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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
EATON CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: ............
(2) Aggregate number of securities to which transaction applies: ...............
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined): ...............................
(4) Proposed maximum aggregate value of transaction: ...........................
(5) Total fee paid: ............................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ....................................................
(2) Form, Schedule or Registration Statement No.: ..............................
(3) Filing Party: ..............................................................
(4) Date Filed: ................................................................
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NOTICE OF MEETING
The 2002 annual meeting of Eaton Corporation shareholders will be held
Wednesday, April 24, at 10:30 a.m. local time at The Forum Conference and
Education Center, One Cleveland Center, 1375 East Ninth Street, Cleveland, Ohio,
for the purpose of:
1. Electing directors;
2. Approving the 2002 Stock Plan;
3. Ratifying the appointment of independent auditors; and
4. Considering reports and such other business as may properly come before the
meeting.
These matters are more fully described in the following pages.
The record date for the meeting has been fixed by the Board of Directors as the
close of business on February 25, 2002. Shareholders of record at that time are
entitled to vote at the meeting.
By order of the Board of Directors
/s/ Earl R. Franklin
Earl R. Franklin
Secretary
March 15, 2002
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Your Vote Is Important
You may vote your shares electronically by using a toll-free telephone number or
the Internet, as described on the proxy card, or you may mark, sign, date and
mail your proxy card in the postage-paid envelope provided. We encourage you to
file your proxy electronically if either of these options is available to you.
The method by which you vote will not limit your right to vote in person at the
annual meeting.
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CONTENTS
PAGE
----
PROXY STATEMENT ................................ 3
Proxy Solicitation ............................. 3
Voting at the Meeting .......................... 3
Election of Directors .......................... 4
Board Committees ............................... 8
Compensation of Directors ...................... 10
Executive Compensation ......................... 11
Approval of the 2002 Stock Plan ................ 19
Ratification of the Appointment of
Independent Auditors ......................... 23
Other Business ................................. 23
Ownership of Outstanding Voting Shares.......... 23
Future Shareholder Proposals ................... 25
APPENDICES
Appendix A:
Charter of Audit Committee ................... 25
Appendix B:
Board of Directors Governance Policies ....... 27
Appendix C:
2002 Stock Plan .............................. 29
PROXY STATEMENT
EATON CORPORATION
Eaton Center
Cleveland, Ohio 44114-2584
216-523-5000
----------------------------------------------
This proxy statement, the accompanying proxy form and Eaton's annual report for
the year ended December 31, 2001 are scheduled to be sent to shareholders on or
about March 15, 2002.
PROXY SOLICITATION
Eaton's Board of Directors solicits your proxy, in the form enclosed, for use at
the 2002 annual meeting of shareholders and any adjournments thereof. The
individuals named in the enclosed form of proxy have advised the Board of their
intention to vote at the meeting in compliance with instructions on all forms of
proxy tendered by shareholders and, where no contrary instruction is indicated
on the proxy form, for the election of the individuals nominated to serve as
directors, for approval of the 2002 Stock Plan and for ratification of the
appointment of Ernst & Young LLP as independent auditors. These matters are
described in the following sections of this proxy statement.
Any shareholder giving a proxy may revoke it by giving Eaton notice in writing
or by facsimile, electronic mail, or other verifiable communication before the
meeting or by revoking it at the meeting. All properly executed or transmitted
proxies not revoked will be voted at the meeting.
In addition to soliciting proxies through the mail, certain employees may
solicit proxies in person or by telephone or facsimile. Eaton has retained
Innisfree M&A Incorporated to provide advice in connection with the proposals
described in this proxy statement and to assist in the solicitation of proxies,
primarily from brokers, banks and other nominees, for an estimated fee of
$10,000-$15,000, plus reasonable costs and expenses. Eaton has also consulted
with Strategic Stock Surveillance, LLC regarding these proposals. Brokerage
firms, nominees, custodians and fiduciaries may be asked to forward proxy
soliciting material to the beneficial shareholders. All reasonable soliciting
costs will be borne by Eaton.
VOTING AT THE MEETING
Each Eaton shareholder of record at the close of business on February 25, 2002
is entitled to one vote for each share then held. On February 25, 69,790,188
Eaton common shares (par value, 50(cents) each) were outstanding and entitled
to vote.
At the 2002 annual meeting, the inspectors of election appointed by the Board of
Directors for the meeting will determine the presence of a quorum and tabulate
the results of shareholder voting. As provided by Ohio law and Eaton's Amended
Regulations, Eaton shareholders present in person or by proxy at the meeting
will constitute a quorum. The inspectors of election intend to treat properly
executed or transmitted proxies marked "abstain" as "present" for these
purposes. The inspectors will also treat as "present" shares held in "street
name" by brokers that are voted on at least one proposal to come before the
meeting.
Director nominees receiving the greatest number of votes will be elected
directors. Votes withheld in respect of the election of directors will not be
counted in determining the outcome of the election. Adoption of all other
proposals to come before the meeting will require the affirmative vote of the
holders of a majority of the outstanding Eaton common shares, which requirement
is consistent with the general vote requirement in Eaton's Amended Articles of
Incorporation. The practical effect of this vote requirement will be that
abstentions and shares held in "street name" by brokers that are not voted in
respect of those proposals will be treated the same as votes cast against those
proposals.
As provided by Ohio law, each shareholder is entitled to cumulative voting
rights in the election of directors if any shareholder gives written notice to
the President or a Vice President or the Secretary of Eaton at least 48
3
hours before the time fixed for the meeting, requesting cumulative voting, and
if an announcement of that notice is made at the beginning of the meeting by the
Chairman or Secretary, or by or on behalf of the shareholder who gave the
notice. If cumulative voting is in effect with respect to an election of
directors, each shareholder has the right to cumulate his or her voting power by
giving one nominee that number of votes which equals the number of directors to
be elected multiplied by the number of the shareholder's shares, or by
distributing his or her votes on the same principle among two or more nominees,
as the shareholder sees fit. If cumulative voting is in effect with respect to
an election of directors, the individuals named in the proxy will vote the
shares represented by the proxy cumulatively for those nominees that they may
determine in their discretion, except that no votes will be cast for any nominee
as to whom the shareholder giving the proxy has directed that his or her vote be
withheld.
1. ELECTION OF DIRECTORS
The Board of Directors is presently composed of ten members. The terms of four
directors will expire in April 2002, and those directors have been nominated for
re-election. Each of the nominees was elected at the 1999 annual meeting. (See
page 5.)
A. William Reynolds, a director since 1987, having attained the normal
retirement age, will resign as a director at the conclusion of the annual
meeting of shareholders on April 24. A search is underway for a new director to
fill the vacancy thus created.
If any of the nominees become unable or decline to serve, the individuals named
in the enclosed proxy will have the authority to appoint substitutes. But
Eaton's management has no reason to believe that this will occur.
Following is biographical information about each nominee and each director.
4
NOMINEES FOR ELECTION TO TERMS ENDING IN 2005 OR WHEN THEIR SUCCESSORS ARE
ELECTED AND HAVE QUALIFIED:
[N. C. LAUTENBACH PHOTO[ [J. R. MILLER PHOTO] [F. C. MOSELEY PHOTO] [V. A. PELSON PHOTO]
NED C. LAUTENBACH, 58, is a JOHN R. MILLER, 64, is FURMAN C. MOSELEY, 67, is VICTOR A. PELSON, 64, is a
partner of Clayton, Dubilier Chairman, President and Chairman of Sasquatch Books. Senior Advisor to UBS
& Rice, Inc., a private Chief Executive Officer of He is former President of Warburg LLC, investment
equity investment firm Petroleum Partners, Inc., a Simpson Investment Company, bankers. Before becoming
specializing in management provider of outsourcing holding company for Simpson associated with UBS Warburg
buyouts. He also serves as services to the petroleum Paper Company and Simpson in 1996, Mr. Pelson was an
Chairman and Chief Executive industry, and is a director Timber Company. He was employee of AT&T from 1959
Officer of Acterna of Cambrex Corporation. From Chairman of Simpson Paper to 1996, where he held a
Corporation, a worldwide 1988 to 2000, he was from 1969 to 1995 and number of executive
provider of communications Chairman and Chief Executive retired as President of positions, including Group
test instruments, systems, Officer of TBN Holdings Simpson Investment in 1995. Executive and President
software and services, and Inc., a buyout firm. He was Mr. Moseley is a director of responsible for the
Co-Chairman and Chief President, Chief Operating Owens Corning. Communications Services
Executive Officer of Officer and a director of DIRECTOR SINCE 1975 Group, Executive Vice
Convansys Corporation, a The Standard Oil Company President and member of the
worldwide provider of from 1980 to 1986. Mr. Management Executive
information technology Miller formerly served as Committee. At the time of
services. Before joining Chairman of the Federal his retirement from AT&T,
Clayton, Dubilier, Mr. Reserve Bank of Cleveland. Mr. Pelson was Chairman of
Lautenbach was associated DIRECTOR SINCE 1985 Global Operations and a
with IBM from 1968 until his member of the Board of
retirement in 1998. At IBM, Directors. Mr. Pelson is a
he held several executive director of Dun &
positions, including Senior Bradstreet, Acterna
Vice President and Group Corporation, United Parcel
Executive - Sales and Service and Carrier 1
Distribution, and was a International, S.A., and
member of IBM's Corporate Chairman of the Board of
Executive Committee. He is a Trustees of the New Jersey
director of Acterna Institute of Technology.
Corporation, Axcelis DIRECTOR SINCE 1994
Technologies, Inc.,
Convansys Corporation, a
member of the Boards of
Trustees of Fidelity
Investments, Fairfield
University, and a member of
the Council on Foreign
Relations.
DIRECTOR SINCE 1997
5
DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL 2003:
[A. M. CUTLER PHOTO] [G. L. TOOKER PHOTO] [D. L. McCOY PHOTO]
ALEXANDER M. CUTLER, 50, is GARY L. TOOKER, 62, is DEBORAH L. MCCOY, 47, is
Chairman, Chief Executive former Chairman of the Senior Vice President,
Officer and President of Board, Chief Executive Flight Operations of
Eaton Corporation. Mr. Officer and Director of Continental Airlines, Inc.
Cutler joined Cutler-Hammer, Motorola, Inc., a She joined Continental as a
Inc. in 1975, which was manufacturer of electronics pilot in 1979, advanced
subsequently acquired by equipment. Mr. Tooker became through several senior pilot
Eaton, and became President Motorola's President in positions to become Senior
of Eaton's Industrial Group 1990, Vice Chairman and Director, Operations
in 1986 and President of the Chief Executive Officer in Performance in 1994, Vice
Controls Group in 1989. He 1993, Chairman in 1997, and President, Inflight and
advanced to Executive Vice retired from Motorola in Standards Training and
President -- Operations in 1999. Mr. Tooker is a Performance in 1996, and
1991, was elected Executive director of Avnet, Inc. and Vice President, Flight
Vice President and Chief Axcelis Technologies, Inc. Training and Inflight in
Operating He serves on the Board of 1997. Ms. McCoy assumed her
Officer -- Controls in 1993, Trustees of Morehouse present position in 1999.
President and Chief College. DIRECTOR SINCE 2000
Operating Officer in 1995, DIRECTOR SINCE 1992
and assumed his present
position in 2000. Mr. Cutler
is a director of Axcelis
Technologies, Inc. and
KeyCorp.
