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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)(4) 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 2003 annual meeting of Eaton Corporation shareholders will be held
Wednesday, April 23, 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. Ratifying the appointment of independent auditors; and
3. 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 24, 2003. 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
Vice President and Secretary
March 14, 2003
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.
CONTENTS
PAGE
----
PROXY STATEMENT ........................ 3
Proxy Solicitation ..................... 3
Voting at the Meeting .................. 3
Election of Directors .................. 4
Board Committees ....................... 8
Compensation of Directors .............. 11
Executive Compensation ................. 12
Ratification of the Appointment of
Independent Auditors ................. 22
Other Business ......................... 22
Ownership of Outstanding Voting
Shares................................ 22
Future Shareholder Proposals ........... 24
APPENDICES
Appendix A:
Charter of Audit Committee and
relevant Policies .................... 24
Appendix B:
Charter of Compensation and
Organization Committee................ 27
Appendix C:
Charter of Finance Committee.......... 28
Appendix D:
Charter of Governance Committee and
relevant Policies..................... 29
Appendix E:
Board of Directors Governance
Policies ............................. 31
Appendix F:
Statement on Ethical Business
Conduct .............................. 34
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, 2002 are scheduled to be sent to shareholders on or
about March 14, 2003.
PROXY SOLICITATION
Eaton's Board of Directors solicits your proxy, in the form enclosed, for use at
the 2003 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, 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 The
Proxy Advisory Group of Strategic Stock Surveillance, LLC, 331 Madison Ave.,
12th Floor, New York, New York 10017, to assist in the solicitation of proxies,
primarily from brokers, banks and other nominees, for an estimated fee of
$8,500. 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 24, 2003
is entitled to one vote for each share then held. On February 24, 70,820,845
Eaton common shares (par value, 50c each) were outstanding and entitled to vote.
At the 2003 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 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
3
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 nine members. The terms of three
directors will expire in April 2003, and those directors have been nominated for
re-election. Each of the nominees was elected at the 2000 annual meeting. (See
page 5.)
Furman C. Moseley, a director since 1975, having attained the normal retirement
age, will resign as a director at the conclusion of the annual meeting of
shareholders on April 23. Gregory R. Page has been nominated to fill the vacancy
thus created, and Kiran M. Patel has been nominated for election to a term
ending April, 2004 (see page 6). Following the annual meeting, the Board of
Directors will be composed of ten members.
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 2006 OR WHEN THEIR SUCCESSORS ARE
ELECTED AND HAVE QUALIFIED:
G. L. TOOKER PHOTO D. L. McCOY PHOTO
A. M. CUTLER PHOTO
ALEXANDER M. CUTLER, 51, is GARY L. TOOKER, 63, is DEBORAH L. MCCOY, 48, 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
5
NOMINEES FOR ELECTION TO TERMS ENDING AS INDICATED BELOW DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL 2004:
AND UNTIL THEIR SUCCESSORS
ARE ELECTED AND HAVE QUALIFIED:
G. R. PAGE PHOTO K. M. PATEL PHOTO M. J. CRITELLI PHOTO E. GREEN PHOTO
GREGORY R. PAGE, 51, is KIRAN M. PATEL, 54, is MICHAEL J. CRITELLI, 54, is ERNIE GREEN, 64, is founder,
President and Chief Executive Vice President and Chairman and Chief Executive President and Chief
Operating Officer of Chief Financial Officer of Officer of Pitney Bowes Executive Officer of EGI,
Cargill, Incorporated, an Solectron Corporation, a Inc., a provider of Inc., a manufacturer of
international marketer, worldwide provider of messaging and advanced automotive components. He is
processor and distributor of electronics manufacturing business communications also President of Florida
agricultural, food, services to leading original solutions. He was elected Production Engineering,
financial and industrial equipment manufacturers. Mr. Vice Chairman and Chief Inc., a subsidiary of EGI.
products and services. He Patel directs Solectron's Executive Officer of the He is a director of DP&L
was Corporate Vice President investor relations, legal corporation in 1996, and Inc., and Pitney Bowes Inc.
& Sector President, and financial operations became Chairman and Chief DIRECTOR SINCE 1995
Financial Markets and Red worldwide, and corporate Executive Officer in 1997.
Meat Group of Cargill in development activities. Mr. Critelli is Chairman of
1998, Corporate Executive Prior to joining Solectron the National Urban League.
