corporation without additional cost. 12-D. To the extent that the Parties transmit or exchange any financial information and data, including, but not limited to, cost or other information relating to production balancing, such information and data will be handled by the receiving Party in accordance with Paragraph 12- A. above. 12-E. Except as above provided, all other data and information exchanged by SUNDSTRAND and TEC under this Agreement will be received without restriction other than a claim for patent infringement or as may be required by applicable government export control laws and regulations. 12-F. Any taxes or other charges imposed by the French government with respect to information or data supplied by TEC to SUNDSTRAND, or the use thereof, will be borne or reimbursed by TEC, and any taxes imposed by the U.S. government with respect to information or data supplied by SUNDSTRAND to TEC, or the use thereof, will be borne or reimbursed by SUNDSTRAND. 56 -54- ARTICLE XIII - DATA WARRANTY 13-A. With respect to data furnished during the life of and pursuant to this Agreement, the disclosing Party warrants that such data will be that which is used or would be used by the disclosing Party for the purpose for which such data was created. If a part of the data delivered hereunder does not meet the warranty specified above, the disclosing Party will, upon discovery of such discrepancy, or upon notification thereof by the receiving Party, correct the discrepancy in that part of the data by supplying amended or additional data. The foregoing data warranty is in lieu of all other data warranties, expressed, implied or statutory. 13-B. Neither Party will be obligated to supply: 13-B(1) any detailed engineering data related to APU subassemblies and parts for which it has design and development responsibility, except for such existing data as may be reasonably required by the other Party to fulfill its responsibilities under this Agreement; 13-B(2) any manufacturing data related to APU subassemblies and parts for which it has production responsibility, except for such existing data as may reasonably be required by the other Party to fulfill its responsibilities for APU assembly and testing necessary for maintaining the desired 50/50 balance of work share contemplated by this Agreement; 57 -55- 13-B(3) any data which either Party is not free to disclose under applicable governmental regulations, patent licenses or other non- disclosure restrictions imposed by third parties; and 13-B(4) any data in any form other than that which is available and would normally be released by the disclosing Party to its own facilities, contractors or suppliers. ARTICLE XIV - PATENT INDEMNITY 14-A. Except as otherwise expressly provided in this Agreement, SUNDSTRAND and TEC agree that any expenses (including, but not limited to, legal fees and expenses), costs, damages or liability arising out of any claim, suit or proceeding brought against the Sales Corporation or its customers, so far as based on any claim that any APU, subassembly or part or the manufacture, sale or normal use of such APU, subassembly or part by the Sales Corporation, or the use of such APU, subassembly or part by a customer, infringes any patent granted in any country, will be shared equally by the Parties, but if circumstances clearly indicate that either SUNDSTRAND or TEC is independently responsible for design of an APU, subassembly or part giving rise to a successful infringement claim, then it will be liable to the Sales Corporation and the other Party for all expenses, costs, damages and liability arising from such infringement. 14-B. SUNDSTRAND and TEC further agree that the primary responsibility with respect to the handling of any such claim, suit or proceeding will be as mutually agreed by the Parties. 58 -56- SUNDSTRAND and TEC will cooperate fully in such defense and will make all reasonable efforts to supply all information and records necessary for the defense of any such claim, suit or proceeding. All reasonable out of pocket expenses associated with handling any such claim, suit or proceeding will be included in determining the equal shares to be borne by the Parties as set forth in 14-A. above. 14-C. With respect to APU subassemblies or parts not designed by SUNDSTRAND or TEC, each Party will endeavor to obtain patent indemnities from its suppliers which will apply to SUNDSTRAND, TEC, the Sales Corporation and its customers and users. ARTICLE XV - INVENTIONS 15-A. Any inventions made solely by employees of SUNDSTRAND and any resulting patents will be and remain the property of SUNDSTRAND, and any inventions made solely by employees of TEC and any resulting patents will be and remain the property of TEC. 15-B. Any invention that is made jointly by SUNDSTRAND employees and TEC employees and any resulting patent will be and become the property of the Party responsible for the development to which it relates and will be made available to both SUNDSTRAND and TEC and the Sales Corporation without additional cost. Each Party will have the right to practice or have practiced for it any such invention, without prior consultation with, or payment of any fee or charge to, the other Party, but only for use in connection with this Agreement. Each Party will 59 -57- be responsible for assuring that its respective employees have signed appropriate patent agreements capable of securing the invention rights to the respective Parties as set forth above. Unless otherwise agreed to in writing by the Parties, the cost of obtaining and maintaining any such patent and any license income therefrom will be that of the owning Party. Each Party will have the right to decline to participate in the cost of obtaining or maintaining any patent on such joint inventions and, in such event, the other Party may do so and any license income from such patent will be the property of the Party paying the cost of obtaining and maintaining such patent. 15-C. SUNDSTRAND and TEC agree not to assert any claim of patent infringement against each other, each other's vendors or subcontractors, or the Sales Corporation, in connection with the performance of any APU program under this Agreement. 15-D. Any compensation which may be due an employee in connection with any invention or patent, whether by agreement, statute, regulation or otherwise, will be paid solely by the employing Party. ARTICLE XVI - GOVERNMENT REGULATIONS 16-A. GOVERNMENT RESTRICTIONS 16-A(1) The Parties believe that the APUs to be sold by the Sales Corporation and the associated APU technology fall within the scope or regulations applicable to transfer of technology imposed by the U.S. and/or French government, but that arrangements can be made 60 -58- for appropriate transfer of technology as contemplated in the Technology Exchange Agreement attached hereto as Exhibit 1. 16-A(2) In the event that the U.S. and/or French government establishes bona fide restrictions on the transfer of technology contemplated under this Agreement, the Parties will endeavor to resolve any problems resulting from such restrictions in an expeditious and mutually beneficial manner, such resolution to be developed between the Parties and the respective governments without involving any "third party" arbitration. 16-A(3) Should any government restrictions be imposed on the transfer of technology by either or both Parties, each Party agrees to notify the other Party when and if such restrictions are imposed, modified, supplanted or terminated, and any appropriate adjustments will be made in the management of the programs by the Parties. 16-B. This Agreement is subject to all the laws and regulations, and administrative acts, now or hereafter in effect, of the U.S. and French government, including, without limitation, those relating to the exportation and re-exportation of technical information and data or products, including those relating to environmental requirements, such as the U.S. Environmental Protection Act (EPA), and those relating to safety requirements, such as the U.S. Occupational Safety and Health Act (OSHA). The Parties agree that each will use its best efforts to secure any licenses and permits as may now or hereafter be required by its government in connection with the 61 -59- performance of its obligations under this Agreement, but this Agreement will not be deemed to require any performance on the part of either Party which cannot lawfully be done pursuant to the laws, regulations and acts referred to above. 16-C. Notwithstanding the foregoing provisions of this Article XVI, if in compliance with said provisions either Party will be unable to perform a material obligation set forth in this Agreement, the Parties agree they will promptly enter into negotiations with each other to seek a suitable solution, which solution will be equitable to both Parties. ARTICLE XVII - EXPORT/IMPORT AUTHORIZATIONS 17-A. The exporter in the case of exports and the importer in the case of imports will be responsible for obtaining any necessary export licenses, import licenses, or other governmental authorizations required in connection with any export or import, as the case may be, under this Agreement. TEC and SUNDSTRAND will cooperate with each other in securing any such authorizations. Any governmental administrative fees or charges in connection with such authorizations will be the responsibility of the Party seeking the authorizations. 17-B. In all other cases, each Party will be responsible for obtaining and bearing the cost of any necessary governmental authorizations required in connection with its performance under this Agreement. 62 -60- ARTICLE XVIII - APPLICABLE LAW This Agreement will be construed, interpreted and applied in accordance with the law of the State of New York, U.S.A. However, Delaware law will apply to the extent required under such law to create and maintain the identity and existence of the Sales Corporation, and local law will apply to the extent required under such law to create and maintain the identity and existence of any sales corporation in another country. ARTICLE XIX - SEVERABILITY If any material provision of this Agreement, as it may be amended, is determined to be invalid or unenforceable by a court or tribunal of competent jurisdiction, then such provision will be deemed to be severed from this Agreement and every other provision of this Agreement will remain in full force and effect. However, the Parties will in good faith use their best efforts to mutually agree on a new agreement which, as nearly as possible, will equitably reflect the basic intent and objectives of this Agreement. ARTICLE XX - EFFECTIVE DATE This Agreement will become effective upon the execution by TEC and SUNDSTRAND. ARTICLE XXI - OBLIGATIONS SURVIVING EXPIRATION OR TERMINATION 21-A. Unless otherwise agreed in writing by the Parties at the time, expiration or termination of this Agreement for any cause will not release either Party hereto from any liability which at 63 -61- the time of expiration or termination has already accrued to the other Party hereto or which thereafter may accrue in respect of any act or omission prior to such expiration or termination, nor will any such expiration or termination hereof affect in any way the survival of any right, duty or obligation of either Party hereto which is expressly stated elsewhere in this Agreement to survive expiration or termination hereof. 21-B. In any event, the rights and obligations of the Parties under the following Articles of this Agreement will survive any expiration or termination of this Agreement: Article V Pricing Article VIII Withdrawal of a Party from APU Programs Article IX Liabilities to Third Parties Article XI Liabilities Between the Parties Article XII Technical Information and Data Article XIV Patent Indemnity Article XV Inventions Article XVI Government Regulations Article XVIII Applicable Law ARTICLE XXII - DURATION, TERMINATION AND DISSOLUTION 22-A. Unless sooner terminated as provided herein, this Agreement will remain in full force and effect until December 31, 2005, and will be renewed automatically for additional terms of five 64 -62- years each, unless either Party gives written notice to the other Party at least eighteen (18) months before expiration of the initial term or any renewal thereof of its intention not to renew, in which event this Agreement will end on expiration of the then current term. 22-B. If either Party ("Acquired Party") becomes subject, directly or indirectly, to ownership or control of more than twenty-five (25) percent of its voting securities by any person engaged in a business directly competitive with an APU program of the Sales Corporation, the other Party may within sixty (60) days thereafter elect to (1) remain a Party to this Agreement which Agreement will continue in full force and effect and be binding on the Parties' successors and assigns, or (2) terminate this Agreement upon written notice to the Acquired Party or its successor. 22-C. In the event that a Party hereto elects not to renew this Agreement pursuant to Paragraph 22-A hereof or elects to terminate this Agreement pursuant to Paragraph 22-B hereof, such Party will have the right to elect to dissolve and liquidate the Sales Corporation, which election may be exercised by written notice to the other Party within thirty (30) days following termination. Upon receipt of such written notice of election, the other Party may either (i) cooperate fully in effecting the dissolution and liquidation of the Sales Corporation under applicable law, or (ii) elect to purchase the shares of stock of the Sales Corporation owned by the terminating Party, at the appraisal value thereof as determined by a valuation expert selected in accordance with the procedures outlined in Paragraph 2-E(2)(e) hereof. 65 -63- 22-D. In the event of termination of this Agreement, the Parties will mutually agree on the basis, within the general framework of the terminated Agreement, on which (1) after-sales support will continue to be made available with respect to aircraft then in service fitted with APUs sold by the Sales Corporation, and (2) all unfulfilled commitments to third parties for the sales of APUs and spare parts will be fulfilled. ARTICLE XXIII - WAIVER The failure of either Party to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other Party of any of the provisions hereof will in no way affect the validity of this Agreement or any part thereof, or the right thereafter to enforce each and every such provision. The waiver of an express condition or requirement of this Agreement will not constitute a waiver of any future obligation to comply with such provision, condition or requirement. ARTICLE XXIV - ASSIGNMENT 24-A. Neither this Agreement nor any interest herein may be assigned by either Party in whole or in part without the prior written consent of the other except that each Party may assign all or any portion of its performance hereunder to a subsidiary more than fifty (50) percent owned by it; provided: 66 -64- 1. the subsidiary is in a position to carry out such performance, and 2. the assigning Party guarantees such performance by such subsidiary and remains bound by the prohibitions and restrictions in this Agreement. 24-B. Each Party will be responsible for having its subsidiaries and employees thereof conform to the provisions of this Agreement to the extent they may be involved in its performance. ARTICLE XXV - FINANCIAL RESPONSIBILITY If either Party ceases or is unable to conduct its operations in the normal course of business (including inability to meet its obligations as they mature) or if any proceeding under the bankruptcy or insolvency laws is brought by or against either Party, or a receiver for either Party is appointed or applied for or an assignment for the benefit of creditors is made by either Party, the other Party may terminate this Agreement. ARTICLE XXVI - NOTICES All notices and other communications hereunder will be made in writing and may be personally served or sent by electronic transmission or certified or registered mail. 26-A. All such notices and other communications to a Party will be addressed as follows (or at such other addresses) as a Party may specify in a written notice): 67 -65- 1. TURBOMECA ENGINE CORPORATION 2709 Forum Drive Grand Prairie, Texas 75051 Attention: Secretary with copies as follows: Labinal S.A. 5, avenue Newton Montigny-le-Bretonneux (Yvelines) France Attention: Chairman Labinal, Inc. 1000 Tower Lane Suite 210 Bensenville, IL 60106 Attention: Vice President, Finance and General Counsel Coudert Brothers 1114 Avenue of the Americas New York, New York 10036 Attention: Clyde E. Rankin, III 2. SUNDSTRAND CORPORATION 4949 Harrison Avenue Rockford, Illinois 61125 Attention: Vice President and General Counsel 68 -66- with a copy as follows: Sundstrand Corporation 4949 Harrison Avenue Rockford, IL. 61125-7003 Attention: Executive Vice President and Chief Financial Officer 26-B. All such notices and other communications to the Sales Corporation will be addressed as follows or as otherwise designated by it in writing to the Parties: Auxiliary Power International Corporation 4450 Ruffin Road San Diego, California 92193 Attention: President 26-C. The effective date for any such notice or communication will be deemed to be the date on which it is received by the addressee, unless later effectivity is specified therein. ARTICLE XXVII - RELEASE OF INFORMATION To the extent practicable neither Party will make any external public release (including, but not limited to, photographs, films, and announcements) with respect to this Agreement or any APU program under this Agreement without first giving notice of any such release to, and coordinating the release with the other Party and the Sales Corporation. If an uncoordinated release takes place, the releasing Party will make every effort to have these disclosures consistent 69 -67- with previously agreed upon policy and will immediately inform the other Party and the Sales Corporation of the disclosure. ARTICLE XXVIII - ENTIRE AGREEMENT - MODIFICATION 28-A. This Agreement is the entire and only agreement between the Parties with respect to the subject matter hereof, and upon becoming effective will supersede any prior verbal or written agreement between the Parties with respect to the subject matter hereof. 28-B. No modification, waiver or amendment of this Agreement or any of the provisions herein contained will be binding upon the Party against whom enforcement of such modification, waiver or amendment is sought, unless it is made in writing and signed by an executive officer of such Party. Either Party may, by appropriate written notice, designate other individuals to whom the foregoing authority has been delegated. ARTICLE XXIX - DESIGNATED AFFILIATE OR SUBSIDIARY The term "designated affiliate or subsidiary of SUNDSTRAND" as used herein will mean (1) SUNDSTRAND SERVICE CORPORATION, a Delaware corporation having a place of business at 4747 Harrison Avenue, Rockford, Illinois 61125. The term "designated affiliate or subsidiary of TEC" as used herein will mean (1) LABINAL S.A., a French societe anonyme having a place of business at 5, avenue Newton, Montigny-le-Bretonneux (Yvelines), France, (2) TURBOMECA S.A., a French societe anonyme having a place of business at 64320 Bizanos, Bordes, France, (3) MICROTURBO S.A., a French societe anonyme having a place of business 70 -68- at B.P. 2089, 31019 Toulouse Cedex, France, and (4) LABINAL, INC. a Delaware corporation having a place of business at 1000 Tower Lane, Suite 210, Bensenville, IL 60106. TURBOMECA ENGINE CORPORATION By: /s/ David C. Sneider ----------------------- Name: David C. Sneider Title: Secretary and Treasurer SUNDSTRAND CORPORATION By: /s/ Richard M. Schilling -------------------------- Name: Richard M. Schilling Title: Vice President and General Counsel and Secretary ACKNOWLEDGED AND ACCEPTED: AUXILIARY POWER INTERNATIONAL CORPORATION By: /s/ Horst B. Kreiner ------------------------ Name: Horst B. Kreiner Title: President & Chief Executive Officer 71 LIST OF ATTACHMENTS Schedule 1 - Terms and Conditions for Shipments of APU Parts and Subassemblies Exhibit 1 - Technology Exchange Agreement Exhibit 2 - Certificate of Incorporation Exhibit 3 - By-Laws Exhibit 4 - Lease EX-11 8 COMPUTATION OF EARNINGS 1 EXHIBIT (11) COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE (UNAUDITED)
QUARTER ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, --------------------- --------------------- (AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA) 1994 1993 1994 1993 - ----------------------------------------------------------------------------------------------------------------- EARNINGS Earnings from continuing operations before extraordinary item $ 35.0 $ 30.7 $ 95.6 $ 90.7 Loss from discontinued SDC business, prior to discontinuance, net of taxes - - - (.7) Gain on sale of SDC, net of taxes - 53.6 - 55.7 -------- --------- ------- --------- Earnings before extraordinary item 35.0 84.3 95.6 145.7 Extraordinary loss on early retirement of debt, net of taxes - (5.0) - (5.0) -------- --------- ------- --------- Net earnings $ 35.0 $ 79.3 $ 95.6 $ 140.7 ======== ========= ======= ========= SHARES Weighted-average number of common shares outstanding 32.7 35.4 32.7 35.4 Additional shares assuming conversion of stock options .1 .1 .1 .1 -------- --------- ------- --------- Fully diluted shares 32.8 35.5 32.8 35.5 ======== ========= ======= ========= FULLY DILUTED EARNINGS PER SHARE Earnings from continuing operations $ 1.07 $ .87 $ 2.91 $ 2.55 Loss from discontinued SDC business, prior to discontinuance, net of taxes - - - (.02) Gain on sale of SDC, net of taxes - 1.51 - 1.57 -------- --------- ------- --------- Earnings before extraordinary item 1.07 2.38 2.91 4.10 Extraordinary loss on early retirement of debt, net of taxes - (.14) - (.14) -------- --------- ------- --------- Net earnings $ 1.07 $ 2.24 $ 2.91 $ 3.96 ======== ========= ======= =========
EX-13 9 ANNUAL REPORT 1 EXHIBIT 13 SUNDSTRAND CORPORATION 1994 ANNUAL REPORT Sundstrand Aerospace Milton Roy Company The Falk Corporation Sullair Corporation [Front cover] 2 MISSION STATEMENT To satisfy the needs of selected worldwide aerospace and industrial markets by developing and manufacturing high quality, proprietary, technology-based components and subsystems and by achieving customer satisfaction. To serve market segments where we can either be a market leader or have a strategy to become one while achieving returns that reward shareholders and employees and permit the business to grow and prosper. CONTENTS Financial Highlights 1 Letter to Shareholders 3 Sundstrand at a Glance 6 Growth in International Markets 8 Aerospace Market Review 10 Industrial Market Review 18 Financial Contents 26 Management's Discussion and Analysis 27 Financial Statements 34 Board of Directors 52 Officers 53 Sundstrand Corporate Information 54 [Inside front cover] 3
FINANCIAL HIGHLIGHTS (Dollar amounts in millions except per share data) 1994 1993 Change - --------------------------------------------------------------------------------------------------- Net sales . . . . . . . . . . . . . . . . $ 1,372.7 $ 1,383.1 (1%) Orders received . . . . . . . . . . . . . $ 1,437.1 $ 1,151.5 25% Unfilled orders . . . . . . . . . . . . . $ 746.8 $ 682.4 9% Net earnings . . . . . . . . . . . . . . $ 95.6 $ 140.7 (32%) Net earnings per share . . . . . . . . . $ 2.92 $ 3.97 (26%) Dividends per share . . . . . . . . . . . $ 1.20 $ 1.20 -- Year-end employment . . . . . . . . . . . 9,200 9,300 (1%) - ---------------------------------------------------------------------------------------------------
SUNDSTRAND SALES PROFILE [Pie charts:] Aerospace 52% Industrial 48% Commercial 80% Military(a) 20% Domestic 64% International 36% (a) Military sales include sales to U.S. government agencies. [1] 4 [Photo description:] Photo of executive officers Paul Donovan, Executive Vice President and Chief Financial Officer; Patrick L. Thomas, Executive Vice President and Chief Operating Officer, Industrial; Don R. O'Hare, Chairman of the Board and Chief Executive Officer; Berger G. Wallin, Executive Vice President of Special Projects; Robert J. Smuland, Executive Vice President and Chief Operating Officer, Aerospace. [2] 5 [Photo caption:] (Left to right) Paul Donovan, Executive Vice President and Chief Financial Officer; Patrick L. Thomas, Executive Vice President and Chief Operating Officer, Industrial; Don R. O'Hare, Chairman of the Board and Chief Executive Officer; Berger G. Wallin, Executive Vice President of Special Projects; Robert J. Smuland, Executive Vice President and Chief Operating Officer, Aerospace.