DIRECTOR SINCE 1993
6
DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL 2004:
[M. J. CRITELLI PHOTO] [E. GREEN PHOTO]
MICHAEL J. CRITELLI, 53, is ERNIE GREEN, 63, is founder,
Chairman and Chief Executive President and Chief
Officer of Pitney Bowes Executive Officer of EGI,
Inc., a provider of Inc., a manufacturer of
messaging and advanced automotive components. He is
business communications also President of Florida
solutions. He was elected Production Engineering,
Vice Chairman of Pitney Inc., a subsidiary of EGI.
Bowes in 1994. He was He is a director of DP&L
promoted to Vice Chairman Inc., and Pitney Bowes Inc.
and Chief Executive Officer DIRECTOR SINCE 1995
of the corporation in 1996,
and became Chairman and
Chief Executive Officer in
1997. Mr. Critelli is a
director of Imagistics
International Inc. and Vice
Chairman of the National
Urban League.
DIRECTOR SINCE 1998
7
BOARD COMMITTEES -- The Board of Directors has the following standing
committees: Audit, Compensation and Organization, Executive, Finance, and
Governance.
Audit Committee. The function of the Audit Committee includes assisting the
Board in monitoring the integrity of the Company's financial statements and its
systems of internal accounting and financial controls and in monitoring the
independence and performance of the Company's internal and independent auditors.
The Audit Committee reviews and reassesses the adequacy of the Audit Committee
Charter annually; reviews the annual audited financial statements with
management and the independent auditors before publication, including major
issues regarding accounting and auditing principles and practices, and the
adequacy of internal controls, and recommends to the Board the inclusion of the
financial statements in the annual report on Form 10-K; reviews analyses of
significant financial reporting issues and judgments made in the preparation of
the Company's annual financial statements; reviews major changes to auditing and
accounting principles and practices; reviews legal matters that may have a
material impact on the Company's financial statements; meets with management to
review the Company's major financial risk exposures and the steps taken to
monitor and control them; reviews the report of the Director -- Audits on
internal controls and internal audit results; recommends the appointment of the
independent auditors, who are accountable to the Committee and the Board;
approves fees for the audit services of the independent auditors; obtains
periodic written statements from the independent auditors delineating all
relationships between the auditors and the Company and discusses these
statements with the auditors; considers the compatibility of the auditors'
services, other than their audit services, with their independence and, if
necessary, recommends that the Board take action to satisfy itself of the
independence of the auditors; evaluates, along with the Board, the performance
of the independent auditors, and if deemed proper, recommends the replacement of
the independent auditors; reviews the appointment and any replacement of the
Company's Director-Audits; meets with the Director-Audits and independent
auditors prior to the annual audit to review the scope, planning and staffing of
the audit; discusses with the independent auditors matters relating to the
Company's annual audit and quarterly reviews, including the independent
auditors' judgment about the quality of the Company's accounting principles
applied in its financial reporting; reviews with the independent auditors
problems or difficulties encountered by the auditors, any management letter
provided by the auditors, and the Company's response to the letter; reviews with
management and the independent auditors the Company's quarterly financial
statements prior to the filing of each Form 10-Q report; meets at least annually
with the Company's chief financial officer, Director-Audits, and independent
auditors in separate executive sessions; and prepares the Committee's report to
be included in the Company's annual proxy statement. The Audit Committee held
three meetings in 2001. Present members are Ms. McCoy and Messrs. Miller,
Moseley and Pelson.
Compensation and Organization Committee. The functions of the Compensation and
Organization Committee include reviewing proposed organization or responsibility
changes at the officer level, evaluating the performance of the Chief Executive
Officer and reviewing the performance evaluations of the other elected officers,
reviewing succession planning for key officer positions and recommending the
individual to assume the position of Chief Executive Officer if that position
becomes vacant due to unforeseen circumstances. The Committee is also
responsible for recommending to the Board the salary of each elected officer,
reviewing awards to elected officers under the Executive Incentive Compensation
Plan and the aggregate amount of awards under the Plan, adjusting that amount as
appropriate within the terms of the Plan, establishing and subsequently
determining the attainment of performance objectives under the Company's
long-term incentive compensation plans, annually reviewing awards to elected
officers under the Company's long-term incentive compensation plans,
administering stock option plans and reviewing compensation practices as they
relate to key employees to confirm that those plans remain equitable and
8
competitive, as well as reviewing significant new employee benefit plans or
significant changes in such plans or changes with a disproportionate effect on
the Company's officers or primarily benefiting key employees, and preparing an
annual report for the Company's proxy statement regarding executive
compensation. The Compensation and Organization Committee held six meetings in
2001. Present members are Messrs. Critelli, Green, Lautenbach, Reynolds and
Tooker.
Executive Committee. The functions of the Executive Committee include all of the
functions of the Board of Directors other than the filling of vacancies in the
Board of Directors or in any of its committees. The Executive Committee acts
upon matters requiring Board action during the intervals between Board meetings.
It did not meet in 2001. Mr. Cutler is a member for the full twelve-month term,
and each of the non-employee directors serves a four-month term.
Finance Committee. The functions of the Finance Committee include the periodic
review of the Company's financial condition and the recommendation of financial
policies, analyzing Company policy regarding its debt-to-equity relationship,
reviewing and making recommendations regarding the Company's dividend policy,
reviewing the Company's cash flow, proposals for long- and short-term debt
financing and the risk management program, meeting with and reviewing the
performance of management pension committees and any other fiduciaries appointed
by the Board for pension and profit-sharing retirement plans and reviewing those
plans and recommending modifications to them. The Finance Committee held two
meetings in 2001. Present members are Messrs. Lautenbach, Miller, Pelson,
Reynolds and Tooker.
Governance Committee. The responsibilities of the Governance Committee include
recommending to the Board improvements in the Company's corporate governance
processes and changes in the Board Governance Policies, advising the Board on
changes in the size and composition of the Board, making recommendations to the
Board regarding the structure and responsibilities of Board committees, and
annually submitting to the Board candidates for members and chairs of each
standing committee. The Governance Committee, jointly with the Chief Executive
Officer, identifies and recommends to the Board candidates for Board membership,
reviews the nomination of directors for re-election, oversees the orientation of
new directors and the ongoing education of the Board, recommends to the Board
compensation of non-employee directors, administers the Board's policy on
director retirements and resignations, administers the directors' stock
ownership guidelines, and recommends to the Board guidelines and procedures to
be used by the directors to evaluate the Board's performance. The
responsibilities of the Governance Committee also include providing oversight
regarding significant public policy issues with respect to the Company's
relationships with shareholders, employees, customers, competitors, suppliers
and the communities in which the Company operates, including such areas as
ethics compliance, environmental, health and safety issues, diversity and equal
employment opportunity, community relations, government relations, charitable
contributions, shareholder and investor relations and the Eaton
Philosophy -- Excellence through People.
The Governance Committee will consider individuals for nomination to stand for
election as directors who are recommended to it in writing by any Eaton
shareholder. Any shareholder wishing to recommend an individual as a nominee for
election at the annual meeting of shareholders to be held in 2003 should send a
signed letter of recommendation, to be received before November 4, 2002, to the
following address: Eaton Corporation, Eaton Center, Cleveland, Ohio 44114-2584,
attention Corporate Secretary. Recommendation letters must state the reasons for
the recommendation and contain the full name and address of each proposed
nominee as well as a brief biographical history setting forth past and present
directorships, employments, occupations and civic activities. Any such
recommendation should be accompanied by a written statement from the proposed
nominee consenting to be named as a candidate and, if nominated and elected,
consenting to serve as a director.
9
The Governance Committee held three meetings in 2001. Present members are Ms.
McCoy and Messrs. Critelli, Green, Miller and Moseley.
The Board of Directors held ten meetings in 2001. All directors attended at
least 75% of the meetings of the Board and its committees. The average rate of
attendance for all directors was 96%.
AUDIT COMMITTEE REPORT -- The Audit Committee of the Board of Directors is
responsible to assist the Board in monitoring the integrity of the Company's
financial statements and its system of internal accounting controls and
financial controls and in monitoring the independence and performance of the
Company's internal and independent auditors. The Committee is comprised of four
Directors, all of whom are independent under the listing standards of the New
York Stock Exchange.
The Board of Directors amended the Audit Committee charter as of July 24, 2001.
A copy of the charter is attached as Appendix A to this proxy statement.
In carrying out its responsibilities, the Audit Committee has reviewed, and has
discussed with the Company's management, the Company's 2001 audited financial
statements.
The Committee has discussed with Ernst & Young LLP, the Company's independent
outside auditors, the matters required to be discussed by generally accepted
auditing standards.
The Committee has also received the written disclosures from Ernst & Young
regarding their independence from the Company and its management that are
required by the Independence Standards Board, has discussed with Ernst & Young
their independence and has considered the compatibility of their services, other
than their audit services referenced in the following sentence, with their
independence. For 2001, Ernst & Young's audit fees relating to the audit of the
Company's annual financial statements and review of the Company's quarterly
financial statements were $3.5 million. Ernst & Young rendered no services
relating to financial information systems design and implementation, and
therefore their fees in this area were $-0-. Their fees for all other services
were $13.3 million, comprised of (a) $4.1 million for audit-related services
(which generally include statutory and employee benefit plan audits, business
acquisitions, and Securities and Exchange Commission registration statements)
and (b) $9.2 million for tax-related services (which generally include tax and
employee benefit plan compliance and tax advisory services).
Based upon the Committee's reviews and discussions referred to above, and in
reliance upon them, the Committee has recommended to the Board of Directors that
the Company's audited financial statements for 2001 be included in the Company's
Annual Report on Form 10-K to be filed with the Securities and Exchange
Commission, and the Board has approved their inclusion.
Respectfully submitted to the Company's shareholders by the Audit Committee of
the Board of Directors.
Furman C. Moseley, Chairman
Deborah L. McCoy
John R. Miller
Victor A. Pelson
COMPENSATION OF DIRECTORS -- Employee directors are not compensated for their
services as directors. Non-employee directors receive an annual retainer of
$60,000, an annual retainer of $5,000 for serving as chairman of any standing
committee of the Board, a fee of $2,000 for each Board meeting attended and for
attendance at any special presentation on non-Board meeting days, and a fee of
$2,000 for each Board committee and shareholder meeting attended.
Non-employee directors first elected before 1996 may defer payment of their
annual fees not to exceed $30,000 at a rate of interest specified in their
deferred compensation agreements. The rate of interest is based upon the number
of years until a director's normal retirement date and, in general, is higher
than prevailing market rates. 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 share units and
10
earns share price appreciation and dividend equivalents. The balance of
retirement compensation earns 10-year Treasury note returns plus 300 basis
points. Short-term compensation earns 13-week 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.
Under the Company's 1998 Stock Plan, as approved by the shareholders, each
person who on April 22, 1998 or thereafter becomes a non-employee director
automatically is granted a stock option for 5,000 shares upon the date of his or
her election. So long as each non-employee director continues to serve in that
capacity, beginning in the year after the director receives his or her initial
grant, he or she is automatically granted an option for a number of shares equal
to the quotient resulting from dividing (i) four times the annual retainer for
each non-employee director in effect on the granting date, by (ii) the closing
price of an Eaton common share on the New York Stock Exchange Composite
Transactions on the last business day immediately preceding the granting date.
