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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001157523-03-000720.txt : 20030321
<SEC-HEADER>0001157523-03-000720.hdr.sgml : 20030321
<ACCEPTANCE-DATETIME>20030321152700
ACCESSION NUMBER: 0001157523-03-000720
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 19
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030321
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EATON CORP
CENTRAL INDEX KEY: 0000031277
STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714]
IRS NUMBER: 340196300
STATE OF INCORPORATION: OH
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 333-56644
FILM NUMBER: 03612318
BUSINESS ADDRESS:
STREET 1: EATON CTR
STREET 2: 1111 SUPERIOR AVE
CITY: CLEVELAND
STATE: OH
ZIP: 44114-2584
BUSINESS PHONE: 2165235000
MAIL ADDRESS:
STREET 1: 1111 SUPERIOR AVENUE
CITY: CLEVELAND
STATE: OH
ZIP: 44114
FORMER COMPANY:
FORMER CONFORMED NAME: EATON YALE & TOWNE INC
DATE OF NAME CHANGE: 19710822
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>a4358939.txt
<DESCRIPTION>EATON CORPORATION 10-K
<TEXT>
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
---------
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 2002
- ------------------------------------
Commission file number 1-1396
- -----------------------------
Eaton Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(216) 523-5000
---------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------------------ ---------------------------
Common Shares ($.50 par value) The New York Stock Exchange
The Chicago Stock Exchange
The Pacific Stock Exchange
The London Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months and (2) has been subject to such filing
requirements for the past ninety days. Yes X
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. Yes X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X
The aggregate market value of voting stock held by non-affiliates of the
registrant as of June 30, 2002 was $5.1 billion.
As of January 31, 2003, there were 70,779,954 Common Shares outstanding.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2003 annual shareholders' meeting
are incorporated by reference into Part III.
<PAGE>
Part I
Item 1. Business
- -----------------
Eaton Corporation (Eaton or Company) is a global diversified industrial
manufacturing company. Eaton was incorporated in Ohio in 1916, as a successor to
a New Jersey company incorporated in 1911. The Company is a leader in fluid
power systems; electrical power quality, distribution and control; automotive
engine air management and fuel economy; and intelligent drivetrain systems for
fuel economy and safety in trucks. Annual sales in 2002 were $7.2 billion.
Headquartered in Cleveland, Ohio, Eaton had 48,000 employees at year-end 2002,
which increased to 51,000 in January 2003 due to the acquisition of the
electrical business of Delta plc. Eaton sells products in more than 50
countries. More information regarding the Company is available at
http://www.eaton.com.
Eaton electronically files or furnishes reports pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) to the United
States Securities and Exchange Commission (Commission), including annual reports
on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K,
as well as any amendments to those reports. As soon as reasonably practicable,
these reports are available free of charge through the Company's Internet web
site at http://www.eaton.com. These filings are also accessible on the
Commission's Internet web site at www.sec.gov.
On January 31, 2003, Eaton acquired the electrical business of Delta plc
for approximately $215 million. This business, which will be included in the
Industrial & Commercial Controls segment, had 2001 sales of approximately $379
million (at the foreign exchange rate on the date the transaction was
completed). The Delta electrical business has 3,400 employees and is
headquartered in the United Kingdom. The business' major electrical brands
include MEM(R), Holec(TM), Bill(TM), Home Automation(TM), Elek(TM) and
Tabula(TM).
In November 2002, the Boston Weatherhead business of Dana Corporation was
purchased for $130 million. This business, which had 2001 sales of $207 million,
manufactures hose, tubing, and fluid connectors for fluid power systems
primarily for industrial distribution, mobile off-highway and heavy-duty truck
markets. In June 2002, the remaining 40% interest in Jining Eaton Hydraulics
Company, Ltd. (JEHYCO), a hydraulics systems manufacturer located in Jining,
China, was acquired. This business manufactures hydraulic pumps and motors for
mobile and industrial markets. These businesses will be included in the Fluid
Power segment.
On July 15, 2002, Eaton sold the Navy Controls business for $92 million.
This business was part of the Industrial & Commercial Controls segment.
Business Segment Information
- ----------------------------
Information regarding principal products, net sales, operating profit and
long-lived assets by business segment and geographic region is presented in
"Business Segment and Geographic Region Information" on pages F-28 through F-32
of this report. Additional information regarding Eaton's segments and business
in general is presented below.
Fluid Power
- -----------
Patents and Trademarks - Eaton owns, controls, or is licensed under many
patents related to this segment. Trademarks used in connection with the
marketing of products included in this segment are EATON, EATON (logomark),
CHAR-LYNN, Q-AMP, GEROLER, HYDRAULIC LAUNCH ASSIST, HLA, ORBIT, ORBITROL,
DUFFIELD, VICKERS, BOSTON WEATHERHEAD, EVERFLEX, HYDRO-LINE, TEDECO, STERER,
ILLUMINATER, LUBRICLONE, LEVELMASTER, EEMCO, TELLITE, AEROQUIP, "FLYING A" LOGO,
AEROQUIP EXPRESS, BENCHMARK, BRUISER, AQP, HI-PAC, STC, MATCHMATE, MATCHMATE
PLUS, MATCHMATE BLUE, MATCHMATE ICE, STARTLITE, EPSILON, ZAPPER, ZAPPER PLUS,
PROCRIMP, RYNGLOK, AIRFLEX, FAWICK, and GOLF PRIDE.
<PAGE>
Competition - Principal methods of competition in this segment are price,
geographic coverage, service and product performance. Eaton occupies a strong
competitive position in relation to the many competitors in this segment and,
with respect to many products, is considered among the market leaders.
Significant Customers - Approximately 11% of this segment's net sales in
2002 were made to two manufacturers of vehicles in the United States and Europe.
These customers are also significant customers of the Automotive segment.
Industrial & Commercial Controls
- --------------------------------
Patents and Trademarks - Eaton owns, controls, or is licensed under many
patents related to this segment. Some of the more significant trademarks used in
connection with the marketing of products included in this segment are EATON,
EATON (logomark), CUTLER-HAMMER, CH (EMBLEM), C-H ESS, SERIES C (& DESIGN),
DE-ION, DURANT, FACTORYMATE, PANELMATE, POW-R-WAY, POW-R-LINE, POW-R-DESIGNER,
ADVANTAGE, ADVANTAGE PLUS, ADVANTAGE (& DESIGN), ADVANCED POWER CENTER, MAGNUM,
MAGNUM DS, DS, OPTIM, TRI-PAC, IMPACC, AEGIS, AFCI, INTELLIGENT TECHNOLOGIES,
IT, and HEINEMANN. In addition, the Company has the right to use the
WESTINGHOUSE trademark in marketing certain products until 2004.
Competition - Principal methods of competition in this segment are price,
geographic coverage, service and product performance. Eaton occupies a strong
competitive position in relation to the many competitors in this segment and,
with respect to many products, is considered among the market leaders.
Significant Customers - Approximately 16% of this segment's net sales in
2002 were made to one customer located in the United States, which is not a
significant customer of any other segment.
Automotive
- ----------
Patents and Trademarks - Eaton owns, controls, or is licensed under many
patents related to this segment. While the EATON and EATON (logomark) trademarks
are emphasized in marketing many products within this segment, the Company also
markets under a number of other trademarks including EATONITE, DILL,
SUPERCHARGER (& DESIGN), Fluid Condition Monitor, FCM, BLOCKER, and GERODISC.
Seasonal Fluctuations - Sales of the Automotive segment historically have
been lower in the third quarter than in the second quarter as a result of the
normal seasonal pattern of automotive industry production.
Competition - Principal methods of competition in this segment are price,
service and product performance. Eaton occupies a strong competitive position in
relation to the many competitors in this segment and, with respect to many
products, is considered among the market leaders.
Significant Customers - Approximately 56% of this segment's net sales in
2002 were made to divisions and subsidiaries of five large original equipment
manufacturers of vehicles and one automotive component supplier. All of these
customers are concentrated in North America and Europe. Eaton has been
conducting business with each of these companies for many years. Sales to these
companies include a number of different products and different models or types
of the same product, sales of which are not dependent upon one another. With
respect to many of the products sold, various divisions and subsidiaries of each
of the companies are in the nature of separate customers, and sales to one
division or subsidiary are not dependent upon sales to other divisions or
subsidiaries. Two of these customers are also significant customers of the Truck
segment, while two others are also significant customers of the Fluid Power
Segment.
<PAGE>
Truck
- -----
Patents and Trademarks - Eaton owns, controls, or is licensed under many
patents related to this segment. Trademarks used in connection with the
marketing of products included in this segment are EATON, EATON (logomark),
FULLER, ROADRANGER, AutoShift, VORAD, SmartCruise, EASY-PEDAL, SOLO, ANGLE
SPRING, LIGHTNING SERIES and TOP 2.
Competition - Principal methods of competition in this segment are price,
service and product performance. Eaton occupies a strong competitive position in
relation to the many competitors in this segment and, with respect to many
products, is considered among the market leaders.
Significant Customers - Approximately 74% of this segment's net sales in
2002 were made to divisions and subsidiaries of five original equipment
manufacturers of heavy-, medium-, and light-duty trucks and off-highway
vehicles, concentrated in North America, Europe and South America. Two of these
customers are also significant customers of the Automotive segment.
Information Concerning Eaton's Business in General
- --------------------------------------------------
Patents - Eaton's policy is to file applications and obtain patents for its
new products including product modifications and improvements. While U.S.
patents generally expire 20 years after the patent application filing date, new
patents are issued to Eaton on a regular basis. While in the aggregate Eaton's
patents are considered important in the operation of its businesses, the loss or
expiration of any one patent would not materially affect Eaton as a whole.
Raw Materials - Principal raw materials used are iron, steel, copper,
nickel, aluminum, brass, silver, rubber, plastic and insulating materials.
Materials are purchased in various forms, such as pig iron, metal sheets and
strips, forging billets, bar stock and plastic pellets. Raw materials, as well
as parts and other components, are purchased from many suppliers and, under
normal circumstances, the Company has no difficulty obtaining them.
Order Backlog - Since a significant portion of open orders placed with
Eaton by original equipment manufacturers of cars, trucks and off-highway
vehicles are historically subject to month-to-month releases by customers during
each model year, such orders are not considered technically firm. In measuring
backlog of orders, the Company includes only the amount of such orders released
by such customers as of the dates listed. Using this criterion, total backlog at
December 31, 2002 and 2001 was approximately $1.2 billion at each year-end.
Backlog should not be relied upon as being indicative of results of operations
for future periods.
Research and Development - Research and development expenses for new
products and improvement of existing products in 2002, 2001 and 2000 (in
millions) were $203, $228 and $269, respectively. Over the past five years, the
Company has invested approximately $1.2 billion in research and development.
Protection of the Environment - Operations of the Company involve the use
and disposal of certain substances regulated under environmental protection
laws. Eaton continues to modify certain processes on an ongoing, regular basis
in order to reduce the impact on the environment, including the reduction or
elimination of certain chemicals used in and wastes generated from operations.
Compliance with Federal, State and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, is not expected to have a
material adverse effect upon earnings or the competitive position of the
Company. Eaton's estimated capital expenditures for environmental control
facilities are not expected to be material for 2003 and 2004. Information
regarding the Company's liabilities related to environmental matters is
presented in "Protection of the Environment" on page F-20 of this report.
<PAGE>
Item 2. Properties
- -------------------
Eaton's world headquarters is located in Cleveland, Ohio. The Company
maintains manufacturing facilities at 174 locations in 25 countries, including
28 light-manufacturing and fabrication facilities. In January 2003, the number
of facilities increased to 184 locations in 26 countries due to the acquisition
of the electrical business of Delta plc. The Company is a lessee under a number
of operating leases for certain real properties and equipment, none of which are
material to its operations. Eaton's principal research facilities are located in
Southfield, Michigan, Pittsburgh, Pennsylvania and Milwaukee, Wisconsin. In
addition, certain divisions conduct research in their own facilities. Management
believes that the manufacturing facilities are adequate for operations, and such
facilities are maintained in good condition.
Item 3. Legal Proceedings
- --------------------------
Information regarding the Company's legal proceedings is presented in
"Protection of the Environment" and "Contingencies" on page F-20 of this
report.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- --------------------------------------------------------------------------
The Company's Common Shares are listed for trading on the New York,
Chicago, Pacific and London stock exchanges. Information regarding cash
dividends paid and the high and low market price per Common Share for each
quarter in 2002 and 2001 is presented in "Quarterly Data" on page F-49 of this
report. At December 31, 2002, there were 10,611 holders of record of the
Company's Common Shares. Additionally, approximately 27,000 current and former
employees were shareholders through participation in the Eaton Savings Plan
(ESP) and Eaton Personal Investment Plan (EPIP).
Item 6. Selected Financial Data
- --------------------------------
Information regarding selected financial data is presented in the
"Seven-Year Consolidated Financial Summary" on page F-50 of this report.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is presented on pages F-33 through F-48 of this report.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- ------------------------------------------------------------------
Information regarding market risk is presented on page F-44 of this report.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The report of independent auditors, consolidated financial statements, and
notes to consolidated financial statements are presented on pages F-1 through
F-32 of this report.
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
- -----------------------------------------------------------------------
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Information contained in the definitive Proxy Statement to be filed on or
about March 15, 2003, with respect to directors, is incorporated by reference.
A listing of Eaton's officers, their ages, positions and offices held over
the past five years, as of January 31, 2003, follows:
Name Age Position (Date elected to position)
- ---- --- -----------------------------------
Alexander M. Cutler 51 Chairman and Chief Executive Officer; President
(August 1, 2000 - present)
President and Chief Operating Officer
(September 1, 1995 - July 31, 2000)
Director (1993 - present)
Richard H. Fearon 46 Executive Vice President - Chief Financial and
Planning Officer (April 24, 2002 - Present)
Partner, Willow Place Partners LLC (2001 - 2002)
Senior Vice President - Corporate Development,
Transamerica Corporation (1997 - 2000)
Craig Arnold 42 Senior Vice President and Group Executive - Fluid
Power (October 25, 2000 - present)
Corporate Vice President of General Electric and
President of GE Lighting Services Ltd.
(1999 - 2000)
Corporate Vice President and President of GE
Plastics, Greater China (1998 - 1999)
Corporate Vice President and President of GE
Appliances, Asia (1997 - 1998)
<PAGE>
Stephen M. Buente 52 Senior Vice President and Group Executive -
Automotive (August 21, 2000 - present)
Operations Vice President - Automotive Controls
(1999 - 2000)
Operations Vice President - Engine Components
(1995 - 1999)
Randy W. Carson 52 Senior Vice President and Group Executive -
Cutler-Hammer (January 1, 2000 - present)
Vice President - Growth Initiatives (1999)
Senior Vice President at Rockwell Automation
(1992 - 1998)
James E. Sweetnam 50 Senior Vice President and Group Executive -
Truck (July 1, 2001 - present)
Vice President - Heavy-Duty Transmission, Clutch
and Aftermarket (2000 - 2001)
Vice President and General Manager - Heavy-Duty
Transmission Division (1997 - 1999)
Kristen M. Bihary 49 Vice President - Communications
(July 28, 1999 - present)
Vice President - External Affairs, Internal and
Marketing Communications at Shell Chemical
Company (1998 - 1999)
Vice President - Public Affairs at Varity
Corporation (1995 - 1998)
Donald H. Bullock 43 Vice President - Information Technologies
(August 1, 2000 - present)
Director of Finance Reengineering
(1998 - 2000)
Principal at CSC Index (1992 - 1998)
Susan J. Cook 55 Vice President - Human Resources
(January 16, 1995 - present)
Earl R. Franklin 59 Vice President and Secretary
(April 24, 2002 - present)
Secretary and Associate General Counsel
(September 1, 1991 - April 23, 2002)
J. Robert Horst 59 Vice President and General Counsel
(January 1, 2000 - present)
Deputy General Counsel (1998 - 1999)
Associate General Counsel (1991 - 1998)
John S. Mitchell 46 Vice President - Taxes
(November 22, 1999 - present)
Vice President - Taxes at The Limited, Inc.
(1997 - 1999)
Robert E. Parmenter 50 Vice President and Treasurer
(January 1, 1997 - present)
Billie K. Rawot 51 Vice President and Controller
(March 1, 1991 - present)
Ken D. Semelsberger 41 Vice President - Strategic Planning
(April 28, 1999 - present)
Director - Corporate Development and Planning
(1998 - 1999)
Director - Strategic Planning
(1995 - 1998)
<PAGE>
There are no family relationships among the officers listed, and there are
no arrangements or understandings pursuant to which any of them were elected as
officers. All officers hold office for one year and until their successors are
elected and qualified, unless otherwise specified by the Board of Directors;
provided, however, that any officer is subject to removal with or without cause,
at any time, by a vote of a majority of the Board of Directors.
Item 11. Executive Compensation
- --------------------------------
Information contained in the definitive Proxy Statement to be filed on or
about March 15, 2003, with respect to executive compensation, is incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Information contained in the definitive Proxy Statement to be filed on or
about March 15, 2003, with respect to security ownership of certain beneficial
owners and management, is incorporated by reference.
Equity Compensation Plans
- -------------------------
The following table summarizes information, as of December 31, 2002,
relating to equity compensation plans of the Company pursuant to which grants of
options, restricted stock, deferred compensation units or other rights to
acquire Company Common Shares may be granted from time to time.
Number of
securities
remaining
(A) available
Number of for future
securities Weighted- issuance
to be average under equity
issued upon exercise compensation
exercise of price of plans
outstanding outstanding (excluding)
options, options, securities
warrants warrants reflected in
Plan category and rights and rights column(A))
- ---------------------- ----------- ----------- ------------
Equity compensation
plans approved by
security holders(1) 9,792,650 (3) $63.40 (5) 3,249,313
Equity compensation
plans not approved
by security holders(2) 765,834 (4) N/A 147,040
---------- ---------
Total 10,558,484 $63.40 (5) 3,396,353
========== =========
(1) The equity compensation plans of the Company that have been approved by the
Company's shareholders are the 2002 Stock Plan, 1998 Stock Plan, 1995 Stock
Plan, 1991 Stock Option Plan and Incentive Compensation Deferral Plan
(amended and restated as of October 1, 1997).
(2) The equity compensation plans of the Company that have not been submitted
to the Company's shareholders for approval are the 1996 Non-Employee
Director Fee Deferral Plan and the Deferred Incentive Compensation Plan
(amended and restated as of March 31, 2000).
<PAGE>
Under the 1996 Non-Employee Director Fee Deferral Plan, all non-employee
directors may defer payment of their fees at a rate of return which varies,
depending on whether the director defers the fees as retirement compensation or
as short-term compensation. At least 50% of retirement compensation, or any
greater portion which the director elects, is converted to Company Common Share
units and earns Common Share price appreciation and dividend equivalents. The
balance of retirement compensation earns 10-year U.S. Treasury note returns plus
300 basis points. Short-term compensation earns 13-week U.S. Treasury bill
returns. These arrangements provide for accelerated lump sum or installment
payments upon a failure by the Company to pay or termination of service in the
context of a change in control of the Company. After retirement or other
termination of services as a director, the Governance Committee of the Board
determines whether fees deferred are to be paid in a lump sum or periodic
installments and whether the amounts converted to Common Share units are to be
paid in cash or Common Shares.
Under the Deferred Incentive Compensation Plan, participants, which include
officers and other eligible executives, may elect to defer receipt of their
incentive compensation award as either short-term deferrals (5 years) or
retirement compensation. Amounts deferred until retirement earn the greater of
Company Common Share price appreciation plus dividend equivalents or 13-week
U.S. Treasury bill returns. Short-term deferrals earn 13-week U.S. Treasury bill
returns. Amounts deferred as retirement compensation which are converted to
Company Common Share units are payable in either lump sum or periodic
installments of Common Shares. The Compensation and Organization Committee of
the Board determines the method of payment for elected officers upon retirement
or other termination. The Corporate Compensation Committee, which is comprised
of Company officers, determines the method of payment for appointed officers and
other executives who participate in the plan upon retirement or other
termination.
(3) Includes 7,334,952 time-vesting stock options, 98,780 restricted shares
and 2,196,342 of performance-based stock options. Also included are 162,576
shares underlying stock units, payable on a one-for-one basis, credited to stock
unit accounts as of December 31, 2002 under the Incentive Compensation Deferral
Plan (amended and restated as of October 1, 1997).
(4) Represents shares underlying stock units, payable on a one-for-one
basis, credited to stock unit accounts as of December 31, 2002 under the 1996
Non-Employee Director Fee Deferral Plan and the Deferred Incentive Compensation
Plan (amended and restated as of March 31, 2000).
(5) Weighted average exercise price of outstanding stock options; excludes
restricted stock and deferred compensation share units.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
None required to be reported.
Item 14. Controls and Procedures
- ---------------------------------
Within 90 days prior to filing this report, an evaluation was performed,
under the supervision and with the participation of Eaton's management,
including Alexander M. Cutler - Chairman and Chief Executive Officer; President
and Richard H. Fearon - Executive Vice President - Chief Financial and Planning
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, Eaton's management
concluded that the Company's disclosure controls and procedures were effective
as of December 31, 2002. Subsequent to December 31, 2002, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls and no significant deficiencies and
material weaknesses existed which required corrective actions.
<PAGE>
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
Company reports filed under the Exchange Act is accumulated and communicated to
management, including the Company's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) (1) The report of independent auditors, consolidated financial statements
and notes to consolidated financial statements, included in Item 8
above, are filed as a separate section of this report:
Report of Independent Auditors - Page F-1
Statements of Consolidated Income - Years ended December 31, 2002,
2001 and 2000 - Page F-2
Consolidated Balance Sheets - December 31, 2002 and 2001 - Page F-3
Statements of Consolidated Cash Flows - Years ended December 31,
2002, 2001 and 2000 - Page F-4
Statements of Consolidated Shareholders' Equity - Years ended
December 31, 2002, 2001 and 2000 - Page F-5
Notes to Consolidated Financial Statements - Pages F-6 through F-32
(2) All schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been
omitted.
(3) Exhibits
3(a) Amended Articles of Incorporation (amended and restated as of
April 27, 1994) - Filed in conjunction with this Form 10-K
3(b) Amended Regulations (amended and restated as of April 26,
2000)- Incorporated by reference to the Form 10-Q for the six
months ended June 30, 2000
4(a) Instruments defining rights of security holders, including
indentures (Pursuant to Regulation S-K Item 601(b)(4), the
Company agrees to furnish to the Commission, upon request, a
copy of the instruments defining the rights of holders of long-
term debt)
4(b) Rights Agreement (Dated as of June 28, 1995) - Filed in
conjunction with this Form 10-K
<PAGE>
10 Material contracts - Each of the following is either a
management contract or a compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and restated as
of March 31, 2000) - Incorporated by reference to the Form
10-K for the year ended December 31, 2000
(b) Executive Strategic Incentive Plan I (Amended and Restated as
of January 1, 2001) - Filed in conjunction with this
Form 10-K
(c) Group Replacement Insurance Plan (GRIP), effective as of
June 1, 1992 - Incorporated by reference to the Form 10-K for
the year ended December 31, 1992
(d) 1991 Stock Option Plan - Filed in conjunction with this Form
10-K
(e) 1995 Stock Plan - Filed in conjunction with this Form 10-K
(f) Incentive Compensation Deferral Plan (amended and restated as
of October 1, 1997) - Incorporated by reference to the Form
10-K for the year ended December 31, 2000
(g) Form of Change of Control Agreement entered into with
officers of Eaton Corporation - Filed in conjunction with
this Form 10-K
(h) Form of Indemnification Agreement entered into with officers
of Eaton Corporation - Filed in conjunction with this Form
10-K
(i) Limited Eaton Service Supplemental Retirement Income Plan
(amended and restated as of January 1, 2003) - Filed in
conjunction with this Form 10-K
(j) Supplemental Benefits Plan (amended and restated as of
January 1, 1989) (which provides supplemental retirement
benefits) - Filed in conjunction with this Form 10-K
(k) Excess Benefits Plan (Amended and Restated Effective
January 1, 1989) (with respect to Section 415 limitations of
the Internal Revenue Code) - Filed in conjunction with this
Form 10-K
(l) Executive Incentive Compensation Plan - Incorporated by
reference to the Form 10-K for the year ended December 31,
2000
(m) Plan for the Deferred Payment of Directors' Fees (Originally
adopted in 1985 and amended effective as of September 24,
1996 and January 28, 1998) - Filed in conjunction with this
Form 10-K
(n) Plan for the Deferred Payment of Directors' Fees (Originally
adopted in 1980 and amended and restated in 1989 and 1996) -
Filed in conjunction with this Form 10-K
(o) 1996 Non-Employee Director Fee Deferral Plan (amended and
restated as of October 22, 2002) - Filed in conjunction with
this Form 10-K
(p) Trust Agreement - Outside Directors (dated December 6, 1996)
- Filed in conjunction with this Form 10-K
<PAGE>
(q) Trust Agreement - Officers and Employees (dated December 6,
1996) - Filed in conjunction with this Form 10-K
(r) 1998 Stock Plan - Incorporated by reference to the definitive
Proxy Statement dated March 13, 1998
(s) 2002 Stock Plan - Incorporated by reference to the definitive
Proxy Statement dated March 15, 2002
(t) Executive Strategic Incentive Plan II (Effective as of
January 1, 2001) - Filed in conjunction with this Form 10-K
12 Ratio of Earnings to Fixed Charges - Filed in conjunction with this
Form 10-K
21 Subsidiaries of Eaton Corporation - Filed in conjunction with this
Form 10-K
23 Consent of Independent Auditors - Filed in conjunction with this
Form 10-K
24 Power of Attorney - Filed in conjunction with this Form 10-K
(b) Reports on Form 8-K
On October 15, 2002, the Company filed a Current Report on Form 8-K
regarding the third quarter 2002 earnings release.
On January 21, 2003, the Company filed a Current Report on Form 8-K
regarding the fourth quarter 2002 earnings release.
(c) Exhibits
Certain exhibits required by this portion of Item 15 are filed as a
separate section of this report.
(d) Financial Statement Schedules
None required to be filed.
<PAGE>
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.
Eaton Corporation
-----------------
Registrant
Date: March 21, 2003 /s/ Richard H. Fearon
----------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning
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.
Date: March 21, 2003
Signature Title
- --------- -----
*
- -------------------
Alexander M. Cutler Chairman and Chief Executive Officer; President
Director
*
- ---------------
Billie K. Rawot Vice President and Controller;
Principal Accounting Officer
*
- -------------------
Michael J. Critelli Director
*
- -----------
Ernie Green Director
*
- -----------------
Ned C. Lautenbach Director
*
- ----------------
Deborah L. McCoy Director
*
- --------------
John R. Miller Director
*
- -----------------
Furman C. Moseley Director
*
- ----------------
Victor A. Pelson Director
*
- --------------
Gary L. Tooker Director
*By /s/ Richard H. Fearon
--------------------------------------
Richard H. Fearon, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
<PAGE>
Certification
I, Alexander M. Cutler, certify that:
1. I have reviewed this annual report on Form 10-K of Eaton Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003 /s/ Alexander M. Cutler
-------------------------------------
Alexander M. Cutler
Chairman and Chief Executive Officer;
President
<PAGE>
Certification
I, Richard H. Fearon, certify that:
1. I have reviewed this annual report on Form 10-K of Eaton Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 21, 2003 /s/ Richard H. Fearon
------------------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning Officer
<PAGE>
Eaton Corporation
2002 Annual Report on Form 10-K
Report of Independent Auditors
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Report Of Independent Auditors
- ------------------------------
To the Board of Directors & Shareholders
Eaton Corporation
We have audited the accompanying consolidated balance sheets of Eaton
Corporation as of December 31, 2002 and 2001, and the related statements of
consolidated income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Eaton
Corporation at December 31, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
As discussed in "Goodwill and Other Intangible Assets" in the Notes to
Consolidated Financial Statements, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective January 1, 2002.
/s/ Ernst & Young LLP
---------------------
Cleveland, Ohio
January 20, 2003
F-1
<PAGE>
Eaton Corporation
Statements of Consolidated Income
Year ended December 31
------------------------
2002 2001 2000
(Millions except for per share data) ---- ---- ----
Net sales $7,209 $7,299 $8,309
Costs & expenses
Costs of products sold 5,272 5,503 6,092
Selling & administrative 1,217 1,220 1,299
Research & development 203 228 269
------ ------ ------
6,692 6,951 7,660
------ ------ ------
Income from operations 517 348 649
Other income (expense)
Interest expense-net (104) (142) (177)
Gains on sales of businesses 18 61
Other-net (32) 11 80
------ ------ ------
(118) (70) (97)
------ ------ ------
Income from continuing operations before
income taxes 399 278 552
Income taxes 118 109 189
------ ------ ------
Income from continuing operations 281 169 363
Income from discontinued operations 90
------ ------ ------
Net income $ 281 $ 169 $ 453
====== ====== ======
Net income per Common Share assuming dilution
Continuing operations $ 3.92 $ 2.39 $ 5.00
Discontinued operations 1.24
------ ------ ------
$ 3.92 $ 2.39 $ 6.24
====== ====== ======
Average number of Common Shares outstanding 71.7 70.5 72.6
Net income per Common Share basic
Continuing operations $ 3.98 $ 2.43 $ 5.06
Discontinued operations 1.25
------ ------ ------
$ 3.98 $ 2.43 $ 6.31
====== ====== ======
Average number of Common Shares outstanding 70.6 69.4 71.8
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.76
The notes on pages F-6 to F-32 are an integral part of the consolidated
financial statements.
F-2
<PAGE>
Eaton Corporation
Consolidated Balance Sheets
December 31
---------------
2002 2001
(Millions) ---- ----
ASSETS
Current assets
Cash $ 75 $ 112
Short-term investments 353 199
Accounts receivable 1,032 1,070
Inventories 698 681
Deferred income taxes 181 153
Other current assets 118 172
------ ------
2,457 2,387
Property, plant & equipment
Land & buildings 790 763
Machinery & equipment 3,044 3,053
------ ------
3,834 3,816
Accumulated depreciation (1,879) (1,766)
------ ------
1,955 2,050
Goodwill 1,910 1,902
Other intangible assets 510 533
Other assets 306 774
------ ------
$7,138 $7,646
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 47 $ 58
Current portion of long-term debt 154 130
Accounts payable 488 418
Accrued compensation 199 158
Accrued income & other taxes 225 258
Other current liabilities 621 647
------ ------
1,734 1,669
Long-term debt 1,887 2,252
Postretirement benefits other than pensions 652 670
Deferred income taxes & other liabilities 563 580
Shareholders' equity
Common Shares (70.6 in 2002 and 69.5 in 2001) 35 35
Capital in excess of par value 1,413 1,348
Retained earnings 1,603 1,447
Accumulated other comprehensive income (loss) (699) (299)
Deferred compensation plans (50) (56)
------ ------
2,302 2,475
------ ------
$7,138 $7,646
====== ======
The notes on pages F-6 to F-32 are an integral part of the consolidated
financial statements.
F-3
<PAGE>
Eaton Corporation
Statements of Consolidated Cash Flows
Year ended December 31
----------------------
2002 2001 2000
(Millions) ---- ---- ----
Net cash provided by operating activities
of continuing operations
Income from continuing operations $ 281 $ 169 $ 363
Adjustments to reconcile to net cash provided
by operating activities
Depreciation & amortization 353 355 364
Amortization of goodwill & other
intangible assets 23 94 98
Deferred income taxes (51) 58 44
Pension assets (4) (84) (67)
Other long-term liabilities (1) 30 35
Gains on sales of businesses & corporate assets (18) (61) (22)
Other non-cash items in income 22 2 (6)
Changes in working capital, excluding
acquisitions & sales of businesses
Accounts receivable 59 98 (39)
Inventories 13 149 (13)
Accounts payable 41 64 (16)
Accrued income & other taxes 101 75 (86)
Other current liabilities (14) (129) (44)
Other working capital accounts 47 (53) (81)
Other-net 48 (2) (11)
----- ----- -----
900 765 519
Net cash used in investing activities
of continuing operations
Expenditures for property, plant & equipment (228) (295) (386)
Acquisitions of businesses, less cash acquired (153) (35) (115)
Sales of businesses & corporate assets 96 403 122
Proceeds from initial public offering of subsidiary 349
(Purchases) sales of short-term investments (135) (154) 40
Other-net 5 22 (34)
----- ----- -----
(415) (59) (24)
Net cash used in financing activities
of continuing operations
Borrowings with original maturities of more
than three months
Proceeds 419 1,481 1,555
Payments (635) (1,419) (1,560)
Borrowings with original maturities of less
than three months-net (228) (643) 150
Cash dividends paid (123) (120) (127)
Purchase of Common Shares (12) (417)
Proceeds from exercise of employee stock options 45 37 11
----- ----- -----
(522) (676) (388)
----- ----- -----
Total (decrease) increase in cash
from continuing operations (37) 30 107
Net cash used in discontinued operations (104)
----- ----- -----
Total (decrease) increase in cash (37) 30 3
Cash at beginning of year 112 82 79
----- ----- -----
Cash at end of year $ 75 $ 112 $ 82
===== ===== =====
The notes on pages F-6 to F-32 are an integral part of the consolidated
financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Eaton Corporation
Statements of Consolidated Shareholders' Equity
Accumulated Total
Common Shares Capital in other Deferred share-
--------------- excess of Retained comprehensive compensa- holders'
Shares Dollars par value earnings income (loss) tion plans equity
(Millions) ------ ------- --------- -------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 74.0 $37 $1,041 $1,804 $(220) $(38) $2,624
Net income 453 453
Other comprehensive income (loss) (47) (47)
------
Total comprehensive income 406
Cash dividends paid (127) (127)
Issuance of shares under
employee benefit plans,
including tax benefit .3 57 (1) 6 62
Put option obligation 7 7
Purchase of shares (6.0) (3) (112) (302) (1) (418)
Initial public offering and
spin-off of subsidiary 272 (416) (144)
Other-net 1 (1) 0
---- --- ------ ------ ----- ---- ------
Balance at December 31, 2000 68.3 34 1,266 1,410 (267) (33) 2,410
Net income 169 169
Other comprehensive income (loss) (32) (32)
------
Total comprehensive income 137
Cash dividends paid (120) (120)
Issuance of shares under
employee benefit plans,
including tax benefit 1.1 1 64 (2) (1) 62
Issuance of shares to trust .3 22 (22) 0
Purchase of shares (.2) (4) (8) (12)
Other-net (2) (2)
---- --- ------ ----- ----- ---- ------
Balance at December 31, 2001 69.5 35 1,348 1,447 (299) (56) 2,475
Net income 281 281
Other comprehensive income (loss) (400) (400)
------
Total comprehensive loss (119)
Cash dividends paid (123) (123)
Issuance of shares under
employee benefit plans,
including tax benefit 1.0 (a) 61 (2) 8 67
Issuance of shares to trust .1 5 (5) 0
Other-net (1) 3 2
---- --- ------ ------ ----- ---- ------
Balance at December 31, 2002 70.6 $35 $1,413 $1,603 $(699) $(50) $2,302
==== === ====== ====== ===== ==== ======
</TABLE>
(a) Balance less than $1.
