-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BdKae1hF6nNXfqRNOJ5P94n7fLE7S3LpQfd3YZyKNbHrNIw1xV/pOinMK5B+l45F VSJZDOx4I0L3ULv0Z/Q6PA== 0000950137-99-000744.txt : 19990402 0000950137-99-000744.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950137-99-000744 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNDSTRAND CORP /DE/ CENTRAL INDEX KEY: 0000095395 STANDARD INDUSTRIAL CLASSIFICATION: PUMPS & PUMPING EQUIPMENT [3561] IRS NUMBER: 361840610 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05358 FILM NUMBER: 99581278 BUSINESS ADDRESS: STREET 1: 4949 HARRISON AVE STREET 2: P O BOX 7003 CITY: ROCKFORD STATE: IL ZIP: 61125 BUSINESS PHONE: 8152266000 MAIL ADDRESS: STREET 1: PO BOX 7003 CITY: ROCKFORD STATE: IL ZIP: 61125-7003 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-5358 SUNDSTRAND CORPORATION (Exact name of registrant as specified in its charter) 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. $2,927,079,891 as of February 24, 1999.* *For purposes of this calculation, the Registrant has assumed that its directors and executive officers are affiliates. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 53,962,426 shares of common stock outstanding at February 24, 1999. DOCUMENTS INCORPORATED BY REFERENCE. List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes. DOCUMENT FORM 10-K REFERENCE Portions of Registrant's Proxy Statement for the 1999 Annual Part III Meeting of Stockholders
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 2 SUNDSTRAND CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
PAGE ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 6 Item 3. Legal Proceedings........................................... 6 Item 4. Submission of Matters to a Vote of Security Holders......... 7 Executive Officers of the Registrant........................ 7 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters......................................... 8 Item 6. Selected Financial Data for the Registrant for Each of the Last Five Fiscal Years...................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 10 Item 7a. Quantitative and Qualitative Disclosures About Market Risk........................................................ 19 Item 8. Financial Statements and Supplementary Data................. 21 Item 9. Disagreements with Accountants on Accounting and Financial Disclosure.................................................. 45 PART III Item 10. Directors and Executive Officers of the Registrant.......... 46 Item 11. Executive Compensation...................................... 46 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 46 Item 13. Certain Relationships and Related Transactions.............. 46 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 46 Signatures.............................................................. 51
2 3 CROSS-REFERENCE TABLE OF CONTENTS Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders, including all information required in Part III of Form 10-K. The Cross-Reference Table of Contents set forth in Part III identifies the source of incorporated material for each of the Form 10-K items included in Part III. Only those sections of the Proxy Statement cited in the Cross-Reference Table are part of this Form 10-K and filed with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS Sundstrand Corporation (Sundstrand or the Registrant) is a multinational organization comprised of two operating segments, Aerospace and Industrial. These segments are engaged in the design, manufacture, and sale of a variety of proprietary, technology-based components and systems for diversified international markets. During 1998, the Registrant's Aerospace segment acquired Keystone Engineering Company and Shannon Aircraft Motor Works and the Registrant's Industrial segment acquired Ansimag, Inc., the Mining Services Division of A. Goninan & Co. Limited, Maso Process-Pumpen GmbH, Robin Industries S.A., and Williams Instrument Company, Inc. See the Acquisitions section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 13 for additional information on 1998 acquisitions. On February 21, 1999, Sundstrand entered into an Agreement and Plan of Merger with United Technologies Corporation (the "Merger Agreement"). See the Subsequent Event footnote on page 45 in the notes to consolidated financial statements. STRATEGY The Registrant intends to grow its revenues and market share by introducing new products, entering new markets, and by making acquisitions (such acquisition activity currently being limited by terms of the Merger Agreement). Sundstrand believes that by focusing its attention on smaller product groups, it can better anticipate customer needs and improve the timing and increase the volume of new product development. This focused marketing and development strategy was continued in 1998 with most of the remaining businesses in both the Aerospace and Industrial segments being organized into product orientated enterprises. Reliability of the Registrant's products is also very important. To this end, the Registrant has devoted and will continue to devote significant efforts to maintaining and improving product reliability. For additional discussion of strategy see Management's Discussion and Analysis of Financial Condition and Results of Operations on page 18. DATE OF INCORPORATION The Registrant was incorporated in Illinois in 1910 and became a Delaware corporation in 1966. FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS The financial information on operating segments can be found on pages 26 and 27. AEROSPACE SEGMENT The Registrant's Aerospace business designs, develops and manufactures systems and components for aircraft, space and defense applications. Through its Electric Systems, Mechanical Systems, and Power Systems product lines, the business provides highly engineered solutions to the aerospace industry for applications such as: primary, secondary and emergency power generation, distribution and management; actuation; aircraft environmental control (primarily cooling fans); and fuel and lube/scavenge pumps. In addition to having components supplied by a common set of manufacturing sites, each of the Aerospace segment's product lines serve common customers that include airframe manufacturers, the United States government, and most of the world's airlines. Key indicators of the Aerospace segment's business include the production rates of airframe manufacturers and the trend in airline revenue passenger miles. 3 4 The Electric Systems product line consists of electric power generating, distribution, and control systems including generators, solid state power controls and integrated drive generators. The Registrant's systems are installed on every current commercial aircraft platform offered by Airbus Industrie and Boeing (except for the MD-90), most regional jet aircraft, and many of the world's military aircraft. This scope of coverage is important both for the significant aftermarket business it generates and for the ongoing relationships it provides with customers. With proven capabilities in electrical power generation, electronics, power electronics and hybrid technologies, Sundstrand can design a total electrical system (generation and distribution) for each aircraft's power requirements and usage patterns. The completion of the acquisition of Leach International Corporation's Automated Power Management System (APMS) product line and electrical load management technology in 1997 extended Sundstrand's capabilities for generating and managing aircraft electric power. The Electric Systems product line accounted for more than 60 percent of Aerospace segment sales in 1998 and more than 50 percent of segment sales in 1997 and 1996. The Mechanical Systems product line includes aircraft actuation systems, secondary/emergency power systems, and a range of pumps as well as systems for missile and space applications and undersea propulsion. Actuation systems incorporate mechanical, hydraulic, and electrical technologies for the movement and positioning of aircraft control surfaces such as flaps, slats, and horizontal stabilizers. Some of the Registrant's largest and most successful actuation system programs have been for military applications. This experience base has enabled Sundstrand to expand its product offerings into commercial markets where opportunities for growth exist. Secondary and emergency power systems include aircraft accessory drives and engine starting systems along with ram air turbines and air-driven generators that provide emergency hydraulic or electric power. Sundstrand's Power Systems product line produces auxiliary power units (APUs) and environmental control systems for a wide variety of commercial and military applications ranging from business jets to commercial transports. The APU business is growing successfully as a result of the Airbus Industrie A320 aircraft, on which the Registrant's APUs are a listed option, and as a result of its APUs being sole sourced on the Embraer 135/145 regional jet and the Boeing 717 aircraft. Power Systems achieved break-even operating results in the second quarter of 1998. INDUSTRIAL SEGMENT The Registrant's Industrial business serves a group of basic industries throughout the world with a variety of products ranging from small metering pumps to some of the world's largest ring gears. While the application of the various products is diverse, the products share similar technology -- mechanically engineered, rotating equipment; similar customer industries -- primarily involving raw material processing, bulk material handling, direct manufacturing and construction; and similar distribution channels -- approximately two-thirds sold through manufacturer representatives and distributors and one-third sold to end-use customers. The Industrial segment's business is tied closely to the level of general economic activity as all products are sold to other businesses which utilize them in their own manufacturing processes. The Falk Corporation serves a global customer base in industries such as mining, metal processing, wood and paper processing, construction and cement, chemical processing, utilities, transportation, food processing, and a variety of smaller markets. Falk's products include a broad line of standard enclosed gear drives and flexible shaft couplings sold through a worldwide distributor network as well as custom-engineered enclosed gear drives, large open gear sets, large alloy steel castings, and main propulsion marine drives sold directly to end users. Typical customer applications involve bulk material handling and raw material processing into finished goods. Falk's standard enclosed gear drives and couplings are used in conveying and mixing applications, while the larger custom drives are used for mining crushers and grinders and ship propulsion systems. Sullair Corporation is a major multinational manufacturer of rotary screw industrial and portable air compressors, rotary screw compressors for the process market, rotary screw vacuum systems, and pneumatic construction tools. Filters and dryers are also available for applications requiring extremely clean, dry air. Sullair's industrial compressors range from five-horsepower continuous-duty encapsulated models to 4 5 600-horsepower, high-efficiency, two-stage tandem models. Sullair's portable compressors for the construction market have capacities ranging from 70 cfm to 1,900 cfm. Sullair's industrial and portable compressors are sold through a network of distributors and to a select group of end user customers. Sundstrand Fluid Handling Corporation is a multinational manufacturer of engineered, high-speed, centrifugal pumps and compressors for the hydrocarbon and chemical processing, pulp and paper, water treatment, electric power, and sanitary processing industries worldwide. These pumps are tailored for specific customer applications, and sold to end users and engineering contractors. Milton Roy Company serves the worldwide market with high-quality metering pumps and related equipment, specialty pumps and industrial mixing equipment. These products are used in municipal and industrial water and waste water treatment, chemical and hydrocarbon processing, oil and gas production, minerals processing and pulp and paper applications. Larger capacity pumps are sold through independent agents and by a direct sales force and in limited situations, to end users and engineering contractors who often incorporate them into chemical injection systems. Smaller electronic pumps, controllers, and monitoring systems are stocked and sold through industrial distribution channels for small industrial water and waste water treatment applications. INTERNATIONAL For information related to the Registrant's international activities see the Foreign Operations and Activity discussion on page 14 in Management's Discussion and Analysis of Financial Condition and Results of Operations. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES See the Information by Operating Segment on pages 26 and 27. MATERIALS AND SUPPLIES The Registrant uses many raw and finished materials of primary and alloy-type metal in forms such as cast, forged, sheet, and bar, which are generally available from multiple sources. In addition, mechanical and electronic materials and supplies such as fasteners, bearings, gaskets, filters, motors, resistors, transformers, and semiconductors are procured from various sources. The Registrant deals with numerous suppliers and is not dependent upon any one manufacturer or supplier of materials, supplies, or services. However, from time to time, general shortages of particular raw materials and supplies may have an adverse effect on the Registrant. See additional discussion related to suppliers in the Impact of Year 2000 section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 14. INTELLECTUAL PROPERTY RIGHTS The Registrant owns a large number of pending and granted patents (expiring through 2019) and other intellectual property rights and interests, e.g., trademarks, copyrights, trade secrets, and licenses, which are of importance in the aggregate to the conduct of its business and are expected to be of value in the future. In the judgment of the Registrant, its patents and other intellectual property rights and interests are adequate for the conduct of its business, and the loss or expiration of any single or group of patents or other intellectual properties or interests would not materially affect the conduct of its business as a whole. In the Registrant's opinion, its design, manufacturing and marketing skills, experience, and reputation are as responsible for its positions in the markets it serves as are its patents and other formal intellectual property rights and interests. MAJOR CUSTOMERS In addition to the U.S. government, as discussed in the Government Contract Matters section on page 17, the Boeing Company is a significant customer of the Registrant's Aerospace segment. Sales in 1998 to Boeing, including sales where the U.S. government was the ultimate customer, were 10.6 percent of consolidated sales and 17.3 percent of Aerospace segment sales. Sales in 1997 to Boeing, including sales where the 5 6 U.S. government was the ultimate customer, were 11.8 percent of consolidated sales and 20.6 percent of Aerospace segment sales. Sales in 1996 to Boeing, including sales where the U.S. government was the ultimate customer, were 8.7 percent of consolidated sales and 16.9 percent of Aerospace segment sales. UNFILLED ORDERS See the discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 12. GOVERNMENT CONTRACT MATTERS See the discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 17 and the Government Contract Matters footnote on page 44. COMPETITION The Registrant has competitors or potential competitors in both of its operating segments. Some of these competitors or potential competitors may have greater financial and personnel resources than the Registrant. The Registrant believes that its research and development, proprietary technology, and product and service reputations have been of particular significance in maintaining the Registrant's competitive standing. RESEARCH AND DEVELOPMENT See the Research and Development footnote on page 42. ENVIRONMENTAL MATTERS See the Environmental Matters footnote on pages 43 and 44. ITEM 2. PROPERTIES The Registrant occupies building space totaling approximately 6.3 million square feet, which is divided by operating segments as follows: Aerospace, 3.1 million square feet; Industrial, 3.0 million square feet; and corporate offices, .2 million square feet. All building space is owned by the Registrant, except approximately .9 million square feet of leased space, and is well maintained, in good operating condition, and suitable for its operations. The Registrant owns approximately 200 acres of vacant land for future expansion. Aerospace domestic manufacturing facilities are located in Phoenix, Arizona; Los Angeles and San Diego, California; Denver and Grand Junction, Colorado; Rockford, Illinois; York, Nebraska; and Santa Isabel, Puerto Rico. Aerospace foreign manufacturing facilities are located in Nordlingen, Germany; Shannon, Ireland; and the Republic of Singapore. Industrial domestic manufacturing facilities are located in Auburn, Alabama; Valencia, California; Arvada, Colorado; Elk Grove Village, Illinois; Michigan City, Indiana; Acton, Massachusetts; Ivyland, Pennsylvania; and Milwaukee, Wisconsin. Industrial foreign manufacturing facilities are located in Broadmeadow, Australia; Eastbourne, England; Dijon, Montbrison, Pont-St-Pierre and Samoreau, France; Ilsfeld, Germany; and Madras, India. ITEM 3. LEGAL PROCEEDINGS The Registrant is party to litigation matters and claims incurred in the course of its operations. While the results of litigation and claims cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse effect on the Registrant's consolidated financial position, results of operations, or liquidity. The Registrant is also involved in a number of matters involving environmental claims. For information concerning these matters see the Note to the Registrant's Consolidated Financial Statements captioned "Environmental Matters" on pages 43 and 44. 6 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Registrant's security holders during the fourth quarter of fiscal year 1998. EXECUTIVE OFFICERS OF THE REGISTRANT The following chart sets forth the executive officers of Registrant, their ages, their offices with the Registrant, and the period during which they have held such offices.
AGE AS OF NUMBER OF NAME 2/24/99 CURRENT OFFICE AND PRINCIPAL OCCUPATION YEARS AS OFFICER ---- --------- --------------------------------------- ---------------- Robert H. Jenkins........ 55 Chairman of the Board, President and Chief 3 Executive Officer. Elected President and Chief Executive Officer October 1, 1995; elected to additional position of Chairman of the Board April 15, 1997.(1) Patrick L. Thomas........ 53 Executive Vice President and Chief Operating 4 Officer, Industrial. Elected Executive Vice President and Chief Operating Officer, Industrial January 2, 1995.(2) Ronald F. McKenna........ 58 Executive Vice President and Chief Operating 3 Officer, Aerospace. Elected Executive Vice President and Chief Operating Officer, Aerospace May 6, 1996.(3) Paul Donovan............. 51 Executive Vice President and Chief Financial 10 Officer. Chief Financial Officer since December 2, 1988; elected to additional position of Executive Vice President August 7, 1990. DeWayne J. Fellows....... 54 Vice President and Controller. Controller since 10 February 16, 1989; elected to additional position of Vice President August 7, 1990. Mary Ann Hynes........... 51 Vice President, General Counsel and Secretary. 1 Elected Vice President, General Counsel and Secretary February 26, 1998.(4) James R. Carlson......... 55 Vice President and Treasurer. Elected Vice 2 President and Treasurer November 18, 1997. Appointed Vice President, Treasury Operations and Assistant Treasurer from January 6, 1997 to November 18, 1997.(5) Neil D. Traubenberg...... 49 Vice President, Tax. Elected Vice President, Tax 2 November 18, 1997. Appointed Vice President, Tax from January 6, 1997 to November 18, 1997.(6) Patrick J. Winn.......... 49 Vice President, Corporate Human Resources. 2 Elected Vice President, Corporate Human Resources November 18, 1997. Appointed Vice President, Corporate Human Resources from September 13, 1997 to November 18, 1997.(7)
(1) Mr. Jenkins was Executive Vice President of Illinois Tool Works, Inc. from March 1, 1990, to September 30, 1995. (2) Mr. Thomas was President of Milton Roy Company from April 1, 1991, to January 1, 1995. (3) Mr. McKenna was Vice President of Business Development, Sundstrand Aerospace from January 28, 1995, to May 6, 1996 and Vice President and General Manager of Sundstrand Aerospace Electric Power from December 2, 1989, to January 27, 1995. 7 8 (4) Ms. Hynes was General Counsel of Wolters Kluwer U.S., Inc. from January 1996 to February 1998 and General Counsel of CCH Inc. for more than five years prior to January 1996. (5) Mr. Carlson was Assistant Treasurer of the Registrant for more than five years prior to January 6, 1997. (6) Mr. Traubenberg was Tax Director of the Registrant for more than five years prior to January 6, 1997. (7) Mr. Winn was Senior Associate Attorney of the Registrant for more than five years prior to September 13, 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS COMMON STOCK INFORMATION Sundstrand common stock is listed on the New York, Chicago, and Pacific stock exchanges under the symbol SNS. DIVIDENDS AND STOCK PRICE RANGE
PER SHARE OF COMMON STOCK --------------------------------------- PRICE RANGE DIVIDEND ------------------------ PAID HIGH LOW -------- --------- -------- Quarter 1998 First.............................................. $.17 $62 $46 13/16 Second............................................. .17 71 7/16 53 15/16 Third.............................................. .17 60 7/8 41 5/8 Fourth............................................. .17 55 13/16 44 ---- $.68 ==== 1997 First.............................................. $.17 $47 $39 7/8 Second............................................. .17 59 1/4 42 1/4 Third.............................................. .17 63 1/16 54 1/2 Fourth............................................. .17 60 45 13/16 ---- $.68 ====
For information regarding restrictions on dividend payments see the Notes Payable and Long-Term Debt footnote on page 36. For information on the number of common stockholders and further information regarding the Registrant's common stock price see the Selected Financial Data for the Registrant for Each of the Last Five Fiscal Years on pages 9 and 10. 8 9 ITEM 6. SELECTED FINANCIAL DATA FOR THE REGISTRANT FOR EACH OF THE LAST FIVE FISCAL YEARS
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997(A) 1996(C) 1995(D) 1994(E) -------- -------- -------- -------- -------- (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA) Summary of Operations Net Sales Aerospace......................................... $1,229 $1,001 $ 785 $ 726 $ 710 Industrial........................................ 776 751 736 747 663 ------ ------ ------ ------ ------ Total........................................ $2,005 $1,752 $1,521 $1,473 $1,373 ====== ====== ====== ====== ====== Operating Profit Aerospace......................................... $ 272 $ 209 $ 138 $ 54 $ 88 Industrial........................................ 118 128 84 121 106 ------ ------ ------ ------ ------ Total........................................ $ 390 $ 337 $ 222 $ 175 $ 194 ====== ====== ====== ====== ====== - ---------------------------------------------------------------------------------------------------------- Earnings from continuing operations before income taxes and cumulative effect of accounting change............................................ $ 347 $ 294 $ 184 $ 135 $ 149 Net earnings from continuing operations before cumulative effect of accounting change............ $ 226 $ 188 $ 114 $ 79 $ 96 Net earnings available for common shares............ $ 226 $ 183 $ 114 $ 79 $ 96 Return on average equity, after tax................. 41.6% 34.8% 22.9% 16.2% 19.0% - ---------------------------------------------------------------------------------------------------------- Per Share of Common Stock(b) Basic earnings per share from continuing operations before cumulative effect of accounting change..... $ 4.02 $ 3.15 $ 1.87 $ 1.25 $ 1.46 Basic earning per share............................. $ 4.02 $ 3.06 $ 1.87 $ 1.25 $ 1.46 Diluted earnings per share from continuing operations before cumulative effect of accounting change............................................ $ 3.99 $ 3.13 $ 1.86 $ 1.25 $ 1.46 Diluted earnings per share.......................... $ 3.99 $ 3.04 $ 1.86 $ 1.25 $ 1.46 Cash dividends...................................... $ .68 $ .68 $ .68 $ .60 $ .60 Market value -- high................................ $71.44 $63.06 $42.75 $35.38 $26.00 low................................. $41.63 $39.88 $32.50 $22.25 $20.50 year-end............................ $51.88 $50.38 $42.50 $35.19 $22.75 Book value.......................................... $10.02 $ 9.33 $ 8.49 $ 7.80 $ 7.80 - ---------------------------------------------------------------------------------------------------------- Year-End Financial Position Working capital..................................... $ 366 $ 413 $ 375 $ 323 $ 303 Current ratio....................................... 1.7 1.9 1.9 1.7 1.7 Total assets........................................ $1,807 $1,700 $1,595 $1,593 $1,587 Long-term debt...................................... $ 299 $ 222 $ 226 $ 228 $ 247 Total debt.......................................... $ 462 $ 365 $ 344 $ 396 $ 441 Shareholders' equity................................ $ 545 $ 542 $ 513 $ 481 $ 494 Ratio of total debt to total capital................ 45.9% 40.2% 40.1% 45.2% 47.1% Shares outstanding at year end (in millions)........ 54.4 58.1 60.4 61.7 63.3 - ----------------------------------------------------------------------------------------------------------
9 10
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997(A) 1996(C) 1995(D) 1994(E) -------- -------- -------- -------- -------- (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA) Other Data Orders received Aerospace......................................... $1,176 $1,266 $ 822 $ 896 $ 736 Industrial........................................ 758 745 735 761 701 ------ ------ ------ ------ ------ Total........................................ $1,934 $2,011 $1,557 $1,657 $1,437 ====== ====== ====== ====== ====== Unfilled orders Aerospace......................................... $1,018 $1,071 $ 806 $ 769 $ 599 Industrial........................................ 137 155 161 162 148 ------ ------ ------ ------ ------ Total........................................ $1,155 $1,226 $ 967 $ 931 $ 747 ====== ====== ====== ====== ====== Property, plant, and equipment: Additions, at cost................................ $ 109 $ 119 $ 63 $ 62 $ 54 Depreciation...................................... $ 63 $ 58 $ 60 $ 61 $ 61 Approximate number of employees..................... 10,900 10,400 9,400 9,200 9,200 Approximate number of shareholders of record........ 3,400 3,300 3,500 3,700 4,000
(a) Includes a one-time curtailment gain of $15 million before taxes ($9 million after taxes equivalent to $.15 per share) related to an amendment to the Registrant's Retiree Health Insurance Plans. Also includes a charge of $9 million before taxes ($5 million after taxes equivalent to $.09 per share) related to the cumulative effect of a change in the method of accounting for certain consulting costs. (b) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements beginning on page 28. (c) 1996 includes a restructuring charge of $32 million before taxes ($23 million after taxes equivalent to $.38 per share) related to the operations of Sullair Europe S.A. Also includes pension and post-retirement benefit curtailment gains of $8 million before taxes ($5 million after taxes equivalent to $.08 per share) related to the shutdown of the Registrant's former Lima, Ohio, facility. (d) Includes a restructuring charge of $58 million before taxes ($40 million after taxes equivalent to $.64 per share) related to the reduction of manufacturing capacity and the divestiture of two non-core product lines. (e) Includes a reduction of depreciation expense related to a change in depreciable lives of $9 million before taxes ($6 million after taxes equivalent to $.08 per share). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking information which is subject to market risks and opportunities that could have a material impact on actual results, and accordingly should be considered in conjunction with the cautionary language set forth in the Outlook section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 18. Total sales of the Registrant increased $253 million to $2,005 million in 1998, from $1,752 million in 1997. Net earnings in 1998 were $226 million, or $3.99 per share assuming dilution, which included period costs related to the 1996 restructuring of approximately $1 million. Excluding the restructuring related period costs, 1998 net earnings were $227 million, or $4.01 per share assuming dilution. Net earnings in 1997 were $183 million, or $3.04 per share assuming dilution, which included a one-time, pretax, curtailment gain of $15 million related to an amendment to the Registrant's Retiree Health Insurance Plans, period costs associated with the 1996 restructuring of approximately $2 million and the cumulative effect of a change in accounting principle resulting in a pretax charge of $9 million. Excluding the 10 11 restructuring related period costs, one-time gains and cumulative effect of a change in method of accounting for certain consulting costs, 1997 net earnings were $180 million, or $3.00 per share assuming dilution. SALES BY OPERATING SEGMENT
1998 1997 1996 SALES (AMOUNTS IN MILLIONS) AND ---------------- ---------------- ---------------- INCREASE (DECREASE) FROM PRIOR YEAR AMOUNT CHANGE AMOUNT CHANGE AMOUNT CHANGE - --------------------------------------- ------ ------ ------ ------ ------ ------ Operating segment Aerospace -- Commercial.............. $ 903 22.5% $ 737 34.0% $ 550 12.9% -- Military................ 326 23.5% 264 12.3% 235 (1.7)% ------ ----- ------ ----- ------ ----- -- Total................... 1,229 22.8% 1,001 27.5% 785 8.1% Industrial........................... 776 3.3% 751 2.0% 736 (1.5)% ------ ----- ------ ----- ------ ----- Total............................. $2,005 14.4% $1,752 15.2% $1,521 3.3% ====== ===== ====== ===== ====== =====
Aerospace segment sales in 1998 were $1,229 million, which represents a $228 million increase over 1997 and 61 percent of total company sales. Commercial sales in 1998 increased by $166 million compared with 1997 due to a 32 percent increase in original equipment manufacturer (OEM) sales and a 15 percent increase in aftermarket sales. The growth in commercial sales reflected the continued increase in aircraft orders, airline passenger and freight traffic growth, and continued profitability of the U.S. and European airline industry. Although the Asia-Pacific economic crisis has negatively impacted the profitability of the Asian airline industry, the Registrant's overall Aerospace sales have not been significantly impacted by these events. As a result of double digit increases in both military OEM and aftermarket sales, total military sales were $326 million in 1998, a $62 million increase from 1997. The growth in military sales was due primarily to increased shipments on the program to provide the propulsion system for the United Kingdom's Royal Navy Spearfish torpedo. Acquisitions in 1998 were not material to the increase in Aerospace segment sales. Aerospace segment sales in 1997 were $1,001 million, which represents a $216 million increase over 1996 sales and 57 percent of total company sales. Commercial sales in 1997 increased by $187 million compared with 1996 due to a 44 percent increase in original equipment manufacturer (OEM) sales and a 27 percent increase in aftermarket sales. The growth in commercial sales reflected the significant increase in aircraft orders and airline traffic growth, along with improved profitability of the airline industry. As a result of double digit increases in both military OEM and aftermarket sales, total military sales were $264 million in 1997, a $29 million increase from 1996. The growth in military sales was due primarily to increased shipments on the F-16 program and revenues from the program to provide the propulsion system for the United Kingdom's Royal Navy Spearfish torpedo. The Registrant's Electric Systems product line is the largest product line within the Aerospace segment. This product line accounted for more than 60 percent of Aerospace segment sales in 1998 and more than 50 percent of segment sales in 1997 and 1996. Sales in the Industrial segment were $776 million in 1998, representing 39 percent of total company sales, compared with sales of $751 million in 1997. Fluid Handling and Milton Roy reported moderate growth in sales while sales at Falk and Sullair approximated 1997 levels. Acquisitions in 1998 added $32 million to Industrial segment sales. Excluding the effect of these acquisitions, sales in the Industrial segment decreased slightly as a result of the slowdown in Asia-Pacific economies and lower commodity prices which significantly softened the petrochemical, paper/pulp, mining, hydrocarbon exploration and processing markets. Industrial segment sales were $751 million in 1997, representing 43 percent of total company sales, compared with 1996 sales of $736 million. Falk, Sullair, and Milton Roy each reported a modest growth in sales; while sales for Fluid Handling decreased slightly. The majority of the sales decrease for Fluid Handling resulted from the devaluation of the French franc against the U.S. dollar during 1997, with actual sales volume remaining flat. Currency issues unfavorably impacted total Industrial sales growth by approximately $14 million during 1997. 11 12 OPERATING PROFIT BY OPERATING SEGMENT
1998 1997 1996 OPERATING PROFIT (AMOUNTS IN MILLIONS) AND --------------- --------------- --------------- OPERATING PROFIT AS A PERCENT OF NET SALES AMOUNT % AMOUNT % AMOUNT % - ------------------------------------------------- ------ ----- ------ ----- ------ ----- Operating segment Aerospace...................................... $272 22.1% $209 20.9% $138 17.6% Industrial..................................... 118 15.2% 128 17.0% 84 11.4% ---- ---- ---- ---- ---- ---- Total....................................... $390 19.5% $337 19.2% $222 14.6% ==== ==== ==== ==== ==== ====
Aerospace segment operating profit in 1998 increased by $63 million to $272 million, or 22.1 percent of sales, compared to operating profit of $209 million, or 20.9 percent of sales in 1997. Excluding the impact of the $9 million Aerospace portion of a one-time curtailment gain related to a 1997 amendment to the Registrant's Retiree Health Insurance Plans, operating profit was $200 million, or 20.0 percent of sales in 1997. The increase in operating profit margin was due to the incremental profitability on growing sales volume. Operating profit in the Aerospace segment in 1997 increased by $71 million to $209 million from $138 million in 1996. Excluding $9 million, which was the Aerospace portion of a one-time curtailment gain related to an amendment to the Registrant's Retiree Health Insurance Plans, 1997 operating profit was $200 million, or 20.0 percent of sales. The operating profit increase, excluding the one-time gain, was due primarily to the increase in commercial OEM and aftermarket sales. Industrial segment operating profit decreased to $118 million in 1998 from $128 million in 1997. Excluding restructuring related period costs, 1998 operating profit was $120 million, or 15.5 percent of sales, compared with 1997 operating profit of $124 million, or 16.5 percent of sales, excluding $6 million for the Industrial portion of a one-time curtailment gain related to an amendment to the Registrant's Retiree Health Insurance Plans and $2 million in restructuring related period costs. The operating profit margin decrease, excluding the one-time items, was due to higher investments in product development and market-rate-of-demand manufacturing initiatives, competitive pricing pressures, and the accounting impact of reduced overhead absorption caused by inventory reductions. Operating profit in the Industrial segment in 1997 was $128 million, which included $6 million for the Industrial portion of a one-time curtailment gain related to an amendment to the Registrant's Retiree Health Insurance Plans and $2 million in restructuring related period costs. Excluding one-time items, 1997 operating profit was $124 million, or 16.5 percent of sales compared with $116 million, or 15.8 percent of sales, in 1996. The improvement resulted from the increase in Industrial shipments and lower losses at Sullair Europe, as the benefits of the 1996 restructuring plan began to be realized. AUXILIARY POWER UNITS The Registrant's Power Systems product line includes auxiliary power units (APUs) and environmental control systems developed and produced for both the military and commercial aerospace markets. Since 1989, the Registrant has participated in the development and marketing of a family of APUs to serve the commercial airline transport market. Initial entry into this market required substantial investment by the Registrant. The Registrant continues to project near and long-term growth opportunities in both commercial OEM sales and the aftermarket business. Additional investment in the product line is expected, but at a lower rate than in prior years, as the family of existing APUs is applied to a limited number of new aircraft platforms. As a result of the significant progress made over the past few years, Power Systems achieved break-even operating results in the second quarter of 1998 and is expected to remain profitable in the foreseeable future. UNFILLED ORDERS Unfilled orders decreased by $71 million to $1,155 million at December 31, 1998, of which $379 million are not expected to be filled in 1999. Unfilled orders at December 31, 1997 were $1,226 million. Unfilled 12 13 orders in the Aerospace segment decreased by $53 million or approximately 5 percent from 1997 due to unusually high orders in the fourth quarter of 1997 as a result of peak OEM order activity and several large, multiple year, aftermarket orders. Industrial segment unfilled orders decreased $18 million or by approximately 12 percent which reflects the effects of lower commodity prices and the Asia-Pacific economic slowdown on the Industrial segment's primary markets. RESTRUCTURINGS During 1996, the Registrant initiated a restructuring plan within its Industrial segment related primarily to the operations of Sullair Europe S.A. which resulted in a pretax charge of $32 million. The restructuring was undertaken as a result of continuing losses at this operation, weakness in the European economy, and significant competitive pressures in the European markets. The charge included $11 million in cash termination benefits; $14 million for the partial write-down of assets of Sullair Europe and $7 million (primarily cash related charges) for disposition of the facility in St. Priest, France and professional fees. Operations previously at the St. Priest facility were transferred to other plant sites in Europe and the United States. The shutdown of the St. Priest facility and the termination or transfer of the employees was completed during 1997. Since the charge was recorded in 1996, approximately $13 million has been paid and charged against the restructuring liability, including costs to terminate 124 employees. Additionally, restructuring related period costs of $2 million were incurred in both 1998 and 1997. It is anticipated that the sale of the St. Priest facility will be completed by the end of the second quarter of 1999, at which time the restructuring will be substantially complete. During 1995, the Registrant initiated a restructuring plan which resulted in a pretax charge of $58 million. The charge was taken to reduce excess Aerospace manufacturing capacity caused by reductions in manufacturing volume and increases in manufacturing productivity, and to write-down the assets of the Industrial segment's Spectronic Instruments business (Spectronic) and the Aerospace segment's Advanced Power Technology, Inc. (APT) in anticipation of their divestiture. The charge included $24 million in cash and non-cash termination benefits, including recognition of certain long-term retirement benefits for approximately 350 employees. Also included in the charge was $34 million for the write-down and disposition of assets related to the Lima facility, Spectronic, and APT. The shutdown of the Lima facility was completed during 1996 and the disposition of the facility was completed in the first quarter of 1998. The sale of Spectronic and a majority interest in APT were completed in the third quarter of 1995. Since the 1995 restructuring charge was recorded, approximately $10 million in cash has been paid and charged against the restructuring liability, including costs to terminate 360 employees. As of March 31, 1998, the planned restructuring activities from the 1995 restructuring plan were substantially complete. ACQUISITIONS During 1998, the Registrant's Aerospace segment acquired Keystone Engineering Company (Keystone) and Shannon Aircraft Motor Works (Shannon). Keystone, located in California, is a manufacturer of light-weight propellant pressure tanks and domes for commercial satellites and launch vehicles as well as other components and sub-assemblies for various space applications. The Keystone acquisition has provided the Registrant an entrance into the growing commercial space market. Shannon, headquartered in Ireland, is a leader in the repair and overhaul of aircraft motor and generator components, with additional facilities in France and Canada. The Shannon acquisition enhances the Registrant's ability to provide repair services in Europe and nearby markets. The Registrant's Industrial segment acquired Ansimag, Inc. (Ansimag), the Mining Services Division of A. Goninan & Co., Limited (Goninan), Maso Process-Pumpen GmbH (Maso), Robin Industries S.A. (Robin), and Williams Instrument Company, Inc. (Williams) during 1998. Ansimag, located in Illinois, is a manufacturer of non-metallic, magnetically driven, sealless pumps used in the chemical and general process industries. Goninan, located in Australia, is a manufacturer of steel and iron ring gears and enclosed gear drives used in the mining, steel, cement and other heavy industries. Maso, located in Germany, designs, 13 14 develops and manufactures pumps used in the food, beverage and pharmaceutical industries, using the same technology as the Sine(R) pump product line of the Registrant. Robin, located in France, manufactures industrial mixing equipment used in the chemical and mineral processing, pulp and paper, water treatment and pharmaceutical industries. Williams, located in California, manufactures pneumatically powered mechanical pumps for the oil and gas production industry. All of these acquisitions enhance the Registrant's current product lines and the Goninan, Maso, and Robin acquisitions increase the Registrant's access to foreign markets and its global presence. FOREIGN OPERATIONS AND ACTIVITY The Registrant has been expanding its international activities during the past several years, in part through joint-venture operations, acquisitions, and the development of foreign subsidiaries. Accordingly, the Registrant enters into foreign currency forward exchange contracts primarily to protect specific assets and liabilities and certain cash flows from foreign currency exchange rate fluctuations. As a result, foreign exchange rate fluctuations are not expected to have a material impact on the Registrant's financial condition or results of operations. For further information related to foreign currency forward exchange contracts see the Summary of Significant Accounting Policies note beginning on page 28 and the Financial Instruments with Off-Balance-Sheet Risk note on page 39. The Registrant continues to explore a variety of strategies to expand its international presence, including joint ventures and distribution arrangements (such activity currently being limited by terms of the Merger Agreement). Markets in areas with high-growth potential, such as the Asia-Pacific region and Latin America, are the primary focus of the Registrant's efforts. In general, Asian economies continue to experience on-going economic uncertainty which has slowed the Registrant's growth in this region. Although the Registrant believes these uncertainties will continue in the near term, it also believes that the long-term growth prospects of this region are strong and as a result, the Registrant will continue to explore growth strategies in this region. The expected impact of continued weakness in the Asia-Pacific region has been factored into the Registrant's 1999 forecast which is discussed in the Outlook section of Management's Discussion and Analysis of Financial Condition and Results of Operations on page 18. EURO CONVERSION On January 1, 1999, eleven of fifteen member countries of the European Union established fixed conversion rates between their existing currencies and adopted the euro as their new common currency. The euro will trade on currency exchanges and the legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and January 1, 2002. Beginning on January 1, 2002, euro denominated bills and coins will be issued and legacy currencies will be withdrawn from circulation. The Registrant has assessed the impact on its operations and has established plans to accommodate the euro conversion and its related impact on customer and vendor transactions, currency exchange risks, and accounting systems. The Registrant does not expect the euro conversion to have a material impact on its financial condition or results of operations. IMPACT OF YEAR 2000 The Registrant is working to correct it's Year 2000 Issue, which if not resolved could result in the failure of a variety of systems or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, manufacture product, send invoices, or engage in similar normal business activities. The Registrant's assessment process related to the Year 2000 Issue has been divided into the following categories: business operating systems (examples include accounting and treasury), other operating systems (examples include engineering, computer aided drafting, production facilities and environmental systems), suppliers/customers, and products. Following is the current status of each category. 