SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 11-K
ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended December 31, 2003
Or
[ ] Transition report pursuant to Section 15(d) of the Securities Exchange
Act of 1934 (Fee required)
For the transition period from _____________ to ___________
Commission file number ____________________________________
A. Full title of the plan and the address of the plan, if different
from that of the issuer named below:
EATON PERSONAL INVESTMENT PLAN
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
Eaton Corporation, 1111 Superior Avenue,
Cleveland, Ohio 44114-2584
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of
1934, the trustees (or other persons who administer the employee benefit plan)
have duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
(Name of Plan)
EATON PERSONAL INVESTMENT PLAN
Date: June 28, 2004 By: Eaton Corporation Pension
Administration Committee
By: /s/ B. K. Rawot
-------------------------
(Signature)
B. K. Rawot
Vice President and Controller
Eaton Corporation
AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTAL
SCHEDULE
Eaton Personal Investment Plan
December 31, 2003 and 2002 and Year ended December 31, 2003
With Report of Independent Registered Public Accounting Firm
Eaton Personal Investment Plan
Audited Financial Statements and Supplemental Schedule
December 31, 2003 and 2002 and
Year ended December 31, 2003
CONTENTS
Report of Independent Registered Public Accounting Firm....................................... 1
Audited Financial Statements
Statements of Net Assets Available for Benefits............................................... 2
Statement of Changes in Net Assets Available for Benefits..................................... 3
Notes to Financial Statements................................................................. 4
Supplemental Schedule
Schedule H, line 4i--Schedule of Assets (Held at End of Year)................................. 11
Report of Independent Registered Public Accounting Firm
Pension Administration Committee and the
Pension Investment Committee - Eaton Corporation
We have audited the accompanying statements of net assets available for benefits
of the Eaton Personal Investment Plan as of December 31, 2003 and 2002, and the
related statement of changes in net assets available for benefits for the year
ended December 31, 2003. These financial statements are the responsibility of
the Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan at
December 31, 2003 and 2002, and the changes in its net assets available for
benefits for the year ended December 31, 2003, in conformity with U.S. generally
accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedule of assets
(held at end of year) as of December 31, 2003, is presented for purposes of
additional analysis and is not a required part of the financial statements but
is supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. This supplemental schedule is the responsibility of the
Plan's management. The supplemental schedule has been subjected to the auditing
procedures applied in our audits of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.
ERNEST & YOUNG LLP
Cleveland, Ohio
June 4, 2004
1
Eaton Personal Investment Plan
Statements of Net Assets Available for Benefits
DECEMBER 31
2003 2002
------------ ------------
Assets
Investments at fair value:
Plan interest in Eaton Employee Savings Trust $ 73,954,356 $ 57,774,037
Participant notes receivable 2,423,568 2,094,382
------------ ------------
Total investments 76,377,924 59,868,419
Receivables:
Contributions:
Participants 71,063 -
Employer 5,814 -
Interest 2,142 -
------------ ------------
Total receivables 79,019 -
------------ ------------
Net assets available for benefits $ 76,456,943 $ 59,868,419
============ ============
See notes to financial statements.
2
Eaton Personal Investment Plan
Statement of Changes in Net Assets Available for Benefits
Year ended December 31, 2003
ADDITIONS
Investment income:
Interest $ 152,042
Plan interest in Eaton Employee Savings Trust
investment gain 10,845,711
------------
Total investment income 10,997,753
Contributions:
Employer 351,920
Employee 5,475,970
Rollovers 139,337
------------
Total contributions 5,967,227
Transfer from other plan 6,537,206
------------
Total additions 23,502,186
DEDUCTIONS
Benefits paid to participants 6,775,046
Administrative expenses 26,159
------------
6,801,205
Net transfer to other plans 112,457
------------
Total deductions 6,913,662
------------
Net increase 16,588,524
Net assets available for benefits at beginning of year 59,868,419
------------
Net assets available for benefits at end of year $ 76,456,943
============
See notes to financial statements.
3
Eaton Personal Investment Plan
Notes to Financial Statements
December 31, 2003 and 2002 and
Year ended December 31, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements of the Eaton Personal Investment Plan (the Plan) have
been prepared under the accrual basis of accounting.