The notes on pages F-6 to F-32 are an integral part of the consolidated
financial statements.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Dollars and shares in millions, except per share data (per share data assume
dilution)
ACCOUNTING POLICIES
- -------------------
Consolidation and Basis of Presentation
- ---------------------------------------
The consolidated financial statements include accounts of Eaton and all
subsidiaries and other controlled entities. The equity method of accounting is
used for investments in associate companies where the Company has a 20% to 50%
ownership interest. These associate companies are not material either
individually, or in the aggregate, to Eaton's financial position, net income or
cash flows.
The Company does not have off-balance sheet arrangements, financings or
other relationships with unconsolidated entities or other persons known as
"special purpose entities" (SPEs). In the ordinary course of business, Eaton
leases certain real properties, primarily sales and office facilities, and
equipment, as described in "Lease Commitments" below. Transactions with related
parties are in the ordinary course of business, are conducted on an arm's-length
basis, and are not material to the Company's financial position, net income or
cash flows.
Foreign Currency Translation
- ----------------------------
The functional currency for substantially all subsidiaries outside the
United States is the local currency. Financial statements for these subsidiaries
are translated into United States dollars at year-end exchange rates as to
assets and liabilities and weighted-average exchange rates as to revenues and
expenses. The resulting translation adjustments are recorded in Accumulated
Other Comprehensive Income (Loss) in Shareholders' Equity.
Inventories
- -----------
Inventories are carried at lower of cost or market. Inventories in the
United States are generally accounted for using the last-in, first-out (LIFO)
method. Remaining United States and all other inventories are accounted for
using the first-in, first-out (FIFO) method.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization are computed by the straight-line method for
financial statement purposes. Cost of buildings is depreciated over 40 years and
machinery and equipment over principally three to 10 years. Intangible assets
subject to amortization, primarily consisting of patents, tradenames and
distribution networks are amortized over a range of five to 30 years. Software
is amortized over a range of three to five years.
F-6
<PAGE>
Effective January 1, 2002, Eaton adopted Statement of Financial Accounting
Standard (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". The Statement addresses the conditions under which an
impairment charge should be recorded related to long-lived assets to be held and
used, except goodwill, and those to be disposed of by sale or otherwise.
Long-lived assets, except goodwill, are reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount may not be recoverable.
Events or circumstances that would result in an impairment review primarily
include operations reporting losses, a significant change in the use of an
asset, or the planned disposal or sale of the asset. The asset would be
considered impaired when the future net undiscounted cash flows generated by the
asset are less than its carrying value. An impairment loss would be recognized
based on the amount by which the carrying value of the asset exceeds its fair
value. The adoption of this Statement did not have an impact on the Company's
financial position, net income or cash flows.
Goodwill and Indefinite Life Intangible Assets
- ----------------------------------------------
Effective January 1, 2002, Eaton adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", as further
described below. Upon adoption, the Company ceased the amortization of goodwill
and indefinite life intangible assets recorded in connection with current and
previous business acquisitions. SFAS No. 142 changes the accounting for goodwill
and indefinite life intangible assets from an amortization approach to a
non-amortization approach requiring periodic testing for impairment of the
asset. During 2002, Eaton completed the initial impairment test for goodwill and
indefinite life intangible assets as of January 1, 2002 and the required annual
impairment test. These tests confirmed that the fair value of Eaton's reporting
units exceeds their respective carrying values, and that no impairment loss
needed to be recognized upon adoption of SFAS No. 142 or for the year ended
December 31, 2002.
Financial Instruments
- ---------------------
In the normal course of business, Eaton is exposed to fluctuations in
foreign currencies, interest rates, and commodity prices. The Company uses
various financial instruments, primarily foreign currency forward exchange
contracts, interest rate swaps and commodity futures contracts to manage
exposure to price fluctuations. Financial instruments used by Eaton are
straightforward, non-leveraged, instruments for which quoted market prices are
readily available from a number of independent services. Financial instruments
generally are not bought and sold solely for trading purposes, except for
nominal amounts authorized under limited, controlled circumstances (resulted in
immaterial net gains in 2002 and 2001). Credit loss is deemed to be remote
because the counterparties to the instruments are major international financial
institutions with strong credit ratings and because of the Company's control
over the limit of positions entered into with any one counterparty.
F-7
<PAGE>
All derivative financial instruments are recognized as either assets or
liabilities on the balance sheet and are measured at fair value. Accounting for
the gain or loss resulting from the change in the financial instrument's fair
value depends on whether it has been designated, and effective, as a hedge and,
if so, on the nature of the hedging activity. Financial instruments can be
designated 1) as hedges of changes in the fair value of a recognized fixed-rate
asset or liability, or the firm commitment to acquire an asset or liability, 2)
as hedges of variable cash flows of a recognized variable-rate asset or
liability, or the forecasted acquisition of an asset or liability, or 3) as
hedges of foreign currency exposure from a net investment in one of the
Company's foreign operations. Gains and losses related to a hedge are either 1)
recognized in income immediately to offset the gain or loss on the hedged item
or 2) deferred and reported as a component of Other Comprehensive Income (Loss)
in Shareholders' Equity and subsequently recognized in net income when the
hedged item affects net income. The ineffective portion of the change in fair
value of a financial instrument is recognized in income immediately.
The gain or loss related to financial instruments that are not designated
as hedges, are recognized immediately in net income.
Warranty Expenses
- -----------------
Estimated product warranty expenses are accrued in costs of sales at the
time the related sale is recognized. Estimates of warranty expenses are based
primarily on historical warranty claim experience and specific customer
contracts. Warranty expenses include accruals for basic warranties for products
sold, as well as accruals for product recalls and other related items when they
are known and estimable.
Stock Options Granted to Employees & Directors
- ----------------------------------------------
Stock options granted to employees and directors to purchase Common Shares
are accounted for using the intrinsic value based method. Under this method, no
compensation expense is recognized on the grant date, since on that date the
option price equals the market price of the underlying shares.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition when a company voluntarily changes to the fair value based method of
recognizing expense in the income statement for stock-based employee
compensation, including stock options granted to employees and directors. As
allowed by SFAS No. 123, Eaton has adopted the Statement's disclosure-only
provisions and does not recognize expense for stock options granted to
employees. If Eaton accounted for stock options under the fair value based
method of expense recognition in SFAS No. 123, net income per Common Share would
have been reduced by $.19 in 2002, $.22 in 2001 and $.25 in 2000, as described
further in "Shareholders' Equity" below.
Revenue Recognition
- -------------------
Substantially all revenues are recognized when products are shipped to
unaffiliated customers and title has transferred. Shipping and handling costs
billed to customers are included in net sales and the related costs in cost of
products sold.
F-8
<PAGE>
Estimates
- ---------
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and notes. Actual results
could differ from these estimates.
Financial Presentation Changes
- ------------------------------
Certain amounts for prior years have been reclassified to conform to the
current year presentation.
SUBSEQUENT EVENT (Unaudited)
- ---------------------------
On January 31, 2003, Eaton acquired the electrical business of Delta plc
for approximately $215. This business had 2001 sales of approximately $379 (at
the foreign exchange rate on the date the transaction was completed). The Delta
business has 3,400 employees and is headquartered in the United Kingdom. The
business' major electrical brands include MEM(R), Holec(TM), Bill(TM), Home
Automation(TM), Elek(TM) and Tabula(TM). The Delta business will be integrated
into Eaton's Industrial & Commercial Controls segment.
ACQUISITIONS OF BUSINESSES
- --------------------------
Eaton acquired businesses for a combined net cash purchase price of $153 in
2002, $35 in 2001 and $115 in 2000. All acquisitions were accounted for by the
purchase method of accounting and, accordingly, the Statements of Consolidated
Income include the results of the acquired businesses from the effective dates
of acquisition.
In November 2002, the Boston Weatherhead business of Dana Corporation was
purchased for $130. This business, which had 2001 sales of $207, manufactures
hose, tubing, and fluid connectors for fluid power systems primarily for
industrial distribution, mobile off-highway and heavy-duty truck markets. The
allocation of the purchase price for this acquisition is preliminary and will be
finalized in 2003. In June 2002, the remaining 40% interest in Jining Eaton
Hydraulics Company, Ltd. (JEHYCO), a hydraulics systems manufacturer located in
Jining, China, was acquired. This business manufactures hydraulic pumps and
motors for mobile and industrial markets. The operating results of these
businesses are reported in Business Segment Information in Fluid Power.
In March 2001, the remaining 50% interest of Sumitomo Eaton Hydraulics
Company (now named Eaton Fluid Power Ltd.), the former joint venture with
Sumitomo Heavy Industries Ltd., was acquired. This business manufactures a
complete line of hydraulic motors under the Orbit(TM) and Orbitol(TM) brand
names, primarily for the Japanese mobile equipment market. The operating results
of this business are reported in Business Segment Information in Fluid Power.
During July 2001, the commercial clutch manufacturing assets of Transmisiones
TSP, S.A. de C.V. in Mexico were acquired. In October 2001, the European portion
of the vehicle mirror actuator business of Donnelley Corporation, located in
Manorhamilton, Ireland was acquired.
F-9
<PAGE>
In September 2000, the industrial cylinder business of International Motion
Control Incorporated was acquired. This business manufactures industrial
cylinders which are primarily used by machine and equipment builders to transfer
and apply fluid power. The operating results of this business are reported in
Business Segment Information in Fluid Power.
SALES OF BUSINESSES AND CORPORATE ASSETS
- ----------------------------------------
Eaton sold businesses, product lines and certain corporate assets for
aggregate cash proceeds of $96 in 2002, $403 in 2001 and $122 in 2000.
In July 2002, the Navy Controls business was sold resulting in a pretax
gain of $18 ($13 after-tax, or $.18 per Common Share).
Sales of businesses in 2001 included the Vehicle Switch/Electronics
Division (VS/ED), the Air Conditioning and Refrigeration business, and certain
assets of the Automotive and Truck segments. The sales of these businesses
resulted in a net pretax gain of $61 ($22 after-tax, or $.30 per share).
Sales of certain corporate assets and product lines in 2000 resulted in a
net pretax gain of $22 ($14 after-tax or $.19 per share).
The net gains on the sales of businesses in 2002 and 2001 were reported as
a separate line item in the Statements of Consolidated Income and Business
Segment Information. The net gain on the sales of corporate assets and product
lines in 2000 was included in the Statements of Consolidated Income in Other
Income-Net and in Business Segment Information in Corporate & Other-Net. The
operating results of VS/ED are reported in Business Segment Information as
Divested Operations.
UNUSUAL CHARGES
- ---------------
2002 Charges
- ------------
Eaton undertook restructuring actions in 2002 to further reduce operating
costs across its business segments and certain corporate functions. These
actions, and their related charges, were a continuation of restructuring
programs initiated in 2001.
Additional restructuring charges related to past acquisitions were incurred
in Fluid Power. In accordance with generally accepted accounting principles,
these charges were recorded as restructuring expense as incurred. The additional
acquisition-related charges consisted of $22 of workforce reductions for 841
employees and $4 of asset write-downs and plant consolidation and other
expenses. The charges recorded primarily related to the closure of facilities in
Glenrothes, Scotland and Livorno, Italy, and for the closure of the Mooresville,
North Carolina facility, which was announced in the third quarter of 2002 and is
expected to be completed in the first quarter of 2003.
Restructuring charges of $13 in the Industrial & Commercial Controls
business consisted primarily of workforce reductions of 449 employees. The
workforce reductions, primarily in the sales force, resulted in severance and
other employee benefits being paid. Asset write-downs and plant consolidation
and other expenses of $3 were also recorded as a result of restructuring
actions.
F-10
<PAGE>
Restructuring charges in the Truck business consisted of $6 for workforce
reductions of 251 employees and $10 for asset write-downs and plant
consolidation and other expenses. The charges primarily relate to the closure of
the heavy-duty transmission plant in Shelbyville, Tennessee due to depressed
conditions in the truck industry over the past two years and Eaton's efforts to
rationalize manufacturing capacity to better manage the cyclical nature of the
truck industry.
Restructuring charges related to corporate staff consisted of $3 of
workforce reductions for 133 employees. The Company also recorded a charge of
$10 representing a contribution to the Eaton Charitable Fund.
2001 Charges
- ------------
In connection with the acquisitions of businesses in the Fluid Power
segment, Eaton incurred acquisition integration costs. Integration charges
included $15 for plant consolidation and other expenses and $7 for workforce
reductions. Workforce reductions include severance and other related employee
benefits for the termination of 239 personnel.
Restructuring charges in the Industrial & Commercial Controls business
consisted of $21 for workforce separation costs for the termination of 887
personnel, primarily manufacturing, and $9 for plant consolidation and other
expenses.
Restructuring charges in the Truck business consisted of $35 of workforce
reductions for 1,038 employees and $20 of asset write-downs and plant
consolidation and other expenses. The workforce reductions consisted of
severance and other employee benefits for the elimination of salary positions
within the organization and manufacturing personnel at the closed facilities.
The Company completed the closure of manufacturing facilities in Hillsville,
Virginia, and in Tipton, Gloucester and Aycliffe, United Kingdom, consolidating
production to a facility in Gdansk, Poland, as well as completing the closure of
the heavy-duty transmission plant in St. Nazaire, France.
Restructuring charges related to corporate staff consisted of $8 for
workforce reductions, representing 10% of the corporate staff, as well as $4 for
asset writedowns and other expenses. A corporate charge of $10 related to an
arbitration was recorded in the second quarter of 2001. The arbitration award
related to a contractual dispute over supply arrangements initiated in February
1999 against Vickers, Incorporated (now named Eaton Hydraulics Inc.), a
subsidiary of Aeroquip-Vickers, Inc., which was acquired by Eaton in April 1999.
2000 Charges
- ------------
Integration charges related to the acquisition of Aeroquip-Vickers
consisted of $46 of plant consolidation and other expenses and $1 for workforce
reductions. The workforce reduction charges consist of severance and other
related employee benefits for the termination of approximately 110 employees,
primarily manufacturing personnel. The Company also incurred $5 of corporate
charges related to the restructuring of certain functions.
F-11
<PAGE>
Summary of Unusual Charges
- --------------------------
Unusual charges recorded in each year follows:
2002 2001 2000
---- ---- ----
Operational restructuring charges
Fluid Power $ 26 $ 22 $ 47
Industrial & Commercial Controls 16 30
Automotive 1
Truck 16 55
Corporate restructuring charges 3 12 5
----- ----- -----
62 119 52
Other corporate charges 10 10
----- ----- -----
Pretax $ 72 $ 129 $ 52
===== ===== =====
After-tax $ 47 $ 86 $ 34
Per Common Share .66 1.21 .47
The operational restructuring charges are included in the Statements of
Consolidated Income in Income from Operations and reduced operating profit of
the related business segment. The corporate restructuring charges are included
in the Statements of Consolidated Income in Income from Operations and the other
corporate charges are included in Other Expense-Net. All of the corporate
restructuring and other corporate charges are included in Business Segment
Information in Corporate & Other-Net.
Restructuring Liabilities
- -------------------------
Restructuring liabilities of $8 remaining at December 31, 2000 were fully
utilized in 2001. Movement of the various components of restructuring
liabilities for 2002 and 2001 follows:
Plant
Workforce reductions Inventory & consoli-
-------------------- other asset dation
Employees Dollars write-downs & other Total
--------- ------- ----------- ------- -----
2001 charges 2,310 $ 71 $ 20 $ 28 $119
Utilized in 2001 (1,966) (50) (20) (26) (96)
----- ---- ---- --- ----
Liabilities remaining
at December 31, 2001 344 21 0 2 23
2002 charges 1,994 45 8 9 62
Utilized in 2002 (1,844) (55) (8) (6) (69)
----- ---- ---- --- ---
Liabilities remaining
at December 31, 2002 494 $ 11 $ 0 $ 5 $16
===== ==== ==== === ===
F-12
<PAGE>
In 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 addresses the reporting of
expenses related to exit and disposal activities, including business
restructurings, and is effective for actions initiated after 2002. This
Statement does not alter the accounting for exit or disposal activities
associated with acquired businesses. The Statement will require an evaluation of
the facts and circumstances in determining the proper accounting recognition of
expenses related to each exit or disposal activity. It is expected the Statement
will spread out the recognition of these expenses, but not alter the related
cash flows.
GOODWILL AND OTHER INTANGIBLE ASSETS
- ------------------------------------
As discussed in "Accounting Policies" above, effective January 1, 2002,
Eaton adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets". Upon adoption, the Company ceased the
amortization of goodwill and indefinite life intangible assets recorded in
connection with previous business acquisitions. A reconciliation of income from
continuing operations and income from continuing operations per Common Share for
2001 and 2000, as if SFAS No. 142 had been adopted as of the beginning of each
year, follows:
2002 2001 2000
---- ---- ----
Reported income from continuing operations $ 281 $ 169 $ 363
Add back amortization of goodwill &
indefinite life intangible assets,
net of income taxes 63 64
----- ----- -----
Adjusted income from continuing operations $ 281 $ 232 $ 427
===== ===== =====
Reported income from continuing operations
per Common Share assuming dilution $3.92 $2.39 $5.00
Add back amortization of goodwill &
indefinite life intangible assets,
net of income taxes .88 .89
----- ----- -----
Adjusted income from continuing operations
per Common Share $3.92 $3.27 $5.89
===== ===== =====
F-13
<PAGE>
A summary of goodwill and other intangible assets follows:
2002 2001
------------------------- -------------------------
Historical Accumulated Historical Accumulated
cost amortization cost amortization
---------- ------------ ---------- ------------
Goodwill $2,232 $322 $2,218 $316
====== ==== ====== ====
Intangible assets not
subject to amortization
(primarily trademarks) $ 333 $ 24 $ 330 $ 24
====== ==== ====== ====
Intangible assets subject
to amortization
Patents $ 192 $ 78 $ 190 $ 63
Other 153 66 176 76
------ ---- ------ ----
$ 345 $144 $ 366 $139
====== ==== ====== ====
Expense related to intangible assets subject to amortization for 2002 was
$23. Estimated annual pretax expense for intangible assets subject to
amortization recorded at December 31, 2002 for each of the next five years
follows: 2003, $22; 2004, $18; 2005, $17; 2006, $16; and 2007, $15.
DISCONTINUED OPERATIONS
- -----------------------
On June 30, 2000, the Company's semiconductor equipment operations were
reorganized into a wholly-owned subsidiary, Axcelis Technologies, Inc.
(Axcelis). In July 2000, Axcelis completed an initial public offering (IPO) for
the sale of 17.6% of its common stock. The net proceeds from the IPO were $349.
On December 29, 2000 Eaton distributed its remaining interest in Axcelis to
Eaton shareholders as a dividend (spin-off). The gain on the IPO of $272 was
recorded as a direct increase to Shareholders' Equity. The spin-off was recorded
as a direct reduction of Shareholders' Equity of $416.
The consolidated financial statements present the semiconductor equipment
operations as a discontinued operation for 2000. Operating results of
discontinued operations in 2000 were net sales of $679, pretax income of $132
and net income of $90.
DEBT AND OTHER FINANCIAL INSTRUMENTS
- ------------------------------------
Short-term debt of $47 at December 31, 2002 related to lines of credit of
subsidiaries outside the United States. These subsidiaries have available
short-term lines of credit aggregating $97 from various banks worldwide.
F-14
<PAGE>
Long-term debt, including the current portion, follows:
2002 2001
---- ----
7.05% debentures due 2002 $ 100
Variable rate notes due 2003 $ 150 150
6.95% notes due 2004
(converted to floating rate by
interest rate swap) 250 250
1.62% Yen notes due 2006 42 38
8% debentures due 2006 86 86
8.9% debentures due 2006
(converted to floating rate by
interest rate swap) 100 100
6% Euro 200 million notes due 2007
(converted to floating rate by
interest rate swap) 209 177
5.75% notes due 2012
($175 converted to floating rate by
interest rate swap) 300
8.1% debentures due 2022 100 100
7-5/8% debentures due 2024 66 66
6-1/2% debentures due 2025
(due 2005 at option of debenture holders) 145 145
7.875% debentures due 2026 82 82
7.65% debentures due 2029 200 200
6.4% to 7.6% medium-term notes due at
various dates through 2018 131 157
Commercial paper 30 630
Other 150 101
------ ------
2,041 2,382
Less current portion of long-term debt (154) (130)
------ ------
$1,887 $2,252
====== ======
Eaton has credit facilities of $900, of which $500 expire in May 2003 and
$400 expire in April 2005.
The Company has entered into interest rate swaps to manage interest rate
risk. A summary of these instruments outstanding at December 31, 2002, excluding
certain immaterial instruments, follows (currency in millions):
Interest rates(b)
Interest rate Hedge Notional ---------------- Floating interest
rate swaps (a) type amount Receive Pay rate basis
- ----------------- ---------- ------ ------- --- --------------------
Fixed to floating Fair value $250 6.95% 5.1% 6 month LIBOR+3.7%
Fixed to floating Fair value $100 8.9% 5.6% 6 month LIBOR+3.9%
Fixed Euro to
floating Euro Fair value 200 6.0% 3.8% 6 month EURIBOR+.54%
Euro
Fixed to floating Fair value $175 5.75% 2.5% 6 month LIBOR+0.58%
a The maturity of the swaps correspond with the maturity of the hedged item
as noted in the long-term debt table.
b Interest rates are as of year-end 2002.
F-15
<PAGE>
The weighted-average interest rate on short-term borrowings, including
commercial paper classified as long-term debt, was 3.9% at December 31, 2002 and
3.3% at December 31, 2001.
Aggregate mandatory annual maturities of long-term debt for each of the
next five years are as follows: 2003, $154; 2004, $255; 2005, $47; 2006, $231;
and 2007, $261.
Interest paid was $116 in 2002, $175 in 2001, and $205 in 2000.
The carrying values of cash, short-term investments and short-term debt in
the balance sheet approximate their estimated fair values. The estimated fair
values of other financial instruments outstanding are as follows:
2002 2001
--------------------------- ---------------------------
Notional Carrying Fair Notional Carrying Fair
amount value value amount value value
------ ----- ----- ------ ----- -----
Long-term debt,
current portion
of long-term debt
& foreign currency
principal swaps $(2,041) $(2,202) $(2,382) $(2,514)
Commodity contracts $ 10 (a) (a) $ 14 (a) (a)
Foreign currency
forward exchange
contracts 275 (7) (6) 122 (5) (11)
Interest rate swaps
Fixed to floating 811 59 59 509 10 10
Floating to floating 92 (a) (a)
Floating to fixed 13 (3) (3) 113 (3) (3)
(a) Balance less than $1.
The estimated fair values of financial instruments are principally based on
quoted market prices. The fair value of foreign currency forward exchange
contracts, which primarily relate to the Euro, British Pound and Japanese Yen
and which mature in 2003, and foreign currency principal and interest rate swaps
were estimated based on quoted market prices of comparable contracts, adjusted
through interpolation where necessary for maturity differences.
F-16
<PAGE>
RETIREMENT BENEFIT PLANS
- ------------------------
The Company has defined benefit pension plans and other postretirement
benefit plans, primarily health care and life insurance. Components of plan
obligations and assets and the net amounts recognized in the balance sheets are
as follows:
Other
postretirement
Pension benefits benefits
----------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Projected benefit obligation
at beginning of year $(1,856) $(1,762) $(894) $(827)
Service cost (76) (61) (15) (14)
Interest cost (126) (124) (60) (62)
Actuarial loss (118) (128) (3) (72)
Benefits paid 205 213 91 79
Effect of translation (43) 14
Other 18 (8) 3 2
------- ------- ----- -----
Projected benefit obligation
at end of year (1,996) (1,856) (878) (894)
------- ------- ----- -----
Fair value of plan assets at
beginning of year 1,836 2,209
Actual return on plan assets (196) (183)
Employer contributions 30 37 92 80
Benefits paid (205) (213) (91) (79)
Effect of translation 25 (11)
Other (10) (3) (1) (1)
------- ------- ----- -----
Fair value of plan assets at
end of year 1,480 1,836 0 0
------- ------- ----- -----
Benefit obligations with
no plan assets (91) (82) (878) (894)
Benefit obligations
(in excess of)less than
plan assets (425) 62
Not recognized through net income
Net loss 846 333 186 190
Prior service cost 12 33 3 (2)
Other 2 1 9 7
------- ------- ----- -----
Net amount recognized $ 344 $ 347 $(680) $(699)
======= ======= ===== =====
Amounts recognized in the balance
sheet consist of:
Accrued asset $ 23 $ 430
Accrued liability (310) (121) $(680) $(699)
Intangible asset 14 7
Accumulated other comprehensive
income 617 31
------- ------- ----- -----
Net amount recognized $ 344 $ 347 $(680) $(699)
======= ======= ===== =====
F-17
<PAGE>
Statement of Financial Accounting Standards No. 87 requires recognition of
a minimum liability for those pension plans with accumulated benefit obligations
in excess of the fair values of plan assets at the end of the year. Accordingly,
in the fourth quarter of 2002, Eaton recorded a non-cash charge of $586 ($386
after-tax) related to the additional minimum liability for certain underfunded
pension plans which reduced Accumulated Other Comprehensive Income in
Shareholders' Equity. Pension funding requirements are not currently affected by
the recording of this charge. Further, the charge did not impact net income, and
will be reversible should the fair value of the pension plans' assets again
exceed the accumulated benefit obligations at the end of 2003.
The components of pension benefit income (cost) for continuing operations are
as follows:
2002 2001 2000
---- ---- ----
Service cost $ (76) $ (61) $ (63)
Interest cost (126) (124) (119)
Expected return on plan assets 213 213 200
Other (8) 6 6
----- ----- -----
3 34 24
Curtailment loss (4) (3) (2)
Settlement (loss) gain (21) 21 18
----- ----- -----
$ (22) $ 52 $ 40
===== ===== =====
Actuarial assumptions used in the calculation of amounts recognized for
pensions are as follows:
United States &
non-United States
United States plans plans weighted-average
------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Return on pension plan assets 10.00% 10.00% 9.85% 9.85%
Rate of compensation increase 3.75% 4.00% 3.73% 3.74%
Discount rate 6.75% 7.25% 6.53% 6.56%
United States pension plans represent 76% of the total projected benefit
obligation. For non-United States plans, assumptions reflect economic conditions
applicable to the respective country.
The return on pension plan assets of 10.00% for United States plans and the
weighted-average rate of 9.85% for United States and non-United States plans for
2002 and 2001 were utilized in the calculation of benefit cost for the
respective year. The return on pension plan assets for 2003 will be lowered to
8.75% for United States plans and a weighted-average rate of 8.71% for United
States and non-United States plans.
F-18
<PAGE>
The discount rates of 6.75% and 7.25% for United States plans and the
weighted-average rates of 6.53% and 6.56% for United States and non-United
States plans for 2002 and 2001, respectively, were utilized in the calculation
of the amounts recognized in the balance sheet at year-end. The discount rates
also affect the benefit cost expensed in the prospective year.
The Company also has various defined-contribution benefit plans, primarily
consisting of the Eaton Savings Plan (ESP). Total contributions related to these
plans charged to expense were $34 in 2002, $43 in 2001, and $75 in 2000.
The components of other postretirement benefit cost of continuing
operations are as follows:
2002 2001 2000
---- ---- ----
Service cost $ (15) $ (14) $ (16)
Interest cost (60) (62) (60)
Net amortization (4) 3
----- ----- -----
(79) (73) (76)
Curtailment gain 1
Settlement loss (2)
----- ----- -----
$ (81) $ (73) $ (75)
===== ===== =====
Actuarial assumptions used in the calculation of amounts recognized for
other postretirement benefits are as follows:
2002 2001
---- ----
Discount rate 6.75% 7.25%
Projected health care cost trend rate 10.00% 8.00%
Ultimate health care cost trend rate 5.00% 5.00%
Year ultimate health care cost trend
rate is achieved 2007 2007
The discount rates of 6.75% and 7.25% for 2002 and 2001, respectively, were
utilized in the calculation of the amounts recognized in the balance sheet at
year-end. The discount rates also affect the benefit cost expensed in the
prospective year.
Assumed health care cost trend rates have a significant effect on the
amounts reported for other postretirement benefits. A one-percentage point
change in the assumed health care cost trend rates would have the following
effects:
1% Increase 1% Decrease
----------- -----------
2002 benefit cost $ 2 $ (2)
Recorded liability
at December 31, 2002 28 (25)
F-19
<PAGE>
PROTECTION OF THE ENVIRONMENT
- -----------------------------
The Company has established policies to ensure that its operations are
conducted in keeping with good corporate citizenship and with a positive
commitment to the protection of the natural and workplace environments. For
example, each manufacturing facility has a person responsible for environmental,
health and safety (EHS) matters. All of Eaton's manufacturing facilities are
becoming certified under ISO 14001, an international standard for environmental
management systems. The Company routinely reviews EHS performance at each of its
facilities and continuously strives to improve pollution prevention at its
facilities.
As a result of past operations, Eaton is involved in remedial response and
voluntary environmental remediation at a number of sites, including certain of
its currently-owned or formerly-owned plants. The Company has also been named a
potentially responsible party (PRP) under the Federal Superfund law at a number
of waste disposal sites.
A number of factors affect the cost of environmental remediation, including
the number of parties involved at a particular site, the determination of the
extent of contamination, the length of time the remediation may require, the
complexity of environmental regulations, and the continuing advancement of
remediation technology. Taking these factors into account, Eaton has estimated
(without discounting) the costs of remediation, which will be incurred over a
period of several years. The Company accrues an amount consistent with the
estimates of these costs when it is probable that a liability has been incurred.
At December 31, 2002 and 2001, the balance sheet included a liability for these
costs of $64 and $62, respectively. With regard to some of the matters included
in the liability, Eaton has rights of recovery from non-affiliated parties for a
portion of these estimated costs.
Based upon the Company's analysis and subject to the difficulty in
estimating these future costs, Eaton expects that any sum it may be required to
pay in connection with environmental matters is not reasonably likely to exceed
the liability by an amount that would have a material adverse effect on its
financial position, net income or cash flows. All of these estimates are
forward-looking statements and, given the inherent uncertainties in evaluating
environmental exposures, actual results can differ from these estimates.
CONTINGENCIES
- -------------
The Company is subject to various investigations, claims, legal and
administrative proceedings, covering a wide range of matters that arise in the
ordinary course of business activities. Any liability that may result from these
proceedings is not expected to have a material adverse effect on Eaton's
financial position, net income or cash flows.
SHAREHOLDERS' EQUITY
- --------------------
There are 300 million Common Shares authorized ($.50 par value per share),
70.6 million of which are issued and outstanding at year-end 2002. At December
31, 2002, there were 10,611 holders of record of Common Shares. Additionally,
approximately 27,000 current and former employees were shareholders through
participation in the Eaton Savings Plan (ESP) and Eaton Personal Investment Plan
(EPIP).
F-20
<PAGE>
The Company has plans which permit certain employees and directors to defer
a portion of their compensation. Eaton has deposited $45 of Common Shares and
marketable securities into a trust to fund a portion of these liabilities. The
marketable securities are included in Other Assets and the Common Shares are
included in Shareholders' Equity.
Stock Options
- -------------
Stock options have been granted to certain employees and directors, under
various plans, to purchase Common Shares at prices equal to fair market value as
of the date of grant. Historically, the majority of these options vest ratably
during the three-year period following the date of grant and expire 10 years
from the date of grant.
During 1997 and 1998, the Company granted special performance-vested stock
options with a 10-year vesting term in lieu of more standard employee stock
options. These options have a provision for accelerated vesting if and when
Eaton achieves certain net income and Common Share price targets. If the targets
are not achieved, these options become exercisable 10 days before the expiration
of their 10-year term. As of December 31, 2002, 2.2 special performance-vested
stock options were outstanding of which .9 were exercisable.
A summary of stock option activity follows:
2002 2001 2000
--------------- ---------------- ---------------
Average Average Average
price price price
per per per
option Options option Options option Options
------ ------- ------ ------- ------ -------
Outstanding January 1 $59.97 9.9 $57.30 10.2 $65.89 8.7
Granted 80.85 1.1 72.67 1.1 71.90 1.5
Exercised 46.67 (1.0) 42.00 (.9) 33.76 (.3)
Canceled 70.55 (.4) 67.04 (.5) 83.05 (.6)
---- ---- ----
Options outstanding before
spin-off of Axcelis 66.89 9.3
Cancellation of options
of Axcelis employees 72.39 (.5)
Adjustment for spin-off
of Axcelis 1.4
---- ---- ----
Outstanding December 31 $63.40 9.6 $59.97 9.9 $57.30 10.2
==== ==== ====
Exercisable December 31 $58.87 6.3 $55.94 6.1 $51.51 5.8
Reserved for future
grants December 31 3.1 1.4 2.0
F-21
<PAGE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2002:
Weighted- Weighted-
Weighted- average average
average exercise exercise
Options remaining price per Options price per
Range of exercise out- contractual outstanding exerci- exercisable
prices per option standing life (years) option sable option
- ----------------- -------- ----------- ----------- ----- -----------
$33.86 - $39.99 .1 .1 $33.91 .1 $33.91
$40.00 - $49.99 1.7 2.2 45.50 1.7 45.50
$50.00 - $59.99 .1 6.8 57.76 .1 57.47
$60.00 - $69.99 4.6 5.5 61.79 3.5 61.78
$70.00 - $79.99 1.9 6.8 74.27 .8 74.38
$80.00 - $88.41 1.2 8.8 82.00 .1 87.67
--- ---
9.6 6.3
=== ===
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation". If Eaton accounted for its stock options under the fair value
method of SFAS No. 123, net income and net income per Common Share would have
been as indicated below:
2002 2001 2000
---- ---- ----
Net income
As reported $ 281 $ 169 $ 453
Assuming fair value method 267 153 435
Net income per Common Share assuming
dilution
As reported $3.92 $2.39 $6.24
Assuming fair value method 3.73 2.17 5.99
Net income per Common Share basic
As reported $3.98 $2.43 $6.31
Assuming fair value method 3.79 2.21 6.06
The fair value of each option grant was estimated using the Black-Scholes
option pricing model with the following assumptions:
2002 2001 2000
---- ---- ----
Dividend yield 2.5% 2.5% 3%
Expected volatility 29% 26% 23%
Risk-free interest rate 2.6% to 4.3% 3.7% to 5% 6% to 6.8%
Expected option life in years 4 4 4 or 5
Weighted-average per
share fair value of
options granted
during the year $18.34 $15.71 $15.47
F-22
<PAGE>
Preferred Share Purchase Rights
- -------------------------------
In 1995, the Company declared a dividend of one Preferred Share Purchase
Right for each outstanding Common Share. The Rights become exercisable only if a
person or group acquires, or offers to acquire, 20% or more of Eaton's Common
Shares. The Company is authorized to reduce that threshold for triggering the
Rights to not less than 10%. The Rights expire on July 12, 2005, unless redeemed
earlier at one cent per Right.