14 15 Business Operating Systems In 1994, the Registrant began the assessment and modification process to address the year 2000 Issue. Based on a completed assessment of all business operating systems, the Registrant determined that it will be required to modify or replace portions of its software so that its computer systems will function properly in the year 2000 and thereafter. The Registrant believes that with modifications to existing software and, in some cases, conversions to new software, the Year 2000 Issue will not pose significant operational problems. In the event that modifications and conversions are not completed on a timely basis, the Year 2000 Issue could have a material impact on the operations of the Registrant. The Registrant is utilizing both internal and external resources to reprogram, or replace, and test software for Year 2000 modifications. The Registrant estimates modification and replacement plan efforts are approximately 80 percent complete as of December 31, 1998 and anticipates that all remaining critical systems will be revised or replaced by July 1999. Other Operating Systems The Registrant has completed its assessment of Year 2000 Issues associated with other operating critical systems, such as manufacturing machinery, test equipment and environmental systems with date sensitive software and embedded microprocessors. This assessment has identified no significant operational issues and the Registrant expects to complete all necessary revisions or replacements of these systems by June 1999. Suppliers / Customers The Registrant has initiated communications with its significant suppliers, customers, and other relevant third parties to determine the extent to which the Registrant's operations may be vulnerable to those third parties' failure to resolve their own Year 2000 Issues. In addition, the Registrant has conducted eight symposiums at which more than 200 significant suppliers attended, and some visits have taken place with suppliers and customers. This activity will continue until the Registrant believes its significant suppliers and customers are Year 2000 ready. Due to the difficulty in determining whether third-parties have resolved their Year 2000 issues, the Registrant is in the process of developing contingency plans, which it considers necessary, such as identifying alternative suppliers and/or implementing inventory management steps such as stock-piling purchased materials, in order to minimize any adverse effect to the Registrant's operations. An area of concern, which the Registrant is monitoring, involves utility suppliers, principally electric power suppliers. The inability of electric power suppliers to become Year 2000 compliant in a timely manner could result in wide-spread power outages or rolling brown-outs. Failures of third parties to adequately address their Year 2000 Issues and any failure of the Registrant to develop timely and effective contingency plans could adversely effect the Registrant's operations, the extent of which is currently not known. Products The Registrant has performed an assessment of its exposure to contingencies related to the Year 2000 Issue for the products it has previously sold. Based upon this assessment, the Registrant does not believe there is any exposure that would have a material adverse affect on the Registrant's financial position, results of operations or liquidity. Summary The Registrant's total cost to make modifications to resolve Year 2000 issues is estimated to be between $9 million and $14 million and is being funded through operating cash flows. To date, the Registrant has incurred approximately $7 million related to operating systems modifications. The costs of the project and the dates on which the Registrant believes it will complete the Year 2000 modifications are based on management's best estimates. These estimates were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification 15 16 plans and other factors. These estimates may not be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. The Registrant could also be subject to litigation for the failure of computer systems, equipment shutdowns and product delivery delays. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. ENVIRONMENTAL MATTERS For a detailed discussion, see the Environmental Matters footnote on pages 43 and 44. LIQUIDITY AND CAPITAL RESOURCES Working capital was $366 million at December 31, 1998, compared with $413 million at December 31, 1997. The $47 million decrease was due primarily to an increase in notes payable, resulting from the Registrant's acquisitions and share repurchase activity, a decrease in inventories and a decrease in other assets partially offset by an increase in accounts receivable resulting from higher year over year fourth quarter sales volume in 1998. Net cash provided by operating activities increased to $333 million in 1998 from $252 million in 1997. The increase was due primarily to higher net earnings, a reduction in inventories, and a decrease in other assets as benefits were paid from a previously funded trust for incurred but not reported health care claims. This increase was partially offset by higher accounts receivable resulting from higher year over year fourth quarter sales volume in 1998. Inventories decreased as a result of the Registrant's focus on inventory reduction programs and the on-going implementation of market-rate-of-demand manufacturing. Net cash flow from operating activities increased to $252 million in 1997 from $168 million in 1996. The growth in cash flow from operations is due primarily to higher net earnings and lower deferred tax assets resulting from the realization of tax planning strategies, partially offset by the increase in inventories and lower restructuring liabilities. Net cash flow from operating activities in 1996 decreased to $168 million from $197 million in 1995. Excluding the restructuring charges and related items, operating cash flow did not change materially year over year as the unfavorable impact of fluctuations in accounts receivable and accounts payable balances were substantially offset by higher net earnings and the effect of increased accrued expenses. The increase in accrued expenses in 1996, excluding fluctuations in restructuring reserves, was due primarily to increases in advanced payments received from customers and post-retirement benefit liabilities. In 1998, the Registrant used $203 million of cash for investing activities, primarily for the purchase of fixed assets and acquisitions. The Registrant also used $123 million for financing activities in 1998, primarily for the payment of dividends and the repurchase of common stock. An increase in notes payable and long-term debt partially offset the cash used for the payment of dividends and the repurchase of common stock. During 1997, the Registrant used $121 million of cash for investing activities, primarily for the purchase of fixed assets. In 1997, the Registrant used $140 million of cash for financing activities, primarily to repurchase its common stock and pay dividends, partially offset by additional borrowings. In 1996, the Registrant used $86 million of cash for investing activities, primarily for the purchase of fixed assets and for acquisitions. During 1996, the Registrant used $144 million of cash for financing activities, primarily to repay short-term borrowings, repurchase its common stock, and pay dividends. At December 31, 1998, the Registrant had unsecured revolving domestic credit facilities totaling $435 million that were being provided by seven banks. At December 31, 1998, there were no outstanding balances under these lines of credit and the entire unused portion of these credit facilities was available under the Registrant's most restrictive debt covenants. These credit facilities will expire during the fourth quarter of 1999 and the Registrant expects to replace or renew these facilities with credit lines that are similar in 16 17 amount or less than the current facilities. Cash flow from operating activities and access to credit facilities and the commercial paper market provide the Registrant with current and continuing sources of liquidity. The Registrant issues commercial paper in the United States, which is supported by its domestic revolving credit facilities. At December 31, 1998 and 1997, the Registrant had $45 million and $143 million of commercial paper outstanding, respectively. On February 8, 1996 and December 7, 1998, the Registrant filed shelf registration statements on Form S-3 with the Securities and Exchange Commission for the public issuance of debt in the amounts of $150 million and $100 million, respectively, for a total of $250 million. In December 1998 and January 1999, $198 million and $52 million was issued, respectively, under this facility with the proceeds used to pay down the revolving credit facilities and commercial paper. On January 26, 1998 the Registrant's Board of Directors authorized the repurchase of up to an additional 10 million shares of its common stock, bringing the total authorized for repurchase to 30 million shares. The Registrant had purchased approximately 20 million shares through December 31, 1998 at a total purchase price of $634 million. In addition, approximately 440,000 shares have been repurchased through February 24, 1999. Funds for the repurchases were provided by the Registrant's operating activities, 4(2) commercial paper program and public debt issuance. The Registrant will consider a variety of options for the repurchase of the shares, from time to time, including open market purchases or Dutch auctions. The Registrant currently intends to hold the repurchased shares as treasury stock. The Registrant uses debt to the extent internally generated cash flow is insufficient to meet its requirements. Accordingly, the ratio of its total-debt-to-total-capital is important since it indicates the Registrant's capacity to absorb additional debt. This ratio was 45.9 percent at the end of 1998, compared with 40.2 percent at the end of 1997, and 40.1 percent at the end of 1996. Capital expenditures, cash dividend payments, and working capital requirements will be financed from the Registrant's continuing sources of liquidity. The Registrant remains actively involved in evaluating potential acquisitions, which may be financed with internal cash flow, debt, stock, or a combination thereof. Capital expenditures for the years 1998, 1997, and 1996 were $109 million, $119 million, and $64 million, respectively. Capital expenditures consist of normal replacements of property, plant, and equipment and continued investment in machinery and equipment related to increasing volume and the implementation of market-rate-of-demand manufacturing processes. TAX ISSUES For a detailed discussion, see the Income Taxes footnote on pages 37 and 38. GOVERNMENT CONTRACT MATTERS A portion of the Registrant's business results from contracts with or for government agencies. Military sales in 1998 were $332 million, of which 57 percent and 43 percent were from prime contracts and subcontracts, respectively. Military sales in 1997 were $267 million, of which 55 percent and 45 percent were from prime contracts and subcontracts, respectively. Military sales in 1996 were $240 million, of which 48 percent and 52 percent were from prime contracts and subcontracts, respectively. In addition, sales where the final customer was the U.S. government represented 64 percent, 65 percent, and 72 percent of total military sales in 1998, 1997, and 1996, respectively. For additional discussions on government contract matters, see the Government Contract Matters footnote on page 44. 17 18 STRATEGY The Registrant is known internationally for the quality of its engineered products. In the future, the Registrant intends to continue in this area of excellence while focusing on new product and market opportunities. The emphasis will be on sales growth through the development or acquisition of products of like technology and profit potential (such product acquisition activity currently being limited by terms of the Merger Agreement). Additionally, the Registrant is focusing on improving its manufacturing capabilities and processes so that its ability to manufacture and serve its customers will continue to be important competitive advantages. The new business and manufacturing process strategies will be focused through decentralized organizations. Focused product orientated enterprises will be used to implement customized improvements in work flow, cycle time reductions, and customer responsiveness. OUTLOOK Overall sales are expected to grow at a slower rate in 1999 compared to the prior year as a result of lower increases in commercial aircraft order rates, continued economic uncertainty in Asia and Latin America, and the continued effect of low commodity prices on the Industrial segment's primary markets. The Registrant projects that sales will increase approximately 5 percent and operating profit should be in the 20 percent of sales range in 1999. As a result, the Registrant expects to generate diluted earnings per share of between $4.25 and $4.55, excluding any additional share repurchases. For 1999, the Registrant plans to expend approximately $132 million on research and development, of which $43 million will be funded by customers, and invest $100 million to $110 million in capital expenditures. Operating cash flow before capital expenditures is expected to range between $330 million and $370 million in 1999. The Registrant will continue to invest its cash for optimal returns, either by investing in the Company or by growing the Company through acquisitions. The Registrant intends to manage its total-debt-to-total-capital ratio within a range of 40 percent to 50 percent in 1999. Total Aerospace sales are projected to increase between 5 percent and 10 percent for 1999. Commercial sales, both OEM and aftermarket, are expected to increase between 5 percent and 10 percent as a result of continued strength in commercial aircraft order rates coupled with continued airline passenger and freight traffic growth. Military sales are expected to remain consistent relative to 1998 levels. The Aerospace segment is expected to generate an operating profit margin in the range of 22 percent to 23 percent of sales in 1999. The Registrant does not anticipate improvements in primary market conditions for the Industrial segment in 1999. Despite these difficult market conditions, sales are expected to increase up to 5 percent with operating profit margins up to 15 percent of sales as a result of the full-year impact of current year acquisitions, product/market growth initiatives and cost efficiencies gained from operating improvement programs. FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY When used in this Management's Discussion and Analysis of Financial Condition and Results of Operations, the terms "anticipate," "believe," "estimate," "expect," "forecast," "goal," "outlook," "plan," "project," "should" and similar expressions are intended to identify "forward-looking" statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Such risks and uncertainties include the Registrant's successful execution of internal strategic initiatives, including implementation of business unit or enterprise concepts; governmental export and import policies; factors that result in significant and prolonged disruption to air travel worldwide; overall expenditures for capital equipment and infrastructure development; relations with the Registrant's employees; competitive pricing pressures; global trade policies; worldwide political stability and economic conditions, particularly Asia and Latin America; termination of and/or difficulties related to significant government programs (particularly military procurement programs serviced by the Registrant); and potential risks associated with efforts by the Registrant, its suppliers and customers to modify their information systems to be ready for the year 2000. 18 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Registrant is exposed to interest rate risk, foreign currency risk, and equity market risk in the normal course of business and these risks are mitigated from time to time by derivative financial instruments. Fluctuations in the market values of such derivative instruments are generally offset by reciprocal changes in the underlying economic exposures that the instruments are intended to hedge. Because derivative instruments are used solely as hedges and not for speculative trading purposes, they do not represent incremental risk to the Registrant. For further discussion of derivative financial instruments, refer to the Summary of Significant Accounting Policies, Notes Payable and Long-Term Debt, Financial Instruments with Off-Balance-Sheet Risk, and Fair Value of Financial Instruments sections in the notes to consolidated financial statements. Interest Rate Risk The Registrant's earnings are affected by changes in interest rates as a result of its issuance of floating rate notes payable and short-term commercial paper; however, the Registrant limits its exposure to changes in interest rates through the use of pay fixed/receive floating interest rate swap contracts on a portion of its floating rate debt. At December 31, 1998 and 1997, the Registrant had $192 million and $160 million, respectively, of outstanding floating rate debt obligations and $132 million and $0 million, respectively, of interest rate swap contracts. If market rates would have averaged 10% higher than actual levels in either 1998 or 1997, the effect on the Registrant's interest expense and net earnings, after considering the effects of the interest rate swap contracts, would not have been material. The registrant also utilizes fixed rate notes payable and long-term debt to finance operations. As the interest rates on these obligations are fixed, the Registrant's interest expense and net earnings are not exposed to fluctuations in interest rates; however, the fair value of these obligations is affected by changes in interest rates. The fair value of fixed rate debt obligations, although not recognized for book purposes, is an important measure of the approximate cost to the Registrant of settling its debt before scheduled maturity. At December 31, 1998 and 1997, the Registrant had outstanding fixed rate debt obligations of $270 million and $205 million, respectively. The fair value of these obligations was $301 million and $236 million at December 31, 1998 and 1997, respectively. The potential loss in fair value on such debt obligations from a hypothetical 10% adverse change in interest rates would not be material. At December 31, 1998 the Registrant had $200 million of outstanding interest rate lock contracts as hedges of the U.S. Treasury rate to be used as the pricing benchmark in an intended future debt issue. The gain or loss on these contracts will be deferred and recognized over the life of the debt issue. If the Registrant does not proceed with the intended debt issue, the gain or loss on termination of the interest rate lock contracts would be recognized in current period net income. At December 31, 1998, the fair value asset of the interest rate lock contracts was approximately $3 million. The potential loss in fair value on such financial instruments from a hypothetical 10% adverse change in interest rates on 10 year U.S. treasury bonds would not be material to the financial position of the Registrant. The Registrant had no outstanding rate lock contracts at December 31, 1997. Foreign Currency Risk A substantial majority of the Company's revenue, expense, and capital purchasing activities are transacted in U.S. dollars; however, the Registrant is exposed to fluctuations in foreign currencies for transactions denominated in other currencies, primarily the British pound sterling, French franc, and Singapore dollar. The Registrant uses foreign currency forward exchange contracts to reduce such exposure on specific assets, liabilities, and certain cash flows denominated in foreign currencies. At December 31, 1998 the Registrant had outstanding contracts to purchase and sell an equivalent of $11 million and $70 million of foreign currencies, respectively, with a net fair value liability of approximately $4 million. At December 31, 1997 the Registrant had outstanding contracts to purchase and sell an equivalent of $53 million and $72 million of foreign currencies, respectively, with a net fair value liability of approximately $3 million. The potential loss in fair value for such financial instruments from a hypothetical 10% adverse change in quoted 19 20 foreign currency exchange rates would not have been material to the financial position of the Registrant at December 31, 1998 or 1997. Equity Market Risk The Registrant is exposed to equity price risk on certain employee benefit plan assets that are invested in available-for-sale marketable securities consisting of an S&P 500 Index mutual fund. The Registrant uses equity index costless collars to reduce its exposure to equity market volatility on a portion of these investments. At December 31, 1998, the Registrant had available-for-sale marketable securities with a fair value of approximately $11 million and equity index costless collars with a notional amount of $5 million. The potential loss in fair value on these investments, assuming a hypothetical 10% adverse change in the S&P 500 Index from its December 31, 1998 level and after considering the effects of the equity index costless collars, would not be material to the financial position of the Registrant at December 31, 1998. The Registrant did not have investments in marketable securities at December 31, 1997. 20 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Management's Report The management of Sundstrand is responsible for the preparation and presentation of the consolidated financial statements and related financial information included in this Annual Report on Form 10-K. These have been prepared in conformity with generally accepted accounting principles consistently applied and, as such, include amounts based on estimates by management. The consolidated financial statements have been audited by Ernst & Young LLP, the Registrant's independent auditors. Management also is responsible for maintaining a system of internal accounting controls which is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management's authorization and are properly recorded. To assure the maintenance of effective internal controls, management adopts and disseminates policies, procedures and directives; selects and trains qualified personnel; establishes organizational structures which permit the delegation of authority and responsibility; and maintains an active program of internal audits and appropriate follow-up by management. The management of Sundstrand also recognizes its responsibility to promote a strong ethical climate throughout the Company. Toward this end, the Registrant provides training in ethical decision making to each employee. In addition, each employee receives a copy of the Registrant's manual on Business Conduct and Ethics. The Board of Directors elects an Audit Committee from among its members who are not employees of the Registrant. The Audit Committee meets periodically with management, the internal auditors, and the independent auditors to review the work of each and satisfy itself that they are properly discharging their responsibilities. Both the independent auditors and internal auditors have free access to the Audit Committee, without the presence of management, to discuss internal accounting controls, auditing, and financial reporting matters. /s/ Robert H. Jenkins /s/ Paul Donovan Robert H. Jenkins Paul Donovan Chairman of the Board, President Executive Vice President and Chief Executive Officer and Chief Financial Officer January 25, 1999
- -------------------------------------------------------------------------------- Independent Auditors' Report To the Shareholders and Board of Directors, Sundstrand Corporation We have audited the accompanying consolidated balance sheets of Sundstrand Corporation and subsidiaries as of December 31, 1998 and 1997 and the related statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Registrant's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sundstrand Corporation and subsidiaries at December 31, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois January 25, 1999, Except for the footnote entitled "Subsequent Event," as to which our report is dated February 21, 1999. 21 22 SUNDSTRAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ------ ------ ------ (AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA) Net sales................................................... $2,005 $1,752 $1,521 Costs and expenses: Costs of products sold.................................... 1,316 1,148 990 Marketing and administration.............................. 317 286 300 Restructuring charges, net................................ - - 24 ------ ------ ------ 1,633 1,434 1,314 ------ ------ ------ Earnings before other income (deductions)................... 372 318 207 Other income (deductions): Interest expense.......................................... (35) (30) (29) Interest income........................................... 4 6 5 Other, net................................................ 6 - 1 ------ ------ ------ (25) (24) (23) ------ ------ ------ Earnings before income taxes and cumulative effect of accounting change......................................... 347 294 184 Less income taxes........................................... 121 106 70 ------ ------ ------ Net earnings before cumulative effect of accounting change.................................................... 226 188 114 Cumulative effect of change in method of accounting for certain consulting costs, net of taxes.................... - (5) - ------ ------ ------ Net earnings................................................ $ 226 $ 183 $ 114 ====== ====== ====== Weighted-average number of common shares outstanding........ 56.2 59.8 61.0 Weighted-average number of common shares outstanding -- assuming dilution......................................... 56.6 60.2 61.3 Basic earnings per share: Earnings before cumulative effect of accounting change.... $ 4.02 $ 3.15 $ 1.87 Cumulative effect of change in accounting................. - (.09) - ------ ------ ------ Net earnings.............................................. $ 4.02 $ 3.06 $ 1.87 ====== ====== ====== Diluted earnings per share: Earnings before cumulative effect of accounting change.... $ 3.99 $ 3.13 $ 1.86 Cumulative effect of change in accounting................. - (.09) - ------ ------ ------ Net earnings.............................................. $ 3.99 $ 3.04 $ 1.86 ====== ====== ====== Cash dividends per common share............................. $ .68 $ .68 $ .68
See Notes to Consolidated Financial Statements 22 23 SUNDSTRAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ------ ------ ----- (AMOUNTS IN MILLIONS) Cash flow from operating activities: Net earnings.............................................. $ 226 $ 183 $114 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation........................................... 63 58 61 Amortization........................................... 17 15 12 Deferred income taxes.................................. 11 51 6 Change in operating assets and liabilities excluding the effects of acquisitions: Accounts receivable.................................. (48) (13) (18) Inventories.......................................... 68 (75) (37) Other assets......................................... 19 (20) 5 Accounts payable..................................... 1 23 (4) Accrued expenses..................................... (7) 23 20 Other.................................................. (17) 7 9 ----- ----- ---- Total adjustments...................................... 107 69 54 ----- ----- ---- Net cash provided by operating activities................... 333 252 168 ----- ----- ---- Cash flow from investing activities: Cash paid for property, plant, and equipment.............. (109) (119) (64) Proceeds from the sale of assets.......................... 9 15 2 Cash paid for acquisitions, net of cash acquired.......... (94) (18) (29) Cash paid for available-for-sale marketable securities.... (10) - - Other investing activities................................ 1 1 5 ----- ----- ---- Net cash used for investing activities...................... (203) (121) (86) ----- ----- ---- Cash flow from financing activities: Net borrowings (payments) supported by lines of credit.... (98) 25 (50) Issuance of short-term notes payable...................... 118 - - Issuance of long-term debt................................ 80 - - Principal payments on long-term debt...................... (7) (4) (7) Additional debt for acquisitions.......................... 4 - - Proceeds from stock options exercised..................... 4 5 3 Purchase of treasury stock................................ (186) (125) (49) Dividends paid............................................ (38) (41) (41) ----- ----- ---- Net cash used for financing activities...................... (123) (140) (144) ----- ----- ---- Effect of exchange rate changes on cash..................... (5) 4 5 ----- ----- ---- Increase (decrease) in cash and cash equivalents.......... 2 (5) (57) Cash and cash equivalents at January 1.................... 13 18 75 ----- ----- ---- Cash and cash equivalents at December 31.................... $ 15 $ 13 $ 18 ===== ===== ==== Supplemental cash flow information: Interest paid............................................. $ 33 $ 29 $ 31 Income taxes paid......................................... $ 78 $ 74 $ 55
See Notes to Consolidated Financial Statements 23 24 SUNDSTRAND CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, --------------------- 1998 1997 ------- ------- (AMOUNTS IN MILLIONS EXCEPT SHARE DATA) ASSETS Current Assets Cash and cash equivalents................................. $ 15 $ 13 Accounts receivable, net.................................. 381 326 Inventories, net of progress payments..................... 401 462 Deferred income taxes..................................... 53 49 Other current assets...................................... 15 30 ------ ------ Total current assets................................... 865 880 Property, Plant, and Equipment, net......................... 527 472 Intangible Assets, net...................................... 332 265 Deferred Income Taxes....................................... 22 34 Other Assets................................................ 61 49 ------ ------ $1,807 $1,700 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable............................................. $ 163 $ 143 Long-term debt due within one year........................ 4 9 Accounts payable.......................................... 128 124 Accrued salaries, wages, and commissions.................. 29 26 Accrued postretirement benefits other than pensions....... 18 17 Other accrued liabilities................................. 157 148 ------ ------ Total current liabilities.............................. 499 467 Long-Term Debt.............................................. 295 213 Accrued Postretirement Benefits Other Than Pensions......... 344 357 Other Liabilities........................................... 124 121 ------ ------ 1,262 1,158 ------ ------ SHAREHOLDERS' EQUITY Common stock, par value $.50 per share; authorized 150,000,000 shares; issued 1998 and 1997 -- 75,686,028 shares (including shares in treasury).................. 38 38 Additional contributed capital............................ 165 160 Retained earnings......................................... 1,007 819 Common stock in treasury (at cost); 1998 -- 21,284,447 shares and 1997 -- 17,598,391 shares................... (645) (456) Unamortized value of restricted stock issued.............. (6) (10) ------ ------ 559 551 ------ ------ Accumulated foreign currency translation adjustment....... (11) (9) Unrealized gains on marketable securities................. 1 - Minimum pension liability adjustment...................... (4) - ------ ------ Accumulated other comprehensive earnings.................. (14) (9) ------ ------ 545 542 ------ ------ $1,807 $1,700 ====== ======
See Notes to Consolidated Financial Statements 24 25 SUNDSTRAND CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
UNAMORTIZED ACCUMULATED ADDITIONAL COMMON VALUE OF OTHER COMMON CONTRIBUTED RETAINED STOCK IN RESTRICTED COMPREHENSIVE TOTAL STOCK CAPITAL EARNINGS TREASURY STOCK ISSUED EARNINGS ----- ------ ----------- -------- -------- ------------ ------------- (AMOUNTS IN MILLIONS EXCEPT SHARE DATA ) Balance at January 1, 1996........ $481 $ 38 $151 $ 604 $(287) $(14) $(11) Comprehensive income: Net earnings.................... 114 - - 114 - - - Other comprehensive earnings (net of taxes) -- Foreign currency translation adjustment.................... 3 - - - - - 3 ---- Comprehensive income.............. 117 - - - - - - ---- Stock issued and acquired under employee stock plans, net....... 5 - 4 - 1 - - Cash dividends paid............... (41) - - (41) - - - Purchase of 1,372,074 shares for treasury........................ (51) - - - (51) - - Net amortization of deferred compensation under employee stock plans..................... 2 - - - - 2 - ---- ---- ---- ------ ----- ---- ---- Balance at December 31, 1996...... 513 38 155 677 (337) (12) (8) Comprehensive income: Net earnings.................... 183 - - 183 - - - Other comprehensive earnings (net of taxes) -- Foreign currency translation adjustment.................. (1) - - - - - (1) ---- Comprehensive income.............. 182 - - - - - - ---- Stock issued and acquired under employee stock plans, net....... 8 - 5 - 5 (2) - Cash dividends paid............... (41) - - (41) - - - Purchase of 2,506,132 shares for treasury........................ (124) - - - (124) - - Net amortization of deferred compensation under employee stock plans..................... 4 - - - - 4 - ---- ---- ---- ------ ----- ---- ---- Balance at December 31, 1997...... 542 38 160 819 (456) (10) (9) Comprehensive income: Net earnings...................... 226 - - 226 - - - Other comprehensive earnings, (net of taxes) -- Unrealized gain on marketable securities.................. 1 - - - - - 1 Foreign currency translation adjustment.................. (2) - - - - - (2) Minimum pension liability adjustment ($2)............. (4) - - - - - (4) ---- Comprehensive income.............. 221 - - - - - - ---- Stock issued and acquired under employee stock plans, net....... 6 - 4 - 2 - - Cash dividends paid............... (38) - - (38) - - - Purchase of 3,701,700 shares for treasury........................ (189) - - - (189) - - Conversion of 132,700 shares of restricted stock to restricted stock units..................... - - 1 - (2) 1 - Net amortization of deferred compensation under employee stock plans..................... 3 - - - - 3 - ---- ---- ---- ------ ----- ---- ---- Balance at December 31, 1998...... $545 $ 38 $165 $1,007 $(645) $ (6) $(14) ==== ==== ==== ====== ===== ==== ====
See Notes to Consolidated Financial Statements 25 26 SUNDSTRAND CORPORATION AND SUBSIDIARIES INFORMATION BY OPERATING SEGMENT The Registrant has two reportable segments: Aerospace and Industrial. The Registrant's reportable segments are strategic business groups that offer different products and services. They are managed separately based on the fundamental differences in their operations. The Aerospace segment designs, develops and manufactures systems and components for aircraft, space and defense applications. Through its electric systems, mechanical systems, and power systems product lines the business provides highly engineered solutions to the aerospace industry for applications such as: primary, secondary and emergency power generation, distribution and management; actuation; aircraft environmental control; and fuel and lube/scavenge pumps. In addition to having components supplied by a common set of manufacturing sites, each of the Aerospace segment's product lines serve common customers that include airframe manufacturers, the United States government, and most of the world's airlines. The Industrial segment serves a group of basic industries throughout the world with a variety of products ranging from small metering pumps to some of the world's largest ring gears. While the application of the various products is diverse, the products share similar technology, customer industries, and distribution channels. Products consist of mechanically engineered, rotating equipment sold through manufacturer representatives and distributors to customers primarily in the raw material processing, bulk material handling, direct manufacturing and construction industries. Among other considerations, the Registrant evaluates performance and allocates resources based on profit from operations before corporate general allocations, net interest expense and income taxes (referred to as operating profit). The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies section of the notes to consolidated financial statements beginning on page 28. Financial data with respect to the Aerospace and Industrial operating segments are set forth below and should be read in conjunction with the Restructurings section of the notes to consolidated financial statements on page 42. Intersegment sales are immaterial and have been eliminated. Certain prior year amounts have been reclassified to conform with the 1998 presentation.