INVESTMENT VALUATION AND INCOME RECOGNITION
Effective January 3, 2002, trustee responsibilities for the Plan were
transferred from Key Trust Company of Ohio, N.A., to Fidelity Management Trust
Company, and the Plan's investments, excluding participant loans, were invested
in the Eaton Employee Savings Trust (Master Trust), which was established for
the investment of assets of the Plan and the Eaton Savings Plan. The fair value
of the Plan's interest in the individual funds of the Master Trust is based on
the value of the Plan's interest in the fund as of the transfer date plus actual
contributions and allocated investment income (loss) less actual distributions.
The investments of the Plan, except for the Aeroquip Vickers Fixed Income Fund
in the Master Trust, are stated at fair value. Securities traded on a national
securities exchange are valued at the last reported sales price on the last
business day of the plan year. Investments traded in the over-the-counter market
and listed securities for which no sale was reported on that date are valued at
the average of the last reported bid and asked prices. Common/collective trust
funds and pooled separate accounts are valued at the redemption value of units
held at year-end. Participant loans are valued at cost, which approximates fair
value. The Aeroquip Vickers Fixed Income Fund invests primarily in investment
contracts issued by insurance companies. The investment contracts within the
Aeroquip Vickers Fixed Income Fund are stated at contract value, which
approximates fair value.
Purchases and sales of securities are recorded on a trade-date basis.
4
Eaton Personal Investment Plan
Notes to Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates that affect
the amounts reported in the financial statements and accompanying notes. Actual
results are not expected to differ from these estimates.
2. DESCRIPTION OF THE PLAN
Effective July 1, 1996, Eaton Corporation (the Company or Plan Sponsor)
established the Plan. On May 1, 1998, the Company amended the Plan and restated
certain articles therein to qualify the Plan as a profit-sharing plan under
Section 401(a) of the Internal Revenue Code (the Code), and include a cash or
deferred arrangement that is intended to qualify under Section 401(k) of the
Code. Effective January 1, 2002, the Plan was amended and restated and renamed
the Eaton Personal Investment Plan.
Effective at the close of business on October 1, 2003, the net assets of the
Eaton Corporation Engine Components Division Saginaw Plant Hourly Employee's
401(k) Plan (Saginaw Plan), which related primarily to Saginaw Plan participants
belonging to PACE - Local 7433 bargaining unit, Saginaw, Michigan, were
transferred to the Plan. The related transfer of assets in the amount of
$6,537,206 is presented as "Transfer from other plan" in the Statement of
Changes in Net Assets Available for Benefits.
The Plan provides that all union employees that belong to IAM Local 78 and IAM
Local 1061, Milwaukee, Wisconsin; USWA Local 7509, Shelbyville, Tennessee; UAW
Local 164, Auburn, Indiana; Metal Processors Union IUAP and NW AFL-CIO Local 16,
Rochelle, Illinois; UAW Local 220, Marshall, Michigan; IAM and Aerospace
Workers, Local 77, Eden Prairie, Minnesota; Beaver Salaried Employees
Association and IBEW, AFL-CIO, Local 201, Beaver, Pennsylvania; IBEW, AFL-CIO,
Local 1833, Horseheads, New York; IAMAW Local 1165, Lincoln, Illinois; UAW Local
1609, Winamac, Indiana; IAMAW Local 725, Los Angeles, California; IAM Local 70,
Hutchinson, Kansas; UPIU Local 7967, Cleveland, Ohio; UAW Local 1966 and UAW
Local 475, Jackson, Michigan, IUE Local 792, Jackson, Mississippi, IAMAW Local
2528, Hohenwald, Tennessee, PACE - Local 7433, Saginaw, Michigan, and UAW Local
1404, Columbia City, Indiana will be eligible for membership in the Plan on the
date at which the employee has completed the specified probationary period as
stated in the applicable collective bargaining agreement.
5
Eaton Personal Investment Plan
Notes to Financial Statements (continued)
2. DESCRIPTION OF THE PLAN (CONTINUED)
Eligible employees may elect to make before-tax or after-tax contributions from
1% to 17% of their compensation. For certain locations, the maximum employee
contributions are 30% and eligible employees may receive a Company matching
contribution of 50% up to 6% of their compensation, depending on the location.