[Bar chart:] EARNINGS PER SHARE FROM CONTINUING OPERATIONS (dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 2.60 2.45 1.94 2.56 2.92
TO OUR SHAREHOLDERS Sundstrand Corporation continues to adjust its businesses to meet constantly changing market conditions. The benefit of past cost reductions in our Industrial segment was readily apparent in the 1994 results. Industrial operating margins reached 16 percent on a small volume increase. The well-publicized reductions in defense spending as well as the current reduced rate of new aircraft acquisitions by world airlines continue to impact the Aerospace segment of Sundstrand. We are continuing to restructure this business so that it also will produce desired operating margins with the anticipated recovery in commercial aerospace sales volume. Sales in 1994 of $1,372.7 million were flat compared with the prior year primarily as a result of declining military sales. The Company's incoming orders of $1,437.1 million, however, compared favorably with 1993, with total unfilled orders of $746.8 million at year-end 1994 up about 9 percent from year-end 1993. Net earnings totaled $95.6 million, or $2.92 per share, compared with $90.7 million, or $2.56 per share, earned from continuing operations in 1993. Temporary manufacturing inefficiencies associated with production realignments within the Aerospace segment substantially reduced full-year operating profit, but the impact on earnings per share was more than offset by the recovery of our Industrial business and the repurchase of 1.8 million of the Company's shares during the year. Our operations generated cash flow after capital expenditures totaling $55.9 million. We continue to follow our plan of optimally deploying the substantial cash generated by our strong franchises in the Aerospace and Industrial businesses. This plan encompasses a balance between acquisitions, share repurchases, debt retirement, and dividends. During 1994, we did not conclude any major acquisitions although we continued to evaluate opportunities in related aerospace and industrial fields. We have stringent criteria for Sundstrand's portfolio of businesses and products to assure that shareholder value is maximized. The Milton Roy subsidiary completed two small but strategic product acquisitions which made positive contributions to earnings in the first year. We made substantial progress during 1994 in advancing the Company's share buyback program. During the year, nearly $80 million was returned to our shareholders as we acquired an additional 5 percent of the Company's outstanding shares. The repurchases were made opportunistically throughout the year, with the timing based on the Company's capitalization position, overall cash flow, the outlook for acquisition opportunities, and the prevailing stock price. Dividends of $39.1 million also were paid during the year. Since our Board of Directors authorized the purchase of 10 million shares in 1993, we have repurchased a total of 5 million shares for about $210 million. Our success in returning cash to shareholders via share repurchase demonstrates our intention to provide ongoing shareholder value when attractive external growth opportunities are not available. The continuing repurchase of Company shares over time remains an integral part of Sundstrand's shareholder value enhancement strategy. Our Industrial business segment had an excellent year in 1994, with each of our three businesses showing improvement. Sales of $663.4 million in 1994 were up 5 percent from the 1993 level of $629.5 million. Incoming orders at $701.0 million were up 12 percent compared with 1993. Unfilled orders totaled $147.8 million at year-end 1994. Particularly gratifying was the increase in operating profit as a percentage of sales from 13.4 percent in 1993 to 16.0 percent in 1994. The improvement reflected the benefits of the cost reductions accomplished during the past several years as well as our strong market positions. The substantial operating leverage of the Industrial businesses was evident in 1994 with incremental operating profit rates of over 40 percent realized in a number of our businesses. The outlook for 1995 is to record increased orders, sales, and profits again. [3] 6
[Bar charts:] OPERATING CASH FLOW PER SHARE AFTER CAPITAL SPENDING (dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 2.67 3.23 4.30 5.19 1.71 SHARES OUTSTANDING AT YEAR END (millions) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 36.0 36.1 36.1 33.5 31.6
This optimism is based on the improving operating rates at our customers' plants, the expansion of our businesses into the Asia-Pacific region, and our improved capability to compete in world markets. Incremental operating margins for the Industrial businesses, however, will be lower in 1995 than experienced in 1994, reflecting the segment's investments for international expansion, new products, and training to enhance long-term strategic market positions. The results within the Aerospace segment were not as strong as in the Industrial segment. Our Aerospace operations continued to suffer from the effects of the decline in military spending and the current reduced rate of new aircraft acquisitions by world airlines. Military sales of $277.4 million in 1994 were down $42.0 million or 13 percent compared with 1993. Commercial sales of $431.9 million in 1994 were flat compared with the $434.2 million achieved in 1993. Incoming orders were $736.1 million during the year which resulted in a backlog of $599.0 million at year-end. The decline in Aerospace sales and the delay in achieving the full manufacturing efficiency benefits of the Aerospace restructuring actions taken in 1993 contributed to weaker than anticipated operating margins in 1994. Operating margins for the full year 1994 at 12.4 percent were down 1.7 percentage points compared with the 14.1 percent achieved in 1993. It became evident during the fourth quarter that, despite the positive steps taken to lower costs, the overhead structure of the Aerospace segment, including plant capacity and engineering resources, needed further examination, given the winddown of significant customer-funded development programs. Based on this review, we concluded in February 1995 that additional downsizing of the Aerospace business was required. As announced, steps currently are underway to reduce Aerospace plant capacity with the closure of the Lima, Ohio, facility. The Aerospace organization also is being further streamlined to eliminate product divisions and to intensify customer focus. When the restructuring actions are completed in 1996, we believe the Aerospace segment will have a cost structure in line with our view of future sales and expected manufacturing load levels. The Company also intends to write down the assets of two non-core product lines. The restructuring plan will result in a first quarter pretax charge of $58 million. The anticipated net effects of additional non-accrued expenses, restructuring savings, and related nonrecurring gains are a pretax loss of approximately $7 million in 1995 and pretax earnings of approximately $20 million in 1996. The restructuring is expected to reduce cash flow by about $16 million in 1995 and provide a cash flow benefit of about $8 million in 1996. As was the case in 1993 and 1994, rightsizing remains a key element of our business strategy, and we intend to remain aggressive in lowering our cost structure when market conditions dictate. An improving market in 1996 and 1997 should produce substantial financial benefits as sales recover not dissimilar to those we are now seeing within our Industrial operations. The Company had a change in leadership during the year with Don O'Hare assuming the role of Chairman and Chief Executive Officer at the end of the third quarter. Don helped guide the Company as its Chairman from 1989 to 1991 and continued his association as a Board member and consultant after his retirement. No immediate change in business strategy is anticipated as a result of this change in management. Sundstrand has highly capable, well-regarded management in place that will provide operational support and direction while the Board oversees the selection of a new CEO. Sundstrand's overriding objective remains the long-term growth of shareholder value. In January 1995, the Board of Directors elected Berger G. "Bud" Wallin as a member of the Board and as Executive Vice President for Special Projects. Bud has made significant contributions to Sundstrand during his 40 years of service, most recently as chief [4] 7
[Bar chart:] OPERATING PROFIT (millions of dollars) 1990 1991 1992 1993 1994 - ------------------------------------------------------------------------------------------------------------------------------- Aerospace 136.5 128.3 90.4 106.3 87.6 Industrial 73.6 78.0 82.1 84.1 106.0 ----------- ----------- ----------- ----------- ---------- Total 210.1 206.3 172.5 190.4 193.6
operating officer for our Industrial businesses. The Board also expanded the Corporate Executive Office to include Patrick L. Thomas, who replaced Bud as Executive Vice President and Chief Operating Officer, Industrial. Pat has held a number of management positions during his 25 years with Sundstrand, and served as President of Milton Roy Company since 1991. In closing, we would like to acknowledge and thank Harry Stonecipher for the many contributions he made during his tenure as Chairman, President and Chief Executive Officer of Sundstrand. We wish him well in his new role as President and Chief Executive Officer of McDonnell Douglas Corporation. We especially want to acknowledge and thank our employees for their diligence and dedication in spite of the stress resulting from the restructuring projects we have initiated. Although difficult, these actions are necessary to posture Sundstrand for long-term earnings growth. In addition, we thank our shareholders, customers, and suppliers for their continued support. February 21, 1995 /s/ Don R. O'Hare /s/ Paul Donovan Don R. O'Hare Paul Donovan Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Financial Officer /s/ Robert J. Smuland /s/ Patrick L. Thomas Robert J. Smuland Patrick L. Thomas Executive Vice President and Executive Vice President and Chief Operating Officer, Aerospace Chief Operating Officer, Industrial /s/ Berger G. Wallin Berger G. Wallin Executive Vice President for Special Projects [5] 8 SUNDSTRAND AT A GLANCE AEROSPACE Product Lines ELECTRIC POWER SYSTEMS - Rockford, Illinois Electric power generating systems, including integrated drive generators, constant speed drives, generators, and controls MECHANICAL AND FLUID SYSTEMS - Rockford, Illinois Pumping, actuation, emergency power, torpedo propulsion, and secondary power systems POWER SYSTEMS - San Diego, California Auxiliary power units, gas turbine engines, fans, and environmental control systems
SALES (millions) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- Commercial OEM $ 269.9 $ 271.6 $ 264.0 $ 204.6 $ 204.6 Commercial Aftermarket 247.3 217.7 253.0 229.6 227.3 Military OEM 225.6 238.7 231.8 226.5 200.1 Military Aftermarket 101.2 79.9 90.8 92.9 77.3 ----------- ----------- ----------- ----------- ----------- Total Aerospace $ 844.0 $ 807.9 $ 839.6 $ 753.6 $ 709.3 =========== =========== =========== =========== ========== Sundstrand's aerospace segment serves original equipment manufacturers (OEMs) and operators of commercial and military aircraft. Sales of the largest product line, electric power systems, were $440.8 million in 1994, $449.2 million in 1993, and $478.5 million in 1992. - --------------------------------------------------------------------------------------------------------------------------------
PRIMARY MARKETS [pie chart:] Commercial OEM 29% Commercial Aftermarket 32% Military OEM 28% Military Aftermarket 11%
OPERATING PERFORMANCE [bar charts:] NET SALES (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- Commercial 517.2 489.3 517.0 434.2 431.9 Military 326.8 318.6 322.6 319.4 277.4 ----------- ----------- ----------- ----------- ---------- Total Aerospace 844.0 807.9 839.6 753.6 709.3 =========== =========== =========== =========== ========== OPERATING PROFIT (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 136.5 128.3 90.4 106.3 87.6 ORDERS RECEIVED (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 857.9 685.6 885.7 526.7 736.1 UNFILLED ORDERS (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 875.2 752.9 799.0 572.2 599.0
[6] 9 INDUSTRIAL Businesses MILTON ROY COMPANY - Arvada, Colorado Process pumps, metering pumps, specialty pumps, and analytical instruments THE FALK CORPORATION - Milwaukee, Wisconsin Mechanical power transmissions, couplings, stationary fluid power drives, and marine drives SULLAIR CORPORATION - Michigan City, Indiana Rotary screw air and gas compressors, pneumatic tools, dryers, and filters
SALES (millions) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- Milton Roy $ 93.3 $ 238.0 $ 248.7 $ 240.6 $ 252.2 Falk 221.9 209.4 192.0 195.6 205.3 Sullair 221.7 198.6 198.8 193.3 205.9 ----------- ----------- ----------- ----------- ---------- Total Industrial $ 536.9 $ 646.0 $ 639.5 $ 629.5 $ 663.4 =========== =========== =========== =========== ==========
The three businesses in Sundstrand's industrial segment produce a broad range of products for the world's basic industries. PRIMARY MARKETS [pie chart:] Construction & Cement 14% Mining & Metals 9% Agribusiness 4% Chemical 13% Transportation 3% General Industry 23% Wood & Paper 8% Consumer 2% Hydrocarbon 15% Other 9%
OPERATING PERFORMANCE [bar graphs:] NET SALES (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- Milton Roy 93.3 238.0 248.7 240.6 252.2 Falk 221.9 209.4 192.0 195.6 205.3 Sullair 221.7 198.6 198.8 193.3 205.9 ----------- ----------- ----------- ----------- ---------- Total Industrial 536.9 646.0 639.5 629.5 663.4 =========== =========== =========== =========== ========== OPERATING PROFIT (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 73.6 78.0 82.1 84.1 106.0 ORDERS RECEIVED (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 550.3 625.8 641.6 624.8 701.0 UNFILLED ORDERS (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 133.1 112.9 115.0 110.2 147.8
[7] 10 GROWTH IN INTERNATIONAL MARKETS More than one third of Sundstrand's sales in 1994 were generated in markets outside the United States. These markets will produce a significant portion of our future growth. We expect the Asia-Pacific region to be particularly important. In 1994, we took important steps to expand our position in world markets. These included the establishment of Sundstrand Asia Pacific and the appointment of Ng Pock Too to head this Singapore-based operation. Mr. Ng was formerly the Group President of the Sembawang Group of Companies, a Singapore company active in ship repair, ship building, offshore oil and gas engineering, environmental engineering, maritime services, and industrial manufacturing and services. Mr. Ng, in conjunction with our operating businesses, has responsibility for formulating strategy and identifying marketing opportunities for our business growth in the region. AEROSPACE Airline revenue passenger miles (RPMs) should grow by more than 5 percent annually through the end of the decade, with growth in the Far East closer to 10 percent. In 1990, about 30 percent of the total worldwide RPMs occurred in the Asia-Pacific region. By the year 2000, that is expected to grow to about 40 percent. In 1994, we established a relationship with Sembawang Aviation to promote Sundstrand's aerospace interests in the Asia-Pacific region. Sembawang will market overhaul and repair services throughout the region. Additionally, in China, Sembawang will help market Sundstrand equipment and represent Auxiliary Power International Corporation (APIC), our commercial auxiliary power unit joint venture with Labinal. This relationship will augment Sundstrand's existing global coverage provided through customer service centers in the United States, France, and Singapore, and through its joint venture with Teijin Seiki in Japan. INDUSTRIAL Our Industrial units launched a number of initiatives during the year. Each of our Industrial businesses now has a sales office in Shanghai. We also have established a business development relationship with China Industrial Engineering Consulting Corporation (CIECC). Sullair formed a joint venture in Shenzhen, China, with China Nanshan Development Company and Sembawang Industrial for the manufacture and sale of industrial compressors. For the past several years, Sullair has been increasing the number of compressors sold through local distributors to customers in the emerging economies in the Asia-Pacific region. Falk completed a feasibility study for a proposed joint venture to manufacture power transmission equipment in Indonesia, and opened additional sales offices in Australia. Although Falk sold a majority interest in its Brazilian operation, Falk expects to maintain a strong presence in South America through direct sales, distributors, and a licensee. Milton Roy acquired HMD Group Limited and the business of The Kontro Company, Inc. (HMD-Kontro) in 1994 which provided a United Kingdom base for expansion of existing sealless pump technology and an entree into the international sanitary pump market. Milton Roy, through its Fluid Handling division, was particularly successful in obtaining new orders for the fertilizer industry in China and India. In all of its businesses, Sundstrand continues to explore the most effective way of entering the most promising growth markets. [Photo captions:] Economic growth and infrastructure development in China. Ng Pock Too, President, Sundstrand Asia Pacific [8] 11 [Photo descriptions:] Construction project in Shenzhen, China. Three poses of Ng Pock Too, President, Sundstrand Asia Pacific. [9] 12 MARKET REVIEW In an average year, we would expect airlines to take delivery of approximately 600 large commercial aircraft. From the mid-1980s through the early 1990s, however, airlines competed vigorously to purchase new aircraft with the expectation of continued rapid growth in passenger demand. This activity led to deliveries peaking near 750 aircraft in 1992. The surge in deliveries, which was coincident with a reduction in RPM growth, led to a rapid decline in new aircraft orders, with deliveries falling to approximately 430 aircraft in 1994. Large aircraft deliveries are expected to reach the bottom of this cycle in 1995 and begin growing again in 1996. The new aircraft being ordered are needed to accommodate the increasing traffic and to replace aging aircraft and those that do not meet the latest noise standards. Further growth in commercial aerospace is being generated by the rapidly growing regional aircraft market, which reached its low point in 1994. The popularity of the small commercial jet aircraft is related to their passenger comfort and speed. Turboprops have low operating costs on shorter routes and are expanding the total travel market. Over the longer term, the potential for the greatest percentage growth in commercial aerospace is in the world's emerging economies. The Asia-Pacific region is growing at a faster rate than any other, and route expansion is limited only by capacity and infrastructure development. As these countries continue their industrialization, their large unserved populations will generate ongoing increases in demand. An improving economic climate should contribute to resumed growth in the underserved markets in the Commonwealth of Independent States and Eastern Europe as well. In our military markets, sales declined as expected in 1994. We foresee continued erosion of demand in this market as armed forces worldwide are reduced as a result of the improving political environment. We also are in the process of reducing our plant capacity in order to become more efficient in the face of declining military sales and productivity improvements in manufacturing. Our military programs, however, will remain important. Our advanced technology will continue to assist our military customers in maximizing the effectiveness of each system and person deployed. In 1994, we continued to refine the Aerospace organization to make it more responsive to customer needs as well as to posture it for improved profitability. This process will continue as we adapt to changes in the business and customer mix. For future aircraft, space, and defense programs we have organized our business development team for improved capability in the conception, design, and development of accessory systems. This organization brings applied research, preliminary systems development, and marketing functions together for focused, integrated product development responses to our customers' emerging requirements. We undertook this reorganization both to improve profitability in our current programs and to prepare to provide the increased systems capability our customers are looking for in their new projects. These changes have enabled us to become more customer focused than product oriented. Our goal is to have completely satisfied customers -- commercial and military, OEMs and operators. [Photo captions:] Global airline customers for commercial aerospace products. As aircraft are purchased and operated by airlines around the world, Sundstrand products and support services reach a growing international customer base. [10] 13 AEROSPACE [Photo description:] Four commercial jet aircraft with different airline logos. [11] 14 ELECTRIC POWER GENERATING SYSTEMS Sundstrand is the world's leading supplier of electric power generating systems for aircraft, with systems on almost all Boeing, Airbus, McDonnell Douglas, and Fokker transports; regional jets; and many military aircraft. Emphasis is placed on designing the right system for each aircraft, whether it uses hydromechanical, power electronics, high-voltage DC, or a hybrid system incorporating more than one of these technologies. As a total system supplier, Sundstrand increasingly assumes responsibility for the complete electrical system, including primary, secondary and backup power, and control and test equipment. While the major commercial aircraft manufacturers and established world airlines represent the largest and most stable portion of the Company's electric power business, new programs and emerging markets represent the greatest opportunity for growth. 