1998 1997 1996 ------ ------ ------ (AMOUNTS IN MILLIONS) Net sales Aerospace................................................. $1,229 $1,001 $ 785 Industrial................................................ 776 751 736 ------ ------ ------ $2,005 $1,752 $1,521 ====== ====== ====== The above includes: Military sales (final customer is primarily the U.S. government)............................................ $ 332 $ 267 $ 240 ====== ====== ====== - ------------------------------------------------------------------------------------------ Operating profit Aerospace................................................. $ 272 $ 209 $ 138 Industrial................................................ 118 128 84 ------ ------ ------ Total operating profit.................................... 390 337 222 Interest expense............................................ (35) (30) (29) Interest income............................................. 4 6 5 General corporate expenses.................................. (17) (19) (14) Other....................................................... 5 - - ------ ------ ------ Earnings before income taxes and cumulative effect of accounting change...................................... $ 347 $ 294 $ 184 ====== ====== ======
See Notes to Consolidated Financial Statements 26 27 SUNDSTRAND CORPORATION AND SUBSIDIARIES INFORMATION BY OPERATING SEGMENT (CONTINUED)
1998 1997 1996 ------ ------ ------ (AMOUNTS IN MILLIONS) Assets Aerospace................................................. $1,051 $ 952 $ 846 Industrial................................................ 645 578 558 Corporate................................................. 111 170 191 ------ ------ ------ $1,807 $1,700 $1,595 ====== ====== ====== Capital expenditures Aerospace................................................. $ 78 $ 74 $ 36 Industrial................................................ 30 35 28 Corporate................................................. 1 10 - ------ ------ ------ $ 109 $ 119 $ 64 ====== ====== ====== Depreciation and amortization Aerospace................................................. $ 53 $ 49 $ 48 Industrial................................................ 26 22 23 Corporate................................................. 1 2 2 ------ ------ ------ $ 80 $ 73 $ 73 ====== ====== ====== Geographic Areas Net sales Asia/Pacific Rim.......................................... $ 163 $ 183 $ 164 Europe.................................................... 413 332 276 North America (excluding the United States)............... 130 110 106 South America............................................. 58 53 34 United States............................................. 1,174 1,020 897 Other..................................................... 67 54 44 ------ ------ ------ $2,005 $1,752 $1,521 ====== ====== ====== Operating profit (loss) Domestic.................................................. $ 370 $ 317 $ 241 Foreign................................................... 20 20 (19) ------ ------ ------ $ 390 $ 337 $ 222 ====== ====== ====== Assets Domestic.................................................. $1,630 $1,543 $1,432 Foreign................................................... 177 157 163 ------ ------ ------ $1,807 $1,700 $1,595 ====== ====== ======
See Notes to Consolidated Financial Statements 27 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF OPERATIONS Sundstrand Corporation is a multinational organization engaged in the design, manufacture, and sale of a variety of proprietary, technology-based components and subsystems for diversified international aerospace and industrial markets. The Aerospace and Industrial businesses represent approximately 60 percent and 40 percent of total sales, respectively. The principal markets for the Aerospace business are airframe manufacturers located primarily in the United States and Europe, the United States government, and most of the world's airlines. The Industrial businesses serve a wide range of markets, primarily in the United States and Europe, but with growing activity in Asia and South America. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation provide for the inclusion of the accounts of Sundstrand Corporation and all subsidiaries. All intercompany transactions are eliminated in consolidation. Estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period are required to be made by management in the preparation of financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. Cash Equivalents are considered by the Registrant to be all highly liquid debt instruments purchased with original maturities of three months or less. Sales Under Long-Term Contracts, a portion of which are with the U.S. government, are accounted for under the percentage-of-completion method. The Registrant enters into long-term contracts which require it to develop or advance state-of-the-art technology products. Sales on developmental contracts are recorded as the related costs are incurred and include estimated profits calculated on the basis of the relationship between costs incurred and total estimated costs (cost-to-cost method of percentage-of-completion). The Registrant also enters into long-term contracts for the manufacture of products. Sales on production-type contracts are recorded as deliveries are made (units-of-delivery method of percentage-of-completion). Marketing and administrative costs are expensed as incurred. On a selective basis, the Registrant may enter into a contract to research and develop or manufacture a product with a loss anticipated at the date the contract is signed. These contracts are entered into in anticipation that profits will be obtained from future contracts for the same or similar products. These loss contracts often provide the Registrant with intellectual property rights which, in effect, establish it as the sole producer of certain products. Such losses are recognized at the date the Registrant becomes contractually obligated, with revisions made as changes occur in the related estimates to complete. Certain contracts and subcontracts are subject to government audit and review. Information related to government contract matters is presented on page 44. Inventories are stated at the lower of cost (principally first-in, first-out method) or market. Certain inventories are valued using the last-in, first-out method which approximates the first-in, first-out method. Inventoried costs relating to long-term contracts are accounted for based on the percentage-of-completion methods described above. Property, Plant, and Equipment is recorded at cost and depreciation is generally provided on the straight-line basis by charges to expense at rates based on the estimated useful lives of the assets. Estimated useful lives range from 3 to 20 years for machinery and equipment and 10 to 40 years for buildings. Expenditures for new facilities and expenditures that substantially increase the useful lives of the property are capitalized. Maintenance and repairs are expensed as incurred. 28 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Marketable Securities consist of investments in a publicly traded index fund that are held in an irrevocable Rabbi Trust that will be used to fund certain obligations under the Registrant's employee benefit plans. Marketable securities are reviewed by the Registrant for appropriate classification at the time of purchase and reevaluated as of each balance sheet date. All of the Registrant's marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value, with unrealized gains and losses, net of tax, recorded in accumulated other comprehensive earnings. Realized gains or losses and declines in value, if any, judged to be other than temporary, on available-for-sale securities are reported in other income or expense. At December 31, 1998, the fair value of the Registrant's marketable securities was $11 million which includes $1 million in unrealized gains. The change in net unrealized gains included in comprehensive income for 1998 was $1 million. There were no realized gains or losses on these marketable securities during 1998. The Registrant did not hold any marketable securities at December 31, 1997. Marketable securities are classified as other assets on the balance sheet. Intangible Assets of $332 million and $265 million at December 31, 1998 and 1997, respectively (net of accumulated amortization of $121 million and $108 million, respectively), consist primarily of goodwill associated with certain acquisitions. Goodwill is amortized on a straight-line basis over a period not to exceed 40 years. The Registrant annually evaluates whether a change in the estimated useful life of goodwill is warranted or whether the remaining goodwill balance may be impaired. The Registrant believes that no impairment of goodwill has occurred related to the balance at December 31, 1998. However, if the estimated cumulative undiscounted cash flow, before interest, over the remaining life of the associated goodwill indicated an impairment, a reduction for impairment of goodwill would be recorded in accordance with the Registrant's policy. As a result of the Sullair Europe restructuring discussed on page 42, a $7 million impairment charge was taken as part of the 1996 restructuring charge. Stock-Based Compensation is recorded based on the intrinsic value method in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." The Stock-Based Compensation footnote on pages 40 through 42 contains a summary of the pro forma effects to reported net income and earnings per share for 1998, 1997 and 1996 as if the Registrant had elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Derivative Financial Instruments in the form of foreign currency forward exchange contracts, interest rate swaps, interest rate locks and equity index costless collars are entered into by the Registrant to manage foreign currency exchange rate, interest rate, and equity market risks associated with underlying assets, liabilities, firm commitments, or anticipated transactions. The Registrant's derivative financial instruments are not held or issued for speculative or trading purposes. Accounting policies for these instruments are based on the Registrant's designation of such instruments as hedging transactions under generally accepted accounting principles. Criteria used in designating an instrument as a hedge includes the effectiveness of the instrument in reducing the associated risk of the underlying position. Gains and losses on foreign currency forward exchange contracts that are designated as and are effective as hedges of firm commitments, net investments in a foreign entities, or intercompany loans of a long-term nature, are deferred and included in the measurement of the hedged position upon settlement. Foreign currency forward exchange contracts that do not qualify for hedge accounting are marked-to-market and unrealized gains and losses are included in current period income or expense. Payments and receipts under interest rate swaps are accrued as an adjustment to interest expense on the underlying debt. Gains and losses on interest rate locks are deferred and will be included as an adjustment to interest expense on intended future debt issuances. Gains and losses on equity index costless collars are deferred and recorded as an adjustment to the carrying amount of the underlying investments. Gains and losses on terminations of hedge contracts are recognized as income or expense when terminated in conjunction with the termination of the underlying hedged position, or to the extent that such underlying hedged position is still outstanding, deferred and recognized in income upon settlement of the underlying hedged position. 29 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Registrant has strict controls regarding the use of derivative financial instruments. The required level of authorization for the use of derivative financial instruments increases based on their relative risk characteristics. The use of leveraged derivatives is prohibited. In order to manage credit risk related to derivative financial instruments, the Registrant utilizes only highly rated commercial banks or financial institutions for such purposes. Compliance with this policy is monitored on an ongoing basis, and is reviewed and approved annually by the Finance Committee of the Registrant's Board of Directors. Reclassification of certain prior year amounts have been made to conform with the presentation in 1998. Information by Operating Segment is presented on pages 26 and 27. Quarterly Results are presented on page 45. CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1998, the Registrant adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income." Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Registrant's net income or shareholders' equity. Statement No. 130 requires foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on available-for-sale marketable securities, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement No. 130. During 1998, 1997, and 1996, total comprehensive income amounted to $221 million, $182 million, and $117 million, respectively. Effective January 1, 1998 the Registrant adopted Financial Accounting Standards Board Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." Statement No. 131 supersedes Financial Accounting Standards Board Statement No. 14, "Financial Reporting for Segments of a Business Enterprise." Statement No. 131 establishes new standards for the way that public business enterprises report financial and descriptive information about operating segments in the annual and interim financial statements. Statement No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement No. 131 had no impact on net earnings or shareholders' equity but did effect the disclosure of certain segment information. See the Information by Operating Segment section of the consolidated financial statements on pages 26 and 27. Effective January 1, 1998 the Registrant adopted Financial Accounting Standards Board Statement No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits." Statement No. 132 establishes new disclosure requirements for pension and other postretirement benefit information in the notes to the financial statements. The adoption of Statement No. 132 had no impact on net earnings or shareholders' equity but did effect the disclosure of certain pension and other postretirement information. See the Pension and Other Postretirement Benefits section of the notes to the consolidated financial statements on pages 33 through 35. During the fourth quarter 1998, the Registrant adopted American Institute of Certified Public Accountants Statement of Position 98-5 (SOP 98-5), "Reporting on the Cost of Start-Up Activities." SOP 98-5 requires costs related to start-up activities, including organizational expenses, that were previously capitalized to be written-off and displayed as a cumulative effect of a change in accounting principle in the quarter adopted. The Registrant currently expenses such costs as incurred; as a result, the adoption of SOP 98-5 had no impact on net earnings or shareholders' equity in 1998. In the fourth quarter of 1997, the Registrant adopted Emerging Issues Task Force Issue No. 97-13 (EITF Issue No. 97-13), "Accounting for Costs Incurred in Connection with a Consulting Contract That Combines Business Process Reengineering and Information Technology Transformation." EITF Issue No. 97-13, which was issued and effective on November 20, 1997, requires that reengineering costs previously capitalized be written-off and displayed as a cumulative effect of a change in accounting principle during the 30 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) quarter that includes November 20, 1997 (the Registrant's fourth quarter). Future reengineering costs are required to be expensed as incurred. As a result of this adoption, the Registrant recorded a pretax charge of $9 million ($5 million after taxes or $.09 per share) as a cumulative effect of a change in accounting principle in the consolidated statement of earnings in 1997. Other than the cumulative effect, this change did not have a significant impact on the Registrant's net earnings during 1997. In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share." Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement No. 128 requirements. RECENTLY ISSUED ACCOUNTING STANDARDS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use." The Registrant plans to adopt SOP 98-1 on January 1, 1999. SOP 98-1 requires the capitalization of certain internal costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Registrant currently expenses some costs as incurred that are eligible for capitalization under SOP 98-1. Based upon an assessment of the Registrant's internal use software projects, the adoption of SOP 98-1 will not have a material impact on net earnings or shareholder's equity. In June 1998, the Financial Accounting Standards Board issued Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in fiscal years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Registrant expects to adopt the new Statement effective January 1, 2000. The Statement will require the Registrant to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or deferred and recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will immediately be recognized in earnings. Based upon the Registrant's derivative positions at December 31, 1998, the Registrant estimates the adoption of Statement No. 133 will not have a material impact on net earnings or shareholder's equity. ACQUISITIONS During the first quarter 1998, the Industrial segment acquired Ansimag Inc., a manufacturer and distributor of non-metallic magnet drive sealless pumps used in the chemical and general process industries; Maso Process Pumpen GmbH, a manufacturer of Sine(R) rotor pumps used in the food, beverage and pharmaceutical industries; and Robin Industries S.A., a manufacturer of industrial mixing equipment used in the chemical and mineral processing, pulp and paper, water treatment and pharmaceutical industries. During the third quarter 1998, the Industrial segment acquired Williams Instrument Company, Inc., a manufacturer of pneumatically powered mechanical pumps for the oil and gas production industry; and the Mining Services Division of A. Goninan & Co., Limited, a manufacturer of steel and iron ring gears and enclosed gear drives used in the mining, steel, cement and other heavy industries. During the fourth quarter 1998, the Aerospace segment acquired Keystone Engineering, a manufacturer of light-weight propellant pressure tanks and domes for commercial satellite and launch vehicles; and Shannon Aircraft Motor Works, a leader in the repair and overhaul of aircraft motor and generator components. 31 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) All of the 1998 acquisitions were accounted for under the purchase method. Accordingly, the purchase price for each acquisition was allocated to the respective assets and liabilities based on their estimated fair values as of the date of the acquisition. The excess of the purchase price over the fair values of the net assets acquired was allocated to goodwill. The results of the acquired businesses are included in the Registrant's consolidated financial statements as of the respective acquisition dates. The aggregate purchase price for all of these acquisitions was $90 million in cash plus the assumption of $4 million in debt. Of the total purchase price, $65 million was allocated to goodwill which is being amortized on a straight-line basis over periods of 15 to 25 years. The combined impact of these acquisitions was not material in relation to the Registrant's results of operations. Consequently, pro forma information is not presented. The Keystone and Shannon Aircraft Motor Works acquisitions occurred late in 1998; as a result, purchase price allocations have been made based on preliminary estimates of fair values of acquired assets and assumed liabilities and may be adjusted in 1999 when the Registrant completes its integration plans for these acquisitions and when final fair value information becomes available. The final adjustments to the purchase price allocations are not expected to be material to the consolidated financial statements. During the fourth quarter of 1997, the Aerospace segment purchased the remaining portions of the Leach International Corporation's Automated Power Management System (APMS) product line. The electrical load management technology and some related business was purchased from Leach during 1996. This acquisition was accounted for under the purchase method and was not material to the Registrant's results of operations in 1997. ACCOUNTS RECEIVABLE, NET The components of net accounts receivable at December 31, 1998 and 1997, were:
1998 1997 ----- ----- (AMOUNTS IN MILLIONS) U.S. government Amounts billed.......................................... $ 26 $ 23 Unbilled costs and accrued profits...................... 25 13 ---- ---- 51 36 Commercial................................................ 330 290 ---- ---- $381 $326 ==== ====
INVENTORIES The components of inventories at December 31, 1998 and 1997, were:
1998 1997 ----- ----- (AMOUNTS IN MILLIONS) Raw materials............................................. $ 59 $ 59 Work in process........................................... 143 160 Finished goods and parts.................................. 247 260 ---- ---- 449 479 Less progress payments.................................... 48 17 ---- ---- $401 $462 ==== ====
Prior to the application of progress payments, the inventories shown above included costs of $75 million and $82 million at December 31, 1998 and 1997, respectively, related to long-term contracts. 32 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at December 31, 1998 and 1997, was classified as follows:
1998 1997 ------ ------ (AMOUNTS IN MILLIONS) Land and improvements..................................... $ 40 $ 39 Buildings and improvements................................ 241 231 Machinery and equipment................................... 988 900 ------ ------ 1,269 1,170 Less accumulated depreciation............................. 742 698 ------ ------ $ 527 $ 472 ====== ======
PENSION AND OTHER POSTRETIREMENT BENEFITS The Registrant has defined benefit pension plans covering substantially all U.S. employees. Pay-related plans generally provide pension benefits that are based on the employee's highest compensation during a three-year period or the employee's average career compensation, prior to retirement. Nonpay-related plans provide benefits of stated amounts for each year of service. Pension plans for U.S. employees have been funded at amounts equal to or greater than the minimum required by ERISA. The Registrant also provides health and life insurance benefits for retired employees and certain dependents when employees become eligible for these benefits by satisfying plan provisions, which include certain age and/or service requirements. Health and life insurance benefits for retirees of domestic operations are provided through insurance contracts, a group benefit trust or general assets of the Registrant. Health and life insurance benefits for retirees of foreign operations, where applicable, are provided through government-sponsored plans to which contributions by the Registrant are required. The health insurance plans covering substantially all U.S. employees are contributory, with contributions adjusted annually, and these plans contain other cost-sharing features such as deductibles and coinsurance. Currently, the Registrant requires contributions, which are adjusted annually, primarily from employees who retired subsequent to 1991. The Registrant has the right to modify or terminate any of these plans in the future. Net periodic benefit cost for 1998, 1997, and 1996 included:
POSTRETIREMENT PENSION BENEFITS BENEFITS -------------------- -------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (AMOUNTS IN MILLIONS) Service cost of current period.......... $ 20 $ 17 $ 19 $ 5 $ 4 $ 4 Interest cost on benefit obligation..... 52 48 47 18 21 21 Expected gain on plan assets............ (64) (58) (57) - - - Amortization of transition obligation... 4 4 4 - - - Amortization of prior service cost...... 1 1 1 (5) (5) (2) Recognized actuarial loss (gain)........ (1) (1) - (10) (3) (2) Settlement loss (gain).................. (3) - (4) - - - Curtailment loss (gain)................. - - (2) - (15) (6) ---- ---- ---- ---- ---- --- Net periodic benefit cost............... $ 9 $ 11 $ 8 $ 8 $ 2 $15 ==== ==== ==== ==== ==== ===
33 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Benefit obligation, fair value of plan assets, funded status, net pension and net other postretirement benefit liability information for 1998 and 1997 includes:
POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- ---------------- 1998 1997 1998 1997 ----- ----- ----- ----- (AMOUNTS IN MILLIONS) Change in the benefit obligation: Benefit obligation at beginning of year................. $ 689 $ 618 $ 237 $ 285 Service cost............................................ 20 17 5 4 Interest cost........................................... 52 48 18 21 Plan amendments......................................... 5 4 - (31) Actuarial loss (gain)................................... 61 55 12 (24) Settlements............................................. (26) (2) - - Benefits paid........................................... (31) (51) (20) (18) ----- ----- ----- ----- Benefit obligation at end of year....................... 770 689 252 237 ----- ----- ----- ----- Change in plan assets: Fair value of plan assets at beginning of year.......... 854 715 - - Actual return on plan assets............................ 22 183 - - Employer contributions.................................. 1 9 20 18 Settlements............................................. (26) (2) - - Benefits paid........................................... (31) (51) (20) (18) ----- ----- ----- ----- Fair value of plan assets at end of year................ 820 854 - - ----- ----- ----- ----- Funded status............................................. 50 165 (252) (237) Unrecognized transition obligation........................ 10 14 - - Unrecognized prior service costs.......................... 12 6 (27) (33) Unrecognized actuarial gain............................... (91) (196) (83) (104) ----- ----- ----- ----- Net liability recognized on balance sheet................. $ (19) $ (11) $(362) $(374) ===== ===== ===== ===== Net liability recognized on balance sheet consists of: Prepaid benefit cost.................................... $ 10 $ 15 $ - $ - Accrued benefit liability............................... (39) (30) (362) (374) Intangible asset........................................ 4 4 - - Deferred income taxes................................... 2 - - - Accumulated other comprehensive income.................. 4 - - - ----- ----- ----- ----- Net liability recognized on balance sheet................. $ (19) $ (11) $(362) $(374) ===== ===== ===== =====
The projected benefit obligation, accumulated benefit obligation and fair value of the plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $23 million, $19 million and $0, respectively, as of December 31, 1998 and $14 million, $11 million and $0, respectively, as of December 31, 1997. 34 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The year end measures of benefit obligation are based on an actuarial measurement date of October 1 of the respective years. The assumptions used in determining the benefit obligations in 1998 and 1997 were:
POSTRETIREMENT PENSION BENEFITS BENEFITS ---------------- -------------- 1998 1997 1998 1997 ------ ---- ---- ---- Discount Rate................................. 6.75% 7.50% 7.00% 7.75% Expected return on plan assets................ 9.00% 9.00% - - Rate of compensation increase................. 3.50% 4.25% - -
For postretirement benefits, the assumed annual rate of increase in the per capita cost of medical and prescription drug benefits (applicable only to employees who retired prior to 1992) is 5.25 percent for 1999 and is assumed to decrease to 5.0 percent in 2000 and remain level thereafter. The assumed annual rate of increase in the per capita cost of dental benefits (applicable only to employees who retired prior to 1992) is 5.0 percent in 1999 and is expected to remain level at that rate thereafter. These rates have no effect on the Registrant's costs for employees retiring after 1991 as the Registrant's policy is to increase retiree contributions so that the Registrant's annual per capita cost increases at the general inflation rate. The assumed annual rate of increase in the general inflation rate (applicable to employees retiring after 1991) was 3 percent and 4 percent for 1998 and 1997, respectively. A one percent increase in the annual health care trend rates would have increased the accumulated post-retirement benefit obligation by $15 million at both December 31, 1998 and 1997, and increased the service and interest cost for 1998 and 1997 by $1 million in each year. A one percent decrease in the annual health care trend rates would have decreased the accumulated post-retirement benefit obligation by $15 million at both December 31, 1998 and 1997, and decreased the service and interest cost for 1998 and 1997 by $1 million in each year. Effective September 1997, the Registrant amended its Retiree Health Insurance Plans to modify the period in which the service requirements could be fulfilled. This amendment resulted in a postretirement benefit curtailment gain of $15 million in 1997. It also reduced the net periodic postretirement benefit cost by $3 million for 1997. During 1996, the Registrant closed its Lima, Ohio, facility at which time an $8 million pension and other postretirement benefit curtailment gain was recognized. The decision to close this facility was made in 1995 and a $12 million curtailment loss was recognized at that time. Both amounts have been reflected in the restructuring charge line in their respective years. For more information related to this charge see the Restructurings footnote on pages 42 and 43. Pension plan assets consist principally of common stocks and fixed income investments. During 1998 and 1997, one-year arrangements were executed limiting the Registrant's exposure to investment gains and losses on plan assets. The Registrant also sponsors seven defined contribution retirement benefit plans that cover substantially all U.S. and Puerto Rican employees. All of these plans are subject to ERISA. Six of the plans are intended to be maintained under the provisions of the Internal Revenue Code of 1986, as amended, and one plan is intended to be maintained under the Puerto Rico Income Tax Act of 1954, as amended. Four of these plans provide that the employer will match certain portions of the employee-directed contributions. The maximum employer match as a percentage of salary under these plans was 2 percent, 1 percent, and 0.5 percent for 1998, 1997 and 1996, respectively. The Registrant's matching contributions to the above plans were $6 million in 1998, $3 million in 1997 and $1 million in 1996. 35 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTES PAYABLE AND LONG-TERM DEBT The composition of notes payable at December 31, 1998 and 1997, was:
1998 1997 ----- ----- (AMOUNTS IN MILLIONS) Commercial paper(a)....................................... $ 45 $143 Floating rate notes due 1999(b)........................... 62 - 5.60% notes due 1999...................................... 56 - ---- ---- Notes payable............................................. $163 $143 ==== ====
(a) Average rate of 5.6 percent and 7.1 percent at December 31, 1998 and 1997, respectively. (b) Floating rate of 5.8 percent at December 31, 1998 swapped to a fixed rate of 5.6 percent through the maturity date of the notes. At December 31, 1998, the Registrant maintained committed domestic revolving credit facilities totaling $435 million, including a $100 million facility arranged in 1998. Commitment fees on these facilities were not material. The composition of long-term debt at December 31, 1998 and 1997, was:
1998 1997 ----- ----- (AMOUNTS IN MILLIONS) Floating rate notes due 2000(a)........................... $70 $ - 5.59% notes due 2000...................................... 10 - 9.48% notes due 2001...................................... 100 100 9.15% notes due 2003...................................... 50 50 9.34% notes due 2006...................................... 50 50 Other, including $15 million of variable rate debt, weighted average rate of 4.8% at December 31, 1998...... 19 22 ---- ---- 299 222 Less amount due within one year........................... 4 9 ---- ---- Long-term debt (less current portion)..................... $295 $213 ==== ====
(a) Floating rate of 5.9 percent at December 31, 1998 swapped to a fixed rate of 5.6 percent through the maturity date of the notes. Total principal payments required under long-term debt agreements for the five years subsequent to December 31, 1998, are $4 million in 1999, $81 million in 2000, $100 million in 2001, $3 million in 2002, and $50 million in 2003. In 1998, the Registrant filed a Registration Statement on Form S-3 with the Securities and Exchange Commission for the public sale of up to $100 million of debt securities, increasing the Registrant's previously registered facility for the issuance of such debt securities to $250 million. Under this facility in 1998, the Registrant issued $62 million of floating rate notes due in 1999, $56 million of 5.60 percent notes due in 1999, $70 million of floating rate notes due in 2000, and $10 million of 5.59 percent notes due in 2000. The notes due in 1999 are classified as notes payable. Proceeds from the issuance of these notes were used to repay short-term bank loans. In January 1999, the Registrant issued the remaining $52 million available under this facility in the form of floating rate notes due in 2000. The proceeds were used to pay down commercial paper. Under a long-term debt agreement in place at December 31, 1998, payments of dividends are limited by the requirement to maintain a minimum level of net worth. At December 31, 1998, net worth exceeded the maintenance level by $302 million. 36 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INCOME TAXES Income tax expense for the three years ended December 31, 1998, consisted of the following components:
1998 1997 1996 ---- ---- ---- (AMOUNTS IN MILLIONS) Current income tax expense........................... $130 $152 $ 78 Deferred income tax benefit.......................... (9) (50) (8) ---- ---- ---- Total income tax expense........................... $121 $102 $ 70 ==== ==== ==== Total income tax expense includes: State tax.......................................... $ 13 $ 12 $ 10 Foreign tax........................................ $ 7 $ 7 $ -
State income taxes for 1998, 1997 and 1996 were principally current. Foreign income taxes were principally current for 1998 and 1997, while 1996 included $9 million of current tax expense offset by $9 million of deferred tax benefit. Total income tax expense for each year varied from the amount computed by applying the statutory U.S. federal income tax rate to earnings before income taxes for the reasons set forth in the following reconciliation:
1998 1997 1996 ---- ---- ---- (AMOUNTS IN MILLIONS) Income tax expense at the statutory rate................ $121 $100 $ 64 Increases (reductions) in taxes resulting from: State taxes based on income, net of federal income taxes.............................................. 8 8 7 Adjustments to prior year accruals.................... - 3 - FSC tax benefits...................................... (12) (9) (6) Miscellaneous other items............................. 4 - 5 ---- ---- ---- Actual income tax expense.......................... $121 $102 $ 70 ==== ==== ==== "Effective" tax rate............................... 35.0% 36.0% 38.0% ==== ==== ====
Significant components of the net deferred tax assets at December 31, 1998 and 1997, were:
1998 1997 ------ ------ (AMOUNTS IN MILLIONS) Deferred tax assets arising from: Retiree medical......................................... $140 $144 Employee benefit plans.................................. 25 13 Warranty reserve........................................ 17 13 Inventories............................................. 8 8 Restructuring........................................... 4 7 Environmental reserves.................................. 7 7 Net operating losses.................................... 11 3 Other................................................... 20 32 ---- ---- Total deferred tax assets.......................... 232 227 ---- ---- Deferred tax liabilities arising from: Property, plant, and equipment.......................... 45 40 Taxes provided on unremitted foreign earnings........... 18 21 Other................................................... 94 83 ---- ---- Total deferred tax liabilities..................... 157 144 ---- ---- Net deferred tax assets............................ $ 75 $ 83 ==== ====
37 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Domestic and foreign earnings/(loss) before income taxes and the cumulative effect of accounting change for the three years ended December 31, 1998, as shown below, exclude profits recorded on intercompany sales. Net interest expense is allocated between geographic segments based on non-cash assets.