Eligible employees are 100% vested, subject to certain provisions as defined by
each location. All contributions are allocated by the employee among the
investment funds offered by the Plan. Effective May 1, 2003, catch-up
contributions were permitted in the Plan, allowing participants age 50 and older
to defer an additional amount of their compensation, as prescribed by the
Internal Revenue code.
Effective with the transfer of net assets related to certain locations which
participated in the Aeroquip-Vickers Savings and Profit Sharing Plan (Aeroquip
Plan) to the Plan on April 1, 2002, 25% of the Aeroquip-Vickers, Inc. profit
sharing contribution made under the Aeroquip Plan was invested and held in the
Eaton Common Shares Fund. Employees may elect to transfer the account balances
related to these profit-sharing contributions to other investment funds offered
by the Plan, in gradual phases, such that as of January 1, 2005, the entire
account balance related to such profit-sharing contributions will be eligible to
be transferred.
Each participant's account is credited with the participant's contributions,
employer matching contributions, if applicable, and allocations of the Plan's
earnings and is charged with an allocation of administrative expenses.
Allocations are based on participant account balances. The benefit to which a
participant is entitled is the benefit that can be provided from the
participant's account. Participants are immediately vested in their
contributions and actual earnings thereon. On termination of service, a
participant is eligible to receive a lump-sum amount equal to the value of his
account.
Participants may borrow from their fund accounts up to the lesser of $50,000 or
50% of their vested account balance, reduced by their highest outstanding loan
balance during the preceding 12 months. Loan terms range from 1-5 years except
for loans used for the purchase of a primary residence. The loans are secured by
the balance in the participant's account and bear interest at a rate based on
the prime interest rates as determined daily by the trustee. Principal and
interest are paid through payroll deductions.
All administrative and transaction costs, management fees and expenses of the
Plan are paid by the trustee from the Master Trust unless such costs, fees and
expenses are paid by the Company. The Company elected to pay certain
administrative costs during 2003 on behalf of the Plan.
6
Eaton Personal Investment Plan
Notes to Financial Statements (continued)
2. DESCRIPTION OF THE PLAN (CONTINUED)
The Company may amend, modify, suspend or terminate the Plan at any time. No
amendment, modification, suspension or termination of the Plan shall have the
effect of providing that any amounts then held under the Plan may be used or
diverted to any purpose other than for the exclusive benefit of members or their
beneficiaries.
Information about the Plan is contained in the Plan document, which is available
from the Human Resources Department upon request.
3. INVESTMENTS
Effective January 3, 2002, Fidelity Management Trust Company, trustee and
recordkeeper of the Plan, holds the Plan's investment assets and executes
investment transactions, and all investment assets of the Plan, except for
participant loans, are pooled for investment purposes in the Master Trust.
A summary of the investments of the Master Trust is as follows:
DECEMBER 31
2003 2002
------------------- -------------------
Registered investment companies $ 1,057,070,016 $ 661,423,979
Eaton common shares 564,210,052 492,065,122
Insurance company general accounts 144,670,781 272,326,947
U.S. government securities 125,329,900 92,586,380
Corporate debt instruments 49,023,353 56,633,963
Interest-bearing cash 33,503,543 31,414,358
Axcelis common shares - 19,003,919
Pooled separate accounts 411,641 1,473,735
------------------- -------------------
Total investments $ 1,974,219,286 $ 1,626,928,403
=================== ===================
The Plan had a 3.8% and 3.6% interest in the investments of the Master Trust as
of December 31, 2003 and 2002, respectively.
7
Eaton Personal Investment Plan
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Investment income and administrative expenses relating to the Master Trust are
allocated to the individual plans based upon the average balance invested by
each plan in each of the individual funds of the Master Trust. A summary of the
Master Trust's net investment income allocated to the participating plans for
the year ended December 31, 2003 is as follows:
Interest and dividend income $ 27,653,824
Net appreciation in fair value of investments:
Eaton Common Shares Fund 168,972,886
Registered investment companies 170,719,308
Eaton Fixed Income Fund 3,458,665
----------------
$ 370,804,683
================
At December 31, 2003, the Eaton Fixed Income Fund was comprised of U.S.
government securities (65%), corporate debt instruments (25%), interest-bearing
cash (9%), and pooled separate accounts (1%).