Vice President, Financial in 2001, he was associated DIRECTOR SINCE 1998
Markets & Red Meat Group in with Cummins Inc. for 27
1999, and became President years. In 1996 he was Vice
and Chief Operating Officer President and Chief
in 2000. Mr. Page is a Financial Officer of
director of Cargill, Cummins, and in 1999 became
Incorporated. Executive Vice President. In
TERM ENDING 2005 2000-2001, Mr. Patel was the
Chief Financial Officer of
iMotors, an Internet-based
valued-added retailer of
used cars. He is a member of
the American Institute of
Certified Public
Accountants, the Tennessee
Society of Certified Public
Accountants, and the
Financial Executive
Institute. He is a director
of Westport Innovations,
Inc.
TERM ENDING 2004
6
DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL 2005:
N. C. LAUTENBACH PHOTO J. R. MILLER PHOTO V. A. PELSON PHOTO
NED C. LAUTENBACH, 59, is a JOHN R. MILLER, 65, is VICTOR A. PELSON, 65, is a
partner of Clayton, Dubilier Chairman, President and Senior Advisor to UBS
& Rice, Inc., a private Chief Executive Officer of Warburg LLC, investment
equity investment firm Petroleum Partners, Inc., a bankers. Before becoming
specializing in management provider of outsourcing associated with UBS Warburg
buyouts. He also serves as services to the petroleum and its predecessors in
Chairman and Chief Executive industry. Mr. Miller was 1996, Mr. Pelson was an
Officer of Acterna President, Chief Operating employee of AT&T from 1959
Corporation, a worldwide Officer and a director of to 1996, where he held a
provider of communications The Standard Oil Company number of executive
test instruments, systems, from 1980 to 1986, also positions, including Group
software and services, and serving as a member of its Executive and President
Co-Chairman of Covansys Management Committee, and responsible for the
Corporation, a worldwide where he previously held a Communications Services
provider of information number of other executive Group, Executive Vice
technology services. Before positions including that of President and member of the
joining Clayton, Dubilier, Vice President, Finance for Management Executive
Mr. Lautenbach was three years. He is currently Committee. At the time of
associated with IBM from a director of Cambrex his retirement from AT&T,
1968 until his retirement in Corporation and Riverwood Mr. Pelson was Chairman of
1998. At IBM, he held Holding, Inc. Mr. Miller was Global Operations and a
several executive positions, a member of the Board of the member of the Board of
including Senior Vice Federal Reserve Bank of Directors. Mr. Pelson is a
President and Group Cleveland from 1986 to 1993, director of Dun &
Executive - Sales and serving as its Chairman Bradstreet, Acterna
Distribution, and was a during the last two of those Corporation and United
member of IBM's Corporate years. From 1988 to 2000, he Parcel Service.
Executive Committee. He is a was Chairman and Chief DIRECTOR SINCE 1994
director of Acterna Executive Officer of TBN
Corporation, Covansys Holdings Inc., a buyout
Corporation, a member of the firm.
Boards of Trustees of DIRECTOR SINCE 1985
Fidelity Investments and
Fairfield University, and a
member of the Council on
Foreign Relations.
DIRECTOR SINCE 1997
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 overseeing the integrity of the Company's financial statements and its
systems of internal accounting and financial controls, the independence,
qualifications and performance of the Company's independent auditor, the
performance of the internal auditors and the Company's compliance with legal and
regulatory requirements.