The granting date is the Tuesday immediately before the fourth Wednesday of each
January.
Upon leaving the Board, non-employee directors who were first elected prior to
1996 are eligible to receive an annual benefit, as described below. For Board
service of at least five years, eligible directors receive an annual benefit
equal to the annual retainer in effect at the time the directors leave the
Board. Eligible directors having fewer than five years but more than one year of
Board service at the time of their Board retirement receive a proportionately
reduced annual benefit. The annual benefit is paid for the lesser of ten years
or life. The present value of payments under this plan will be paid in a lump
sum upon a "proposed change in control" of the Company, unless otherwise
determined by a committee of the Board. Directors who are first elected in 1996
or later are not eligible to receive the annual benefit.
BOARD OF DIRECTORS GOVERNANCE POLICIES -- In January, 2002, the Board of
Directors adopted an updated version of the Board of Directors Governance
Policies, recommended by the Governance Committee of the Board. The new
Governance Policies are attached as Appendix B to this proxy statement.
EXECUTIVE COMPENSATION -- The following table summarizes the total compensation
of the Chief Executive Officer of Eaton and the four other most highly
compensated executive officers for fiscal year 2001. The table also summarizes
compensation of the named executive officers for fiscal years 2000 and 1999.
11
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
---------------------------------
AWARDS PAYOUTS
--------------------- ---------
RESTRICTED
ANNUAL COMPENSATION OTHER ANNUAL STOCK STOCK LONG-TERM ALL OTHER
-------------------------- COMPENSATION AWARD(S) OPTIONS INCENTIVE COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) (2) (SHARES) PAYOUTS (3)
--------------------------------------------------------------------------------------------------------------------------
A. M. Cutler 2001 $941,670 $654,588 $14,923 $ 699,100 90,000 $317,771 $25,579
Chairman, 2000 797,940 636,043 0 0 104,553 929,978 39,128
Chief Executive Officer 1999 695,040 914,250 0 0 87,127 792,576 26,944
and President
C. Arnold 2001 $384,375 $135,780 $ 0 $ 174,775 20,100 $126,911 $12,099
Senior Vice President 2000 85,336 150,202 0 3,796,650 0 434,731 0
and Group Executive -- 1999 0 0 0 0 0 0 0
Fluid Power
S. M. Buente 2001 $359,374 $156,282 $ 0 $ 174,775 20,100 $132,548 $18,297
Senior Vice President 2000 303,243 140,216 0 0 15,102 169,394 23,504
and Group Executive -- 1999 256,432 310,711 0 0 23,234 108,260 23,072
Automotive
R. W. Carson 2001 $420,121 $148,405 $ 0 $ 174,775 20,100 $132,715 $20,474
Senior Vice President 2000 383,360 257,489 0 0 104,554 0 23,849
and Group Executive -- 1999 263,654 66,413 0 0 38,336 0 7,653
Cutler-Hammer
S. J. Cook 2001 $319,784 $106,235 $ 0 $ 0 11,000 $ 75,702 $17,604
Vice President -- 2000 299,200 141,098 0 0 15,102 260,314 23,939
Human Resources 1999 282,520 225,021 0 0 23,234 246,664 23,307
--------------------------------------------------------------------------------------------------------------------------
(1) Reported in this column is annual compensation representing an amount
reimbursed by the Company for the payment of income taxes on certain
executive perquisites.
(2) At year-end 2001 the number and value of restricted shares held by each of
the named executive officers were as follows: A. M. Cutler, 10,000,
$744,100; R. W. Carson, 2,500, $186,025; S. M. Buente, 2,500, $186,025; C.
Arnold, 68,947, $5,130,346 and S. J. Cook, 0, $0. Value is calculated by
multiplying the closing price of an Eaton share on that date by the number
of restricted shares (vested and unvested). For reasons related to the
spin-off of the Company's semiconductor operations, the restricted shares
granted to Mr. Arnold in 2000 upon the commencement of his employment by the
Company were cancelled prior to year-end 2000 and were re-granted in 2001.
The restricted shares awarded to the named executive officers vest over four
year periods, except that the restricted shares granted to Mr. Arnold in
2000 vest over five years. Dividends are paid to the executives with respect
to the restricted shares (vested and unvested) they hold at the same rate
and time as dividends are paid on outstanding Company shares generally.
(3) All Other Compensation contains several components. With respect to 2001 and
prior years, the Eaton Savings Plan (formerly called the Eaton Corporation
Share Purchase and Investment Plan) permitted an employee to contribute from
1% to 6% of his or her salary to the matching portion of the plan. Eaton
made a matching contribution which, except in special circumstances, ranged
between $.25 and $1.00 for each dollar contributed by the participating
employee, as determined under a formula designed to reflect Eaton's
quarterly earnings per share. The amounts the Company contributed during
2001 for the named executive officers were as follows: S. M. Buente, $2,552;
A. M. Cutler, $2,927; R. W. Carson, $2,724; S. J. Cook, $3,170 and C.
Arnold, $2,003. The Company maintains plans pursuant to which incentive
compensation may be deferred. Earnings on such deferrals which are above
rates established by the Internal Revenue Service are disclosed in this
table. Those earnings during 2001 for each of the named executive officers
were as follows: S. M. Buente, $0; A. M. Cutler, $2,044; R. W. Carson, $0;
S. J. Cook, $0 and C. Arnold, $0. Under a Company program, each executive
officer may acquire an automobile with a Company subsidy. Under this program
for 2001, the approximate cost to the Company for each of the named
executive officers was as follows: S. M. Buente, $12,676; A. M. Cutler,
$13,485; R. W. Carson, $13,068; S. J. Cook, $12,229 and C. Arnold, $7,896.
The Company provides certain executives, including the named executive
officers, with the opportunity to acquire individual whole-life insurance.
The annual premiums paid by the Company during 2001 for each of the named
executive officers were as follows: S. M. Buente, $3,069; A. M. Cutler,
$7,123; R. W. Carson, $4,682; S. J. Cook, $2,205 and C. Arnold, $2,200. Each
executive officer is responsible for paying individual income taxes due with
respect to the Company's automobile and insurance programs.
12
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES -- The following table
contains information concerning the exercise of stock options during fiscal year
2001 and the value of unexercised stock options at the end of fiscal year 2001
with respect to the named executive officers.
TOTAL VALUE OF
TOTAL NUMBER OF UNEXERCISED,
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES HELD AT HELD AT
ACQUIRED ON FISCAL YEAR END FISCAL YEAR END
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------------------------------------------------------------------------------------------
A. M. Cutler 21,338 $983,895 316,678 333,143 $6,458,007 $2,882,065
C. Arnold 0 0 0 20,100 0 38,190
S. M. Buente 1,259 51,418 63,718 61,991 1,257,581 505,291
R. W. Carson 0 0 87,180 75,810 771,711 587,125
S. J. Cook 2,191 57,685 51,005 65,609 744,360 601,405
-------------------------------------------------------------------------------------------------------
OPTION GRANTS -- The following table gives information concerning grants of
stock options made during fiscal year 2001 to each of the named executive
officers. No stock appreciation rights were granted during fiscal year 2001.
INDIVIDUAL GRANTS
------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR OPTION TERM
OPTIONS IN FISCAL OR BASE EXPIRATION -------------------------------------
NAME GRANTED (#) YEAR(1) PRICE DATE 0% 5% 10%
---------------------------------------------------------------------------------------------------------------
A. M. Cutler 90,000 7.41% $72.93 2/27/2011 $0 $ 4,135,131 $ 10,436,283
C. Arnold 20,100 1.66% 72.93 2/27/2011 0 923,513 2,330,770
S. M. Buente 20,100 1.66% 72.93 2/27/2011 0 923,513 2,330,770
R. W. Carson 20,100 1.66% 72.93 2/27/2011 0 923,513 2,330,770
S. J. Cook 11,000 0.91% 72.93 2/27/2011 0 505,405 1,275,546
All Shareholders(2) 0 3,200,931,898 8,078,542,411
---------------------------------------------------------------------------------------------------------------
(1) Based on a total of 1,213,808 options granted to all employees. As granted,
one-third of the options become exercisable upon each of the first, second
and third anniversary of the date of grant.
(2) At the assumed annual rates of stock price appreciation of 0%, 5% and 10%,
at a base price of $72.93, the value of all 69,667,411 shares outstanding on
January 31, 2002, would increase by the amounts shown. There can be no
assurance that the market price of Eaton shares will increase in the future.
--------------------------------------------------------------------------------
13
LONG-TERM INCENTIVE PLAN AWARDS -- The following table gives information
regarding long-term incentive plan awards made during fiscal year 2001 to each
of the named executive officers.
PERFORMANCE
OR OTHER ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
NUMBER OF PERIOD PRICE BASED PLANS
SHARES, UNTIL ----------------------------------------
UNITS OR MATURATION THRESHOLD TARGET MAXIMUM
NAME OTHER RIGHTS(1) OR PAYOUT (SHARES) (SHARES) (SHARES)
---------------------------------------------------------------------------------------------------
A. M. Cutler 9,800 4 years 9,800 19,600 39,200
C. Arnold 2,975 4 years 2,975 5,950 11,900
S. M. Buente 2,975 4 years 2,975 5,950 11,900
R. W. Carson 2,975 4 years 2,975 5,950 11,900
S. J. Cook 1,650 4 years 1,650 3,300 6,600
---------------------------------------------------------------------------------------------------
(1) These units were awarded during 2001 under the Company's long-term incentive
plan at a target price per unit of $67.496. The actual, final value of the
units will be determined after the completion of the four-year award period
based upon the achievement of corporate and individual performance goals.
The corporate goals relate to cash flow return on gross capital and growth
in earnings per Company common share. Payouts are made in cash, unless the
executive has elected to defer receipt of the payment under the Company's
long-term deferral plan.
COMPENSATION AND ORGANIZATION COMMITTEE REPORT -- The Committee, consisting of
five non-employee directors, met six times in 2001. The Committee has adopted
several fundamental compensation policies that have been endorsed by the Board
of Directors. It is Committee policy that executive compensation must to a large
extent be at risk, in the sense of being dependent on achieving rigorous
Company, business unit and individual performance objectives that are designed
to enhance shareholder value. It is also Committee policy that executive
compensation must be competitive in the employment marketplace in order to allow
the Company to attract, motivate and retain highly qualified executives, and
that it must fairly reflect, in the judgment of the Committee, accomplishments
and responsibilities within the Company.
The administration of the Company's executive compensation is consistent with
these policies. This is confirmed by periodic studies of Company and industry
practices conducted for the Committee with the assistance of a nationally
recognized consulting firm, the results of which are summarized for the Board of
Directors. Based on the last study and the consulting firm's recommendations,
the Committee has established annual guidelines designed to limit the dilutive
effect of the Company's stock option grants. Further, the Committee adjusted the
performance goals under the Company's short-term incentive plan to insure that
the performance metrics are aligned with the Company's earnings growth
objectives. Forty-five percent of the 2001 aggregate cash compensation of the
executive officers named in the compensation table was based directly on
specific financial performance objectives. For 2001, the Committee targeted base
salaries at approximately the median range of compensation paid by similar
companies included in the survey data bases of several nationally recognized
compensation consulting firms. The Committee also established short-term and
long-term incentive opportunities and stock option grants at approximately the
median range, with provisions for larger payments if the Company achieves
superior performance and for smaller payments if the Company does not achieve
target performance.