The Eaton Common Shares Fund, which includes the Eaton common shares and a
portion of the interest-bearing cash, contains participant account balances that
are both participant-directed and nonparticipant-directed. Because the fund
contained balances that are nonparticipant-directed, the entire fund is
considered nonparticipant-directed for disclosure purposes.
Information about the net assets and the significant components of the changes
in net assets relating to the nonparticipant-directed investments for the Plan
are as follows:
DECEMBER 31
2003 2002
--------------- --------------
Net assets:
Investment in Eaton Common Shares Fund $ 9,454,384 $ 7,508,250
Contribution and loan repayment receivable 9,288 -
--------------- --------------
$ 9,463,672 $ 7,508,250
=============== ==============
8
Eaton Personal Investment Plan
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
YEAR ENDED
DECEMBER 31,
2003
---------------
Changes in net assets:
Contributions $ 567,139
Net investment gain from the Eaton Common Shares Fund 2,783,706
Net transfers to participant-directed funds (485,237)
Distributions to participants (719,934)
Loan withdrawal (184,343)
Administrative expenses (5,909)
Net increase $ 1,955,422
4. INCOME TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service
dated May 16, 2003, stating that the Plan is qualified under Section 401(a) of
the Code and, therefore, the related trust is exempt from taxation. Subsequent
to this determination by the Internal Revenue Service, the Plan was amended.
Once qualified, the Plan is required to operate in conformity with the Code to
maintain its qualification. The Plan Administrator believes the Plan is being
operated in compliance with the applicable requirements of the Code and,
therefore, believes that the Plan, as amended, is qualified and the related
trust is tax exempt.
5. TRANSACTIONS WITH PARTIES-IN-INTEREST
Party-in-interest transactions include the investments in the common stock of
Eaton, the investment in the investment funds of the trustee and the payment of
administrative expenses by the Company. Such transactions are exempt from being
prohibited transactions.
During 2003, the Master Trust received $10,539,782 in common stock dividends
from the Company.
9
Eaton Personal Investment Plan
Notes to Financial Statements (continued)
5. TRANSACTIONS WITH PARTIES-IN-INTEREST (CONTINUED)
On June 30, 2000, Eaton reorganized its semiconductor equipment operations into
a wholly owned subsidiary, Axcelis Technologies, Inc. (Axcelis). In July 2000,
Axcelis completed an initial public offering for the sale of 20% of its common
stock shares. On December 29, 2000 Eaton distributed its remaining interest in
Axcelis to Eaton shareholders as a dividend (spin-off), which was tax free to
Eaton and its shareholders for United States income tax purposes. Eaton
shareholders (including the Plan) received 1.179023 shares of Axcelis common
stock per each whole Eaton common share held as of December 6, 2000 and cash
payments for fractional shares. The Axcelis common shares were received by the
Plan on January 5, 2001.
The Plan established an Axcelis Common Stock Fund to hold the shares of Axcelis
common stock received as a dividend. Participants were not allowed to direct
contributions or transfers to the Axcelis Common Stock Fund, but were permitted
to direct the transfer of amounts in the Axcelis Common Stock Fund to other
funds available under the Plan. The Axcelis Common Stock Fund was terminated
subsequent to the close of the market on December 31, 2002. All remaining shares
were liquidated and the assets were invested in a money market fund.
6. RISKS AND UNCERTAINTIES
The Master Trust invests in various investment securities. Investment securities
are exposed to various risks such as interest rate, market and credit risks. Due
to the level of risk associated with certain investment securities, it is at
least reasonably possible that changes in the values of investment securities
will occur in the near term and that such changes could materially affect
participants' account balances and the amounts reported in the statements of net
assets available for benefits.
10
Eaton Personal Investment Plan
EIN: 34-0196300 Plan Number: 162
Schedule H, line 4i--Schedule of Assets
(Held at End of Year)
December 31, 2003
DESCRIPTION OF INVESTMENT
INCLUDING MATURITY DATE,
IDENTITY OF ISSUE, BORROWER, RATE OF INTEREST, COLLATERAL, CURRENT
LESSOR OR SIMILAR PARTY PAR OR MATURITY VALUE VALUE
---------------------------- ----------------------------- -------
*Participant notes receivable 5% - 10.5%;
various maturities $2,423,568
*Indicates a party-in-interest to the Plan.
11