When the Rights become exercisable, the holder of each Right, other than
the acquiring person, is entitled 1) to purchase for $250, one one-hundredth of
a Series C Preferred Share, 2) to purchase for $250, that number of Eaton's
Common Shares or common stock of the acquiring person having a market value of
twice that price, or 3) at the option of the Company, to exchange each Right for
one Common Share or one one-hundredth of a Preferred Share.
Comprehensive Income (Loss)
- ---------------------------
The components of Accumulated Other Comprehensive Income (Loss) as reported
in the Statement of Consolidated Shareholders' Equity are as follows:
Unrealized Deferred Minimum
Foreign gain (loss) gain pension
currency on available (loss)on liability
translation for sale cash flow adjust-
adjustments investments hedges ment Total
----------- ----------- --------- --------- -----
Balance at
January 1, 2000 $(220) $ 0 $ 0 $ 0 $(220)
2000 adjustment,
net of income taxes (47) (4) (51)
Adjustment for
spin-off of Axcelis 4 4
----- --- --- ----- -----
Balance at
December 31, 2000 (263) (4) 0 0 (267)
2001 adjustment,
net of income taxes (20) 5 (5) (21) (41)
Recognition in income
of adjustment related
to divested businesses 9 9
----- --- --- ----- -----
Balance at
December 31, 2001 (274) 1 (5) (21) (299)
2002 adjustment,
net of income taxes (15) 1 (386) (400)
----- --- --- ----- -----
Balance at
December 31, 2002 $(289) $ 1 $(4) $(407) $(699)
===== === === ===== =====
A discussion of the minimum pension liability adjustment recorded in 2002
is included in "Retirement Benefit Plans" above.
F-23
<PAGE>
INCOME TAXES
- ------------
For financial statement reporting purposes, income from continuing
operations before income taxes, based on the geographic location of the
operation to which such earnings are attributable, is summarized below. Certain
foreign operations are branches of Eaton and are, therefore, subject to United
States as well as foreign income tax regulations. As a result, pretax income by
location and the components of income tax expense by taxing jurisdiction are not
directly related. For purposes of this note to the consolidated financial
statements, non-United States operations include Puerto Rico.
Income from continuing
operations before income taxes
------------------------------
2002 2001 2000
---- ---- ----
United States $ 56 $ 60 $264
Non-United States 343 227 288
Write-off of foreign currency translation
adjustments related to divested businesses (9)
---- ---- ----
$399 $278 $552
==== ==== ====
Income tax expense of continuing operations follows:
2002 2001 2000
---- ---- ----
Current
United States
Federal $123 $ (8) $ 89
State & local 6 (5) 10
Non-United States 42 65 56
---- ---- ----
171 52 155
Deferred
United States Federal (71) 64 27
Non-United States 18 (7) 7
---- ---- ----
(53) 57 34
---- ---- ----
$118 $109 $189
==== ==== ====
F-24
<PAGE>
Reconciliations of income taxes of continuing operations at the United
States Federal statutory rate to the effective income tax rate follow:
2002 2001 2000
---- ---- ----
Income taxes at the United States
statutory rate 35.0% 35.0% 35.0%
United States state & local income taxes 1.4 (1.7) 1.8
Other United States-net 1.4 (9.3) 4.9
Non-United States operations (earnings
taxed at other than United States tax (8.3) 4.2 (10.1)
rate)
Amortization of goodwill 4.8 2.6
Sales of businesses 6.4
---- ---- ----
29.5% 39.4% 34.2%
==== ==== ====
Eaton has manufacturing operations in Puerto Rico which operate under
certain United States tax law incentives related to the repatriation of earnings
that, at this point, are not expected to be available after 2005. Management
believes that the loss of these incentives will not have a material adverse
impact on net income. Income tax credits claimed under these incentives were $33
in 2002, $41 in 2001 and $46 in 2000.
Significant components of current and long-term deferred income taxes follow:
2002 2001
-------------------- ---------------------
Current Long-term Current Long-term
assets assets assets liabilities
------- --------- ------- -----------
Accruals & other
adjustments
Employee benefits $ 53 $ 346 $ 56 $ 167
Depreciation &
amortization (405) (436)
Other 117 36 89 23
Other items 11 8 8 12
United States income
tax credit carryforwards 46 14
United States foreign tax
credit carryforwards 33 38
Tax loss carryforwards 54 61
Valuation allowance (78) (87)
---- ----- ---- -----
$181 $ 40 $153 $(208)
==== ===== ==== =====
At the end of 2002, United States income tax credit carryforwards of $46
are available to reduce future Federal income tax liabilities, including $26
which expire at the end of 20 years and $20 of which are not subject to
expiration. Foreign tax credit carryforwards of $33 are also available to reduce
United States Federal income tax liabilities during the next five years. A full
valuation allowance has been recorded for the foreign tax credit carryforwards.
F-25
<PAGE>
At December 31, 2002, certain non-United States subsidiaries had tax loss
carryforwards aggregating $161 that are available to offset future taxable
income. Carryforwards of $107 expire at various dates from 2003 through 2012 and
the balance have no expiration date. A valuation allowance of $45 has been
recorded for the tax effect of these tax loss carryforwards.
No provision has been made for income taxes on undistributed earnings of
consolidated non-United States subsidiaries of $873 at December 31, 2002, since
the earnings retained have been reinvested by the subsidiaries. It is not
practicable to estimate the additional income taxes and applicable foreign
withholding taxes that would be payable on the remittance of such undistributed
earnings.
Worldwide income tax cash flows were payments of $61 in 2002 and $210 in
2000, and a refund of $11 in 2001.
OTHER INFORMATION
- -----------------
Assets
- ------
Accounts receivable are net of an allowance for doubtful accounts of $26 at
the end of 2002 and $20 at the end of 2001.
The components of inventories follow:
2002 2001
---- ----
Raw materials $ 283 $ 260
Work in process 160 217
Finished goods 289 238
----- ----
Inventories at FIFO 732 715
Excess of FIFO over LIFO cost (34) (34)
----- -----
Net inventories $ 698 $ 681
===== =====
Gross inventories accounted for using the LIFO method were $478 at the end
of 2002 and $440 at the end of 2001.
Liabilities
- -----------
A summary of the current and long-term liabilities for warranties follows:
2002 2001
---- ----
Balance at the beginning of the year $ 128 $ 157
Current year accruals 129 92
Claims paid/satisfied (119) (108)
Other (11) (13)
----- -----
Balance at the end of the year $ 127 $ 128
===== =====
F-26
<PAGE>
Lease Commitments
- -----------------
The Company leases certain real properties, primarily sales and office
facilities, and equipment. Minimum rental commitments for 2003 under
noncancelable operating leases, which expire at various dates and in most cases
contain renewal options, are $83 and decline substantially thereafter.
Rental expense was $102 in 2002, $113 in 2001, and $118 in 2000.
Net Income per Common Share
- ---------------------------
The calculation of net income per Common Share assuming dilution and basic
follows:
2002 2001 2000
---- ---- ----
Net income $ 281 $ 169 $ 453
===== ===== =====
Average number of Common Shares
outstanding assuming dilution 71.7 70.5 72.6
Less dilutive effect of stock options 1.1 1.1 .8
----- ----- -----
Average number of Common Shares
outstanding basic 70.6 69.4 71.8
===== ===== =====
Net income per Common Share
assuming dilution
Continuing operations $3.92 $2.39 $5.00
Discontinued operations 1.24
----- ----- -----
$3.92 $2.39 $6.24
===== ===== =====
Net income per Common Share
basic
Continuing operations $3.98 $2.43 $5.06
Discontinued operations 1.25
----- ----- -----
$3.98 $2.43 $6.31
===== ===== =====
Employee and director stock options to purchase 3.0 Common Shares in 2002,
2.2 in 2001, and 6.0 in 2000 were outstanding but were not included in the
computation of net income per Common Share assuming dilution, since they would
have had an antidilutive effect on earnings per share.
F-27
<PAGE>
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
- ---------------------------------------------------
Eaton is a global diversified industrial manufacturer with annual sales of
$7.2 billion. The Company is a leader in fluid power systems; electrical power
quality, distribution and control; automotive engine air management and fuel
economy; and intelligent drivetrain systems for fuel economy and safety in
trucks. Eaton had 48,000 employees at the end of 2002, which increased to 51,000
in 2003 due to the acquisition of the electrical business of Delta plc, and
sells products in more than 50 countries. Major products included in each
segment and other information follows.
Fluid Power
- -----------
All pressure ranges of hose, fittings, adapters, couplings and other fluid
power connectors; hydraulic pumps, motors, valves, cylinders, power steering
units, transaxles and transmissions; electronic and hydraulic controls; electric
motors and drives; filtration products and fluid-evaluation products and
services; aerospace products and systems -- hydraulic and electrohydraulic
pumps, motors, electric motor pumps, hydraulic motor driven generators and
integrated system packages, hydraulic and electromechanical actuators, flap and
slat systems, nose wheel steering systems, cockpit controls, power and load
management systems, sensors, fluid debris monitoring products, illuminated
displays, integrated displays and panels, relays and valves; clutches and brakes
for industrial machines; golf grips and precision molded and extruded plastic
products
Industrial & Commercial Controls
- ----------------------------------
Vacuum interrupters, a wide range of circuit breakers and a variety of
power distribution and control assemblies and components used in managing
distribution of electricity to homes, businesses and industrial facilities;
engineering systems and diagnostic and support services to support customer
power and control system requirements; thermal circuit breakers and power
control and conversion equipment used in commercial and military applications;
drives, contactors, starters, and other motor control products used in the
control and protection of electric motors; a wide range of sensors used for
position sensing; automation personal computers and programmable logic
controllers for controlling machine logic; a full range of operator interface
hardware and software for interfacing with machines
Automotive
- ----------
Valvetrain systems, intake and exhaust valves, lash compensation lifters
and lash adjusters, cylinder heads, superchargers, limited slip and locking
differentials, transmission dampers, precision gear forgings, air control
valves, engine sensors and controls, mirror actuators, transmission controls,
on-board vapor recovery systems, fuel level senders and pressure control valves
Truck
- -----
Heavy-, medium-, and light-duty mechanical transmissions, heavy-duty
automated transmissions, heavy- and medium-duty clutches, gears and shafts,
traction control systems, transfer boxes, power take-off units, splitter boxes,
gearshift mechanisms, transmissions for off-highway construction equipment, and
collision warning systems
F-28
<PAGE>
Other Information
- -----------------
The principal markets for Fluid Power, Automotive and Truck are original
equipment manufacturers and after-market customers of aerospace products and
systems, off-highway agricultural and construction vehicles, industrial
equipment, passenger cars and heavy-, medium-, and light-duty trucks. These
manufacturers are generally concentrated in North America and Europe; however,
sales are made globally. Most sales of these products are made directly to such
manufacturers.
The principal markets for Industrial & Commercial Controls are industrial,
construction, commercial, automotive and government customers. These customers
are generally concentrated in North America; however, sales are made globally.
Sales are made directly by the Company and indirectly through distributors and
manufacturers' representatives to such customers.
No single customer represented more than 10% of net sales of continuing
operations in 2002, 2001 or 2000. Sales from ongoing United States and Canadian
operations to customers in foreign countries were $503 in 2002, $520 in 2001 and
$599 in 2000 (7% of sales for all years presented).
The accounting policies of the segments are generally the same as the
policies described under "Accounting Policies" above, except that inventories
and related cost of products sold of the segments are accounted for using the
FIFO method and operating profits only reflect the service cost component
related to pensions and other postretirement benefits. Intersegment sales and
transfers are accounted for at the same prices as if the sales and transfers
were made to third parties.
Identifiable assets exclude general corporate assets, which principally
consist of cash, short-term investments, deferred income taxes, certain accounts
receivable, certain property, plant and equipment, and certain other assets.
F-29
<PAGE>
Business Segment Information
2002 2001 2000
---- ---- ----
Net sales
Fluid Power $2,456 $2,507 $2,607
Industrial & Commercial Controls 1,993 2,199 2,421
Automotive 1,594 1,479 1,502
Truck 1,166 1,029 1,456
------ ------ ------
Total ongoing operations 7,209 7,214 7,986
Divested operations 85 323
------ ------ ------
Total net sales $7,209 $7,299 $8,309
====== ====== ======
Operating profit (loss)
Fluid Power $ 187 $ 183 $ 235
Industrial & Commercial Controls 149 163 251
Automotive 225 194 214
Truck 90 (64) 107
------ ------ ------
Total ongoing operations 651 476 807
Corporate
Divested operations 6 8
Amortization of goodwill & other
intangible assets (23) (94) (95)
Interest expense-net (104) (142) (177)
Gains on sales of businesses 18 61
Corporate & other-net (143) (29) 9
------ ------ ------
Income from continuing operations before
income taxes 399 278 552
Income taxes 118 109 189
------ ------ ------
Income from continuing operations 281 169 363
Income from discontinued operations 90
------ ------ ------
Net income $ 281 $ 169 $ 453
====== ====== ======
Income from continuing operations before income taxes was reduced by
unusual items as follows:
Fluid Power $ 26 $ 22 $ 47
Industrial & Commercial Controls 16 30
Automotive 1
Truck 16 55
Corporate 13 22 5
------ ------ ------
$ 72 $ 129 $ 52
====== ====== ======
F-30
<PAGE>
2002 2001 2000
---- ---- ----
Identifiable assets
Fluid Power $1,439 $1,345 $1,518
Industrial & Commercial Controls 847 1,016 1,099
Automotive 819 781 816
Truck 605 651 710
------ ------ ------
Total ongoing operations 3,710 3,793 4,143
Goodwill 1,910 1,902 1,985
Other intangible assets 510 533 553
Corporate 1,008 1,418 1,215
Divested operations 284
------ ------ ------
Total assets $7,138 $7,646 $8,180
====== ====== ======
Expenditures for property, plant & equipment
Fluid Power $ 53 $ 61 $ 95
Industrial & Commercial Controls 34 54 71
Automotive 75 96 96
Truck 56 64 81
------ ------ ------
Total ongoing operations 218 275 343
Corporate 10 17 28
Divested operations 3 15
------ ------ ------
Total expenditures for property, plant &
equipment $ 228 $ 295 $ 386
====== ====== ======
Depreciation of property, plant & equipment
Fluid Power $ 91 $ 96 $ 97
Industrial & Commercial Controls 70 72 74
Automotive 69 66 65
Truck 54 56 57
------ ------ ------
Total ongoing operations 284 290 293
Corporate 22 23 21
Divested operations 14
------ ------ ------
Total depreciation of property, plant &
equipment $ 306 $ 313 $ 328
====== ====== ======
F-31
<PAGE>
Geographic Region Information
Ongoing operations
--------------------------
Long-
Net Operating lived
sales profit assets
------ ------ ------
2002
United States $5,605 $ 483 $1,338
Canada 185 15 13
Europe 1,110 65 351
Latin America 403 45 160
Pacific Region 358 43 93
Eliminations (452)
------ ------ ------
$7,209 $ 651 $1,955
====== ====== ======
2001
United States $5,677 $ 414 $1,419
Canada 177 11 15
Europe 1,108 (5) 322
Latin America 406 37 203
Pacific Region 310 19 91
Eliminations (464)
------ ------ ------
$7,214 $ 476 $2,050
====== ====== ======
2000
United States $6,483 $ 679 $1,532
Canada 182 15 14
Europe 1,232 46 352
Latin America 412 47 193
Pacific Region 253 20 79
Eliminations (576)
------ ------ ------
$7,986 $ 807 $2,170
====== ====== ======
Net sales and operating profit are attributed to geographical regions based
upon the location of the selling unit.
Long-lived assets consist of property, plant and equipment-net.
Operating profit was reduced by unusual items as follows:
2002 2001 2000
---- ---- ----
United States $ 49 $ 67 $ 42
Europe 10 37 4
Latin America 2 1
Pacific Region 1
------ ------ ------
$ 59 $ 107 $ 47
====== ====== ======
F-32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------
Dollars in millions, except for per share data (per share data assume dilution)
Overview
- --------
While global economic conditions remained difficult in 2002, presenting a
challenging operating environment, Eaton posted significantly improved results,
with each business segment reporting solid performance during the year. During
2002, Eaton made significant progress towards key corporate goals of 1)
out-growing end markets, 2) resizing the Company to compete effectively and
profitably in the depressed market and 3) improving the strength of the balance
sheet.
Worldwide net sales were $7,209 in 2002. Although 1% lower than 2001, sales
reflected levels that outperformed a number of the Company's end markets. Net
income was $281 in 2002 ($3.92 per Common Share), up 66% from $169 in 2001
($2.39 per share). The increase was primarily due to the result of the benefits
of restructuring actions taken in 2002 and prior years. Before unusual items in
both years, operating earnings were $315 in 2002 ($4.40 per share), up 35% from
$233 in 2001 ($3.30 per share). Unusual items reported in both years included
restructuring charges, other unusual charges and gains on sales of businesses.
Eaton's results in 2002 were aided by actions taken in 2002 and earlier
years to comprehensively restructure operations. With these actions, the Company
incurred restructuring and other unusual charges of $72 in 2002 ($.66 per Common
Share) and $129 in 2001 ($1.21 per share), and delivered $130 of savings in
2002. These savings helped the Company to post significantly higher earnings
despite end markets showing yet another year of decline. In addition, 2002
results were favorably impacted by $.88 per Common Share due to the adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", which ceased the amortization of goodwill and certain
intangible assets. These positive effects on income were partially offset by
additional pension expense and other postretirement benefit expense in 2002 of
$.52 per share. The Company also reported gains on sales of businesses of $.18
per share in 2002 compared to $.30 per share in 2001.
Throughout 2002, Eaton continued to focus on strengthening the balance
sheet. Cash flow from operations in 2002 was an all-time high of $900, and cash
flow after capital expenditures and cash dividends (free cash flow) for the year
was $549. As a result, total debt was reduced by $352 during the year and cash
and short-term investments increased by $117. The net debt to total capital
ratio at the end of 2002 was 41.9%, down from 46.2% at year-end 2001. This ratio
would have dropped to 38.2% but for the recognition of a $386 reduction of
Shareholders' Equity related to the recognition of a minimum pension liability
for certain pension plans at the end of 2002.
F-33
<PAGE>
2002 Compared to 2001
- ---------------------
Results of Operations
- ---------------------
Sales of $7,209 for 2002 were 1% below 2001. After excluding the impact of
the divestitures of the Navy Controls business in the third quarter of 2002 and
the Vehicle Switch/Electronics Division (VS/ED) in the first quarter of 2001,
sales increased by 1%. Sales of the Fluid Power segment were $2,456 in 2002, 2%
below 2001, while sales of the Industrial & Commercial Controls segment of
$1,993 were down 9% from 2001, due to weakness in end markets served by these
segments. The Automotive segment reported sales of $1,594 in 2002, 8% higher
than 2001, reflecting the continued strong performance of the North American and
European automobile markets. Truck segment sales rose to $1,166, 13% above 2001,
spurred by purchases of heavy-trucks in North America in advance of new engine
emission requirements.
Sales in the United States increased to $5,605 in 2002, 1% above 2001 after
excluding the impact of the divestitures of businesses in 2002 and 2001,
primarily the result of continued strong performance in the Automotive segment
and the mid-year surge in the Truck segment. Sales in international markets were
$2,056 in 2002, only slightly above 2001. Sales in 2002 of $1,110 in Europe,
$403 in Latin America and $185 in Canada were all flat compared to 2001, as
these economies remained weak. Sales in the Pacific region increased to $358,
15% higher than 2001, primarily due to improved performance of Fluid Power,
Automotive and Truck operations in this region.
As the weak economic conditions of 2001 continued into 2002, Eaton
undertook additional restructuring actions to further reduce fixed operating
costs across its business segments and certain corporate functions. During 2002,
$62 of operational restructuring charges were recorded, including $26 for Fluid
Power, $16 for Industrial & Commercial Controls and $16 for Truck. These
compared to similar restructuring charges of $119 in 2001. In addition, unusual
corporate charges of $10 in each of 2002 and 2001 were recorded which related to
non-operating activities. On an after-tax basis, these restructuring and unusual
charges reduced net income for 2002 by $47 ($.66 per Common Share) and for 2001
by $86 ($1.21 per share). The operational restructuring charges are included in
the Statements of Consolidated Income in Income from Operations and reduced
Operating Profit of the related business segment. The corporate restructuring
charges are included in the Statements of Consolidated Income in Income from
Operations and the other corporate charges are included in Other Expense-Net.
All of the corporate restructuring and other corporate charges are included in
Business Segment Information in Corporate & Other-Net.
Results for 2002 were favorably impacted by the adoption of SFAS No. 142,
which ceased the amortization of goodwill and indefinite life intangible assets
recorded in connection with current and previous business acquisitions. This
accounting change increased pretax income for 2002 by $73 ($63 after- tax, or
$.88 per Common Share) compared to 2001. Income for 2002 was reduced by $57 ($37
after-tax, or $.52 per share) compared to 2001 due to increased pension expense
and other postretirement benefit expense which reflected the decline in the
market value of equity investments in Eaton's pension fund, coupled with lower
discount rates associated with pension and other postretirement benefit
liabilities.
F-34
<PAGE>
As displayed in the Statements of Consolidated Income, despite slightly
lower sales, income from Operations of $517 in 2002 increased $169 over 2001,
rising to 7.2% of sales from 4.8% of sales in 2001. These increases were
primarily attributable to the benefits of the aggressive restructuring actions
described above, which generated $130 of savings in 2002. The increases also
reflected lower restructuring charges recorded in 2002 compared to 2001 and
reduced amortization expense in 2002 related to the change in accounting for
goodwill and indefinite life intangible assets described above. Offsetting these
positive effects on income was increased pension expense and other
postretirement benefit expense in 2002, as described above.
In the third quarter of 2002, Eaton sold the Navy Controls business, which
resulted in a pretax gain of $18 ($13 after-tax, or $.18 per Common Share).
During 2001, VS/ED, the Air Conditioning and Refrigeration business and certain
assets of Automotive and Truck businesses were sold. The sales of businesses in
2001 resulted in a net pretax gain of $61 ($22 after-tax, or $.30 per share).
The gains for both years are reported as a separate line item in the Statements
of Consolidated Income and Business Segment Information. In Business Segment
Information, the operating results of VS/ED are included in divested operations.
The effective income tax rate for 2002 was 29.5% compared to 39.4% for
2001. The higher rate in 2001 was primarily the result of the tax effect of
book/tax basis differences related to businesses sold in the first quarter of
2001 and the amortization of non-deductible goodwill in 2001. Excluding the
negative tax consequences related to the sales of businesses and non-deductible
goodwill in 2001, the effective tax rate for 2001 was 28.2% compared to 29.5% in
2002.
Before restructuring charges, other unusual charges and gains on the sales
of businesses, operating earnings were $315 in 2002 ($4.40 per Common Share),
35% above 2001 on a similar basis. These improvements were primarily the result
of the factors described above. Net income for 2002, including unusual charges
and gains on sales of businesses, was $281 ($3.92 per share), 66% higher
compared to $169 in 2001 ($2.39 per share).
Business Segments
- -----------------
Fluid Power
- -----------
Sales of Eaton's largest business segment, Fluid Power, were $2,456 in
2002, 2% below one year earlier. Fluid Power end markets showed no growth
compared to 2001, with North American fluid power industry shipments down about
2%, commercial aerospace markets off about 17%, and defense aerospace markets up
by 27%. The expected significant decline in the commercial aerospace market
started in the second quarter of 2002, while traditional mobile and industrial
hydraulics markets showed little improvement in 2002. Offsetting these declines
was strength in the military aerospace markets.
F-35
<PAGE>
Operating profits before restructuring charges were $213 in 2002, 4% higher
than $205 posted in 2001. These profits represented a return on sales of 8.7% in
2002, up from 8.2% in 2001. In spite of general weakness in end markets, profits
in 2002 were higher than 2001, primarily the result of the benefits of
aggressive restructuring actions taken to resize this business in prior periods.
Restructuring charges recognized in 2002 were $26 compared to $22 in 2001.
Profits after restructuring charges were $187 in 2002, up from $183 in 2001.
In the fourth quarter of 2002, two acquisitions were completed in this
segment. The Company purchased the Boston Weatherhead business of Dana
Corporation for $130. This business, which had 2001 sales of $207, manufactures
hose, tubing, and fluid connectors for fluid power systems primarily for the
industrial distribution, mobile off-highway and heavy-duty truck markets. In
addition, the aerospace circuit breaker business of Mechanical Products was
purchased during the fourth quarter.
During the second quarter of 2002, Eaton purchased the remaining 40%
interest in its hydraulics systems joint venture company, Jining Eaton
Hydraulics Company, Ltd. (JEHYCO), located in Jining, China. JEHYCO is the
Company's fourth wholly-owned business in China.
In 2002, Eaton announced a multi-year contract with Lockheed Martin to
supply the wing fluid distribution package on the supersonic multi-role Joint
Strike Fighter, the F-35, which represents Eaton's second major contract for
this aircraft. The award is for the system design and development phase of the
program, which is expected to total 14 aircraft and generate an estimated $3 of
revenue over the next two years. Based on the projected manufacture of 3,000
aircraft and additional foreign military sales over the planned lifetime of the
F-35, this award has the potential of generating revenue for Eaton of $1 billion
over the 35 year life of the program. The Company also announced it had been
selected to receive $84 in business as a result of the U.S. Air Force's decision
to purchase an additional 60 C-17 cargo aircraft in 2004 through 2007.
During 2002, the Company also announced a multi-year contract with Airbus
to provide products for hydraulic fluid conveyance in the new Airbus 380, the
world's largest commercial aircraft. The contract has potential revenue of $70
over the next 20 years. This was the second contract awarded to Eaton for the
A380, with the combined contracts expected to generate revenues of approximately
$270 over the next 20 years. Additionally, during 2002, Eaton was awarded a
multi-year contract by BMW to provide fluid hose assemblies for two major
automobile production models. This contract is expected to have revenues in
excess of $150 over the next six years.
Industrial & Commercial Controls
- --------------------------------
In the Industrial & Commercial Controls segment, sales for 2002 were
$1,993, down 9% from 2001, but down only 7% after adjusting for the impact of
selling the Navy Controls business at the start of the third quarter. End
markets for the electrical business weakened during the year, with an estimated
9% decline in the North American markets for this business compared to 2001. The
long-cycle, large-project portion of this business, which is tied to commercial
construction, continued to soften during the year.
F-36
<PAGE>
Operating profits before restructuring charges were $165 in 2002, down from
$193 in 2001. These profits represented a return on sales of 8.3% in 2002
compared to 8.8% in 2001. Profits declined 15% from 2001, but were down 12%
after excluding Navy Controls which was sold in mid-2002. The decline in profits
was primarily the result of declining sales volume due to weak market conditions
in most of the sectors this segment serves and the effects of product mix.
Restructuring charges recognized in 2002 were $16 compared to $30 in 2001.
Profits after restructuring charges were $149 in 2002 compared to $163 in 2001.
In January 2003, Eaton completed the acquisition of the electrical business
of Delta plc for $215. This business, which had 2001 sales of $379, includes
major electrical brands such as MEM(R), Holec(TM), Bill(TM), Home
Automation(TM), Elek(TM) and Tabula(TM). The Delta business represents a
significant addition to the capabilities and geographic footprint of the
Industrial & Commercial Controls business. Additionally, in early January 2003
the acquisition of the power systems business of Commonwealth Sprague Capacitor
was completed. This business will add to offerings in the areas of power quality
and energy management.
During the second quarter of 2002, Eaton announced the formation of its new
Performance Power Solutions organization, created to expand the Company's
position in the power quality and assurance market, as well as to create a new
business relationship with Johnson Controls. This business expansion is expected
to result in $300 of new business revenue over the next four years.
Automotive
- ----------
The Automotive segment posted sales of $1,594 in 2002, 8% above 2001.
Compared to 2001, NAFTA automotive production was up 6% to 16.7 million units,
while European production decreased 2% to 18.0 million units. The Automotive
segment continued its strong performance with sales growth that considerably
outpaced its end markets. The heavy investments Eaton has made in new product
development over the last several years are delivering strong results and
broadening opportunities, as this segment has been able to accelerate the pace
of new product introductions to gain market share.
Operating profits before restructuring charges were $226 in 2002, up 16%
from $194 in 2001. The segment produced a return on sales of 14.2% in 2002, up
from 13.1% in 2001. The increases in profits and margins were primarily the
result of the increase in sales during 2002.
In 2002, the Company announced the acquisition, from McLaren Performance
Technologies, of the technology, trademarks, and engineering assets related to
the Gerodisc(TM) product line. The addition of this product line to Eaton's
existing products broadens the product range sold to the light-duty automotive
differential market. During the year, Eaton also increased its investment to 49%
in Cyltec, an associate company that manufactures cylinder heads for the light
vehicle market in North America. In late 2002, Eaton won a contract from the
Chrysler Group to provide electronic differentials for the front and rear axles
of a future vehicle platform.
F-37
<PAGE>
Further progress was made in growing Eaton's supercharger business in 2002.
In Brazil, the smallest supercharger ever produced on a commercial basis was
launched for use on the new Ford Fiesta, and delivery began of a high-efficiency
supercharger for use with the new M-271 engine program of Mercedes. The Company
is providing superchargers, intake and exhaust valves, roller rocker arms and
lash adjusters for the M-271 program.
In the first quarter of 2002, Eaton announced the receipt of a contract
from General Motors Corporation's Tier One mirror suppliers to provide memory
glass and power-folding mirror actuators for a wide range of pick-up trucks and
sport utility vehicles.
Truck
- -----
The Truck segment posted sales of $1,166 in 2002, a 13% increase over 2001.
Sales in the North American heavy-duty truck market were higher in the second
and third quarters of 2002, spurred by purchases of heavy-duty trucks in North
America in advance of new engine emission requirements. NAFTA heavy-duty truck
production was up 24% in 2002 to 181,000 units, NAFTA medium-duty truck
production was flat, European truck production was down 6%, and South American
production decreased by 12%.
Operating profits before restructuring charges were $106 in 2002 compared
to a loss of $9 in 2001. These profits represented a return on sales of 9.1% in
2002. The positive impact of the extensive restructuring actions in this segment
over the last two years can be seen in the $115 of increased profit before
restructuring costs in 2002 on increased sales of $137. Restructuring charges
recognized in 2002 were $16 compared to $55 in 2001. Profits after restructuring
charges were $90 in 2002 compared to a loss of $64 in 2001.
During 2002, Eaton announced two new contracts in South America with Volvo
and AGCO to supply transmissions for heavy-duty trucks and farm tractors. These
contracts are expected to generate more than $190 of sales over the next eight
years.
Corporate Income (Expense)
- --------------------------
Results for 2002 were impacted favorably by the adoption of SFAS No. 142,
which ceased the amortization of goodwill and indefinite life intangible assets
recorded in connection with current and previous business acquisitions. This
accounting change resulted in a $73 reduction in amortization expense in 2002.
Net interest expense of $104 in 2002 decreased by $38 compared to 2001. The
decrease was primarily related to the reduction in debt of $352 from the end of
2001 to the end of 2002, as well as a reduction of interest rates in 2002.
Corporate and other expense-net was $143 in 2002 compared to $29 in 2001.
The increase was primarily the result of increased pension expense and other
postretirement benefit expense of $57 in 2002 compared to 2001. This increase
was due to the effect of the decline in the market value of equity investments
in Eaton's pension fund, coupled with lower discount rates associated with
pension and other postretirement benefit liabilities. The increase in corporate
and other expense-net also reflected other expenses including profits owed to
minority interests in subsidiaries, foreign currency, environmental and legal,
as well as other corporate office accruals.
F-38
<PAGE>
Changes in Financial Condition During 2002
- ------------------------------------------
Eaton's financial position further strengthened during 2002. Net working
capital of $723 at the end of 2002 was virtually unchanged from year-end 2001
(the current ratio was 1.4 at both year-ends). Eaton continued to generate
strong cash flow from operating activities, which is the primary source of funds
to finance the needs of the Company.
Operating activities generated cash of $900 in 2002, an all-time record and
in excess of the strong cash flow generation of $765 in 2001. Further progress
was made in reducing operating capital, resulting in a lowering of the number of
inventory days-on-hand by six days, a decrease in accounts receivable days
outstanding of three days, and reduction in capital expenditures. Capital
expenditures for 2002 were $228, $67 lower than 2001 and just over 3% of sales.
As a result, the Company was able to complete with cash the acquisitions of
Boston Weatherhead and the aerospace circuit breaker business of Mechanical
Products in November 2002 while still reducing debt by $352 during 2002 and
increasing cash and short-term investments by $117 at the end of 2002.
Total debt of $2,088 at the end of 2002 decreased $352 from the end of
2001. In addition to the contribution from strong operating cash flow, debt was
paid down from the proceeds from the sale of Navy Controls. As a result of lower
debt and increased cash and short-term investments, the net debt to capital
ratio was reduced to 41.9% at the end of 2002 from 46.2% at year-end 2001. This
ratio would have dropped to 38.2% but for a $386 reduction of Shareholders'
Equity related to the recognition of a minimum pension liability for certain
pension plans at the end of 2002. The Company has credit facilities of $900, of
which $500 expire in May 2003 and $400 in April 2005.
In 2002, Eaton issued $300 of 5.75% Notes due 2012. The net proceeds from
the Notes were used to reduce outstanding commercial paper and repay a portion
of more expensive indebtedness incurred in connection with the 1999 acquisition
of Aeroquip-Vickers, Inc. During 2002, the Company also reached an agreement
with the Internal Revenue Service relating to the treatment of its broad-based
company-owned life insurance plans for the years 1993 through 1998. Pursuant to
the agreement, the Company terminated its remaining broad-based company-owned
life insurance plans. The settlement of this issue resulted in no material
effect on Eaton's financial position, net income or cash flows.