1998 1997 1996 ---- ---- ---- (AMOUNTS IN MILLIONS) Domestic................................................ $330 $276 $206 Foreign................................................. 17 18 (22) ---- ---- ---- Earnings before income taxes and cumulative effect of accounting change.................................. $347 $294 $184 ==== ==== ====
Profits recorded on intercompany sales from foreign entities excluded above were $21 million, $19 million, and $19 million in 1998, 1997 and 1996, respectively, and were earned primarily by the Registrant's Singapore subsidiaries. As of December 31, 1998 and 1997, the Registrant had not provided federal income taxes on $82 million and $65 million, respectively, of undistributed earnings recorded by certain subsidiaries outside the United States, since these earnings were deemed permanently invested. In 1994, the IRS informed the Registrant that it was disallowing a deduction for $115 million in payments pursuant to the agreement dated August 29, 1988, which settled the previously disclosed government contracts dispute. During 1998, this issue was resolved with no material impact to the Registrant. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 1996 ----- ----- ----- (AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA) Numerator for basic and diluted earnings per share -- net earnings........................................ $ 226 $ 183 $ 114 ===== ===== ===== Denominator: Denominator for basic earnings per share -- Weighted-average shares.......................... 56.2 59.8 61.0 Effect of dilutive securities -- Employee stock options and restricted stock units............... 0.4 0.4 0.3 ----- ----- ----- Denominator for diluted earnings per share -- adjusted weighted-average shares................. 56.6 60.2 61.3 ===== ===== ===== Basic earnings per share.............................. $4.02 $3.06 $1.87 ===== ===== ===== Diluted earnings per share............................ $3.99 $3.04 $1.86 ===== ===== =====
Additional disclosures regarding employee stock options are presented on pages 40 through 42. 38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK In the normal course of business, the Registrant is party to financial instruments with off-balance-sheet risk for the purpose of meeting financing needs and reducing exposure to fluctuations in capital markets. These financial instruments include financial guarantees, foreign currency forward exchange contracts, interest rate swaps, interest rate locks and equity index costless collars. These instruments may involve elements of credit risk in excess of the amount recognized in the financial statements. Financial guarantees are conditional commitments issued by the Registrant to guarantee the payment of certain liabilities, primarily borrowing arrangements, of unconsolidated affiliates and unaffiliated entities to third parties. At December 31, 1998, the Registrant's had outstanding financial guarantees totaling $5 million scheduled to expire in 1999 and 2000. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates and at specified exchange rates. At December 31, 1998, the Registrant had contracts maturing primarily during 1999 to purchase and sell the equivalent of $11 million and $70 million in foreign currencies, respectively. At December 31, 1997, the Registrant had contracts maturing primarily during 1998 to purchase and sell the equivalent of $53 million and $72 million in foreign currencies, respectively. All of the foreign exchange contracts were used by the Registrant to reduce the impact of foreign currency fluctuations on specific assets, liabilities and certain cash flows denominated in foreign currencies, primarily the French franc and the British pound sterling. Had counterparties failed to perform under the contracts and assuming all the contracts matured on December 31, 1998, the Registrant's cash loss would have been $3 million. Interest rate swaps are contracts in which two parties agree to pay interest to each other on a notional principal amount, with one party paying a fixed rate and the other party paying a floating rate. Such swaps eliminate interest rate risk on floating rate debt by enabling the Registrant to pay a fixed interest rate and receive a floating payment exactly equal to the interest due on the floating rate debt. At December 31, 1998, the Registrant had interest rate swap contracts eliminating interest rate risk on $132 million of floating rate debt with maturities to March 2000. The Registrant was not party to such contracts at December 31, 1997. An interest rate lock contract is a notional forward sale of a U.S. Treasury bond at a specified price on a specified future date. Interest rate lock contracts protect against fluctuations in the U.S. Treasury rate to be used as the pricing benchmark in an intended future debt issue. If the U.S. Treasury rate rises or falls during the term of the contract, the contract will produce a gain or a loss, respectively, which will be deferred and amortized into interest expense over the life of the debt issue. At December 31, 1998, the Registrant had outstanding interest rate lock contracts with an aggregate notional amount of $200 million maturing in 1999. The Registrant was not party to such contracts at December 31, 1997. An equity index costless collar is a simultaneous combination of put and call options on a specified equity market index. Under an equity index costless collar, the price paid for the put option is exactly offset by the amount received from the sale of the call option. The put option provides for a cash payment to the Registrant if the index is below the put strike level at expiration, and the call option requires the Registrant to make a cash payment if the index exceeds the call strike level. If the index is between the put strike and the call strike levels at expiration, there will be no cash payment to or from the Registrant. The Registrant uses such collars to limit the exposure on certain available-for-sale marketable securities to fluctuations in the S&P 500 Index. At December 31, 1998, the Registrant was a party to S&P 500 Index collars expiring in 1999 with notional amounts totaling $5 million. The S&P 500 Index level at December 31, 1998 was within the collars. The Registrant was not party to such contracts at December 31, 1997. 39 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Registrant in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates their fair value. Notes payable and long-term debt: The carrying amounts of the Registrant's borrowings under its commercial paper programs, its short-term revolving credit agreements, floating rate notes payable and long-term debt instruments approximate their fair value. The fair value of the Registrant's other long-term debt is estimated using discounted cash flow analyses based on the Registrant's current incremental borrowing rates for similar types of borrowing arrangements. Derivative instruments: The fair value of the Registrant's derivative instruments, including foreign currency forward exchange contracts, interest rate swaps, interest rate locks and equity index costless collars, is estimated based on quoted market prices of comparable contracts. The carrying amounts and fair values of the Registrant's financial instruments at December 31, 1998 and 1997, were:
1998 1997 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ----- -------- ----- (AMOUNTS IN MILLIONS) Cash and cash equivalents....................... $ 15 $15 $ 13 $ 13 Notes payable................................... 163 163 143 143 Long-term debt.................................. 299 330 222 253 Derivative instruments: Foreign currency forward exchange contracts... - (4) (4) (3) Interest rate swaps........................... - - - - Interest rate locks........................... - 3 - - Equity index costless collars................. - - - -
LEASE ARRANGEMENTS AND RENT EXPENSE Rent and lease expense for the years 1998, 1997, and 1996 was $12 million, $13 million, and $13 million, respectively. The Registrant leases certain facilities and equipment under operating leases, many of which contain renewal options and escalation clauses. Minimum future rental commitments under noncancelable operating leases which extend beyond one year are payable as follows: 1999, $8 million; 2000, $6 million; 2001, $6 million; 2002, $5 million; 2003, $1 million; and after 2003, $1 million. Facilities and equipment under capital leases, minimum future rentals receivable under subleases, and contingent rental expenses were not significant for the years 1998, 1997, and 1996. STOCK-BASED COMPENSATION The Registrant maintains five plans for the administration of stock-based compensation: the Stock Incentive Plan, the Management Stock Performance Plan, the 1989 Restricted Stock Plan, the Nonemployee Director Stock Option Plan, and the Director Compensation Plan. The Stock Incentive Plan permits up to a maximum of 6.6 million shares of common stock to be granted as nonqualified and incentive stock options and restricted stock to managerial, supervisory, and professional employees. The Management Stock Performance Plan is similar in nature and permits up to 3 million shares to be granted. No further grants are permitted under the 1989 Restricted Stock Plan, however, approximately 800,000 shares of restricted stock have previously been granted. The Nonemployee Director Stock Option Plan permits up to 264,000 stock options to 40 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) be granted. The Director Compensation Plan permits grants of up to 192,692 shares of restricted stock in lieu of cash for director fees and retainers. During 1998, the Stock Incentive Plan, Management Stock Performance Plan, the 1989 Restricted Stock Plan, and the Director Compensation Plan were amended to allow the grant of restricted stock units. This amendment also allows employees and the Registrant to convert outstanding shares of restricted stock to restricted stock units. As a result of this amendment, 71,000 restricted stock units were granted in 1998 and 132,700 shares of restricted stock were converted to restricted stock units in 1998. In all plans offering stock options, the options are granted at fair market value for a term of 10 years and become exercisable in increments of 25 percent of an individual grant on each of the second through fifth anniversary dates of the grant. In all plans offering restricted stock, the restricted stock may not be sold by the employee until the restrictions placed on the shares expire. Likewise, in all plans offering restricted stock units, the restricted stock units may not be sold by the employee during the vesting period. The restrictions on restricted stock and restricted stock units lapse in increments of 20 percent of an individual grant on each of the fifth through ninth anniversary dates of the grant. The amount of compensation represented by the grants of restricted stock and restricted stock units is being amortized over a nine-year vesting period. Total compensation expense recognized for restricted stock and restricted stock units in 1998, 1997 and 1996 was $3 million, $4 million and $2 million, respectively. The following table summarizes information about the Registrant's restricted stock and restricted stock units grants for the years 1998, 1997 and 1996:
1998 1997 1996 ------- ------- ------- Restricted stock units granted..................... 71,000 - - Restricted shares granted.......................... 5,804 50,500 51,600 Weighted average fair value per share/unit......... $ 51.18 $ 51.42 $ 38.16
In accordance with the provisions of SFAS No. 123, the Registrant applies APB Opinion 25 and related Interpretations in accounting for stock options issued under these plans and accordingly, does not recognize compensation expense related to these options. If the Registrant had elected to recognize compensation expense based on the fair value of the options granted at the grant date as prescribed by SFAS No. 123, pro forma net income and earnings per share would have been:
1998 1997 1996 ----- ----- ----- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Net earnings -- as reported.............................. $ 226 $ 183 $ 114 Net earnings -- pro forma................................ 222 180 113 Basic earnings per share -- as reported.................. 4.02 3.06 1.87 Basic earnings per share -- pro forma.................... 3.95 3.01 1.85 Diluted earnings per share -- as reported................ 3.99 3.04 1.86 Diluted earnings per share -- pro forma.................. 3.92 2.99 1.84
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1998, 1997 and 1996 respectively: risk-free interest rates of 4.63%, 5.86% and 6.05%; dividend yields of 1.3%, 1.3% and 1.6%; stock price volatility factors of 22.3%, 20.8% and 20.0%; assumed forfeiture rate of 3.0%; and expected life of the options of seven years. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted-average fair value of options granted in 1998, 1997 and 1996 was $13.70, $14.87 and $10.75, respectively. 41 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Transactions involving stock options are summarized as follows:
WEIGHTED AVERAGE NUMBER OF EXERCISE STOCK OPTIONS OPTIONS PRICE - ---------------------------------------------------------- --------- -------- Outstanding December 31, 1995............................. 1,342,834 $23.07 Granted................................................. 698,350 38.87 Canceled................................................ (29,100) 21.91 Exercised............................................... (176,629) 19.85 --------- ------ Outstanding December 31, 1996............................. 1,835,455 29.41 Granted................................................. 751,250 51.24 Canceled................................................ (38,451) 31.91 Exercised............................................... (225,803) 21.19 --------- ------ Outstanding December 31, 1997............................. 2,322,451 37.23 Granted................................................. 848,100 50.85 Canceled................................................ (13,800) 43.95 Exercised............................................... (165,941) 22.15 --------- ------ Outstanding December 31, 1998............................. 2,990,810 $41.90 ========= ====== Exercisable December 31, 1998............................. 792,323 $28.24 ========= ======
The following summarizes information about the Registrant's stock options outstanding as of December 31, 1998:
TOTAL OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ------------------------------- WEIGHTED AVERAGE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - -------------------------- ----------- ---------------- ---------------- ----------- ---------------- $15 to $25................ 509,347 5.2 years $21.48 422,163 $21.28 $25 to $35................ 227,013 6.8 years $32.46 167,513 $32.66 $35 to $45................ 663,200 7.9 years $38.88 198,947 $38.87 $45 to $55................ 1,560,450 9.4 years $50.84 3,700 $51.31 $55 to $65................ 30,800 9.1 years $61.28 - -
RESEARCH AND DEVELOPMENT The Registrant performs research and development under both Company-funded programs and under contracts with others, principally the U.S. government. Company-funded programs include bid and proposal work for both military and commercial products and research and development. All Company-funded research and development is expensed as incurred or expensed in accordance with the Registrant's policy on contract accounting; customer-funded research and development is accounted for under the Registrant's contract accounting policy. Total research and development expenditures for the years 1998, 1997, and 1996 were $141 million, $117 million, and $98 million, respectively, of which $49 million, $44 million, and $43 million, respectively, was funded by customers. RESTRUCTURINGS In December 1996, the Registrant's Industrial segment initiated a restructuring plan related primarily to the operations of Sullair Europe S.A. which resulted in a pretax charge of $32 million. The charge is reflected in the restructuring charge line on the statement of earnings. The restructuring was undertaken as a result of continuing losses at this operation, weakness in the European economy, and significant competitive pressures 42 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) in the European markets. The charge included $11 million in cash termination benefits for approximately 140 employees, primarily consisting of workers at Sullair Europe's St. Priest, France, facility. The charge also included $14 million for the partial write-down of assets of Sullair Europe and $7 million (primarily cash related charges) for disposition of the St. Priest facility and professional fees. Operations previously at the St. Priest facility were transferred to other Sullair plant sites in Europe and the United States. The shutdown of the St. Priest facility and the termination or transfer of the employees was completed during 1997. Since the charge was recorded in 1996, approximately $13 million has been paid and charged against the restructuring liability, including costs to terminate 124 employees. Additionally, restructuring related period costs of $2 million were incurred in both 1998 and 1997. It is anticipated that the sale of the St. Priest facility will be completed by the end of the second quarter of 1999, at which time the restructuring will be substantially complete. During 1995, the Registrant initiated a restructuring plan which resulted in a pretax charge of $58 million. The charge was taken to reduce excess Aerospace manufacturing capacity caused by reductions in manufacturing volume and increases in manufacturing productivity, and to write-down the assets of the Industrial segment's Spectronic Instruments business (Spectronic) and the Aerospace segment's Advanced Power Technology, Inc. (APT) in anticipation of their divestiture. The charge included $24 million in cash and non-cash termination benefits, including recognition of certain long-term retirement benefits for approximately 350 employees. Also included in the charge was $34 million for the write-down and disposition of assets related to the Lima facility, Spectronic, and APT. The shutdown of the Lima facility was completed during 1996 and the disposition of the facility was completed in the first quarter of 1998. The sales of Spectronic and a majority interest in APT were completed in the third quarter of 1995. Since the 1995 restructuring charge was recorded, approximately $10 million in cash has been paid and charged against the restructuring liability, including costs to terminate 360 employees. As of March 31, 1998, the planned restructuring activities from the 1995 restructuring plan were substantially complete. ENVIRONMENTAL MATTERS The Registrant must comply with numerous environmental laws and regulations and is exposed to liabilities and compliance costs arising from its past and current handling, processing, storing, and disposal of hazardous substances and wastes. The Registrant continually monitors its operations with respect to potential environmental issues and, where appropriate, has established reserves for onsite and offsite environmental investigation and remediation costs. The amount reserved with respect to any site reflects the Registrant's estimate of its level of responsibility, the anticipated cost of remediation and, when applicable, an assessment of the ability of other potentially responsible parties (PRPs) to pay their share of such costs. Although the Registrant believes its experience provides a reasonable basis for estimating its liability, the ultimate outcome at any site may differ from the Registrant's estimate. As additional information becomes available, the Registrant adjusts its reserves as it determines to be appropriate. The Registrant's reserve spending for investigation and remediation costs over the past three years is as follows: 1998 -- $2 million; 1997 -- $1 million; and 1996 -- $5 million. It is anticipated that its expenditures from the environmental reserve will be $4 million in 1999 and $3 million in 2000. Although the Registrant believes its environmental reserve is adequate, due to changed circumstances or the discovery of new sites at which the Registrant is liable, additional accruals could be required in the future that could have a material effect on the results of operations in a particular quarter or annual period. However, the Registrant believes it is unlikely that there would be any material adverse effect on the Registrant's long-term financial position. Environmental expenditures that relate to the day-to-day activities of current operations are expensed or capitalized as appropriate. These expenditures are in addition to the above reserve spending. Such expenditures in 1998, 1997, and 1996 were not material and are not expected to be material in 1999 or 2000. 43 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At the present and former plant sites where the Registrant is presently conducting remediations, the established reserves are believed to be adequate to complete the required remediation. At certain present and former plant sites, the Registrant is in the process of evaluating whether remediation will be required or whether the existing contamination is attributable to the Registrant's activities. With respect to one former plant site, the Registrant has recently been advised that an investigation is being conducted at closed wastewater treatment lagoon formerly owned and operated by a local government authority to determine the extent to which contamination may be present and may have affected the groundwater. The Registrant discharged process water to the treatment facility and accordingly is a potentially responsible party. At the time the plantsite was sold, an environmental reserve was established. The Registrant is presently unable to determine whether adjustment to this reserve or those established with respect to other present and former plantsites will be required. Under the Superfund laws, the Registrant participates as a PRP at 27 sites where environmental remediation is being or will be conducted. At 22 of these sites, the Registrant anticipates that it will be able to conclude its participation by settling as a de minimis PRP and that the reserves are adequate to satisfy these liabilities. At three sites, the Registrant will not qualify as a de minimus PRP. However, based upon the Registrant's evaluation of its exposure and the information available from its activity as a PRP, the Registrant believes its reserves are adequate to satisfy its potential liability at each of these sites. The two remaining Superfund sites are located in Rockford, Illinois. At one of these sites, the PRP group in which the Registrant participates, has entered into consent decrees with the Illinois Environmental Protection Agency relating to certain investigations and interim remediations which are substantially complete and the Registrant believes it has fully reserved for its allocated share of the costs. The PRP group is currently finalizing the results of the feasibility study and determining the scope of remediation. Although the Registrant has established reserves for the clean-up based upon its evaluation of its exposure and presently available information, until the clean-up method has been determined and the costs allocated among the PRP group, the Registrant cannot determine the adequacy of its reserve for this site. The second Superfund site relates to a regional area of groundwater contamination, much of which is located in a highly industrialized area. A Consent Order has been signed between the City of Rockford and the U.S. Department of Justice that settles the major issues at this site. The Registrant has participated in the settlement. As a result of the Consent Order, the Registrant now believes that the reserve which it previously established is adequate to meet its remaining liability. GOVERNMENT CONTRACT MATTERS U.S. Government contracts generally provide for the termination or the adjustment of material terms of such contracts at the election of the government, and the government may pursue contractual, administrative, civil, and criminal remedies for improper or illegal activities associated with obtaining and performing government contracts. Administrative remedies include the suspension, debarment, or ineligibility of all or part of a company from receiving government contracts and government-approved subcontracts. As is the case with any company that performs material amounts of business with the federal government, any such action by the government could have a material impact upon the Registrant's business. Management is not currently aware of any such situations. 44 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Quarterly Results (unaudited)
QUARTER ENDED -------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30(A) DECEMBER 31(B) -------- ------- --------------- -------------- (AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA) 1998 Net sales...................................... $485 $ 490 $ 498 $ 532 Gross profit................................... $166 $ 169 $ 172 $ 182 Net earnings................................... $ 51 $ 57 $ 57 $ 61 Basic earnings per share....................... $.89 $1.00 $1.02 $1.12 Diluted earnings per share..................... $.88 $ .99 $1.02 $1.11 1997 Net sales...................................... $389 $ 440 $ 433 $ 490 Gross profit................................... $132 $ 149 $ 151 $ 172 Net earnings................................... $ 35 $ 43 $ 55 $ 50 Basic earnings per share....................... $.58 $ .71 $ .92 $ .85 Diluted earnings per share..................... $.58 $ .71 $ .91 $ .84
(a) 1997 includes a one-time curtailment gain of $15 million before taxes ($9 million after taxes equivalent to $.15 per share) related to an amendment to the Registrant's Retiree Health Insurance Plans. (b) 1997 includes a charge of $9 million before taxes ($5 million after taxes equivalent to $.09 per share) related to the cumulative effect of a change in the method of accounting for certain consulting costs. SUBSEQUENT EVENT On February 21, 1999, the Registrant entered into an Agreement and Plan of Merger with United Technologies Corporation. Pursuant to this agreement, the Registrant will be merged with and into the Hamilton Standard division of United Technologies with the new merged entity being named "Hamilton Sundstrand Corporation." This agreement is subject to approval by the Registrant's shareholders and certain United States and European regulatory agencies and is expected to be completed by mid-year 1999. ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None 45 46 PART III As allowed by SEC regulations, the information required by Items 10 through 13 of Part III of this report, with the exception of the information on the Executive Officers which appears at the end of Part I, are incorporated by reference to the Registrant's definitive proxy statement. If the Registrant's definitive proxy statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, the Items comprising the Part III information will be filed as an amendment to the Form 10-K, not later than the end of the 120 day period. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Proxy Statement, information under the captions "Nominees for Election to Sundstrand Board for Terms Expiring in 2002," "Directors Whose Terms Expire in 2000," "Directors Whose Terms Expire in 2001" and "Section 16 (a) Beneficial Ownership Reporting Compliance". ITEM 11. EXECUTIVE COMPENSATION Proxy Statement, information regarding director compensation and information under the captions "Compensation Committee Report on Executive Compensation," "Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values," "Retirement Plans," and "Employment Agreements". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Proxy Statement, information under the caption "Ownership of Sundstrand Common Stock". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Proxy Statement, information under the caption "Transactions and Loans with Management". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE NO. -------- (a) 1. Consolidated Financial Statements Included in Part II Management's Report....................................... 21 Independent Auditors' Report.............................. 21 Consolidated Statement of Earnings, Years Ended December 22 31, 1998, 1997, and 1996............................... Consolidated Statement of Cash Flows, Years Ended December 23 31, 1998, 1997, and 1996............................... Consolidated Balance Sheet, December 31, 1998 and 1997.... 24 Consolidated Statement of Shareholders' Equity, Years 25 Ended December 31, 1998, 1997, and 1996................ Information by Operating Segment for the Years Ended 26 December 31, 1998, 1997, and 1996...................... Notes to Consolidated Financial Statements................ 30 Quarterly Results (Unaudited) for 1998 and 1997........... 45
46 47 (a) 2. Financial Statement Schedules The schedules have been omitted as the required information is not applicable or not required. (a) 3. Exhibits (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation, or Succession (a) Agreement and Plan of Merger, dated as of February 21, 1999 among the Registrant, United Technologies and HSSail Inc. (filed as Exhibit 2.1 to Registrant's Report on Form 8-K dated February 23, 1999, File No 1-5358, and incorporated herein by reference). (3) Articles of Incorporation and By-Laws (a) Registrant's Restated Certificate of Incorporation as effective December 19, 1991 (filed as Exhibit (3)(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-5358, and incorporated herein by reference). (b) Registrant's By-Laws, including all amendments, as effective September 22, 1998 (filed as Exhibit (3)(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-5358, and incorporated herein by reference). (4) Instruments Defining the Rights of Security Holders, including Indentures (a) Credit Agreement dated as of January 28, 1993, among Registrant and seven banking institutions including Morgan Guaranty Trust Company of New York, as Agent (filed as Exhibit (4)(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-5358, and incorporated herein by reference); Amendment No. 1 dated October 15, 1993, and Amendment No. 2 dated October 31, 1994, to the Credit Agreement (filed as Exhibit (4)(b) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 1-5358, and incorporated herein by reference); and Amendment No. 3 dated November 30, 1995, to the Credit Agreement (filed as Exhibit (4)(c) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-5358, and incorporated herein by reference); and Amended and Restated Credit Agreement dated December 16, 1996, to the Credit Agreement (filed as Exhibit 4(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, File No. 1-5358, and incorporated herein by reference). (b) Credit Agreement dated, as of October 1, 1998, between the Registrant and the First National Bank of Chicago (filed as Exhibit (4)(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-5358, and incorporated herein by reference). (c) Second Amended and Restated Rights Agreement between Registrant and Harris Trust and Savings Bank, as Rights Agent, dated November 21, 1995 (filed as Exhibit 1 to Registrant's Form 8-A/A (Amendment No. 2) dated November 27, 1995, File No. 1-5358, and incorporated herein by reference); and First Amendment to Second Amended and Restated Rights Agreement, dated February 20, 1996 (filed as Exhibit (4)(e) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-5358, and incorporated herein by reference). (d) Lease dated as of December 14, 1987, between Registrant and Greyhound Real Estate Investment Six, Inc. (filed as Exhibit (4)(f) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, File No. 1-5358, and incorporated herein by reference). (e) Note Agreement of Registrant dated May 15, 1991 (filed as Exhibit (19)(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, File No. 1-5358, and incorporated herein by reference); and Amendment effective December 31, 1991, to the Note Agreement (filed as Exhibit (19)(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-5358, and incorporated herein by reference). 47 48 (f) Note Agreement of Registrant dated October 31, 1991 (filed as Exhibit (4)(l) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-5358, and incorporated herein by reference); and Amendment dated December 1, 1995, to the Note Agreement (filed as Exhibit (4)(l) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-5358, and incorporated herein by reference). (g) Note Agreement of Registrant dated December 2, 1991 (filed as Exhibit (4)(m) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-5358, and incorporated herein by reference). (h) Amendment dated December 11, 1995, to Registrant's Note Agreement dated May 15, 1991, as amended December 31, 1991, and to Registrant's Note Agreement dated December 2, 1991 (filed as Exhibit (4)(n) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 1-5358, and incorporated herein by reference). (10) Material Contracts (a) Employment Agreement dated June 1, 1998, between Registrant and Robert H. Jenkins, Registrant's Chairman of the Board, President and Chief Executive Officer (filed as Exhibit (10)(a) to Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 1-5358, and incorporated herein by reference).* (b) Form of Employment Agreement between Registrant and each of Paul Donovan, Registrant's Executive Vice President and Chief Financial Officer; Patrick L. Thomas, Registrant's Executive Vice President and Chief Operating Officer, Industrial; Ronald F. McKenna, Registrant's Executive Vice President and Chief Operating Officer, Aerospace; Mary Ann Hynes, Registrant's Vice President and General Counsel and Secretary; and DeWayne J. Fellows, Registrant's Vice President and Controller (filed as Exhibit (10)(b) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 1-5358, and incorporated herein by reference).* (c) Amendment and Restatement of Registrant's Stock Incentive Plan effective September 22, 1998.* (d) First Amendment to Registrant's amended and restated Stock Incentive Plan effective January 15, 1999.* (e) Registrant's Nonemployee Director Stock Option Plan effective August 1, 1994 (filed as Exhibit A to Registrant's Proxy Statement dated March 7, 1995, File No. 1-5358, and incorporated herein by reference).* (f) Text of resolution adopted by the Board of Directors of Registrant on February 20, 1996, amending Registrant's Nonemployee Director Stock Option Plan, which amendment became effective April 16, 1996, upon stockholder approval.* (g) Second Amendment to Registrant's Nonemployee Director Stock Option Plan effective as of December 8, 1998. (h) Registrant's Director Compensation Plan effective August 1, 1994 (filed as Exhibit B to Registrant's Proxy Statement dated March 7, 1995, File No. 1-5358, and incorporated herein by reference).* (i) First Amendment to Registrant's Director Compensation Plan effective as of April 21, 1998 (filed as Exhibit (10)(k) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-5358 and incorporated herein by reference).* (j) Second Amendment to Registrant's Director Compensation Plan effective as of December 8, 1998.* (k) Registrant's 1989 Restricted Stock Plan as adopted April 20, 1989, by the stockholders of Registrant (filed as Exhibit (10)(v) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-5358, and incorporated herein by reference).* (l) Text of resolution adopted by the Board of Directors of Registrant on August 7, 1990, amending Registrant's 1989 Restricted Stock Plan (filed as Exhibit (19)(f) to *Management contract or compensatory plan. 48 49 Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, File No. 1-5358, and incorporated herein by reference).* (m) Text of resolution adopted by the Board of Directors of Registrant on November 21, 1995, amending Registrant's 1989 Restricted Stock Plan.* (n) Third Amendment to Registrant's 1989 Restricted Stock Plan effective as of June 1, 1998.* (o) Fourth Amendment to Registrant's 1989 Restricted Stock Plan effective as of September 22, 1998.* (p) Fifth Amendment to Registrant's 1989 Restricted Stock Plan effective as of January 15, 1999.* (q) Text of resolution adopted by the Board of Directors of Registrant on July 16, 1989, adopting a Director Emeritus Retirement Plan and copy of such plan as effective July 20, 1989 (filed as Exhibit (10)(dd) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-5358, and incorporated herein by reference).* (r) First Amendment to Registrant's Director Emeritus Retirement Plan effective as of April 21, 1997 (filed as Exhibit (10)(q) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-5358 and incorporated herein by reference).* (s) Text of resolution adopted by the Board of Directors of Registrant on October 17, 1984, establishing a 1984 Elected Officers' Loan Program (filed as Exhibit (10)(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1984, File No. 1-5358, and incorporated herein by reference).* (t) Text of resolution adopted by the Board of Directors of Registrant on October 15, 1991, amending the 1984 Elected Officers' Loan Program (filed as Exhibit (10)(ff) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, File No. 1-5358, and incorporated herein by reference).* (u) Amendment and Restatement of Registrant's Management Stock Performance Plan effective as of September 22, 1998.* (v) First Amendment to Registrant's amended and restated Management Stock performance Plan effective January 15, 1999.* (w) Registrant's Supplemental Retirement Plan effective as of December 10, 1975, including all amendments (filed as Exhibit 10(u) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, File No. 1-5358 and incorporated herein by reference).* (x) Fifth Amendment to Registrant's Supplemental Retirement Plan effective as of December 8, 1998.* (y) Registrant's Officer Performance Compensation Plan effective as of January 1, 1997 (filed as Exhibit A to Registrant's Proxy Statement dated March 5, 1997, File No. 1-5358, and incorporated herein by reference.).* (z) Amended and Restated Deferred Compensation Plan of Registrant effective as of December 19, 1997 (filed as Exhibit (10)(w) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-5358, and incorporated herein by reference). (aa) First Amendment to Registrant's amended and restated Deferred Compensation Plan effective as of April 21, 1998.* (bb) Second Amendment to Registrant's amended and restated Deferred Compensation Plan effective as of June 1, 1998.* (cc) Third Amendment to Registrant's amended and restated Deferred Compensation Plan effective as of September 22, 1998.* (dd) Fourth Amendment to Registrant's amended and restated Deferred Compensation Plan effective as of December 8, 1998.* *Management contract or compensatory plan. 49 50 (ee) Consulting Agreement dated April 15, 1997, between Registrant and Don R. O'Hare, Registrant's retired Chairman of the Board, effective April 15, 1997 (filed as Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, File No. 1-5358, and incorporated herein by reference).* (ff) Consulting agreement dated September 22, 1997, between Registrant and Richard M. Schilling, Registrant's retired Vice President, General Counsel and Secretary, effective December 31, 1997 (filed as Exhibit (10)(y) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-5358, and incorporated herein by reference). (21) Subsidiaries of Registrant (23) Consents of Experts and Counsel (a) Consent of Independent Auditors (Ernst & Young LLP). (24) Power of Attorney (27) Financial Data Schedule (99) Additional Exhibits (a) Undertakings (filed as Exhibit (28)(a) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1982, File No. 1-5358, and incorporated herein by reference). (b) Reports on Form 8-K Form 8-K dated February 23, 1999, regarding an Agreement and Plan of Merger between the Registrant and United Technologies Corporation. *Management contract or compensatory plan. 50 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 26th day of March, 1999. SUNDSTRAND CORPORATION (Registrant) By: /s/ PAUL DONOVAN ------------------------------------ Paul Donovan Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Robert H. Jenkins Chairman of the Board, President and Chief Executive Officer Paul Donovan Executive Vice President and Chief Financial Officer DeWayne J. Fellows Vice President and Controller Richard A. Abdoo Director J. P. Bolduc Director Ilene S. Gordon Director Gerald Grinstein Director Charles Marshall Director Klaus H. Murmann Director Ward Smith Director Berger G. Wallin Director March 26, 1999 By: /s/ PAUL DONOVAN ---------------------------------- Paul Donovan, Attorney-in-Fact 51 EX-10.