1994 was a year of significant activity for the major aircraft manufacturers. Airbus Industrie introduced its A330 and A340 aircraft to a growing number of world airline customers. These newer models employ Sundstrand electric power generating systems as do the Airbus A300, A310, and A320. McDonnell Douglas announced the selection of Sundstrand as the electric power system supplier on its proposed MD-95 aircraft. This follows the MD-80 and MD-11 on which Sundstrand systems are used. Also, Boeing selected the Sundstrand electric power system for its new 737-700 and 737-800. This decision means that Sundstrand will remain the exclusive supplier for all Boeing aircraft in production, including the 777 which completed first flight tests in 1994. For most of these programs, airlines in emerging economic regions are providing Sundstrand with additional growth. New airlines taking delivery of aircraft using Sundstrand systems typically purchase spare end items and replacement parts to maintain their fleets. In addition, they rely on Sundstrand to provide training in basic maintenance operations as well as unit replacements. Among the manufacturers of smaller aircraft with Sundstrand electric power systems, Fokker delivered the first F-70 regional jet in 1994. The Canadair Regional Jet, introduced in 1993, continued to gain acceptance with short-haul operators, and Canadair selected the Sundstrand electric power generating system for the new CL-604 business jet. The Gulfstream V is being developed with a Sundstrand system as well. Military program milestones in 1994 included the development of the electric power system for the 767 AWACS aircraft, and the selection of Sundstrand as a supplier of electric power systems on the EFA 2000 Eurofighter. The Korean assembled F-16 also will carry a Sundstrand electric power system. Development work continues on electric power systems for the Comanche helicopter, F-22 Advanced Tactical Fighter, and V-22 tilt rotor aircraft. [Photo captions:] Airbus A310 with Sundstrand integrated drive generator. The expanding international fleets of Airbus Industrie commercial transports rely on Sundstrand electric power generating equipment. Singapore Airlines mechanic Mohammed Hisham. [12] 15 ELECTRIC POWER [Photo description:] Mechanic with integrated drive generator in front of Singapore Airlines Airbus A310. [13] 16 MECHANICAL AND FLUID SYSTEMS In addition to its flagship electric power business, Sundstrand Aerospace produces three other aircraft product lines--actuation, secondary/emergency power, and fluid systems--from its headquarters in Rockford, Illinois, as well as systems for missile and space applications and undersea propulsion. Actuation systems incorporate mechanical, hydraulic, and electrical technologies for the movement and positioning of aircraft flight control surfaces such as flaps, slats, and stabilizers. Some of the Company's largest and most successful actuation system programs have been for military applications. As the military market continues to decline, Sundstrand continues to pursue actuation opportunities in commercial aircraft and engine programs. Recent program wins include the Gulfstream V horizontal stabilizer and flaps, and, in partnership with Sextant Avionique and Parker Bertea, the flight control actuation systems for the Canadair Global Express executive jet. Sundstrand also was selected to provide the propeller pitch actuation system for the Pratt & Whitney Advanced Ducted Propeller next-generation engine. Secondary and emergency power systems include aircraft accessory drives and engine starting systems along with ram air turbines (RATs) and air-driven generators (ADGs) that provide emergency hydraulic or electric power. Current secondary power programs include the F-16 engine start system, the B-2 aircraft-mounted accessory drive gearbox, and the gearboxes for auxiliary power units (APUs) marketed by Sundstrand Power Systems and the APIC joint venture. Aircraft using Sundstrand emergency RATs and ADGs include several Airbus and Boeing commercial transports that are in ongoing production, as well as newer programs like the Airbus A321/A319, Canadair Global Express, Canadair Challenger CL-604, and Mc Donnell Douglas C-17 military transport. Sundstrand continues to be a major manufacturer of main fuel pumps for commercial turbofan engines such as the General Electric CF6-80 series and the Pratt & Whitney 2037. Fuel boost and override/jettison pumps for aircraft such as the Boeing 767 continue as production programs. A new centrifugal main fuel pump for the Pratt & Whitney F-119 engine, initially slated for the F-22 Advanced Tactical Fighter, is a simple, lightweight design that will form the basis for the next generation of military and commercial engine fuel pumps. In 1993, Sundstrand was selected to provide the main fuel pump, which is integrated into a Hamilton Standard fuel control module, for the Pratt & Whitney Canada PW500 series medium-size turbofan engine. Pratt & Whitney Canada selected Sundstrand in 1994 to replace the previous supplier of the fuel pump on the PW206 turboshaft engine. In addition, Sundstrand was recently selected as the lube and scavenge pump supplier for the C-17 and the gas- powered turbine engine supplier for the British Royal Navy's Spearfish torpedo. [Photo captions:] Mockup of PW530 engine with Sundstrand fuel pump. Business jet operators worldwide who choose aircraft with the Pratt & Whitney Canada PW500 series turbofan engine will become customers for the Sundstrand fuel pump integrated into the Hamilton Standard fuel control module. Pratt & Whitney Canada engineer Alain Lewis. [14] 17 MECHANICAL AND FLUID [Photo description:] Engineer standing behind mockup of PW530 engine. [15] 18 AUXILIARY POWER UNITS From its facilities in San Diego, California, Sundstrand Aerospace produces auxiliary power units (APUs), fans, compressors, and vapor cycle cooling systems for a wide variety of commercial and military applications. APIC, a joint venture between Sundstrand and Labinal S.A. of France, is responsible for marketing Sundstrand's APS 2000 APU and Labinal's APS 3200 series of APUs for commercial transports manufactured by Airbus, Boeing, and McDonnell Douglas. Since the introduction in 1991 of the APIC APS 2000 APU for the Boeing 737, the APU has gained worldwide market acceptance and is now used by more than 25 airlines. With over 1.5 million hours of operational experience, the APS 2000 APU is demonstrating product performance and reliability among the world's best. The APS 2000 APU was selected in 1994 as the APU for the proposed McDonnell Douglas MD-95 twin-engine aircraft. The APIC APS 3200 APU, offered on the Airbus A319, A320, and A321 aircraft, entered service in 1994 with current APS 2000 customers Lufthansa, United Airlines, Air France, and Swissair. The Sundstrand APS 1000 APU family in 1994 expanded its presence in the growing worldwide regional aircraft market. The first APU for installation on the N250 prototype aircraft was delivered to IPTN in Indonesia, while AVRO International Jetliner introduced the APS 1000 APU into revenue service with deliveries of its new RJ family of regional jets to Air Malta, Lufthansa Cityline, and Crossair. The first Saab 2000 Jetprop also was placed into revenue service at Crossair with the APS 1000 APU. The Sundstrand APS 500 will be installed in the Embraer 145 commuter aircraft in 1995, in an uprated power version designed to provide full market coverage up to the lower end of the APS 1000 power rating. On the smaller end of the product line, initial deliveries were made in 1994 for the Gemini APU's first business jet application, the Lear 60. Sundstrand had several notable successes as a supplier of highly reliable aerospace fans in 1994. These wins include new platforms such as the Canadair Global Express executive jet and McDonnell Douglas MD-95 as well as retrofit and future original equipment opportunities for the Airbus A319/A320/A321 family and the MD-90 and MD-11 aircraft. In 1994, Sundstrand was awarded a significant contract by the Advanced Research Project Agency to build and test a small expendable turbojet engine applying technology which has been developed by Sundstrand over the past few years. This engine is intended to power next-generation remotely piloted vehicles. Sundstrand continued to build on its military auxiliary power market base with the continued development of a new APU on the V-22 tilt rotor aircraft. Sales of military equipment such as the F-16 engine start system, KC-135R APU, CH-53 APU, and Blackhawk APU continued to provide a sound business base in 1994. [Photo captions:] AVRO RJ100 with Sundstrand APS 1000 auxiliary power unit. The latest British entry in the increasingly popular regional jet market is the AVRO RJ family, including the RJ70, RJ85 and RJ100, all offering Sundstrand auxiliary power units. AVRO mechanic Stephen Williams. [16] 19 POWER SYSTEMS [Photo description:] AVRO mechanic with auxiliary power unit in front of AVRO RJ100 aircraft. [17] 20 MARKET REVIEW The Company's Industrial businesses offer a wide variety of products ranging from small metering pumps to some of the world's largest ring gears, and serve a diverse group of basic industries worldwide. These industries are involved primarily in raw material processing, bulk material handling, direct manufacturing, and construction. Their operations are tied closely to the level of general economic activity. In the Industrial segment's principal markets, 1994 marked the beginning of economic recovery. The North American market improved slowly but steadily throughout the year, while Europe began to recover late in the year. Weak oil prices limited growth in the worldwide petrochemical and hydrocarbon processing industries. Markets in Asia and the Pacific Rim continued to grow at the fastest rate as emerging economies developed their infrastructures. While the overall market was improving, each of the Industrial businesses participated in that improvement to a different degree in 1994. For Milton Roy, total sales declined slightly (excluding the HMD-Kontro acquisition) reflecting the weakness in its instruments and European metering pump businesses. HMD-Kontro was acquired in March 1994, and added a new range of products to Milton Roy's sealless pump business. Activity remained strong in the fertilizer industry in China and India, which boosted sales for the Fluid Handling division's European operation. Increasing demand and greater market penetration boosted sales at the Liquid Metronics and Hartell divisions. Through the first half of 1994, Falk's custom-engineered products generated most of its sales growth, reflecting the improving economy and the resulting pickup in capital expansion projects. Worldwide, Falk experienced increasing activity in Latin America and the Asia-Pacific region. In the second half of the year, Falk's sales of standard products increased, consistent with a general economic recovery. These sales were more evenly distributed geographically throughout Falk's markets. In the markets served by Sullair, North and South America experienced steady growth throughout 1994 and Europe began to improve in the second half of the year, a pattern that also reflected the improving economic conditions. The markets in China and the Pacific Rim have begun to contribute to Sullair's growth and provide a significant opportunity for expanding Sullair's business over the long term. The anticipated improvement in the world's economies, supported by improving utilization rates at customer facilities, should benefit most of our Industrial businesses, although we expect continued weakness in the petroleum industry. Asia and the Pacific Rim will continue to offer the greatest overall long-term growth potential, while Latin America, Australia, and New Zealand are expected to generate additional growth for some products. To improve their competitiveness in the world markets, the Industrial businesses continue to emphasize quality and productivity throughout their operations. All of the major manufacturing facilities have earned ISO 9000 certification, and efficiency improvements made over the past few years are generating strong incremental operating profits during the economic recovery. [Photo captions:] Pulp and paper market for Industrial products. The paper production industry uses Milton Roy, Falk, and Sullair products for process and support applications worldwide. [18] 21 INDUSTRIAL [Photo description:] Man on walkway on top of papermaking machine. [19] 22 PUMPS AND ANALYTICAL INSTRUMENTS Milton Roy Company, based in Arvada, Colorado, is a manufacturer of high-quality metering pumps, centrifugal pumps and compressors, and analytical instruments. The Fluid Handling division manufactures engineered pumps, compressors, and blowers for the hydrocarbon and chemical processing, pulp and paper, water treatment, electric power, and sanitary processing industries worldwide. Fluid Handling serves customers worldwide through its operations in the United States and Europe. In addition, its Japanese joint venture, Nikkiso Sundstrand, serves the Asian market. The 1994 acquisition of HMD-Kontro provides the division with a significant market share increase in the sealless pump industry and an entree to the sanitary pump market. In a milestone project completed in 1994, the Fluid Handling division shipped the largest pumping system it has ever manufactured. The unit was delivered to the North Slope oil fields in Alaska. An additional major project initiated in 1994 includes 14 sophisticated pump and compressor systems for a synthetic fiber manufacturing plant in India. Metering pumps are manufactured by three of the six Milton Roy divisions. These pumps typically are applied in water conditioning, waste water treatment, and chemical applications. The Flow Control division produces metering pumps for the North and South American and Far Eastern markets. The emerging economies and associated infrastructure development of the Far East have provided the Flow Control division with an expanding market for its well-recognized products. Dosapro Milton Roy, a manufacturer of similar metering pumps, serves the markets of Europe, the Middle East, and Africa. Additionally, the large scale European engineering contractor base provides Dosapro with a worldwide conduit for its products. Liquid Metronics produces low flow electronic metering pumps, programmable digital pump controllers, and pH monitoring systems principally used in small industrial water treatment applications. The Hartell unit produces low-cost pumps for the laundry, beverage, and ice machine industries. The Milton Roy Instruments division manufactures precision ruled and holographic gratings and spectroscopic instruments for the industrial, life science, and educational markets in the United States, Europe, and the Far and Middle East. Milton Roy's divisions actively participate in the international marketplace. In addition to the access provided by multinational facilities and joint ventures, Milton Roy serves international customers from offices in Singapore, Shanghai, Hong Kong, Tokyo, Brussels, Milan, Frankfurt, London, Madrid, and Paris. [Photo captions:] HMD sealless pumps ready for shipment. Magnetically driven HMD pumps will be used for transferring highly corrosive chemicals to process crude oil into various petroleum products at a refinery in northern England. HMD assembler Richard Cradduck. [20] 23 MILTON ROY [Photo description:] Man seated among several skids with pumps. [21] 24 MECHANICAL POWER TRANSMISSION EQUIPMENT The Falk Corporation is an established global supplier to basic industries such as mining, metal processing, wood and paper processing, construction and cement, chemical processing, utilities, transportation, food processing, and a variety of other smaller markets. Falk's products include a broad line of standard enclosed gear drives and rotating shaft couplings as well as custom-engineered enclosed gear drives, large open gear sets, large alloy steel castings, and main propulsion marine drives. A focus on quality at Falk has led to strong vertical integration of the marketing, engineering development, and manufacturing processes. Falk provides engineering solutions to meet customer needs, pours high-quality castings to exacting specifications, manufactures most of its own components, and assembles them into finished products. This top-to-bottom control allows Falk to maintain its reputation as a quality supplier while providing opportunities throughout the process to monitor and control costs. In addition, manufacturing flexibility and short cycle times permit rapid turnaround on rush projects for customers with tight deadlines. Typical applications for the power transmission equipment manufactured by Falk involve the physical movement of bulk materials as well as the processing of these raw materials into finished goods. Falk's standard enclosed gear drives and couplings frequently see use in bulk material handling and processing operations, while the larger custom drives are used in mining, coal, and cement industries. In 1994, Falk shipped a 43-foot diameter ring gear for the world's largest semiautogenous grinding (SAG) mill, located at the Escondida copper mine in northern Chile. The mill will use a small load of metal balls in a large rotating drum to help break up large pieces of rock bearing the copper ore. From its operations in the United States and a joint venture in Mexico, Falk serves well-established markets in North and South America. Falk began an $8 million conversion of its Auburn, Alabama, facility to cellular manufacturing during 1994, which will increase production output and efficiency. Falk's Milwaukee facility began converting to cellular manufacturing in 1990. Falk also put into production in 1994 a $3 million expansion to its heat treating facilities to allow in-house carburizing and hardening of most standard product gearing and mill pinions. Although Falk sold a majority interest in its Brazilian operation to local management in 1994, a strong presence will be maintained in South America. Sales efforts have been expanding in Asia and the Pacific Rim as well as Australia. Falk, along with the other Sundstrand Industrial businesses, established a business development relationship in 1994 with