Eaton is in compliance with all covenants and other requirements set forth
in its credit agreements and indentures, and it is not reasonably likely that
this condition would change in the foreseeable future. The Company does not have
any rating downgrade triggers that would accelerate the maturity dates of its
debt.
At the end of 2002, Shareholders' Equity was reduced by a non-cash
after-tax charge of $386 related to the recognition of a minimum liability for
certain pension plans. This charge is further described in "Retirement Benefit
Plans" in the Notes to the Consolidated Financial Statements. The charge did not
impact net income, and will be reversible should the pension plans again become
overfunded at the end of 2003. Pension funding requirements are not currently
affected by the recording of this non-cash charge.
Cash dividends paid were $123 in 2002. Dividends per Common Share of $1.76
in 2002 were the same as in 2001. Eaton has paid dividends on Common Shares each
year since 1923.
F-39
<PAGE>
Outlook for 2003
- ----------------
The modest recovery Eaton had anticipated in its end markets beginning in
the fourth quarter of 2002 was delayed due to the slow and uneven pace of North
American economic recovery. As the Company surveys its end markets, only
marginal growth is foreseen in the first half of 2003, with stronger growth
expected in the second half. For the year as a whole, Eaton anticipates growth
in its end markets of approximately 1 to 2%. As in the past year, it expects to
outgrow end markets by approximately 2 to 3%.
The Company does not anticipate a recovery in the traditional mobile and
industrial hydraulics markets until the second half of 2003. The decline in the
commercial aerospace market has occurred as expected. Eaton believes that the
commercial aerospace markets are near bottom, but may not recover significantly
until 2004. Military aerospace markets remain strong and are expected to improve
further over the course of 2003.
Eaton expects that the electrical distribution equipment market will begin
to recover in 2003, but not until the fourth quarter. The residential market was
strong in 2002, but is expected to weaken slightly during 2003.
NAFTA automobile production is forecasted to be 15.9 million units in 2003
and 16.1 million units in Europe. The Company expects that North American
heavy-truck production during 2003 could approach 190,000 units, with volumes
lower in the first quarter and strengthening during the balance of the year.
The Company expects to record additional growth during 2003 from the
recently completed acquisitions of the Boston Weatherhead fluid power hose and
fittings business, the electrical division of Delta plc, the aerospace circuit
breaker business of Mechanical Products, and the power systems business of
Commonwealth Sprague Capacitor. Eaton anticipates these acquisitions could add
approximately $500 to 2003 revenues.
Restructuring expenses for 2003 are expected to be approximately $50,
evenly spread over the year. These charges relate substantially to the
integration of the recently acquired Boston Weatherhead fluid power business and
the electrical business of Delta plc.
Capital expenditures for 2003 are forecasted to be $335 and will be funded
primarily by cash flow from operations.
Due to the decline in stock market valuations during 2002 and the reduced
general level of interest rates, certain key assumptions used to calculate
pension and other postretirement benefit expense for 2003 will be adjusted,
including the lowering of the assumption used for the return on pension plan
assets from 10.00% to 8.75% and the discount rate from 7.25% to 6.75%. These
changes in assumptions are expected to result in an increase of approximately
$72 in pension expense and other postretirement benefit expense in 2003.
Before restructuring charges, Eaton projects 2003 operating earnings per
Common Share to be between $5.00 and $5.25. In 2003, the Company expects
restructuring charges to be approximately $.50 per share, resulting in a
projection of net income after restructuring charges of between $4.50 and $4.75
per share. As a result of the continuing soft market conditions, Eaton will
continue to exercise tight control over all expenditures. The Company
anticipates that it should be significantly cash flow positive again in 2003.
F-40
<PAGE>
Significant Accounting Changes in 2003
- --------------------------------------
In 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 addresses the reporting of
expenses related to exit and disposal activities, including business
restructurings, initiated after 2002. This Statement does not alter the
accounting for exit or disposal activities associated with acquired businesses.
The Statement will require an evaluation of the facts and circumstances in
determining the proper accounting recognition of expenses related to each exit
or disposal activity. It is expected the Statement will spread out the reporting
of these expenses, but not alter the related cash flows.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires Eaton's management
to make estimates and use assumptions in certain circumstances that affect
amounts reported in the accompanying consolidated financial statements. In
preparing these financial statements, management has made their best estimates
and judgments of certain amounts included in the financial statements, giving
due consideration to materiality. For any estimate or assumption there may be
other reasonable estimates or assumptions that could have been used. However,
the Company believes that given the current facts and circumstances, it is
unlikely that applying such other estimates and assumptions would have caused
materially different amounts to have been reported, except for pension and other
postretirement benefit plans for which several different reasonable assumptions
could be used for the valuation of the plans, as described below. Application of
these accounting policies involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from estimates used.
Revenue Recognition
- -------------------
Substantially all of Eaton's revenues are recognized when products are
shipped to unaffiliated customers and title has transferred.
Allowance for Uncollectible Accounts Receivable
- -----------------------------------------------
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on management's evaluation of the financial condition of the customer.
Allowance for Obsolete and Excess Inventory
- -------------------------------------------
Inventories are valued at the lower of cost or market value and have been
reduced by an allowance for excess and obsolete inventories. The estimated
allowance is based on management's review of inventories on hand, compared to
estimated future usage and sales.
F-41
<PAGE>
Impairment of Long-Lived Assets
- -------------------------------
As a result of the adoption of SFAS No. 142 in 2002, goodwill and
indefinite life intangible assets must be reviewed at least annually for
impairment, in accordance with the specified methodology. Further, goodwill,
intangible and other long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount may not be
recoverable. Goodwill and other intangible assets totaled $2,420 at the end of
2002 and represented 34% of total assets. These assets resulted primarily from
the $1,100 acquisition of the electrical distribution and controls business unit
of Westinghouse in 1994, and the $1,600 acquisition of Aeroquip-Vickers in 1999.
These businesses have a long history of operating success and profitability and
hold significant market positions in the majority of their product lines. Their
products are not subject to rapid technological or functional obsolescence,
which should result in continuous strong demand for products for many years and
accordingly support the book values of the goodwill and intangible assets
related to these businesses.
Deferred Income Tax Assets
- ---------------------------
Deferred income tax assets and liabilities have been recorded for the
differences between the financial accounting and income tax basis of assets and
liabilities. Recorded deferred income tax assets and liabilities are described
in detail in "Income Taxes" in the Notes to the Consolidated Financial
Statements. Significant factors considered by management in the determination of
the probability of the realization of deferred tax assets include historical
operating results, expectations of future earnings and taxable income, and the
extended period of time over which postretirement health care liabilities will
be paid.
Pension and Other Postretirement Benefit Plans
- ----------------------------------------------
The measurement of liabilities related to pension plans and other
postretirement benefit plans is based on management's assumptions related to
future events including interest rates, return on pension plan assets, rate of
compensation increases, and health care cost trend rates. Actual pension plan
asset performance will either reduce or increase unamortized pension losses,
which ultimately affects net income. A one-percentage point change in the
assumed rate of return on pension plan assets is estimated to have a $22 effect
on pension expense. Likewise, a one-percentage point increase in the discount
rate is estimated to reduce pension expense by $20. Information related to
changes in key assumptions used to recognize expense for other postretirement
benefit plans is found in "Retirement Benefit Plans" in the Notes to the
Consolidated Financial Statements.
For 2003, certain key assumptions used to calculate pension and other
postretirement benefit expense have been adjusted, including the lowering of
both the assumed return on pension plan assets from 10.00% to 8.75% and the
discount rate from 7.25% to 6.75%. These changes are expected to result in
increased pension and other postretirement benefit expense of approximately $72
in 2003 compared to 2002.
F-42
<PAGE>
Protection of the Environment
- -----------------------------
Eaton's operations involve the use and disposal of certain substances
regulated under environmental protection laws. On an ongoing, regular basis,
certain processes continue to be modified in order to reduce the impact on the
environment, including the reduction or elimination of certain chemicals used
in, and wastes generated from, operations. Liabilities related to environmental
matters are further discussed in "Protection of the Environment" in the Notes to
the Consolidated Financial Statements.
Contingencies
- -------------
The Company is subject to various investigations, claims, legal and
administrative proceedings, covering a wide range of matters that arise in the
ordinary course of business activities. Any liability that may result from these
proceedings is not expected to have a material adverse effect on Eaton's
financial position, net income or cash flows.
Stock Options Granted to Employees
- ----------------------------------
In December 2002, Statement of Financial Accounting Standards (SFAS) No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure", was
issued by the Financial Accounting Standards Board. SFAS No. 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation", to provide alternative methods
of transition when a company voluntarily changes to the fair value based method
of recognizing expense in the income statement for stock-based employee
compensation, including stock options granted to employees. As allowed by SFAS
No. 123, Eaton has adopted the disclosure-only provisions of the Standard and
does not recognize expense for stock options granted to employees.
Off-Balance Sheet Arrangements
- ------------------------------
Eaton does not have off-balance sheet arrangements, financings or other
relationships with unconsolidated entities or other persons known as "special
purpose entities" (SPEs). In the ordinary course of business, Eaton leases
certain real properties, primarily sales and office facilities, and equipment,
as described in "Lease Commitments" in the Notes to the Consolidated Financial
Statements. Transactions with related parties are in the ordinary course of
business, are conducted on an arm's-length basis, and are not material to
Eaton's financial position, net income or cash flows.
Eaton uses straightforward, non-leveraged, financial instruments for which
quoted market prices are readily available from a number of independent
services, to manage exposure to fluctuations in foreign currencies, interest
rates and commodity prices.
F-43
<PAGE>
Contractual Obligations Related to Long-term Debt, Leases and Related Risk
Disclosure
- --------------------------------------------------------------------------
Eaton is subject to various financial risks attributable to operating in a
global economy. Systems to measure and assure that these exposures are
comprehensively evaluated have been developed so that appropriate and timely
action can be taken to reduce risk, if necessary. Management performs a periodic
oversight review of exposures. Derivative financial instruments are utilized on
a discrete basis to manage exposures in the foreign exchange, interest and
commodity markets only after approval by senior management. The counterparties
used in these transactions have been diversified in order to minimize the impact
of any potential credit loss in the event of nonperformance by the
counterparties. Derivative activities are described in greater detail in "Debt
and Other Financial Instruments" in the Notes to the Consolidated Financial
Statements.
Eaton is subject to interest rate risk as it relates to long-term debt. The
table below presents principal cash flows and related weighted-average interest
rates by expected maturity dates of long-term debt and capital leases, excluding
foreign currency principal swaps and immaterial long-term debt of certain
international operations.
<TABLE>
<CAPTION>
2002
Expected maturity date
-------------------------------------------- Fair
2003 2004 2005 2006 2007 After Total value
---- ---- ---- ---- ---- ----- ----- -----
Long-term debt, including
current portion
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate (US$) $250 $ 15 $186 $ 50 $1,013 $1,514 $1,656
Average interest rate 7.0% 6.4% 8.5% 7.0% 7.0% 7.2%
Fixed rate (Yen in 2006
and Euro in 2007) $ 42 $209 $251 $270
Average interest rate 1.6% 6.0% 5.3%
Variable rate debt (US$) $150 $ 30 $180 $180
Average interest rate 2.6% 1.4% 2.4%
2001
Expected maturity date
-------------------------------------------- Fair
2002 2003 2004 2005 2006 After Total value
---- ---- ---- ---- ---- ----- ----- -----
Long-term debt, including
current portion
Fixed rate (US$) $125 $250 $ 15 $186 $762 $1,338 $1,451
Average interest rate 7.0% 7.0% 6.4% 8.5% 7.5% 7.5%
Fixed rate (Yen in 2006
and Euro in 2007) $ 38 $177 $215 $232
Average interest rate 1.6% 6.0% 5.2%
Variable rate debt (US$ $380 $400 $780 $780
Average interest rate 3.0% 3.0% 3.0%
</TABLE>
By the end of 2002, approximately 43% of Eaton's long-term debt was swapped
to floating interest rates. Additional information related to long-term debt and
related interest rate swaps can be found in "Debt and Other Financial
Instruments" in the Notes to the Consolidated Financial Statements.
F-44
<PAGE>
Minimum rental commitments for 2003 under noncancelable operating leases,
which expire at various dates and in most cases contain renewal options, are $83
and decline substantially thereafter.
Forward-Looking Statements
- --------------------------
This Annual Report to Shareholders contains forward-looking statements
concerning 2003 net income per Common Share, operating earnings per share,
worldwide markets for Eaton products, volumes from new business awards and
relationships (including long-term contracts) which are not necessarily spread
evenly throughout the award periods, expenses and benefits of restructuring
programs, capital expenditures, pension and other postretirement benefit expense
and compliance with credit agreements. These statements are subject to various
risks and uncertainties, many of which are outside the Company's control and,
therefore, should be used with caution. The following factors could cause actual
results to differ materially from those in the forward-looking statements:
unanticipated changes in the markets for the Company's business segments;
failure to implement restructuring plans; unanticipated downturns in business
relationships with customers or sales to these customers, including sales
pursuant to new long-term contracts where volumes and the timing of sales can
vary materially from expectations and from year to year; competitive pressures
on sales and pricing; increase in the cost of material and other production
costs, or unexpected costs that cannot be recouped in product pricing; the
introduction of competing technologies; unexpected technical or marketing
difficulties; unexpected claims, charges or dispute resolutions; and
unanticipated further deterioration of economic and financial conditions in the
United States and around the world. Eaton does not assume any obligation to
update these forward-looking statements.
2001 Compared to 2000 - Continuing Operations
- ---------------------------------------------
Results of Operations
- ---------------------
Net sales of continuing operations of $7,299 in 2001 decreased 12% from
2000. Excluding the impact on sales from the divestiture of the VS/ED in 2001,
sales from ongoing operations declined 10% for the year. Sales of the Fluid
Power segment were $2,507 in 2001, 4% below 2000, while sales of the Industrial
& Commercial Controls segment of $2,199 were down 9% from 2000. The Automotive
segment reported sales of $1,479 in 2001, which were down only 2% from 2000.
Truck segment sales fell to $1,029 in 2001, 29% below 2000, representing the
largest segment decline across the Company.
Net sales in the United States and Canada decreased 12% in 2001 to $5,854,
primarily the result of weak economic conditions. In 2001, sales in Europe fell
10% to $1,108, as the European economy weakened as well. Sales in the United
States and Europe also were lower due to the divestiture in the first quarter of
2001 of VS/ED, which had sales of $323 in 2000. Sales in Latin America were
$406, down 1% from the prior year. Sales in the Pacific region increased 23% to
$310, primarily due to the acquisition of the remaining 50% interest in Sumitomo
Eaton Hydraulics Company (now named Eaton Fluid Power Ltd).
F-45
<PAGE>
In response to the weakening global business environment in early 2001, and
the anticipated delay in recovery of the economy and Eaton's end markets until
the second half of 2002, the Company took restructuring actions in 2001 to help
maintain a competitive advantage in the current economic environment and reduce
structural costs across its businesses. Operational restructuring charges
totaled $119 in 2001, including $55 related to the Truck business, $30 for the
Industrial & Commercial Controls business, and $22 for actions to continue the
integration of the former Aeroquip-Vickers operations and other recent
acquisitions within Fluid Power. Restructuring charges in 2001 for reductions in
corporate staff and other actions were $12. A charge of $10 was also recorded in
2001 related to an arbitration award in connection with a contractual dispute
over supply arrangements associated with a subsidiary of Eaton. The arbitration
award resulted from a legal action initiated in February 1999 against Vickers,
Inc. (now named Eaton Hydraulics Inc.), part of Aeroquip-Vickers, Inc., which
was acquired by Eaton in April 1999.
All restructuring charges and other unusual pretax charges totaled $129 in
2001 ($86 after-tax, or $1.21 per Common Share), compared to similar pretax
charges of $52 in 2000 ($34 after-tax, or $.47 per share). Unusual charges for
2000 included operational restructuring charges of $47 related to the Fluid
Power business segment and $5 for actions to restructure corporate staff. The
operational restructuring charges in 2001 and 2000 are included in the
Statements of Consolidated Income in Income from Operations and reduced
operating profit of the related business segment. The corporate charges are
included in the Statements of Consolidated Income in Income from Operations,
except for $11 in 2001 included in Other Income-Net that primarily related to
the arbitration award discussed above. In Business Segment Information, all
corporate charges are included in Corporate & Other-Net.
As displayed in the Statements of Consolidated Income, Income from
Operations in 2001 of $348 declined 46% from $649 in 2000. The decline was the
result of the difficult operating conditions in most of Eaton's businesses in
2001, especially the Truck segment, coupled with the increased levels of
restructuring charges recorded in 2001.
During 2001, Eaton sold businesses resulting in a net pretax gain of $61
($22 after-tax, or $.30 per Common Share). In the first quarter, VS/ED, which
had sales of $323 in 2000, was divested along with certain assets of the Truck
segment. In the third quarter, the Air Conditioning & Refrigeration business,
which had sales of $75 in 2000, was sold along with certain assets of the
Automotive segment. These gains are reported as a separate line item in the
Statements of Consolidated Income and Business Segment Information. In Business
Segment Information, the operating results of VS/ED are included in Divested
Operations.
Income in 2000 was increased by a net pretax gain on the sales of corporate
assets of $22 ($14 after-tax, or $.19 per Common Share). These gains were
included in the Statements of Consolidated Income in Other Income-Net and in
Business Segment Information in Corporate and Other-Net.
Before restructuring and the other unusual charges and gains on the sales
of businesses, operating earnings were $233 in 2001 ($3.30 per Common Share),
down 39% from $383 in 2000 ($5.28 per share). The decline was the result of the
difficult operating conditions in most of Eaton's businesses in 2001, especially
in the Truck segment. Income from continuing operations, including unusual
charges and gains on sales of businesses, was $169 in 2001 ($2.39 per share),
down 53% from $363 in 2000 ($5.00 per share).
F-46
<PAGE>
Business Segments
- -----------------
Fluid Power
- -----------
Eaton's largest business segment, Fluid Power, reported sales of $2,507 in
2001, 4% below 2000, due primarily to weak markets for mobile and industrial
hydraulic products. This result compared favorably to an 11% decline in Fluid
Power's markets, with North American fluid power industry shipments off about
17%, and aerospace shipments that were flat compared to 2000. Sales for the
Aerospace business were up 9% during 2001. However, the anticipated weakening of
this business, resulting from the September 11th terrorist attacks, began to be
felt during the fourth quarter.
Operating profits before restructuring charges were $205 in 2001, down from
$282 in 2000. These profits represented a return on sales of 8.2% in 2001
compared to 10.8% in 2000. The decrease in profit was primarily attributable to
weak market conditions, which resulted in a significant decrease in sales
volumes during 2001. In response to these weak market conditions, this segment
accelerated the integration of Aeroquip-Vickers and other recent acquisitions.
The elimination of 600 positions announced in April 2001 was expanded to 1,000
positions in the third quarter and was completed before year-end. Restructuring
charges recognized in 2001 were $22 compared to $47 in 2000. Profits after
restructuring charges were $183 in 2001, down from $235 in 2000.
In the first quarter of 2001, Eaton completed the purchase of the remaining
50% interest in Sumitomo Eaton Hydraulics Company (now named Eaton Fluid Power
Ltd.), the former joint venture with Sumitomo Heavy Industries Ltd. located in
Kyoto, Japan. This acquisition had annualized sales of $76 in the Pacific
region.
Industrial & Commercial Controls
- --------------------------------
Industrial & Commercial Controls sales of $2,199 in 2001 were down 9% from
2000. Excluding divestitures, sales were off about 7%, compared to an estimated
19% decline in North American markets. This segment outperformed its markets due
to share growth, the continued growth of the Cutler-Hammer Engineering Services
and Systems (C-H ESS) business and increased participation in power quality
markets. End markets for this segment weakened significantly during 2001 due to
prolonged weakness in the industrial segment of the economy, with particular
weakness in the short-cycle distributor flow goods business, which typically
includes higher margin products. The large-project business also showed weakness
late in 2001.
Operating profits before restructuring charges were $193 in 2001, down from
$251 in 2000. These profits represented a return on sales of 8.8% in 2001
compared to 10.4% in 2000. Weak markets in the industrial and commercial sectors
and distributor businesses, as well as the effects of product mix and
restructuring charges, were responsible for the decreased profits in 2001. In
response to weakening market conditions in this business, restructuring actions
were implemented, including the elimination of 887 positions within the
organization. Restructuring charges recognized in 2001 were $30. Profits after
restructuring charges were $163 in 2001, down from $251 in 2000.
F-47
<PAGE>
In the first quarter of 2001, the Company announced it had formed a 50-50
joint venture with Hager Electro SA, creating Eletromar Ltda. This operation
manufactures International Electrical Code residential circuit breakers in
Brazil for the South American marketplace.
Automotive
- ----------
Sales for the Automotive segment of $1,479 in 2001 were down 2% from 2000.
This compared to a 10% decrease in NAFTA automotive production and flat European
automotive production. Despite difficult North American markets and gradual
weakening of markets in Europe, this segment realized the benefit of market
share gains.
Operating profits were $194 in 2001, down 9% from $214 in 2000. These
profits represented a return on sales of 13.1% in 2001 compared to 14.2% in
2000. These results reflected the reduced level of sales in 2001 and were
achieved in spite of difficult market conditions and increased engineering and
research and development costs associated with new product launches for model
years 2002-2004.
In 2001, the Company announced the acquisition of the European portion of
the vehicle mirror actuator business of Donnelley Corporation, located in
Manorhamilton, Ireland. A portion of Eaton's existing mirror actuator business
was relocated to the new facility in Ireland and that operation is expected to
reach sales levels of $50 over the next two to three years.
Truck
- -----
Due to extraordinarily depressed industry conditions, sales of the Truck
segment were $1,029 in 2001, 29% below 2000. NAFTA heavy truck production for
the year was down 42% to 146,000 units, NAFTA medium-duty truck production was
down 21%, European truck production was down 9% and South American production
was up 7%.
Operating losses before restructuring charges were $9 in 2001 compared to
profits of $107 in 2000. The decrease in profit was primarily attributable to
the significant decrease in sales volumes during 2001, the result of very weak
market conditions. This segment completed restructuring actions during 2001
related to the European medium-duty and heavy-duty truck businesses. After
restructuring charges of $55 in 2001, operating losses were $64 in 2001 compared
to profits of $107 in 2000.
During 2001, Eaton acquired the commercial clutch manufacturing assets of
Transmisiones TSP, S.A. de C.V. This business was relocated to the new Truck
facility in San Luis Potosi, Mexico, when that plant became operational in 2002.
Corporate Income (Expense)
- -------------------------
Net interest expense was $142 in 2001, down from $177 in 2000. The decrease
was primarily related to the $564 reduction of debt in 2001 from cash flow from
operations and proceeds from the sales of businesses, as well as reductions in
interest rates during 2001.
Corporate & other-net expense of $29 in 2001 compared to income of $9 in
2000. The decline was due to a $22 pretax gain recorded in 2000 on the sales of
corporate assets and a charge of $10 recorded in 2001 related to an arbitration
award, both of which are discussed above.
F-48
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY DATA
- --------------
(Unaudited)
Quarter ended in 2002 Quarter ended in 2001
-------------------------------------- --------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
(Millions except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $1,775 $1,830 $1,881 $1,723 $1,695 $1,750 $1,871 $1,983
Gross margin 469 514 517 437 415 424 471 486
Percent of sales 26% 28% 27% 25% 24% 24% 25% 25%
Income before income taxes 92 132 127 48 39 61 74 104
Net income $ 67 $ 93 $ 88 $ 33 $ 30 $ 40 $ 49 $ 50
Net income per Common Share
Assuming dilution $ .94 $ 1.30 $ 1.21 $ .47 $ .42 $ .57 $ .69 $ .72
Basic .95 1.32 1.24 .48 .42 .58 .70 .73
Cash dividends paid per Common Share $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44
Market price per Common Share
High $80.30 $73.94 $87.11 $83.98 $76.00 $76.90 $81.43 $74.97
Low 59.10 59.83 69.06 65.90 58.34 55.12 66.16 63.75
A reconciliation of net income to
operating earnings follows:
Net income $ 67 $ 93 $ 88 $ 33 $ 30 $ 40 $ 49 $ 50
Excluding (after-tax)
Unusual charges 2 10 2 33 17 22 17 30
Gains on sales of businesses (13) (15) (7)
------ ------ ------ ------ ------ ------ ------ ------
Operating earnings $ 69 $ 90 $ 90 $ 66 $ 47 $ 47 $ 66 $ 73
====== ====== ====== ====== ====== ====== ====== ======
Net income per Common Share assuming
dilution $ .94 $ 1.30 $ 1.21 $ .47 $ .42 $ .57 $ .69 $ .72
Per share impact of unusual items .04 (.04) .03 .46 .23 .09 .25 .33
------ ------ ------ ------ ------ ------ ------ ------
Operating earnings per Common Share $ .98 $ 1.26 $ 1.24 $ .93 $ .65 $ .66 $ .94 $ 1.05
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
F-49
<PAGE>
<TABLE>
<CAPTION>
Seven-Year Consolidated Financial Summary
- -----------------------------------------
2002 2001 2000 1999 1998 1997 1996
---- ---- ---- ---- --- ---- ----
(Millions except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Continuing operations
Net sales $7,209 $7,299 $8,309 $8,005 $6,358 $7,104 $6,515
Income before income taxes 399 278 552 943 616 730 428
Income after income taxes 281 169 363 603 430 526 305
Percent of net sales 3.9% 2.3% 4.4% 7.5% 6.7% 7.4% 4.7%
Extraordinary item - redemption of debentures (54)
Income (loss) from discontinued operations 90 14 (81) (62) 44
------ ------ ------ ------ ------ ------ ------
Net income $ 281 $ 169 $ 453 $ 617 $ 349 $ 410 $ 349
====== ====== ====== ====== ====== ====== ======
Net income per Common Share assuming dilution
Continuing operations $ 3.92 $ 2.39 $ 5.00 $ 8.17 $ 5.91 $ 6.72 $ 3.89
Extraordinary item (.69)
Discontinued operations 1.24 .19 (1.11) (.79) .57
------ ------ ------ ------ ------ ------ ------
$ 3.92 $ 2.39 $ 6.24 $ 8.36 $ 4.80 $ 5.24 $ 4.46
====== ====== ====== ====== ====== ====== ======
Average number of Common Shares outstanding 71.7 70.5 72.6 73.7 72.7 78.2 78.2
Net income per Common Share basic
Continuing operations $ 3.98 $ 2.43 $ 5.06 $ 8.31 $ 6.02 $ 6.85 $ 3.93
Extraordinary item (.71)
Discontinued operations 1.25 .20 (1.13) (.80) .57
------ ------ ------ ------ ------ ------ ------
$ 3.98 $ 2.43 $ 6.31 $ 8.51 $ 4.89 $ 5.34 $ 4.50
====== ====== ====== ====== ====== ====== ======
Average number of Common Shares outstanding 70.6 69.4 71.8 72.5 71.4 76.8 77.4
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.72 $ 1.60
- ----------------------------------------------------------------------------------------------------------
Total assets $7,138 $7,646 $8,180 $8,342 $5,570 $5,497 $5,290
Long-term debt 1,887 2,252 2,447 1,915 1,191 1,272 1,062
Total debt 2,088 2,440 3,004 2,885 1,524 1,376 1,092
Shareholders' equity 2,302 2,475 2,410 2,624 2,057 2,071 2,160
Shareholders' equity per Common Share $32.61 $35.61 $35.29 $35.44 $28.69 $27.72 $28.00
Common Shares outstanding 70.6 69.5 68.3 74.0 71.7 74.7 77.1
- ----------------------------------------------------------------------------------------------------------
A reconciliation of income from continuing
operations to operating earnings of
continuing operations follows:
Income from continuing operations $ 281 $ 169 $ 363 $ 603 $ 430 $ 526 $ 305
Excluding (after-tax)
Unusual charges 47 86 34 20 44 15 31
Gains on sales of businesses (13) (22) (198) (28) (69)
Gains on sales of corporate assets (14)
------ ------ ------ ------ ------ ------ ------
Operating earnings from continuing
operations $ 315 $ 233 $ 383 $ 425 $ 446 $ 472 $ 336
====== ====== ====== ====== ====== ====== ======
Income from continuing operations
per Common Share assuming dilution $ 3.92 $ 2.39 $ 5.00 $ 8.17 $ 5.91 $ 6.72 $ 3.89
Per share impact of unusual items .48 .91 .28 (2.41) .23 (.69) .40
------ ------ ------ ------ ------ ------ ------
Operating earnings per Common Share of
continuing operations $ 4.40 $ 3.30 $ 5.28 $ 5.76 $ 6.14 $ 6.03 $ 4.29
====== ====== ====== ====== ====== ====== ======
</TABLE>
F-50
<PAGE>
Eaton Corporation
2002 Annual Report on Form 10-K
Exhibit Index
Exhibits
3(a) Amended Articles of Incorporation (amended and restated as of
April 27, 1994) - Filed in conjunction with this Form 10-K
3(b) Amended Regulations (amended and restated as of April 26,
2000)- Incorporated by reference to the Form 10-Q for the six
months ended June 30, 2000
4(a) Instruments defining rights of security holders, including
indentures (Pursuant to Regulation S-K Item 601(b)(4), the
Company agrees to furnish to the Commission, upon request, a
copy of the instruments defining the rights of holders of long-
term debt)
4(b) Rights Agreement (Dated as of June 28, 1995) - Filed in
conjunction with this Form 10-K
10 Material contracts - Each of the following is either a
management contract or a compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and restated as
of March 31, 2000) - Incorporated by reference to the Form
10-K for the year ended December 31, 2000
(b) Executive Strategic Incentive Plan I (Amended and Restated as
of January 1, 2001) - Filed in conjunction with this
Form 10-K
(c) Group Replacement Insurance Plan (GRIP), effective as of
June 1, 1992 - Incorporated by reference to the Form 10-K for
the year ended December 31, 1992
(d) 1991 Stock Option Plan - Filed in conjunction with this Form
10-K
(e) 1995 Stock Plan - Filed in conjunction with this Form 10-K
(f) Incentive Compensation Deferral Plan (amended and restated as
of October 1, 1997) - Incorporated by reference to the Form
10-K for the year ended December 31, 2000
(g) Form of Change of Control Agreement entered into with
officers of Eaton Corporation - Filed in conjunction with
this Form 10-K
(h) Form of Indemnification Agreement entered into with officers
of Eaton Corporation - Filed in conjunction with this Form
10-K
(i) Limited Eaton Service Supplemental Retirement Income Plan
(amended and restated as of January 1, 2003) - Filed in
conjunction with this Form 10-K
(j) Supplemental Benefits Plan (amended and restated as of
January 1, 1989) (which provides supplemental retirement
benefits) - Filed in conjunction with this Form 10-K
<PAGE>
(k) Excess Benefits Plan (Amended and Restated Effective
January 1, 1989) (with respect to Section 415 limitations of
the Internal Revenue Code) - Filed in conjunction with this
Form 10-K
(l) Executive Incentive Compensation Plan - Incorporated by
reference to the Form 10-K for the year ended December 31,
2000
(m) Plan for the Deferred Payment of Directors' Fees (Originally
adopted in 1985 and amended effective as of September 24,
1996 and January 28, 1998) - Filed in conjunction with this
Form 10-K
(n) Plan for the Deferred Payment of Directors' Fees (Originally
adopted in 1980 and amended and restated in 1989 and 1996) -
Filed in conjunction with this Form 10-K
(o) 1996 Non-Employee Director Fee Deferral Plan (amended and
restated as of October 22, 2002) - Filed in conjunction with
this Form 10-K
(p) Trust Agreement - Outside Directors (dated December 6, 1996)
- Filed in conjunction with this Form 10-K
(q) Trust Agreement - Officers and Employees (dated December 6,
1996) - Filed in conjunction with this Form 10-K
(r) 1998 Stock Plan - Incorporated by reference to the definitive
Proxy Statement dated March 13, 1998
(s) 2002 Stock Plan - Incorporated by reference to the definitive
Proxy Statement dated March 15, 2002
(t) Executive Strategic Incentive Plan II (Effective as of
January 1, 2001) - Filed in conjunction with this Form 10-K
12 Ratio of Earnings to Fixed Charges - Filed in conjunction with this
Form 10-K
21 Subsidiaries of Eaton Corporation - Filed in conjunction with this
Form 10-K
23 Consent of Independent Auditors - Filed in conjunction with this
Form 10-K
24 Power of Attorney - Filed in conjunction with this Form 10-K
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.(I)
<SEQUENCE>5
<FILENAME>a4358939-3a.txt
<DESCRIPTION>EXHIBIT 3A
<TEXT>
Eaton Corporation
2002 Annual Report on Form 10-K
Item 15 (c)
Exhibit 3 (a)
Certificate of
Amended Articles of Incorporation of
Eaton Corporation
W.E. Butler, Chairman and Chief Executive Officer, and E. R.
Franklin, Secretary, of Eaton Corporation, an Ohio corporation, do
hereby certify that an annual meeting of the shareholders of said
corporation was duly called and held on the 27th day of April, 1994, at
which meeting a quorum of such shareholders was present in person or by
proxy, and that at such meeting by the affirmative vote of the holders
of shares entitling them to exercise more than a majority of the voting
power of the corporation on such proposal, the following resolutions
were adopted:
RESOLVED: That the following Amended Articles of Incorporation
of Eaton Corporation be, and the same hereby are, adopted to
supersede the existing Amended Articles of Incorporation of
said corporation:
Amended Articles of Incorporation
of
Eaton Corporation
-------------
FIRST: The name of said corporation shall be
EATON CORPORATION
SECOND: The place in the State of Ohio where its principal office is
to be located is Cleveland, Cuyahoga County.
THIRD: Said corporation is formed for the following purposes, to wit:
1. To produce, manufacture, service, buy or otherwise acquire, deal and
traffic in and sell or otherwise dispose of goods, products, merchandise and
real and personal property of every class and description; and to acquire, own,
hold, lease, sell, mortgage or otherwise deal in and dispose of such real estate
and personal property as may be necessary or useful in connection with said
business or the carrying out of any of the purposes of the corporation.