Salary -- In setting executive salaries, the Committee uses input from outside
sources as noted above and management recommendations for individual
adjustments. In judging performance, the Committee considers performance against
annual plans, accomplishment of other objectives and the financial results of
similar companies. The Company also normally considers factors such as
initiative and leadership, as well as time in position, experience, knowledge
and level of competitive compensation in the marketplace. Consistently effective
individual performance is a threshold requirement for any salary increase. The
Committee considers these same factors when preparing its recommendations for
base salary adjustments for the Company's Chairman
14
and Chief Executive Officer. The Committee's recommendations for 2001 salary
adjustments were based upon these considerations and accepted by the Board of
Directors.
Short-Term Incentives -- Annual performance awards for 2001 were based on
individual target opportunities for each executive expressed as a percentage of
the higher of the participant's base salary or salary grade midpoint. Actual
awards are determined by adjusting the target incentive opportunity based on
whether the Company has achieved predetermined levels of cash flow return on
gross capital employed in the business ("CFR"), earnings per share and business
unit performance (for operating managers). Actual awards are also determined by
individual performance ratings and Committee discretion. A philosophical
cornerstone of short-term incentive compensation is the belief that cash flow
return and earnings per share are easily understood by incentive participants,
and that consistently high performance against these measures provides a good
statistical correlation with sustained high stock market valuation. No incentive
payments are made under the Plan unless the Company achieves the predetermined
minimum levels of both CFR and earnings per share. Individual performance
ratings take into account factors such as unanticipated challenges and
opportunities, actual performance against profit plan, personal objectives,
general economic conditions and the performance of other large industrial
corporations. Individual ratings emphasize pay for performance, and may result
in payments ranging from zero to 150% of the amount otherwise payable. The
Committee may adjust the total amount available for payment under the Plan up or
down by 20%, and retains the right to pay up to 20% of the normal incentive fund
to recognize extraordinary contributions to the Company in a year when awards
would not otherwise be payable. The Committee did not exercise this discretion
with respect to the 2001 incentive awards. Executives may defer payment of their
bonuses. Amounts deferred until retirement earn the greater of share price
appreciation and dividend equivalents or 13-week Treasury bill returns. Amounts
deferred for shorter periods earn Treasury bill returns.
Long-Term Incentives -- Long-term incentives are granted annually. Their value
depends on whether the Company achieves aggressive performance objectives during
the four years following a grant. Incentive awards are based upon a combination
of CFR, growth in earnings per share and a discretionary assessment of
individual performance. The performance objectives are established by the
Committee based upon a review with management of the Company's past performance
in comparison to that of its peer group companies and the Company's strategic
objectives and annual business plans. For the 1998-2001 award period, the
Company's performance was below the target objectives established for that
period, but was above the level necessary to earn a minimum award under the
Plan. Individual incentive targets are expressed as phantom share units, and
final awards are paid in cash, instead of shares. Final phantom share unit
awards will be determined based upon Company and individual performance as
described above. Executive officers may defer payment of their awards. At least
50% of any deferrals that will be paid after retirement are converted to share
units and earn share price appreciation and dividend equivalents. The balance
earns 10-year Treasury note returns plus 300 basis points. Short-term deferrals
earn 13-week Treasury bill returns.
Tax Deduction -- Any non-deferred annual compensation of more than $1 million
for the Company's Chief Executive Officer and each of its four other most
highly-compensated officers is not tax deductible unless paid pursuant to
formula-driven, performance-based arrangements that preclude Committee
discretion to adjust compensation after the beginning of the period in which the
compensation is earned. The Committee attempts to preserve deductibility by
encouraging deferrals of otherwise non-deductible payments.
Equity Compensation -- Stock options align the interests of the Company's
officers and other executives with those of its shareholders by having a
significant component of their compensation tied directly to increases in
shareholder value. All officers and key executives of the Company are expected
to hold a multiple of from one to five times their base salary in Company shares
depending on their level in the organization. Options typically have been
granted annually, have an exercise price equal to the fair market value of the
shares on the date of the grant and, to encourage a long-term perspective, have
an exercise period of ten years. The Company does not reprice stock options
after they have been granted and does not grant stock appreciation
15
rights. Based upon its 1999 review of compensation practices, the Committee had
adopted guidelines that limit the Company's regular total stock option grants,
during any five-year period, to a maximum of 10% of the Company's outstanding
shares. When circumstances warrant, the Company does make occasional grants of
restricted stock to selected elected officers or other executives.
Chief Executive Officer Compensation -- The 2001 compensation for Mr. Cutler was
earned pursuant to the arrangements described above. The Committee recommended,
and the Board of Directors approved, a 2001 adjustment to his base salary. The
adjustment was made to reflect his overall performance in this key strategic
leadership role, to competitively position his salary in the marketplace and to
reflect his time in this position.
Mr. Cutler's 2001 short-term incentive payout reflected the award formula of the
Company's incentive compensation plan, which was based on the Company's
financial performance, as measured by CFR and earnings per share compared to the
targets set by the Committee for 2001. Consistent with the Plan's design, the
Committee evaluated the performance of Mr. Cutler, and his final award reflects
his individual rating. In establishing that rating, the Committee took into
account Mr. Cutler's strategic leadership in the face of 2001's major economic
contraction and resulting weakened markets and earnings. Led by Mr. Cutler,
management took decisive action to adjust the size of the organization and to
control costs. Mr. Cutler maintained the Company's very strong cash flow
performance which, when combined with major reductions in debt, significantly
strengthened the Company's financial position. This performance allowed Eaton to
maintain a solid share price valuation despite very poor market conditions. Mr.
Cutler's rating also reflected continued success in improving the Company's
leadership talent and its diversity profile.
Mr. Cutler earned a 1998-2001 payout from the long-term incentive plan that was
based upon the Company's four-year CFR and cumulative EPS performance against
stretch objectives established by the Committee for this period, and upon Mr.
Cutler's personal performance over that period. His grants of stock options,
restricted stock and long-term incentives were based on the factors described in
earlier sections of this report. Mr. Cutler's 2001 long-term incentive plan,
restricted stock and stock option grants compared appropriately with the median
of long-term grants made to Chief Executive Officers by large industrial
competitors.
Respectfully submitted to the Company's shareholders by the Compensation and
Organization Committee of the Board of Directors.
Gary L. Tooker, Chairman
Michael J. Critelli
Ernie Green
Ned C. Lautenbach
A. William Reynolds
16
COMPANY STOCK PERFORMANCE -- The following graph compares the cumulative total
return for Eaton common shares with the S&P 500 and a group of peer companies.
The peer group consists of: ArvinMeritor, Inc., Borg Warner Automotive, Inc.,
Cooper Industries, Inc., Cummins Engine Company, Inc., Dana Corporation, Emerson
Electric Co., Honeywell International, Inc., Hubbell Incorporated, Johnson
Controls, Inc., Navistar International Corporation, PACCAR Inc., Parker-Hannifin
Corporation, Rockwell International Corporation (now Rockwell Automation
Corporation), SPX Corporation, TRW Inc. and Thomas & Betts Corporation.
[LINE GRAPH]
EATON PEERS S&P 500
----- ----- -------
1996 100 100 100
1997 130.621 120.622 133.361
1998 105.804 123.662 171.484
1999 111.067 136.218 207.552
2000 117.868 137.132 187.69
2001 137.68 124.343 165.413
Assumes $100 invested on December 31, 1996 in Eaton common shares, the S&P 500
index and stock of the peer companies. Total return assumes that all dividends
are reinvested when received. The returns of each company in the group of peer
companies are weighted based on the relative stock market capitalization of
those companies at the beginning of the measurement period.
17
RETIREMENT PLANS -- The following table shows the annual normal retirement
benefits payable to officers and other employees of the Company under the
Company's retirement plans upon retirement at age 65 at the compensation levels
and years of service specified. The table assumes retirement under the standard
post-retirement single life annuity option. Under the standard post-retirement
surviving spouse option, the participant receives a reduced pension, and a
pension equal to 50% of the reduced pension is payable to his or her surviving
spouse. The benefit for an employee electing that option whose spouse is three
years younger would be approximately 11% less than the amounts shown in the
table.
PENSION PLAN TABLE
ANNUAL NORMAL RETIREMENT BENEFITS PURSUANT TO STANDARD
AVERAGE FINAL SINGLE LIFE ANNUITY OPTION FOR YEARS OF CREDITED SERVICE INDICATED
ANNUAL -----------------------------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
=============================================================================================
300,000 $ 64,868 $ 86,490 $108,113 $129,735 $151,358 $ 172,980
400,000 87,368 116,490 145,613 174,735 203,858 232,980
500,000 109,868 146,490 183,113 219,735 256,358 292,980
600,000 132,368 176,490 220,613 264,735 308,858 352,980
700,000 154,868 206,490 258,113 309,735 361,358 412,980
800,000 177,368 236,490 295,613 354,735 413,858 472,980
900,000 199,868 266,490 333,113 399,735 466,358 532,980
1,000,000 222,368 296,490 370,613 444,735 518,858 592,980
1,100,000 244,868 326,490 408,113 489,735 571,358 652,980
1,200,000 267,368 356,490 445,613 534,735 623,858 712,980
1,300,000 289,868 386,490 483,113 579,735 676,358 772,980
1,400,000 312,368 416,490 520,613 624,735 728,858 832,980
1,500,000 334,868 446,490 558,113 669,735 781,358 892,980
1,600,000 357,368 476,490 595,613 714,735 833,858 952,980
1,700,000 379,868 506,490 633,113 759,735 886,358 1,012,980
1,800,000 402,368 536,490 670,613 804,735 938,858 1,072,980
1,900,000 424,868 566,490 708,113 849,735 991,358 1,132,980
The information contained in the preceding table is based on the assumption that
the retirement plans will be continued in their present form.
Annual normal retirement benefits are computed at the rate of 1% of average
final annual compensation up to the applicable Social Security integration level
($35,100 for 2001 retirements) plus 1 1/2% of average final annual compensation
in excess of the Social Security integration level, multiplied by the employee's
years of credited service.
An employee's average final annual compensation is the average annual amount of
his or her total compensation (which includes salary and bonus as so identified
in the Summary Compensation Table on page 12) for service during the five
consecutive years within the last ten years of employment for which the
employee's total compensation was greatest. Years of credited service means the
number of years of employment between age 21 and retirement, with a maximum of
44 years. As of January 31, 2002, the number of years of credited service for
each of the individuals named in the Summary Compensation Table on page 12 was
as follows: A. M. Cutler, 26.4; C. Arnold, 1.3; R. W. Carson, 3; S. M. Buente,
25.3; S. J. Cook, 7.3.
---------------
Certain provisions of the Internal Revenue Code, as amended, limit the annual
benefits that may be paid from a tax-qualified retirement plan. As permitted
under the Code, the Board of Directors has authorized the payment from Eaton's
general funds of any benefits calculated under the provisions of the applicable
retirement plan which may exceed those limits. The present value of these
benefits will be paid in a single installment upon a proposed change in control
of the Company unless otherwise determined by the Board of Directors.