CIECC, a Chinese engineering firm, and completed a feasibility study for a proposed joint venture manufacturing company in Indonesia. [Photo captions:] Finished 43-foot diameter Falk ring gear. The world's largest SAG mill ring gear, manufactured by Falk, will drive a 38-foot diameter, 18,000-horsepower mill at the Escondida copper mine in the Atacama desert of northern Chile. Falk machinist Jim McGraw. [22] 25 FALK [Photo description:] Man standing next to large gear. [23] 26 INDUSTRIAL AND PORTABLE COMPRESSORS Sullair Corporation holds a strong position worldwide with a full line of rotary screw air compressors, process and gas compressors, refrigeration compressors, vacuum systems, and accessories to complement these products. Sullair products are sold primarily through independent distributors to industrial and construction markets around the world. Sullair serves markets in the Americas from its headquarters in the United States and through its joint venture company, Sullair Argentina. Sullair Europe has facilities in France, and serves Europe, the Middle East, and Africa. Operational changes and improved market conditions in some of its markets contributed to Sullair Europe's improved results during the year. Shenzhen Sullair Asia Industrial Co. Ltd., a joint venture company recently established in China, will provide a manufacturing base to serve the growing Asian market. In 1994, Sullair improved its ability to serve its customers in Asia by improving the quality of its sales and service representation throughout the region, particularly in China, Korea, Japan, and Indonesia. Sullair licensee, Champion Compressors Ltd., covers Australia and New Zealand. Sullair's industrial compressors range from five-horsepower compact "encapsulated" models to 600-horsepower two-stage tandem models which supply large volumes of air on a continuous-duty basis. Filters and dryers complement the selection for customers requiring very clean and dry air. Sullair also produces rotary screw compressors for the refrigeration market and manufactures the broadest line of rotary screw vacuum systems in the industry. In portable compressors for the construction market, Sullair's models range in size from 70 cfm to 1,600 cfm. Sullair also produces and markets pneumatic contractor tools for various applications worldwide. The most recent product line additions include a series of oil-free industrial compressors, which are ideal for food and beverage processing, pharmaceutical and electronics production, hospitals, and other applications requiring extremely clean and dry air. Sullair showcased its advanced designs and technology and introduced its DS Series oil-free compressors to the European market in 1994 at the world's largest industrial trade fair in Hanover, Germany. Throughout the entire Sullair line, products are being updated to provide greater value and reliability. Sullair continues to enhance its global image through quality manufacturing systems and dedicated customer service training facilities. Sullair is investing in its worldwide sales network through the expansion of its distributor network and increased sales and product training to increase Sullair's share in present markets and expand into new ones. [Photo captions:] Assembly of compressor at Shenzhen Sullair Asia. Sullair's joint venture compressor manufacturing facility in Shenzhen, China, will supply product and provide service for the Far East market. Technicians Peter Qinghua (front) and Sax Chang. [24] 27 SULLAIR [Photo description:] Two men with partially assembled compressor and bags of parts. [25] 28 FINANCIAL CONTENTS Management's Discussion and Analysis 27 Management's Report 33 Independent Auditor's Report 33 Consolidated Statement of Earnings 34 Consolidated Statement of Cash Flows 35 Consolidated Balance Sheet 36 Consolidated Statement of Shareholders' Equity 37 Information by Business Segment 38 Quarterly Results 39 Notes to Consolidated Financial Statements 40 Additional 1O-K Information 49 Selected Financial Data 50 [26] 29 Management's Discussion and Analysis
1994 1993 1992 Sales (amounts in millions) and ---------------------- --------------------- ---------------------- increase (decrease) from prior year Amount Change Amount Change Amount Change - -------------------------------------------------------------------------------------------------------------------------------- Business segment Aerospace - Commercial . . . . . . . . . . . . . $ 431.9 (0.5%) $ 434.2 (16.0%) $ 517.0 5.7% - Military . . . . . . . . . . . . 277.4 (13.1%) 319.4 (1.0%) 322.6 1.3% ----------- ---------- ----------- - Total . . . . . . . . . . . . . . . 709.3 (5.9%) 753.6 (10.2%) 839.6 3.9% Industrial . . . . . . . . . . . . . . . . . . . 663.4 5.4% 629.5 (1.6%) 639.5 (1.0%) ----------- ---------- ----------- Total . . . . . . . . . . . . . . . . . . $ 1,372.7 (0.8%) $ 1,383.1 (6.5%) $ 1,479.1 1.7% =========== ========== =========== [Bar chart:] SALES (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- Aerospace 844.0 807.9 839.6 753.6 709.3 Industrial 536.9 646.0 639.5 629.5 663.4 ----------- ----------- ----------- ----------- ---------- Total 1,380.9 1,453.9 1,479.1 1,383.1 1,372.7
In 1994, total sales were $1,372.7 million and net earnings from continuing operations were $95.6 million, or $2.92 per share, compared with total sales of $1,383.1 million and net earnings from continuing operations of $90.7 million, or $2.56 per share, in 1993. Net earnings from continuing operations in 1994 included a benefit of $5.5 million from a decrease in depreciation expense. The lower depreciation expense was due to an increase in the depreciable lives of certain fixed assets. The change resulted from internal asset management procedures that are designed to ensure continued compliance with government contract accounting requirements. Net earnings in 1993 of $140.7 million consisted of $90.7 million from continuing operations, a $55.0 million gain from the sale of the Sundstrand Data Control division (SDC), and a $5.0 million extraordinary loss related to the early retirement of high-cost, long-term debt. SALES BY BUSINESS SEGMENT Aerospace segment sales in 1994 declined $44.3 million from 1993 to $709.3 million representing 51.7 percent of total Company sales. Military sales were $42.0 million lower in 1994 than in 1993 with sales to both military original equipment manufacturers (OEMs) and aftermarket customers declining more than 10 percent. Both commercial OEM and aftermarket sales were flat in 1994 compared with 1993. Aerospace segment sales in 1993 of $753.6 million were $86.0 million lower than in 1992 and represented 54.5 percent of the Company's total sales. Commercial aerospace sales decreased $82.8 million in 1993 primarily as a result of lower shipments of electric power generating and auxiliary power equipment to both OEM and aftermarket customers. Military sales decreased $3.2 million during 1993 due to lower OEM shipments, partially offset by higher aftermarket sales. The Company's electric power systems product line (Electric Power) is the dominant product line within the Aerospace segment. This product line accounted for 62.1 percent, 59.6 percent, and 57.0 percent of Aerospace segment sales in 1994, 1993, and 1992, respectively. In addition, Electric Power contributed significantly to the profits of the Aerospace segment. Industrial segment sales increased by $33.9 million in 1994 to $663.4 million, representing 48.3 percent of total Company sales. The increase was a result of improved sales from each of the three Industrial businesses. The improvement at Falk and Sullair was due to strong domestic sales resulting from the improved U.S. economy. However, the growth in Falk's sales was offset in part by the effect of the second quarter divestiture of Sundstrand do Brasil. The increase in Milton Roy's sales was due to the effect of the first quarter acquisitions of HMD Group Limited and the business of The Kontro Company, Inc. (HMD-Kontro) partially offset by lower sales from its instruments and European metering pump businesses. Industrial segment sales in 1993 of $629.5 million were $10.0 million lower than in 1992 and represented 45.5 percent of the Company's total sales. The decrease was due primarily to the weak European economy, which resulted in lower sales for the Company's Milton Roy and Sullair businesses. [27] 30 Management's Discussion and Analysis
1994 1993 1992 Operating profit (amounts in millions) and ---------------------- --------------------- ---------------------- operating profit as a percent of net sales Amount % Amount % Amount % - -------------------------------------------------------------------------------------------------------------------------------- Business segment Aerospace . . . . . . . . . . . . . . . . . . . . $ 87.6 12.4 $ 106.3 14.1 $ 90.4 10.8 Industrial . . . . . . . . . . . . . . . . . . . 106.0 16.0 84.1 13.4 82.1 12.8 --------- -------- --------- Total . . . . . . . . . . . . . . . . . . . . . $ 193.6 14.1 $ 190.4 13.8 $ 172.5 11.7 ========= ======== ========= [Bar chart:] OPERATING PROFIT (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- Aerospace 136.5 128.3 90.4 106.3 87.6 Industrial 73.6 78.0 82.1 84.1 106.0 ----------- ----------- ----------- ----------- ---------- Total 210.1 206.3 172.5 190.4 193.6 =========== =========== =========== =========== ==========
OPERATING PROFIT BY BUSINESS SEGMENT Aerospace segment operating profit was $87.6 million in 1994 compared with $106.3 million in 1993. The decrease was due primarily to the previously discussed decline in military sales and the effect of short-term manufacturing inefficiencies partially offset by lower marketing and administrative expenses resulting from the 1992 Aerospace restructuring. The short-term manufacturing inefficiencies, which reduced operating profit substantially in 1994, related primarily to the transfer of production from the closed Brea and San Diego, California, plants to other Aerospace facilities. Aerospace segment operating profit was $106.3 million in 1993, compared with 1992 operating profit of $90.4 million which included a charge of $32.2 million for restructuring as a result of the accelerated decline in military sales and projected slower growth in commercial sales during the next several years. The charge also provided for the costs associated with the integration of the former Westinghouse Electrical Systems Division with Electric Power. The final payments related to this restructuring were expended during 1994. Excluding the restructuring charge, Aerospace segment operating profit in 1993 decreased $16.3 million from 1992. The decrease was due primarily to the previously mentioned reduction in commercial OEM and aftermarket sales, largely offset by benefits achieved through the prior year's restructuring. Industrial segment operating profit increased by $21.9 million from 1993, to $106.0 million in 1994. The increase was the result of improved sales and operating margins at all three businesses, with gains at Falk and Sullair outpacing those at Milton Roy. Falk's improvement related primarily to the recovering U.S. economy. Sullair also benefitted from the U.S. economy as well as from improved results from its European operations. Milton Roy benefitted from the HMD-Kontro acquisition. In 1993, despite the $10.0 million decline in Industrial segment sales, operating profit increased $2.0 million to $84.1 million due to continuing cost reductions. Other expense in 1994 and 1993 of $4.7 million and $6.5 million, respectively, consisted primarily of modest losses at unconsolidated subsidiaries, premiums on forward exchange contracts which protect the Company's earnings from foreign currency movements, and postretirement benefit costs for retired employees of divested business units. Other expense in 1992 of $7.8 million was due primarily to monetary corrections at a Brazilian subsidiary and premiums on forward exchange contracts. FOREIGN OPERATIONS AND ACTIVITY The Company has been expanding its international activity over the past several years, in part through joint venture operations, acquisitions, and development of foreign subsidiaries. Accordingly, the Company enters into foreign currency forward contracts primarily to protect specific assets and liabilities and certain cash flow from foreign currency exchange rate fluctuations. As a result, foreign exchange rate fluctuations are not expected to have a material impact on the Company's financial condition or operations. For further information related to foreign currency forward contracts see the Summary of Significant Accounting Policies note on page 40 and the Financial Instruments With Off-Balance-Sheet Risk note on pages 45 and 46. [28] 31 The Company is continuing to expand internationally, and is focusing much of its attention on potential high growth areas, such as the Asia-Pacific region. Entrance into these markets entails a certain amount of investment risk, and joint ventures, such as Shenzhen Sullair Asia Industrial Co. Ltd., the Sullair joint venture in China, are being formed to limit the Company's risk as well as to facilitate access to local markets. Additionally, Milton Roy is increasing its ownership in Asia LMI Pte. Ltd., an Indian company, and Falk is continuing negotiations related to the formation of a joint venture in Indonesia. The Company expects long-term benefits from these new markets, but does not expect its involvement in these joint ventures to impact its financial condition or operations materially in the near future. UNFILLED ORDERS Unfilled orders at December 31, 1994, increased to $746.8 million from $682.4 million at December 31, 1993. Unfilled orders in the Industrial segment increased by $37.6 million, reflecting the improved U.S. economy and increasing capital project activity in emerging markets. Aerospace segment unfilled orders increased by $26.8 million primarily as a result of increased commercial OEM orders. The Aerospace segment backlog is expected to increase materially in 1995. Reductions in domestic military business will be more than offset by a large long-term order for Spearfish torpedo propulsion units. The 1995 Industrial segment backlog is expected to decrease slightly from the 1994 amount. ACQUISITIONS AND DIVESTITURES During the first quarter of 1994, Milton Roy acquired HMD Group Limited and the business of The Kontro Company, Inc. These acquisitions expanded Milton Roy's position in the sealless pump markets. In the second quarter of 1994, Falk sold an 85 percent majority interest in Sundstrand do Brasil Equipamentos S.A., a Brazilian subsidiary, to local management. This transaction did not have a material impact on the earnings of the Company. On November 12, 1993, the Company sold the assets of SDC to AlliedSignal. For a more detailed discussion, see the Sundstrand Data Control Division Sale note on page 41. On May 8, 1992, the Company acquired the assets of the Westinghouse Electrical Systems Division (ESD), a manufacturer of electric power generating equipment for aircraft, for a purchase price of $128.0 million. Through this acquisition, the Company expanded its share in the domestic and international aircraft electric power generating equipment markets. The acquisition of ESD increased Electric Power and Aerospace segment sales by $59.4 million and was slightly dilutive to earnings in 1992. ESD's manufacturing facilities were located in Lima, Ohio, and Santa Isabel, Puerto Rico. Funds for the acquisition were provided by the Company's 4(2) commercial paper program. AUXILIARY POWER UNITS The Company's Power Systems product line includes auxiliary power units (APUs) developed and produced for both the military and commercial aerospace markets. The Company and Labinal, Inc. are parties to a joint venture, Auxiliary Power International Corporation (APIC), which was formed as part of an effort to capitalize on potential growth in certain segments of the commercial APU market. As a result of a weak commercial airline market and costs incurred in developing and marketing commercial APUs, the Company has experienced operating losses related to this piece of the market. During 1994, the Company and Labinal concluded that growth opportunities in the near future for this piece of the commercial APU market served by APIC are limited as a result of reduced procurement of aircraft by airlines and by development of fewer aircraft in the future by the major airframe manufacturers. Accordingly, the parties have initiated activities to reduce current levels of expenditures to be consistent with the size of the available market while continuing to provide the highest level of support to customers consistent with the intent of being a long-term participant in this market. These actions are expected to reduce both expenditures and operating losses in this business. ENVIRONMENTAL MATTERS For a detailed discussion, see the Environmental Matters note on pages 47 and 48. SIGNIFICANT CUSTOMER In addition to the U.S. government, as discussed in the Government Contract Matters section on page 31, the Boeing Company is a significant customer of the Company's Aerospace segment. Sales in 1994 to Boeing, including sales where the U.S. government was the ultimate customer, were 7.6 percent of consolidated sales and 14.6 percent of Aerospace segment sales. Sales in 1993 to Boeing, including sales where the U.S. government was the ultimate customer, were 9.5 percent of consolidated sales and 17.4 percent of Aerospace segment sales. Sales in 1992 to Boeing, including sales where the U.S. government was the ultimate customer, were 10.0 percent of consolidated sales and 17.6 percent of Aerospace segment sales. [29] 32 Management's Discussion and Analysis LIQUIDITY AND CAPITAL RESOURCES Working capital decreased to $303.3 million at December 31, 1994, from $365.3 million at December 31, 1993. The $62.0 million decrease was due primarily to an increase in notes and accounts payable, offset in part by an increase in cash and cash equivalents, a reduction in income taxes payable, and a reduction in other accrued liabilities. The increase in notes payable was due primarily to the repurchase of common stock under the stock repurchase program, the HMD-Kontro acquisition, and the discontinuance of a cash management policy which reduced notes payable at quarter end using available foreign cash. The increase in cash and cash equivalents also is due to the discontinuance of this cash management policy. The reduction in income taxes payable related primarily to a $34.9 million first quarter 1994 payment relating to the gain on the sale of SDC. Other accrued liabilities decreased for a number of reasons, the largest being reductions in the 1992 Aerospace restructuring reserve and in reserves related to the sale of SDC. Net cash flow from operating activities in 1994 was $108.4 million, a $133.4 million decrease from 1993. The decrease was due primarily to changes in accounts receivable and inventory balances, which generated $6.3 million of cash flow during 1994, compared with $81.8 million in 1993, and the previously mentioned $34.9 million tax payment related to the gain on the sale of SDC. Net cash flow from operating activities in 1993 was $241.8 million, an increase of $11.3 million from 1992. The increase was primarily the result of higher earnings from continuing operations. In 1994, the Company used $77.7 million of cash for investing activities, primarily for the purchase of fixed assets and the HMD-Kontro acquisition. Financing activities provided $32.4 million of cash in 1994, primarily net borrowings supported by lines of credit and borrowings for the HMD-Kontro acquisition, partially offset by cash used to repurchase common stock and pay dividends. In 1993, the Company generated $143.9 million of cash from investing activities due primarily to the sale of SDC, partially offset by the purchase of fixed assets. The Company used $363.2 million of cash for financing activities for debt repayments, dividend payments, and repurchases of the Company's stock. In 1992, $201.8 million of cash was used for investing activities, which consisted primarily of the acquisition of ESD and the purchase of fixed assets. The Company used $21.6 million of cash for financing activities, primarily as a result of dividend payments, partially offset by a net increase in debt.