2. To acquire by purchase, subscription, or otherwise, and to own, hold
for investment or otherwise, and to use, sell, assign, transfer, mortgage,
pledge, exchange or otherwise dispose of shares of stock, bonds, debentures,
notes, scrip, securities, evidences of indebtedness, contracts or obligations of
any government or governmental body, corporation, association, firm or
individual, and also to issue in exchange therefor stocks, bonds or other
securities or evidences of indebtedness of this corporation, and while the owner
or holder of any such property to receive, collect and dispose of the interest,
dividends, income and other rights accruing on or from such property and to
possess and exercise in respect thereof all of the rights, powers and privileges
of ownership, including all voting powers connected therewith.
1
<PAGE>
3. To aid in any manner any corporation, association, firm or
individual, any shares of stock in which or any bonds, debentures, notes,
securities, evidences of indebtedness, contracts or obligations of which are
held by or for this corporation, directly or indirectly, or in which or in the
welfare of which this corporation shall have any interest, direct or indirect,
and to aid or participate in the reorganization, consolidation or merger of any
corporation, association or firm in which, or in the welfare of which, this
corporation shall have any interest.
4. To carry on any lawful business and in connection therewith to do
any and everything necessary, suitable or proper, and to have all the rights,
powers and privileges now or hereafter conferred by the laws of the State of
Ohio upon corporations organized under Sections 1701.01 et seq. of the Ohio
Revised Code or under any act amendatory thereof, supplementary thereto or
substituted therefor.
In furtherance and not in limitation of the general powers conferred by
the laws of the State of Ohio and in furtherance and not in limitation of the
purposes hereinbefore stated, it is hereby expressly provided that this
corporation shall also have the following authority and powers, to wit:
(a) To do any and all things hereinabove or hereinafter set
forth to the same extent and as fully as natural persons might or could
do, either as principal, agent, contractor or otherwise, and either
alone or in conjunction with any other individuals, firms,
associations, corporations, syndicates or bodies politic;
(b) To borrow or raise money, without limit, upon any terms,
for any purpose of this corporation or of any corporation, association,
firm, syndicate or individual having a business or property which this
corporation determines to finance, promote or become interested in; to
issue, sell and dispose of this corporation's bonds, debentures, notes,
certificates of indebtedness and other obligations, secured or
unsecured, and however evidenced, upon any terms, and as security
therefor to mortgage, pledge or grant any charge or impose any lien
upon all or any part of the real or personal property, rights,
interests or franchises of this corporation, whether owned by it at the
time or thereafter acquired;
(c) To make, execute, endorse and accept promissory notes,
bills of exchange and other negotiable instruments and to redeem any
debt or other obligation before the same shall fall due on any terms
and on any advance or premium;
(d) To guarantee the payment of dividends upon any capital
stock, and, by endorsement or otherwise, to guarantee the payment of
the principal or interest, or both, on any bonds, debentures, notes,
scrip or other obligations or evidences of indebtedness, or the
performance of any contracts, leases or obligations of any other
corporation or association or of any firm, individual or syndicate in
which or in whose welfare this corporation may have any interest;
2
<PAGE>
(e) To pay for any property, rights or interests acquired by
this corporation in cash or other property, rights or interests held by
this corporation, or by issuing and delivering in exchange therefor its
own stock, bonds, debentures, notes, certificates of indebtedness or
other obligations, or any of them, however evidenced; to purchase or
otherwise acquire, hold, sell, pledge, transfer or otherwise dispose of
and to reissue any shares of its own capital stock (so far as may be
permitted by law) and its bonds, debentures, notes or other securities
or evidences of indebtedness;
(f) To do all and everything necessary and proper for the
accomplishment of the objects herein enumerated or necessary or
incidental to the protection and benefit of this corporation, and in
general to carry on such lawful businesses necessary or incidental to
the attainment of the purposes of this corporation, whether such
businesses are similar in nature to the objects and powers hereinabove
set forth or otherwise.
The foregoing provisions of this Article THIRD shall not be construed
as imposing any limitation upon the purpose of the corporation to engage in any
lawful act or activity for which corporations may be formed under the laws of
the State of Ohio, and nothing herein shall be deemed to limit or exclude in any
manner any capacity, power, right or privilege given to this corporation by law
or the authority which it is or might be permitted to exercise under the
statutes of the State of Ohio.
FOURTH: The authorized number of shares of the corporation is Three
Hundred Fourteen Million One Hundred Six Thousand Three Hundred Ninety-Four
(314,106,394) classified and designated as follows:
A. Serial Preferred Shares: Fourteen Million One Hundred Six
Thousand Three Hundred Ninety-Four (14,106,394) shares are classified
and designated as Serial Preferred Shares without par value and are
herein called the "Serial Preferred Shares"; and
B. Common Shares: Three Hundred Million (300,000,000) shares
are classified and designated Common Shares with a par value of Fifty
Cents (50(cent)) each and are herein called the "Common Shares".
The express terms of such classes of shares are as follows:
DIVISION A - SERIAL PREFERRED SHARES
1. Issuance in Series: The Serial Preferred Shares may be issued from
time to time in series. All Serial Preferred Shares shall be of equal rank and
shall be identical, except in respect of matters that may be fixed by the Board
of Directors as herein provided, and each share of a particular series shall be
identical with all the other shares of such series, except that in the case of
series on which dividends are cumulative the dates from which dividends are
cumulative may vary to reflect differences in the dates of issue. Subject to the
provisions of Sections 2 to 8, both inclusive, of this Division A, which
provisions shall apply to all Serial Preferred Shares, the Board of Directors is
3
<PAGE>
hereby authorized to cause Serial Preferred Shares to be issued in one or more
series, and with respect to each such series and prior to the issuance thereof,
to fix:
(a) The designation of the series, which may be by
distinguishing number, letter or title;
(b) The number of shares of the series, which number the Board
of Directors may (except where otherwise provided in the creation of
the series) increase or decrease (but not below the number of shares
thereof then outstanding), the shares removed from any series to be
available for reissuance in other series;
(c) The dividend rate of the series;
(d) The dates at which dividends, if declared, shall be
payable, and in the case of series on which dividends are cumulative
the dates from which dividends shall be cumulative;
(e) The redemption rights and price or prices, if any, for
shares of the series;
(f) The terms, conditions and amount of any sinking fund
provided for the purchase or redemption of the shares of the series;
(g) The amounts payable on shares of the series in the event
of any voluntary or involuntary liquidation, dissolution, or winding up
of the affairs of the corporation;
(h) Whether the shares of the series shall be convertible into
Common Shares or shares of any other series or class, and, if so, the
conversion price or prices and the adjustments thereof, and all other
terms and conditions upon which such conversion may be made; and
(i) Restrictions (in addition to those set forth in 6(b) and
6(c) of this Division A) on the issuance of shares of the same series
or of any other class or series.
The Board of Directors is authorized to adopt from time to time and
without further shareholder approval, amendments to the Amended Articles of
Incorporation of the corporation fixing, with respect to each such series the
matters described in clauses (a) to (i), both inclusive, of this Section 1.
2. Dividend Rights: The holders of Serial Preferred Shares of each
series, in preference to the dividend rights of any class of shares of the
corporation, shall be entitled to receive out of any funds legally available and
when and as declared by the Board of Directors dividends in cash at the rate for
such series fixed in accordance with the provisions of Section 1 of this
Division A, and no more, payable quarterly on the dates fixed for such series.
Such dividends shall be cumulative, in the case of shares of each particular
series, from and after the date or dates fixed with respect to such series.
4
<PAGE>
No dividend for any quarterly dividend period shall be paid upon or
declared and set apart for any of the Serial Preferred Shares for any quarterly
dividend period unless:
(a) as to each series of Serial Preferred Shares entitled to
cumulative dividends, dividends for all past dividend periods shall
have been paid or shall have been declared and a sum sufficient for the
payment thereof set apart; and
(b) as to all series of Serial Preferred Shares, dividends for
the current dividend period shall have been paid or be or have been
declared and a sum sufficient for the payment thereof set apart ratably
in accordance with the amounts which would be payable as dividends on
the shares of the respective series for the current dividend period if
all dividends for the current dividend period were declared and paid in
full.
No dividend in respect of past dividend periods shall be paid upon or
declared and set apart for payment on any of the Serial Preferred Shares
entitled to cumulative dividends unless there shall be or have been declared and
set apart for payment on all outstanding shares of Serial Preferred Shares
entitled to cumulative dividends, dividends for past dividend periods ratably in
accordance with the amounts which would be payable on the shares of the series
entitled to cumulative dividends if all dividends due for all past dividend
periods were declared and paid in full.
3. Dividends and Acquisitions of Shares: So long as any Serial
Preferred Shares are outstanding, no dividend, except a dividend payable in
Common Shares or in any other shares of the corporation ranking junior to the
Serial Preferred Shares, shall be paid or declared or any distribution be made,
except as aforesaid, on the Common Shares or on any other shares of the
corporation, nor shall any Common Shares or any other shares of the corporation
be purchased, retired or otherwise acquired by the corporation or any sinking
fund payment with respect to any other shares of the corporation be made (except
out of the proceeds of the sale of Common Shares or any other shares of the
corporation ranking junior to the Serial Preferred Shares received by the
corporation subsequent to January 31, 1968):
(a) Unless in each case all dividends on the Serial Preferred
Shares for past quarterly dividend periods and the full dividends for
the current quarterly dividend period shall have been declared and paid
or a sum sufficient for payment thereof set apart; and
(b) Unless in each case there shall be no default with respect
to the redemption of Serial Preferred Shares of any series from, and no
default with respect to any required payment into, any sinking fund
provided for shares of such series in accordance with the provisions of
Section 1 of this Division A.
4. Redemption: (a) Subject to the express terms of each series and to
the provisions of Section 6(b) (iii) of this Division A, the corporation (i) may
from time to time redeem all or any part of the Serial Preferred Shares of any
series at the time outstanding at the option of the Board of Directors at the
applicable redemption price for such series fixed in accordance with the
provisions of Section 1 of this Division A, or (ii) shall from time to time make
such redemptions of the Serial Preferred Shares as may be required to fulfill
the requirements of any sinking fund provided for shares of such series at the
5
<PAGE>
applicable sinking fund redemption price fixed in accordance with the provisions
of Section 1 of this Division A, together in each case with accrued and unpaid
dividends to the redemption date.
(b) Notice of every such redemption shall be mailed, by first-class
mail, postage prepaid, to the holders of record of the Serial Preferred Shares
to be redeemed, at their respective addresses then appearing on the books of the
corporation, not less than 30 nor more than 60 days prior to the date fixed for
such redemption. At any time before or after notice has been given as above
provided, the corporation may deposit the aggregate redemption price of the
Serial Preferred Shares to be redeemed, together with accrued and unpaid
dividends thereon to the redemption date, with any bank or trust company in
Cleveland, Ohio, or New York, New York, having capital and surplus of more than
$5,000,000, named in such notice, directed to be paid to the respective holders
of the Serial Preferred Shares so to be redeemed, in amounts equal to the
redemption price of all Serial Preferred Shares so to be redeemed, together with
accrued and unpaid dividends thereon to the redemption date, on surrender of the
stock certificate or certificates held by such holders, and upon the giving of
such notice and the making of such deposit such holders shall cease to be
shareholders with respect to such shares, and after such notice shall have been
given and such deposit shall have been made such holders shall have no interest
in or claim against the corporation with respect to such shares except only to
receive such money from such bank or trust company, without interest, or the
right to exercise, before the redemption date, any unexpired rights of
conversion. In case less than all of the outstanding shares of Serial Preferred
Shares are to be redeemed, the corporation shall select by lot the shares so to
be redeemed in such manner as shall be prescribed by the Board of Directors.
If the holders of Serial Preferred Shares which shall have been called
for redemption shall not, within six years after such deposit, have claimed the
amount deposited for the redemption thereof, any such bank or trust company
shall, upon demand, pay over to the corporation such unclaimed amounts and
thereupon such bank or trust company and the corporation shall be relieved of
all responsibility in respect thereof and to such holders.
(c) Any Serial Preferred Shares which are redeemed by the corporation
pursuant to the provisions of this Section 4 of this Division A and any Serial
Preferred Shares which are purchased and delivered in satisfaction of any
sinking fund requirements provided for shares of such series and any Serial
Preferred Shares which are converted in accordance with their express terms
shall be cancelled and not reissued. Any Serial Preferred Shares otherwise
acquired by the corporation shall be restored to the status of authorized and
unissued Serial Preferred Shares without serial designation.
5. Rights Upon Liquidation: (a) The holders of Serial Preferred Shares
of any series shall in case of liquidation, dissolution or winding up of the
corporation, or any reduction of its capital, be entitled to receive in full out
of the assets of the corporation, including its capital, before any amount shall
be paid or distributed among the holders of Common Shares or any other shares of
the corporation, the amounts fixed with respect to shares of such series in
accordance with Section 1 of this Division A, plus in any such event an amount
equal to all dividends accrued and unpaid thereon to the date of payment of the
amount due pursuant to such liquidation, dissolution or winding up of the
corporation. In case the net assets of the corporation legally available
6
<PAGE>
therefor are insufficient to permit the payment upon all outstanding Serial
Preferred Shares of the full preferential amount to which they are respectively
entitled, then such net assets shall be distributed ratably upon outstanding
shares of Serial Preferred Shares in proportion to the full preferential amount
to which each such share is entitled.
After payment to holders of Serial Preferred Shares of the full
preferential amounts as aforesaid, holders of Serial Preferred Shares as such
shall have no right or claim to any of the remaining assets of the corporation.
In this Division "dividends accrued and unpaid" on any share means an
amount computed by dividing the annual dividend payable on the share (whether
earned, declared, paid or not) by 365 and multiplying the result by the number
of days from the date on which dividends on the share first became cumulative
through the date of payment of the amount due or the redemption date, as the
case may be, and subtracting from the product the sum of dividends paid (without
interest) on the share and of dividends declared on the share for whose payment
a sufficient sum has been set aside.
(b) The merger or consolidation of the corporation into or with any
other corporation, or the merger of any other corporation into it, or the sale,
lease, or conveyance of all or any part of the property or business of the
corporation, shall not be deemed to be a dissolution, liquidation or winding up
of the corporation for the purposes of this Section 5 of this Division A. No
purchase, redemption or retirement of any shares of the corporation in any
manner authorized or permitted by these Amended Articles of Incorporation shall
be considered a reduction of capital within the meaning of this Section 5 of
this Division A.
6. Voting Rights: (a) The holders of Serial Preferred Shares shall be
entitled to one vote for each such share upon all matters presented to
shareholders; and, except as otherwise provided herein or required by law, the
holders of Serial Preferred Shares and the holders of Common Shares shall vote
together as one class on all matters.
If, and so often as, the corporation shah be in default in the payment
of the equivalent of six quarterly dividends (whether or not consecutive) on any
series of Serial Preferred Shares at the time outstanding, whether or not earned
or declared, the holders of Serial Preferred Shares of all series voting
separately as a class and in addition to all other rights to vote for directors
shall be entitled to elect, as herein provided, two members of the Board of
Directors of the corporation; provided, however, that the holders of Serial
Preferred Shares shall not have or exercise such special class voting rights
except at meetings of the shareholders for the election of directors at which
the holders of not less than a majority of the outstanding Serial Preferred
Shares of all series are present in person or by proxy; and provided further
that the special class voting rights provided for herein when the same shall
have become vested shall remain so vested until all dividends on the Serial
Preferred Shares of all series then outstanding for past quarterly dividend
periods and for the current quarterly dividend period shall have been paid or
declared and a sum sufficient for the payment thereof set apart, whereupon the
holders of Serial Preferred Shares shall be divested of their special class
voting rights in respect of subsequent elections of directors, subject to the
revesting of such special class voting rights in the event hereinabove specified
in this Section 6(a).
7
<PAGE>
At any time after such voting power shall have been so vested in the
holders of the Serial Preferred Shares, the Secretary of the corporation may,
and, upon the written request of the holders of record of 10% or more of the
Serial Preferred Shares then outstanding, addressed to him at the principal
office of the corporation in the State of Ohio, shall, call a special meeting of
the holders of the Serial Preferred Shares for the election of the directors to
be elected by them as herein provided to be held within 30 days after such call
and at the place and upon the notice provided by law and in the Code of
Regulations for the holding of meetings of shareholders; provided, however, that
the Secretary shall not be required to call such special meeting in the case of
any such request received less than 90 days before the date fixed for any annual
meeting of shareholders.
If any such special meeting required to be called as provided shall not
be called by the Secretary within the 30 days after the receipt of any such
request, then the holders of record of 10% or more of the Serial Preferred
Shares then outstanding may designate in writing one of their number to call
such meeting, and the person so designated may call such meeting to be held at
the place and upon the notice above provided and for that purpose shall have
access to the stock ledger of the corporation. No such special meeting and no
adjournment thereof shall be held on a date later than 30 days before the annual
meeting of the shareholders or special meeting held in place thereof next
succeeding the time when the holders of the Serial Preferred Shares become
entitled to elect directors as above provided. If any such special meeting shall
be called as above provided, then, by vote of the holders of at least a majority
of those Serial Preferred Shares which are present or represented by proxy at
such meeting, the then authorized number of directors of the corporation shall
be increased by two and at such meeting, the holders of the Serial Preferred
Shares shall be entitled to elect the additional directors so provided for, but
any directors so elected shall not hold office beyond the annual meeting of the
shareholders or special meeting held in place thereof next succeeding the time
when the holders of the Serial Preferred Shares become entitled to elect
directors as above provided.
Whenever the holders of the Serial Preferred Shares shall be divested
of the voting power as above provided, the terms of office of all persons
elected as directors by the holders of the Serial Preferred Shares as a class
shall forthwith terminate and the number of directors shall be reduced
accordingly.
The two directors who may be elected by the holders of Serial Preferred
Shares pursuant to the foregoing provisions shall be in addition to any other
directors then in office or proposed to be elected otherwise than pursuant to
such provisions, and nothing in such provisions shall prevent any change
otherwise permitted in the total number of directors of the corporation or
require the resignation of any director elected otherwise than pursuant to such
provisions.
(b) The vote or consent of the holders of at least two-thirds of the
then outstanding shares of Serial Preferred Shares, given in person or by proxy,
either in writing or at a meeting called for the purpose at which the holders of
Serial Preferred Shares shall vote separately as a class, shall be necessary to
effect any one or more of the following (but so far as the holders of Serial
Preferred Shares are concerned, such action may be effected with such vote or
consent):
8
<PAGE>
(i) Any amendment, alteration or repeal of any of the
provisions of the Amended Articles of Incorporation or of the Code of
Regulations of the corporation which affects adversely the voting
powers, rights or preferences of the holders of Serial Preferred
Shares; provided, however, that for the purpose of this clause (i)
only, neither the amendment of the Amended Articles of Incorporation of
the corporation to authorize, or to increase the authorized or
outstanding number of shares of Serial Preferred Shares or of any
shares of any class ranking on a parity with or junior to the Serial
Preferred Shares, nor the increase by the shareholders pursuant to the
Code of Regulations of the number of directors of the corporation shall
be deemed to affect adversely the voting powers, rights or preferences
of the holders of Serial Preferred Shares; and provided, further, that
if such amendment, alteration or repeal affects adversely the rights or
preferences of one or more but not all of the then outstanding series
of Serial Preferred Shares, only the vote or consent of the holders of
at least two-thirds of the number of the then outstanding shares of the
series so affected shall be required;
(ii) The authorization of, or the increase in the authorized
number of, any shares of any class ranking prior to the Serial
Preferred Shares; or
(iii) The purchase or redemption (whether for sinking fund
purposes or otherwise) of less than all the then outstanding Serial
Preferred Shares except in accordance with a purchase offer made to all
holders of record of Serial Preferred Shares, unless all dividends on
all Serial Preferred Shares then outstanding for all previous quarterly
dividend periods shall have been declared and paid or funds therefor
set apart and all accrued sinking fund obligations applicable to all
Serial Preferred Shares shall have been complied with.
(c) The vote or consent of the holders of at least a majority of the
then outstanding Serial Preferred Shares, given in person or by proxy, either in
writing or at a meeting called for the purpose at which the holders of Serial
Preferred Shares shall vote separately as a class, shall be necessary (but so
far as the holders of Serial Preferred Shares are concerned such action may be
effected with such vote or consent) to authorize any shares ranking on a parity
with the Serial Preferred Shares or an increase in the authorized number of
shares of Serial Preferred Shares.
7. No holder of Serial Preferred Shares of any series shall be entitled
as such as a matter of right to subscribe for or purchase any part of any issue
of shares of the corporation, of any class whatsoever, or any part of any issue
of securities convertible into shares of the corporation, of any class
whatsoever, and whether issued for cash, property, services, or otherwise.
8. For the purposes of this Division A:
(a) Whenever reference is made to shares "ranking prior to the
Serial Preferred Shares", such reference shall mean and include all
shares of the corporation in respect of which the rights of the holders
thereof as to the payment of dividends or as to distributions in the
event of a voluntary or involuntary liquidation, dissolution or winding
9
<PAGE>
up of the corporation are given preference over the rights of the
holders of Serial Preferred Shares.
(b) Whenever reference is made to shares "on a parity with the
Serial Preferred Shares", such reference shall mean and include all
shares of the corporation in respect of which the rights of the holders
thereof as to the payment of dividends or as to distributions in the
event of a voluntary or involuntary liquidation, dissolution or winding
up of the corporation rank on an equality with the rights of the
holders of Serial Preferred Shares.
(c) Whenever reference is made to shares "ranking junior to
the Serial Preferred Shares", such reference shall mean and include all
shares of the corporation in respect of which the rights of the holders
thereof as to the payment of dividends and as to distributions in the
event of a voluntary or involuntary liquidation, dissolution or winding
up of the corporation are junior or subordinate to the rights of the
holders of Serial Preferred Shares.
DIVISION B - COMMON SHARES
1. Dividend Rights: After full dividends on all the outstanding Serial
Preferred Shares for all past dividend periods and also the full dividend on
such shares for the current dividend period shall have been paid or declared and
set apart for payment in accordance with paragraph 2 of Division A above, then
out of any funds lawfully available for dividends under the laws of the State of
Ohio, dividends may be paid upon the Common Shares and upon any other shares, to
the exclusion of the Serial Preferred Shares, if, when and as declared by the
Board of Directors in its discretion.
2. Distribution of Assets: In the event of any liquidation, dissolution
or winding up of the corporation, or any reduction of its capital, resulting in
any distribution of its assets to its shareholders, after there shall have been
paid or set apart for the holders of the Serial Preferred Shares the full
preferential amounts to which they are entitled under the provisions of
paragraph 6 of Division A above, the holders of the Common Shares shall be
entitled to receive as a class, pro rata, to the exclusion of the Serial
Preferred Shares, the assets of the corporation remaining for distribution to
its shareholders.
3. Voting Power: The holders of the Common Shares shall, subject to the
provisions of the Code of Regulations of the corporation and of the statutes of
the State of Ohio relating to the fixing of a record date, be entitled to one
vote for each Common Share held by them respectively, for the election of
directors (excepting directors to be elected by holders of the Serial Preferred
Shares voting as a class) and for all other purposes.
FIFTH: The corporation, by its Board of Directors, shall have full
power and authority, without any consent or vote of the shareholders or any
class thereof, from time to time to purchase shares of any class issued by the
corporation to the extent permitted by law except as may be otherwise provided
in these Amended Articles.
10
<PAGE>
SIXTH: Notwithstanding any provision of law requiring for any action
the vote of a designated proportion of the voting power of the corporation, such
action may be taken by the vote of the holders of shares entitling them to
exercise a majority of the voting power of this corporation; and notwithstanding
any provision of law requiring (or permitting as an alternative to a vote) for
any action the written consent of the holders of any designated proportion of
the outstanding shares of a corporation, such action may be taken by the written
consent of the holders of a majority of the outstanding shares of this
corporation-except in each case as may be otherwise provided in these Amended
Articles or by the Amended Regulations of the corporation.
The affirmative vote or written consent of the holders of shares
entitling them to exercise two-thirds of the voting power of this corporation,
given in person or by proxy at a meeting called for the purpose, shall be
necessary:
1. to approve
(a) the sale, exchange, lease, transfer or other disposition
by the corporation of all, or substantially all, of its assets or
business, or
(b) the consolidation of the corporation, or its merger, into
another corporation, or
(c) the merger into the corporation of another corporation or
corporations if the merger involves the issuance or transfer by the
corporation to the shareholders of the other constituent corporation or
corporations of such number of shares of the corporation as entitle the
holders thereof to exercise at least one-sixth of the voting power of
the corporation in the election of directors immediately after the
consummation of the merger, or
(d) a combination or majority share acquisition in which the
corporation is the acquiring corporation and its voting shares are
issued or transferred to another corporation if the combination or
majority share acquisition involves the issuance or transfer by the
corporation to the shareholders of the other corporation or
corporations of such number of shares of the corporation as entitle the
holders thereof to exercise at least one-sixth of the voting power of
the corporation in the election of directors immediately after the
consummation of the combination or majority share acquisition; or
2. to approve any agreement, contract or other arrangement providing
for any of the transactions described in subparagraph 1 above; or
3. to effect any amendment of the Amended Articles of Incorporation of
the corporation which changes the provisions of these subparagraphs 1, 2 or 3 or
the aforesaid affirmative vote or consent requirements.
11
<PAGE>
For purposes of these Amended Articles of Incorporation, the terms
"combination", "majority share acquisition" and "acquiring corporation" shall
have the meaning given them by Section 1701.01 of the Ohio General Corporation
Law or any similar provision hereinafter enacted.
SEVENTH: No holder of Common Shares of the corporation shall be
entitled, as such, as a matter of right to subscribe for or purchase any part of
any issue of shares of the corporation of any class whatsoever, or any part of
any issue of securities convertible into shares of the corporation of any class
whatsoever and whether issued for cash, property, services or otherwise.
EIGHTH: These Amended Articles of Incorporation shall supersede the
heretofore existing Amended Articles of Incorporation of the corporation.
RESOLVED FURTHER: That the Chairman and Chief Executive
Officer, the President, the Vice Chairman or any Vice President, and
the Secretary or an Assistant Secretary, of this corporation, be and
hereby are authorized and directed to execute and to file in the office
of the Secretary of State of Ohio a certificate containing a copy of
these resolutions and a statement of the manner of their adoption and
to execute, deliver and file any other certificate or instrument which
they may deem necessary or appropriate to render effective or otherwise
fully to carry out the intent and purpose of these resolutions.
IN WITNESS WHEREOF, said W. E. Butler, Chairman and Chief
Executive Officer, and E. R. Franklin, Secretary, of Eaton Corporation,
acting for and on behalf of said corporation, have hereunto subscribed
their names and caused the seal of said corporation to be hereunto
affixed this 27th day of April, 1994.
By: /S/ W.E. BUTLER
-------------------------------------------
Chairman and Chief Executive Officer
By: /S/ E.R. FRANKLIN
-------------------------------------------
Secretary
12
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4
<SEQUENCE>6
<FILENAME>a4358939-4b.txt
<DESCRIPTION>EXHIBIT 4B
<TEXT>
Eaton Corporation
2002 Annual Report on Form 10-K
Item 15 (c)
Exhibit 4 (b)
EATON CORPORATION
and
SOCIETY NATIONAL BANK
Rights Agreement
Dated as of June 28, 1995
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
Section 1. Certain Definitions............................................................................2
Section 2. Appointment of Rights Agent....................................................................6
Section 3. Issue of Right Certificates....................................................................6
Section 4. Form of Right Certificates.....................................................................9
Section 5. Countersignature and Registration..............................................................9
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen
Right Certificates............................................................................10
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.................................11
Section 8. Cancellation and Destruction of Right Certificates............................................13
Section 9. Availability of Preferred Shares..............................................................13
Section 10. Preferred Shares Record Date..................................................................14
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights............................15
Section 12. Certificate of Adjusted Purchase Price or Number of Shares....................................26
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power..........................26
Section 14. Fractional Rights and Fractional Shares.......................................................27
Section 15. Rights of Action..............................................................................29
Section 16. Agreement of Right Holders....................................................................30
Section 17. Right Certificate Holder Not Deemed a Stockholder.............................................30
Section 18. Concerning the Rights Agent...................................................................31
Section 19. Merger or Consolidation or Change of Name of Rights Agent.....................................32
Section 20. Rights and Duties of Rights Agent.............................................................33
Section 21. Change of Rights Agent........................................................................35
Section 22. Issuance of New Right Certificates............................................................37
Section 23. Redemption....................................................................................37
</TABLE>
- i -
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Section 24. Exchange......................................................................................38
Section 25. Notice of Certain Events......................................................................40
Section 26. Notices.......................................................................................41
Section 27. Supplements and Amendments....................................................................42
Section 28. Successors....................................................................................43
Section 29. Benefits of this Agreement....................................................................43
Section 30. Severability..................................................................................43
Section 31. Governing Law.................................................................................43
Section 32. Counterparts..................................................................................44
Section 33. Descriptive Headings..........................................................................44
Signatures ..............................................................................................45
</TABLE>
Exhibit A - Form of Certificate of Amendment
Exhibit B - Form of Right Certificate
Exhibit C - Summary of Rights to Purchase Preferred Shares
- ii -
<PAGE>
Agreement, dated as of June 28, 1995, between Eaton
Corporation, an Ohio corporation (the "Company"), and Society National Bank, a
national banking association (the "Rights Agent").
The Board of Directors of the Company has authorized and
declared a dividend of one preferred share purchase right (a "Right") for each
Common Share (as hereinafter defined) of the Company outstanding on July 12,
1995 (the "Record Date"), each Right representing the right to purchase one
one-hundredth of a Preferred Share (as hereinafter defined), upon the terms and
subject to the conditions herein set forth, and has further authorized and
directed the issuance of one Right with respect to each Common Share that shall
become outstanding between the Record Date and the earliest of the Distribution
Date, the Redemption Date and the Final Expiration Date (as such terms are
hereinafter defined).
Accordingly, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as
such term is hereinafter defined) of 20% or more of the Common Shares of the
Company then outstanding, but shall not include the Company, any Subsidiary (as
such term is hereinafter defined) of the Company, any employee benefit plan of
the Company or any Subsidiary of the Company, or any entity holding Common
Shares for or pursuant to the terms of any such plan. Notwithstanding the
foregoing, no Person shall become an "Acquiring Person" as the result of an
acquisition of Common Shares by the Company which, by reducing the number of
2
<PAGE>
shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 20% or more of the Common Shares of the Company then
outstanding; provided, however, that if a Person shall become the Beneficial
Owner of 20% or more of the Common Shares of the Company then outstanding by
reason of share purchases by the Company and shall, after such share purchases
by the Company, become the Beneficial Owner of any additional Common Shares of
the Company, then such Person shall be deemed to be an "Acquiring Person".
Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an "Acquiring
Person", as defined pursuant to the foregoing provisions of this paragraph (a),
has become such inadvertently, and such Person divests as promptly as
practicable a sufficient number of Common Shares so that such Person would no
longer be an "Acquiring Person," as defined pursuant to the foregoing provisions
of this paragraph (a), then such Person shall not be deemed to be or have ever
been an "Acquiring Person" for any purposes of this Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or Associates has
(A) the right to acquire (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement, arrangement or
understanding (other than
3
<PAGE>
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities), or
upon the exercise of conversion rights, exchange rights, rights (other
than these Rights), warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, securities tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote pursuant to
any agreement, arrangement or understanding; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to beneficially
own, any security if the agreement, arrangement or understanding to
vote such security (1) arises solely from a revocable proxy or consent
given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations promulgated under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or in
directly, by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities) for the purpose of acquiring, holding,
voting (except to the extent contemplated by the proviso to Section
1(c)(ii)(B)) or disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial
Ownership to the contrary, the phrase "then outstanding," when used with
4
<PAGE>
reference to a Person's Beneficial Ownership of securities of the Company, shall
mean the number of such securities then issued and outstanding together with the
number of such securities not then actually issued and outstanding which such
Person would be deemed to own beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday, or a
day on which banking institutions in [Ohio] are authorized or obligated by law
or executive order to close.
(e) "Close of business" on any given date shall mean 5:00 P.M., Cleveland,
Ohio time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 P.M., Cleveland, Ohio time, on the next succeeding
Business Day.
(f) "Common Shares" when used with reference to the Company shall mean the
shares of common stock, par value $.50 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(g) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(h) "Final Expiration Date" shall have the meaning set forth in Section 7
hereof.
(i) "Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
(j) "Preferred Shares" shall mean shares of Series A Participating
Preferred Stock, without par value, of the Company having the rights and
preferences set forth in the Form of Certificate of Amendment attached to this
Agreement as Exhibit A.
5
<PAGE>
(k) "Redemption Date" shall have the meaning set forth in
Section 7 hereof.
(l) "Shares Acquisition Date" shall mean the first date of
public announcement by the Company or an Acquiring Person that an Acquiring
Person has become such.
(m) "Subsidiary" of any Person shall mean any corporation or
other entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such Person.
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to act as agent for the Company and the holders of the
Rights (who, in accordance with Section 3 hereof, shall prior to the
Distribution Date also be the holders of the Common Shares) in accordance with
the terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-Rights Agents as
it may deem necessary or desirable.
Section 3. Issue of Right Certificates. (a) Until the earlier
of (i) the tenth day after the Shares Acquisition Date or (ii) the tenth
business day (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person) after
the date of the commencement by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company or any entity holding Common Shares for or pursuant to
the terms of any such plan) of, or of the first public announcement of the
intention of any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of the Company or
any entity holding Common Shares for or pursuant to the terms of any such plan)
to commence, a tender or exchange offer the consummation of which would result
6
<PAGE>
in any Person becoming the Beneficial Owner of Common Shares aggregating 20% or
more of the then outstanding Common Shares (including any such date which is
after the date of this Agreement and prior to the issuance of the Rights; the
earlier of such dates being herein referred to as the "Distribution Date"), (x)
the Rights will be evidenced (subject to the provisions of Section 3(b) hereof)
by the certificates for Common Shares registered in the names of the holders
thereof (which certificates shall also be deemed to be Right Certificates) and
not by separate Right Certificates, and (y) the right to receive Right
Certificates will be transferable only in connection with the transfer of Common
Shares. As soon as practicable after the Distribution Date, the Company will
prepare and execute, the Rights Agent will countersign, and the Company will
send or cause to be sent (and the Rights Agent will, if requested, send) by
first-class, insured, postage-prepaid mail, to each record holder of Common
Shares as of the close of business on the Distribution Date, at the address of
such holder shown on the records of the Company, a Right Certificate, in
substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing
one Right for each Common Share so held. As of the Distribution Date, the Rights
will be evidenced solely by such Right Certificates.
The Company shall notify the Rights Agent in writing
immediately upon the occurrence of the Distribution Date and, if such
notification is given orally, the Company shall confirm same in writing on or
prior to the Business Day next following. Until such notice is received by the
Rights Agent, the Rights Agent may presume conclusively for all purposes that
the Distribution Date has not occurred.