---------------
The Board of Directors has adopted a plan which provides supplemental annual
retirement income to certain executives who do not have the opportunity to
accumulate significant credited service with Eaton, provided that they
18
retire at age 55 or older and have at least five years of service with Eaton.
The amount of the annual supplement is generally equal to the amount by which a
percentage (described below) of the executive's average final annual
compensation exceeds his or her earned retirement income (which includes amounts
receivable pursuant to the retirement plans described above as well as
retirement plans maintained by the executive's previous employers). The
percentage of average final annual compensation used for this purpose depends
upon an executive's age and years of service at retirement. The percentage
ranges from 20% (for retirements at age 55 with less than 15 years of service)
to 45% (for retirements at age 65 with 15 years or more of service). Under the
plan, the present value of payments will be paid in a single installment upon a
proposed change in control of the Company unless otherwise determined by the
Board of Directors. Eight executive officers currently are accruing benefits
under the plan, including C. Arnold, R. W. Carson and S. J. Cook, who are named
in the Summary Compensation Table on page 12. The estimated annual benefits
payable under this plan are $115,984 to Mr. Arnold, $216,838 to Mr. Carson and
$114,785 to Ms. Cook, based on the assumption that they retire at age 65 and
their base salary and target incentive compensation increases at 4% per annum.
---------------
The Company has entered into agreements with its executive officers, including
those named in the Summary Compensation Table on page 12, which provide for
payments and benefits in the event of a termination of employment in the context
of a change of control of the Company. The purpose of these agreements is to
assure continued dedication, and to diminish the inevitable distraction caused
by personal uncertainties and risks, in the event of a corporate change of
control.
The agreements provide that each officer, for three years following a change of
control, will have duties, salary, bonus, fringe benefits and opportunities for
savings, incentive earnings and retirement compensation no less favorable than
was previously the case. If the Company were to terminate an officer's
employment during this three-year period for reasons other than cause or
disability, or if the officer were to terminate employment because of changed
circumstances, then the officer would be entitled to receive certain amounts and
benefits under these agreements. These amounts and benefits would include (i)
long-term incentive compensation reflective of the portion of the award periods
completed prior to termination, (ii) salary and bonus multiplied by three (or
any lesser number of years and portions thereof until age 65), and (iii)
continuation of medical, life insurance and other welfare benefits for two years
(or any lesser number of years and portions thereof until age 65), subject to
reduction for comparable benefits received in any subsequent employment. The
officer would be entitled to receive an additional payment, net of taxes, to
compensate for the excise tax imposed on these and other payments if they are
determined to be "excess parachute payments" under the Internal Revenue Code.
The agreements provide that, upon the occurrence of a proposed change of
control, the Company would deposit in trust a cash amount sufficient to provide
the benefits and payments to which the officers would be entitled under the
agreements upon a change of control and termination of employment. The
agreements also provide that the Company would reimburse the officers for any
costs incurred to enforce the agreements.
---------------
Certain grantor trusts established by the Company hold approximately $1 million
of marketable securities and 699,431 Company shares in order to provide for a
portion of the Company's deferred compensation obligations. The trust assets,
which are subject to the claims of the Company's creditors, will be used to pay
those obligations in proportion to trust funding. The trusts provide for full
funding upon a change in control of the Company and for accelerated lump sum or
installment payments upon a failure by the Company to pay amounts due under the
plans or upon a termination of employment in the context of a change in control.
2. APPROVAL OF THE 2002 STOCK PLAN
The Board believes that share-based incentives are important factors in
attracting and retaining highly qualified individuals, and that they help to
19
align the interests of those individuals with the interests of the Company's
shareholders. It believes that the shareholder-approved 1998 Stock Plan has been
instrumental in producing the strong financial performance of the Company since
1998. As of January 31, 2002, 1,194,139 common shares remained available for
additional awards under that plan. The Board is therefore submitting to the
Company's shareholders for their approval a new share-based plan, called the
2002 Stock Plan (the "Plan").
The Board believes that the potential dilutive effect of the issuance of stock
options has been mitigated by periodic share repurchase programs over the last
several years. Since 1996, Eaton has repurchased 13.2 million of its shares,
largely offsetting grants made in recent years. Under a share repurchase program
authorized in January 2000, the Company has remaining authority to purchase up
to $499 million worth of shares. The actual number of shares to be purchased, if
any, will depend upon market conditions.
The Plan, which is similar to the 1998 Stock Plan, will authorize the granting
of stock options to non-employee directors, and the granting of stock options
and other share-based awards to non-union salaried employees selected by the
Board's Compensation and Organization Committee (the "Committee"). The purpose
of the Plan is to continue to provide long-term incentives for outstanding
service to the Company and its shareholders and to assist in recruiting and
retaining highly qualified individuals. A copy of the Plan is included as
Appendix C to this proxy statement, and the following summary is qualified in
its entirety by the provisions of the Plan.
ADMINISTRATION - The Committee, which is comprised of non-employee directors,
will administer employee awards. The Governance Committee of the Board, which is
also comprised of non-employee directors, will administer non-employee director
options.
SHARES AVAILABLE - Subject to adjustments for stock splits, stock dividends and
other events affecting the shares, the total number of the Company's common
shares with a par value of 50c each ("shares") that may be delivered under the
Plan will not exceed 2,500,000, and the total number of shares or share units
underlying options or related to other awards that may be granted to any
employee during any period of three consecutive calendar years will not exceed
500,000. No more than 10% of the total number of shares authorized for delivery
under the Plan may be granted as performance shares, restricted shares, stock
appreciation rights or other share-based awards (other than stock options). In
addition, no more than 5% of the total number of shares authorized for delivery
under the Plan may be granted as performance shares, restricted shares, stock
appreciation rights or other share-based awards (other than stock options) which
vest within less than one year after the date of grant. With respect to such
awards in excess of 5% of the total number of such authorized number of shares,
the vesting period must exceed one year, with no more than one third of shares
becoming vested at the end of each of the twelve-month periods following the
date of grant. Shares related to awards that are forfeited, terminated or
unexercised upon expiration shall immediately become available for other awards.
STOCK OPTIONS -
Employee Stock Options. Each option will be exercisable at such times and for
such number of shares as determined by the Committee as of the date of grant.
Grants to officers will not be exercisable for at least six months after those
options are granted. Although the Plan does not impose any similar time
requirement on grants to non-officer employees, such grants historically have
become exercisable as follows: after one year as to 33% of the shares covered by
the grant, after the second year as to another 33%, and after the third year as
to the remaining 34%. The Committee may 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 officers. The Committee may
grant employee options which are intended to qualify as incentive stock options
("Incentive Stock Options") under the Internal Revenue Code.
Non-employee Director Stock Options. Each person who becomes a non-employee
director at the 2002 annual shareholders meeting or
20
thereafter automatically will be granted an option for 5,000 shares upon the
date of his or her election. On each granting date thereafter that each
non-employee director continues to serve in that capacity, he or she will
automatically be granted options for a number of shares equal to the quotient
resulting from dividing (i) four times the annual retainer for non-employee
directors in effect on the granting date by (ii) the closing price of a share on
the last business day immediately preceding the granting date. The granting date
is the Tuesday immediately before the fourth Wednesday of each January. Each
non-employee director option shall be fully exercisable six months following the
date of grant.
Term. The term of each option will be ten years from the date of grant.
Price. The option price will 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 of the
high and low prices as quoted on the New York Stock Exchange Composite
Transactions. The fair market value of a share as of March 1, 2002 was $81.42.
Payment. The exercise price will be payable in cash or, if permitted by the
terms of the option, by other consideration, including shares valued at fair
market value on the date of exercise. Delivery of the shares by the Company to
the option holder upon exercise of an option may be deferred, as authorized by
the Committee.
PERFORMANCE SHARES - The Committee may grant performance shares for no cash
consideration, if permitted by applicable law, or for such consideration as may
be determined by the Committee. The Committee will establish award periods and
the number of performance shares to be earned if Company performance objectives
are met during the award periods. The performance objectives will be stated in
terms of cash flow return on gross capital employed in the Company's business
("CFR"). CFR equals the total of net income plus depreciation 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 any performance objective. The actual levels of CFR to be achieved
and other terms and conditions of the performance shares will be determined by
the Committee. If performance shares are not earned, they will be available for
future grants.
OTHER AWARDS - The Company has not granted stock appreciation rights for many
years, primarily because of their adverse accounting consequences. However, in
some countries stock appreciation rights are more advantageous to the recipients
than conventional stock options. Therefore, the Plan permits their use at the
discretion of the Committee. Stock appreciation rights entitle the holder to
receive a number of shares or cash equal to the increase in the fair market
value of the designated number of shares from the date of grant to the date of
exercise. Stock appreciation rights may be exercised as determined by the
Committee.
The Committee may grant other share-based awards, including restricted shares,
for no cash consideration, or for such consideration as may be determined by the
Committee. Subject to the provisions discussed under "Shares Available" above,
the Committee will determine the criteria or periods for payment or vesting and
the extent to which those criteria or periods have been met. Any such grants
shall have such other terms and conditions as determined by the Committee.
OTHER MATTERS - The Plan will become effective if and when approved by the
shareholders at the 2002 annual meeting of shareholders, and no awards may be
granted after December 31, 2011.
Shares available for awards may consist, in whole or in part, of authorized and
unissued shares or treasury shares.
The Plan may be terminated or amended by the Board of Directors without
shareholder approval, except that the Plan may not be amended without
shareholder approval to (i) materially increase the aggregate number of shares
which may be issued under the Plan, (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
21
below fair market value on the date of grant or (iv) materially modify the
requirements as to eligibility for participation in the Plan.
The Board of Directors is presently comprised of nine non-employee directors and
one employee director. The number of employees to whom employee stock options
are typically granted is approximately 500.
The benefits that will be received by employees under the Plan or which would
have been received under the Plan if it had been in effect in 2001 are not
currently determinable, because awards will be made at the discretion of the
Committee.
FEDERAL INCOME TAX IMPLICATIONS -
General. The Plan has been designed to meet the requirements in Section 162(m)
of the Internal Revenue Code for stock options, stock appreciation rights and
performance shares, but has not been designed to meet those requirements for
other awards.
Stock Options. Employees may be granted Incentive Stock Options or nonqualified
options. Under present federal income tax law and regulations, no tax is imposed
as a result of the grant or exercise of an Incentive Stock Option. The amount by
which the fair market value of the shares received upon exercise exceeds the
option price is an item of tax preference and may be subject to the alternative
minimum tax. If the shares received upon the exercise of an Incentive Stock
Option are not disposed of within two years from the date the option was granted
and within one year after the date the shares are transferred to the holder,
upon the sale of the shares, the difference between the amount realized on the
sale and the option price will be taxed as long-term capital gain or loss. Eaton
will not be entitled to a tax deduction with respect to the grant or exercise of
the Incentive Stock Option or upon the sale of the shares issued upon exercise.
If these holding period rules are not met, the holder will realize ordinary
income upon disposition equal to the amount by which the fair market value of
the shares at the time of exercise (or, if lower, the proceeds of sale) exceeds
the option price. Eaton will be entitled to a tax deduction equal to the
ordinary income realized by the holder. Any gain in excess of the amount taxed
as ordinary income will be taxed as short-term or long-term capital gain.