(C) 2 STOCK INCENTIVE PLAN DATED 9/22/98 1 Exhibit (10)(c) SUNDSTRAND CORPORATION STOCK INCENTIVE PLAN As Amended and Restated September 22, 1998 WHEREAS, the Sundstrand Corporation Stock Incentive Plan (the "Plan") was established effective as of December 1, 1992; and WHEREAS, the Plan has been amended on four prior occasions as follows: a) by resolution of the Board of Directors of the Company adopted on April 18, 1995; b) by resolution of the Board of Directors of the Company adopted on September 19, 1995; c) by a First Amendment to the Plan effective as of November 19, 1996, part of which amendment was subject to shareholder approval which was obtained on April 15, 1997; and d) by a Second Amendment to the Plan made effective as of June 1, 1998, pursuant to a resolution of the Board of Directors of the Company adopted at its April 21, 1998, meeting; and WHEREAS, the Board of Directors at its September 28, 1998, meeting authorized the further amendment of the Plan to include restricted stock units and make other changes not inconsistent with such authorization; and WHEREAS, it has been determined that it is appropriate in connection with the amendment to include restricted stock units to also amend and restate the Plan in its entirety to incorporate into a single document each of the prior amendments and to otherwise make limited changes to improve the readability of the Plan; NOW THEREFORE, the Sundstrand Corporation Stock Incentive Plan is hereby amended and restated effective as of September 22, 1998, to provide as follows: ARTICLE 1. PURPOSE, AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. Sundstrand Corporation, a Delaware corporation (the "Company), maintains this incentive compensation plan, known as the "Sundstrand Corporation Stock Incentive Plan" (the "Plan"). The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Restricted Stock and Restricted Stock Units, and is maintained so as to comply with Section 16 of the Exchange Act and the rules thereunder. The Plan was originally established effective as of December 1, 1992 (the "Effective Date"), and shall remain in effect as provided in Section 1.3 herein. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of Participants to those of Company shareholders, and by providing Participants an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Participants upon whose judgment, interest, and special effort the successful conduct of its operations are largely dependent. -1- 2 1.3 DURATION OF THE PLAN. Subject to the right of the Board of Directors of the Company to terminate the Plan at any time pursuant to Article 13 herein, the Plan shall remain in effect until all Shares subject to the Plan shall have been purchased or acquired according to the Plan's provisions. In no event may an Award be granted under the Plan on or after January 1, 2007. ARTICLE 2. DEFINITIONS Whenever used in the Plan, the following terms shall have the meaning set forth below: (a) "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Restricted Stock or Restricted Stock Units. (b) "Board" means the Board of Directors of the Company. (c) "Change in Control" means any of the following events: (i) The acquisition (other than from the Company) by any person (as such term is defined in Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities; (ii) The individuals who, as of the date hereof, are members of the Board (the "Incumbent Board"), cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the Company stockholders, of any new director was approved by a vote of a majority of the Incumbent Board, and such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; or (iii) (A) A merger or consolidation involving the Company (or any direct or indirect subsidiary of the Company) or (B) the issuance of shares of capital stock of the Company in connection with a merger or consolidation involving the Company (or any direct or indirect subsidiary of the Company) if, in the case of clause (A) or clause (B), the stockholders of the Company immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, immediately following such merger or consolidation, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the person issuing securities in the merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation; provided, however, that for purposes of clause (A) and clause (B), voting securities of the Company issued in connection with the merger or consolidation, including securities to cover stock options or cure "tainted" shares (whether issued in the merger or consolidation or pursuant to a public or private offering related thereto), shall be treated as having been issued in such merger or consolidation and not as having been outstanding immediately prior to such merger or consolidation or (C) a complete liquidation or dissolution of the Company or consummation of the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) of this paragraph (c) of Article 2, solely because twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities is acquired by (I) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (II) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time. -2- 3 (e) "Committee" means the committee specified in Article 3. (f) "Disability" means a permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Committee in good faith, upon receipt of sufficient competent medical advice from one or more individuals, selected by the Committee, who are qualified to give professional medical advice. (g) "Early Retirement" shall mean an Employee's eligibility to receive an early retirement benefit from any retirement plan maintained by the Company or any Subsidiary Entity. (h) "Employee" means any full-time managerial, supervisory or professional employee of the Company or of the Company's Subsidiary Entities. (i) "Fair Market Value" means the average of the highest and lowest quoted selling prices for Shares on the relevant date, or (if there were no sales on such date) the weighted average of the means between the highest and lowest quoted selling prices for Shares on the nearest day before and the nearest day after the relevant date, as determined by the Committee. (j) "Incentive Stock Option" or "ISO" means an option to purchase Shares granted under Article 6 herein, which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code. (k) "Insider" shall mean an Employee who is, on the relevant date, an officer of the Company, as defined under Rule 16a-1 of the Exchange Act as determined by the General Counsel of the Company or such person's designee. (l) "Noninsider" means an Employee who is not, on the relevant date, an Insider, as determined by the General Counsel of the Company or such person's designee. (m) "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares granted under Article 6 herein, which is not intended to be an Incentive Stock Option. (n) "Normal Retirement" shall mean an Employee's eligibility to receive a normal retirement benefit from any retirement plan maintained by the Company or by any Subsidiary Entity. (o) "Option" means an Incentive Stock Option or a Nonqualified Stock Option. (p) "Option Certificate" means a certificate setting forth the terms and provisions applicable to Options granted to a Participant. (q) "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option. (r) "Participant" means an Employee of the Company who has an Award granted under the Plan outstanding. (s) "Period of Restriction" means (i) with respect to Shares of Restricted Stock the period during which the transfer of Shares of Restricted Stock is limited in some way, as provided in the Plan, and (ii) with respect to Restricted Stock Units, the period during which the transfer of Stock Units is limited in some way, as provided in the Plan and, subject to Section 8.8, upon the expiration or termination of which, together with the satisfaction of any other conditions prescribed by the Committee applicable to such Restricted Stock Units, the holder thereof shall receive the number of Shares subject thereto. (t) "Restricted Stock" means an Award granted under Article 7 herein. -3- 4 (u) "Restricted Stock Certificate" means a certificate setting forth the terms and provisions applicable to Restricted Stock granted to a Participant. (v) "Restricted Stock Price" means the price at which a Share may be purchased by a participant pursuant to a Restricted Stock grant. (w) "Restricted Stock Unit" means an Award granted under Article 8 herein. (x) "Restricted Stock Unit Certificate" means a certificate setting forth the terms and provisions applicable to Restricted Stock Units granted to a Participant. (y) "Shares" means shares of common stock of the Company. (z) "Subsidiary Entity" means any corporation in which the Company owns, directly, or indirectly, through subsidiaries, at least fifty percent (50%) of the total combined voting power of all classes of stock, or any other entity (including, but not limited to, partnerships and joint ventures) in which the Company owns at least fifty percent (50%) of the combined equity thereof. ARTICLE 3. ADMINISTRATION 3.1 THE COMMITTEE. The Plan shall be administered by the Compensation Committee of the Board or by any other Committee appointed by the Board consisting of not less than three nonemployee members of the Board. The Committee shall be comprised solely of Directors who are eligible to administer the Plan pursuant to Rule 16b-3(b) under the Exchange Act. 3.2 AUTHORITY OF THE COMMITTEE. The Committee shall have full power except as limited by law or by the Certificate of Incorporation or Bylaws of the Company, and subject to the provisions herein, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend, or waive rules and regulations for the Plan's administration; and, subject to the provisions of Article 13 herein, to amend the terms and conditions of any outstanding Award consistent with the Plan. The Committee may make arrangements for the cashless exercise of any Options issued hereunder. The Committee may delegate its authority as permitted hereunder. In the provisions of the Plan where action by the Company is contemplated, the Committee shall undertake to perform such action. 3.3 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board shall be final, conclusive, and binding on all persons, including the Company and its successors or assigns, and on its stockholders, Employees, Participants, and their respective estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.2 herein, the total number of Shares authorized for grant under the Plan is 6,146,155 Shares. Such Shares may be either authorized but unissued, reacquired or a combination thereof. 4.2 ADJUSTMENTS IN AVAILABLE SHARES, OPTIONS, RESTRICTED STOCK AND RESTRICTED STOCK UNITS. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the capital structure of the Company affecting the Shares (a "Transaction"), such adjustment shall be made in the number of Shares which may be granted under the Plan, in the maximum number of Options, the maximum number of Shares of Restricted Stock and the maximum number of Restricted Stock Units that the Committee can authorize the CEO to grant in the aggregate or grant to any one Employee in any calendar year, in the maximum number of Options, -4- 5 Shares of Restricted Stock and Restricted Stock Units which may be granted to an elected officer in any calendar year, and in the number of and/or price of Shares subject to outstanding Options, outstanding Shares of Restricted Stock granted and outstanding Restricted Stock Units granted (including, but not limited to, Shares which are subject to outstanding Restricted Stock Units, the receipt of which has been deferred in accordance with Section 8.8 hereof) under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided that the number of Shares subject to any Award shall always be a whole number. In the event of a Transaction, Options, Shares of Restricted Stock and Restricted Stock Units shall continue in effect in accordance with their terms and the holder thereof shall be entitled to receive in respect of all Shares subject thereto (upon exercise in the case of Options), the same number and kind of stock, securities, cash, property or other consideration that such Shares were entitled to receive in the Transaction; provided, however, that such stock, securities, cash, property or other consideration shall remain subject to all of the conditions and restrictions which were applicable to the Options, Shares of Restricted Stock or Restricted Stock Units immediately prior to the consummation of the Transaction; and provided, further, however, that in the event the Transaction constitutes a Change in Control, a holder of Options and a holder of Restricted Stock Units with respect to which a deferral election is in effect pursuant to Section 8.8, may make an election that such Options and such units shall remain outstanding following the Transaction (in accordance with the applicable deferral election in the case of a holder of Restricted Stock Units and entitle the holder thereof to receive in respect thereof shares of common stock of the entity (or an affiliate thereof) which effected the Transaction (i.e. the same number and kind of stock that such units would have been entitled to receive in the Transaction or such Options would have been entitled to receive in the Transaction if exercised at the time of the Transaction), if any, provided the shares of such stock are publicly traded on a national securities exchange. ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1 ELIGIBILITY. Persons eligible to participate in this Plan are such Employees as are determined by the Committee to be eligible or who otherwise have received Shares under the Plan. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible Employees, those to whom Awards shall be granted. ARTICLE 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Employees at any time and from time to time as shall be determined by the Committee. The Committee shall have discretion in determining the number and type of Options granted to each Participant. In no event may the number of Options granted to an elected officer of the Company in any calendar year exceed 150,000 Options. The Committee may delegate to the Chief Executive Officer of the Company ("CEO") the authority to grant to Noninsiders Options, the terms and provisions of which have been set by the Committee. During any calendar year the aggregate number of Options available for grant by the CEO pursuant to this Section 6.1 may not exceed 600,000, with the number of Options which may be granted by the CEO to any one Employee during any calendar year limited to 10,000. 6.2 OPTION CERTIFICATE. Each Option grant shall be evidenced by an Option Certificate that shall specify the Option Price, the Option duration, the number of Shares to which the Option pertains, whether the Option is intended to be an ISO or a NQSO, and such other provisions as the Committee shall determine. 6.3 OPTION PRICE. The Option Price for each grant of an Option shall be determined by the Committee; provided that the Option Price shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. -5- 6 6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that, except as provided in subsections (a), (b), (c) and (d) of Section 6.8, no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. 6.5 EXERCISE OF OPTIONS. Subject to the provisions of Section 6.10, Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant. However, no Option granted under this Plan shall be exercisable prior to the expiration of six (6) months following the date of its grant. 6.6 PAYMENT. Subject to such other method(s) as may have been established by the Company, Options shall be exercised by the delivery of a written notice of exercise to the Secretary of the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares (or by cashless exercise as arranged by the Committee as provided in Section 3.2). The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent, or (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), (c) by cashless exercise to the extent authorized by the Committee or (d) by a combination of (a), (b) and (c). As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the name or names designated by the Participant, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.7 SPECIAL RESTRICTIONS ON SHARES ACQUIRED PURSUANT TO THE EXERCISE OF AN OPTION. The Committee may impose such restrictions on Shares acquired pursuant to the exercise of an Option under the Plan as it may deem advisable. 6.8 TERMINATION OF EMPLOYMENT. (a) Termination by Normal Retirement or Early Retirement at Age 60. In the event the employment of a Participant is terminated by reason of Normal Retirement or Early Retirement at or after attaining age 60, all outstanding Options granted to that Participant shall immediately become exercisable, and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of such retirement, whichever period is longer. (b) Termination by Early Retirement Prior to Age 60. In the event the employment of a Participant is terminated by reason of Early Retirement prior to attainment of age 60, the Committee, in its sole discretion, shall have the right to cause all or any portion of such outstanding Options granted to that Participant to immediately become exercisable, in which event such Options shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of such Early Retirement, whichever period is longer. (c) Termination by Death. In the event the employment of a Participant is terminated by reason of death, all outstanding Options granted to that Participant shall immediately become exercisable, and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of death, whichever period is longer. Such Options shall be exercisable by such person or persons who shall have been named as the Participant's beneficiary, or if no beneficiary has been named, by such persons who have acquired the Participant's rights under the Option by will or by the laws of descent and distribution. (d) Termination by Disability. In the event the employment of a Participant is terminated by reason of Disability, all outstanding Options granted to that Participant shall immediately become -6- 7 exercisable as of the date the Committee determines the definition of Disability to have been satisfied, and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date that the Committee determines the definition of Disability to have been satisfied, whichever period is longer. (e) Employment Termination Followed by Death. In the event that a Participant's employment terminates by reason of Normal Retirement, Early Retirement or Disability and within the exercise period following such termination the Participant dies, then the remaining exercise period under outstanding Options shall be any time prior to their expiration date, or for one (1) year following death, whichever period is shorter. Such Options shall be exercisable by such person or persons who shall have been named as the Participant's beneficiary, or if no beneficiary has been named, by such persons who have acquired the Participant's rights under the Option by will or by the laws of descent and distribution. (f) Termination of Employment for Other Reasons. If the employment of a Participant shall terminate for any reason other than the reasons set forth in subsections (a)-(d) of this Section 6.8, the Committee, in its sole discretion, shall have the right to cause all or any portion of such outstanding Options granted to that Participant to immediately become exercisable, subject to such terms as the Committee, in its sole discretion, deems appropriate. Options which are or become exercisable as of the effective date of employment termination shall remain exercisable any time prior to their expiration date, or for three (3) months after the date of employment termination, whichever period is shorter. 6.9 FORFEITURE OF OPTIONS. Options held by a Participant which are not exercisable as of the effective date of employment termination and which do not become exercisable pursuant to the provisions of Section 6.8 shall be forfeited immediately. 6.10 ALTERNATE EXERCISABILITY FOLLOWING TERMINATION. With respect to Options held either by Noninsiders or Insiders as of the date of any employment termination, the provisions of Section 6.8 regarding the exercisability of Options as of the date of employment termination and the provisions regarding the length of the exercise period following employment termination notwithstanding, the Committee may, in its sole discretion, provide for accelerated exercisability of all Options and an extended period of exercisability following termination, upon such terms and provisions as it deems appropriate; provided, however, that the period of extended exercisability shall not extend beyond the period specified in Section 6.4 herein. With respect to Options held by Noninsiders as of the date of employment termination, the Committee may delegate to the CEO the authority to modify the terms and provisions regarding acceleration of exercisability and extension of the period of exercisability following termination, subject to the limitations of Section 6.4 herein. 6.11 TRANSFERABILITY OF OPTIONS. Except as otherwise provided in this Section 6.11, options granted under the Plan may only be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated in accordance with the Participant's beneficiary designation, by will, or by the laws of descent and distribution. The Committee, in its sole discretion, may provide for the transferability of Options granted under the Plan, by a Participant to persons or entities on terms and conditions as may be determined by the Committee, in its sole discretion. The Committee, with respect to an Option granted under the Plan which is not transferable, may, in its sole discretion, provide for the transferability of such an Option by the Participant to persons or entities on terms and conditions as may be determined by the Committee, in its sole discretion. Any determination by the Committee to provide for the transferability of an Option by any one Participant under the Plan shall not be deemed to provide to any other Participant under the Plan a right of transferability with respect to an Option granted under the Plan to such other Participant. ARTICLE 7. RESTRICTED STOCK -7- 8 7.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the Plan, including the provision of Article 9 herein, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to eligible Employees in such amounts as the Committee shall determine. In no event may a grant of Restricted Stock be made in any calendar year to an elected officer of the Company if the limitation contained in Section 9.2 has not been met. The Committee may delegate to the CEO the authority to grant to Noninsiders Shares of Restricted Stock, the terms and provisions of which have been set by the Committee. 7.2 RESTRICTED STOCK CERTIFICATE. Each Restricted Stock grant shall be evidenced by a Restricted Stock Certificate that shall specify the Period or Periods of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine. 7.3 RESTRICTED STOCK PRICE. The Restricted Stock Price for each grant of Restricted Stock shall be determined by the Committee. The Restricted Stock Price may be less than the par value of a Share on the date of the Restricted Stock grant. 7.4 RESTRICTIONS ON TRANSFERABILITY AND VESTING. Except as otherwise provided in this Article 7, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee in its sole discretion and specified in the Restricted Stock Certificate, or upon the earlier satisfaction of any other conditions as specified by the Committee in its sole discretion and set forth in the Restricted Stock Certificate. 7.5 OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable. 7.6 ESCROW OR LEGEND. In order to enforce the restrictions imposed upon Shares of Restricted Stock issued hereunder, the Committee may require any Participant to enter into an escrow agreement providing that the certificates representing Shares of Restricted Stock issued pursuant to this Article 7 shall remain in the physical custody of an escrow holder until any or all of the restrictions imposed pursuant to this Article 7 have terminated and the Committee may cause a legend or legends to be placed on any certificates representing Shares issued pursuant to this Article 7, which legend or legends shall make appropriate reference to the restrictions imposed hereunder. 7.7 VOTING RIGHTS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 7.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to those Shares. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid. 7.9 TERMINATION OF EMPLOYMENT; COMPANY REACQUISITION RIGHTS. (a) Termination by Reason of Normal Retirement, Death or Disability. In the event the employment of a Participant who has been granted Shares of Restricted Stock hereunder terminates because of Normal Retirement, death or Disability, then the Company shall not have the right to reacquire any of such Shares of Restricted Stock granted hereunder to such Participant and all restrictions applicable to such Shares shall immediately terminate. (b) Termination by Reason Other than Normal Retirement, Death or Disability. In the event the employment of a Participant who has been granted Shares of Restricted Stock hereunder terminates for any reason other than Normal Retirement, death or Disability, the Company shall have the option for ninety (90) days following such termination of employment to reacquire at his or her cost for cash all or any part of the terminating Participant's nonvested Shares of Restricted Stock. -8- 9 (c) Alternate Treatment of Restricted Stock. Notwithstanding anything contained in subsections (a) and (b) of this Section 7.9 to the contrary, the Committee shall in its sole discretion have the authority to modify the treatment of those Shares of Restricted Stock held by Participants as of the date of employment termination on which the restrictions have not terminated, upon such terms as the Committee deems appropriate. With respect to nonvested Shares of Restricted Stock that were granted pursuant to Section 7.1 and are held by Noninsiders as of the date of employment termination, the Committee may delegate to the CEO the authority to modify the terms regarding the termination of restrictions. ARTICLE 8. RESTRICTED STOCK UNITS 8.1 GRANT OF RESTRICTED STOCK UNITS. Subject to the terms and provisions of the Plan including the provision of Article 9 herein, the Committee, at any time and from time to time, may grant Restricted Stock Units to eligible Employees in such amounts as the Committee shall determine. In no event may a grant of Restricted Stock Units be made in any calendar year to an elected officer of the Company if the limitation contained in Section 9.2 has not been met. The Committee may delegate to the CEO the authority to grant to Noninsiders Restricted Stock Units, the terms and provisions of which have been set by the Committee. 8.2 RESTRICTED STOCK UNIT CERTIFICATE. Each Restricted Stock Unit shall be evidenced by a Restricted Stock Unit Certificate that shall specify the number of Restricted Stock Units to which it applies, the Period or Periods of Restriction, and any other provisions as the Committee shall determine. 8.3 RESTRICTIONS. At or prior to the time a grant of Restricted Stock Units is made, the Committee shall establish a Period of Restriction applicable to such Restricted Stock Units. Each grant of Restricted Stock Units may be subject to a different Period of Restriction. The Committee may, in its sole discretion, at or prior to the time a grant of Restricted Stock Units is made, prescribe such restrictions in addition to the Period of Restriction as it may deem advisable. 8.4 RESTRICTIONS ON TRANSFERABILITY. Except as otherwise provided in this Article 8, Restricted Stock Units may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated. 8.5 RIGHTS OF HOLDERS OF RESTRICTED STOCK UNITS. Unless the Committee otherwise provides in a Restricted Stock Unit Certificate, a Restricted Stock Unit shall confer no rights as a stockholder of the Company on the holder thereof. The holder of a Restricted Stock Unit shall be entitled to receive, upon payment by the Company of a cash dividend on its outstanding Shares, a cash payment from the Company for each Restricted Stock Unit then held by such Participant equal to the per Share dividend paid on the outstanding Shares. 8.6 TERMINATION OF EMPLOYMENT. (a) Termination by Reason of Normal Retirement, Death or Disability. In the event the employment of a Participant who has been granted Restricted Stock Units hereunder terminates because of Normal Retirement, death or Disability, the Period of Restriction and all other applicable restrictions with respect to the Restricted Stock Units then held by such Participant shall immediately terminate. (b) Termination by Reason Other than Normal Retirement, Death or Disability. In the event the employment of a Participant who has been granted Restricted Stock Units hereunder terminates for any reason other than Normal Retirement, death or Disability, the Company shall have the option for ninety (90) days following such termination of employment to cancel all or any part of -9- 10 the Restricted Stock Units then held by such Participant on which the Period of Restriction or other applicable restrictions have not lapsed. (c) Alternate Treatment of Restricted Stock Units. Notwithstanding anything contained in subsections (a) and (b) of this Section 8.6 to the contrary, the Committee shall in its sole discretion have the authority to modify the treatment of those Restricted Stock Units held by Participants as of the date of employment termination with respect to which the Period of Restriction and any other applicable restrictions shall not have lapsed, upon such terms as the Committee deems appropriate. With respect to Restricted Stock Units held by Noninsiders as of the date of employment termination with respect to which the Period of Restriction and any other applicable restrictions shall not have lapsed, the Committee may delegate to the CEO the authority to modify the terms regarding the termination of restrictions. 8.7 PAYMENT IN RESPECT OF RESTRICTED STOCK UNITS. Subject to Section 8.8 hereof, on the date of the expiration or termination of the Period of Restriction and the satisfaction of any other conditions prescribed by the Committee applicable to a Restricted Stock Unit, each Restricted Stock Unit shall entitle the holder thereof to receive one Share. 8.8 DEFERRAL OF RESTRICTED STOCK UNITS. The holder of Restricted Stock Units may elect to defer the issuance of any Share underlying a Restricted Stock Unit until such date as such holder shall choose, so long as such election is made in or prior to the calendar year preceding the calendar year in which such Shares would otherwise have been issued, but in no event less than six (6) months prior to the date such Shares would otherwise have been issued; provided, however, that notwithstanding the foregoing, upon the occurrence of a Potential Change in Control, the Company shall notify in writing each Participant of the occurrence of such event and each Participant shall have the right within 14 days of the Potential Change in Control to elect to defer the issuance of any Share underlying a Restricted Stock Unit until such date as such holder shall choose. For purposes of this Section 8.8, a "Potential Change in Control" means: (a) The execution by the Company of a written agreement which, if consummated, would constitute a Change in Control. (b) A public announcement (including any filing with the Securities and Exchange Commission) by any "person" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act), including any corporation or group of associated firms acting in concert, other than (i) the Company and/or (ii) any employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) of the Company, including a trust established pursuant to such plan, of an intention to take or consider taking actions which, if consummated, would constitute a Change in Control. (c) The acquisition, whether directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the 1934 Act), or of record, of securities of the Company representing fifteen percent (15%) or more in number of any class of its then-outstanding voting securities by any "person" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act), including any corporation or group of associated persons acting in concert, other than (i) the Company and/or (ii) an employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) of the Company, including a trust established pursuant to any such plan. For this purpose, the ownership of record of fifteen percent (15%) or more in number of any class of the then-outstanding voting securities of the Company by a person engaged in the business of acting as a nominee for unrelated beneficial owners shall not in and of itself be deemed to constitute a Potential Change in Control. (d) The occurrence of any other event that the Board determines is a Potential Change in Control. 8.9 WITHDRAWAL. The holder of Restricted Stock Units who has elected to defer the receipt of Shares pursuant to Section 8.8 hereof, may, at his or her discretion, at any time prior to the time such Shares would otherwise be issued to such holder, but in no event prior to the time at which the Shares -10- 11 underlying such Restricted Stock Units would otherwise have been issued had the holder not made an election to defer the issuance of such Shares as provided in this Article 8, on ten (10) days' prior written notice to the Company elect to receive any or all of the Shares such holder has deferred, provided that 10% of the number of Shares the receipt of which is being accelerated shall be forfeited to the Company. ARTICLE 9. LIMITATIONS ON RESTRICTED STOCK SHARE AND UNIT GRANTS; THRESHOLD PARAMETER 9.1 LIMITATION ON AGGREGATE NUMBER OF RESTRICTED STOCK SHARES AND UNITS THAT CAN BE GRANTED DURING ANY YEAR. (a) During any calendar year, the aggregate number of Shares of Restricted Stock and of Restricted Stock Units available for grant by the CEO pursuant to Sections 7.1 and 8.1 herein may not exceed 300,000, with the total number of Shares of Restricted Stock and of Restricted Stock Units which may be granted by the CEO to any one Employee during any calendar year limited to 4,000. 9.2 Limitation on Grants Applicable to Elected Officers. (a) Threshold Parameters. Notwithstanding anything to the contrary contained in the Plan, the Committee shall select, not later than the 90th day after the commencement of each plan year, one or more of the following performance elements and the performance level to be achieved as the threshold parameter: (a) generation of free cash (b) earnings per share (c) revenues (d) market share (e) stock price (f) cash flow (g) retained earnings (h) results of customer satisfaction surveys (i) aggregate product price and other product price measures (j) safety record (k) acquisition activity (l) management succession planning (m) improved asset management (n) improved gross margins (o) increased inventory turns (p) product development and liability (q) research and development integration -11- 12 (r) proprietary protections (s) legal effectiveness (t) handling of SEC and environmental matters (u) manufacturing efficiencies (v) system review and improvement (w) service reliability and cost management (x) operating expense ratios (y) total stockholder return (z) return on sales (aa) return on equity (bb) return on capital (cc) return on assets (dd) return on investments (ee) net income (ff) operating income (gg) working capital (hh) comparative performance of one or more of the above criteria to the performance of other corporations. (b) Awards of Shares of Restricted Stock and Restricted Stock Units. No Shares of Restricted Stock nor Restricted Stock Units will be awarded under the Plan to any elected officer of the Company with respect to a plan year unless the threshold parameter for such plan year is achieved, as determined by the Committee. In determining actual performance under any performance element selected, adjustments will be made to exclude (i) all items determined in accordance with standards published by opinion No. 30 of the Accounting Principles Board ("APB Opinion No. 30") to be extraordinary or unusual in nature, infrequent in occurrence, related to disposal of a segment of a business or related to a change in accounting principles; (ii) all items related to discontinued operations that do not qualify as a segment of a business as defined under APB Opinion No. 30; and (iii) all restructuring charges recorded in accordance with Emergency Issues Task Force Issue No. 94-3. Prior to granting any Shares of Restricted Stock or any Restricted Stock Units with respect to a plan year, the Committee shall confirm that the threshold parameter has been satisfied. If the threshold parameter is achieved, the total number of Shares of Restricted Stock and Restricted Stock Units awarded to an elected officer with respect to such plan year shall not exceed 50,000; provided that the Committee, in its sole discretion, may cancel or reduce the number of Shares of Restricted Stock and Restricted Stock Units which are awarded based on such criteria as the Committee in its sole discretion shall determine. ARTICLE 10. BENEFICIARY DESIGNATION 10.1 BENEFICIARY DESIGNATION. Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under -12- 13 the Plan shall accrue in case of his or her death. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Secretary of the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining at the Participant's death shall accrue to the Participant's estate. ARTICLE 11. RIGHTS OF EMPLOYEES 11.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, or confer upon any Participant any right to continue in the employ of the Company. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiary Entities (or between Subsidiary Entities) shall not be deemed a termination of employment. 11.2 PARTICIPATION. No Employee shall have the right to be selected to receive an Award under this Plan, or, having once been selected, have a right to again be selected to receive a future Award. ARTICLE 12. CHANGE IN CONTROL 12.1 OCCURRENCE OF A CHANGE OF CONTROL. Upon the occurrence of a Change in Control, unless otherwise specifically prohibited by the terms of applicable law or regulation: (a) Any and all Options granted hereunder shall become immediately exercisable; (b) Any Periods of Restriction and other restrictions imposed on Shares of Restricted Stock or Restricted Stock Units shall immediately terminate; and (c) Subject to Article 13 herein, the Committee, before the effective date of the Change in Control, shall have the authority to make any modifications to the Awards and any modifications to a deferral of Restricted Stock Units as determined by the Committee, after consultation with the holder of the Award or deferred Restricted Stock Units, to be appropriate. ARTICLE 13. AMENDMENT, MODIFICATION, AND TERMINATION 13.1 AMENDMENT, MODIFICATION AND TERMINATION. The Board at any time from time to time may amend, modify or terminate the Plan. No such amendment, modification or termination, however, may change the Plan in a way that (i) impairs any benefit theretofore accrued hereunder by any Participant and (ii) in the event of a Change in Control, is adverse to the rights of any Participant, in the case of either (i) or (ii) without the Participant's prior written consent. The immediately preceding sentence may not under any circumstances be amended at any time after September 22, 1998 and any effort to change such sentence shall be null, void and of no force or effect. In addition, no such amendment, modification or termination of the Plan may occur without the approval of the shareholders of the Company, if shareholder approval for such amendment, modification or termination is required by the federal securities laws, any national securities exchange or system on which the Shares are then listed or reported, or a regulatory body having jurisdiction with respect thereto. ARTICLE 14. WITHHOLDING 14.1 TAX WITHHOLDING. The Company shall have the power and the right as set forth in this Article 14 to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy any and all Federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising out of or as a result of this Plan. -13- 14 14.2 SHARE WITHHOLDING. With respect to tax withholding required upon the exercise of Options, upon the termination of restrictions on Restricted Stock or Restricted Stock Units, or upon any other taxable event hereunder, a Participant may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold a number of Shares or Restricted Stock Units, as applicable, the Fair Market Value of which Shares or the underlying Shares related to Restricted Stock Units, in itself or when added to a cash payment made by the Participant to the Company, equals the minimum statutory total tax. ARTICLE 15. SUCCESSORS 15.1 SUCCESSORS. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 16. LEGAL CONSTRUCTION 16.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 16.2 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16.3 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. 