(b) On the Record Date, or as soon as practicable thereafter,
the Company will send a copy of a Summary of Rights to Purchase Preferred
Shares, in substantially the form of Exhibit C hereto (the "Summary of Rights"),
by first-class, postage-prepaid mail, to each record holder of Common Shares as
7
<PAGE>
of the close of business on the Record Date, at the address of such holder shown
on the records of the Company. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders thereof
together with a copy of the Summary of Rights attached thereto. Until the
Distribution Date (or the earlier of the Redemption Date or the Final Expiration
Date), the surrender for transfer of any certificate for Common Shares
outstanding on the Record Date, with or without a copy of the Summary of Rights
attached thereto, shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby.
(c) Certificates for Common Shares which become outstanding
(including, without limitation, reacquired Common Shares referred to in the last
sentence of this paragraph (c)) after the Record Date but prior to the earliest
of the Distribution Date, the Redemption Date or the Final Expiration Date shall
have impressed on, printed on, written on or otherwise affixed to them the
following legend:
This certificate also evidences and entitles the holder hereof
to certain rights as set forth in a Rights Agreement between
Eaton Corporation and Society National Bank, dated as of June
28, 1995 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is
on file at the principal executive offices of Eaton
Corporation. Under certain circumstances, as set forth in the
Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this
certificate. Eaton Corporation, will mail to the holder of
this certificate a copy of the Rights Agreement without charge
after receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, Rights
issued to any Person who becomes an Acquiring Person (as
defined in the Rights Agreement) may become null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
8
<PAGE>
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby. In
the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed cancelled and retired so that the Company shall
not be entitled to exercise any Rights associated with the Common Shares which
are no longer outstanding.
Section 4. Form of Right Certificates. The Right Certificates
(and the forms of election to purchase Preferred Shares and of assignment to be
printed on the reverse thereof) shall be substantially the same as Exhibit B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage. Subject to the provisions of Section 22 hereof, the Right Certificates
shall entitle the holders thereof to purchase such number of one one-hundredths
of a Preferred Share as shall be set forth therein at the price per one
one-hundredth of a Preferred Share set forth therein (the "Purchase Price"), but
the number of such one one-hundredths of a Preferred Share and the Purchase
Price shall be subject to adjustment as provided herein.
Section 5. Countersignature and Registration. The Right
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its Chief Executive Officer, its President, any of its Vice Presidents,
or its Treasurer, either manually or by facsimile signature, shall have affixed
thereto the Company's seal or a facsimile thereof, and shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature.
9
<PAGE>
The Right Certificates shall be manually countersigned by
the Rights Agent and shall not be valid for any purpose unless countersigned. In
case any officer of the Company who shall have signed any of the Right
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of the Company to sign such Right
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office, books for registration and transfer
of the Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
Subject to the provisions of Section 14 hereof, at any time after the close of
business on the Distribution Date, and at or prior to the close of business on
the earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates,
10
<PAGE>
entitling the registered holder to purchase a like number of one one-hundredths
of a Preferred Share as the Right Certificate or Right Certificates surrendered
then entitled such holder to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Right Certificate or Right
Certificates shall make such request in writing delivered to the Rights Agent,
and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the principal office of the
Rights Agent. Thereupon the Rights Agent shall countersign and deliver to the
person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date
of Rights. (a) The registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
11
<PAGE>
duly executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each one one-hundredth of a
Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the close of business on July 12, 2005 (the "Final Expiration
Date"), (ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the "Redemption Date"), or (iii) the time at which such Rights are
exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-hundredth of a
Preferred Share purchasable pursuant to the exercise of a Right shall initially
be $250, and shall be subject to adjustment from time to time as provided in
Section 11 or 13 hereof and shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase duly executed,
accompanied by payment of the Purchase Price for the shares to be purchased and
an amount equal to any applicable transfer tax required to be paid by the holder
of such Right Certificate in accordance with Section 9 hereof by certified
check, cashier's check or money order payable to the order of the Company, the
Rights Agent shall thereupon promptly (i) (A) requisition from any transfer
agent of the Preferred Shares certificates for the number of Preferred Shares to
be purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) requisition from the depositary agent
depositary receipts representing such number of one one-hundredths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company hereby directs the depositary
agent to comply with such request, (ii) when appropriate, requisition from the
Company the amount of cash to be paid in lieu of issuance of fractional shares
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in accordance with Section 14 hereof, (iii) after receipt of such certificates
or depositary receipts, cause the same to be delivered to or upon the order of
the registered holder of such Right Certificate, registered in such name or
names as may be designated by such holder and (iv) when appropriate, after
receipt, deliver such cash to or upon the order of the registered holder of such
Right Certificate.
(d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 14 hereof.
Section 8. Cancellation and Destruction of Right Certificates.
All Right Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no
Right Certificates shall be issued in lieu thereof except as expressly permitted
by any of the provisions of this Rights Agreement. The Company shall deliver to
the Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all cancelled Right Certificates to the Company, or shall, at the written
request of the Company, destroy such cancelled Right Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. Availability of Preferred Shares. The Company
covenants and agrees that it will cause to be reserved and kept available out of
its authorized and unissued Preferred Shares or any Preferred Shares held in its
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treasury, the number of Preferred Shares that will be sufficient to permit the
exercise in full of all outstanding Rights in accordance with Section 7. The
Company covenants and agrees that it will take all such action as may be
necessary to ensure that all Preferred Shares delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such Preferred Shares
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Right Certificates
or of any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose
name any certificate for Preferred Shares is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of the
Preferred Shares represented thereby on, and such certificate shall be dated,
the date upon which the Right Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made; provided, however, that if the date of such surrender and
payment is a date upon which the Preferred Shares transfer books of the Company
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<PAGE>
are closed, such person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the Preferred Shares transfer books of the Company are open. Prior to
the exercise of the Rights evidenced thereby, the holder of a Right Certificate
shall not be entitled to any rights of a holder of Preferred Shares for which
the Rights shall be exercisable, including, without limitation, the right to
vote, to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights. The Purchase Price, the number of Preferred Shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Shares
payable in Preferred Shares, (B) subdivide the outstanding Preferred
Shares, (C) combine the outstanding Preferred Shares into a smaller
number of Preferred Shares or (D) issue any shares of its capital stock
in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective
date of such subdivision, combination or reclassification, and the
number and kind of shares of capital stock issuable on such date, shall
be proportionately adjusted so that the holder of any Right exercised
15
<PAGE>
after such time shall be entitled to receive the aggregate number and
kind of shares of capital stock which, if such Right had been exercised
immediately prior to such date and at a time when the Preferred Shares
transfer books of the Company were open, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification; provided, however, that
in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital
stock of the Company issuable upon exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any
Person becomes an Acquiring Person, each holder of a Right shall
thereafter have a right to receive, upon exercise thereof at a price
equal to the then current Purchase Price multiplied by the number of
one one-hundredths of a Preferred Share for which a Right is then
exercisable, in accordance with the terms of this Agreement and in lieu
of Preferred Shares, such number of Common Shares of the Company as
shall equal the result obtained by (x) multiplying the then current
Purchase Price by the number of one one-hundredths of a Preferred Share
for which a Right is then exercisable and dividing that product by (y)
50% of the then current per share market price of the Company's Common
Shares (determined pursuant to Section 11(d) hereof) on the date of the
occurrence of such event. In the event that any Person shall become an
Acquiring Person and the Rights shall then be outstanding, the Company
shall not take any action which would eliminate or diminish the
benefits intended to be afforded by the Rights.
From and after the occurrence of such event, any Rights that
are or were acquired or beneficially owned by any Acquiring Person (or
any Associate or Affiliate of such Acquiring Person) shall be void and
any holder of such Rights shall thereafter have no right to exercise
such Rights under any provision of this Agreement. No Right Certificate
16
<PAGE>
shall be issued pursuant to Section 3 that represents Rights
beneficially owned by an Acquiring Person whose Rights would be void
pursuant to the preceding sentence or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the
transfer of any Rights to an Acquiring Person whose Rights would be
void pursuant to the preceding sentence or any Associate or Affiliate
thereof or to any nominee of such Acquiring Person, Associate or
Affiliate; and any Right Certificate delivered to the Rights Agent for
transfer to an Acquiring Person whose Rights would be void pursuant to
the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but unissued to permit
the exercise in full of the Rights in accordance with the foregoing
subparagraph (ii), the Company shall take all such action as may be
necessary to authorize additional Common Shares for issuance upon
exercise of the Rights. In the event the Company shall, after good
faith effort, be unable to take all such action as may be necessary to
authorize such additional Common Shares, the Company shall substitute,
for each Common Share that would otherwise be issuable upon exercise of
a Right, a number of Preferred Shares or fraction thereof such that the
current per share market price of one Preferred Share multiplied by
such number or fraction is equal to the current per share market price
of one Common Share as of the date of issuance of such Preferred Shares
or fraction thereof.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred
Shares entitling them (for a period expiring within 45 calendar days
after such record date) to subscribe for or purchase Preferred Shares
(or shares having the same rights, privileges and preferences as the
Preferred Shares ("equivalent preferred shares")) or securities
17
<PAGE>
convertible into Preferred Shares or equivalent preferred shares at a
price per Preferred Share or equivalent preferred share (or having a
conversion price per share, if a security convertible into Preferred
Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section
11(d)) on such record date, the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price
in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of Preferred Shares outstanding
on such record date plus the number of Preferred Shares which the
aggregate offering price of the total number of Preferred Shares and/or
equivalent preferred shares so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be
offered) would purchase at such current market price and the
denominator of which shall be the number of Preferred Shares
outstanding on such record date plus the number of additional Preferred
Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so
to be offered are initially convertible); provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right
be less than the aggregate par value of the shares of capital stock of
the Company issuable upon exercise of one Right. In case such
subscription price may be paid in a consideration part or all of which
shall be in a form other than cash, the value of such consideration
shall be as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed
with the Rights Agent. Preferred Shares owned by or held for the
account of the Company shall not be deemed outstanding for the purpose
of any such computation. Such adjustment shall be made successively
whenever such a record date is fixed; and in the event that such
rights, options or warrants are not so issued, the Purchase Price shall
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<PAGE>
be adjusted to be the Purchase Price which would then be in effect if
such record date had not been fixed.
(c) In case the Company shall fix a record date for the making
of a distribution to all holders of the Preferred Shares (including any
such distribution made in connection with a consolidation or merger in
which the Company is the continuing or surviving corporation) of
evidences of indebtedness or assets (other than a regular quarterly
cash dividend or a dividend payable in Preferred Shares) or
subscription rights or warrants (excluding those referred to in Section
11(b) hereof), the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of
which shall be the then current per share market price of the Preferred
Shares on such record date, less the fair market value (as determined
in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights
Agent) of the portion of the assets or evidences of indebtedness so to
be distributed or of such subscription rights or warrants applicable to
one Preferred Share and the denominator of which shall be such current
per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital
stock of the Company to be issued upon exercise of one Right. Such
adjustments shall be made successively whenever such a record date is
fixed; and in the event that such distribution is not so made, the
Purchase Price shall again be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security" for the
purpose of this Section 11(d)(i)) on any date shall be deemed to be the
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<PAGE>
average of the daily closing prices per share of such Security for the
30 consecutive Trading Days (as such term is hereinafter defined)
immediately prior to such date; provided, however, that in the event
that the current per share market price of the Security is determined
during a period following the announcement by the issuer of such
Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or
(B) any subdivision, combination or reclassification of such Security
and prior to the expiration of 30 Trading Days after the ex-dividend
date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such
case, the current per share market price shall be appropriately
adjusted to reflect the current market price per share equivalent of
such Security. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the
New York Stock Exchange or, if the Security is not listed or admitted
to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the
Security is listed or admitted to trading or, if the Security is not
listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and
low asked prices in the over-the-counter market, as reported by the
National Association of Securities Dealers, Inc. Automated Quotations
System ("NASDAQ") or such other system then in use, or, if on any such
date the Security is not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional
market maker making a market in the Security selected by the Board of
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<PAGE>
Directors of the Company. The term "Trading Day" shall mean a day on
which the principal national securities exchange on which the Security
is listed or admitted to trading is open for the transaction of
business or, if the Security is not listed or admitted to trading on
any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder,
the "current per share market price" of the Preferred Shares
shall be determined in accordance with the method set forth in
Section 11(d)(i). If the Preferred Shares are not publicly
traded, the "current per share market price" of the Preferred
Shares shall be conclusively deemed to be the current per
share market price of the Common Shares as determined pursuant
to Section 11(d)(i) (appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring
after the date hereof), multiplied by one hundred. If neither
the Common Shares nor the Preferred Shares are publicly held
or so listed or traded, "current per share market price" shall
mean the fair value per share as determined in good faith by
the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
the Purchase Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one one-millionth
of a Preferred Share or one ten-thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
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<PAGE>
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section
11(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock of the Company other than Preferred
Shares, thereafter the number of such other shares so receivable upon exercise
of any Right shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-hundredths of a Preferred Share (calculated to the nearest one
one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number
of one one-hundredths of a share covered by a Right immediately prior to this
adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
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<PAGE>
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in substitution
for any adjustment in the number of one one-hundredths of a Preferred Share
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number of Rights shall be exercisable for the number of
one one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates evidencing, subject
to Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company, shall
cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein and shall be
23
<PAGE>
registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-hundredths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter issued
may continue to express the Purchase Price and the number of one one-hundredths
of a Preferred Share which were expressed in the initial Right Certificates
issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-hundredth of the then par value, if
any, of the Preferred Shares issuable upon exercise of the Rights, the Company
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
24
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Section 11, as and to the extent that it in its sole discretion shall determine
to be advisable in order that any consolidation or subdivision of the Preferred
Shares, issuance wholly for cash of any Preferred Shares at less than the
current market price, issuance wholly for cash of Preferred Shares or securities
which by their terms are convertible into or exchangeable for Preferred Shares,
dividends on Preferred Shares payable in Preferred Shares or issuance of rights,
options or warrants referred to hereinabove in Section 11(b), hereafter made by
the Company to holders of its Preferred Shares shall not be taxable to such
stockholders.
(n) In the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-hundredths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-hundredths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
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<PAGE>
Section 12. Certificate of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Section 11 or 13
hereof, the Company shall promptly (a) prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) file with the Rights Agent and with each transfer agent for the Common
Shares or the Preferred Shares a copy of such certificate and (c) mail a brief
summary thereof to each holder of a Right Certificate in accordance with Section
25 hereof.
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power. In the event, directly or indirectly, at any time after
a Person has become an Acquiring Person, (a) the Company shall consolidate with,
or merge with and into, any other Person, (b) any Person shall consolidate with
the Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (c) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person other than the Company or one or more of its wholly-owned
Subsidiaries, then, and in each such case, proper provision shall be made so
that (i) each holder of a Right (except as otherwise provided herein) shall
thereafter have the right to receive, upon the exercise thereof at a price equal
to the then current Purchase Price multiplied by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of such other Person (including the Company as
successor thereto or as the surviving corporation) as shall equal the result
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<PAGE>
obtained by (A) multiplying the then current Purchase Price by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable and
dividing that product by (B) 50% of the then current per share market price of
the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer; (ii) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or transfer, all
the obligations and duties of the Company pursuant to this Agreement; (iii) the
term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such
issuer shall take such steps (including, but not limited to, the reservation of
a sufficient number of its Common Shares in accordance with Section 9 hereof) in
connection with such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to the Common Shares thereafter deliverable upon the exercise of
the Rights. The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and such issuer shall have
executed and delivered to the Rights Agent a supplemental agreement so
providing. The Company shall not enter into any transaction of the kind referred
to in this Section 13 if at the time of such transaction there are any rights,
warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights. The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares. (a) The
Company shall not be required to issue fractions of Rights or to distribute
Right Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Right Certificates
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<PAGE>
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right. For the purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price for any day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Rights
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Board of Directors of
the Company. If on any such date no such market maker is making a market in the
Rights, the fair value of the Rights on such date as determined in good faith by
the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute
certificates which evidence fractional Preferred Shares (other than fractions
which are integral multiples of one one-hundredth of a Preferred Share).
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Fractions of Preferred Shares in integral multiples of one one-hundredth of a
Preferred Share may, at the election of the Company, be evidenced by depositary
receipts, pursuant to an appropriate agreement between the Company and a
depositary selected by it; provided, that such agreement shall provide that the
holders of such depositary receipts shall have all the rights, privileges and
preferences to which they are entitled as beneficial owners of the Preferred
Shares represented by such depositary receipts. In lieu of fractional Preferred
Shares that are not integral multiples of one one-hundredth of a Preferred
Share, the Company shall pay to the registered holders of Right Certificates at
the time such Rights are exercised as herein provided an amount in cash equal to
the same fraction of the current market value of one Preferred Share. For the
purposes of this Section 14(b), the current market value of a Preferred Share
shall be the closing price of a Preferred Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect
of this Agreement, excepting the rights of action given to the Rights Agent
under Section 18 hereof, are vested in the respective registered holders of the
Right Certificates (and, prior to the Distribution Date, the registered holders
of the Common Shares); and any registered holder of any Right Certificate (or,
prior to the Distribution Date, of the Common Shares), without the consent of
the Rights Agent or of the holder of any other Right Certificate (or, prior to
the Distribution Date, of the Common Shares), may, in his own behalf and for his
own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
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<PAGE>
right to exercise the Rights evidenced by such Right Certificate in the manner
provided in such Right Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a
Right, by accepting the same, consents and agrees with the Company and the
Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder.
No holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
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<PAGE>
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to
pay to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense (including, without
limitation, the reasonable expenses of legal counsel), incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of its duties under this Agreement.
The Rights Agent shall be protected and shall incur no
liability for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement, in reliance upon any
Right Certificate or certificate for the Preferred Shares or Common Shares or
for other securities of the Company, instrument of assignment or transfer, power
of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
31
<PAGE>
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons, or otherwise upon the advice of counsel as set
forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of
Rights Agent. Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the stock transfer business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned; and in
case at that time any of the Right Certificates shall not have been
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<PAGE>
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
Section 20. Rights and Duties of Rights Agent. The Rights
Agent undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Right Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company
and any other Person only for its own negligence, bad faith or willful
misconduct.
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(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any
adjustment in the terms of the Rights (including the manner, method or amount
thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after actual
notice that such change or adjustment is required); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
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<PAGE>
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Secretary or the Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered by it in
good faith in accordance with instructions of any such officer or for any delay
in acting while waiting for those instructions.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct, provided reasonable care was exercised in
the selection and continued employment thereof.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company and to each
transfer agent of the Common Shares or Preferred Shares by registered or
certified mail, and to the holders of the Right Certificates by first-class
35
<PAGE>
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
30 days' notice in writing, mailed to the Rights Agent or successor Rights
Agent, as the case may be, and to each transfer agent of the Common Shares or
Preferred Shares by registered or certified mail, and to the holders of the
Right Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Right Certificate
(who shall, with such notice, submit his Right Certificate for inspection by the
Company), then the registered holder of any Right Certificate may apply to any
court of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the United
States or of the States of Ohio or New York (or of any other state of the United
States so long as such corporation is authorized to do business as a banking
institution in the States of Ohio or New York), in good standing, having an
office in the States of Ohio or New York, which is authorized under such laws to
exercise corporate trust or stock transfer powers and is subject to supervision
or examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $50
million. After appointment, the successor Rights Agent shall be vested with the
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<PAGE>
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Shares
or Preferred Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, at its option, issue new Right Certificates
evidencing Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or kind or
class of shares or other securities or property purchasable under the Right
Certificates made in accordance with the provisions of this Agreement.
Section 23. Redemption. (a) The Board of Directors of the
Company may, at its option, at any time prior to such time as any Person becomes
an Acquiring Person, redeem all but not less than all the then outstanding
Rights at a redemption price of $.01 per Right, appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such redemption price being hereinafter referred to as the
"Redemption Price"). The redemption of the Rights by the Board of Directors may
be made effective at such time, on such basis and with such conditions as the
Board of Directors in its sole discretion may establish.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights pursuant to paragraph (a) of
this Section 23, and without any further action and without any notice, the
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<PAGE>
right to exercise the Rights will terminate and the only right thereafter of the
holders of Rights shall be to receive the Redemption Price. The Company shall
promptly give public notice of any such redemption; provided, however, that the
failure to give, or any defect in, any such notice shall not affect the validity
of such redemption. Within 10 days after such action of the Board of Directors
ordering the redemption of the Rights, the Company shall mail a notice of
redemption to all the holders of the then outstanding Rights at their last
addresses as they appear upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agent for the
Common Shares. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made. Neither the Company nor any of its Affiliates or Associates may
redeem, acquire or purchase for value any Rights at any time in any manner other
than that specifically set forth in this Section 23 or in Section 24 hereof, and
other than in connection with the purchase of Common Shares prior to the
Distribution Date.
Section 24. Exchange. (a) The Board of Directors of the
Company may, at its option, at any time after any Person becomes an Acquiring
Person, exchange all or part of the then outstanding and exercisable Rights
(which shall not include Rights that have become void pursuant to the provisions
of Section 11(a)(ii) hereof) for Common Shares at an exchange ratio of one
Common Share per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such exchange
ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding
the foregoing, the Board of Directors shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or any such Subsidiary, or
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<PAGE>
any entity holding Common Shares for or pursuant to the terms of any such plan),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to paragraph (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of Common Shares equal to
the number of such Rights held by such holder multiplied by the Exchange Ratio.
The Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such action as may be necessary to authorize additional
39
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Common Shares for issuance upon exchange of the Rights. In the event the Company
shall, after good faith effort, be unable to take all such action as may be
necessary to authorize such additional Common Shares, the Company shall
substitute, for each Common Share that would otherwise be issuable upon exchange
of a Right, a number of Preferred Shares or fraction thereof such that the
current per share market price of one Preferred Share multiplied by such number
or fraction is equal to the current per share market price of one Common Share
as of the date of issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Common Share. For the
purposes of this paragraph (d), the current market value of a whole Common Share
shall be the closing price of a Common Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events. (a) In case the Company
shall propose (i) to pay any dividend payable in stock of any class to the
holders of its Preferred Shares or to make any other distribution to the holders
of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to
offer to the holders of its Preferred Shares rights or warrants to subscribe for
or to purchase any additional Preferred Shares or shares of stock of any class
or any other securities, rights or options, (iii) to effect any reclassification
of its Preferred Shares (other than a reclassification involving only the
subdivision of outstanding Preferred Shares), (iv) to effect any consolidation
or merger into or with, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one or
more transactions, of 50% or more of the assets or earning power of the Company
40
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and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the Common Shares and/or Preferred Shares, whichever shall be the
earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under Section 11(a)(ii)
hereof.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
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first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
Eaton Corporation
Eaton Center
Cleveland, Ohio 44114
Attention: Office of the Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
Society National Bank
Attention:
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. The Company may from
time to time supplement or amend this Agreement without the approval of any
holders of Right Certificates in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provisions herein, or to make any other provisions with respect
to the Rights which the Company may deem necessary or desirable, any such
supplement or amendment to be evidenced by a writing signed by the Company and
the Rights Agent; provided, however, that from and after such time as any Person
becomes an Acquiring Person, this Agreement shall not be amended in any manner
which would adversely affect the interests of the holders of Rights. Without
limiting the foregoing, the Board of Directors of the Company may at any time
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prior to such time as any Person becomes an Acquiring Person amend this
Agreement to lower the thresholds set forth in Sections 1(a) and 3(a) to not
less than the greater of (i) the sum of .001% and the largest percentage of the
outstanding Common Shares then known by the Company to be beneficially owned by
any Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any entity
holding Common Shares for or pursuant to the terms of any such plan) and (ii)
10%.
Section 28. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Rights Agent and the registered holders of the Right Certificates
(and, prior to the Distribution Date, the Common Shares) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
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laws of the State of Ohio and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and attested, all as of the day and year first
above written.
EATON CORPORATION
Attest:
By: /s/ E.R. Franklin By: /s/ J.M. Carmont
---------------------------- ------------------------------------
Title: Secretary Title: Vice President and Treasurer
SOCIETY NATIONAL BANK,
as Rights Agent
Attest:
By: /s/ Laura Thoms By: /s/ William Bedy
---------------------------- ---------------------------------------
Title: Assistant Vice President Title: Vice President
45
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Exhibit A
FORM
of
CERTIFICATE OF AMENDMENT
by
DIRECTORS
of
EATON CORPORATION
<PAGE>
William E. Butler, Chairman of the Board and Chief Executive
Officer, and Earl R. Franklin, Secretary of Eaton Corporation, an Ohio
corporation for profit with its principal place of business at Cleveland, Ohio
(hereinafter called the "Corporation"), hereby certify that at a meeting of the
Board of Directors called and held on the 28th day of June, 1995 the following
resolution was adopted pursuant to Section 1701.70(B)(1) of the Ohio General
Corporation Law:
RESOLVED, that pursuant to the authority vested in the Board
of Directors (hereinafter called the "Board of Directors" or the "Board") in
accordance with the provisions of the Ohio General Corporation Law, as amended,
and by Article FOURTH of the Corporation's Amended Articles of Incorporation,
such Article FOURTH is amended to add a new paragraph 9 to Division A providing
for a series of Serial Preferred Shares, without par value, of the Corporation
and that the designation and the authorized number of shares of, and the
relative rights, preferences, and limitations of, such series are as follows:
Series A Participating Preferred Stock:
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be 900,000.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
class of preferred stock ranking prior and superior to the Series A Preferred
Stock with respect to dividends, the holders of shares of Series A Preferred
Stock, in preference to the holders of Common Stock, par value $.50 per share
(the "Common Stock"), of the Corporation, and of any other junior stock, shall
be entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, quarterly dividends payable in cash
on the first day of March, June, September and December in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $1 or (b)
subject to the provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series A Preferred Stock. In the event the Corporation shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
A-1
<PAGE>
(B) The Corporation shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the
Series A Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date of
issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Each share of Series A Preferred Stock shall entitle the
holder thereof to 1 vote on all matters submitted to a vote of the
stockholders of the Corporation. The holders of fractional Series A
Preferred Stock shall not be entitled to any vote on any matter
submitted to a vote of the shareholders of the Corporation.
(B) Subject to the provisions of Paragraph 6 of Division A of
this Article FOURTH, the holders of Serial Preferred Shares shall be
entitled to elect two directors of the Corporation whenever dividends
payable on any series of Serial Preferred Shares shall be in default as
qualified therein. For purposes of the holders of Serial Preferred
Shares exercising such right, the provisions of the Corporation's Code
of Regulations and other provisions of law shall apply, as if the
Serial Preferred Shares were the only class of shares of the
Corporation outstanding.
(C) Except as otherwise provided herein, in the Amended
Articles of Incorporation of the Corporation, in any other Certificate
of Amendment creating a series of Serial Preferred Shares or any
A-2
<PAGE>
similar stock, or by law, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock and any other capital
stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(D) Except as set forth herein, in the Amended Articles of
Incorporation of the Corporation, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and all
such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to
the Series A Preferred Stock, provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares
of any such junior stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series A
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and
preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
A-3
<PAGE>
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued Serial Preferred Shares and may be reissued as part of a new series of
Serial Preferred Shares subject to the conditions and restrictions on issuance
set forth herein, in the Amended Articles of Incorporation, or in any other
Certificate of Amendment creating a series of Serial Preferred Shares or any
similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case each share
of Series A Preferred Stock shall at the same time be similarly exchanged or
A-4
<PAGE>
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not
be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, on a parity
with any other series of Serial Preferred Shares and shall rank junior to any
series of any other class of preferred stock of the Corporation which by its
terms is senior to the Serial Preferred Shares.
Section 10. Amendment. Subject to the provisions of Article
FOURTH of the Corporation's Amended Articles of Incorporation, the Amended
Articles of Incorporation and the Code of Regulations of the Corporation shall
not be amended, altered or repealed in any manner which would affect adversely
the voting powers, rights or preferences of the holders of the Series A
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock, voting together as a single class.
IN WITNESS WHEREOF, this Certificate of Amendment is executed
on behalf of the Corporation by its Chairman of the Board and Chief Executive
Officer and attested by its Secretary this ________________ day of ____________,
1995.
Chairman of the Board and
Chief Executive Officer
Attest:
Secretary
A-5
<PAGE>
Exhibit B
Form of Right Certificate
Certificate No. R- Rights
NOT EXERCISABLE AFTER JULY 12, 2005 OR EARLIER IF REDEMPTION
OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT
$.01 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE
RIGHTS AGREEMENT.
Right Certificate
EATON CORPORATION
This certifies that_________________________, or registered
assigns, is the registered owner of the number of Rights set forth above, each
of which entitles the owner thereof, subject to the terms, provisions and
conditions of the Rights Agreement, dated as of June 28, 1995 (the "Rights
Agreement"), between Eaton Corporation, an Ohio corporation (the "Company"), and
Society National Bank (the "Rights Agent"), to purchase from the Company at any
time after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to 5:00 P.M., Cleveland, Ohio time, on July 12, 2005 at the
principal office of the Rights Agent, or at the office of its successor as
Rights Agent, one one-hundredth of a fully paid non-assessable share of Series A
Participating Preferred Stock, without par value (the "Preferred Shares"), of
the Company, at a purchase price of $250 per one one-hundredth of a Preferred
Share (the "Purchase Price"), upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase duly executed. The number of
Rights evidenced by this Right Certificate (and the number of one one-hundredths
of a Preferred Share which may be purchased upon exercise hereof) set forth
above, and the Purchase Price set forth above, are the number and Purchase Price
as of June 28, 1995, based on the Preferred Shares as constituted at such date.
As provided in the Rights Agreement, the Purchase Price and the number of one
one-hundredths of a Preferred Share which may be purchased upon the exercise of
the Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Right Certificates.
Copies of the Rights Agreement are on file at the principal executive offices of
the Company and the above-mentioned offices of the Rights Agent.
B-1
<PAGE>
This Right Certificate, with or without other Right
Certificates, upon surrender at the principal office of the Rights Agent, may be
exchanged for another Right Certificate or Right Certificates of like tenor and
date evidencing Rights entitling the holder to purchase a like aggregate number
of Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate (i) may be redeemed by the Company at a redemption
price of $.01 per Right or (ii) may be exchanged in whole or in part for
Preferred Shares or shares of the Company's Common Stock, par value $.50 per
share.
No fractional Preferred Shares will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share, which may, at the
election of the Company, be evidenced by depositary receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal. Dated as of
_____________________, 199__.
EATON CORPORATION
ATTEST: By:
----------------------------------------
Countersigned:
Society National Bank
By:
------------------------------------------------
Authorized Signature
B-2
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Right Certificate.)
FOR VALUE RECEIVED _________________________ hereby sells, assigns and transfers
unto______________________________________________________________
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ___________________________
Attorney, to transfer the within Right Certificate on the books of the
within-named Company, with full power of substitution.
Dated: _______________, 199_
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in the Securities Transfer
Agent Medallion Program, the Stock Exchanges Medallion Program or the New York
Stock Exchange, Inc. Medallion Signature Program.
--------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by
this Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
--------------------------------------------------
Signature
--------------------------------------------------
B-3
<PAGE>
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Right
Certificate.)
To: EATON CORPORATION
The undersigned hereby irrevocably elects to exercise
_______________________Rights represented by this Right Certificate to purchase
the Preferred Shares issuable upon the exercise of such Rights and requests that
certificates for such Preferred Shares be issued in the name of:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
Dated: _______________________, 199_
Signature
Signature Guaranteed:
B-4
<PAGE>
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
--------------------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by an Acquiring Person or an Affiliate or
Associate thereof (as defined in the Rights Agreement).
Signature
--------------------------------------------------------------------------
NOTICE
The signature in the Form of Assignment or Form of Election to
Purchase, as the case may be, must conform to the name as written upon the face
of this Right Certificate in every particular, without alteration or enlargement
or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
B-5
<PAGE>
SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES
Introduction
On June 28, 1995, the Board of Directors of Eaton Corporation
(the "Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding common share, par value $.50 per share (the
"Common Shares"), of the Company. The dividend is payable on July 12, 1995 (the
"Record Date") to the shareholders of record on that date. The description and
terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement")
between the Company and Society National Bank, as Rights Agent (the "Rights
Agent"). The Rights contain important "flip-over" and "flip-in" features
designed to protect the Company from unfair takeovers.
Purchase Price
Each Right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Participating Preferred Stock,
without par value (the "Preferred Shares"), of the Company at a price of $250
per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment.
Flip-Over
If the Company is acquired in a merger or other business
combination or 50% or more of its consolidated assets or earning power are sold
after a person or group has become an Acquiring Person (as defined below), each
holder of a Right will thereafter have the right to receive, upon exercise, that
number of shares of common stock of the acquiring company which then will have a
market value of two times the exercise price of the Right.
Flip-In
If any person or group of affiliated or associated persons
becomes an Acquiring Person, each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise that number of Common Shares
having a market value of two times the exercise price of the Right.
Transfer and Detachment
Until the Distribution Date, the Rights will be evidenced,
with respect to any of the Common Share certificates outstanding as of the
Record Date, by such Common Share certificate with a copy of this Summary of
Rights attached thereto. Until the Distribution Date (or earlier redemption or
expiration of the Rights), the Rights will be transferred with and only with the
Common Shares, and transfer of those certificates will also constitute transfer
of those
<PAGE>
Rights.
As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights ("Right Certificates") will be
mailed to holders of record of the Common Shares as of the close of business on
the Distribution Date and such separate Right Certificates alone will thereafter
evidence the Rights.
Distribution Date
The "Distribution Date" is the earlier of:
(i) 10 days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") have
acquired beneficial ownership of 20% or more of the outstanding Common
Shares; or
(ii) 10 business days (or such later date as may be determined
by action of the Board of Directors before any person or group becomes
an Acquiring Person) following the commencement of, or announcement of
an intention to make, a tender offer or exchange offer the consummation
of which would result in the beneficial ownership by a person or group
of 20% or more of the outstanding Common Shares.
Exercisability
The Rights are not exercisable until the Distribution Date.
The Rights will expire on July 12, 2005 (the "Final Expiration Date"), unless
the Final Expiration Date is extended or unless the Rights are earlier redeemed
or exchanged by the Company, as described below.