A person granted a non-qualified stock option will not be taxed upon the grant
of the option, and Eaton will not be entitled to a tax deduction by reason of
the grant. The option holder will realize taxable income upon exercise of the
option in the amount by which the fair market value of the shares received
exceeds the option price. Eaton will be entitled to a tax deduction equal to the
ordinary income to the employee.
Performance Shares. Performance shares will not result in taxable income to the
recipient or a tax deduction for Eaton during any period that the recipient's
rights to shares under the award are contingent on Eaton's attainment of
performance goals. At the time the Committee certifies that the Company's
performance goal has been met, the recipient will realize taxable ordinary
income equal to the fair market value of the shares at the time of
certification. Eaton will be entitled to a tax deduction in the same amount.
Other Awards. Restricted shares will not be taxable to the recipient, or
deductible by Eaton, when awarded or during the period the shares are
restricted. At the time the restriction lapses, the recipient will realize
taxable ordinary income equal to the fair market value of the shares at the time
of lapse, less the amount (if any) paid by the recipient for those shares.
Subject to the provisions of Section 162(m) of the Internal Revenue Code, Eaton
will at that time be entitled to a tax deduction in the same amount.
ACCOUNTING PRACTICE - There is currently no accounting charge to the income of
the Company in connection with the grant or exercise of a stock option. The
Company's income will be charged to the extent of any appreciation in the fair
value of stock appreciation rights which are outstanding and expected to be
exercised in the future. The Company's income will be charged for the expected
fair value of shares awarded in the future as performance shares.
VOTE REQUIRED - The Board's adoption of the Plan is conditioned upon the Plan's
receiving the approval of holders of the majority of the outstanding Eaton
common shares.
22
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE 2002 STOCK
PLAN.
3. RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
Upon the recommendation of its Audit Committee, the Board of Directors has
appointed the accounting firm of Ernst & Young LLP as independent auditors to
conduct the annual audit of Eaton's books and records for 2002. The submittal of
this matter to the shareholders at the annual meeting is not required by law or
by Eaton's Amended Regulations. The Board of Directors is nevertheless
submitting it to the shareholders to ascertain their views. If this proposal is
not approved at the annual meeting by the affirmative vote of holders of a
majority of the outstanding shares, the Board intends to reconsider its
appointment of Ernst & Young LLP as independent auditors.
A representative of Ernst & Young LLP will be present at the annual meeting to
answer any questions concerning the independent auditors' areas of
responsibility.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF
ERNST & YOUNG LLP.
4. OTHER BUSINESS
Management does not know of any other matters requiring shareholder action that
may come before the meeting; but, if any are properly presented, the individuals
named in the enclosed form of proxy will vote on those matters according to
their best judgment.
OWNERSHIP OF OUTSTANDING VOTING SHARES -- Set forth below is certain information
concerning persons who are known by Eaton to have reported owning beneficially
more than 5% of the Company's common shares as of the most recent practicable
date.
TITLE OF CLASS: COMMON SHARES
NAME AND ADDRESS OF NUMBER PERCENT
BENEFICIAL OWNER OF SHARES OF CLASS
---------------------------------------------------
FMR Corp. 6,103,212(1) 8.8%
82 Devonshire Street
Boston, MA 02109
Vanguard Windsor Funds 4,026,800(2) 5.81%
P.O. Box 2600 Valley
Forge, PA 19482
Wellington Management 6,137,800(3) 8.86%
Company, LLP
75 State Street
Boston, Massachusetts 02109
---------------------------------------------------
(1) FMR Corp. has filed with the Securities and Exchange Commission a Schedule
13G dated February 14, 2002, which reports the beneficial ownership of
6,103,212 common shares by it and certain affiliated entities and
individuals. As reported in the Schedule 13G, FMR Corp. and such affiliated
entities and individuals have sole voting power with respect to 527,392
shares and sole power to dispose or to direct the disposition of 6,103,212
common shares.
(2) The Vanguard Group, on behalf of the Vanguard Windsor Fund, has filed with
the Securities and Exchange Commission a Schedule 13G dated February 12,
2002, which reports the beneficial ownership of 4,026,800 common shares by
it and certain affiliated entities and individuals. As reported in the
Schedule 13G, Vanguard Windsor Fund and such affiliated entities and
individuals have sole voting power with respect to 4,026,800 shares and
shared power to dispose or to direct the disposition of 4,026,800 common
shares.
(3) Wellington Management Company, LLP has filed with the Securities and
Exchange Commission a Schedule 13G dated February 14, 2002, which reports
the beneficial ownership of 6,137,800 common shares by it and certain
affiliated entities and individuals. As reported in the Schedule 13G,
Wellington Management Company, LLP and such affiliated entities and
individuals have shared voting power with respect to 618,630 common shares
and shared power to dispose or to direct the disposition of 6,137,800 common
shares.
23
The following table shows the beneficial ownership, reported to the Company as
of January 31, 2002, of Company common shares by each director and nominee, each
executive officer named in the Summary Compensation Table on page 12 and all of
those individuals and all other executive officers as a group and also sets
forth the number of share units held under various deferred compensation plans.
TITLE OF CLASS: COMMON SHARES
NAME OF NUMBER PERCENT TOTAL NUMBER OF
BENEFICIAL OF SHARES OF DEFERRED SHARES AND
OWNER OWNED(1,2) CLASS(3) SHARE UNITS(4) DEFERRED SHARE UNITS
--------------------------------------------------------------------------------------------------
C. Arnold 75,607(5) -- -- 75,607
S. M. Buente 94,363(5) -- 16,386 110,749
R. W. Carson 117,946(5) -- 7,322 125,268
S. J. Cook 68,919(5) -- 7,600 76,519
M. J. Critelli 12,879 -- -- 12,879
A. M. Cutler 441,709(5,6) -- 90,215 531,924
E. Green 16,676 -- 1,476 18,152
N. C. Lautenbach 15,852 -- 4,076 19,928
D. L. McCoy 8,904 -- 1,432 10,336
J. R. Miller 20,676 -- -- 20,676
F. C. Moseley 27,776(6) -- 2,100 29,876
V. A. Pelson 18,176(6) -- 3,558 21,734
A. W. Reynolds 22,176 -- 2,231 24,407
G. L. Tooker 19,176(6) -- 1,862 21,038
Directors, Nominees and
Executive Officers as a group
of 23 1,319,306 -- 188,060 1,507,366
--------------------------------------------------------------------------------------------------
(1) Each person has sole voting and investment power with respect to the shares
listed, unless otherwise indicated.
(2) Includes shares which the person has the right to acquire within 60 days
after January 31, 2002 upon the exercise of outstanding stock options as
follows: C. Arnold, 6,633; S. M. Buente, 82,485; R. W. Carson, 115,015; S.
J. Cook, 67,518; A. M. Cutler, 397,169; and all directors, nominees and
executive officers as a group, 1,105,135 shares.
(3) Each of the individuals listed holds less than 1% of outstanding common
shares.
(4) For descriptions of these units, see pages 10 and 15.
(5) Includes shares held under the Eaton Savings Plan (formerly called the Eaton
Corporation Share Purchase and Investment Plan) as of January 31, 2002.
(6) Includes shares held jointly or in other capacities, such as by trust.
24
Employee benefit plans of the Company and its subsidiaries on January 31, 2002
held 7,306,305 common shares for the benefit of participating employees, or
10.48% of common shares outstanding.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE -- Section 16(a) of the
Securities Exchange Act of 1934 requires the Company's directors and officers to
file reports of holdings and transactions in the Company's equity securities
with the Securities and Exchange Commission and the New York Stock Exchange. The
Company believes that its directors and officers complied fully with all such
filing requirements with respect to 2001.
FUTURE SHAREHOLDER PROPOSALS -- Shareholders who wish to submit proposals for
inclusion in the proxy statement and for consideration at the annual meeting
must do so on a timely basis. In order to be included in the proxy statement for
the 2003 annual meeting, proposals must relate to proper subjects and must be
received by the Corporate Secretary, Eaton Corporation, Eaton Center, Cleveland,
Ohio 44114-2584, before November 15, 2002.
By order of the Board of Directors
/s/ EARL R. FRANKLIN
Earl R. Franklin
Secretary
March 15, 2002
APPENDIX A
CHARTER OF AUDIT COMMITTEE
The Audit Committee shall be responsible to assist the Board of Directors in
monitoring (1) the integrity of the Company's financial statements and its
systems of internal accounting and financial controls and (2) the independence
and performance of the Company's internal and independent auditors.
The Audit Committee shall be comprised of at least three Directors appointed by
the Board, who shall meet the independence and experience requirements of the
New York Stock Exchange.
The Audit Committee shall have the authority to retain special legal, accounting
or other consultants to advise the Committee. The Audit Committee may request
any officer or employee of the Company or the Company's outside counsel or
independent auditor to attend a meeting of the Committee or to meet with any
members of, or consultants to, the Committee.
The Audit Committee shall make regular reports to the Board concerning the
Committee's actions, conclusions and recommendations.
The Audit Committee shall:
1. Review and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for approval.
2. Review the annual audited financial statements with management and the
independent auditor before publication, including major issues regarding
accounting and auditing principles and practices as well as the adequacy of
internal controls that could significantly affect the financial statements, and
recommend to the Board that the financial statements be included in the annual
report to shareholders and annual report on Form 10-K.
3. Review analyses prepared by management and the independent auditor of
significant financial reporting issues and judgments made in connection with the
preparation of the Company's annual financial statements.
4. Review major changes to the Company's auditing and accounting principles and
practices as suggested by the independent auditor, internal auditors or
management.
25
5. Review with the Company's General Counsel legal matters that may have a
material impact on the Company's financial statements.
6. Meet periodically with management to review the Company's major financial
risk exposures and the steps management has taken to monitor and control such
exposures.
7. Review the report of the Director -- Audits on internal controls and
internal audit results.
8. Recommend to the Board the appointment of the independent auditor, which
will be accountable to the Audit Committee and the Board.
9. Approve the fees to be paid to the independent auditor for audit services.
10. Obtain periodic written statements from the independent auditor delineating
all relationships between the auditor and the Company, discuss such statements
with the auditor, consider the compatibility of the auditor's services, other
than its audit services, with its independence and, if so determined by the
Audit Committee, recommend that the Board take appropriate action to satisfy
itself of the independence of the auditor.
11. Evaluate together with the Board the performance of the independent auditor
and, if so determined by the Audit Committee, recommend that the Board replace
the independent auditor.
12. Review the appointment and any replacement of the Company's Director --
Audits.
13. Meet with the Director -- Audits and independent auditor prior to the
Company's annual audit to review the scope, planning and staffing of the audit.
14. Discuss with the independent auditor any matters raised by the auditor under
generally accepted auditing standards relating to the conduct of the Company's
annual audit and quarterly reviews, including the independent auditor's judgment
about the quality of the Company's accounting principles as applied in its
financial reporting. In regard to quarterly reviews, this discussion may be held
either through the entire Committee or through its Chairman on the Committee's
behalf.
15. Review with the independent auditor any problems or difficulties the auditor
may have encountered and any management letter provided by the auditor and the
Company's response to that letter.
16. Review with management and the independent auditor the Company's quarterly
financial statements as early as possible and in any case prior to the filing of
each Form 10-Q report. This review may be conducted either through the entire
Committee or through its Chairman on the Committee's behalf.