16.4 FOREIGN EMPLOYEES. To the extent permissible under applicable law, the Company may grant Awards to eligible Employees who are employed in locations outside of the United States. The Committee shall have the authority to modify the terms of Awards granted to such Employees in order to ensure compliance with applicable local and national law. 16.5 GOVERNING LAW. To the extent not preempted by Federal law (or foreign law, in the case of grants to Employees who are not United States residents), the Plan, and any agreement hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware. 16.6 SEVERABILITY. In the event any provision of the Plan or any action taken thereunto shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included, and the illegal or invalid action shall be deemed null and void. Executed at Rockford, Illinois as of the 22nd day of September, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ---------------------------- Paul Donovan Its: Executive Vice President and Chief Financial Officer -14- EX-10.(D) 3 STOCK INCENTIVE PLAN DATED 1/15/99 1 Exhibit (10)(d) FIRST AMENDMENT TO THE SUNDSTRAND CORPORATION STOCK INCENTIVE PLAN (As Amended and Restated effective September 22, 1998) WHEREAS, the Sundstrand Corporation Stock Incentive Plan (the "Plan") was established effective as of December 1, 1992; and WHEREAS, the Plan was amended and restated effective as of September 22, 1998, to include restricted stock units, to make certain other changes, and to incorporate therein all prior amendments to the Plan and to make other changes to improve readability of the Plan; and WHEREAS, it has been determined that it is appropriate to further amend the Plan; NOW, THEREFORE, the Sundstrand Corporation Stock Incentive Plan, as amended and restated September 22, 1998, is hereby amended effective as of January 15, 1999 as follows: 1. Section 7.4 of Article 7 of the Plan is amended by changing the title thereof to "Restrictions on Transferability and Vesting; Termination of Restrictions." and by adding the following new paragraph at the end thereof, which new paragraph shall be applicable to all Restricted Stock outstanding on January 15, 1999, or thereafter issued under the Plan: "Notwithstanding anything to the contrary contained in the Plan or in any `Terms and Conditions' specified in a Restricted Stock Certificate relating to the issuance of Restricted Stock Awards under the Plan, the termination of restrictions on shares of Restricted Stock granted under the Plan which would otherwise terminate at any time during the three (3) month period which follows the month in which a quarterly or annual earnings press release of the Company is issued shall terminate on the third business day after the day on which such applicable quarterly or annual earnings press release is issued." 2. Section 8.4 of Article 8 of the Plan is amended by changing the title thereof to "Restrictions of Transferability; Termination of Restrictions." and by adding the following new paragraph at the end thereof: "Notwithstanding anything to the contrary contained in the Plan or in any terms and conditions specified in any Restricted Stock Unit Certificate relating to the issuance of Restricted Stock Units under the Plan, the termination of restrictions on Restricted Stock Units granted under the Plan which would otherwise terminate at any time during the three (3) month period which follows the month in which a quarterly or annual earnings press release of the Company is issued shall terminate on the third business day after the day on which such applicable quarterly or annual earnings press release is issued." Executed at Rockford, Illinois as of the 15th day of January. SUNDSTRAND CORPORATION By: /s/ Paul Donovan --------------------------------- Paul Donovan Title: Executive Vice President and Chief Financial Officer EX-10.(F) 4 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN 1 Exhibit (10)(f) AMENDMENT OF NONEMPLOYEE DIRECTOR STOCK OPTION PLAN RESOLVED, by the Board of Directors of Sundstrand Corporation, that Section 6.5 of the Sundstrand Corporation Nonemployee Director Stock Option Plan, be, and it hereby is, amended, subject to stockholder approval, to read as follows: Section 6.5 Retirement. In the event of the Retirement of a Nonemployee Director, all outstanding Options granted to such Nonemployee Director shall immediately become exercisable by the Nonemployee Director, or as applicable, his or her beneficiaries, heirs or estate, and shall remain exercisable for the longer period of the Option Duration of each such Option grant, or one (1) calendar year after the date of Retirement. FURTHER RESOLVED, by the Board of Directors of Sundstrand Corporation that, Section 6.3 of the Sundstrand Corporation Nonemployee Director Stock Option Plan be, and it hereby is, amended subject to stockholder approval, to read as follows: Section 6.3 Exercise of Options. Options shall be exercisable at the Option Price on and after the Option Purchase Date applicable to such Options, and except as otherwise provided in the Plan, shall continue to be exercisable during the Option Duration or any extension thereof as provided in Section 6.5. FURTHER RESOLVED, that with the approval of the Board of Directors, the proposed amendments to Section 6.5 and Section 6.3 of the Plan shall be submitted to the Corporation's stockholders at the 1996 Annual Meeting for approval, and, if approved, shall be effective with respect to options granted on or after the approval date. EX-10.(G) 5 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN 12/8/98 1 Exhibit (10)(g) SECOND AMENDMENT TO THE SUNDSTRAND CORPORATION NONEMPLOYEE DIRECTOR STOCK OPTION PLAN WHEREAS, the Sundstrand Corporation Nonemployee Director Stock Option Plan was established effective as of August 1, 1994; and WHEREAS, the Plan has heretofore been amended on one occasion by a resolution adopted at the Board of Director's meeting on February 20, 1996; and WHEREAS, it has been determined that it is in the best interest of the Corporation to amend the Plan further to make it consistent with other plans maintained by the Corporation. NOW, THEREFORE, effective as of December 8, 1998, the Sundstrand Corporation Nonemployee Director Stock Option Plan is hereby amended as follows: 1. Section (a) of Article 2. of the Plan is amended to provide as follows: (a) "Change in Control" means any of the following events: (i) The acquisition (other than from the Company) by any person (as such term is defined in Sections 13(d) or 14(d) of the Exchange Act of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities; (ii) The individuals who, as of the date hereof, are members of the Board (the "Incumbent Board"), cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the Company stockholders, of any new director was approved by a vote of a majority of the Incumbent Board, and such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; or (iii) (A) A merger or consolidation involving the Company (or any direct or indirect subsidiary of the Company) or (B) the issuance of shares of capital stock of the Company in connection with a merger or consolidation involving the Company (or any direct or indirect subsidiary of the Company) if, in the case of clause (A) or clause (B), the stockholders of the Company immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, immediately following such merger or consolidation, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the person issuing securities in the merger or 2 -2- consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation; provided, however, that for purposes of clause (A) and clause (B), voting securities of the Company issued in connection with the merger or consolidation, including securities to cover stock options or cure "tainted" shares (whether issued in the merger or consolidation or pursuant to a public or private offering related thereto), shall be treated as having been issued in such merger or consolidation and not as having been outstanding immediately prior to such merger or consolidation or (C) a complete liquidation or dissolution of the Company or consummation of the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) of this paragraph (c) of Article 2, solely because twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities is acquired by (I) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (II) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition." 2. Section (h) of Article 2. of the Plan is amended to provide as follows: h) 'Option Price' means the price at which a Share may be purchased pursuant to an Option, which price shall be the Fair Market Value of a Share as of the fifth business day prior to the date the Option is granted." 3. Section 4.2 of Article 4. of the Plan is amended to provide as follows: 4.2 In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the capital structure of the Company affecting the Shares (a "Transaction"), such adjustment shall be made in the number of Shares available for grant under the Plan, in the maximum number of Options which may be granted under the Plan, and in the number of and/or price of Shares subject to outstanding Options under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided that the number of Shares subject to any Option shall always be a whole number. In the event of a Transaction, Options shall continue in effect and in accordance with their terms and the holder thereof shall be entitled upon exercise to receive in respect of all Shares subject thereto, the same number and kind of stock, 3 -3- securities, cash, property or other consideration that such Shares were entitled to receive in the Transaction; provided, however, that such stock, securities, cash, property or other consideration shall remain subject to all of the conditions and restrictions which were applicable to the Options immediately prior to the consummation of the Transaction; and provided, further, however, that in the event the Transaction constitutes a Change in Control, a holder of Options may make an election that such Options shall remain outstanding following the Transaction and entitle the holder thereof to receive in respect thereof share of common stock of the entity (or an affiliate thereof) which effected the Transaction (i.e., the same number and kind of stock that such Options would have been entitled to receive in the Transaction if exercised at the time of the Transaction), if any, provided the shares of such stock are publicly traded on a national securities exchange. 4. Article 8. of the Plan is amended to provide as follows: Article 8. Change in Control. Upon the occurrence of a Change in Control, unless otherwise specifically prohibited by the terms of applicable law or regulation: (a) Any and all Options granted hereunder shall become immediately exercisable; and (b) Subject to Article 9 herein, the Committee, before the effective date of the Change in Control, shall have the authority to make any modifications to the Options as determined by the Committee, after consultation with the holder of such Options, to be appropriate. 5. Article 9. of the Plan is amended to provide as follows: Article 9. Amendment, Modification, and Termination. The Board at any time from time to time may amend, modify or terminate the Plan. No such amendment, modification or termination, however, may change the Plan in a way that (i) impairs any benefit theretofore accrued hereunder by any Nonemployee Director and (ii) in the event of a Change in Control, is adverse to the rights of any Nonemployee Director, in the case of either (i) or (ii) without the Nonemployee Director's prior written consent. The immediately preceding sentence may not under any circumstances be amended at any time after December 8, 1998 and any effort to change such sentence shall be null, void and of no force or effect. In addition, no such amendment, modification of termination of the Plan may occur without the approval of the shareholders of the Company, if shareholder approval for such amendment, modification or termination is required by the federal securities laws, any national securities exchange or system on which the Shares are then listed or reported, or a regulatory body having jurisdiction with respect thereto." 4 -4- Executed at Rockford, Illinois as of the 8th day of December, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ---------------------- Paul Donovan Its: Executive Vice President and Chief Financial Officer EX-10.(J) 6 COMPENSATION PLAN 1 Exhibit (10)(j) SECOND AMENDMENT TO THE SUNDSTRAND CORPORATION DIRECTOR COMPENSATION PLAN WHEREAS, the Sundstrand Corporation Director Compensation Plan was established effective as of August 1, 1994; and WHEREAS, the Plan has heretofore been amended on one occasion by an amendment adopted November 18, 1997, but made effective as of April 21, 1998; and WHEREAS, it has been determined that it is in the best interest of the Corporation to amend the Plan further to make it consistent with other plans maintained by the Corporation and to make it easier to administer. NOW, THEREFORE, effective as of December 8, 1998, the Sundstrand Corporation Director Compensation Plan is amended as follows: 1. The second sentence of Section 1.1 of Article 1. of the Plan is amended by inserting after the words "Common Stock" where they appear therein the words "or in Restricted Stock Units". 2. Section (c) of Article 2 of the Plan is changed to provide as follows: "'Fair Market Value' means the average of the highest and lowest quoted selling prices for Shares on the relevant date, or (if there were no sales on such date) the average of the means between the highest and lowest quoted selling prices for Shares on the nearest day before and the nearest day after the relevant date, as determined by the Committee (as defined in Section 3.1 hereof). 3. Article 2 of the Plan is changed by adding new Sections (h), (i) and (j) which shall provide as follows: "(h) 'Change in Control' means any of the following events: (i) The acquisition (other than from the Company) by any person (as such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the '1934 Act')) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities; (ii) The individuals who, as of the date hereof, are members of the Board (the 'Incumbent Board'), cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the Company stockholders, of any new director was approved by a vote of a majority of 2 -2- the Incumbent Board, and such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; or (iii) (A) A merger or consolidation involving the Company (or any direct or indirect subsidiary of the Company) or (B) the issuance of shares of capital stock of the Company in connection with a merger or consolidation involving the Company (or any direct or indirect subsidiary of the Company) if, in the case of clause (A) or clause (B), the stockholders of the Company immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, immediately following such merger or consolidation, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the person issuing securities in the merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation; provided, however, that for purposes of clause (A) and clause (B), voting securities of the Company issued in connection with the merger or consolidation, including securities to cover stock options or cure 'tainted' shares (whether issued in the merger or consolidation or pursuant to a public or private offering related thereto), shall be treated as having been issued in such merger or consolidation and not as having been outstanding immediately prior to such merger or consolidation or (C) a complete liquidation or dissolution of the Company or consummation of the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) of this paragraph (h) of Article 2, solely because twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities is acquired by (I) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (II) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (i) 'Restricted Stock Unit' means an Award granted under Article __ herein. (j) 'Restricted Stock Unit Certificate' means a certificate setting forth the terms and provisions applicable to Restricted Stock Units granted to a Director." 4. Section 3.2 of Article 3. of the Plan is amended to provide as follows: 3 -3- "Administration. The Committee shall have the full power, discretion and authority to interpret and administer the Plan consistent with Plan provisions; provided, however, in no event shall the Committee have the power to determine the persons eligible to participate in the Plan, or the number, price or timing of Shares or Restricted Stock Units to be issued under the Plan, all such determinations being automatic pursuant to Plan provisions. Any action taken by the Committee with respect to the administration of the Plan which would result in any Director ceasing to be a 'disinterested person' for purposes of any other plan maintained by the Company within the meaning of Rule 16b-3 of the Exchange Act, shall be null and void." 5. Article 6 of the Plan is changed to provide as follows: "Article 6. Payment of or Conversion to Shares or Restricted Stock Units 6.1 Subject to the terms and provisions of the Plan, the Annual Retainer of a nonemployee Director who, with respect to the period following an Annual Meeting of Stockholders of the Company, has elected to have such Annual Retainer paid in Shares, shall be paid as of the date of such Annual Meeting in Shares, the Fair Market Value of which on the fifth business day prior to the date of such Annual Meeting, shall equal the Annual Retainer. The foregoing notwithstanding, in the event the conversion of the Annual Retainer into Shares would result in the issuance of a fractional share, the Annual Retainer shall be increased by the amount necessary to eliminate the need to issue such fractional Share. 6.2 Subject to the terms and provisions of the Plan, the Additional Annual Retainer of a Director with respect to the period following an Annual Meeting of Shareholders of the Company commencing with the 1998 Annual Meeting, shall be converted as of the date of such Annual Meeting into Shares, the Fair Market Value of which on the fifth business day prior to the date of such Annual Meeting, shall equal the Additional Annual Retainer. The foregoing notwithstanding, in the event the conversion of the Additional Annual Retainer into Shares would result in the issuance of a fractional share, the Additional Annual Retainer shall be increased by the amount necessary to eliminate the need to issue such fractional Share. 6. Article 8 of the Plan is changed to provide as follows: "Article 8. Amendment, Modification and Termination The Board has the authority at any time to amend, modify or terminate the Plan; provided, however, that the Plan may not be amended more than once every six months other than to bring it into compliance with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules 4 -4- thereunder. No such amendment, modification or termination, however, may change the Plan in a way that (i) impairs any benefit theretofore accrued hereunder by any Director and (ii) in the event of a Change in Control, is adverse to the rights of any Director, in the case of either (i) or (ii) without the Director's prior written consent. The immediately preceding sentence may not under any circumstances be amended at any time after September 22, 1998, and any effort to change such sentence shall be null, void and of no force or effect. In addition, no such amendment, modification or termination of the Plan may occur without the approval of the stockholders of the Company, if stockholder approval for such amendment, modification or termination is required by the federal securities laws, any national securities exchange or system on which the Shares are then listed or reported, or a regulatory body having jurisdiction with respect thereto. 7. The Plan is changed by adding a new Article 12. to follow Article 11. which shall provide as follows: "12.1 Occurrence of a Change of Control. Upon the occurrence of a Change in Control, unless otherwise specifically prohibited by the terms of applicable law or regulation: (a) Any Periods of Restriction and other restrictions imposed on Shares of Restricted Stock or Restricted Stock Units shall immediately terminate; and (b) Subject to Article 8 herein, the Committee, before the effective date of the Change in Control, shall have the authority to make any modifications to the Awards and any modifications to a deferral of Restricted Stock Units as determined by the Committee, after consultation with the holder of the Award or deferred Restricted Stock Units, to be appropriate. Executed at Rockford, Illinois as of the 8th day of December, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ---------------------------- Paul Donovan Its: Executive Vice President and Chief Financial Officer EX-10.(M) 7 RESTRICTED STOCK PLAN 1 Exhibit (10)(m) AMENDMENT OF THE 1989 RESTRICTED STOCK PLAN RESOLVED, by the Board of Directors of Sundstrand Corporation, that the Sundstrand Corporation 1989 Restricted Stock Plan be, and the same here by is, amended by the addition of the following provision to subsection (d) of Article 6: "Notwithstanding the foregoing, a participant may elect to defer the removal of the restrictions imposed upon shares purchased by such participant hereunder pursuant to guidelines established by the Compensation Committee of the Board of Directors of Sundstrand." EX-10.(N) 8 RESTRICTED STOCK PLAN 1 Exhibit (10)(n) THIRD AMENDMENT OF THE SUNDSTRAND CORPORATION 1989 RESTRICTED STOCK PLAN WHEREAS, the Sundstrand Corporation 1989 Restricted Stock Plan (the "Plan") was approved by the stockholders of the Corporation at the Corporation's April 20, 1989 annual meeting; and WHEREAS, the Plan has previously been amended on two prior occasions by resolutions adopted by the Corporation's Board of Directors, the first one being adopted at the Board's meeting on August 7, 1990, and the second one being adopted at the Board's meeting on November 21, 1995; and WHEREAS, by the second amendment adopted by the Corporation's Board of Directors at its November 21, 1995, meeting participants in the Plan were granted an election to defer the removal of restrictions imposed on restricted shares granted under the Plan pursuant to guidelines to be established by the Compensation Committee of the Board, which guidelines have not been established; and WHEREAS, the Compensation Committee of the Board of Directors of Sundstrand Corporation at its meeting of November 19, 1996, adopted an administrative rule providing for the vesting of restricted shares granted under the Plan as of the first day of each month; and WHEREAS, it has been determined that it is appropriate to further amend the Plan to modify the "Change in Control" provisions and to specifically limit the ability to amend the Plan with respect to certain participants who have entered into agreements with the Corporation. NOW, THEREFORE, the Sundstrand Corporation 1989 Restricted Stock Plan is hereby amended by this Third Amendment effective June 1, 1998, as follows: 1. Subparagraph (f) of Section 6 of the Plan is amended to read as follows: "(f) Notwithstanding any other terms and conditions contained in the Plan, the restrictions provided in this Section 6 shall automatically cease in the event of a Change in Control described below in this subparagraph: 'Change in Control' shall mean any of the following events: (i) The acquisition (other than from Sundstrand) by any person (as such term is defined in Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the1934 Act) of twenty-five percent (25%) or more of the combined voting power of Sundstrand's then outstanding voting securities; 2 2 (ii) The individuals who, as of the date hereof, are members of the Board of Directors of Sundstrand (the "Incumbent Board"), cease for any reason to constitute a majority of the Board of Directors of Sundstrand, unless the election, or nomination for election by Sundstrand stockholders, of any new director was approved by a vote of a majority of the Incumbent Board, and such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; or (iii) (A) A merger or consolidation involving Sundstrand (or any direct or indirect subsidiary of Sundstrand) or (B) the issuance of shares of capital stock of Sundstrand in connection with a merger or consolidation involving Sundstrand (or any direct or indirect subsidiary of Sundstrand) if, in the case of clause (A) or clause (B), the stockholders of Sundstrand immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, immediately following such merger or consolidation, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the person issuing securities in the merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of Sundstrand outstanding immediately before such merger or consolidation; provided, however, that for purposes of clause (A) and clause (B), voting securities of Sundstrand issued in connection with the merger or consolidation, including securities to cover stock options or cure "tainted" shares (whether issued in the merger or consolidation or pursuant to a public or private offering related thereto), shall be treated as having been issued in such merger or consolidation and not as having been outstanding immediately prior to such merger or consolidation or (C) a complete liquidation or dissolution of Sundstrand or consummation of the same or other disposition of all or substantially all of the assets of Sundstrand. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) of this subparagraph (f) of Section 6, solely because twenty-five percent (25%) or more of the combined voting power of Sundstrand's then outstanding voting securities is acquired by (I) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by Sundstrand or any of its subsidiaries or (II) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of Sundstrand in the same proportion as their ownership of stock in Sundstrand immediately prior to such acquisition." 2.The first paragraph of Section 9 of the Plan is amended to read as follows: "This Plan may be amended at any time by the Board of Directors of Sundstrand, provided that since this Plan was approved by the Company's stockholders no such amendment may increase the maximum number of shares that may be issued pursuant to this Plan, except pursuant to 3 3 Section 4 hereof, without the further approval of the Company's stockholders; and, provided, further, that no such amendment may change the Plan in any way that (i) negatively impacts any benefit theretofore granted or accrued hereunder to any participant who is a party to an Agreement (as defined below) or (ii) in the event of a Change in Control, is adverse in any way to the rights of any participant who is a party to an Agreement (as defined below), in the case of either (i) or (ii) without the participant's prior written consent. The immediately preceding sentence may not under any circumstances be amended at any time after June 1, 1998 and any effort to amend such sentence shall be null, void and of no force or effect. The term "Agreement" means an employment, severance or other similar agreement between the Company and any of the individuals listed on an Exhibit which shall be prepared by and kept on file for such purpose with the Company's Vice President, Corporate Human Resources or any successor to such person filling the same or an equivalent position." Executed at Rockford, Illinois as of the 1st day of June, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan --------------------------- Title: Paul Donovan Executive Vice President and Chief Financial Officer 4 EXHIBIT MAINTAINED PURSUANT TO SECTION 4 OF THE SUNDSTRAND CORPORATION 1989 RESTRICTED STOCK PLAN James R. Carlson James A. Cherry William R. Coole Paul Donovan DeWayne J. Fellows Mary Ann Hynes Robert H. Jenkins Ronald F. McKenna Gean B. Stalcup Patrick L. Thomas Neil D. Traubenberg David K. Whitehouse Patrick J. Winn EX-10.(O) 9 RESTRICTED STOCK PLAN 1 Exhibit (10)(o) FOURTH AMENDMENT OF THE SUNDSTRAND CORPORATION 1989 RESTRICTED STOCK PLAN WHEREAS, the Sundstrand Corporation 1989 Restricted Stock Plan (the "Plan") was approved by the stockholders of the Corporation at the Corporation's April 20, 1989 annual meeting; and WHEREAS, the plan has previously been amended on three occasions, twice by resolutions adopted by the Corporation's Board of Directors (August 7, 1990 and November 2, 1995) and once by a formal amendment which was made effective as of June 1, 1998; and WHEREAS, the Compensation Committee of the Board of Directors of the Corporation, pursuant to the November 21, 1995, resolution amending the Plan was authorized to adopt, but has not adopted, guidelines relating to the deferral of the removal of restrictions imposed on restricted shares granted under the Plan, and at its meeting of November 19, 1996, adopted an administrative rule relating to the vesting of restricted shares as of the first day of each month; and WHEREAS, it has been determined that it is appropriate to further amend the Plan to provide for a new form of benefit under the Plan to be called restricted stock units and to authorize restricted stock previously granted to participants to be converted into restricted stock unit grants. NOW, THEREFORE, the Sundstrand Corporation 1989 Restricted Stock Plan is hereby amended by this Fourth Amendment effective as of September 22, 1998, as follows: 1. Section 4 of the Plan is amended by adding three new paragraphs to the end thereof which shall provide as follows: "In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, share combination, or other change in the capital structure of the Company affecting the shares of the Company's common stock (a "Transaction"), such adjustment shall be made in the number of outstanding restricted stock grants under the Plan and in the number of outstanding restricted stock units held by a participant under the Plan (including, but not limited to, shares which are subject to outstanding restricted stock units, the receipt of which has been deferred in accordance with Section 11 hereof) as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided that the number of shares subject to any grant shall always be a whole number. In the event of a Transaction which does not constitute a "Change of Control," shares granted to a participant under the Plan and restricted stock units held by a participant under the Plan shall continue in effect in accordance with their terms and the holder thereof shall be entitled to receive in respect of such shares and restricted stock units, the same number and kind of stock, securities, cash, property or other consideration that such shares or restricted stock units were entitled to receive in the Transaction; provided, however, that such stock, securities, cash, property or other consideration shall remain 2 2 subject to the same conditions and restrictions as were applicable to the shares granted to a participant hereunder or restricted stock units held by a participant hereunder as existed immediately prior to the consummation of the Transaction. In the event of a Transaction which constitutes a Change in Control, any and all restrictions then applicable to shares granted to a participant or applicable to restricted stock units held by a participant shall immediately terminate as provided in Subparagraph (f) of Section 6; provided that a holder of restricted stock units hereunder, may make an election as provided in Section 11 hereof that such units shall remain outstanding following the Transaction in accordance with such election and the holder thereof shall be entitled to receive in respect thereof shares of common stock or other securities of the entity (or an affiliate thereof) which effected the Transaction, if any, provided such shares of common stock or other securities are publicly traded on a national securities exchange." 2. The portion of Subparagraph (f) of Section 6 of the Plan which precedes the "Change in Control" definition shall be changed to provide as follows: "(f) The restrictions provided in this Section 6 on shares and the restrictions provided in Section 11 on restricted stock units shall automatically cease in the event of a Change in Control described below in this subparagraph." 3. The Plan is amended by adding a new Section 11 which will follow Section 10 and provide as follows: "11. RESTRICTED STOCK UNITS. (a) Effective as of September 22, 1998, any participant who has purchased shares under the Plan may, at such participant's sole discretion, have such shares converted into restricted stock units, which units shall be subject to the terms and conditions hereinafter set forth in this Section 11 of the Plan. (b) Each restricted stock unit shall be evidenced by a certificate that shall specify the number of restricted stock units to which it applies, the period of restriction, and any other provisions as the Committee shall determine. (c) Each restricted stock unit shall be subject to the same restrictions as were applicable to the share held by the participant under the Plan which was replaced by such restricted stock unit. (d) Except as otherwise provided in this Section 11, restricted stock units may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated. (e) Unless the Committee otherwise provides in a restricted stock unit certificate, a restricted stock unit shall confer no rights as a stockholder of the Company on the holder thereof. The holder of a restricted stock unit shall be entitled to receive, upon payment by the Company of a cash dividend on its outstanding shares of Sundstrand Common Stock, a cash payment from the Company for each restricted stock 3 3 unit then held by such participant equal to the per share dividend paid on the outstanding shares of Sundstrand Common Stock. (f) In the event the employment of a participant who holds restricted stock units hereunder terminates the following shall apply: (i) if the reason for employment termination is because of normal retirement, death, total disability or early retirement with the consent of the Sundstrand Board of Directors or of the Committee, the restrictions with respect to the restricted stock units then held by such participant shall immediately terminate; or (ii) if the reason for employment termination is for any reason other than normal retirement, death, total disability or early retirement with the consent of the Sundstrand Corporation Board of Directors or of the Committee, the Company shall have the option for ninety (90) days following such termination of employment to cancel all or any part of the restricted stock units then held by such terminating participant on which the restrictions have not lapsed. (g) Subject to Subparagraph (h) of this Section 11, on the date of the expiration or termination of the restrictions and the satisfaction of any other conditions prescribed by the Committee applicable to a restricted stock unit, each restricted stock unit shall entitle the holder thereof to receive one share. (h) The holder of restricted stock units may elect to defer the issuance of any share underlying such restricted stock unit until such date as such holder shall choose, so long as such election is made in or prior to the calendar year preceding the calendar year in which such share would otherwise have been issued, but in no event less than six (6) months prior to the date on which such share would otherwise have been issued. The foregoing notwithstanding, upon the occurrence of each Potential Change in Control, the Company shall notify in writing each participant of the occurrence of such event and each Participant shall have the right within the 14 day period following receipt of such notice but in no event prior to the effective date of the "Change in Control" to which such notice relates to elect (i) in the case of restricted stock units on which the restrictions applicable to such units will terminate as the result of the Change in Control either to receive the underlying shares relating to such units or to defer the issuance of the shares underlying such units to such date as such holder shall choose, or (ii) in the case of restricted stock units on which the restrictions have previously lapsed but the issuance of the underlying shares has been deferred to either then receive the underlying shares or to defer the issuance of the shares underlying the restricted stock unit until such date as such shares would otherwise have been issued. For purposes of this Section 8.8, a "Potential Change in Control" means: (i) The execution by the Company of a written agreement which, if consummated, would constitute a Change in Control; 4 4 (ii) A public announcement (including any filing with the Securities and Exchange Commission) by any "person" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act), including any corporation or group of associated firms acting in concert, other than (i) the Company and/or (ii) any employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) of the Company, including a trust established pursuant to any such plan, of an intention to take or consider taking actions which, if consummated, would constitute a Change in Control; (iii) The acquisition, whether directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the 1934 Act), or of record, of securities of the Company representing fifteen percent (15%) or more in number of any class of its then-outstanding voting securities by any "person" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act), including any corporation or group of associated persons acting in concert, other than (i) the Company and/or (ii) an employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) of the Company, including a trust established pursuant to any such plan. For this purpose, the ownership of record of fifteen percent (15%) or more in number of any class of the then-outstanding voting securities of the Company by a person engaged in the business of acting as a nominee for unrelated beneficial owners shall not in and of itself be deemed to constitute a Potential Change in Control; or (iv) The occurrence of any other event that the Board of Directors of Sundstrand determines is a Potential Change in Control. (i) The holder of restricted stock units who has elected to defer the receipt of shares pursuant to Subparagraph (h) of this Section 11, may, at his or her discretion, at any time prior to the time such shares would otherwise be issued to such holder, on ten (10) days' prior written notice to the Company, elect to receive any or all of the shares such holder has deferred, provided that 10% of the number of shares the receipt of which is being accelerated shall be forfeited to the Company. Executed at Rockford, Illinois as of the 22nd day of September, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ------------------------------ Title: Paul Donovan Executive Vice President and Chief Financial Officer EX-10.(P) 10 RESTRICTED STOCK PLAN 1 Exhibit (10)(p) FIFTH AMENDMENT TO THE SUNDSTRAND CORPORATION 1989 RESTRICTED STOCK PLAN WHEREAS, the Sundstrand Corporation 1989 Restricted Stock Plan (the "Plan") was approved by the stockholders of the Corporation at the Corporation's April 20, 1989 annual meeting; and WHEREAS, the Plan has previously been amended on four occasions, twice by resolutions adopted by the Corporation's Board of Directors (August 7, 1990 and November 21, 1995) and twice by formal amendments (the Third and Fourth Amendments), the most recent of which (the Fourth Amendment) was made effective as of September 22, 1998; and WHEREAS, the Compensation Committee of the Board of Directors of the Corporation pursuant to the November 21, 1995, resolution amending the Plan was authorized to adopt, but has not adopted, guidelines relating to the deferral of the removal of restrictions imposed on restricted shares granted under the Plan, and at its meeting of November 19, 1996, adopted an administrative rule relating to the vesting of restricted shares as of the first day of each month, which rule, as the result of this Fifth Amendment is no longer in effect; and WHEREAS, it has been determined that it is appropriate to further amend the Plan to provide for the removal of restrictions on stock and restricted stock units granted under the Plan, which restrictions would otherwise be removed during specified periods, as of the beginning of the related period commonly referred to as the "window period" of the Corporation, and to provide for tax withholding with respect to shares and restricted stock units on which restrictions are removed. NOW, THEREFORE, the Sundstrand Corporation 1989 Restricted Stock Plan is hereby amended by this Fifth Amendment effective as of January 15, 1999, as follows: 1. Subparagraph (d) of Section 6 of the Plan is amended by adding the following new paragraph which shall be applicable to all presently outstanding shares and outstanding restricted stock units subject to the Plan: "The removal of the restrictions imposed upon shares purchased by a participant hereunder or upon restricted stock units held by a participant hereunder, which would otherwise occur at any time during the three months which follows the month in which a quarterly or annual earnings press release of the Company is issued shall be removed on the third business day after the day on which such applicable quarterly or annual earnings press release is issued." 