[Bar chart:] OPERATING CASH FLOW (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 178.9 183.2 230.5 241.8 108.4
At December 31, 1994, seven banks provided a total of $335.0 million of unsecured revolving domestic credit facilities to the Company under a single agreement, all of which was unused. The Company also maintains foreign lines of credit for use in foreign operations totaling the equivalent of approximately $22 million, of which $.6 million was used at December 31, 1994. The entire unused portion of these credit facilities was available under the Company's most restrictive debt covenants at December 31, 1994. Cash flow from operating activities and access to credit facilities and the commercial paper market provide the Company with current and continuing sources of liquidity. The Company issues commercial paper in the United States, which is supported by its domestic revolving credit facilities. At December 31, 1994 and 1993, the Company had $193.3 million and $24.8 million of commercial paper outstanding, respectively. On November 16, 1993, the Company's Board of Directors expanded its authorization for the repurchase of the Company's outstanding common stock to a total of ten million shares, up six million shares from the previous authorization granted on February 16, 1993. The Company will consider a variety of options for the repurchase of the shares, from time to time, including open market, Dutch auction, and other purchases. The Company will hold the repurchased shares as treasury stock. The Company had purchased 5.0 million shares through December 31, 1994, pursuant to the repurchase authorization, at a total purchase price of $210.6 million. Funds for the repurchases were provided by the Company's 4(2) commercial paper program and operating activities. In December 1993, the Company recorded an extraordinary loss of $5.0 million, or $.14 per share, for the early retirement of high-cost, long-term debt. The extraordinary loss was due to the redemption premiums paid to holders of its 9.375% bonds and 12.0% notes, and the writeoff of capitalized debt [30] 33
[Bar chart:] CAPITALIZATION (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- Debt 369.3 454.7 478.9 281.6 440.3 Equity 624.5 692.5 530.0 512.2 493.8 ----------- ----------- ----------- ----------- ---------- Total 993.8 1,147.2 1,008.9 793.8 934.1 =========== =========== =========== =========== ==========
issuance costs associated with these instruments. Funds used to redeem these instruments were provided by the net proceeds from the sale of SDC. Interest expense in 1994 decreased by $10.4 million primarily as a result of the debt retirement. Interest expense in 1995 is expected to increase moderately from 1994 primarily as a result of a higher average debt balance throughout the year. The Company uses debt to the extent internally generated cash flow is insufficient to meet its requirements. Accordingly, the ratio of its total debt to total capital is important since it indicates the Company's capacity to absorb additional debt. This ratio was 47.1 percent at the end of 1994, compared with 35.5 percent at the end of 1993, and 47.5 percent at the end of 1992. The increase in 1994 was due primarily to the previously discussed increase in notes payable and the effects of the share repurchase program. The decrease in 1993 was primarily the result of the gain on the sale of SDC, the previously mentioned reduction of debt, and the improvement in working capital, partially offset by the share repurchases previously mentioned. Assuming no share repurchases and no acquisitions, the Company expects the total-debt-to-total-capital ratio to be approximately 40 percent by the end of 1995. Capital expenditures, cash dividend payments, and working capital requirements will be financed from the Company's continuing sources of liquidity. The Company remains actively involved in evaluating potential acquisitions, which may be financed with internal cash flow, debt, stock, or a combination thereof. Capital expenditures (excluding leased equipment) consisting primarily of normal replacements of property, plant, and equipment were $53.9 million in 1994, compared with $56.0 million in 1993. Capital expenditures in 1995 are expected to be moderately higher than 1994 levels. Total research and development expenditures for the years 1994, 1993, and 1992 were $109.0 million, $126.9 million, and $122.0 million, respectively, of which $45.0 million, $50.1 million, and $43.0 million, respectively, was funded by customers. The Company expects 1995 research and development expenditures to be approximately $125 million, including approximately $55 million which will be customer funded. TAX ISSUES For a detailed discussion, see the Income Taxes note on pages 43 through 45. GOVERNMENT CONTRACT MATTERS A portion of the Company's business results from contracts with or for government agencies. Military sales in 1994 were $278.8 million, of which 31 percent and 69 percent were from prime contracts and subcontracts, respectively. The Company's military sales in 1993 were $322.5 million, of which 32 percent and 68 percent were from prime contracts and subcontracts, respectively. The Company's military sales in 1992 were $327.8 million, of which 35 percent and 65 percent were from prime contracts and subcontracts, respectively. In addition, sales where the final customer was the U.S. government represented 87 percent, 88 percent, and 91 percent of total military sales in 1994, 1993, and 1992, respectively. Government contracts generally provide for the termination or the adjustment of material terms of such contracts at the election of the government, and the government may pursue contractual, administrative, civil, and criminal remedies for improper or illegal activities associated with obtaining and performing government contracts. Administrative remedies include the suspension, debarment, or ineligibility of all or part of a company from receiving government contracts and government-approved subcontracts. As is the case with any company that performs material amounts of business with the federal government, any such action by the government could have a material impact upon the Company's business. Management is not aware of any such situations, except as discussed below. In 1986, the U.S. Navy terminated for its convenience a contract with the Company for the supply of jet aircraft start units. As a result, the Company requested termination costs of approximately $20 million. Conversely, the government demanded payment of $20.3 million by the Company representing previously paid progress payments associated with production costs, which the government determined were not allocable to the contract. In October 1994, as a result of settlement negotiations, an agreement was reached with the government under which the Company expects to recover approximately $9.5 million. Actions are ongoing to implement the settlement agreement, including the arrangement of payment and commence- [31] 34 Management's Discussion and Analysis ment of the administrative closeout process. The resolution of this matter is not expected to have a material financial impact on the Company, nor impact the Company's ability to enter into future contractual agreements with the U.S. Navy. For additional discussions on government contract matters, see the Government Contract Matters note on page 48. OUTLOOK Industrial The outlook for the Company's Industrial businesses is quite favorable. Our businesses have strong franchises in mature, cyclical markets, and they produce above average profitability and excellent cash flow. Continuing strength in the U.S. industrial economy, along with a recovering European economy and penetration of more rapidly growing economies in the rest of the world, should allow the Industrial segment to continue to grow while earning significant operating margins. The growth of this segment may require additional capital expenditures in certain businesses for increases in capacity. Industrial companies or products with specific characteristics also may present attractive acquisition targets for the Company. Aerospace The commercial aerospace industry worldwide is expected to experience moderate growth through the end of the decade. The Company's Aerospace business has a strong market position, and is poised to benefit from anticipated worldwide growth in revenue passenger miles which ultimately results in increased demand for new aircraft. Major reductions in military spending, however, are expected to negatively impact the Company's manufacturing load over an extended period of time. In addition, the current reduced rate of new aircraft acquisitions by world airlines, the migration to twin-engine planes, and improved reliability of the Company's products also have impacted the manufacturing load. This has resulted in the profitability of the Aerospace segment becoming increasingly volume sensitive. Increases in manufacturing productivity accompanied by recent reductions in manufacturing volume have resulted in excess manufacturing and engineering capacity, along with related overheads. In response to this situation, the Company's Board of Directors on February 21, 1995, approved a restructuring plan that will result in a first quarter pretax charge of $58 million. The charge will be taken to cover the one-time costs of reducing excess manufacturing capacity by closing its facility in Lima, Ohio, reducing the engineering overhead in the Company's Aerospace segment, and writing down the assets of two non-core product lines. The anticipated net effects of additional non-accrued expenses, restructuring savings, and related nonrecurring gains are a pretax loss of approximately $7 million in 1995 and pretax earnings of approximately $20 million in 1996. The restructuring is expected to reduce cash flow by about $16 million in 1995 and provide a cash flow benefit of about $8 million in 1996. Forecast In its quarterly earnings release of February 22, 1995, the Company forecast for 1995 a sales increase of about 5 percent which should result in earnings per share in a range of $3.25 to $3.45, excluding the effects of the previously discussed restructuring and any additional share repurchases. Order trends support this forecast. Industrial sales in 1995 are expected to increase by about 10 percent and, excluding the first quarter charge, yield an operating profit margin of about 17 percent of sales. Aerospace sales are expected to be relatively flat in 1995 with an operating profit margin of approximately 13 percent of sales, excluding the effects of the restructuring. [32] 35 Management's Report The management of Sundstrand is responsible for the preparation and presentation of the consolidated financial statements and related financial information included in this annual report. These have been prepared in conformity with generally accepted accounting principles consistently applied and, as such, include amounts based on estimates by management. The consolidated financial statements have been audited by Ernst & Young LLP, the Company's independent auditors. Management also is responsible for maintaining a system of internal accounting controls which is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and are properly recorded. To assure the maintenance of effective internal controls, management adopts and disseminates policies, procedures and directives; selects and trains qualified personnel; establishes organizational structures which permit the delegation of authority and responsibility; and maintains an active program of internal audits and appropriate follow-up by management. The management of Sundstrand also recognizes its responsibility to promote a strong ethical climate throughout the Company. Toward this end, the Company provides training in ethical decision making to each employee. In addition, each employee receives a copy of the Company's manual on Business Conduct and Ethics. The Board of Directors elects an Audit Committee from among its members who are not employees of the Company. The Audit Committee meets periodically with management, the internal auditors, and the independent auditors to review the work of each and satisfy itself that they are properly discharging their responsibilities. Both the independent auditors and internal auditors have free access to the Audit Committee, without the presence of management, to discuss internal accounting controls, auditing, and financial reporting matters. /s/ Don R. O'Hare /s/ Paul Donovan Don R. O'Hare Paul Donovan Chairman of the Board and Executive Vice President Chief Executive Officer and Chief Financial Officer February 21, 1995 - -------------------------------------------------------------------------------- Independent Auditor's Report To the Shareholders and Board of Directors, Sundstrand Corporation We have audited the accompanying consolidated balance sheets of Sundstrand Corporation and subsidiaries as of December 31, 1994 and 1993, and the related statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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 conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sundstrand Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, in 1992 the Company changed its method of accounting for postretirement benefits other than pensions. /s/ Ernst & Young LLP Chicago, Illinois January 26, 1995 (Except for the Subsequent Event note, as to which the date is February 21, 1995) [33] 36
Consolidated Statement of Earnings Sundstrand Corporation and Subsidiaries (SNS) Year ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ (Amounts in millions except per share data) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,372.7 $ 1,383.1 $ 1,479.1 Costs and expenses: Costs of products sold . . . . . . . . . . . . . . . . . . . . . . . . . . 915.5 912.5 963.6 Marketing and administration . . . . . . . . . . . . . . . . . . . . . . . 279.8 291.9 329.9 Restructuring of Aerospace segment . . . . . . . . . . . . . . . . . . . . - - 32.2 ----------- ----------- ----------- 1,195.3 1,204.4 1,325.7 ----------- ----------- ----------- Earnings before other income (deductions) . . . . . . . . . . . . . . . . . . 177.4 178.7 153.4 Other income (deductions): Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29.6) (40.0) (59.1) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 4.3 19.8 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.8) (9.7) (3.7) ----------- ----------- ----------- (28.0) (45.4) (43.0) ----------- ----------- ----------- Earnings from continuing operations before income taxes, extraordinary item, and cumulative effect of accounting change . . . . . . 149.4 133.3 110.4 Less income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.8 42.6 40.3 ----------- ----------- ----------- Earnings from continuing operations before extraordinary item and cumulative effect of accounting change . . . . . . . . . . . . . . 95.6 90.7 70.1 Earnings (loss) from discontinued SDC business prior to discontinuance, net of taxes . . . . . . . . . . . . . . . . . . . - (.7) 13.2 Gain on sale of SDC, net of taxes . . . . . . . . . . . . . . . . . . . . . . - 55.7 - ----------- ----------- ----------- Earnings before extraordinary item and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . 95.6 145.7 83.3 Extraordinary loss on early retirement of debt, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (5.0) - Cumulative effect on prior years of change in method of accounting for postretirement benefits other than pensions, net of taxes . . . . . . . . . . . . . . . . . . . . . - - (205.0) ----------- ----------- ------------ Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95.6 $ 140.7 $ (121.7) =========== =========== ============ Weighted-average number of common shares outstanding . . . . . . . . . . . . 32.7 35.4 36.1 Earnings (loss) per share: Earnings from continuing operations before extraordinary item and cumulative effect of accounting change . . . . . . . . . . . . . . . $ 2.92 $ 2.56 $ 1.94 Earnings (loss) from discontinued SDC business, prior to discontinuance . . . . . . . . . . . . . . . . . . . . . . . . . - (.02) .37 Gain on sale of SDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1.57 - ----------- ----------- ----------- Earnings before extraordinary item and cumulative effect of accounting change . . . . . . . . . . . . . . . . . 2.92 4.11 2.31 Extraordinary loss on early retirement of debt . . . . . . . . . . . . . . - (.14) - Cumulative effect of change in accounting . . . . . . . . . . . . . . . . . - - (5.68) ----------- ----------- ----------- Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.92 $ 3.97 $ (3.37) =========== =========== =========== Cash dividends per common share . . . . . . . . . . . . . . . . . . . . . . . $ 1.20 $ 1.20 $ 1.175
See Notes to Consolidated Financial Statements [34] 37
Consolidated Statement of Cash Flows Sundstrand Corporation and Subsidiaries (SNS) Year ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- (Amounts in millions) Cash flow from operating activities: Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95.6 $ 140.7 $ (121.7) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.6 69.3 66.6 Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.9 18.8 16.3 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (14.6) 5.4 (184.7) Postretirement benefits other than pensions - cumulative effect . . . . . - - 319.9 Settlements of losses on long-term contracts . . . . . . . . . . . . . . (1.9) (4.6) (3.3) Change in operating assets and liabilities excluding the effects of acquisitions and divestitures: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.5) 40.8 (3.4) Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 41.0 26.6 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 11.0 35.7 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 (7.1) (5.0) Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (78.9) (16.9) 54.4 Cash provided by discontinued SDC business . . . . . . . . . . . . . . . . - 11.7 17.2 Pretax gain on sale of SDC . . . . . . . . . . . . . . . . . . . . . . . . - (90.0) - Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0 21.7 11.9 ----------- ----------- ----------- Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.8 101.1 352.2 ----------- ----------- ----------- Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 108.4 241.8 230.5 ----------- ----------- ----------- Cash flow from investing activities: Cash paid for property, plant, and equipment . . . . . . . . . . . . . . . (52.5) (58.2) (75.4) Proceeds from sale of property, plant, and equipment . . . . . . . . . . . 9.7 10.0 9.8 Cash paid for Electrical Systems Division . . . . . . . . . . . . . . . . . - - (128.0) Cash paid for HMD-Kontro, net of cash acquired . . . . . . . . . . . . . . (24.5) - - Investment in equity companies . . . . . . . . . . . . . . . . . . . . . . (10.4) (1.1) (3.0) Proceeds from sale of discontinued SDC business . . . . . . . . . . . . . . - 193.2 - Cash used for discontinued SDC business . . . . . . . . . . . . . . . . . . - - (5.2) ----------- ----------- ----------- Net cash provided by (used for) investing activities . . . . . . . . . . . . (77.7) 143.9 (201.8) ----------- ----------- ------------ Cash flow from financing activities: Net borrowings (payments) supported by lines of credit . . . . . . . . . . 142.8 (32.4) - Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . (9.4) (164.1) (112.5) Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . - - 5.6 Additional debt for Electrical Systems Division acquisition . . . . . . . . - - 128.0 Additional debt for HMD-Kontro acquisition . . . . . . . . . . . . . . . . 24.5 - - Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . (86.4) (124.2) - Cash used for discontinued SDC business . . . . . . . . . . . . . . . . . . - - (.2) Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39.1) (42.5) (42.5) ----------- ----------- ----------- Net cash provided by (used for) financing activities . . . . . . . . . . . . 32.4 (363.2) (21.6) ----------- ------------ ----------- Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . (12.7) (12.3) (10.3) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . 50.4 10.2 (3.2) Cash and cash equivalents at January 1 . . . . . . . . . . . . . . . . . . 15.4 5.2 8.4 ----------- ----------- ----------- Cash and cash equivalents at December 31 . . . . . . . . . . . . . . . . . . $ 65.8 $ 15.4 $ 5.2 =========== =========== =========== Supplemental cash flow information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32.1 $ 45.8 $ 59.9 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98.0 $ 72.3 $ 62.6
See Notes to Consolidated Financial Statements [35] 38
Consolidated Balance Sheet Sundstrand Corporation and Subsidiaries (SNS) December 31, 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- (Amounts in millions except share data) Assets Current Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65.8 $ 15.4 Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293.3 283.7 Inventories, net of progress payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 307.0 312.6 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.3 71.8 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.8 9.4 ----------- ----------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735.2 692.9 Property, Plant, and Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459.1 471.5 Intangible Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285.8 274.4 Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.1 31.3 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.7 41.8 ----------- ----------- $ 1,586.9 $ 1,511.9 =========== =========== Liabilities and Shareholders' Equity Current Liabilities Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193.9 $ 26.6 Long-term debt due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7 8.2 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94.8 82.1 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 34.6 Accrued salaries, wages, and commissions . . . . . . . . . . . . . . . . . . . . . . . . . 23.4 26.4 Accrued postretirement benefits other than pensions . . . . . . . . . . . . . . . . . . . . 19.3 19.5 Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89.8 130.2 ----------- ----------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431.9 327.6 Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235.7 246.8 Accrued Postretirement Benefits Other Than Pensions . . . . . . . . . . . . . . . . . . . . . 356.8 348.7 Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68.7 76.6 Shareholders' Equity Common stock, par value $.50 per share; authorized 150,000,000 shares; issued 1994 and 1993 - 37,843,014 shares (including shares in treasury) . . . . . . . . . 18.9 18.9 Additional contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147.0 146.6 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582.1 525.6 Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . (9.4) (11.3) Common stock in treasury (at cost); 1994 - 6,207,043 shares and 1993 - 4,392,996 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (233.7) (153.6) Unamortized value of restricted stock issued . . . . . . . . . . . . . . . . . . . . . . . (11.1) (14.0) ----------- ----------- 493.8 512.2 ----------- ----------- $ 1,586.9 $ 1,511.9 =========== ===========
See Notes to Consolidated Financial Statements [36] 39
Consolidated Statement of Shareholders' Equity Sundstrand Corporation and Subsidiaries (SNS) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------------- (Amounts in millions except share data) Common Stock Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18.9 $ 18.9 $ 18.9 ============ =========== ============ Additional Contributed Capital Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 146.6 $ 138.7 $ 138.2 Stock issued under employee stock plans . . . . . . . . . . . . . . . . . . .4 7.9 .5 ----------- ----------- ----------- Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 147.0 $ 146.6 $ 138.7 =========== =========== =========== Retained Earnings Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 525.6 $ 427.4 $ 591.6 Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95.6 140.7 (121.7) Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39.1) (42.5) (42.5) ----------- ----------- ----------- Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 582.1 $ 525.6 $ 427.4 =========== =========== =========== Foreign Currency Translation Adjustment Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (11.3) $ (9.1) $ (8.0) Adjustment for the year . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 (2.2) (1.1) ----------- ----------- ----------- Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9.4) $ (11.3) $ (9.1) =========== ============ =========== Common Stock in Treasury Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (153.6) $ (38.8) $ (38.8) Purchase of 1,768,300 shares in 1994 and 3,273,300 shares in 1993 for treasury . . . . . . . . . . . . . . . . . (79.4) (131.2) - Stock issued under employee stock plans . . . . . . . . . . . . . . . . . . 3.5 17.3 .2 Purchase of shares previously issued under employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . (4.2) (.9) (.2) ----------- ----------- ----------- Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ (233.7) $ (153.6) $ (38.8) =========== =========== ============ Unamortized Value of Restricted Stock Issued Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (14.0) $ (7.1) $ (9.5) Stock issued under employee stock plans . . . . . . . . . . . . . . . . . . (3.7) (12.4) (.3) Purchase of shares previously issued under employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 .2 .4 Net amortization of deferred compensation under employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 5.3 2.3 ----------- ----------- ----------- Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $ (11.1) $ (14.0) $ (7.1) =========== =========== ===========
See Notes to Consolidated Financial Statements [37] 40
Information by Business Segment Sundstrand Corporation and Subsidiaries (SNS) Financial data with respect to the various business segments in which the Company operates are set forth below. Intersegment sales are immaterial. Military sales occur primarily in the Aerospace segment. 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ (Amounts in millions) Net sales Aerospace(a)(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 709.3 $ 753.6 $ 839.6 Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663.4 629.5 639.5 ----------- ----------- ----------- $ 1,372.7 $ 1,383.1 $ 1,479.1 =========== =========== =========== The above includes: Military sales (final customer is primarily the U.S. government) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 278.8 $ 322.5 $ 327.8 =========== =========== =========== Export sales of domestically manufactured products Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 136.9 $ 132.0 $ 152.2 Asia/Pacific Rim . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110.8 101.7 97.5 North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.1 62.2 58.5 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.0 44.1 44.9 ----------- ----------- ----------- $ 366.8 $ 340.0 $ 353.1 =========== =========== ===========
(a) Sales of the electric power systems product line were $440.8 million, $449.2 million, and $478.5 million in 1994, 1993, and 1992, respectively. (b) Sales to the Boeing Company, including sales where the U.S. government was the ultimate customer, were $103.9 million, $130.9 million, and $148.0 million in 1994, 1993, and 1992, respectively.