Adjustments
The Purchase Price, and the number of Preferred Shares or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution, in the event of:
(i) a stock dividend on, or a subdivision, combination or
reclassification of, the Preferred Shares,
(ii) the grant to holders of the Preferred Shares of certain
rights to subscribe for or purchase Preferred Shares at a price, or securities
convertible into Preferred Shares with a conversion price, less than the
then-current market price of the Preferred Shares, or
(iii) the distribution to holders of the Preferred Shares of
evidences of indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in Preferred
Shares) or of subscription rights or warrants (other than those referred to
above).
<PAGE>
The number of outstanding Rights is also subject to adjustment upon certain
occurrences prior to the Distribution Date.
With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment of at least
1% in such Purchase Price. No fractional Preferred Shares will be issued (other
than fractions which are integral multiples of one one-hundredth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
Preferred Shares
Preferred Shares purchasable upon exercise of the Rights will
not be redeemable. Each Preferred Share will be entitled to a minimum
preferential quarterly dividend payment of $1 per share but will be entitled to
an aggregate dividend of 100 times the dividend declared per Common Share. In
the event of liquidation, the holders of the Preferred Shares will be entitled
to a minimum preferential liquidation payment of $100 per share but will be
entitled to an aggregate payment of 100 times the payment made per Common Share.
Each Preferred Share will have 1 vote, voting together with the Common Shares.
Finally, in the event of any merger, consolidation or other transaction in which
Common Shares are exchanged, each Preferred Share will be entitled to receive
100 times the amount received per Common Share. The dividend and liquidation
rights and rights upon a merger, consolidation or other transaction are
protected by customary antidilution provisions.
The value of the one one-hundredth interest in a Preferred
Share purchasable upon exercise of each Right should, because of the nature of
the Preferred Shares' dividend and liquidation rights, approximate the value of
one Common Share.
Exchange
At any time after any person or group becomes an Acquiring
Person, and prior to the acquisition by that person or group of 50% or more of
the outstanding Common Shares, the Board of Directors of the Company may
exchange the Rights (other than Rights owned by the Acquiring Person, which will
have become void), in whole or in part, at an exchange ratio of one Common
Share, or one one-hundredth of a Preferred Share (or of a share of a class or
series of the Company's preferred stock having equivalent rights, preferences
and privileges), per Right (subject to adjustment).
Redemption
At any time prior to any person or group becoming an Acquiring
Person, the Board of Directors of the Company may redeem all the Rights at a
price of $.01 per Right (the "Redemption Price"). The redemption may be made
effective at such time, on such basis and with such conditions as the Board of
Directors in its sole discretion may establish. Immediately upon any redemption,
the right to exercise the Rights will terminate and the only right of the
holders of Rights will be to receive the Redemption Price.
<PAGE>
Amendments
The terms of the Rights may be amended by the Board of
Directors of the Company without the consent of the holders of the Rights,
including an amendment to lower the 20% threshold described above to not less
than the greater of (i) the sum of .001% and the largest percentage of the
outstanding Common Shares then known to the Company to be beneficially owned by
any person or group of affiliated or associated persons and (ii) 10%, except
that after any person or group becomes an Acquiring Person no such amendment may
adversely affect the interests of the holders of the Rights.
Rights as Holders
Until a Right is exercised, the holder thereof, as such, will
have no rights as a shareholder of the Company, including, without limitation,
the right to vote or to receive dividends.
Further Information
A copy of the Rights Agreement has been filed with the
Securities and Exchange Commission as an Exhibit to a Registration Statement on
Form 8-A dated , 1995. A copy of the Rights Agreement is available free of
charge from the Company's Shareholder Relations Department. This summary
description of the Rights does not purport to be complete and is qualified in
its entirety by reference to the Rights Agreement, which is hereby incorporated
herein by reference.
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<FILENAME>a438939-b.txt
<DESCRIPTION>EXHIBIT 10B
<TEXT>
03/08/01
Eaton Corporation
2002 Annual Report on Form 10-K
Item 15 (c)
Exhibit 10 (b)
EATON CORPORATION
EXECUTIVE STRATEGIC INCENTIVE PLAN I
(Effective as of January 1, 1991 and
Amended and Restated as of June 21, 1994, July 25, 1995,
April 21, 1998, April 1, 1999, and January 1, 2001)
<PAGE>
2
<PAGE>
<PAGE>
EATON CORPORATION
EXECUTIVE STRATEGIC INCENTIVE PLAN I
1. PURPOSE
The purpose of the Executive Strategic Incentive Plan I (the "Plan") is
to promote the growth and profitability of Eaton Corporation (the
"Company") through the granting of incentives intended to motivate
executives of the Company to achieve demanding long-term corporate
objectives and to attract and retain executives of outstanding ability.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan shall be
administered by the Compensation and Organization Committee (the
"Committee") of the Company's Board of Directors (the "Board") which
shall consist of at least three directors of the Company selected by
the Board.
Except as otherwise expressly provided herein, the Committee shall have
complete authority to: (i) interpret all provisions of the Plan
consistent with law; (ii) designate the executives to participate under
the Plan; (iii) determine the incentive targets and performance
objectives applicable to participants; (iv) adopt, amend and rescind
general and special rules and regulations for the Plan's
administration; and (v) make all other determinations necessary or
advisable for the administration of the Plan.
3. ELIGIBILITY
Any executive of the Company designated by the Committee in its sole
discretion shall be eligible to participate in the Plan.
4. INCENTIVE TARGETS
3
<PAGE>
(A) Establishment of Incentive Amounts and Conversion to Phantom Common
Share Units
Individual Incentive Amounts for each participant with respect
to each Plan Award Period (as defined below) shall be
determined by the Committee. With respect to Award Periods
beginning on or after January 1, 1998, participant incentive
targets will be expressed in the form of Phantom Common Share
Units which will be determined by the Committee by: (a) first
establishing the Individual Incentive Amount in cash for each
participant with respect to each Award Period and (b) then
dividing such Individual Incentive Amount by the average of
the mean prices for the Company's common shares for the first
twenty(20) trading days of each Award Period. In all cases,
the resulting Phantom Common Share Units shall be rounded up
to the nearest 50 whole units. For purposes of the Plan, "mean
price" shall be the mean of the highest and lowest selling
prices for Company common shares quoted on the New York Stock
Exchange List of Composite Transactions on the relevant
trading day. Notwithstanding the foregoing provisions of this
Section 4(A), the Committee may, in its sole discretion, use a
different method for establishing incentive targets for
participants under the Plan.
(B) Award Periods
Each Award Period shall be the four-calendar year period
commencing as of the first day of the calendar year in which
the performance objectives are established for the Award
Period as described in Section 4(C). A new Award Period shall
commence as of the first day of each calendar year, unless
otherwise specified by the Committee.
(C) Establishment of Company Performance Objectives
As soon as practicable at the beginning of each Award Period,
threshold, target, and maximum Company performance objectives
for such Award Period shall be established by the Committee.
For Award Periods commencing on or after January 1, 1998,
4
<PAGE>
unless otherwise determined by the Committee in its sole
discretion, performance objectives will be established using a
CFROGC/EPS Growth Performance Matrix which shall use the
Company's average cash flow return on gross capital ("CFROGC")
for such period along one axis and the Company's cumulative
earnings per share ("EPS") for such period along the second
axis. Within sixty (60) days after the performance objectives
have been established by the Committee, each participant will
be provided with written notice of his or her established
objectives. In its sole discretion, the Committee may modify
previously established performance objectives due to any
change in conditions, the occurrence of any events or other
factors which make such objectives unsuitable. Notwithstanding
the foregoing, after a Change in Control (as hereinafter
defined), neither the Committee nor the Board shall have the
authority to modify performance objectives in any manner which
could prove detrimental to the interests of the Plan's
participants.
(D) Determination of Payments
For each Award Period, payments ranging from 50% to 200% of
the Phantom Common Share Units credited under Section 4(A)
will be determined by the Committee for the attainment of
performance objectives between either threshold and target or
target and maximum.
For Award Periods beginning on or after January 1, 1998, Final
Individual Phantom Common Share Unit Awards shall be
determined by the Committee as promptly as practicable after
the completion of the Award Period: (a) determining the
CFROGC/EPS Growth Matrix Performance Percentage applicable for
the Award Period (equal to (i) 50% upon attainment of the
threshold performance objective; (ii) 100% upon attainment of
the target performance objective; and (iii) 200% upon
attainment of the maximum performance; or the applicable
percentage for performance between threshold and target or
target and maximum); (b) multiplying such percentage by the
5
<PAGE>
number of Performance Share Units credited to the participant
and (c) further multiplying the result by an Individual
Performance Rating which will be a whole percentage between
zero and 150% established by the Committee in its sole
discretion after considering the recommendations of Company
management.
The Final Individual Phantom Common Share Unit Award shall be
converted to cash at a market value of Company common shares
as determined by the Committee based on the average of the
mean prices for the Company's common shares for the final
twenty (20) trading days of the Award Period), and distributed
to the participate within ninety (90) days, unless the
participant has made an irrevocable election to defer all or
part of the amount of his or her award pursuant to any long
term incentive compensation deferral plan adopted by the
Committee or the Company.
5. PRORATA PAYMENTS
A participant must be employed by the Company or one of its
subsidiaries at the end of an Award Period in order to be entitled to a
payment in respect to such Award Period; provided, however, that a
payment, prorated for the participant's length of service during the
Award Period, may be authorized by the Committee, in its sole
discretion, in the event the employment of a participant terminates
before the end of an Award Period due to death, permanent disability,
normal or early retirement, closure or divestiture of an Eaton facility
or any other reason. Notwithstanding the foregoing, upon any
termination of the Plan by the Committee during the term of any Award
Period, payments to all participants will be made, prorated for each
participant's length of service during the Award Period prior to the
date of Plan termination.
6. OTHER PROVISIONS
(A) Adjustments upon Certain Changes
6
<PAGE>
In the event of changes to the structure or corporate
organization of the Company's businesses which affect the
participants and/or the performance prospects of the Company,
the Committee may make appropriate adjustments to individual
participant Incentive Targets or to the established
performance objectives for incomplete Award Periods.
Adjustments under this Section 6 shall be made by the
Committee, whose determination as to what adjustments shall be
made, and the extent thereof, shall be final, binding and
conclusive. Notwithstanding the foregoing, after a Change in
Control, neither the Committee nor the Board shall have the
authority to change established Performance Objectives in any
manner which could prove detrimental to the interests of the
participant.
(B) Change in Control Defined
For purposes of the Plan, a Change in Control shall be deemed
to have occurred if:
(i) a tender offer shall be made and consummated for the
ownership of 25% or more of the outstanding voting
securities of the Company,
(ii) the Company shall be merged or consolidated with
another corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting
securities of the surviving or resulting corporation
shall be owned in the aggregate by the former
shareholders of the Company as the same shall have
existed immediately prior to such merger or
consolidation,
(iii) the Company shall sell substantially all of its
assets to another corporation which is not a
wholly-owned subsidiary of the Company,
(iv) a "person" within the meaning of Section 3(a)(9) or
of Section 13(d)(3) of the Securities Exchange Act of
1934 (as in effect on the effective date of the Plan)
shall acquire 25% or more of the outstanding voting
7
<PAGE>
securities of the Company (whether directly,
indirectly, beneficially or of record). For purposes
of the Plan, ownership of voting securities shall
take into account and shall include ownership as
determined by applying the provisions of Rule
13d-3(d)(1)(I) under the Securities Exchange Act of
1934 (as in effect on the effective date of the
Plan), or
(v) during any period of two consecutive years,
individuals who at the beginning of such period
constitute the Board cease for any reason to
constitute at least a majority thereof unless the
election, or nomination for election by the Company's
shareholders, of each new director was approved by a
vote of at least two-thirds of the directors then
still in office who were directors at the beginning
of the period.
(C) Non-Transferability
No right to payment under the Plan shall be subject to debts,
contract liabilities, engagements or torts of the participant,
nor to transfer, anticipation, alienation, sale, assignment,
pledge or encumbrance by the participant except by will or the
law of descent and distribution or pursuant to a qualified
domestic relations order.
(D) Compliance with Law and Approval of Regulatory Bodies
No payment shall be made under the Plan except in compliance
with all applicable federal and state laws and regulations
including, without limitation, compliance with tax
requirements.
(E) No Right to Employment
Neither the adoption of the Plan nor its operation, nor any
document describing or referring to the Plan, or any part
thereof, shall confer upon any participant under the Plan any
right to continue in the employ of the Company or any
subsidiary, or shall in any way affect the right and power of
8
<PAGE>
the Company or any subsidiary to terminate the employment of
any participant under the Plan at any time with or without
assigning a reason therefore, to the same extent as the
Company might have done if the Plan had not been adopted.
(F) Interpretation of the Plan
Headings are given to the sections of the Plan solely as a
convenience to facilitate reference; such headings, numbering
and paragraphing shall not in any case be deemed in any way
material or relevant to the construction of the Plan or any
provisions thereof. The use of the masculine gender shall also
include within its meaning the feminine. The use of the
singular shall also include within its meaning the plural and
vice versa.
(G) Amendment and Termination
The Committee may at any time suspend, amend or terminate the
Plan. Notwithstanding the foregoing, upon the occurrence of a
Change in Control, no amendment, suspension or termination of
the Plan shall, without the consent of the participant, alter
or impair any rights or obligations under the Plan with
respect to such participant.
(H) Effective Dates of the Plan
The Plan was adopted by the Board on April 24, 1991 but the
effective date of the Plan shall be January 1, 1991. The Plan
was amended and restated as of June 21, 1994, July 25, 1995,
April 21, 1998, April 1, 1999 and January 1, 2001 (which
includes changes which affect Awards granted on or after
January 1, 1998).
9
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<FILENAME>a4358939-10d.txt
<DESCRIPTION>EXHIBIT 10D
<TEXT>
Eaton Corporation
2002 Annual Report on Form 10-K
Item 15 (c)
Exhibit 10 (d)
EATON CORPORATION
1991 STOCK OPTION PLAN
1. Purpose
The Plan enables professional and management employees who contribute
significantly to the success of Eaton Corporation (the "Company") to participate
in its future prosperity and growth and further to identify their interests with
those of the shareholders. The purpose of the Plan is to provide long-term
incentive for gain through outstanding service to the Company and its
shareholders and to assist in recruiting and retaining people of ability and
initiative in professional and management positions.
2. Administration
The Plan shall be administered by the Compensation Committee of the Board of
Directors (the "Committee") which shall consist of at least three directors
selected by the Board. The Board may also select one or more directors as
alternate members of the Committee, who may take the place of any absent member
or members at any meeting of the Committee. Members of the Committee are not
eligible to be granted an option under the Plan and each shall be a
"disinterested person" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934 ("Rule 16b-3"). The Committee shall have complete authority
to interpret all provisions of the Plan consistent with law, to prescribe the
form of instruments evidencing any option or Stock Appreciation Rights granted
under the Plan, to adopt, amend and rescind general and special rules and
regulations for its administration, and to make all other determinations
necessary or advisable for the administration of the Plan.
3. Eligibility
Any salaried employee (including officers) of the Company and any of its
subsidiaries (including any subsidiary acquired after adoption of the Plan) who
in the judgment of the Committee occupies a professional or management position
in which his efforts contribute to the profits or growth of the Company or a
subsidiary may be granted an option. Directors of the Company who are not also
salaried employees are not eligible to participate in the Plan.
The Committee will designate employees to whom options are to be granted and
will specify the number of shares subject to each option.
4. Shares Subject to Option
Options may be granted under the Plan on or after May 1, 1991. Each option so
granted will give the employee the right to purchase a designated number of the
Company's common shares with a par value of 50(cent) each ("shares"), (subject
to adjustment under Section 9 hereof). Upon exercise of any option or Stock
Appreciation Rights, the Company may deliver to the employee authorized but
unissued shares, treasury shares, or any combination thereof.
The Committee will maintain records showing the cumulative total of all shares
subject to options outstanding under the Plan. The number of shares delivered
under the Plan shall not exceed in the aggregate 1,250,000. This number may be
adjusted to reflect any change in the capitalization of the Company resulting
from a stock dividend or a stock split or other adjustment contemplated by
Section 9 hereof and occurring after the adoption of the Plan. Subject to
Section 6(D) hereof, if an option is terminated or cancelled, in whole or in
part, for any reason other than the exercise thereof, the shares allocated to
the option or portion thereof so terminated or cancelled may be reallocated to
another option or options to be granted under the Plan.
5. Stock Options
(A) Allotment of Shares
(1) Subject to the limitations specified in Section 5(A) (2) hereof, the
Committee may grant to participants (i) options which are intended to
qualify as incentive stock options ("Incentive Stock Options") under Section
422A of the Internal Revenue Code, as amended (the "Code"); (ii) options
which are not intended to qualify as Incentive Stock Options; or (iii) both
of the foregoing if not granted to a participant in tandem where the
exercise of one type of option would reduce the shares available under the
other type of option.
(2) The aggregate fair market value (determined at the time the option is
granted) of the shares with respect to Stock Options are exercisable for the
first time by any participant during any calendar year (under all plans of
the Company and its subsidiaries) shall not exceed $100,000.
<PAGE>
(3) Options which are not Incentive Stock Options may be granted to any
participant without regard to the limitation stated in Section 5(A)(2),
hereof.
(B) Option Price
The price per share for shares purchased by the exercise of any option granted
under the Plan will be the fair market value per share of such shares at the
time the option is granted.
(C) Option Period
Each option shall expire on such date as the Committee shall determine, but not
later than the tenth anniversary of the date on which the option is granted.
(D) Exercise of Options
(1) By a Participant During Continuous Employment
Subject to the provisions of the Plan, each option granted hereunder shall
be exercisable on such date or dates and during such period and for such
number of shares as the Committee may determine; provided, however, that in
no event shall an option be exercisable prior to six months from the date of
grant.
Subject to the provisions of subparagraphs (2) and (3) of paragraph (D) of
this Section 5, an employee may not exercise any part of an option granted
under the Plan unless, at the time of such exercise, he has been in the
continuous employment of the Company or a subsidiary of the Company since
the date the option was granted. The Committee may decide in each case to
what extent leaves of absence for government or military service, illness,
temporary disability, or other reasons shall not for this purpose be deemed
interruptions of continuous employment.
No option shall be exercisable after the expiration of ten years from the
date the option was granted. During the lifetime of an employee to whom an
option is granted, the option may be exercised only by the employee, his
attorney-in-fact, or his guardian as hereinafter provided.
On a case-by-case basis, the Committee may, in its sole discretion,
accelerate the schedule of the time or times when an option granted under
the Plan may be exercised.
(2) By a Former Employee
No person may exercise an option after he ceases to be an employee of the
Company or any subsidiary unless he ceases to be an employee of the Company
as a result of normal retirement, early retirement, or disability
retirement, either physical or mental, or because of physical or mental
disability. In these instances, the option may be exercised by him, his
attorney-in-fact, or his guardian, as appropriate, at any time after the
date on which he ceases to be an employee (but no later than the end of the
fixed term of the option) for the number of shares for which the option
could have been exercised at the time he ceased to be an employee, or for
such greater number of shares subject to the option as to which the
Committee may authorize an acceleration of the schedule of the time or times
of exercise under the option.
(3) In Case of Death
If an employee or former employee who was granted an option dies, and at the
time of death was entitled to exercise any option granted under the Plan,
the option may be exercised within twelve months after the death of the
employee or former employee (but no later than the end of the fixed term of
the option) by his estate, or by a person who acquires the right to exercise
the option by bequest or inheritance. The option may be exercised only for
the number of shares for which it could have been exercised at the time the
employee or former employee died, or for such greater number of shares
subject to the option for which the Committee may authorize an acceleration
of the schedule of the time or times of exercise under the option.
(4) Purchase of Options Following Death
Following the death of an employee or former employee who at the time of his
death was entitled to exercise any option granted under the Plan, the
Company may, at its election, upon the request of the then holder of the
option, at any time prior to its exercise, purchase the option at an
aggregate price (payable in cash or shares or a combination of both) equal
to the excess of the fair market value per share on the date of receipt by
the Company of the request over the option price per share, multiplied by
the number of shares to which the option was then subject to exercise. Only
the number of shares, if any, transferred in payment for options purchased
by the Company pursuant to the foregoing sentence shall be charged against
the maximum number of shares which may be delivered under the Plan as set
forth in Section 4 hereof.
2
<PAGE>
6. Stock Appreciation Rights
(A) The Committee may grant Stock Appreciation Rights in connection with all or
part of any option granted under the Plan, either at the time of the grant of
the option or at any time thereafter during the term of the option.
(B) Stock Appreciation Rights entitle the holder of an option in connection with
which such Stock Appreciation Rights are granted, upon exercise of the Stock
Appreciation Rights, to surrender the option, or any applicable portion thereof,
to the extent unexercised, and to receive a number of shares, or cash and
shares, determined pursuant to subparagraphs (3) and (4) of paragraph (C) of
this Section 6. The option shall, to the extent so surrendered, thereupon cease
to be exercisable.
(C) Stock Appreciation Rights shall be subject to the following terms and
conditions and to other terms and conditions not inconsistent with the Plan as
shall from time to time be approved by the Committee:
(1) Stock Appreciation Rights shall be exercisable at such time or times and
to the extent, but only to the extent, that the option to which they relate
shall be exercisable.
(2) Stock Appreciation Rights shall in no event be exercisable unless and
until the holder of the Stock Appreciation Rights has completed at least
twelve months of continuous service with the Company or a subsidiary of the
Company, or both, immediately following the date upon which the Stock
Appreciation Rights were granted.
(3) Upon exercise of Stock Appreciation Rights, the holder shall be entitled
to receive a number of shares equal in aggregate fair market value to the
amount by which the fair market value per share on the date of such exercise
shall exceed the option price per share of the related option, multiplied by
the number of shares in respect of which the Stock Appreciation Rights have
been exercised.
(4) As the Committee shall determine in its discretion, up to one-half of the
Company's obligation arising from an exercise of Stock Appreciation Rights
may be settled by the payment of cash. Any exercise of Stock Appreciation
Rights by an officer of the Company subject to Section 16(b) of the
Securities Exchange Act of 1934 involving a partial cash settlement may be
made, in accordance with Rule 16b-3, only during a period of time beginning
on the third business day following the date of release for publication of
any annual or quarterly summary statement of the Company's revenues and
earnings and ending on the twelfth business day following that date.
Notwithstanding the provisions of subparagraph (3) of paragraph (C) of this
Section 6, the Committee shall determine a single fair market value of the
shares for each exercise period referred to in the preceding sentence, which
fair market value shall not be higher than the highest sale price of the
shares during the exercise period, as reported on the New York Stock Exchange
list of composite transactions, which shall be applicable to all Stock
Appreciation Rights exercised by any of the officers of the Company subject
to Section 16(b) during the exercise period which involve a partial cash
settlement.
(D) To the extent that Stock Appreciation Rights shall be exercised, the option
in connection with which the Stock Appreciation Rights have been granted shall
be deemed to have terminated for a reason other than the exercise thereof for
the purpose of the limitation on the aggregate number of shares that may be
delivered under the Plan, and only the number of shares delivered upon the
exercise of the Stock Appreciation Rights shall be charged against the maximum
number of shares which may be delivered under the Plan, as set forth in Section
4 hereof.
7. Method of Exercise
Each option or Stock Appreciation Right granted under the Plan shall be deemed
exercised when the holder shall indicate the decision to do so in writing
delivered to the Company, and, in the case of an option, shall at the same time
tender to the Company payment in full for the shares for which the option is
exercised, and shall comply with such other reasonable requirements as the
Committee may establish pursuant to Section 10 hereof. Payment for the shares
shall be made in cash or, in the discretion of the Committee, through delivery
of shares or a combination of cash and shares. No person, estate or other entity
shall have any of the rights of a shareholder with reference to shares subject
to an option or Stock Appreciation Right until a certificate or certificates for
the shares have been delivered to such person, estate or other entity.
3
<PAGE>
An option or Stock Appreciation Right granted under the Plan may be exercised
for any lesser number of shares than the full amount for which it could be
exercised. Such partial exercise of an option or Stock Appreciation Right shall
not affect the right to exercise the option or Stock Appreciation Right from
time to time in accordance with the Plan for the remaining shares subject to the
option or Stock Appreciation Right.
8. Assignability
No option or Stock Appreciation Right granted to an employee under the Plan
shall be transferable by him except by will or the laws of descent and
distribution,
9. Adjustment upon Change of Shares
In the event of a reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split, stock
dividend, rights offering or other events affecting shares of the Company, the
number and class of shares then subject to options previously granted under the
Plan, and the price per share payable upon exercise of such options, shall be
equitably adjusted by the Committee to reflect the change.
10. Compliance with Law and Approval of Regulatory Bodies
No option and no Stock Appreciation Right shall be exercisable and no shares
will be delivered under the Plan except in compliance with all applicable
federal and state laws and regulations, including without limitation, compliance
with withholding tax requirements and with the rules of all domestic stock
exchanges on which the Company's shares may be listed. Any share certificate
issued to evidence shares for which an option is exercised may bear legends and
statements the Committee shall deem advisable to assure compliance with federal
and state laws and regulations. No option and no Stock Appreciation Right shall
be exercisable, and no shares will be delivered under the Plan, until the
Company has obtained consent or approval from regulatory bodies, federal or
state, having jurisdiction over such matters as the Committee may deem
advisable.
In the case of the exercise of an option by a person or estate acquiring the
right to exercise the option by bequest or inheritance, the Committee may
require reasonable evidence as to the ownership of the option and may require
such consents and releases of taxing authorities that it may deem advisable.
4
<PAGE>
11. General Provisions
Neither the adoption of the Plan nor its operation, nor any document describing
or referring to the Plan, or any part thereof, shall confer upon any employee
any right to continue in the employ of the Company or any subsidiary, or shall
in any way affect the right and power of the Company or any subsidiary to
terminate the employment of any employee at any time with or without assigning a
reason therefor to the same extent as the Company might have done if the Plan
had not been adopted.
Headings are given to the sections of the Plan solely as a convenience to
facilitate reference; such headings, numbering and paragraphing shall not in any
case be deemed in any way material or relevant to the construction of the Plan
or any provisions thereof. The use of the masculine gender shall also include
within its meanings the feminine. The use of the singular shall also include
within its meaning the plural, and vice versa.
12. Amendment
The Board of Directors of the Company may alter, amend or terminate the Plan
from time to time, except that no amendment to the Plan may become effective for
which approval of the shareholders is necessary for the continued applicability
to the Plan of Rule 16b-3.
13. Duration of the Plan
No option or Stock Appreciation Right shall be granted under the Plan after
December 31, 2000. Options and Stock Appreciation Rights granted before that
date shall remain valid thereafter in accordance with their terms.
14. Effective Date of Plan
The Plan was adopted by the Board of Directors of the Company on January 23,
1991. It will become effective if and when approved by shareholders holding a
majority of the Company's outstanding common shares entitled to vote at the
Annual Meeting of Shareholders in 1991.
5
<PAGE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>9
<FILENAME>a4358939-10e.txt
<DESCRIPTION>EXHIBIT 10E
<TEXT>
Eaton Corporation
2002 Annual Report on Form 10-K
Item 15 (c)
Exhibit 10 (e)
EATON 1995 STOCK PLAN
1. Purpose
The Plan enables non-employee directors and professional and management
employees who contribute significantly to the success of Eaton Corporation (the
"Company") to participate in its future prosperity and growth and to identify
their interests with those of the shareholders. The purpose of the Plan is to
provide long-term incentive through outstanding service to the Company and its
shareholders and to assist in recruiting and retaining people of outstanding
ability and initiative in non-employee director, professional and management
positions.
2. Administration
(A) Employee Awards
With respect to employee awards, the Plan shall be administered by the
Compensation Committee of the Board of Directors (the "Committee"), which shall
consist of at least three non-employee directors selected by the Board. All
other non-employee directors also may serve as alternate members of the
Committee, who may take the place of any absent member or members at any meeting
of the Committee.
(B) Non-employee Director Options
With respect to non-employee director options, the Plan shall be administered by
the Non-employee Director Options Committee, which shall be comprised of the
members of the Board who are employees of the Company.
(C) Authority of Committees
With respect only to those awards for which it has administrative
responsibility, the Committee and the Non-employee Director Options Committee
shall each have complete authority to interpret all provisions of the Plan
consistent with law, to determine the type and terms of awards consistent with
the provisions of the Plan, to prescribe the form of instruments evidencing
awards, to adopt, amend and rescind general and special rules and regulations
for its administration, and to make all other determinations necessary or
advisable for its administration of the Plan. The determinations of each
committee shall be final and conclusive. The committees may act by resolution or
in any other manner permitted by law.
3. Shares Available
The aggregate of (a) the number of Eaton common shares delivered by the Company
in payment and upon exercise of awards to employees and non-employee directors
and (b) the number of shares subject to outstanding awards to employees and
non-employee directors shall not exceed 5,000,000 at any one time, subject to
adjustments as authorized herein. Shares related to awards that are forfeited,
terminated, unexercised upon expiration, settled in cash in lieu of shares or in
such manner that all or some of the shares covered by an award are not issued,
or exchanged for awards that do not involve shares, shall immediately become
available for other awards. Shares available for awards may consist, in whole or
in part, of authorized and unissued shares or treasury shares.
The maximum aggregate number of shares or share units underlying options or
related to other awards that may be granted to any employee during any three
consecutive calendar year period is 500,000.
Awards may be made under the Plan on or after January 1, 1995, subject to
approval of the Plan by shareholders at the 1995 annual meeting.
<PAGE>
4. Eligibility for Employee Awards
Any salaried employee (including officers) of the Company or any of its
subsidiaries occupying a professional or management position may be granted an
award. The Committee (a) will designate employees to whom grants are to be made,
(b) will specify the number of options, stock appreciation rights, performance
shares, restricted shares or other stock-based awards subject to each grant, and
(c) subject to Section 5(C), will specify the price of the award.
5. Stock Options
(A) Employee Stock Options
Grants. The Committee may grant to eligible employees (i) options which are
intended to qualify as incentive stock options ("Incentive Stock Options") under
the Internal Revenue Code, or (ii) options which are not intended to qualify as
Incentive Stock Options. Each option will give the employee the right to
purchase a designated number of the Company's common shares with a par value of
50(cent) each ("shares"). The aggregate fair market value (at the time of grant)
of shares for Incentive Stock Options under all plans of the Company which
become initially exercisable by an employee during any calendar year shall not
exceed $100,000 (or such other amount as may be provided by the Internal Revenue
Code or regulations thereunder).
Exercise. Each option shall be exercisable on such date or dates, during such
period and for such number of shares, as shall be determined by the Committee as
of the date of grant, although grants to employees subject to Section 16(b) of
the Securities Exchange Act of 1934 ("16b") shall not be exercisable for at
least six months after those options are granted. The Committee may, in its sole
discretion, accelerate the times when an option may be exercised and the
Management Compensation Committee (comprised of Company officers) may do
likewise for employees who are not subject to 16b.
(B) Non-employee Director Stock Options
Grants. Subject to approval by shareholders at the 1995 annual meeting, each
person serving as a non-employee director on January 24, 1995 and who continues
serving in that capacity after the annual meeting of shareholders on April 26,
1995, has been granted an option for 5,000 shares at an exercise price of
$48.56. Each person who becomes a non-employee director after January 24, 1995
automatically shall be granted an option for 5,000 shares upon the date of his
or her election. Each non-employee director shall automatically be granted an
option for 1,000 shares on each granting date that he or she continues to serve
in that capacity, beginning in the year after that director receives his or her
initial grant. The granting date is the Tuesday immediately before the fourth
Wednesday of each January.
Term. The term of each option shall be ten years from the date of grant.
Exercise. An option shall be fully exercisable six months following the later of
the date of grant or shareholder approval of the Plan.
(C) Price
Each employee and non-employee director option shall state the number of shares
to which it pertains and the option price. The option price shall be the fair
market value of the shares subject to the option on the date of grant. The fair
market value shall be the mean between the high and low prices as quoted on the
New York Stock Exchange Composite Transactions.
(D) Payment
The price at which shares may be purchased upon exercise of an employee or
non-employee director option shall be paid in full at the time of exercise in
cash, or, if permitted by the applicable committee, by means of tendering shares
or other consideration valued at fair market value on the date of exercise, or
any combination thereof. The applicable committee shall determine acceptable
methods of tendering shares or other consideration.
2
<PAGE>
6. Stock Appreciation Rights
The Committee may grant stock appreciation rights to eligible employees in
connection with any option granted under the Plan, or separate and apart from
any option.
Stock appreciation rights granted in conjunction with an option entitle the
holder of an option, upon exercise of the stock appreciation rights, to
surrender the option, or any applicable portion thereof, to the extent
unexercised, and to receive a number of shares, or cash and shares, as the
Committee may determine. The cash or number of shares that the holder shall be
entitled to receive shall equal in aggregate fair market value the amount by
which the fair market value per share on the date of such exercise (as
determined by the Committee in its sole discretion) shall exceed the option
price per share of the related option, multiplied by the number of shares in
respect of which the stock appreciation rights have been exercised. Stock
appreciation rights granted separate and apart from any option entitle the
holder, upon exercise of such rights, to receive a payment measured by the
increase in the fair market value of a number of shares designated by such
rights from the date of grant to the date of exercise.
The number of shares subject to a stock appreciation right shall be counted
against the individual limit on the maximum number of shares that may be awarded
to any employee during any three consecutive calendar year period, and against
the maximum number of shares which may be delivered under the Plan. The number
of shares subject to a stock appreciation right granted in conjunction with an
option shall be deemed to be the number of shares subject to the option. The
number of shares subject to a freestanding stock appreciation right shall be the
number of shares to which the right applies.
7. Performance Shares
The Committee may grant performance shares to any eligible employee for no cash
consideration, if permitted by applicable law, or for such consideration as may
be determined by the Committee and specified in the grant. The Committee shall
establish award periods and shall establish the number of performance shares to
be earned if Company performance objectives are met. The performance objectives
shall be stated in terms of cash flow return on gross capital employed in the
Company's business ("CRC"). CRC equals the total of net income plus
depreciation, goodwill amortization and after-tax net interest divided by the
total of capital plus accumulated depreciation minus goodwill and short-term
investments. After performance shares have been awarded and performance
objectives have been established, the Committee may not increase the number of
performance shares that may be earned by any employee upon attainment of those
performance objectives within a performance period. The actual levels of CRC to
be achieved, and the length of the performance period and other terms and
conditions of the performance shares, shall be determined by the Committee.
To the extent performance shares are forfeited or the grant of performance
shares has expired or is surrendered, canceled or terminated, the shares subject
to the grant shall be available for future grants if within other plan
limitations.