2. The Plan is amended by adding a new Section 12 which will follow Section 11 and provide as follows: 2 12. Tax Withholding. (a) The Company shall have the power and the right as set forth in this Section 12 to deduct or withhold, or require a participant to remit to the Company, an amount sufficient to satisfy any and all Federal, state and local taxes (including the participant's FICA obligation) required by law to be withheld with respect to any taxable event arising out of or as a result of this Plan. (b) With respect to tax withholding required upon the termination of restrictions on any shares purchased by a participant hereunder or upon restricted stock units held by a participant hereunder, or upon any other taxable event hereunder, a participant may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold a number of shares or restricted stock units, as applicable, the Fair Market Value of which shares or the underlying shares related to restricted stock units, in itself or when added to a cash payment made by the participant to the Company, equals the minimum statutory total tax. For purposes of this subparagraph (b) the term "Fair Market Value" means the average of the highest and lowest quoted selling prices for the Common Stock of the Company on the relevant date, or (if there were no sales on such date) the weighted average of the means between the highest and lowest quoted selling prices for the Common Stock of the Company on the nearest day before and the nearest day after the relevant date. Executed at Rockford, Illinois as of the 15th day of January, 1999. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ----------------------------- Title: Paul Donovan Executive Vice President and Chief Financial Officer EX-10.(U) 11 MANAGEMENT STOCK PERFORMANCE PLAN 1 Exhibit (10)(u) SUNDSTRAND CORPORATION MANAGEMENT STOCK PERFORMANCE PLAN AS AMENDED AND RESTATED SEPTEMBER 22, 1998 WHEREAS, the Sundstrand Corporation Management Stock Performance Plan (the "Plan") was established effective as of November 19, 1996; and WHEREAS, the Plan has been amended by a First Amendment made effective as of June 1, 1998, pursuant to a resolution of the Board of Directors of the Corporation adopted at its April 21, 1998, meeting; and WHEREAS, the Board of Directors at its September 22, 1998, meeting authorized the further amendment of the Plan to include restricted stock units and make other changes not inconsistent with such authorization; and WHEREAS, it has been determined that it is appropriate in connection with the amendment to include restricted stock units to amend and restate the Plan in its entirety to incorporate into a single document the prior amendment and to otherwise make limited changes to improve the readability of the Plan; NOW THEREFORE, the Sundstrand Corporation Management Stock Performance Plan is hereby amended and restated effective as of September 22, 1998, to provide as follows: ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. Sundstrand Corporation, a Delaware corporation (the "Company), maintains this stock performance compensation plan, known as the "Sundstrand Corporation Management Stock Performance Plan" (the "Plan"). The Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, Restricted Stock and Restricted Stock Units. The Plan was originally established effective as of November 19, 1996 (the "Effective Date"), and shall remain in effect as provided in Section 1.3 herein. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of Participants to those of Company shareholders, and by providing Participants an incentive for outstanding performance. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Participants upon whose judgment, interest, and special effort the successful conduct of its operations are largely dependent. 1.3 DURATION OF THE PLAN. Subject to the right of the Board of Directors of the Company to terminate the Plan at any time pursuant to Article 13 herein, the Plan shall remain in effect until all Shares subject to the Plan shall have been purchased or acquired according to the Plan's provisions. In no event may an Award be granted under the Plan on or after November 19, 2006. ARTICLE 2. DEFINITIONS Whenever used in the Plan, the following terms shall have the meaning set forth below: (a) "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, Restricted Stock or Restricted Stock Units. 2 -2- (b) "Board" means the Board of Directors of the Company. (c) "CEO" means the Chief Executive Officer of the Company. (d) "Change in Control" means any of the following events: (i) The acquisition (other than from the Company) by any person (as such term is defined in Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities; (ii) The individuals who, as of the date hereof, are members of the Board (the "Incumbent Board"), cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the Company stockholders, of any new director was approved by a vote of a majority of the Incumbent Board, and such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; or (iii) (A) A merger or consolidation involving the Company (or any direct or indirect subsidiary of the Company) or (B) the issuance of shares of capital stock of the Company in connection with a merger or consolidation involving the Company (or any direct or indirect subsidiary of the Company) if, in the case of clause (A) or clause (B), the stockholders of the Company immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, immediately following such merger or consolidation, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the person issuing securities in the merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Company outstanding immediately before such merger or consolidation; provided, however, that for purposes of clause (A) and clause (B), voting securities of the Company issued in connection with the merger or consolidation, including securities to cover stock options or cure "tainted" shares (whether issued in the merger or consolidation or pursuant to a public or private offering related thereto), shall be treated as having been issued in such merger or consolidation and not as having been outstanding immediately prior to such merger or consolidation or (C) a complete liquidation or dissolution of the Company or consummation of the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) of this paragraph (d) of Article 2, solely because twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding voting securities is acquired by (I) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Company or any of its subsidiaries or (II) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the committee specified in Article 3. (g) "Disability" means a permanent and total disability, within the meaning of Code Section 22(e)(3), as determined by the Committee in good faith, upon receipt of sufficient 3 -3- competent medical advice from one or more individuals, selected by the Committee, who are qualified to give professional medical advice. (h) "Early Retirement" shall mean an Employee's eligibility to receive an early retirement benefit from any retirement plan maintained by the Company or any Subsidiary Entity. (i) "Employee" means any full-time managerial, supervisory or professional employee of the Company or of the Company's Subsidiary Entities. "Employee" does not include any director or elected officer of the Company. (j) "Fair Market Value" means the average of the highest and lowest quoted selling prices for Shares on the relevant date, or (if there were no sales on such date) the weighted average of the means between the highest and lowest quoted selling prices for Shares on the nearest day before and the nearest day after the relevant date, as determined by the CEO. (k) "Incentive Stock Option" or "ISO" means an option to purchase Shares granted under Article 6 herein, which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code. (l) "Insider" shall mean an Employee who is, on the relevant date, an elected officer of the Company. (m) "Noninsider" means an Employee who is not, on the relevant date, an Insider, as determined by the General Counsel of the Company or such person's designee. (n) "Nonqualified Stock Option" or "NQSO" means an option to purchase Shares granted under Article 6 herein, which is not intended to be an Incentive Stock Option. (o) "Normal Retirement" shall mean an Employee's eligibility to receive a normal retirement benefit from any retirement plan maintained by the Company or any Subsidiary Entity. (p) "Option" means an Incentive Stock Option or a Nonqualified Stock Option. (q) "Option Certificate" means a certificate setting forth the terms and provisions applicable to Options granted to a Participant. (r) "Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option. (s) "Participant" means an Employee of the Company who has an Award granted under the Plan outstanding. (t) "Period of Restriction" means (i) with respect to Shares of Restricted Stock the period during which the transfer of Shares of Restricted Stock is limited in some way, as provided in the Plan, and (ii) with respect to Restricted Stock Units, the period during which the transfer of Stock Units is limited in some way, as provided in the Plan and, subject to Section 8.8, upon the expiration or termination of which, together with the satisfaction of any other conditions prescribed by the Committee applicable to such Restricted Stock Units, the holder thereof shall receive the number of Shares subject thereto. (u) "Restricted Stock" means an Award granted under Article 7 herein. (v) "Restricted Stock Certificate" means a certificate setting forth the terms and provisions applicable to Restricted Stock granted to a Participant. 4 -4- (w) "Restricted Stock Price" means the price at which a Share may be purchased by a Participant pursuant to a Restricted Stock grant. (x) "Restricted Stock Unit" means an Award granted under Article 8 herein. (y) "Restricted Stock Unit Certificate" means a certificate setting forth the terms and provisions applicable to Restricted Stock Units granted to a Participant. (z) "Shares" means shares of common stock of the Company. (aa) "Subsidiary Entity" means any corporation in which the Company owns, directly, or indirectly, through subsidiaries, at least fifty percent (50%) of the total combined voting power of all classes of stock, or any other entity (including, but not limited to, partnerships and joint ventures) in which the Company owns at least fifty percent (50%) of the combined equity thereof. ARTICLE 3. ADMINISTRATION 3.1 AUTHORITY OF THE CEO. The CEO shall have full power, except as limited by law or by the Certificate of Incorporation or Bylaws of the Company, and subject to the provisions herein, to determine the size and types of Awards; to determine the terms and conditions of such Awards in a manner consistent with the Plan, and subject to the provisions of Article 13 herein, to amend the terms and conditions of any outstanding Award consistent with the Plan. 3.2 THE COMMITTEE. The Plan shall be administered by the Employee Benefit Committee which is appointed by the Finance Committee of the Board or by any other Committee appointed by the Board. 3.3 AUTHORITY OF THE COMMITTEE. The Committee shall have full power, except as limited by law or by the Certificate of Incorporation or the By-Laws of the Company, and subject to provisions herein, to construe and interpret the Plan and any agreement or instrument entered into under the Plan; and to establish, amend, or waive rules and regulations for the Plan's administration. The Committee may make arrangements for the cashless exercise of any Options issued hereunder. The Committee may delegate its authority as permitted hereunder. 3.4 DECISIONS BINDING. All determinations and decisions made by the CEO or the Committee pursuant to the provisions of the Plan shall be final, conclusive, and binding on all persons, including the Company and its successors or assigns, and on its stockholders, Employees, Participants, and their respective estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.2 herein, the total number of Shares authorized for grant under the Plan shall be 3.0 million Shares. Such Shares may be either authorized but unissued, reacquired or a combination thereof. 4.2 ADJUSTMENTS IN AVAILABLE SHARES, OPTIONS, RESTRICTED STOCK AND RESTRICTED STOCK UNITS. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the capital structure of the Company affecting the Shares (a "Transaction"), such adjustment shall be made in the number of Shares which may be granted under the Plan, in the maximum number of Options and the maximum number of Shares of Restricted Stock and the maximum number of Restricted Stock Units that the CEO is authorized to grant in the aggregate or grant to any one Employee in any calendar year, and in the number of and/or price of Shares subject to outstanding Options and outstanding Shares of Restricted Stock granted and outstanding Restricted Stock Units granted (including but not limited to, Shares which are subject to outstanding Restricted Stock Units, the receipt of which has been deferred in accordance with Section 8.8 hereof) 5 -5- under the Plan, as may be determined to be appropriate and equitable by the CEO, in his sole discretion, to prevent dilution or enlargement of rights; provided that the number of Shares subject to any Award shall always be a whole number. In the event of a Transaction, Options, Shares of Restricted Stock and Restricted Stock Units shall continue in effect in accordance with their terms and the holder thereof shall be entitled to receive in respect of all Shares subject thereto (upon exercise in the case of Options), the same number and kind of stock, securities, cash, property or other consideration that such Shares were entitled to receive in the Transaction; provided, however, that such stock, securities, cash, property or other consideration shall remain subject to all of the conditions and restrictions which were applicable to the Options, Shares of Restricted Stock or Restricted Stock Units immediately prior to the consummation of the Transaction; and provided, further, however, that in the event the Transaction constitutes a Change in Control, a holder of Options and a holder of Restricted Stock Units with respect to which a deferral election is in effect pursuant to Section 8.8, may make an election that such Options and such units shall remain outstanding following the Transaction (in accordance with the applicable deferral election in the case of a holder of Restricted Stock Units and entitle the holder thereof to receive in respect thereof shares of common stock of the entity (or an affiliate thereof) which effected the Transaction, (i.e., the same number and kind of stock that such units would have been entitled to receive in the Transaction or such Options would have been entitled to receive in the Transaction if exercised at the time of the Transaction) if any, provided the shares of such stock are publicly-traded on a national securities exchange. ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1 ELIGIBILITY. Persons eligible to participate in this Plan are such Employees as are determined by the CEO to be eligible. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the CEO may, from time to time, select from all eligible Employees, those to whom Awards shall be granted. ARTICLE 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted only to Employees, who are Noninsiders, at any time and from time to time as shall be determined by the CEO. The CEO shall have discretion in determining the number and type of Options granted to each Participant. During any calendar year, the aggregate number of Options available for grant by the CEO pursuant to this Section 6.1 is limited to 600,000, with the number of Options which may be granted by the CEO to any one Employee during any calendar year limited to 10,000. 6.2 OPTION CERTIFICATE. Each Option grant shall be evidenced by an Option Certificate that shall specify the Option Price, the Option duration, the number of Shares to which the Option pertains, whether the Option is intended to be an ISO or a NQSO, and such other provisions as the CEO shall determine. 6.3 OPTION PRICE. The Option Price for each grant of an Option shall be determined by the CEO; provided that the Option Price shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. 6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the CEO shall determine at the time of grant; provided, however, that except as provided in subsections Sections (a), (b), (c) and (d) of Section 6.8, no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. 6.5 EXERCISE OF OPTIONS. Subject to the provisions of Section 6.10, Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the CEO shall in each instance approve, which need not be the same for each grant or for each Participant. However, no Option grants under this Plan shall be exercisable prior to the expiration of six (6) months following the date of its grant. 6 -6- 6.6 PAYMENT. Subject to such other method(s) as may have been established by the Committee, Options shall be exercised by the delivery of a written notice of exercise to the Secretary of the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares (or by cashless exercise as arranged by the Committee as provided in Section 3.2). The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent, or (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price), (c) by cashless exercise to the extent authorized by the Committee or (d) by a combination of (a), (b) and (c). As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the name or names designated by the Participant, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.7 SPECIAL RESTRICTIONS ON SHARES ACQUIRED PURSUANT TO THE EXERCISE OF AN OPTION. The CEO may impose such restrictions on Shares acquired pursuant to the exercise of an Option under the Plan as he may deem advisable. 6.8 TERMINATION OF EMPLOYMENT. (a) Termination by Normal Retirement or Early Retirement at Age 60. In the event the employment of a Participant is terminated by reason of Normal Retirement or Early Retirement at or after attaining age 60, all outstanding Options granted to that Participant shall immediately become exercisable, and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of such retirement, whichever period is longer. (b) Termination by Early Retirement Prior to Age 60. In the event the employment of a Participant is terminated by reason of Early Retirement prior to attainment of age 60, the CEO, in his sole discretion, shall have the right to cause all or any portion of such outstanding Options granted to that Participant to immediately become exercisable, in which event such Options shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of such Early Retirement, whichever period is longer. (c) Termination by Death. In the event the employment of a Participant is terminated by reason of death, all outstanding Options granted to that Participant shall immediately become exercisable, and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date of death, whichever period is longer. Such options shall be exercisable by such person or persons who shall have been named as the Participant's beneficiary, or, if no beneficiary has been named, by such persons who have acquired the Participant's rights under the Option by will or by the laws of descent and distribution. (d) Termination by Disability. In the event the employment of a Participant is terminated by reason of Disability, all outstanding Options granted to that Participant shall immediately become exercisable as of the date the CEO determines the definition of Disability to have been satisfied, and shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date that the CEO determines the definition of Disability to have been satisfied, whichever period is longer. (e) Employment Termination Followed by Death. In the event that a Participant's employment terminates by reason of Normal Retirement, Early Retirement or Disability and within the 7 -7- exercise period following such termination the Participant dies, then the remaining exercise period under outstanding Options shall be any time prior to their expiration date, or for one (1) year following death, whichever period is shorter. Such Options shall be exercisable by such person or persons who shall have been named as the Participant's beneficiary, or if no beneficiary has been named, by such persons who have acquired the Participant's rights under the Option by will or by the laws of descent and distribution. (f) Termination of Employment for Other Reasons. If the employment of a Participant shall terminate for any reason other than the reasons set forth in subsections (a)-(d) of this Section 6.8, the CEO, in his sole discretion, shall have the right to cause all or any portion of such outstanding Options granted to that Participant to immediately become exercisable, subject to such terms as the CEO, in his sole discretion, deems appropriate. Options which are or become exercisable as of the effective date of employment termination shall remain exercisable any time prior to their expiration date, or for three (3) months after the date of employment termination, whichever period is shorter. 6.9 FORFEITURE OF OPTIONS. Options held by a Participant which are not exercisable as of the effective date of employment termination and which do not become exercisable pursuant to the provisions of Section 6.8 shall be forfeited immediately. 6.10 ALTERNATE EXERCISABILITY FOLLOWING TERMINATION. With respect to Options held by a Participant as of the date of any employment termination, the provisions of Section 6.8 regarding the exercisability of Options as of the date of employment termination and the provisions regarding the length of the exercise period following employment termination notwithstanding, the CEO may, in his sole discretion, provide for accelerated exercisability of all Options and an extended period of exercisability following termination, upon such terms and provisions as he deems appropriate; provided, however, that the period of extended exercisability shall not extend beyond the period specified in Section 6.4 herein. 6.11 TRANSFERABILITY OF OPTIONS. Except as otherwise provided in this Section 6.11, options granted under the Plan may only be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated in accordance with the Participant's beneficiary designation, by will, or by the laws of descent and distribution. The CEO, in his sole discretion, may provide for the transferability of Options granted under the Plan, by a Participant to persons or entities on terms and conditions as may be determined by the CEO, in his sole discretion. The CEO, with respect to an Option granted under the Plan which is not transferable, may, in his sole discretion, provide for the transferability of such an Option by the Participant to persons or entities on terms and conditions as may be determined by the CEO, in his sole discretion. Any determination by the CEO to provide for the transferability of an Option by any one Participant under the Plan shall not be deemed to provide to any other Participant under the Plan a right of transferability with respect to an Option granted under the Plan to such other Participant. ARTICLE 7. RESTRICTED STOCK 7.1 DISCRETIONARY GRANTS OF RESTRICTED STOCK. The CEO, at any time and from time to time, may grant Shares of Restricted Stock to eligible Employees in such amounts as the CEO shall determine. 7.2 RESTRICTED STOCK CERTIFICATE. Each Restricted Stock grant shall be evidenced by a Restricted Stock Certificate that shall specify the Period or Periods of Restriction, the number of Shares of Restricted Stock granted, and such other provisions as the CEO shall determine. 7.3 RESTRICTED STOCK PRICE. The Restricted Stock Price for each grant of Restricted Stock shall be determined by the CEO. The Restricted Stock Price may be less than the par value of a Share on the date of the Restricted Stock grant. 7.4 RESTRICTIONS ON TRANSFERABILITY AND VESTING. Except as otherwise provided in this Article 7, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the CEO in 8 -8- his sole discretion and specified in the Restricted Stock Certificate, or upon the earlier satisfaction of any other conditions as specified by the CEO in his sole discretion and set forth in the Restricted Stock Certificate. 7.5 OTHER RESTRICTIONS. The CEO shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as he may deem advisable. 7.6 ESCROW OR LEGEND. In order to enforce the restrictions imposed upon Shares of Restricted Stock issued hereunder, the Committee may require any Participant to enter into an escrow agreement providing that the certificates representing Shares of Restricted Stock issued pursuant to this Article 7 shall remain in the physical custody of an escrow holder until any or all of the restrictions imposed pursuant to this Article 7 have terminated and the Committee may cause a legend or legends to be placed on any certificates representing Shares issued pursuant to this Article 7, which legend or legends shall make appropriate reference to the restrictions imposed hereunder. 7.7 VOTING RIGHTS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 7.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to those Shares. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid. 7.9 TERMINATION OF EMPLOYMENT; COMPANY REACQUISITION RIGHTS. (a) Termination by Reason of Normal Retirement, Death or Disability. In the event the employment of a Participant who has been granted Shares of Restricted Stock hereunder terminates because of Normal Retirement, death or Disability, then the Company shall not have the right to reacquire any of such Shares of Restricted Stock granted hereunder to such Participant and all restrictions applicable to such Shares shall immediately terminate. (b) Termination by Reason Other than Normal Retirement, Death or Disability. In the event the employment of a Participant who has been granted Shares of Restricted Stock hereunder terminates for any reason other than Normal Retirement, death or Disability, the Company shall have the option for ninety (90) days following such termination of employment to reacquire at his or her cost for cash all or any part of the terminating Participant's nonvested Shares of Restricted Stock. (c) Alternate Treatment of Restricted Stock. Notwithstanding anything contained in subsections (a) and (b) of this Section 7.9 to the contrary, the CEO shall in his sole discretion have the authority to modify the treatment of those Shares of Restricted Stock held by Participants as of the date of employment termination on which the restrictions have not terminated, upon such terms as the CEO deems appropriate. ARTICLE 8. RESTRICTED STOCK UNITS 8.1 GRANT OF RESTRICTED STOCK UNITS. Subject to the terms and provisions of the Plan, the CEO, at any time and from time to time, may grant Restricted Stock Units to eligible Employees in such amounts as the CEO shall determine. 8.2 RESTRICTED STOCK UNIT CERTIFICATE. Each Restricted Stock Unit shall be evidenced by a Restricted Stock Unit Certificate that shall specify the number of Restricted Stock Units to which it applies, the Period or Periods of Restriction, and such other provisions as the CEO shall determine. 9 -9- 8.3 RESTRICTIONS. At or prior to the time a grant of Restricted Stock Units is made, the CEO shall establish a Period of Restriction applicable to such Restricted Stock Units. Each grant of Restricted Stock Units may be subject to a different Period of Restriction. The CEO may, in his sole discretion, at or prior to the time a grant of Restricted Stock Units is made, prescribe such restrictions in addition to the Period of Restriction as he may deem advisable. 8.4 RESTRICTIONS ON TRANSFERABILITY. Except as otherwise provided in this Article 8, Restricted Stock Units may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated. 8.5 RIGHTS OF HOLDERS OF RESTRICTED STOCK UNITS. Unless the CEO otherwise provides in a Restricted Stock Unit Certificate, a Restricted Stock Unit shall confer no rights as a stockholder of the Company on the holder thereof. The holder of Restricted Stock Units shall be entitled to receive, upon payment by the Company of a cash dividend on its outstanding Shares, a cash payment from the Company for each Restricted Stock Unit then held by such Participant equal to the per Share dividend paid on the outstanding Shares. 8.6 TERMINATION OF EMPLOYMENT. (a) Termination by Reason of Normal Retirement, Death or Disability. In the event the employment of a Participant who has been granted Restricted Stock Units hereunder terminates because of Normal Retirement, death or Disability, the Period of Restriction and all other applicable restrictions with respect to the Restricted Stock Units then held by such Participant shall immediately terminate. (b) Termination by Reason Other than Normal Retirement, Death or Disability. In the event the employment of a Participant who has been granted Restricted Stock Units hereunder terminates for any reason other than Normal Retirement, death or Disability, the Company shall have the option for ninety (90) days following such termination of employment to cancel all or any part of the Restricted Stock Units then held by such Participant on which the Period of Restriction or other applicable restrictions have not lapsed. (c) Alternate Treatment of Restricted Stock Units. Notwithstanding anything contained in subsections (a) and (b) of this Section 8.6 to the contrary, the CEO shall in his sole discretion have the authority to modify the treatment (including the terms regarding the termination of restrictions) of those Restricted Stock Units held by Participants as of the date of employment termination with respect to which the Period of Restriction and any other applicable restrictions shall not have lapsed upon such terms, as the CEO deems appropriate. 8.7 PAYMENT IN RESPECT OF RESTRICTED STOCK UNITS. Subject to Section 8.8 hereof, on the date of the expiration or termination of the Period of Restriction and the satisfaction of any other conditions prescribed by the CEO applicable to a Restricted Stock Unit, each Restricted Stock Unit shall entitle the holder thereof to receive one Share. 8.8 DEFERRAL OF RESTRICTED STOCK UNITS. The holder of Restricted Stock Units may elect to defer the issuance of any Share underlying a Restricted Stock Unit until such date as such holder shall choose, so long as such election is made in or prior to the calendar year preceding the calendar year in which such Shares would otherwise have been issued, but in no event less than six (6) months prior to the date such Shares would otherwise have been issued; provided, however, that notwithstanding the foregoing, upon the occurrence of a Potential Change in Control, the Company shall notify in writing each Participant of the occurrence of such event and each Participant shall have the right within 14 days of the Potential Change in Control to elect to defer the issuance of any Share underlying a Restricted Stock Unit until such date as such holder shall choose. For purposes of this Section 8.8., a "Potential Change in Control" means: (a) The execution by the Company of a written agreement which, if consummated, would constitute a Change in Control. 10 -10- (b) A public announcement (including any filing with the Securities and Exchange Commission) by any "person" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act), including any corporation or group of associated firms acting in concert, other than (i) the Company and/or (ii) any employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) of the Company, including a trust established pursuant to such plan, of an intention to take or consider taking actions which, if consummated, would constitute a Change in Control. (c) The acquisition, whether directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the 1934 Act), or of record, of securities of the Company representing fifteen percent (15%) or more in number of any class of its then-outstanding voting securities by any "person" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act), including any corporation or group of associated persons acting in concert, other than (i) the Company and/or (ii) an employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) of the Company, including a trust established pursuant to any such plan. For this purpose, the ownership of record of fifteen percent (15%) or more in number of any class of the then-outstanding voting securities of the Company by a person engaged in the business of acting as a nominee for unrelated beneficial owners shall not in and of itself be deemed to constitute a Potential Change in Control. (d) The occurrence of any other event that the Board determines is a Potential Change in Control. 8.9 WITHDRAWAL. The holder of Restricted Stock Units who has elected to defer the receipt of Shares pursuant to Section 8.8 hereof, may, at his or her discretion, at any time prior to the time such Shares would otherwise be issued to such holder, but in no event prior to the time at which the Shares underlying such Restricted Stock Units would otherwise have been issued had the holder not made an election to defer the issuance of such Shares as provided in this Article 8, on ten (10) days' prior written notice to the Company elect to receive any or all of the Shares such holder has deferred provided that 10% of the number of Shares the receipt of which is being accelerated shall be forfeited to the Company. ARTICLE 9. LIMITATION ON RESTRICTED STOCK SHARE AND UNIT GRANTS 9.1 During any calendar year, the aggregate number of Shares of Restricted Stock and of Restricted Stock Units which the CEO may grant pursuant to Sections 7.1 and 8.1 herein may not exceed 300,000 with the total number of Shares of Restricted Stock and of Restricted Stock Units which may be granted by the CEO to any one Employee during any calendar year limited to 4,000. ARTICLE 10. BENEFICIARY DESIGNATION 10.1 BENEFICIARY DESIGNATION. Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan shall accrue in case of his or her death. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Secretary of the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining at the Participant's death shall accrue to the Participant's estate. ARTICLE 11. RIGHTS OF EMPLOYEES 11.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment at any time, or confer upon any Participant any right to continue in the employ of the Company. 11 -11- For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiary Entities (or between Subsidiary Entities) shall not be deemed a termination of employment. 11.2 PARTICIPATION. No Employee shall have the right to be selected to receive an Award under this Plan, or, having once been selected, have a right to again be selected to receive a future Award. ARTICLE 12. CHANGE IN CONTROL 12.1 OCCURRENCE OF A CHANGE IN CONTROL. Upon the occurrence of a Change in Control, unless otherwise specifically prohibited by the terms of applicable law or regulation: (a) Any and all Options granted hereunder shall become immediately exercisable; (b) Any Periods of Restriction and other restrictions imposed on Shares of Restricted Stock or Restricted Stock Units shall immediately terminate; and (c) Subject to Article 13 herein, the CEO, before the effective date of the Change in Control, shall have the authority to make any modifications to the Awards and any modifications to a deferral of Restricted Stock Units as determined by the CEO, after consultation with the holder of the Award or deferred Restricted Stock Units, to be appropriate. ARTICLE 13. AMENDMENT, MODIFICATION, AND TERMINATION 13.1 AMENDMENT, MODIFICATION, AND TERMINATION. The Board at any time and from time to time may amend, modify or terminate the Plan. No such amendment, modification or termination, however, may change the Plan in a way that (i) impairs any benefit theretofore accrued by any Participant and (ii) in the event of a Change in Control, is adverse to the rights of any Participant, in the case of either (i) or (ii) without the Participant's prior written consent. The immediately preceding sentence may not under any circumstances be amended at any time after September 22, 1998 and any effort to change such sentence shall be null, void and of no force or effect. In addition, no such amendment, modification termination of the Plan may occur without the approval of the shareholders of the Company, if shareholder approval for such amendment, modification or termination is required by the federal securities law, any national securities exchange or system on which the Shares are then listed or reported, or a regulatory body having jurisdiction with respect thereto. ARTICLE 14. WITHHOLDING 14.1 TAX WITHHOLDING. The Company shall have the power and the right as set forth in this Article 14 to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy any and all Federal, state, and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising out of or as a result of this Plan. 14.2 SHARE WITHHOLDING. With respect to tax withholding required upon the exercise of Options, upon the termination of restrictions on Restricted Stock or Restricted Stock Units, or upon any other taxable event hereunder, a Participant may elect, subject to the approval of the CEO, to satisfy the withholding requirement, in whole or in part, by having the Company withhold a number of Shares or Restricted Stock Units, as applicable, the Fair Market Value of which Shares or the underlying Shares related to Restricted Stock Units, in itself or when added to a cash payment made by the Participant to the Company, equals the minimum statutory total tax. ARTICLE 15. SUCCESSORS 15.1 SUCCESSORS. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is 12 -12- the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 16. LEGAL CONSTRUCTION 16.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 16.2 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16.3 FOREIGN EMPLOYEES. To the extent permissible under applicable law, the CEO may grant Awards to eligible Employees who are employed in locations outside of the United States. The CEO shall have the authority to modify the terms of Awards granted to such Employees in order to ensure compliance with applicable local and national law. 16.4 GOVERNING LAW. To the extent not preempted by Federal law (or foreign law, in the case of grants to Employees who are not United States residents), the Plan, and any agreement hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware. 16.5 SEVERABILITY. In the event any provision of the Plan or any action taken thereunto shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included, and the illegal or invalid action shall be deemed null and void. Executed at Rockford, Illinois as of the 22nd day of September, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan -------------------------- Paul Donovan Its: Executive Vice President and Chief Financial Officer EX-10.(V) 12 MANAGEMENT STOCK PERFORMANCE PLAN 1 Exhibit (10)(v) FIRST AMENDMENT TO THE SUNDSTRAND CORPORATION MANAGEMENT STOCK PERFORMANCE PLAN (As Amended and Restated effective September 22, 1998) WHEREAS, the Sundstrand Corporation Management Stock Performance Plan (the "Plan") was established effective as of November 19, 1996; and WHEREAS, the Plan was amended and restated effective as of September 22, 1998, to include restricted stock units and to make certain other changes, and to incorporate therein all prior amendments to the Plan and to make other changes to improve readability of the Plan; and WHEREAS, it has been determined that it is appropriate to further amend the Plan; NOW, THEREFORE, the Sundstrand Corporation Management Stock Performance Plan, as amended and restated September 22, 1998, is hereby amended effective as of January 15, 1999 as follows: 1. Section 7.4 of Article 7 of the Plan is amended by changing the title thereof to "Restrictions on Transferability and Vesting; Termination of Restrictions." and by adding the following new paragraph at the end thereof, which new paragraph shall be applicable to all Restricted Stock outstanding on January 15, 1999, or thereafter issued under the Plan: "Notwithstanding anything to the contrary contained in the Plan or in any terms and Conditions specified in a Restricted Stock Certificate relating to any Restricted Stock awarded under the Plan, the termination of restrictions on shares of Restricted Stock granted under the Plan which would otherwise terminate at any time during the three (3) month period which follows the month in which a quarterly or annual earnings press release of the Company is issued shall terminate on the third business day after the day on which such applicable quarterly or annual earnings press release is issued." 2. Section 8.4 of Article 8 of the Plan is amended by changing the title thereof to "Restrictions on Transferability and Vesting; Termination of Restrictions." adding the following new paragraph at the end thereof: "Notwithstanding anything to the contrary contained in the Plan or in any terms and conditions specified in a Restricted Stock Unit Certificate relating to the issuance of Restricted Stock Units under the Plan, the termination of restrictions on Restricted Stock Units granted under the Plan which would otherwise terminate at any time during the three (3) month period which follows the month in which a quarterly or annual earnings press release of the Company is issued shall terminate on the third business day after the day on which such applicable quarterly or annual earnings press release is issued." Executed at Rockford, Illinois as of the 15th day of January, 1999. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ------------------------------ Paul Donovan Title: Executive Vice President and Chief Financial Officer EX-10.(X) 13 SUPPLEMENTAL RETIREMENT PLAN 1 Exhibit (10)(x) FIFTH AMENDMENT TO THE SUNDSTRAND CORPORATION SUPPLEMENTAL RETIREMENT PLAN WHEREAS, the Sundstrand Corporation Supplemental Retirement Plan (the "Plan") was established effective as of December 10, 1975; WHEREAS, the Plan was amended and restated in its entirety effective as of January 1, 1988; and WHEREAS, the Plan as amended and restated has heretofore been amended on four occasions; and WHEREAS, it has been determined that it is in the best interest of the Corporation to further amend the Plan; NOW, THEREFORE, effective as of December 8, 1998, the Sundstrand Corporation Supplemental Retirement Plan as amended and restated January 1, 1988, is further amended as follows: 1. Section 3.1(a) of Article III of the Plan is amended by adding the following new subsection (v) after subsection (iv) thereof and by deleting from subsection (iv) the word "or" at the end thereof: (v) including in the employee's 'Years of Participation' (used to determine the amount of any retirement benefit) and 'Years of Service' (used to determine the eligibility for and vesting of any retirement benefit) (as those terms are defined and used in the Qualified Plan) the service determined as provided in Exhibit A to this Plan, provided such employee is an elected officer of the Corporation and, other than the Chief Executive Officer of the Corporation (whose service is required to be included hereunder), has been selected by the Chief Executive Officer to have such service included for purposes of calculating the Supplemental Retirement Benefit, or 2. The Plan is amended by adding at the end thereof an Exhibit A which shall be in the form attached to this Amendment. 2 -2- 3. Article VI of the Plan is amended to provide as follows: ARTICLE VI AMENDMENT, MODIFICATION OR TERMINATION The Corporation intends the Plan to be permanent but reserves the right to amend, modify or terminate the Plan when, in the sole opinion of the Corporation, such amendment, modification or termination is advisable. Any such amendment, modification or termination shall be made pursuant to a resolution of the Board and shall be effective as of the date set forth in such resolution; provided, however, that no such amendment, modification or termination, however, may change the Plan in a way that (i) impairs any Employees, former Employee's or Surviving Spouse's rights, participation in, or benefits theretofore accrued hereunder and (ii) in the event of a Change in Control, is adverse to the rights, participation in, or benefits of any Employee, former Employee or Surviving Spouse (including without limitation, the amount or form of payment of any benefits accrued hereunder) in the case of either (i) or (ii) without the Employee's, former Employee's or Surviving Spouse's prior written consent. The immediately preceding sentence may not under any circumstances be amended at any time after December 8, 1998 and any effort to change such sentence shall be null, void and of no force or effect. For the purpose of this Article VI, an accrued Supplemental Retirement Benefit will be determined for each eligible Employee, former Employee or Surviving Spouse in accordance with the provisions of the Plan and the accrued benefit provided by the Qualified Plan all determined as of the effective date of the amendment, modification or termination. Payment of benefits based on an accrued Supplemental Retirement Benefit will be made in accordance with the terms of this Plan to the Employee, or former Employee who retires under the Qualified Plan, or to such an Employee's or former Employee's Surviving Spouse if such Employee or former Employee dies and leaves a spouse eligible for a Qualified Plan Surviving Spouse Benefit under the Qualified Plan. For purposes of the preceding paragraph the term "Change in Control" means: any of the following events: A) The acquisition (other than from the Corporation) by any person (as such term is defined in Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding voting securities; 3 -3- B) The individuals who, as of the date hereof, are members of the Board (the "Incumbent Board"), cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the Corporation stockholders, of any new director was approved by a vote of a majority of the Incumbent Board, and such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; or C) (i) A merger or consolidation involving the Corporation (or any direct or indirect subsidiary of the Corporation) or (B) the issuance of shares of capital stock of the Corporation in connection with a merger or consolidation involving the Corporation (or any direct or indirect subsidiary of the Corporation) if, in the case of clause (A) or clause (B), the stockholders of the Corporation immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, immediately following such merger or consolidation, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the person issuing securities in the merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Corporation outstanding immediately before such merger or consolidation; provided, however, that for purposes of clause (A) and clause (B), voting securities of the Corporation issued in connection with the merger or consolidation, including securities to cover stock options or cure "tainted" shares (whether issued in the merger or consolidation or pursuant to a public or private offering related thereto), shall be treated as having been issued in such merger or consolidation and not as having been outstanding immediately prior to such merger or consolidation or (C) a complete liquidation or dissolution of the Corporation or consummation of the sale or other disposition of all or substantially all of the assets of the Corporation. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (i) of this paragraph (d) of Article 2, solely because twenty-five percent (25%) or 4 -4- more of the combined voting power of the Corporation's then outstanding voting securities is acquired by (I) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Corporation or any of its subsidiaries or (II) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Corporation in the same proportion as their ownership of stock in the Corporation immediately prior to such acquisition. 4. Section 7.1 of Article VII of the Plan is amended to provide as follows: 7.1 Funding. Except as may otherwise be provided in the Sundstrand Corporation Rabbi Trust, established by Agreement dated January 30, 1996, as the same may have been or may hereafter be amended, between Sundstrand Corporation and Marshall & Ilsley Trust Company, the Plan shall be unfunded, and any Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit shall be paid only from the general assets of the Corporation. No Employee, former Employee or Surviving Spouse or any other person shall have any interest in any particular assets of the Corporation by reason of the right to receive a benefit under the Plan and any such Employee, former Employee or Surviving Spouse or other person shall have only the rights of a general unsecured creditor of the Corporation with respect to any rights under the Plan. Executed at Rockford, Illinois as of the 8th day of December, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan -------------------------- Title: Paul Donovan Executive Vice President and Chief Financial Officer 5 EXHIBIT A Chief Executive Officer ELIGIBILITY Chief Executive Officer "EXTRA" SERVICE For years of service while Chief Executive Officer denoted by N (including years of service credited under an Employment Agreement pursuant to a Corporate Change in Control), a participant will be credited with the following number years of "extra" Sundstrand pension service: (N times N times 2) / 10 Example - for 7 years of actual service while Chief Executive Officer and 3 years credited under an Employment Agreement pursuant to a Corporate Change in Control, the "extra" years of Sundstrand pension service equals (10 times 10 times 2) / 10 equals 20.000 years. Such "extra" years of Sundstrand pension service will be added to Chief Executive Officer's actual years of Sundstrand service. OFFSET FOR VESTED DEFINED BENEFIT PENSION FROM PRIOR EMPLOYER The value of the "extra" Sundstrand pension service will be reduced by the value of any vested defined benefit pension from employment prior to being hired by Sundstrand. No offset will be applied for any vested balance from a savings plan or profit sharing plan sponsored by a prior employer. VESTING OF "EXTRA" YEARS OF SUNDSTRAND PENSION SERVICE The "extra" years of Sundstrand service will vest upon the later of (a) or (b) as follows: (a) attainment of age 55 while in continued Sundstrand employment; (b) five years of service as Chief Executive Officer In the event of a Corporate Change in Control of Sundstrand Corporation, the "extra" years of Sundstrand service will immediately vest regardless of any age or service requirements. 6 -2- COORDINATION WITH OTHER SUNDSTRAND CORPORATION SUPPLEMENTAL PENSION PROMISES The additional pension benefit provided to the Chief Executive Officer by this amendment shall be compared to the additional pension benefit provided by any other individual employment agreement between such individual and Sundstrand Corporation such that the larger pension benefit shall be applicable. Specifically in the case of Robert H. Jenkins pursuant to his employment agreement with Sundstrand as amended from time to time, he is entitled to larger of: - the supplemental pension as described by the formula in this Exhibit A; - pension service credit equal to double his actual period of service with Sundstrand Corporation with no offset for any pension benefit from a prior employer; - In the event of a Corporate Change in Control, immediate pension service credit of 20 years with no offset for any pension benefit from a prior employer. * * * Senior Management Position and Selected by CEO ELIGIBILITY - Senior management position - Selected by Chief Executive Officer "EXTRA" SERVICE For years of service while in a senior management position denoted by N (including years of service credited under an Employment Agreement pursuant to a Corporate Change in Control), a participant will be credited with the following number of years of "extra" Sundstrand pension service: (N times N) / 15 Example - for 7 years of actual service in a senior management position and 3 years credited under an Employment Agreement pursuant to a Corporate Change in Control, the "extra" years of Sundstrand pension service equals (10 times 10) / 15 equals 6.667 years. Such "extra" years of Sundstrand pension service will be added to such senior executive's actual years of Sundstrand service. 7 -3- OFFSET FOR VESTED DEFINED BENEFIT PENSION FROM PRIOR EMPLOYER The value of the "extra" Sundstrand pension service will be reduced by the value of any vested defined benefit pension from employment prior to being hired by Sundstrand. No offset will be applied for any vested balance from a savings plan or profit sharing plan sponsored by a prior employer. VESTING OF "EXTRA" YEARS OF SUNDSTRAND PENSION SERVICE The "extra" years of Sundstrand service will vest upon the later of (a) or (b) as follows: (a) attainment of age 55 while in continued Sundstrand employment; (b) five years of service in a senior management position. In the event of a Corporate Change in Control of Sundstrand Corporation, the "extra" years of Sundstrand service will immediately vest regardless of any age or service requirements. EX-10.(AA) 14 DEFERRED COMPENSATION PLAN 1 Exhibit (10)(aa) FIRST AMENDMENT TO THE SUNDSTRAND CORPORATION DEFERRED COMPENSATION PLAN (As amended and restated effective December 19, 1997) WHEREAS, The Sundstrand Corporation Deferred Compensation Plan (the "Plan") was established effective as of January 1, 1995; and WHEREAS, the Plan was amended and restated in its entirety effective as of December 19, 1997 (which amendment and restatement superceded an earlier amendment and restatement which was to have become effective as of December 31, 1997); and WHEREAS, it was determined that it was appropriate to further amend the Plan, which amendment was incorporated in a resolution adopted by the Sundstrand Corporation Board of Directors at its April 21, 1998 meeting; and WHEREAS, to facilitate administration of the Plan it has been determined that it is appropriate to set forth the changes made in the resolution adopted by the Sundstrand Corporation Board of Directors at its April 21, 1998 meeting in a formal Plan amendment. NOW, THEREFORE, this First Amendment to the Sundstrand Corporation Deferred Compensation Plan (as amended and restated effective December 19, 1997) has been prepared to reflect such changes effective as of April 21, 1998 as follows: 1. Section 7.2 of Article VII of the Plan is changed to provide as follows: "Section 7.2. Payment of Deferred Amounts. In the year prior to the elected distribution date, the Executive or Director must complete the Compensation Payment Election Form to indicate the desired payment option or to elect to redefer payment. (The redeferral option is available only one time and, with respect to Directors, only to those Directors who at such time are either active employees or sitting members of the Board.) Unless otherwise provided by action authorized in Section 9.1 hereof, or as otherwise provided pursuant to the terms of this Plan, the Corporation shall pay an amount in accordance with the payment option specified on the Executive's or Director's Compensation Payment Election Form. Payments will be made annually over the period specified on the Executive's or Director's Compensation Payment Election Form, provided that the payment period may not extend beyond the Executive's or Director's seventy-fifth birthday. Annual payments will be made in January of the specified distribution year. After the Corporation has paid an amount equal to the Executive's or Director's Deferred Compensation Account, the Corporation shall have no further obligation under this Plan. In the event the Executive leaves the Corporation or the director ceases to be an active Board member before the specified distribution year, payment will be made as indicated on the applicable Deferral Election or Compensation Payment Election Form. In all cases, appropriate taxes on the deferral payments are the responsibility of the payee." Executed at Rockford, Illinois as of the 21st day of April, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ---------------------------- Title: Paul Donovan Executive Vice President and Chief Financial Officer EX-10.(BB) 15 DEFERRED COMPENSATION PLAN 1 Exhibit (10)(bb) SECOND AMENDMENT TO THE SUNDSTRAND CORPORATION DEFERRED COMPENSATION PLAN (As amended and restated effective December 19, 1997) WHEREAS, The Sundstrand Corporation Deferred Compensation Plan (the "Plan") was established effective as of January 1, 1995; and WHEREAS, the Plan was amended and restated in its entirety effective as of December 19, 1997 (which amendment and restatement superceded an earlier amendment and restatement which was to have become effective as of December 31, 1997); and WHEREAS, by resolution of the Board of Directors of Sundstrand Corporation the Plan was amended effective as of April 21, 1998 and such amendment was formally incorporated into the Plan by the First Amendment to the Plan, as amended and restated effective December 19, 1997; and WHEREAS, at the Sundstrand Corporation Compensation Committee meeting of May 26, 1998, the Compensation Committee authorized management to amend the Plan in certain respects so as to be consistent with the intent and purposes of amendments to the employment and severance agreements with certain employees of the Corporation. NOW, THEREFORE, pursuant to the authorization of the Compensation Committee of the Board of Directors of Sundstrand Corporation the Plan (as amended and restated effective December 19, 1997) be and it hereby is amended effective as of June 1, 1998, as follows: 1. Section 7.5 of the Plan is amended to read as follows: "Section 7.5. Change in Control; Potential Change in Control. (a) In the event of a "Change in Control" (as defined below), (i) if termination of an Executive's employment occurs at any time after such Change in Control, the affected Executive will receive payment of his or her account balances at the time of his or her termination of employment, or (ii) if a Director ceases to be a Director of the Corporation or of the entity acquiring control of the Corporation, the affected Director will receive payment of his or her account balance at the time he or she ceases to be a Director of the Corporation or of the entity acquiring control of the Corporation. For purposes of this Plan, "Change in Control" shall mean any of the following events: (i) The acquisition (other than from the Corporation) by any person (as such term is defined in Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty-five percent (25% or more of the combined voting power of the Corporation's then outstanding voting securities; (ii) The individuals who, as of the date hereof, are members of the Board (the "Incumbent Board"), case for any reason to constitute a majority of the Board, unless the election, or nomination for election by the Corporation stockholders, of any new director was approved by a vote of a majority of the Incumbent Board, and such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; or 2 -2- (iii) (1) A merger or consolidation involving the Corporation (or any direct or indirect subsidiary of the Corporation) or (2) the issuance of shares of capital stock of the Corporation in connection with a merger or consolidation involving the Corporation (or any direct or indirect subsidiary of the Corporation) if, in the case of clause (1) or clause (2), the stockholders of the Corporation immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, immediately following such merger or consolidation, more than sixty-seven percent (67%) of the combined voting power of the then outstanding voting securities of the person issuing securities in the merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Corporation outstanding immediately before such merger or consolidation; provided, however, that for purposes of clause (1) and clause (2), voting securities of the Corporation issued in connection with the merger or consolidation, including securities to cover stock options or cure "tainted" shares (whether issued in the merger or consolidation or pursuant to a public or private offering related thereto), shall be treated as having been issue din such merger or consolidation and not as having been outstanding immediately prior to such merger or consolidation or (3) a complete liquidation or dissolution of the Corporation or consummation of the sale or other disposition of all or substantially all of the assets of the Corporation. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur pursuant to clause (a), solely because twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding voting securities is acquired by (A) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Corporation or any of its subsidiaries or (B) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders of the Corporation in the same proportion as their ownership of stock in the Corporation immediately prior to such acquisition." (b) Upon the occurrence of each Potential Change in Control (as defined below), the Company shall notify in writing each Executive and each Director who has made a deferral under the Plan of the occurrence of such event and each such Executive or such Director shall have the right within the 14-day period following receipt of such notice but in no event prior to the effective date of the "Change of Control" to which such notice relates to elect either to receive payment of his or her account balances as provided in subparagraph (a) of this Section 7.5 if the Change in Control occurs or to receive payment of his or her account balances on such date as such account balances otherwise would be paid under the Plan. For purposes of this Subparagraph (b) of this section 7.5, a "Potential Change in Control" means: (i) The execution by the Company of a written agreement which, if consummated, would constitute a Change in Control; (ii) A public announcement (including any filing with the Securities and Exchange Commission) by any "person" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act), including any corporation or group of associated firms acting in concert, other than (I) the Company and/or (ii) any employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) of the Company, including a trust established pursuant to such plan, of an intention to take or consider taking actions which, if consummated, would constitute a Change in Control; 3 -3- (iii) The acquisition, whether directly, indirectly, beneficially (within the meaning of Rule 13d-3 of the 1934 Act), or of record, of securities of the Company representing fifteen percent (15%) or more in number of any class of its then-outstanding voting securities by any "person" (within the meaning of Sections 13(d) and 14(d)(2) of the 1934 Act), including any corporation or group of associated persons acting in concert, other than (i) the Company and/or (ii) an employee pension benefit plan (within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended) of the Company, including a trust established pursuant to any such plan. For this purpose, the ownership of record of fifteen percent (15%) or more in number of any class of the then-outstanding voting securities of the Company by a person engaged in the business of acting as a nominee for unrelated beneficial owners shall not in and of itself be deemed to constitute a Potential Change in Control; or (iv) The occurrence of any other event that the Board determines is a Potential Change in Control." 2. Article VIII of the Plan is amended by deleting Section 8.1 and by adding the following new Sections 8.1 and 8.2 to provide as follows: "Section 8.1. Amendment and Termination of the Plan. At any time and from time to time, by action of either the Board or by the Compensation Committee of the Board, the Corporation shall have the right to (a) amend this Plan in any respect, (b) replace this Plan with another deferred compensation arrangement or (c) terminate this Plan, provided, however, that in no event may any such amendment, replacement or termination reduce or otherwise impair any benefit provided under this Plan with respect to amounts theretofore deferred under this Plan by an Executive who is a party to an Agreement (as defined below) or by any Director, in either case, without such Executive's or such Director's prior written consent. Other than to expand coverage, the immediately preceding sentence and Section 8.2 below may not under any circumstances be amended at any time after June 1, 1998. The term "Agreement" means an employment, severance or other similar agreement between the Company and any of the individuals listed on an Exhibit which shall be prepared by and kept on file for such purpose with the Company's Vice President, Corporate Human Resources or any successor to such person filling the same or an equivalent position. Section 8.2. Effect of Amendment, Replacement or Termination on Prior Deferrals. Notwithstanding anything contained in this Plan to the contrary, in no event shall any amendment, replacement or termination of this Plan adversely impact the terms or conditions applicable to an Executive's (who is a party to an Agreement) or Director's or, after the death of such Executive or Director, such Executive's or Director's Beneficiary's, continued participation in or benefits provided under this Plan with respect to amounts deferred under this Plan as in effect immediately prior to the date of such amendment, replacement or termination (including without limitation, the interest theretofore accrued under the Plan and the formula and method for accruing interest as in effect immediately prior to the date of such amendment, replacement or termination which was to be used for future interest accrual with respect to amounts theretofore deferred under this Plan) without the applicable Executive's or Director's or, after the death of such Executive or Director, such Executive's or Director's Beneficiary's, prior written consent. It is the purpose of the foregoing to clearly provide that with respect to each Executive (who is a party to an Agreement) or Director who participates in the Plan, once a deferral is made by such person under the Plan in any Plan Year no subsequent amendment, replacement or 4 -4- termination of the Plan may in any negative way affect such deferral, either currently or with respect to any future period, including, but not limited to, changing the method for determining the applicable interest rate for each Plan Year, the accrual of interest on each deferral, the method for allowing such deferral to be redeferred, and the methods of payment of such deferral, prior to the time such deferral and all interest theron has been paid in full, without first obtaining the prior written consent of the person(s) entitled to receive such deferrals and the interest thereon." 3. Article IX of the Plan is amended by adding a new Section 9.9 at the end thereof which shall provide as follows: "9.9. Funding of Deferrals. Notwithstanding anything to the contrary contained in the Plan: (a) With respect to each deferral made by an Executive or a Director under this Plan, the Company shall within 90 days after such deferral deposit into the Sundstrand Corporation Rabbi Trust established pursuant to an Agreement dated January 30, 1996, between Sundstrand Corporation and Marshall & Ilsley Trust Company (the "Rabbi Trust") an amount equal to such deferral and shall cause the trustee for the Rabbi Trust to allocate to an account established within the Rabbi Trust in the name of each Executive or Director who has made such a deferral the amount of such deposit. (b) Within 90 days after the end of each calendar year the Company shall deposit into the Rabbi Trust an amount equal to the interest accrual during the preceding calendar year in accordance with the Plan with respect to each deferral and shall cause such deposit to be credited to the applicable account of the Executive or Director. (c) Each year during the months of April or May the Company's certified public accounting firm shall take such steps as it reasonably determines to be necessary to verify that the Company has made the deposits to the Rabbi Trust required hereunder and has caused such deposits to be properly credited to the appropriate accounts of each Executive and each Director. Such accountant, within 30 days after completing the required verification, shall send a written confirmation to each Executive and each Director with a deferral under the Plan as to whether the proper amounts have been deposited to the Rabbi Trust and credited to his or her account and shall advise as to the amount held under the Rabbi Trust in his or her account. In the event the Company does not retain any certified public accounting firm or the Company's certified public accounting firm refuses to perform this verification and notice, any Executive or Director may petition a federal court of competent jurisdiction in the location where the Company's main offices are located to appoint a certified public accounting firm of significant stature to perform such work. The cost of making such appointment (including, but not limited to, attorney fees and any other costs) shall be borne by the Company. (d) In the event the Company fails to meet its funding obligation as provided in this Section 9.9, any Executive or Director can bring a legal proceeding before a court of competent jurisdiction (either federal, sate or local) to enforce such obligation. The costs of any such proceeding, including, but not limited to, attorney fees and any other costs, shall be borne by the Company." 5 -5- Executed at Rockford, Illinois as of the 1st day of June, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ------------------------- Title: Paul Donovan Executive Vice President and Chief Financial Officer 6 -6- EXHIBIT MAINTAINED PURSUANT TO SECTION 8.1 OF THE SUNDSTRAND CORPORATION DEFERRED COMPENSATION PLAN James R. Carlson James A. Cherry William R. Coole Paul Donovan DeWayne J. Fellows Mary Ann Hynes Robert H. Jenkins Ronald F. McKenna Gean B. Stalcup Patrick L. Thomas Neil D. Traubenberg David K. Whitehouse Parick J. Winn EX-10.(CC) 16 DEFERRED COMPENSATION PLAN 1 Exhibit (10)(cc) THIRD AMENDMENT TO THE SUNDSTRAND CORPORATION DEFERRED COMPENSATION PLAN (As amended and restated effective December 19, 1997) WHEREAS, The Sundstrand Corporation Deferred Compensation Plan (the "Plan") was established effective as of January 1, 1995; and WHEREAS, the Plan was amended and restated in its entirety effective as of December 19, 1997 (which amendment and restatement superceded an earlier amendment and restatement which was to have become effective as of December 31, 1997); and WHEREAS, the Plan, as amended and restated effective December 19, 1997, has previously been amended on two occasions; and WHEREAS, at the Sundstrand Corporation Board of Directors meeting of September 22, 1998, the Board approved an amendment to the Plan (which amendment was inappropriately referred to in the adopting resolution as the First Amendment rather than as this Third Amendment). NOW, THEREFORE, this Third Amendment to the Sundstrand Corporation Deferred Compensation Plan (as amended and restated effective December 19, 1997) reflects the changes necessary to reflect its adoption by the Sundstrand Corporation Board of Directors at its September 22, 1998, meeting and is effective as of September 22, 1998, as follows: 1. The first sentence of Section 7.2 of Article VII of the Plan is amended to provide as follows: "In or prior to the calendar year preceding the elected distribution date, but in no event less than six (6) months prior to the elected distribution date, the Executive or Director must complete the Compensation Payment Election Form to indicate the desired payment option or to elect to redefer payment." 2. Section 7.6 of Article VII of the Plan is amended to provide as follows: "7.6. Withdrawal. An Executive or a Director may, in his or her discretion, withdraw all of his or her account balances at any time provided that: (a) if the Executive is then employed by the Corporation or the Director is a current member of the Board, 10% of the amount withdrawn shall be forfeited to the Corporation and the Executive or Director may not again become a participant in the Plan prior to the one-year anniversary date of such withdrawal; and 2 -2- (b) if the Executive is no longer employed by the Corporation or the Director has ceased being a member of the Board, 10% of the amount withdrawn shall be forfeited to the Corporation. Executed at Rockford, Illinois as of the 22nd September, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ------------------------- Title: Paul Donovan Executive Vice President and Chief Financial Officer EX-10.(DD) 17 DEFERRED COMPENSATION PLAN 1 Exhibit (10)(dd) FOURTH AMENDMENT TO THE SUNDSTRAND CORPORATION DEFERRED COMPENSATION PLAN (As amended and restated effective December 19, 1997) WHEREAS, The Sundstrand Corporation Deferred Compensation Plan (the "Plan") was established effective as of January 1, 1995; and WHEREAS, the Plan was amended and restated in its entirety effective as of December 19, 1997 (which amendment and restatement superceded an earlier amendment and restatement which was to have become effective as of December 31, 1997); and WHEREAS, the Plan, as amended and restated effective December 19, 1997, has previously been amended on three occasions; and WHEREAS, it was determined that it was appropriate to further amend the Plan, which amendment was accomplished pursuant to a resolution adopted by the Sundstrand Corporation Board of Directors at its meeting of December 8, 1998; and WHEREAS, to facilitate the administration of the Plan it has been determined that it is appropriate to set forth the changes contemplated in the resolution adopted by the Sundstrand Corporation Board of Directors at its December 8, 1998, meeting in a formal Plan amendment. NOW, THEREFORE, this Fourth Amendment to the Sundstrand Corporation Deferred Compensation Plan (as amended and restated effective December 19, 1997) has been prepared to reflect such changes effective as of December 8, 1998, as follows: 1. Section 7.2 of Article VII of the Plan is changed by adding a new paragraph at the end thereof to provide as follows: "The foregoing provisions of this Section 7.2 notwithstanding, the Chief Executive Officer of the Company and/or the Chief Financial Officer of the Company, in his or her sole discretion, may allow an Executive or a Director who has made a deferral under the Plan (and irrespective as to whether such deferral has previously been the subject of a redeferral) the payment of which is to commence after such Executive's retirement from the Company or such Director's retirement from the Board of Directors of the Company, the opportunity to make a final redeferral, provided such final redeferral is made prior to the time the payment of such deferral would otherwise have commenced; and provided further that any such redeferral may not extend the payment period beyond the Executive's or Director's seventy-fifth birthday." 2. Article VIII of the Plan is amended by deleting Sections 8.1 and 8.2 and substituting in place thereof the following new Sections 8.1 and 8.2 to provide as follows: "Section 8.1. Amendment and Termination of the Plan. At any time and from time to time, by action of either the Board or by the Compensation Committee of the Board, the Corporation shall have the right to (a) amend this Plan in any respect, (b) replace this Plan with another deferred compensation arrangement or (c) terminate this Plan, provided, however, that in no event may any such amendment, replacement or termination reduce or otherwise impair any benefit provided under this Plan with respect to amounts theretofore deferred under this Plan by an Executive or by any Director, in either case, without such Executive's or such Director's prior written consent. Other than to expand coverage, the immediately preceding sentence and Section 8.2 2 -2- below may not under any circumstances be amended at any time after June 1, 1998 and any effort to change such sentence shall be null, void and of no force or effect. Section 8.2. Effect of Amendment, Replacement or Termination on Prior Deferrals. Notwithstanding anything contained in this Plan to the contrary, in no event shall any amendment, replacement or termination of this Plan adversely impact the terms or conditions applicable to an Executive's or Director's or, after the death of such Executive or Director, such Executive's or Director's Beneficiary's, continued participation in or benefits provided under this Plan with respect to amounts deferred under this Plan as in effect immediately prior to the date of such amendment, replacement or termination (including without limitation, the interest theretofore accrued under the Plan and the formula and method for accruing interest as in effect immediately prior to the date of such amendment, replacement or termination which was to be used for future interest accrual with respect to amounts theretofore deferred under this Plan) without the applicable Executive's or Director's or, after the death of such Executive or Director, such Executive's or Director's Beneficiary's, prior written consent. It is the purpose of the foregoing to clearly provide that with respect to each Executive or Director who participates in the Plan, once a deferral is made by such person under the Plan in any Plan Year no subsequent amendment, replacement or termination of the Plan may in any negative way affect such deferral, either currently or with respect to any future period, including, but not limited to, changing the method for determining the applicable interest rate for each Plan Year, the accrual of interest on each deferral, the method for allowing such deferral to be redeferred, and the methods of payment of such deferral, prior to the time such deferral and all interest theron has been paid in full, without first obtaining the prior written consent of the person(s) entitled to receive such deferrals and the interest thereon." Executed at Rockford, Illinois as of the 8th day of December, 1998. SUNDSTRAND CORPORATION By: /s/ Paul Donovan ---------------------------- Title: Paul Donovan Executive Vice President and Chief Financial Officer EX-21 18 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% Sundstrand Fluid Handling Corporation....................... Delaware 100%
52 EX-23.(A) 19 CONSENT OF INDEPENDENT AUDITORS(ERNST & YOUNG LLP) 1 EXHIBIT (23)(A) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-29234) pertaining to the Sundstrand Corporation Employee Savings Plan, the Registration Statement (Form S-8 No. 33-29235) pertaining to the Sundstrand Corporation Rockford Factory Employee Savings Plan, the Registration Statement (Form S-8 No. 33-61372) pertaining to the Sundstrand Corporation Stock Incentive Plan, the Registration Statement (Form S-8 No. 33-58689) pertaining to the Sundstrand Corporation Nonemployee Director Stock Option Plan and the Sundstrand Corporation Nonemployee Director Compensation Plan, the Registration Statement (Form S-8 No. 333-23169) pertaining to the Sundstrand Corporation Management Stock Performance Plan, and the Registration Statement (Form S-8 No. 333-31559) pertaining to the Sundstrand Corporation Stock Incentive Plan of our report dated January 25, 1999, except for the footnote entitled "Subsequent Event," as to which our report is dated February 21, 1999, with respect to the consolidated financial statements of Sundstrand Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Chicago, Illinois March 26, 1999 53 EX-24 20 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 ROBERT H. JENKINS and PAUL DONOVAN, and either or both of them, as its true and lawful attorneys-in-fact, in its name and on its behalf to file with the Securities and Exchange Commission the Annual Report on Form 10-K of said Corporation for the year ended December 31, 1998, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. That each of the undersigned directors and officers of said Corporation does hereby nominate, constitute and appoint ROBERT H. JENKINS and PAUL DONOVAN, and either or both of them, as his true and lawful attorneys-in-fact, in his name and in the capacity indicated below, to execute the aforesaid Form 10-K. And the undersigned do hereby authorize and direct the said attorneys-in-fact, and either or both of them, to execute and deliver such other documents to the Securities and Exchange Commission and to take all such other action as they or either of them may consider necessary or advisable to the end that said Form 10-K shall comply with the Securities Exchange Act of 1934 and the applicable rules, rulings and regulations of the Securities and Exchange Commission. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents this 25th day of March, 1999. SUNDSTRAND CORPORATION By: /s/ ROBERT H. JENKINS ------------------------------------ Robert H. Jenkins Chairman of the Board, President and Chief Executive Officer (CORPORATE SEAL) ATTEST: /s/ WILLIAM R. COOLE - -------------------------------------- William R. Coole Assistant Secretary 2
SIGNATURE TITLE --------- ----- /s/ ROBERT H. JENKINS Chairman of the Board, President and Chief Executive - --------------------------------------------- Officer and Director Robert H. Jenkins /s/ PAUL DONOVAN Executive Vice President and Chief Financial Officer - --------------------------------------------- Paul Donovan /s/ DEWAYNE J. FELLOWS Vice President and Controller - --------------------------------------------- DeWayne J. Fellows /s/ RICHARD A. ABDOO Director - --------------------------------------------- Richard A. Abdoo /s/ J. P. BOLDUC Director - --------------------------------------------- J. P. Bolduc Director - --------------------------------------------- Ilene S. Gordon /s/ GERALD GRINSTEIN Director - --------------------------------------------- Gerald Grinstein /s/ CHARLES MARSHALL Director - --------------------------------------------- Charles Marshall /s/ KLAUS H. MURMANN Director - --------------------------------------------- Klaus H. Murmann Director - --------------------------------------------- Ward Smith Director - --------------------------------------------- Berger G. Wallin
EX-27 21 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1998 DEC-31-1998 15 0 381 0 401 865 1,269 742 1,807 499 295 38 0 0 507 1,807 2,005 2,005 1,316 1,633 0 0 35 347 121 226 0 0 0 226 4.02 3.99
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