- ------------------------------------------------------------------------------------------------------------------------------ Operating profit Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87.6 $ 106.3 $ 90.4 Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.0 84.1 82.1 ----------- ----------- ----------- Total operating profit . . . . . . . . . . . . . . . . . . . . . . . . . 193.6 190.4 172.5 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29.6) (40.0) (59.1) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 4.3 19.8 General corporate expenses . . . . . . . . . . . . . . . . . . . . . . . . . (14.3) (14.9) (15.0) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.7) (6.5) (7.8) ----------- ----------- ----------- Earnings from continuing operations before income taxes, extra- ordinary item, and cumulative effect of accounting change . . . . . . . . $ 149.4 $ 133.3 $ 110.4 =========== =========== =========== - ------------------------------------------------------------------------------------------------------------------------------ Assets Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 831.5 $ 856.1 $ 1,001.7 Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600.2 526.5 590.4 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155.2 129.3 187.5 ----------- ----------- ----------- $ 1,586.9 $ 1,511.9 $ 1,779.6 =========== =========== =========== Capital expenditures (includes leased equipment) Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.3 $ 32.4 $ 55.0 Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.0 20.1 20.1 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 3.7 .3 ----------- ----------- ----------- $ 53.9 $ 56.2 $ 75.4 =========== =========== =========== Depreciation and amortization (includes leased equipment) Aerospace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53.9 $ 60.8 $ 55.0 Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.3 23.3 25.5 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 4.1 2.3 ----------- ----------- ----------- $ 78.5 $ 88.2 $ 82.8 =========== =========== ===========
See Notes to Consolidated Financial Statements [38] 41
Information by Business Segment (Continued) Sundstrand Corporation and Subsidiaries (SNS) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ (Amounts in millions) Geographic Areas Net sales Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,242.5 $ 1,241.2 $ 1,314.5 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130.2 141.9 164.6 ----------- ----------- ----------- $ 1,372.7 $ 1,383.1 $ 1,479.1 =========== =========== =========== Operating profit Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 180.0 $ 185.2 $ 152.8 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6 5.2 19.7 ----------- ----------- ----------- $ 193.6 $ 190.4 $ 172.5 =========== =========== =========== Assets Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,409.3 $ 1,347.7 $ 1,586.4 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177.6 164.2 193.2 ----------- ----------- ----------- $ 1,586.9 $ 1,511.9 $ 1,779.6 =========== =========== ===========
Quarterly Results (Unaudited) Quarter Ended ---------------------------------------------------------------- March 31 June 30 Sept. 30 Dec. 31(a) - -------------------------------------------------------------------------------------------------------------------------------- (Amounts in millions except per share data) 1994 Net sales . . . . . . . . . . . . . . . . . . . . . . . . $ 324.3 $ 331.1 $ 339.7 $ 377.6 Gross profit . . . . . . . . . . . . . . . . . . . . . . $ 100.7 $ 109.8 $ 113.8 $ 132.9 Net earnings . . . . . . . . . . . . . . . . . . . . . . $ 17.8 $ 19.1 $ 23.7 $ 35.0 Earnings per share . . . . . . . . . . . . . . . . . . . $ .54 $ .58 $ .72 $ 1.08 1993 Net sales . . . . . . . . . . . . . . . . . . . . . . . . $ 340.7 $ 341.8 $ 324.7 $ 375.9 Gross profit . . . . . . . . . . . . . . . . . . . . . . $ 127.7 $ 115.7 $ 101.5 $ 125.7 Earnings before extraordinary item . . . . . . . . . . $ 24.5 $ 19.8 $ 17.1 $ 84.3 Net earnings . . . . . . . . . . . . . . . . . . . . . . $ 24.5 $ 19.8 $ 17.1 $ 79.3 Earnings per share before extraordinary item . . . . . . $ .68 $ .55 $ .49 $ 2.39 Earnings per share . . . . . . . . . . . . . . . . . . . $ .68 $ .55 $ .49 $ 2.25
(a) Results for 1993 included $55.0 million after taxes ($1.55 per share) for the net gain on the sale of SDC and $5.0 million after taxes ($.14 per share) for the extraordinary loss on the early retirement of debt. See Notes to Consolidated Financial Statements [39] 42 Notes to Consolidated Financial Statements SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation provide for the inclusion of the accounts of Sundstrand Corporation and all subsidiaries. All intercompany transactions are eliminated in consolidation. Cash Equivalents are considered by the Company to be all highly liquid debt instruments purchased with original maturities of three months or less. Sales Under Long-Term Contracts, a portion of which are with the U.S. government, are accounted for under the percentage of completion method. The Company enters into long-term contracts which require it to develop or advance state-of-the-art technology products. Sales on developmental contracts are recorded as the related costs are incurred and include estimated profits calculated on the basis of the relationship between costs incurred and total estimated costs (cost-to-cost method of percentage of completion). The Company also enters into long-term contracts for the manufacture of products. Sales on production-type contracts are recorded as deliveries are made (units-of-delivery method of percentage of completion). Marketing and administrative costs are expensed as incurred. On a selective basis, the Company may enter into a contract to research and develop or manufacture a product with a loss anticipated at the date the contract is signed. These contracts are entered into in anticipation that profits will be obtained from future contracts for the same or similar products. These loss contracts often provide the Company with intellectual property rights which, in effect, establish it as the sole producer of certain products. Such losses are recognized at the date the Company becomes contractually obligated, with revisions made as changes occur in the related estimates to complete. Certain contracts and subcontracts are subject to government audit and review. Information related to government contract matters is presented on page 48. Inventories are stated at the lower of cost (principally first-in, first-out method) or market. Certain inventories are valued using the last-in, first-out method. Inventoried costs relating to long-term contracts are accounted for based on the percentage-of-completion methods described above. Property, Plant, and Equipment is recorded at cost and depreciation is generally provided on the straight-line basis by charges to expense at rates based on the estimated useful lives of the assets. Estimated useful lives range from 3 to 20 years for machinery and equipment and 10 to 40 years for buildings. Expenditures for new facilities and expenditures that substantially increase the useful lives of the property are capitalized. Maintenance and repairs are expensed as incurred. Intangible Assets of $285.8 million and $274.4 million at December 31, 1994 and 1993, respectively (net of accumulated amortization of $81.3 million and $66.5 million, respectively), consist primarily of goodwill associated with certain acquisitions. Goodwill is amortized primarily over 40 years using the straight-line method. The Company annually evaluates whether a change in the estimated useful life of goodwill is warranted or whether the remaining goodwill balance may be impaired. The Company currently believes that no impairment of goodwill has occurred. However, if the cumulative undiscounted cash flows, before interest, over the remaining life of the goodwill indicated an impairment, a reduction for impairment of goodwill would be recorded. Derivative Financial Instruments in the form of foreign currency forward contracts are entered into by the Company as a hedge against foreign currency exposures. These contracts limit the Company's exposure to both favorable and unfavorable currency fluctuations. On contracts which are designated as a hedge of a firm commitment, a net investment in a foreign entity, or an intercompany transaction of a long-term nature, gains and losses are deferred and included in the measurement of the hedged transaction upon settlement. Gains and losses on other foreign currency forward contracts, including contracts which relate to anticipated transactions, are reflected in the financial statements in the period in which the currency fluctuation occurs. The Company has strict controls regarding the use of derivative financial instruments, which is limited to foreign currency forward contracts. Any deviation from this policy requires the prior approval of the Company's Executive Vice President and Chief Financial Officer. In order to manage credit risk related to the foreign currency forward contracts, the Company utilizes only highly-rated commercial banks or financial institutions for such purposes. Compliance with this policy is monitored on an ongoing basis, and is reviewed and approved annually by the Finance Committee of the Company's Board of Directors. Information by Business Segment is presented on pages 38 and 39. [40] 43 ADDITIONAL STATEMENT OF CASH FLOWS INFORMATION Excluded from the 1993 Consolidated Statement of Cash Flows was $11.9 million of non-cash financing activities related to the conversion of Phantom Stock and Cash Equivalent Rights liabilities to Restricted Stock under the Company's Stock Incentive Plan. For additional information on this plan see the Stock Incentive Plan note on pages 46 and 47. SUNDSTRAND DATA CONTROL DIVISION (SDC) SALE On November 12, 1993, pursuant to the Stock, Note, and Real Property Purchase Agreement between AlliedSignal, Inc. (Allied) and the Company dated July 14, 1993, the Company transferred substantially all of the assets, business, and properties which were utilized in connection with the business of SDC to Allied. The purchase price was $191.0 million and Allied agreed to assume certain liabilities of the business. This resulted in a pretax gain of $96.0 million and an after-tax gain of $55.7 million, which included earnings generated since the January 31, 1993, measurement date. Results for prior years have been restated and results for 1993 have been disaggregated to reflect SDC as a discontinued operation. WESTINGHOUSE ELECTRICAL SYSTEMS DIVISION (ESD) ACQUISITION On May 8, 1992, the Company acquired the assets of ESD for $128.0 million. ESD is a manufacturer of electric power generating equipment for aircraft. The acquisition was recorded using the purchase method of accounting, and the results of operations of ESD since the acquisition date have been included in the Company's consolidated financial statements for 1992, 1993, and 1994. The cost in excess of the net assets acquired was $68.6 million and is being amortized using the straight-line method over 40 years. RESTRUCTURING OF AEROSPACE SEGMENT The anticipated accelerated decline in military sales and slower growth in commercial sales during the next several years made the initiation of restructuring actions necessary during 1992 in the Company's Aerospace segment. These actions also provided for the integration of ESD into the Company's electric power systems product line and were directly related to reducing capacity and lowering fixed costs. Restructuring actions identified in 1992 resulted in charges to continuing operations of $32.2 million before taxes and $20.4 million after taxes ($.57 per share). The Company completed this restructuring in the fourth quarter of 1994 having charged costs of $8.4 million, $14.5 million, and $9.3 million against the reserve in 1994, 1993, and 1992, respectively. ACCOUNTS RECEIVABLE, NET The components of net accounts receivable at December 31, 1994 and 1993, were:
(Amounts in millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ U.S. government Amounts billed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40.4 $ 46.0 Unbilled costs and accrued profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.1 20.7 ----------- ----------- 70.5 66.7 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222.8 217.0 ----------- ----------- $ 293.3 $ 283.7 =========== =========== INVENTORIES The components of inventories at December 31, 1994 and 1993, were: (Amounts in millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48.8 $ 43.8 Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117.1 135.8 Finished goods and parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155.4 156.4 ----------- ----------- 321.3 336.0 Less progress payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3 23.4 ----------- ----------- $ 307.0 $ 312.6 =========== ===========
Prior to the application of progress payments, the inventories shown above included costs of $51.3 million and $61.4 million at December 31, 1994 and 1993, respectively, related to long-term contracts. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at December 31, 1994 and 1993, was classified as follows:
(Amounts in millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39.2 $ 35.0 Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229.5 227.1 Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775.1 786.3 ----------- ----------- 1,043.8 1,048.4 Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 584.7 576.9 ----------- ----------- $ 459.1 $ 471.5 =========== ===========
During 1994, the Company changed its estimate of the average useful lives used to compute depreciation for certain fixed assets. This change resulted from internal asset management procedures that are designed to ensure continued compliance with government contract accounting requirements and was made to reflect better the estimated periods during which such assets will remain in service. The change had the effect of increasing net earnings by $5.5 million, or $.17 per share, in the year ended December 31, 1994. [41] 44 Notes to Consolidated Financial Statements PENSION BENEFITS The Company has defined benefit pension plans covering substantially all U.S. employees. Pay-related plans generally provide pension benefits that are based on the employee's highest compensation during a three-year period or the employee's average career compensation, prior to retirement. Nonpay-related plans provide benefits of stated amounts for each year of service. Pension plans for U.S. employees have been funded at amounts equal to or greater than the minimum required by ERISA. Pension cost for 1994, 1993, and 1992 included:
(Amounts in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ Service cost of current period . . . . . . . . . . . . . . . . . . . . . . . $ 19.3 $ 17.0 $ 16.2 Interest cost on projected benefit obligation . . . . . . . . . . . . . . . 44.4 38.5 38.0 Less recognized (loss) gain on plan assets . . . . . . . . . . . . . . . . . (3.8) 36.6 36.7 Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . . (50.6) (6.0) (1.5) ----------- ----------- ----------- Net pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16.9 $ 12.9 $ 16.0 =========== =========== ===========
The funded status of the plans at December 31, 1994 and 1993, was: 1994 1993 ------------------------------ ------------------------------ Assets in Accum- Assets in Accum- excess of ulated excess of ulated accum- benefits accum- benefits ulated in excess ulated in excess (Amounts in millions) benefits of assets benefits of assets - -------------------------------------------------------------------------------------------------------------------------------- Benefit obligation liability: Vested benefits . . . . . . . . . . . . . . . . . . . . . $ 370.0 $ 6.5 $ 469.1 $ 9.9 Nonvested benefits . . . . . . . . . . . . . . . . . . . 52.1 .4 40.1 .6 ----------- ----------- ------------ ----------- Accumulated benefit obligation . . . . . . . . . . . . . 422.1 6.9 509.2 10.5 Effect of projected future compensation levels . . . . . . . . . . . . . . . . . . 82.5 1.5 85.9 1.8 ----------- ----------- ------------ ----------- Projected benefit obligation . . . . . . . . . . . . . . 504.6 8.4 595.1 12.3 Less plan assets at market value . . . . . . . . . . . . . 586.0 - 614.4 1.9 ----------- ----------- ----------- ----------- Projected benefit obligation in excess of (less than) plan assets . . . . . . . . . . . . (81.4) 8.4 (19.3) 10.4 Adjustments for deferrals of benefit obligation liability not yet recognized in cost: Net experience gain . . . . . . . . . . . . . . . . . . . 100.5 .7 45.1 .7 Initial net obligation . . . . . . . . . . . . . . . . . (23.9) (.3) (27.6) (.4) Prior service cost due to plan amendments . . . . . . . . . . . . . . . . . . . . 1.6 (.6) .9 (.6) Adjustment required to recognize minimum liability . . . . . . . . . . . . . . . . . . . . - .4 - .7 ----------- ----------- ----------- ----------- Accrued (prepaid) pension liability . . . . . . . . . . . . $ (3.2) $ 8.6 $ (.9) $ 10.8 =========== =========== ============ ===========
The projected benefit obligation was determined using an assumed discount rate of 8.5 percent at December 31, 1994, and 7.25 percent at December 31, 1993. The assumed weighted-average long-term rate of compensation increase was 5.0 percent at December 31, 1994 and 4.5 percent at December 31, 1993. The assumed long-term rate of return on plan assets was 8.75 percent at December 31, 1994, 1993, and 1992. Plan assets consist principally of common stocks and fixed income investments. During 1993, SDC was sold and, as a result, future benefits for former employees of this division were fixed causing recognition of a $7.5 million curtailment gain, which has been reflected in the gain on the sale of SDC. The Company also sponsors four defined contribution retirement benefit plans that cover substantially all U.S. and Puerto Rican employees. All of these plans are subject to ERISA. Three of the plans are intended to be maintained under the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended, and one plan is intended to be maintained under the Puerto Rico Income Tax Act of 1954, as amended. Two of these plans provide that the employer will match certain portions of the employee-directed contributions. The 1994, 1993, and 1992 Company matching contributions to the above plans were $.5 million, $.7 million, and $.8 million, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides health and life insurance benefits for retired employees and certain dependents when employees become eligible for these benefits by satisfying plan provisions, which include certain age and/or service requirements. Health and life insurance benefits for retirees of domestic operations are provided through insurance contracts, a group benefit trust or general assets of the Company. Health and life insurance benefits for retirees of foreign operations, where applicable, are provided through government-sponsored plans to which contributions by the Company are required. The health insurance plans covering substantially all U.S. employees are contributory, with contributions adjusted annually, and these plans contain other cost-sharing features such as deductibles and coinsurance. Currently, the Company requires contributions, which are adjusted annually, primarily from employees who retired subsequent to 1991. The Company does not prefund these plans and has the right to modify or terminate any of these plans in the future. In the second quarter of 1992, the Company adopted Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions," retroactive to the [42] 45 first quarter of 1992. SFAS No. 106 requires that the projected future cost of retiree health and life insurance be recognized as a cost as employees render service instead of when the benefits are paid. As a result of this adoption, the Company recorded a pretax charge of $319.9 million ($205.0 million after taxes or $5.68 per share) as the cumulative effect of the accounting change at that date. Postretirement health and life insurance costs for 1994, 1993, and 1992 were $23.4 million, $34.6 million, and $33.8 million, respectively. The components of postretirement benefit cost for 1994, 1993, and 1992 were:
(Amounts in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.6 $ 5.1 $ 6.1 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.8 29.4 27.7 Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . . (3.0) .1 - ----------- ----------- ----------- Postretirement benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . $ 23.4 $ 34.6 $ 33.8 =========== =========== ===========
The funded status of the plans at December 31, 1994 and 1993, was: (Amounts in millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Accumulated postretirement benefit obligation: Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199.4 $ 227.9 Eligible active plan participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8 14.2 Other active plan participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.6 65.1 ----------- ----------- 265.8 307.2 Plan assets at market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - ----------- ----------- Accumulated postretirement benefit obligation in excess of plan assets . . . . . . . . . . . 265.8 307.2 Unrecognized prior period gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86.5 32.0 Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.8 29.0 ----------- ----------- Postretirement benefit liability recognized in the balance sheet . . . . . . . . . . . . . . $ 376.1 $ 368.2 =========== ===========
The assumed weighted-average annual rate of increase in the per capita cost of medical and prescription drug benefits (applicable only to employees who retired prior to 1992) is 8 percent for 1995 and is assumed to decrease gradually each year from 1995 to 2000 and remain level at 5 percent thereafter. The assumed weighted-average annual rate of increase in the per capita cost of dental benefits (applicable only to employees who retired prior to 1992) is 7 percent in 1995 and is assumed to decrease 1 percent per year from 1995 to 1997 and remain level at 5 percent thereafter. These rates have no effect on the Company's costs for employees retiring after 1991 as the Company's policy is to increase retiree contributions so that the Company's annual per capita cost increases at the general inflation rate. The assumed annual rate of increase in the general inflation rate (applicable to employees retiring after 1991) is 4 percent. A 1 percent increase in the annual health care trend rates would have increased the accumulated postretirement benefit obligation at December 31, 1994 and 1993, by $15.9 million and $20.8 million, respectively, and increased postretirement benefit expense for 1994, 1993, and 1992 by $1.3 million, $3.7 million, and $4.4 million, respectively. The weighted-average discount rate used to estimate the accumulated postretirement benefit obligation was 8.75 percent at December 31, 1994, and 7.5 percent at December 31, 1993. During 1993, SDC was sold and, as a result, future benefits for former employees of this division were fixed causing recognition of a $10.9 million curtailment gain, which has been reflected in the gain on the sale of SDC. INCOME TAXES Income tax expense for the three years ended December 31, 1994, consisted of the following components:
(Amounts in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . $ 64.4 $ 37.2 $ 110.1 Deferred income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . (10.6) 5.4 (69.8) ----------- ----------- ----------- Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . $ 53.8 $ 42.6 $ 40.3 =========== =========== =========== Total income tax expense (benefit) includes: State tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.0 $ 8.1 $ 5.0 Foreign tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.5 $ (2.5) $ 2.7
State and foreign income taxes for 1994, 1993, and 1992 were principally current. Total income tax expense for each year varied from the amount computed by applying the statutory U.S. federal income tax rate to earnings before income taxes for the reasons set forth in the following reconciliation:
(Amounts in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ Income tax expense at the statutory rate . . . . . . . . . . . . . . . . . . $ 52.3 $ 46.6 $ 37.5 Increases (reductions) in taxes resulting from: State taxes based on income, net of federal income taxes . . . . . . . . . 5.8 5.2 3.3 Adjustments to prior year accruals . . . . . . . . . . . . . . . . . . . . 3.8 (2.7) - Taxes on subsidiaries at rates other than the statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 (2.4) - Additional earnings of foreign subsidiaries now deemed to be permanently invested . . . . . . . . . . . . . . . . . . (8.1) - - Taxes on undistributed earnings of foreign subsidiaries no longer deemed permanently invested . . . . . . . . . . . . . . . . . . - - 17.6 Reversal of taxes provided at rates higher than the current statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . - - (13.3) Change in federal statutory rate . . . . . . . . . . . . . . . . . . . . . - (3.1) - FSC tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.8) (3.3) (8.0) Miscellaneous other items . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 2.3 3.2 ----------- ----------- ----------- Actual income tax expense . . . . . . . . . . . . . . . . . . . . . . . . $ 53.8 $ 42.6 $ 40.3 =========== =========== =========== "Effective" tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . 36.0% 32.0% 36.5%
[43] 46 Notes to Consolidated Financial Statements In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes," effective for fiscal years beginning after December 15, 1992. The Company adopted SFAS No. 109 as of January 1, 1993, with no significant effect. Prior to adopting SFAS No. 109, the Company accounted for income taxes based on Accounting Principles Board Opinion No. 11. Significant components of the net deferred tax assets at December 31, 1994, and 1993, were:
(Amounts in millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ Deferred Tax Assets Arising From: Retiree medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 144.7 $ 146.3 Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.8 9.5 Employee benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 10.6 Environmental reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0 12.2 Recoverable taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0 20.0 Warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 9.1 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9 15.4 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.2 24.4 ----------- ----------- Total Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229.4 247.5 ----------- ----------- Deferred Tax Liabilities Arising From: Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.1 41.8 Taxes provided on unremitted foreign earnings . . . . . . . . . . . . . . . . . . . . . . . 24.5 34.5 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.4 68.1 ----------- ----------- Total Deferred Tax Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.0 144.4 ----------- ----------- Net Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 117.4 $ 103.1 =========== ===========
During the third quarter of 1993, a tax bill was enacted which increased the federal statutory tax rate on the income of corporations from 34 percent to 35 percent. Due to the tax law change, deferred tax assets increased $11.2 million, of which $8.1 million was a reduction in goodwill related to the acquisition of ESD and $3.1 million was a reduction in current-year tax expense. The sources of significant timing differences for 1992 and their effects were:
(Amounts in millions) 1992 - ------------------------------------------------------------------------------------------------------------------------------ Utilization of expected tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58.4 Undistributed earnings of foreign subsidiaries not considered permanently invested . . . . . . . . . . . . . . 12.4 Differences in tax and book inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 Environmental reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Distributed earnings of foreign subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (109.1) Differences in tax and book employee benefit expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21.2) Reversal of taxes provided at rates higher than the current statutory rate . . . . . . . . . . . . . . . . . . (13.3) Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.2) Miscellaneous other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.1) ----------- Total deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (69.8) ===========
Domestic and foreign earnings from continuing operations before income taxes for the three years ended December 31, 1994, as shown below, exclude profits recorded on intercompany sales. Net interest expense is allocated between geographic segments based on non-cash assets.