17. Meet at least annually with the Company's chief financial officer,
Director -- Audits and independent auditor in separate executive sessions.
18. Prepare the report required by the rules of the Securities and Exchange
Commission to be included in the Company's annual proxy statement.
While the Audit Committee shall have the responsibilities and powers set forth
in this Charter, it shall not be the duty of the Committee to plan or conduct
audits or to determine that the Company's financial statements are complete and
accurate and in accordance with generally accepted accounting principles. These
instead shall be the responsibility of management and the independent auditor.
Nor shall it be the duty of the Audit Committee to conduct investigations, to
resolve disagreements, if any, between management and the independent auditor or
to assure compliance with laws and regulations or the Company's code of conduct.
26
APPENDIX B
EATON CORPORATION
BOARD OF DIRECTORS GOVERNANCE POLICIES
JANUARY 23, 2002
I. BOARD ORGANIZATION AND COMPOSITION
A. Size and Structure of Board. The size of the Board should be in the range of
10-15. No more than two Directors should be employees of the Company. The Board
believes that it is desirable for the Company's Board to be divided into three
approximately equal classes, one of which is elected each year, since this
structure assures continuity and has worked well historically.
B. Director Independence. Except for Directors who are Company employees, all
Directors should be independent. A Director will be considered independent if
the Director has no financial, personal or other relationship to the Company or
its management which would interfere with the exercise of his or her independent
judgment.
C. Director Tenure. Each Director is elected for a three-year term. There is no
limit to the number of terms a Director may serve. However, the Company's
retirement policy calls for each outside Director to retire at the Annual
Shareholders Meeting following the Director's 68th birthday and for each inside
Director to retire from the Board when he or she retires as an employee, no
later than the Director's 65th birthday. The Chairman and Chief Executive
Officer should not continue on the Board after retiring as an employee.
Directors who retire from their employment or who otherwise significantly change
the position they held when initially elected to the Board should not
necessarily leave the Board. However, the Board will review the continued
appropriateness of Board membership under these new circumstances.
D. Membership on Other Boards. Each Director is responsible to notify the
Chairman of the Governance Committee before accepting invitations to join other
Boards of Directors. One purpose of this policy is to avoid actual or potential
conflicts of interest or the appearance of conflicts of interest. Appropriate
legal advice will be obtained as necessary. Another purpose of this policy is to
insure that Directors do not have an excessive number of Board assignments that
would put the Directors' effectiveness at risk.
E. New Directors. Director candidates will be selected on the basis of their
ability to make contributions to the Board of Directors and to the Company's
governance activities. Among the most salient strengths to be considered are
personal ability, character, intelligence, relevant business background,
expertise in areas of importance to the Company's objectives, and a sensitivity
to the Company's corporate responsibilities. The initial screening of Director
candidates is conducted jointly by the Chairman of the Governance Committee and
the Chairman and Chief Executive Officer. The Governance Committee then
identifies the recommended candidate for possible approval by the Board of
Directors.
F. Combining the Positions of Chairman and Chief Executive Officer. It is the
Board's policy that the positions of Chairman of the Board and Chief Executive
Officer should be held by the same person. The Board believes that this practice
provides the most efficient and effective leadership model for the Company.
G. No Lead Director. The Board believes that designating a lead Director is not
necessary or appropriate for the best interests of the Company and its
shareholders unless the Chairman and Chief Executive Officer is absent, and then
only for the duration of his or her absence. When the outside Directors meet
without the Chairman and Chief Executive Officer, they may designate a Director
to chair the meeting whenever they believe that would be useful.
II. COMMITTEE COMPOSITION AND LEADERSHIP
A. Membership of Committees. All Board Committees are comprised entirely of
outside independent Directors, except for the Executive Committee, which is
chaired by the Chairman and Chief Executive Officer.
B. Rotation of Committee Memberships and Chairs. In order to assure that each
Director has a broad exposure to the work of the various
27
Board Committees, and at the same time to provide for continuity in the
membership of each Committee, the Board has adopted the practice of rotating
each outside Director's Committee assignments approximately every three to five
years, except that, for continuity, Committee Chairs normally continue on their
Committees somewhat longer than five years, at the discretion of the Board. The
Director who will become the Chair of a Committee should be selected from among
the current members of the Committee and should be designated at least one year
in advance in order to permit adequate preparation time and a smooth transition.
C. Committee Descriptions. There are five standing Committees of the Board: the
Audit Committee, Compensation and Organization Committee, Executive Committee,
Finance Committee and Governance Committee. The responsibilities and membership
of these Committees are described in the Company's annual proxy statement.
III. PERFORMANCE ASSESSMENT
A. Board Self-Assessment. The Board considers it important to conduct a
self-assessment of its performance every two years.
B. Chairman and Chief Executive Officer Performance Assessment. The performance
of the Chairman and Chief Executive Officer is assessed annually by the
Compensation and Organization Committee, which reports its conclusions to the
outside Directors for discussion in executive session. The results of the
assessment are reviewed with the Chairman and Chief Executive Officer by the
Chair of the Compensation and Organization Committee.
C. Senior Management Performance Assessment. One of the most important
responsibilities of the Board is to assure that the Company's senior management
is well qualified to conduct the Company's business affairs. The Board has
delegated to the Chairman and Chief Executive Officer the responsibility to
assess the performance of the senior management team. The Chairman and Chief
Executive Officer, then, reports annually to the Board, giving his assessment of
each officer's performance and his thoughts on succession planning.
IV. OPERATION OF THE BOARD AND COMMITTEES
A. Agendas and Background Information. The Agenda for each meeting of the Board
and Committees should be sent to the Directors or Committee members in advance,
along with background information on important subjects. Any Board or Committee
member may ask that an item be added to the Agenda.
B. Access to Management. Directors should request from management information
that they consider helpful in the performance of their duties.
C. Executive Sessions. At each Board meeting, the Board typically holds an
executive session, in which only the Directors are present. Whenever the Board
deems it appropriate, the Board also meets independent of any inside Directors
to discuss whatever topics it deems appropriate.
D. Board Meetings on Strategic Planning. The Board devotes one entire meeting
per year to strategic planning, along with portions of additional meetings
throughout the year. Company performance is to be measured in terms of the
Company's strategic objectives and its relative performance among its peers.
E. Concurrent Committee Meetings. Because of scheduling constraints, certain
meetings of Board Committees are held concurrently, although doing so requires
the inside Directors to be absent from certain Committee meetings.
F. Minutes. Minutes of all Committee meetings are sent to all Directors for
their information in advance of the following Board meeting, together with the
minutes of the prior Board meeting.
G. Management Speaks for the Company. The Board believes that management speaks
for the Company. Individual Board members may occasionally communicate with
various constituencies that are involved with the Company. However, it is
expected that Board members would do this with the knowledge and concurrence of
management and would advise the Chief Executive Officer of the nature and
content of any such communications.
H. Orientation for New Directors. An orientation process has been developed for
new Directors,
28
including background briefings by the Chairman and Chief Executive Officer,
other senior officers and the Secretary.
V. COMPENSATION OF OUTSIDE DIRECTORS
A. Regular Reviews of Compensation. Regularly scheduled reviews of outside
Director compensation are conducted by the Governance Committee to assure that
the compensation remains competitive and appropriate. In this way, compensation
reviews are not specially scheduled at management's initiative.
B. Pensions. In 1996, the Company's pension plan for outside Directors was
discontinued as to newly-elected outside Directors. Those first elected in 1996
or later are not eligible to receive pension payments after retiring from the
Board. However, each of the Directors is encouraged to take advantage of the
opportunity under the 1996 Director Deferral Plan to defer Director fees into
shares of the Company, which are issued to the Director following retirement
from the Board.
C. Stock Options. Upon election each Director receives stock options for 5,000
common shares of the Company, exercisable at the market price of the shares on
the date of grant. Thereafter, each Director annually receives stock options for
a number of additional shares, with a market value on the date of grant equal to
four times the outside Directors' annual retainer. These options also are
exercisable at the market price of the shares on the date of grant.
D. Share Ownership Guidelines. The Board has adopted guidelines calling for each
outside Director to acquire within five years a number of Company shares with a
market value equal to three times the amount of the outside Directors' annual
retainer.
VI. GENERAL
These Policies will be reviewed by the Governance Committee annually and may be
amended from time to time.
APPENDIX C
2002 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 and Organization Committee of the Board of Directors (the
"Committee"), which shall consist of at least three non-employee directors.
(B) Non-employee Director Options
With respect to non-employee director options, the Plan shall be administered by
the Governance Committee of the Board of Directors, which shall consist of at
least three non-employee directors.
(C) Authority of Committees
With respect only to those awards for which it has administrative
responsibility, the Committee and the Governance Committee shall each have
complete authority (except as otherwise expressly provided herein) 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. The Committee
29
may delegate its authority to officers of the Company with respect to the
granting of awards to employees who are not officers or directors of the
Company.
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 2,500,000 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. No more than 10% of the total
number of shares authorized for delivery under the Plan may be granted as
performance shares, restricted shares, stock appreciation rights or other
share-based awards (other than stock options). In addition, no more than 5% of
the total number of shares authorized for delivery under the Plan may be granted
as performance shares, restricted shares, stock appreciation rights or other
share-based awards (other than stock options) which vest within less than one
year after the date of grant. With respect to such awards in excess of 5% of the
total number of such authorized number of shares, the vesting period must exceed
one year, with no more than one third of shares becoming vested at the end of
each of the twelve-month periods following the date of grant.
Awards may be made under the Plan at any time after approval of the Plan by
shareholders at the 2002 annual meeting until December 31, 2011.
4. ELIGIBILITY FOR AWARDS
Any non-union salaried employee (including officers) of the Company or any of
its subsidiaries 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
share-based awards subject to each grant, and (c) subject to Section 5(C), will
specify the price of the award. Non-employee directors are eligible to receive
stock options as provided under Section 5(B).
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
50c 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 ("Section 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 Section 16b.
30
(B) Non-employee Director Stock Options
Grants. Subject to approval of the Plan by shareholders at the 2002 annual
meeting, each person who at that meeting or thereafter first becomes a
non-employee director automatically shall be granted an option for 5,000 shares
upon the date of his or her election. On each granting date that each
non-employee director continues to serve in that capacity, beginning in the year
after that director receives his or her initial grant, he or she shall
automatically be granted an option for a number of shares equal to the quotient
resulting from dividing (i) four times the annual retainer for each non-employee
director in effect on the granting date, by (ii) the closing price of an Eaton
common share on the New York Stock Exchange Composite Transactions on the last
business day immediately preceding the granting date. The granting date is the
Tuesday immediately before the fourth Wednesday of each January. Notwithstanding
anything to the contrary herein, no non-employee director shall receive an
initial grant or a continuing grant for a particular year if that director
receives such a grant under any other stock plan of the Company.
Term. The term of each option shall expire ten years from the date of grant.
Exercise. An option shall become fully exercisable six months following the
date of grant.
(C) Price
Each employee option and each 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 of 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 option
or non-employee director option shall be paid in full at the time of exercise in
cash, or, if permitted by the terms of the option, by means of tendering shares
or other consideration valued at fair market value on the date of exercise, or
any combination thereof. The appropriate committee shall determine acceptable
methods of tendering shares or other consideration. Delivery of shares by the
Company to the option holder upon exercise of an option may be deferred, as
authorized by the appropriate committee.