8. Other Awards
The Committee may grant other share-based awards to any eligible employee for no
cash consideration, if permitted by applicable law, or for such consideration as
may be determined by the Committee and specified in the grant. Such grants may
include restricted shares. The Committee may specify such criteria or periods
for payment as it shall determine and the extent to which such criteria or
periods have been met shall be conclusively determined by the Committee. Other
share-based grants may be paid in shares or other consideration related to
shares, as specified by the grant, and shall have such terms and conditions as
shall be determined by the Committee.
3
<PAGE>
9. Assignability
Awards intended to be exempt from 16b are transferable only by will or the laws
of descent and distribution or to such greater extent as permitted by applicable
16b regulations. Such awards are exercisable during the grantee's lifetime only
by him or by his guardian or legal representative or by such others as permitted
by applicable 16b regulations. The appropriate committee shall have
discretionary authority to grant awards not intended to be exempt from 16b which
are transferable to members of an award holder's immediate family, including
trusts for the benefit of such family members and partnerships in which such
family members are the only partners. A transferred award may be exercised or
transferred by the transferee only to the extent that the grantee would have
been entitled had the award not been transferred. Notwithstanding anything
herein to the contrary, the exercise of incentive stock options shall be limited
as required by the Internal Revenue Code and applicable regulations.
10. Adjustments
In the event of a reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split, stock
dividend, rights offering or similar event affecting shares of the Company, the
appropriate committee shall equitably adjust (a) the number and class of shares
(i) reserved under he Plan, (ii) for which awards may be granted to an
individual, and (iii) covered by outstanding awards denominated in shares or
share units, (b) the prices relating to outstanding awards, and (c) the
appropriate fair market value and other price determinations for such awards.
11. General Provisions
The Company shall have the right to deduct from any cash payment made under the
Plan any taxes required by law to be withheld. It shall be a condition to the
obligation of the Company to deliver shares that the participant pay the Company
such amount as it may request for the purpose of satisfying any such tax
liability. Any award under the Plan may provide that the participant may elect,
in accordance with any applicable committee regulations, to pay the amount of
such withholding taxes in shares.
No person, estate or other entity shall have any of the rights of a shareholder
with reference to shares subject to an award until a certificate or certificates
for the shares have been delivered to that person, estate or other entity. The
Plan shall not confer upon any non-employee director or employee any right to
continue in that capacity. The Plan and all determinations made and actions
taken pursuant hereto, to the extent not governed by the laws of the United
States, shall be governed by the laws of Ohio.
12. Amendment
The Board of Directors of the Company may alter, amend or terminate the Plan
from time to time, except that the Plan may not be amended without shareholder
approval to (i) materially increase the aggregate number of shares which may be
issued, (ii) increase the maximum number of shares which may be granted to any
employee, (iii) grant options or stock appreciation rights at a purchase price
below fair market value on date of grant, or (iv) materially modify the
requirements as to eligibility for participation in the Plan. The provisions of
the Plan pertaining to the awards to non-employee directors may not be amended
more than once every six months, other than to comport with changes in the
Internal Revenue Code, the Employee Retirement Income Security Act, or the rules
thereunder.
13. Effective and Termination Dates
The Plan will become effective as of January 1, 1995, if and when approved by
shareholders holding a majority of the Company's outstanding common shares
entitled to vote at the 1995 annual meeting of shareholders.
No awards shall be granted under the Plan after December 31, 2004. Awards
granted before that date shall remain valid thereafter in accordance with their
terms.
4
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>10
<FILENAME>a4358939-10g.txt
<DESCRIPTION>EXHIBIT 10G
<TEXT>
Eaton Corporation
2002 Annual Report on Form 10-K
Item 15 (c)
Exhibit 10 (g)
CHANGE OF CONTROL
AGREEMENT
AGREEMENT by and between Eaton Corporation, an Ohio corporation (the
"Company") and ______________ (the "Executive"), dated as of the ____ day of
____________, 20__.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
-------------------
(a) The "Effective Date" shall mean the first date during the Change of
Control Period (as defined in Section 1(b)) on which a Change of Control (as
defined in Section 2) occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the Executive's employment
with the Company is terminated prior to the date on which the Change of Control
occurs, and if it is reasonably demonstrated by the Executive that such
termination of employment (i) was at the request of a third party who has taken
steps reasonably calculated to effect a Change of Control or (ii) otherwise
arose in connection with or anticipation of a Change of Control, then for all
purposes of this Agreement the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment.
<PAGE>
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, or (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least two-thirds of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
-2-
<PAGE>
(c) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of assets of another corporation (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 75% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 25% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board, providing for such
Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
-3-
<PAGE>
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have
occurred as a result of any transaction or series of transactions which the
Executive, or any entity in which the Executive is a partner, officer or more
than 50% owner initiates, if immediately following the transaction or series of
transactions that would otherwise constitute a Change in Control, the Executive,
either alone or together with other individuals who are executive officers of
the Company immediately prior thereto, beneficially owns, directly or
indirectly, more than 10% of the then outstanding shares of common stock of the
Company or the corporation resulting from the transaction or series of
transactions, as applicable, or of the combined voting power of the then
outstanding voting securities of the Company or such resulting corporation.
3. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the third anniversary of
such date (the "Employment Period").
4. Terms of Employment.
(a) Position and Duties. (i) During the Employment Period, (A)
the Executive's position (including status, offices, titles and reporting
requirements), authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of those held,
exercised and assigned to the Executive at any time during the 120-day period
immediately preceding the Effective Date and (B) the Executive's services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and time during normal business hours to
the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
-4-
<PAGE>
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary"), which shall be paid
at a monthly rate, at least equal to twelve times the highest monthly base
salary paid or payable, including any base salary which has been earned but
deferred, to the Executive by the Company and its affiliated companies in
respect of the twelve-month period immediately preceding the month in which the
Effective Date occurs. During the Employment Period, the Annual Base Salary
shall be increased no more than 12 months after the last salary increase awarded
to the Executive prior to the Effective Date, and thereafter at least annually,
in each case by a percentage not less than the average annual percentage merit
increase in the Executive's base salary during the five (5) full calendar years
immediately preceding the Effective Date. Any increase in Annual Base Salary
shall not serve to limit or reduce any other obligation to the Executive under
this Agreement. Annual Base Salary shall not be reduced after any such increase
and the term Annual Base Salary as utilized in this Agreement shall refer to
Annual Base Salary as so increased. As used in this Agreement, the term
"affiliated companies" shall include any company controlled by, controlling or
under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Bonus") in cash in an amount (the "Annual
Bonus Amount") at least equal to the Executive's Incentive Potential (as defined
in the Eaton Incentive Compensation Plan) for the most recent year for which an
Incentive Potential was established before the Effective Date under the Eaton
Incentive Compensation Plan, adjusted by the average of the Executive's
individual performance rating for each of the three most recent years ended
before the Effective Date, but eliminating any Corporate Performance Factor (as
defined in the Eaton Incentive Compensation Plan). Each such Annual Bonus shall
be paid no later than the end of the third month of the fiscal year next
following the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
-5-
<PAGE>
(iii) Incentive, Savings and Retirement Plans. During the
Employment Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and its affiliated
companies (including without limitation the Company's Deferred Incentive
Compensation Plan, Limited Eaton Service Supplemental Retirement Income Plan,
long-term Executive Strategic Incentive Plan and Supplemental and/or Excess
Benefits Plans, as and to the extent those plans are in effect from time to
time), but in no event shall such plans, practices, policies and programs
provide the Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent, if any, that
such distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 120-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies.
-6-
<PAGE>
(v) Expenses. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the most favorable policies,
practices and procedures of the Company and its affiliated companies in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the
Executive shall be entitled to fringe benefits, including, without limitation,
tax and financial planning services, payment of club dues, and, if applicable,
use of an automobile and payment of related expenses, in accordance with the
most favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period,
the Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
-7-
<PAGE>
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall
terminate automatically upon the Executive's death during the Employment Period.
If the Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's
employment during the Employment Period for Cause. For purposes of this
Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial performance
is delivered to the Executive by the Board or the Chief Executive Officer of the
Company which specifically identifies the manner in which the Board or Chief
Executive Officer believes that the Executive has not substantially performed
the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct
or gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
-8-
<PAGE>
(c) Good Reason. The Executive's employment may be terminated
by the Executive for Good Reason. For purposes of this Agreement, "Good Reason"
shall mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 4(a) of this Agreement, or any other action by the Company which
results in a diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action not
taken in bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof or the Company's
requiring the Executive to travel on Company business to a substantially greater
extent than required immediately prior to the Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
-9-
<PAGE>
(v) any failure by the Company to comply with and satisfy Section 11(c)
of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive.
(d) Notice of Termination. Any termination by the Company for
Cause, or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
the Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
date on which the Company notifies the Executive of such termination and (iii)
if the Executive's employment is terminated by reason of death or Disability,
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability.
If, during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause or Disability or the Executive shall terminate
employment for Good Reason:
-10-
<PAGE>
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through the Date
of Termination, to the extent not theretofore paid to the Executive, (2) the
amount, if any, which has been earned by the Executive with respect to any
completed Incentive Year under the Eaton Incentive Compensation Plan or any
successor thereto, and any completed Award Period under the Eaton Executive
Strategic Incentive Plan or any successor thereto, in each case to the extent
not theretofore paid to the Executive, and (3) with respect to each Award Period
under the Eaton Executive Strategic Incentive Plan or any successor thereto
which begins before and ends after the Date of Termination, an amount equal to
(x) 100% of the Executive's Individual Incentive Target (as defined in such
plan) for such Award Period times (y) a fraction, the numerator of which is the
number of days in such Award Period before the Date of Termination, and the
denominator of which is the total number of days in such Award Period (the sum
of the amounts described in clauses (1), (2) and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and
B. the product of (1) the Multiple (as defined below) and (2) the sum
of (x) the Executive's Annual Base Salary and (y) the Annual Bonus Amount;
(ii) for a number of years after the Executive's Date of Termination
equal to the lesser of two and the Multiple, or such longer period as may be
provided by the terms of the appropriate plan, program, practice or policy, the
Company shall continue benefits to the Executive and/or the Executive's family
at least equal to those which would have been provided to them in accordance
with the plans, programs, practices and policies described in Section 4(b)(iv)
of this Agreement if the Executive's employment had not been terminated or, if
more favorable to the Executive, as in effect generally at any time thereafter
with respect to other peer executives of the Company and its affiliated
companies and their families, provided, however, that if the Executive becomes
re-employed with another employer and is eligible to receive medical or other
welfare benefits under another employer-provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided under
such other plan during such applicable period of eligibility, and for purposes
of determining eligibility (but not the time of commencement of benefits) of the
Executive for retiree benefits pursuant to such plans, practices, programs and
policies, the Executive shall be considered to have remained employed for a
number of years after the Date of Termination equal to the lesser of two and the
Multiple and to have retired on the last day of such period;
-11-
<PAGE>
(iii) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts or
benefits required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or agreement of
the Company and its affiliated companies (such other amounts and benefits shall
be hereinafter referred to as the "Other Benefits").
The "Multiple" means the lesser of (i) three and (ii) the number of years and
portions thereof (expressed as a decimal fraction) from the Date of Termination
until the Executive's 65th birthday.
(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations shall be
paid to the Executive's estate or beneficiary, as applicable, in a lump sum in
cash within 30 days of the Date of Termination. With respect to the provision
of Other Benefits, the term Other Benefits as utilized in this Section 6(b)
shall include, without limitation, and the Executive's estate and/or
beneficiaries shall be entitled to receive, benefits at least equal to the most
favorable benefits provided by the Company and affiliated companies to the
estates and beneficiaries of peer executives of the Company and such affiliated
companies under such plans, programs, practices and policies relating to death
benefits, if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
-12-
<PAGE>
(c) Disability. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive, other
than for payment of Accrued Obligations and the timely payment or provision of
Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination. With respect to the provision
of Other Benefits, the term Other Benefits as utilized in this Section 6(c)
shall include, and the Executive shall be entitled after the Disability
Effective Date to receive, disability and other benefits at least equal to the
most favorable of those generally provided by the Company and its affiliated
companies to disabled executives and/or their families in accordance with such
plans, programs, practices and policies relating to disability, if any, as in
effect generally with respect to other peer executives and their families at any
time during the 120-day period immediately preceding the Effective Date or, if
more favorable to the Executive and/or the Executive's family, as in effect at
any time thereafter generally with respect to other peer executives of the
Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's
employment shall be terminated for Cause during the Employment Period, this
Agreement shall terminate without further obligations to the Executive other
than the obligation to pay to the Executive (x) the Annual Base Salary through
the Date of Termination and (y) Other Benefits, in each case to the extent
theretofore unpaid. If the Executive voluntarily terminates employment during
the Employment Period, excluding a termination for Good Reason, this Agreement
shall terminate without further obligations to the Executive, other than for
Accrued Obligations and the timely payment or provision of Other Benefits. In
such case, all Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor, subject to the last
sentence of this Section 7 and to Section 13(f), shall anything herein limit or
otherwise affect such rights as the Executive may have under any contract or
agreement with the Company or any of its affiliated companies. Amounts which are
vested benefits or which the Executive is otherwise entitled to receive under
any plan, policy, practice or program of or any contract or agreement with the
Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy, practice or
program or contract or agreement except as explicitly modified by this
Agreement. Notwithstanding the foregoing, if the Executive becomes entitled to
receive severance benefits under Section 6(a) hereof, such severance benefits
shall be in lieu of any benefits under any severance or separation plan, program
or policy of the Company or any of its affiliated companies to which the
Executive would otherwise have been entitled.
-13-
<PAGE>
8. Full Settlement; Legal Fees. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and except as
specifically provided in Section 6(a)(ii), such amounts shall not be reduced
whether or not the Executive obtains other employment. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company, the Executive or others of the validity
or enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (whether such contest is between the Company
and the Executive or between either of them and any third party, and including
as a result of any contest by the Executive about the amount of any payment
pursuant to this Agreement), plus in each case interest on any delayed payment
at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the
Internal Revenue Code of 1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
-14-
<PAGE>
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Ernst & Young
LLP or such other certified public accounting firm as may be designated by the
Executive (the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which he gives such notice to the Company (or such shorter period
ending on the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
-15-
<PAGE>
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively
to contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
-16-
<PAGE>
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
-17-
<PAGE>
11. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. Trust Deposit.
(a) Upon the occurrence of a Proposed Change of Control (as defined
below) during the Change of Control Period, the Company shall deposit in trust
or escrow with a third party cash in an amount sufficient to provide all of the
benefits and other payments to which the Executive would be entitled hereunder
if a Change of Control occurred on the date of the Proposed Change of Control
and the Executive's employment were terminated by the Executive for Good Reason
immediately thereafter. Upon such deposit, references hereunder to any payment
by the Company shall be deemed to refer to a payment from such trust or escrow;
provided, however, that nothing contained herein shall relieve the Company of
its obligation to make the payments required of it hereunder in the event any
such payment is not made from the trust or escrow.
-18-
<PAGE>
(b) "Proposed Change of Control" means:
(i) the commencement of a tender or exchange offer by any
third person (other than a tender or exchange offer which, if consummated, would
not result in a Change of Control) for 25% or more of the Outstanding Company
Common Stock or combined voting power of the Outstanding Company Voting
Securities;
(ii) the execution of an agreement by the Company, the consummation of
which would result in the occurrence of a Change of Control;
(iii) the public announcement by any person (including the Company) of
an intention to take or to consider taking actions which if consummated would
constitute a Change of Control other than through a contested election for
directors of the Company; or
(iv) the adoption by the Board, as a result of other circumstances,
including circumstances similar or related to the foregoing, of a resolution to
the effect that, for purposes of this Agreement, a Proposed Change of Control
has occurred.
13. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Ohio, without reference to principles of conflict
of laws. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
-------------------------
Eaton Corporation
Eaton Center
Cleveland, Ohio 44114-2584
If to the Company:
Eaton Corporation
Eaton Center
Cleveland, Ohio 44114-2584
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
-19-
<PAGE>
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement
or the failure to assert any right the Executive or the Company may have
hereunder, including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this
Agreement, shall not be deemed to be a waiver of such provision or right or any
other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, prior to the Effective Date, the Executive's employment may be terminated
by either the Executive or the Company at any time prior to the Effective Date,
in which case the Executive shall have no further rights under this Agreement.
From and after the Effective Date this Agreement shall supersede any other
agreement between the parties with respect to the subject matter hereof.
-20-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
----------------------------------------------
[name of Executive]
EATON CORPORATION
By
-------------------------------------------
J. R. Horst
Vice President and General Counsel
By
-------------------------------------------
E.R. Franklin
Secretary
-21-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>11
<FILENAME>a4358939-10h.txt
<DESCRIPTION>EXHIBIT 10H
<TEXT>
Eaton Corporation
2002 Annual Report on Form 10-K
Item 15 (c)
Exhibit 10 (h)
INDEMNIFICATION AGREEMENT
This Agreement, made this ______ day of _____________, 20__, by and between
Eaton Corporation, an Ohio corporation (the "Company"), and ___________________,
[title] ("Indemnitee");
WHEREAS, the Company and Indemnitee are each aware of the exposure to
litigation of officers, Directors and representatives of the Company as such
persons exercise their duties to the Company;
WHEREAS, the Company and Indemnitee are also aware of conditions in the
insurance industry that have affected and may affect in the future the Company's
ability to obtain appropriate directors' and officers' liability insurance on an
economically acceptable basis;
WHEREAS, the Company desires to continue to benefit from the services of
highly qualified, experienced and otherwise competent persons such as
Indemnitee; and
WHEREAS, Indemnitee desires to serve or to continue to serve the Company as
an officer of the Company, or, if requested to do so by the Company, as a
director, officer, trustee, employee, representative or agent of another
corporation, joint venture, trust or other enterprise, for so long as the
Company continues to provide on an acceptable basis adequate and reliable
indemnification against certain liabilities and expenses which may be incurred
by Indemnitee;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained, the parties hereto agree as follows:
<PAGE>
1. INDEMNIFICATION.
(a) The Company shall indemnify Indemnitee to the fullest extent permitted
by law with respect to his activities as an officer of the Company and/or as a
person who is serving or has served at the request of the Company as a director,
officer, trustee, employee, representative or agent of another corporation,
joint venture, trust or other enterprise, domestic or foreign, against expenses
(including, without limitation, attorneys' fees, judgments, fines, and amounts
paid in settlement) actually and reasonably incurred by him ("Expenses") in
connection with any claim against Indemnitee, whether or not such claim is
brought by any party who may be an "insured person" under the Company's
directors' and officers' liability insurance, which is the subject of any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, investigative or otherwise and whether formal or
informal (a "Proceeding"), to which Indemnitee was, is, or is threatened to be
made a party by reason of anything done or not done by Indemnitee in any such
capacity.
(b) The rights of Indemnitee hereunder shall be in addition to any rights
Indemnitee may now or hereafter have to indemnification by the Company or
otherwise. More specifically, the parties hereto intend that Indemnitee shall be
entitled to receive, as determined by Indemnitee, payment to the maximum extent
permitted by one or any combination of the following:
(I) the payments provided by the Company's Amended Regulations in
effect on the date hereof, a copy of the relevant portions of which are
attached hereto as Exhibit I;
(ii) the payments provided by the Articles of Incorporation, Code of
Regulations, or By-laws or their equivalent of the Company in effect at the
time Expenses are incurred by Indemnitee;
(iii) the payments allowable under Ohio law in effect at the date
hereof;
(iv) the payments allowable under the law of the jurisdiction under
which the Company is incorporated at the time Expenses are incurred by
Indemnitee;
(v) the payments available under liability insurance obtained by the
Company; and
(vi) such other payments as are or may be otherwise available to
Indemnitee.
Combination of two or more of the payments provided by (I) through (vi)
shall be available to the extent that the Applicable Document, as hereafter
defined, does not require that the payments provided therein be exclusive of
other payments. The document or law providing for any of the payments listed in
items (I) through (vi) above is referred to in this Agreement as the "Applicable
Document." The Company hereby undertakes to use its best efforts to assist
Indemnitee, in all proper and legal ways, to obtain the payments selected by
Indemnitee under items (I) through (vi) above.
(c) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans for employees of the Company or of any of
its subsidiaries without regard to ownership of such plans; references to
"fines" shall include any excise taxes assessed on Indemnitee with respect to
any employee benefit plan; references to "serving at the request of the Company"
shall include any service as a director, officer, trustee, employee,
representative or agent of the Company which imposes duties on, or involves
services by, Indemnitee with respect to an employee benefit plan, its
participants or beneficiaries; references to the masculine shall include the
feminine; references to the singular shall include the plural and vice versa;
and if Indemnitee acted in good faith and in a manner he reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, he shall be deemed to have acted in a manner consistent with the standards
required for indemnification by the Company under the Applicable Documents.
<PAGE>
2. INSURANCE.
The Company shall maintain directors' and officers' liability insurance
which is at least as favorable to Indemnitee as the policy in effect on the date
hereof and for so long as Indemnitee's services are covered hereunder, provided
and to the extent that such insurance is available on a reasonable commercial
basis. However, Indemnitee shall continue to be entitled to the indemnification
rights provided hereunder regardless of whether liability or other insurance
coverage is at any time obtained or retained by the Company. Any payments in
fact made to Indemnitee under an insurance policy obtained or retained by the
Company shall reduce the obligation of the Company to make payments hereunder by
the amount of the payments made under any such insurance policy. In the event
that insurance becomes unavailable in the amount or scope of coverage of the
policy in effect on the date hereof on a reasonable commercial basis and the
Company foregoes maintenance of all or a portion of such insurance coverage, the
Company shall stand as a self-insurer with respect to the coverage, or portion
thereof, not retained, and shall indemnify Indemnitee against any loss arising
out of the reduction or cancellation of such insurance coverage.
3. PAYMENT OF EXPENSES.
At Indemnitee's request, the Company shall pay the Expenses as and when incurred
by Indemnitee, after receipt of written notice pursuant to Paragraph 6 hereof
and an undertaking in the form of Exhibit II attached hereto by or on behalf of
Indemnitee (I) to repay such amounts so paid on Indemnitee's behalf if it shall
ultimately be determined under the Applicable Document that Indemnitee is
required to repay such Expenses and (ii) to reasonably cooperate with the
Company concerning the Proceeding. That portion of Expenses which represents
attorneys' fees and other costs incurred in defending any Proceeding shall be
paid by the Company within thirty (30) days of its receipt of such notice,
together with reasonable documentation evidencing the amount and nature of such
Expenses.
<PAGE>
4. ESCROW RESERVE.
The Company shall dedicate up to an aggregate of ten million dollars
($10,000,000) as collateral security for the initial funding of its obligations
hereunder and under similar agreements with other directors, officers and
representatives by depositing assets or bank letters of credit in escrow or
reserving lines of credit that may be drawn down by an escrow agent in the
dedicated amount (the "Escrow Reserve"); provided, however, that the terms of
any such Escrow Reserve may provide that the cash, securities or letters or
lines of credit available therefor shall only be utilized for the
indemnification or advancement of expenses provided for herein in the event that
there shall have occurred within the preceding five years a Change in Control of
the Company, as defined below. The Company shall promptly provide Indemnitee
with a true and complete copy of the agreement relating to the establishment and
operation of the Escrow Reserve, together with such additional documentation or
information with respect to the escrow as Indemnitee may from time to time
reasonably request. The Company shall promptly deliver an executed copy of this
Agreement to the Escrow Reserve agent to evidence to the agent that Indemnitee
is a beneficiary of the Escrow Reserve and shall deliver to Indemnitee the
escrow agent's signed receipt evidencing that delivery. For purposes of this
Agreement, a "Change in Control" of the Company shall have occurred if at any
time any of the following events shall occur: (i) a tender offer shall be made
and consummated for the ownership of securities of the Company representing 25%
or more of the combined voting power of Company's then outstanding voting
securities, (ii) the Company shall be merged or consolidated with another
corporation and as a result of such merger or consolidation less than 75% of the
outstanding voting securities of the surviving or resulting corporation shall be
owned in the aggregate by the former shareholders of the Company, other than
affiliates (within the meaning of the Securities Exchange Act of 1934 (the
"Exchange Act")) of any party to such merger or consolidation, as the same shall
have existed immediately prior to such merger or consolidation, (iii) the
Company shall sell substantially all of its assets to another corporation which
is not a wholly-owned subsidiary of the Company, (iv) any person (as such term
is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, of securities of the Company
representing 25% or more of the combined voting power of the Company's then
outstanding securities; or (v) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of the Company cease for any reason to constitute at least a majority
thereof unless the election, or the nomination for election by the Company's
shareholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period. For purposes of this Agreement, ownership of voting securities shall
take into account and include ownership as determined by applying the provisions
of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect).
<PAGE>
5. ADDITIONAL RIGHTS.
The indemnification provided in this Agreement shall not be exclusive of
any other indemnification or right to which Indemnitee may be entitled and shall
continue after Indemnitee has ceased to occupy a position as an officer,
director or representative as described in Paragraph 1 above with respect to
Proceedings relating to or arising out of Indemnitee's acts or omissions during
his service in such position.
6. NOTICE TO COMPANY.
Indemnitee shall provide to the Company prompt written notice of any
Proceeding brought, threatened, asserted or commenced against Indemnitee with
respect to which Indemnitee may assert a right to indemnification hereunder;
provided that failure to provide such notice shall not in any way limit
Indemnitee's rights under this Agreement.
7. COOPERATION IN DEFENSE AND SETTLEMENT.
Indemnitee shall not make any admission or effect any settlement with
respect to a Proceeding without the Company's written consent unless Indemnitee
shall have determined to undertake his own defense in such matter and has waived
the benefits of this Agreement in writing delivered to the Company. The Company
shall not settle any Proceeding to which Indemnitee is a party in any manner
which would impose any Expense on Indemnitee without his written consent.
Neither Indemnitee nor the Company will unreasonably withhold consent to any
proposed settlement. Indemnitee and the Company shall cooperate to the extent
reasonably possible with each other and with the Company's insurers, in attempts
to defend or settle such Proceeding.
<PAGE>
8. ASSUMPTION OF DEFENSE.
Except as otherwise provided below, to the extent that it may wish, the
Company jointly with any other indemnifying party similarly notified will be
entitled to assume Indemnitee's defense in any Proceeding, with counsel mutually
satisfactory to Indemnitee and the Company. After notice from the Company to
Indemnitee of the Company's election so to assume such defense, the Company will
not be liable to Indemnitee under this Agreement for Expenses subsequently
incurred by Indemnitee in connection with the defense thereof other than
reasonable costs of investigation or as otherwise provided below. Indemnitee
shall have the right to employ counsel in such Proceeding, but the fees and
expenses of such counsel incurred after notice from the Company of its
assumption of the defense thereof shall be at Indemnitee's expense unless:
(a) the employment of counsel by Indemnitee has been authorized by the
Company;
(b) counsel employed by the Company initially is unacceptable or later
becomes unacceptable to Indemnitee and such unacceptability is reasonable
under then existing circumstances;
(c) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between Indemnitee and the Company in the conduct of
the defense of such Proceeding; or
(d) the Company shall not have employed counsel promptly to assume the
defense of such Proceeding.
In each of the cases set forth in items (a) through (d) above, the fees and
expenses of counsel shall be at the expense of the Company and subject to
payment pursuant to this Agreement. The Company shall not be entitled to assume
the defense of Indemnitee in any Proceeding brought by or on behalf of the
Company or as to which Indemnitee shall have reached either of the conclusions
provided for in clauses (b) or (c) above.
<PAGE>
9. ENFORCEMENT.
In the event that any dispute or controversy shall arise under this
Agreement between Indemnitee and the Company with respect to whether Indemnitee
is entitled to indemnification in connection with any Proceeding or with respect
to the amount of Expenses incurred, then with respect to each such dispute or
controversy Indemnitee may seek to enforce this Agreement through legal action
or, at Indemnitee's sole option and request, through arbitration. If arbitration
is requested, such dispute or controversy shall be submitted by the parties to
binding arbitration in the City of Cleveland, State of Ohio, before a single
arbitrator agreeable to both parties. If the parties cannot agree on a
designated arbitrator within fifteen (15) days after arbitration is requested in
writing by either of them, the arbitration shall proceed in the City of
Cleveland, State of Ohio, before an arbitrator appointed by the American
Arbitration Association. In either case, the arbitration proceeding shall
commence promptly under the rules then in effect of that Association and the
arbitrator agreed to by the parties or appointed by that Association shall be an
attorney other than an attorney who has, or is associated with a firm having
associated with it an attorney which has, been retained by or performed services
for the Company or Indemnitee at any item during the five (5) years preceding
the commencement of arbitration. The award shall be rendered in such form that
judgment may be entered thereon in any court having jurisdiction thereof. The
prevailing party shall be entitled to prompt reimbursement of any costs and
expenses (including, without limitation, reasonable attorney's fees) incurred in
connection with such legal action or arbitration provided that Indemnitee shall
not be obligated to reimburse the Company unless the arbitrator or court which
resolves the dispute determines that Indemnitee acted in bad faith in bringing
such action or arbitration.
10. EXCLUSIONS.
Notwithstanding the scope of indemnification which may be available to
Indemnitees from time to time under any Applicable Document, no indemnification,
reimbursement or payment shall be required of the Company hereunder with respect
to:
(a) any claim or any part thereof as to which Indemnitee shall have
been adjudged by a court of competent jurisdiction from which no appeal is
or can be taken, by clear and convincing evidence, to have acted or failed
to act with deliberate intent to cause injury to the Company or with
reckless disregard for the best interests of the Company;
(b) any claim or any part thereof arising under Section 16(b) of the
Exchange Act pursuant to which Indemnitee shall be obligated to pay any
penalty, fine, settlement or judgment;
(c) any obligation of Indemnitee based upon or attributable to
Indemnitee gaining in fact any personal gain, profit or advantage to which
he was not entitled; or
(d) any Proceeding initiated by Indemnitee without the consent or
authorization of the Board of Directors of the Company, provided that this
exclusion shall not apply with respect to any claims brought by Indemnitee
(I) to enforce his rights under this Agreement or (ii) in any Proceeding
initiated by another person or entity whether or not such claims were
brought by Indemnitee against a person or entity who was otherwise a party
to such Proceeding.
Nothing in this Paragraph 10 shall eliminate or diminish the Company's
obligations to advance that portion of Indemnitee's Expenses which represent
attorneys' fees and other costs incurred in defending any Proceeding pursuant to
Paragraph 3 of this Agreement.
<PAGE>
11. EXTRAORDINARY TRANSACTIONS.
The Company covenants and agrees that, in the event of any merger,
consolidation or reorganization in which the Company is not the surviving
entity, any sale of all or substantially all of the assets of the Company or any
liquidation of the Company (each such event is hereinafter referred to as an
"extraordinary transaction"), the Company shall:
(a) Have the obligations of the Company under this Agreement expressly
assumed by the survivor, purchaser or successor, as the case may be, in
such extraordinary transaction; or
(b) Otherwise adequately provide for the satisfaction of the Company's
obligations under this Agreement, in a manner acceptable to Indemnitee.
12. NO PERSONAL LIABILITY.
Indemnitee agrees that neither the Directors nor any officer, employee,
representative or agent of the Company shall be personally liable for the
satisfaction of the Company's obligations under this Agreement, and Indemnitee
shall look solely to the assets of the Company and the Escrow Reserve referred
to in Paragraph 4 hereof for satisfaction of any claims hereunder.
<PAGE>
13. PERIOD OF LIMITATIONS.
No legal action shall be brought and no cause of action shall be asserted
by or on behalf of the Company or any affiliate of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal
representatives after the expiration of two (2) years from the date of accrual
of such cause of action, and any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of legal action within such two-year period; provided, however,
that if any shorter period of limitations is otherwise applicable to any such
cause of action such shorter period shall govern.
14. SEVERABILITY.
If any provision, phrase, or other portion of this Agreement should be
determined by any court of competent jurisdiction to be invalid, illegal or
unenforceable, in whole or in part, and such determination should become final,
such provision, phrase or other portion shall be deemed to be severed or
limited, but only to the extent required to render the remaining provisions and
portions of this Agreement enforceable, and this Agreement as thus amended shall
be enforced to give effect to the intention of the parties insofar as that is
possible.
15. SUBROGATION.
In the event of any payment under this Agreement, the Company shall be
subrogated to the extent thereof to all rights to indemnification or
reimbursement against any insurer or other entity or person vested in
Indemnitee, who shall execute all instruments and take all other action as shall
be reasonably necessary for the Company to enforce such rights.
16. GOVERNING LAW.
The parties hereto agree that this Agreement shall be construed and
enforced in accordance with and governed by the laws of the State of Ohio.
<PAGE>
17. NOTICES.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be considered to have been duly given if delivered by hand
and receipted for by the party to whom the notice, request, demand or other
communication shall have been directed, or mailed by certified mail, return
receipt requested, with postage prepaid:
(a) If to the Company, to: EATON CORPORATION
Eaton Center
Cleveland, Ohio 44114-2584
Attention: General Counsel
(b) If to Indemnitee, to:
________________________
Eaton Corporation
Eaton Center
Cleveland, Ohio 44114-2584
or to such other or further address as shall be designated from time to time by
Indemnitee or the Company to the other.
18. TERMINATION.
This Agreement may be terminated by either party upon not less than sixty
(60) days' prior written notice delivered to the other party, but such
termination shall not in any way diminish the obligations of the Company
hereunder (including the obligation to maintain the Escrow Reserve referred to
in Paragraph 4 hereof) with respect to Indemnitee's activities prior to the
effective date of the termination.
19. AMENDMENTS.
This Agreement and the rights and duties of Indemnitee and the Company
hereunder may not be amended, modified or terminated except by written
instrument signed and delivered by the parties hereto.
20. BINDING EFFECT.
This Agreement is and shall be binding upon and shall inure to the benefit
of the parties thereto and their respective heirs, executors, administrators,
successors and assigns.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
INDEMNITEE EATON CORPORATION
- -------------------- ------------------------------
[Name] By J. R. Horst
Title: Title: Vice President and
General Counsel
And by
------------------------------
E. R. Franklin
Title: Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>12
<FILENAME>a4358939-10i.txt
<DESCRIPTION>EXHIBIT 10I
<TEXT>
Eaton Corporation
2002 Annual Report on Form 10-K
Item 15 (c)
Exhibit 10 (i)
LIMITED EATON SERVICE
SUPPLEMENTAL RETIREMENT INCOME PLAN
Eaton Corporation (the "Company") hereby establishes a Supplemental
Retirement Income Plan (herein referred to as the "Limited Service Plan") for
certain executives of the Company designated by the Board of Directors of the
Company. The Plan was originally effective as of May 1, 1979. This amendment and
rest