(Amounts in millions) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139.2 $ 130.9 $ 98.1 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 2.4 12.3 ----------- ----------- ----------- Total earnings from continuing operations before income taxes, extraordinary item, and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . $ 149.4 $ 133.3 $ 110.4 =========== =========== ===========
Profits recorded on intercompany sales excluded above were $14.5 million, $4.2 million, and $3.0 million, in 1994, 1993, and 1992, respectively, and were earned primarily by the Company's Singapore subsidiaries. At December 31, 1994, total assets of operations outside the United States were $177.6 million after deducting $12.8 million due from the Company's domestic operations. The Company's year-end 1994 equity in its foreign operations was $175.5 million. As a result of the 1992 resolution of a multi-year dispute with the Internal Revenue Service (IRS) concerning intercompany pricing with a Singapore subsidiary, the Company was able to establish a plan for repatriation of foreign earnings which had the effect of reducing the amount of foreign subsidiary earnings which were permanently invested. In 1994, the increase in business opportunities outside the U.S., and in the Far East region in particular, caused the Company to review its repatriation plans. In order to exploit the expanding foreign marketplace, the Company adjusted its planning to recognize that foreign earnings previously earmarked for repatriation would now be considered permanently invested and used for capital investment. As of December 31, 1994 and 1993, the Company had not provided federal income taxes on $67.3 million and $38.2 million, respectively, of undistributed earnings recorded by certain subsidiaries outside the United States, since these earnings were deemed permanently invested. For the years 1983 through 1985, the IRS has proposed to increase the Company's taxable income by approximately $225 million based upon the IRS' assertion that certain intercompany loans between the Company and its Sunpac subsidiary in Singapore should be taxed as if they were dividends to the Company. While the amount of the proposed adjustment is material, the Company does not believe the IRS' position will be sustained. [44] 47 In connection with the resolution of government contracts disputes, amended federal income tax returns were filed for the years 1978 through 1987 which requested $32.3 million in refunds and created tax benefit carryforwards of $51.9 million, which the Company subsequently used. The issue of whether the payments made upon the resolution of the government contracts disputes could reduce taxable income in the years in which the revenues from the contracts were reported was decided during 1992 by the U.S. Tax Court, which issued an opinion adverse to the Company for the years 1979 through 1982. The Company took various actions to reverse the Tax Court's decision. In October 1994, the Company ceased its efforts to reverse this decision and made a payment of $17.8 million to the IRS which did not have a material financial impact on the Company. Additionally, during 1994, the IRS informed the Company that it was disallowing a deduction for the $115.0 million in payments pursuant to the settlement agreement dated August 29, 1988. While the potential impact of this disallowance is material, the Company does not believe that the IRS' position will be substantially sustained. The Company believes that its recorded tax and interest provisions are sufficient to cover the final resolution of any tax deficiencies. NOTES PAYABLE AND LONG-TERM DEBT Notes payable consist of commercial paper and bank borrowings and were $193.9 million and $26.6 million at an average interest rate of 6.3 percent and 3.6 percent at December 31, 1994, and 1993, respectively. At December 31, 1994, the Company maintained domestic revolving credit facilities totaling $335.0 million. Commitment fees incurred in 1994 were $.7 million. The Company also maintained foreign lines of credit for use in its foreign operations totaling the equivalent of approximately $22 million at December 31, 1994. Under the domestic credit facilities in place at December 31, 1994, payments of dividends are limited by the requirement to maintain a minimum level of net worth. At December 31, 1994, net worth exceeded the maintenance level by $172.3 million. The composition of long-term debt at December 31, 1994 and 1993, was:
(Amounts in millions) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ 11.05% notes due serially 1994-1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.0 $ 25.0 9.48% notes due 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 9.15% notes due 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.0 50.0 9.34% notes due 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.0 50.0 Other, including $17.7 million of variable rate debt, weighted average 6.0% at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . 31.4 30.0 ----------- ----------- 246.4 255.0 Less amount due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7 8.2 ----------- ----------- Long-term debt (less current portion) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 235.7 $ 246.8 =========== ===========
In December 1993, the Company recorded an extraordinary loss of $7.9 million before taxes, or $5.0 million after taxes, for the early retirement of debt. The extraordinary loss was due to the redemption premiums paid to holders of the 9.375% bonds and the 12.0% notes, and the writeoff of capitalized debt issuance costs associated with these instruments. Total principal payments required under long-term debt agreements for the five years subsequent to December 31, 1994, are $10.7 million in 1995, $8.4 million in 1996, $8.0 million in 1997, $6.0 million in 1998, and $1.1 million in 1999. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, the Company is party to financial instruments with off-balance-sheet risk to meet financing needs and to reduce its own exposure to fluctuations in exchange rates. These financial instruments include financial guarantees and forward exchange contracts. These instruments involve, to varying degrees, elements of credit and/or exchange rate risk in excess of the amount recognized in the financial statements. Financial guarantees are conditional commitments issued by the Company to guarantee the payment of certain liabilities of unconsolidated affiliates and unaffiliated entities to third parties. These guarantees are issued primarily to support borrowing arrangements, and are scheduled to expire, subject to extension, during 1995. The Company's exposure for financial guarantees is equal to the contractual amount of these guarantees. The contractual amounts and the maximum credit loss in the event of non-performance at December 31, 1994, were both $9.5 million. [45] 48 Notes to Consolidated Financial Statements Forward exchange contracts are contracts for delivery or purchase of foreign currencies at specified future dates. For forward exchange contracts, the contract amounts represent currency exposure if the other party fails to perform under the contract. At December 31, 1994, the Company had forward exchange contracts maturing during 1995 to sell the equivalent of $91.2 million and to purchase the equivalent of $16.7 million in foreign currency. These contracts included $95.4 million which the Company used to limit its exposure to foreign currency fluctuations related to specific assets and liabilities denominated in a foreign currency, primarily the French franc. The remaining $12.5 million was used to limit the effects of foreign currency fluctuations on anticipated Singapore dollar cash flow, based on forecasted monthly expenditures. Had all of the forward exchange contracts matured on December 31, 1994, the Company's cash requirement would have been immaterial. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates their fair value. Foreign currency exchange contracts: The fair value of the Company's foreign exchange contracts is estimated based on quoted market prices of comparable contracts. Short- and long-term debt: The carrying amounts of the Company's borrowings under its commercial paper programs, its short-term revolving credit agreements, and variable rate long-term debt instruments approximate their fair value. The fair value of the Company's other long-term debt is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and fair values of the Company's financial instruments at December 31, 1994 and 1993, were:
1994 1993 ----------------------------- ----------------------------- Carrying Fair Carrying Fair (Amounts in millions) Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 65.8 $ 65.8 $ 15.4 $ 15.4 Foreign exchange contracts . . . . . . . . . . . . . . . . - .1 - (.1) Short-term debt . . . . . . . . . . . . . . . . . . . . . . 193.9 193.9 26.6 26.6 Long-term debt . . . . . . . . . . . . . . . . . . . . . . 246.4 256.6 255.0 301.0
LEASE ARRANGEMENTS AND RENT EXPENSE Rent and lease expense for the years 1994, 1993, and 1992 were $14.8 million, $16.4 million, and $19.8 million, respectively. The Company leases certain facilities and equipment under operating leases, many of which contain renewal options and escalation clauses. Minimum future rental commitments under noncancelable operating leases which extend beyond one year are payable as follows: 1995, $11.2 million; 1996, $9.0 million; 1997, $6.7 million; 1998, $5.1 million; 1999, $5.0 million; and after 1999, $14.6 million. Facilities and equipment under capital leases, minimum future rentals receivable under subleases, and contingent rental expenses were not significant for the years 1994, 1993, and 1992. STOCK INCENTIVE PLAN During 1992, the Company established a stock incentive plan, which was approved by the Company's shareholders at the April 20, 1993, Annual Meeting. The plan permits up to a maximum of 1.8 million shares of common stock to be granted as nonqualified and incentive stock options and restricted stock to managerial, supervisory, and professional employees. The options are granted, at fair market value, for a term of ten years and become exercisable in increments of 25 percent of an individual grant on each of the second through fifth anniversary dates of the grant. The approval of this plan included the immediate conversion to Restricted Stock of 445,520 rights under the Company's Phantom Stock Plan and 102,800 rights under the Company's Cash Equivalent Program. In addition, during 1994 and 1993, the Company sold 82,275 and 52,500 shares, respectively, of restricted stock to managerial employees. The restricted stock may not be resold until the restrictions placed on these shares expire. The amount of compensation represented by the sale of restricted stock is being amortized over a nine-year vesting period. Transactions involving stock options for the plan are summarized as follows:
Per Share Number of Option Stock Options Options Price - ------------------------------------------------------------------------------------------------------------------------------- Outstanding January 1, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,925 $38.63 Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - ----------- --------------- Outstanding December 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,925 38.63 =========== =============== Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,100 37.06-43.84 Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,950) 38.63 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - ----------- --------------- Outstanding December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344,075 37.06-43.84 =========== ================ Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314,950 44.75-47.56 Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,900) 38.63 Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,361) 38.63 ----------- --------------- Outstanding December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 641,764 $37.06-47.56 =========== =============== Exercisable December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,403 $38.63 =========== ===============
[46] 49 At December 31, 1994 and 1993, shares available for future grants under this plan were 467,084 and 855,105, respectively. RESTRICTED STOCK PLAN In accordance with the terms of the Company's restricted stock plan, 4,750 and 500 shares of common stock were sold to key managerial employees at their par value during 1994 and 1993, respectively. This common stock may not be resold until the restrictions placed on these shares expire. The amount of compensation represented by the sale of restricted stock is being amortized over a nine-year vesting period. As of December 31, 1994, 160,550 shares were available for granting under this restricted stock plan. RESEARCH AND DEVELOPMENT The Company performs research and development under both Company-funded programs and under contracts with others, principally the U.S. government. Company-funded programs include bid and proposal work for both military and commercial products and research and development. All Company-funded research and development is expensed as incurred or expensed in accordance with the Company's policy on contract accounting; customer-funded research and development is accounted for under the Company's contract accounting policy. Total research and development expenditures for the years 1994, 1993, and 1992 were $109.0 million, $126.9 million, and $122.0 million, respectively, of which $45.0 million, $50.1 million, and $43.0 million, respectively, was funded by customers. ENVIRONMENTAL MATTERS In 1994, the Company spent $5.2 million on remediation cleanups and related studies, compared with $4.6 million in 1993, and $10.7 million in 1992. The Company anticipates spending approximately $5.4 million in 1995 for similar activities. In 1994, the costs associated with environmental matters as they relate to day-to-day activities were not material and such costs for 1995 are not expected to be material. The Company is involved in environmental investigation and/or remediation at certain of its present and former plant sites. At those sites where remediation activity is presently being conducted, the Company is not yet able to determine when such activity will be complete. The total annual remediation operating costs at such sites are not material to the Company. At one of the Company's plant sites, the Company is continuing to work with the Colorado Department of Health by implementing a partial remediation program and developing a final remediation plan. At all of the other present and former plant sites where remediations are being conducted, the Company believes such remediations are sufficient to meet the requirements of the applicable enforcement agencies. The Company believes the provisions it has made for the investigations and remediations at its present and former plant sites, at which it has retained certain environmental liability, are adequate to meet current requirements at such sites, and to meet claims made by third parties which have arisen from the conditions at such sites. The Company, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (Superfund) or equivalent state statutes, has been named or notified that it is a potentially responsible party (PRP) at twenty-seven sites where environmental damage is alleged. With respect to twenty-two of the sites, the Company's involvement is very limited and it is anticipated that the Company's liability will be resolved on a de minimis basis. The Company believes the provisions it has made are adequate to satisfy its liability at these sites. There are three Superfund sites with respect to which the Company, although its involvement is relatively small, will not be able to participate in a de minimis resolution. The Company believes the provisions it has made are adequate to satisfy its liability at these sites. The remaining two Superfund sites are the Interstate Pollution Control (IPC) Superfund site and the Southeast Rockford Superfund site, both located in Rockford, Illinois. The IPC site involves the Company and 41 other PRPs which have signed a consent decree with the Illinois Environmental Protection Agency (IEPA) to fund and perform a remedial investigation and feasibility study and to pay the IEPA for certain past and future response costs relating to its investigations. In addition, pursuant to another consent order, certain removal and other interim remediations have been completed and paid for by the PRPs. The Company has established provisions with respect to this site to cover the costs associated with remediation cleanups and related studies. At the Southeast Rockford Superfund site the United States Environmental Protection Agency (USEPA) has named the Company as a PRP. Based upon available information, the Company believes the contamination is from multiple sources and the Company is not one of such sources. The Southeast Rockford Superfund site located in Rockford, Illinois, involves a historically contaminated regional groundwater situation with respect to which the Company and six other PRPs have been requested by the USEPA to reimburse past costs of $8.9 million which the USEPA has incurred and future costs. The provision established is to cover the costs of supporting the Company's position that it is not one of the sources of the contamination at this site and is believed to be adequate for this purpose. [47] 50 Notes to Consolidated Financial Statements Uncertainties such as the extent of contamination, the extent of the Company's contribution to the contamination at the Southeast Rockford Superfund site, if any, the number of other PRPs and their financial viability, and the absence of a determination of the type of remediation which may be required have caused the Company to be unable reasonably to estimate the total remediation costs which it may incur with respect to this site. However, the Company is actively involved in seeking a solution which would not result in a material loss to the Company and believes such a solution is probable. GOVERNMENT CONTRACT MATTERS In connection with U.S. government contracts and subcontracts, the Company received notification in prior years of several defective pricing claims. While the Company believes that its existing provisions for these claims are adequate, the amounts due upon final resolution may differ from the recorded provisions. SUBSEQUENT EVENT The Company's Board of Directors on February 21, 1995, approved a restructuring plan that will result in a first quarter pretax charge of $58 million. The charge will be taken to cover the one-time costs of reducing excess manufacturing capacity by closing its facility in Lima, Ohio, reducing the engineering overhead in the Company's Aerospace segment, and writing down the assets of two non-core product lines. The anticipated net effects of additional non-accrued expenses, restructuring savings, and related nonrecurring gains are a pretax loss of approximately $7 million in 1995 and pretax earnings of approximately $20 million in 1996. The restructuring is expected to reduce cash flow by about $16 million in 1995 and provide a cash flow benefit of about $8 million in 1996. DIVIDENDS AND STOCK PRICE RANGE (UNAUDITED)
Per share of Common Stock ----------------------------------------------- Price range Dividends ------------------------------ Paid High Low - ------------------------------------------------------------------------------------------------------------ Quarter 1994 First . . . . . . . . . . . . . . . . . . . . . . . $ .30 $ 48 1/4 $ 41 Second . . . . . . . . . . . . . . . . . . . . . . . .30 49 7/8 44 1/2 Third . . . . . . . . . . . . . . . . . . . . . . . .30 51 3/4 46 7/8 Fourth . . . . . . . . . . . . . . . . . . . . . . . .30 52 41 1/4 ----------- $ 1.20 =========== 1993 First . . . . . . . . . . . . . . . . . . . . . . . $ .30 $ 41 1/2 $ 35 Second . . . . . . . . . . . . . . . . . . . . . . . .30 44 3/4 38 1/8 Third . . . . . . . . . . . . . . . . . . . . . . . .30 44 1/2 38 1/4 Fourth . . . . . . . . . . . . . . . . . . . . . . . .30 42 1/2 36 3/4 ------------ $ 1.20 ============
[Bar chart:] STOCK PRICE AT YEAR END (dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 29.00 37.00 40.25 42.00 45.50