6. 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 ("CFR"). CFR equals the total of net income plus depreciation
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 CFR to be achieved, and the length of
the performance period and, subject to the requirements of Section 3, 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.
7. OTHER AWARDS
In limited circumstances where the Committee determines that the use of stock
options is inadvisable for tax or other regulatory reasons, it may grant stock
appreciation rights to eligible employees. Stock appreciation rights entitle the
holder, upon exercise, to receive a number of shares or cash, as the Committee
may determine, equal to the increase in fair market value of a number of shares
designated by such
31
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.
Subject to Section 3, 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, subject to the
requirements of Section 3, shall have such terms and conditions as shall be
determined by the Committee.
8. TRANSFERS
Except as otherwise provided by the appropriate committee, awards under the Plan
are not transferable other than by will or the laws of descent and distribution.
A transferred award may be exercised 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 transfer of Incentive Stock
Options shall be limited as required by the Internal Revenue Code and applicable
regulations.
9. 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
following shall be equitably adjusted by the appropriate committee: (a) the
number and class of shares (i) reserved under the 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.
10. 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 regulations issued by the appropriate committee, 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 laws of Ohio shall govern the Plan and all
determinations made and actions taken pursuant hereto, to the extent not
governed by the laws of the United States.
11. 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.
32
12. EFFECTIVE AND TERMINATION DATES
The Plan will become effective if and when approved by shareholders holding a
majority of the Company's outstanding common shares entitled to vote at the 2002
annual meeting of shareholders.
No awards shall be granted under the Plan after December 31, 2011. Awards
granted before that date shall remain valid thereafter in accordance with their
terms.
33
EATON CORPORATION
EATON CENTER
CLEVELAND, OHIO 44114-2584
-------------------------------------------------------------------
Eaton Logo
The undersigned hereby appoints A. M. Cutler, J. R. Horst and E. R.
Franklin as proxies, each with the power to appoint his substitute,
and hereby authorizes them to represent and to vote, as designated
on the reverse side of this card, all of the Eaton common shares,
including reinvestment shares, if any, held by the undersigned on
February 25, 2002, at the annual meeting of shareholders to be held
at The Forum Conference and Education Center, One Cleveland Center,
1375 East Ninth Street, Cleveland, Ohio, on April 24, 2002, at
10:30 a.m. local time and at any adjournments thereof.
Election of Directors: (01) N. C. Lautenbach, (02) J. R.
Miller, (03) F. C. Moseley (04) V.
A. Pelson
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
WHEN PROPERLY EXECUTED, IT WILL BE VOTED FOR ITEMS #1, #2 AND
#3 UNLESS CONTRARY INSTRUCTIONS ARE INDICATED ON THE REVERSE
SIDE.
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
P
R
O
X
Y
SEE REVERSE
SIDE
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
[X] PLEASE MARK YOUR |
VOTES AS IN THIS | 0954
EXAMPLE. |________
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" ALL OF THE BOARD OF DIRECTORS' NOMINEES AND "FOR"
ITEM #2 AND #3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1, #2 AND #3.
-----------------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
1. Election of [ ] [ ] 2. Approval of [ ] [ ] [ ] 3. Ratification of [ ] [ ] [ ]
Directors 2002 Stock Plan appointment of
(see reverse) Independent Auditors
For, except vote withheld from
the following nominee(s):
------------------------------
4. In their discretion, the proxies are
authorized to vote upon such other business
as may properly come before the meeting.
Please sign exactly as name appears hereon.
Joint owners should each sign. When signing
as attorney, executor, administrator, trustee
or guardian, please give full title as such.
---------------------------------------------
------------------------------------------
SIGNATURE(S) DATE
-------------------------------------------------------------------------------------------------------------------------------
X FOLD AND DETACH HERE X
YOU ARE URGED TO TAKE ADVANTAGE OF NEW AND CONVENIENT WAYS TO VOTE YOUR SHARES
ON MATTERS TO BE COVERED AT THE 2002 ANNUAL MEETING OF SHAREHOLDERS. PLEASE USE
ANY OF THE FOLLOWING THREE VOTING METHODS TO CAST YOUR BALLOT.
FAST AND CONVENIENT -- 24 HOURS A DAY -- 7 DAYS A WEEK
TO VOTE BY INTERNET:
- Have your proxy card in hand when you access the web site.
- Log on to the Internet and go to the web site http://www.eproxyvote.com/etn.
- You will be prompted to enter your control number printed in the box above.
- Follow the simple instructions provided.
TO VOTE BY TELEPHONE:
- Have your proxy card in hand when you call.
- On a touch-tone telephone, CALL TOLL FREE 1-877-779-8683, OR 1-877-PRXVOTE.
- You will be prompted to enter your control number printed in the box above.
- Follow the simple recorded instructions.
TO VOTE BY MAIL:
- Mark, sign and date your proxy card.
- Return your proxy card in the postage-paid envelope provided.
IF YOU CHOOSE TO VOTE YOUR SHARES BY TELEPHONE OR THE INTERNET, THERE IS NO NEED
FOR YOU TO MAIL BACK YOUR PROXY CARD.
THANK YOU FOR VOTING
CONFIDENTIAL VOTING INSTRUCTIONS
To Fidelity Management Trust Company, Trustee for the Plans listed
below (the "Trustee"):
The undersigned, as a participant in the (a) Eaton Savings Plan or
(b) Eaton Personal Investment Plan ((a) and (b) being collectively
called the "Plans") hereby directs the Trustee to vote in person or
by proxy all common shares of Eaton Corporation credited to the
undersigned's account under the Plans on the record date at the
annual meeting of shareholders of Eaton Corporation to be held at
The Forum Conference and Education Center, One Cleveland Center,
1375 East Ninth Street, Cleveland, Ohio, on April 24, 2002, at
10:30 a.m. local time and at any adjournments thereof. The Trustee
is hereby instructed to vote FOR items #1, #2 and #3 unless the
undersigned indicates proper voting instructions to the contrary.
Under each of the Plans, if the Trustee does not receive proper
voting instructions by April 19, 2002 telling the Trustee how to
vote the Eaton shares in the account of the undersigned, the
Trustee will vote those shares in the same proportion, on each
issue, as it votes other Eaton shares according to instructions
from other Plan participants.
Election of Directors: (01) N.C. Lautenbach, (02) J.R.
Miller, (03) F.C. Moseley, (04) V.A.
Pelson
SEE REVERSE
SIDE
--------------------------------------------------------------------------------
FOLD AND DETACH HERE
[X] PLEASE MARK YOUR |
VOTES AS IN THIS | 2826
EXAMPLE. |_________
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" ALL OF THE BOARD OF DIRECTORS' NOMINEES AND "FOR"
ITEM #2 AND #3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1, #2 AND #3.
-----------------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
1. Election of [ ] [ ] 2. Approval of [ ] [ ] [ ] 3. Ratification of [ ] [ ] [ ]
Directors 2002 Stock Plan appointment of
(see reverse) Independent Auditors
For, except vote withheld from
the following nominee(s):
------------------------------
4. In their discretion, the proxies are
authorized to vote upon such other business
as may properly come before the meeting.
Please sign exactly as name appears hereon.
Joint owners should each sign. When signing
as attorney, executor, administrator, trustee
or guardian, please give full title as such.
---------------------------------------------
------------------------------------------
SIGNATURE(S) DATE
------------------------------------------------------------------------------------------------------------------------------
X FOLD AND DETACH HERE X
YOU ARE URGED TO TAKE ADVANTAGE OF NEW AND CONVENIENT WAYS TO VOTE YOUR SHARES
ON MATTERS TO BE COVERED AT THE 2002 ANNUAL MEETING OF SHAREHOLDERS. PLEASE USE
ANY OF THE FOLLOWING THREE VOTING METHODS TO CAST YOUR BALLOT.
FAST AND CONVENIENT -- 24 HOURS A DAY -- 7 DAYS A WEEK
TO VOTE BY INTERNET:
- Have your proxy card in hand when you access the web site.
- Log on to the Internet and go to the web site http://www.eproxyvote.com/etn.
- You will be prompted to enter your control number printed in the box above.
- Follow the simple instructions provided.
TO VOTE BY TELEPHONE:
- Have your proxy card in hand when you call.
- On a touch-tone telephone, CALL TOLL FREE 1-877-779-8683, OR 1-877-PRXVOTE.
- You will be prompted to enter your control number printed in the box above.
- Follow the simple recorded instructions.
TO VOTE BY MAIL:
- Mark, sign and date your proxy card.
- Return your proxy card in the postage-paid envelope provided.
IF YOU CHOOSE TO VOTE YOUR SHARES BY TELEPHONE OR THE INTERNET, THERE IS NO NEED
FOR YOU TO MAIL BACK YOUR PROXY CARD.
THANK YOU FOR VOTING
CUTLER-HAMMER
CUTLER-HAMMER DE PUERTO RICO, INC.
RETIREMENT SAVINGS PLAN
Dear Participant:
As a participant in the Cutler-Hammer de Puerto Rico, Inc. Retirement Savings
Plan, you have the right to direct Key Trust Company of Ohio, N.A., as trustee
of the Plan, on how to vote the Eaton Corporation common shares credited to your
account under the Plan. The enclosed proxy card may be used for this purpose.
Your directions to Key Trust Company will be kept confidential.
If EquiServe Trust Company, N.A., which is acting as the tabulating agent,
receives your proxy card by April 19, 2002, Key Trust Company will vote the
shares in your account as instructed.
If EquiServe does not receive your proxy card by that date, Key Trust Company
will vote the shares in your account in the same proportion on each issue as it
votes those shares for which it has received voting directions from the other
participants.
DELPHI
DELPHI MECHATRONIC SYSTEMS
SAVINGS-STOCK PURCHASE PROGRAM
Dear Participant:
As a participant in the Delphi Mechatronic Systems Savings-Stock Purchase
Program (the "Plan"), you have the right to direct State Street Bank, as trustee
of the Plan, on how to vote the Eaton Corporation common shares credited to your
account under the Plan. The enclosed proxy card may be used for this purpose.
Your directions to State Street Bank will be kept confidential.
If EquiServe Trust Company, N.A., which is acting as the tabulating agent,
receives your proxy card by April 19, 2002, State Street Bank will vote the
shares in your account as instructed.
If EquiServe does not receive your proxy card by that date, State Street Bank
will vote the shares in your account in the same proportion on each issue as it
votes those shares for which it has received voting directions from the other
participants.
AEROQUIP-VICKERS
AEROQUIP-VICKERS RETIREMENT SAVINGS
AND PROFIT SHARING PLAN
Dear Participant:
As a participant in the Aeroquip-Vickers Retirement Savings and Profit Sharing
Plan, you have the right to direct Vanguard Fiduciary Trust Company
("Vanguard"), as trustee of the Plan, on how to vote the Eaton Corporation
common shares credited to your account under the Plan. The enclosed proxy card
may be used for this purpose. Your directions to Vanguard will be kept
confidential.
If EquiServe Trust Company, N.A., which is acting as the tabulating agent,
receives your proxy card by April 19, 2002, Vanguard will vote the shares in
your account as instructed.
If EquiServe does not receive your proxy card by that date, Vanguard will vote
the shares in your account in the same proportion on each issue as it votes
those shares for which it has received voting directions from the other
participants.