[48] 51 Additional 10-K Information DATE OF INCORPORATION The Company was incorporated in Illinois in 1910 and became a Delaware corporation in 1966. MATERIALS AND SUPPLIES The Company uses many raw and finished materials of primary and alloy-type metal in forms such as cast, forged, sheet, and bar, which are generally available from multiple sources. In addition, mechanical and electronic materials and supplies such as fasteners, bearings, gaskets, filters, motors, resistors, transformers, and semiconductors are procured from various sources. The Company deals with numerous suppliers and is not dependent upon any one manufacturer or supplier of materials, supplies, or services. However, from time to time, general shortages of particular raw materials and supplies may have an adverse effect on the Company. INTELLECTUAL PROPERTY RIGHTS The Company owns a large number of patents (expiring through 2011) and other intellectual property rights and interests, e.g., trademarks, trade secrets, and licenses, which are of importance in the aggregate to the conduct of its business and are expected to be of value in the future. In the judgment of the Company, its patents and other intellectual property rights and interests are adequate for the conduct of its business, but the loss or expiration of any single or group of patents or other intellectual properties or interests would not materially affect the conduct of its business as a whole. In the Company's opinion, its design, manufacturing and marketing skills, experience, and reputation are as responsible for its positions in the markets it serves as are its patents and other intellectual property rights and interests. PROPERTIES The Company occupies building space totaling approximately 6.7 million square feet, which is divided by business segment as follows: Industrial, 3.1 million square feet; Aerospace, 3.4 million square feet; and corporate offices, .2 million square feet. All building space is owned by the Company, except approximately .8 million square feet of leased space, and is well maintained, in good operating condition, and suitable for its operations. The Company owns approximately 210 acres of vacant land for future expansion. Domestic manufacturing facilities are located in Auburn, Alabama; Phoenix, Arizona; San Diego, California; Arvada, Denver, and Grand Junction, Colorado; Rockford, Illinois; Michigan City, Indiana; Acton, Massachusetts; York, Nebraska; Rochester, New York; Lima, Ohio; Bend, Oregon; Ivyland, Pennsylvania; Milwaukee, Wisconsin; and Santa Isabel, Puerto Rico. Foreign manufacturing facilities are located in Eastbourne, England; Dijon, Merignac, Montbrison, Pont-St.-Pierre, and St. Priest, France; Shannon, Ireland and the Republic of Singapore. COMPETITION The Company has competitors or potential competitors in each of its product lines. Some of these competitors or potential competitors may have greater financial and personnel resources than the Company. The Company believes that its research and development, proprietary technology, and product and service reputation have been of particular significance in maintaining the Company's competitive standing. [49] 52
Selected Financial Data, 1990-1994 Sundstrand Corporation and Subsidiaries (SNS) Year ended December 31, 1994(a) 1993 1992(b)(c)(d) 1991(c)(d) 1990(c)(d)(e) - ----------------------------------------------------------------------------------------------------------------------------------- (Dollar amounts in millions except per share data) Summary of Operations Net Sales Aerospace . . . . . . . . . . . . . . . . . . . . . . . . $ 709.3 $ 753.6 $ 839.6 $ 807.9 $ 844.0 Industrial . . . . . . . . . . . . . . . . . . . . . . . 663.4 629.5 639.5 646.0 536.9 --------- ---------- ---------- ----------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,372.7 $ 1,383.1 $ 1,479.1 $ 1,453.9 $ 1,380.9 ========= ========== ========== =========== ========= Operating Profit Aerospace . . . . . . . . . . . . . . . . . . . . . . . . $ 87.6 $ 106.3 $ 90.4 $ 128.3 $ 136.5 Industrial . . . . . . . . . . . . . . . . . . . . . . . 106.0 84.1 82.1 $ 78.0 73.6 --------- ---------- ---------- ----------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 193.6 $ 190.4 $ 172.5 $ 206.3 $ 210.1 ========= ========== ========== =========== ========= Earnings from continuing operations before income taxes, extraordinary item, and cumulative effect of accounting change . . . . . . . . . . . . . . . . $ 149.4 $ 133.3 $ 110.4 $ 145.8 $ 160.4 Net earnings from continuing operations before extraordinary item and cumulative effect of accounting change . . . . . . $ 95.6 $ 90.7 $ 70.1 $ 88.4 $ 95.4 Net earnings (loss) available for common shares . . . . . . . $ 95.6 $ 140.7 $ (121.7) $ 108.8 $ 114.3 Return on average equity, after tax . . . . . . . . . . . . . 19.0% 27.0% (19.9%) 16.5% 19.1% Per Share of Common Stock Earnings from continuing operations before extraordinary item and cumulative effect of accounting change . . . . . . $ 2.92 $ 2.56 $ 1.94 $ 2.45 $ 2.60 Earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 2.92 $ 3.97 $ (3.37) $ 3.02 $ 3.11 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . $ 1.20 $ 1.20 $ 1.175 $ 1.10 $ 1.10 Market value - high . . . . . . . . . . . . . . . . . . . . . $ 52.00 $ 44.75 $ 47.25 $ 37.00 $ 39.94 low . . . . . . . . . . . . . . . . . . . $ 41.00 $ 35.00 $ 31.13 $ 23.38 $ 21.75 year-end . . . . . . . . . . . . . . . . . $ 45.50 $ 42.00 $ 40.25 $ 37.00 $ 29.00 Book value . . . . . . . . . . . . . . . . . . . . . . . . . $ 15.61 $ 15.31 $ 14.66 $ 19.15 $ 17.33 Year-End Financial Position Working capital . . . . . . . . . . . . . . . . . . . . . . . $ 303.3 $ 365.3 $ 489.6 $ 643.4 $ 570.3 Current ratio . . . . . . . . . . . . . . . . . . . . . . . . 1.7 2.1 2.2 3.4 3.0 Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 1,586.9 $ 1,511.9 $ 1,779.6 $ 1,686.9 $ 1,534.5 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 246.4 $ 255.0 $ 419.9 $ 454.7 $ 369.3 Total debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 440.3 $ 281.6 $ 478.9 $ 454.7 $ 369.3 Shareholders' equity . . . . . . . . . . . . . . . . . . . . $ 493.8 $ 512.2 $ 530.0 $ 692.5 $ 624.5 Ratio of total debt to total capital . . . . . . . . . . . . 47.1% 35.5% 47.5% 39.6% 37.2% Other Data Orders received Aerospace . . . . . . . . . . . . . . . . . . . . . . . . $ 736.1 $ 526.7 $ 885.7 $ 685.6 $ 857.9 Industrial . . . . . . . . . . . . . . . . . . . . . . . 701.0 624.8 641.6 625.8 550.3 ---------- ---------- ---------- ----------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,437.1 $ 1,151.5 $ 1,527.3 $ 1,311.4 $ 1,408.2 =========== ========== ========== =========== ========= Unfilled orders Aerospace . . . . . . . . . . . . . . . . . . . . . . . . $ 599.0 $ 572.2 $ 799.0 $ 752.9 $ 875.2 Industrial . . . . . . . . . . . . . . . . . . . . . . . 147.8 110.2 115.0 112.9 133.1 ---------- ---------- ---------- ----------- --------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 746.8 $ 682.4 $ 914.0 $ 865.8 $ 1,008.3 ========== ========== ========== =========== ========= Property, plant, and equipment (excluding leased equipment): Additions, at cost . . . . . . . . . . . . . . . . . . . $ 53.9 $ 56.0 $ 74.6 $ 63.9 $ 77.1 Depreciation . . . . . . . . . . . . . . . . . . . . . . $ 60.5 $ 69.1 $ 65.9 $ 59.7 $ 56.5 Approximate number of employees . . . . . . . . . . . . . . . 9,200 9,300 10,800 10,800 10,800 Approximate number of shareholders of record . . . . . . . . 4,000 4,100 4,300 4,500 4,750
(a) Includes a reduction of depreciation expense related to a change in depreciable lives of $8.6 million before taxes ($5.5 million after taxes equivalent to $.17 per share). (b) Includes charges of $34.9 million before taxes ($22.2 million after taxes equivalent to $.62 per share) for restructuring of, and reduction in employment in the Aerospace segment. Also includes charges of $17.3 million before taxes ($11.0 million after taxes equivalent to $.30 per share), exclusive of the cumulative effect, associated with the adoption of SFAS No. 106 and a credit of $9.1 million before taxes ($5.8 million after taxes equivalent to $.16 per share) resulting from a change in pension cost assumptions. (c) Provisions for interest charges for the anticipated resolution of certain tax disputes in 1992, 1991, and 1990 were $2.0 million, $2.0 million, and $10.0 million before taxes and $1.3 million ($.04 per share), $1.2 million ($.03 per share), and $5.9 million ($.16 per share) after taxes, respectively. (d) Amounts have been restated to reflect the Company's Sundstrand Data Control division as a discontinued operation. (e) Includes the gain on the shareholder litigation lawsuit of $6.6 million before taxes ($3.9 million after taxes equivalent to $.11 per share). [50-51] 53
[Bar charts:] NET EARNINGS FROM CONTINUING OPERATIONS - -------------------------------------------------------------------------------------------------------------------------------- (millions of dollars) 1990 1991 1992 1993 1994 95.4 88.4 70.1 90.7 95.6 WORKING CAPITAL (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 570.3 643.4 489.6 365.4 303.3 UNFILLED ORDERS (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- Aerospace 875.2 752.9 799.0 572.2 599.0 Industrial 133.1 112.9 115.0 110.2 147.8 ----------- ----------- ----------- ----------- ---------- Total 1,008.3 865.8 914.0 682.4 746.8 BOOK VALUE PER SHARE (dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 17.33 19.15 14.66 15.31 15.61 RATIO OF TOTAL DEBT TO TOTAL CAPITAL (percent) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 37.2 39.6 47.5 35.5 47.1 ADDITIONS TO PP&E (millions of dollars) 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------------------------------------------------- 77.1 63.9 74.6 56.0 53.9
[50-51] 54 BOARD OF DIRECTORS Don R. O'Hare(4) Chairman of the Board and Chief Executive Officer Sundstrand Corporation Director since 1979 J. P. Bolduc(1,2,4) President and Chief Executive Officer W. R. Grace & Co. Director since 1991 Gerald Grinstein(2,3) Chairman and Chief Executive Officer Burlington Northern Inc. Director since 1991 Charles Marshall(1,2) Retired Vice Chairman American Telephone and Telegraph Company Director since 1989 Klaus H. Murmann(1,3) Chairman and Chief Executive Officer Sauer, Inc. Chairman of the Confederation of German Employers' Associations Director since 1981 Donald E. Nordlund(3,4) Retired Chairman and Chief Executive Officer Staley Continental, Inc. Director since 1976 Thomas G. Pownall(1,2) Retired Chairman Martin Marietta Corporation Director since 1978 John A. Puelicher(3,4) Retired Chairman Marshall & Ilsley Corporation Director since 1977 Ward Smith(2,3) Retired Chairman NACCO Industries, Inc. Director since 1983 Robert J. Smuland Executive Vice President and Chief Operating Officer, Aerospace Sundstrand Corporation Director since 1993 Berger G. Wallin Executive Vice President for Special Projects Sundstrand Corporation Director since 1995 (1)Nominating Committee (2)Audit Committee (3)Compensation Committee (4)Finance Committee [52] 55 OFFICERS Don R. O'Hare Chairman of the Board and Chief Executive Officer Elected Chairman of the Board and Chief Executive Officer September 26, 1994; consultant to the Company from August 20, 1991, to September 25, 1994; and Chairman of the Board from January 1, 1989, to August 19, 1991. Age 72 Paul Donovan Executive Vice President and Chief Financial Officer Elected Executive Vice President August 7, 1990; and Vice President of Finance, Chief Financial Officer and Treasurer from December 2, 1988, to August 6, 1990. Age 47 Robert J. Smuland Executive Vice President and Chief Operating Officer, Aerospace Elected Executive Vice President August 7, 1990; and Group Vice President, Advanced Technology Group from February 16, 1989, to August 6, 1990. Age 59 Patrick L. Thomas Executive Vice President and Chief Operating Officer, Industrial Elected Executive Vice President January 2, 1995; President of Milton Roy Company from April 1, 1991, to January 1, 1995; and Vice President and General Manager of Sundstrand Fluid Handling from October 12, 1989, to March 31, 1991. Age 49 Berger G. Wallin Executive Vice President for Special Projects Elected Executive Vice President for Special Projects January 2, 1995; Executive Vice President and Chief Operating Officer, Industrial, from August 7, 1990, to January 1, 1995; and Group Vice President, Industrial from October 19, 1989, to August 6, 1990. Age 64 DeWayne J. Fellows Vice President and Controller Elected to additional position of Vice President August 7, 1990; and Controller since February 16, 1989. Age 50 Gary J. Hedges Vice President, Personnel and Public Relations Elected Vice President August 7, 1990; and Vice President, Human Resources for the Advanced Technology Group from October 20, 1986, to August 6, 1990. Age 51 James F. Ricketts Vice President and Treasurer Elected Vice President and Treasurer February 18, 1992, effective February 28, 1992; and Vice President and Treasurer of Ford New Holland from July 1988 to February 27, 1992. Age 48 Richard M. Schilling Vice President and General Counsel and Secretary Vice President since April 21, 1978; elected to additional position of Secretary July 21, 1988. Age 57 [53] 56 SUNDSTRAND CORPORATE INFORMATION ANNUAL MEETING The Company's Annual Meeting will be held in the Wallingford Center at the Clock Tower Resort & Conference Center, 7801 East State Street, Rockford, Illinois, on Tuesday, April 18, 1995, at 11:00 a.m. Central Time. COMMON STOCK INFORMATION Sundstrand common stock is listed on the New York, Chicago and Pacific stock exchanges under the symbol SNS. SHAREHOLDER INVESTMENT SERVICE Sundstrand offers to shareholders of its common stock a Shareholder Investment Service which provides a simple, cost-free way of applying dividends and voluntary cash investments to purchase additional shares of stock. The Company absorbs brokerage commissions and bank service fees for all participants. Requests for information about the Shareholder Investment Service should be directed to the Company's transfer agent. TRANSFER AGENT Requests for information about stock registration, stock transfers, dividend disbursements or the Shareholder Investment Service should be directed to the Company's transfer agent. Address correspondence to: With questions, call: Harris Trust and Savings Bank Jacquelyne L. Mansfield Corporate Trust Operations - 11th Floor Administrative Assistant 311 West Monroe Street Harris Trust and Savings Bank Chicago, Illinois 60606 (312) 461-6838 FORM 10-K AND OTHER FINANCIAL PUBLICATIONS A copy of the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, and other financial publications may be obtained without charge by writing to Investor Relations at the address indicated below. Voice mail requests can be made by telephone at (815) 226-2988. INVESTOR RELATIONS Analyst inquiries should be directed to: Craig Watson Director, Investor Relations Sundstrand Corporation 4949 Harrison Avenue P.O. Box 7003 Rockford IL 61125-7003 (815) 226-2136 [54] 57 SUNDSTRAND CORPORATION 4949 Harrison Avenue P.O. Box 7003 Rockford, Illinois 61125-7003 Phone (815) 226-6000 Fax (815) 226-2699 AEROSPACE SEGMENT Sundstrand Aerospace Rockford, Illinois Sundstrand Power Systems San Diego, California INDUSTRIAL SEGMENT Milton Roy Company Arvada, Colorado The Falk Corporation Milwaukee, Wisconsin Sullair Corporation Michigan City, Indiana Printed in U.S.A. [Inside back cover] 58 [Sundstrand Corporation trademark: circle S logo] Sundstrand Corporation 4949 Harrison Avenue P.O. Box 7003 Rockford, Illinois 61125-7003 U.S.A. [Back cover] EX-21 10 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT (21) SUBSIDIARIES OF REGISTRANT The following lists each of the Registrant's significant domestic and foreign subsidiaries.
Percent Jurisdiction of Voting in Which Securities Name of Corporation Incorporated Owned - ------------------- ------------ ---------- Milton Roy Company . . . . . . . . . . . . . . . . . . . . . . . . Pennsylvania 100% The Falk Corporation . . . . . . . . . . . . . . . . . . . . . . . Delaware 100% Sullair Corporation . . . . . . . . . . . . . . . . . . . . . . . . Indiana 100%
EX-23.(A) 11 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT (23)(A) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Post-Effective Amendment No. 2 to the Registration Statement (Form S-8 No. 33-29234) pertaining to the Sundstrand Corporation Employee Savings Plan, Post-Effective Amendment No. 2 to the Registration Statement (Form S-8 No. 33-29235) pertaining to the Sundstrand Corporation Rockford Factory Employee Savings Plan, the Registration Statement (Form S-8 No. 33-53228) pertaining to the Sundstrand Corporation Personal Investment Plan, and the Registration Statement (Form S-8 No. 33-61372) pertaining to the Sundstrand Corporation Stock Incentive Plan, of our report dated January 26, 1995 (except for the Subsequent Event note, as to which the date is February 21, 1995), with respect to the consolidated financial statements of Sundstrand Corporation incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1994. /s/ Ernst & Young LLP ERNST & YOUNG LLP Chicago, Illinois March 8, 1995 EX-24 12 POWER OF ATTORNEY 1 EXHIBIT (24) POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, SUNDSTRAND CORPORATION, a Delaware corporation, does hereby nominate, constitute and appoint DON R. O'HARE and PAUL DONOVAN, and either or both of them, as its true and lawful attorneys-in-fact, in its name and on its behalf to file with the Securities and Exchange Commission the Annual Report on Form 10-K of said Corporation for the year ended December 31, 1994 pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. That each of the undersigned directors and officers of said Corporation does hereby nominate, constitute and appoint DON R. O'HARE and PAUL DONOVAN, and either or both of them, as his true and lawful attorneys-in-fact, in his name and in the capacity indicated below, to execute the aforesaid Form 10-K. And the undersigned do hereby authorize and direct the said attorneys-in-fact, and either or both of them, to execute and deliver such other documents to the Securities and Exchange Commission and to take all such other action as they or either of them may consider necessary or advisable to the end that said Form 10-K shall comply with the Securities Exchange Act of 1934 and the applicable rules, rulings and regulations of the Securities and Exchange Commission. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents this 21st day of February, 1995. SUNDSTRAND CORPORATION By: /s/ Don R. O'Hare --------------------------------- Don R. O'Hare Chairman of the Board and Chief Executive Officer (CORPORATE SEAL) ATTEST: /s/ Richard M. Schilling - ------------------------ Richard M. Schilling Secretary 2
SIGNATURE TITLE - --------- ----- /s/ Don R. O'Hare Chairman of the Board - -------------------------- and Chief Executive Officer Don R. O'Hare /s/ Paul Donovan Executive Vice President and - -------------------------- Chief Financial Officer Paul Donovan /s/ DeWayne J. Fellows Vice President and Controller - -------------------------- DeWayne J. Fellows Director - -------------------------- J. P. Bolduc /s/ Gerald Grinstein Director - -------------------------- Gerald Grinstein /s/ Charles Marshall Director - --------------------------- Charles Marshall /s/ Klaus H. Murmann Director - --------------------------- Klaus H. Murmann
3
SIGNATURE TITLE - --------- ----- /s/ Donald E. Nordlund Director - --------------------------- Donald E. Nordlund /s/ Thomas G. Pownall Director - --------------------------- Thomas G. Pownall Director - --------------------------- John A. Puelicher /s/ Ward Smith Director - --------------------------- Ward Smith /s/ Robert J. Smuland Director - --------------------------- Robert J. Smuland /s/ Berger G. Wallin Director - --------------------------- Berger G. Wallin
EX-27 13 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31,1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1994 DEC-31-1994 65,800 0 293,300 0 307,000 735,200 1,043,800 584,700 1,586,900 431,900 235,700 18,900 0 0 474,900 1,586,900 1,372,700 1,372,700 915,500 1,195,300 0 0 29,600 149,400 53,800 95,600 0 0 0 95,600 2.92 0
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