The Audit Committee exercises sole authority to appoint, terminate and
compensate the independent auditor; pre-approves all auditing services and
permitted non-audit services to be performed for the Company by the independent
auditor; 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 connection with the preparation of the
Company's annual financial statements; reviews material 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 material 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; at least annually obtains periodic
written statements from the independent auditor delineating all relationships
between the auditor and the Company and discusses these statements with the
auditor; considers the compatibility of the auditor's non-audit services with
the auditor's independence and satisfies itself of the independence of the
auditor; at least annually obtains and reviews a report by the independent
auditor describing the independent auditor's internal quality control
procedures, any material issues raised by the most recent internal quality
control review, or any governmental or professional inquiry during the last five
years regarding one or more independent audits carried out by the independent
auditor, and any steps taken to deal with such issues; evaluates the performance
of the independent auditor and its lead partner; sets clear hiring policies for
employees or former employees of the independent auditor that comply with the
Sarbanes-Oxley Act of 2002 and the New York Stock Exchange listing standards;
reviews the appointment and any replacement of the Company's Director-Audits;
meets with the Director-Audits and independent auditor prior to the annual audit
to review the scope, planning and staffing of the audit; discusses with the
independent auditor matters relating to the Company's annual audit and quarterly
reviews, including the independent auditor's judgment about the quality of the
Company's accounting principles applied in its financial reporting; reviews with
the independent auditor any problems or difficulties encountered by the auditor
in the annual audit; reviews with management and the independent auditor the
Company's quarterly financial statements prior to the filing of each Form 10-Q
report; reviews and discusses quarterly reports by the independent auditor
regarding all critical accounting policies and practices, all alternative
treatments of financial information within generally accepted accounting
principles that have been discussed with management and the treatment preferred
by the internal auditor, and other material written communications between the
independent auditor and the Company's management; reviews disclosures by the
chief executive officer and chief financial officer during their certification
process for Form 10-K and 10-Q reports in regard to significant deficiencies in
the operation of internal controls or any fraud involving management or
employees who have a significant role in the Company's internal controls;
discusses the types of information to be disclosed in earnings guidance to
analysts and others, and the type of presentation to be made to rating agencies;
meets at least annually with the Company's chief financial officer,
Director-Audits, and independent auditors in separate executive sessions;
prepares the Committee's report to be included in the Company's annual proxy
statement; assures that performance evaluations
8
of the Audit Committee are conducted regularly and establishes procedures for
the proper handling of complaints concerning accounting or auditing matters. The
Audit Committee held six meetings in 2002. 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
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 four meetings in
2002. Present members are Messrs. Critelli, Green, Lautenbach 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 2002. 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 to the Board, analyzing Company policy regarding its debt-to-equity
relationship, reviewing and making recommendations to the Board 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 the key assumptions used to calculate annual
pension expense. The Finance Committee held three meetings in 2002. Present
members are Messrs. Lautenbach, Miller, Pelson and Tooker.
Governance Committee. The responsibilities of the Governance Committee include
recommending to the Board improvements in the Company's corporate governance
processes and any 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, in consultation 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,
9
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 2004 should send a
signed letter of recommendation, to be received before November 3, 2003, 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.
The Governance Committee held three meetings in 2002. Present members are Ms.
McCoy and Messrs. Critelli, Green, Miller and Moseley.
COMMITTEE CHARTERS AND POLICIES -- In January 2003, the Board of Directors
revised the Charters of the Audit, Compensation and Organization, Finance and
Governance Committees of the Board. The revised Charters are attached as
appendices to this proxy statement. The Charter of the Audit Committee is
attached as Appendix A, the Charter of the Compensation and Organization
Committee is attached as Appendix B, the Charter of the Finance Committee is
attached as Appendix C, and the Charter of the Governance Committee is attached
as Appendix D.
Formal policies relating to corporate governance matters were adopted in 2002 by
several Board Committees, or by the Board itself upon the Committees'
recommendation. Summaries of these policies are shown in Appendices A and D,
below the Charters of these Committees, respectively.
The Board of Directors held ten meetings in 2002. All directors attended at
least 75% of the meetings of the Board and its committees. The average rate of
attendance for all directors was 98%.
AUDIT COMMITTEE REPORT -- The Audit Committee of the Board of Directors is
responsible for assisting the Board in overseeing (1) the integrity of the
Company's financial statements and its systems of internal accounting and
financial controls, (2) the independence, qualifications and performance of the
Company's independent auditor, (3) the performance of the Company's internal
auditors and (4) the Company's compliance with legal and regulatory
requirements. The Committee is comprised of four Directors, all of whom are
independent under the Sarbanes-Oxley Act of 2002 and the listing standards of
the New York Stock Exchange.
The Board of Directors amended the Committee's charter as of January 22, 2003. 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 2002 audited financial
statements.
The Committee has discussed with Ernst & Young LLP, the Company's independent
outside auditor, 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 2002, Ernst & Young's AUDIT FEES relating to the audit of the
Company's annual financial statements and review of the Company's
10
quarterly financial statements were $3.6 million. Ernst & Young also received
fees of
(a) $2.9 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) $7.1 million for tax-related services (which generally include tax and
employee benefit plan compliance and tax advisory services), resulting in ALL
OTHER FEES totaling $10.0 million. Ernst & Young rendered no services, and
received no fees, for FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION.
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 2002 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.
Victor A. Pelson, Chairman
Deborah L. McCoy
John R. Miller
Furman C. Moseley
COMPENSATION OF DIRECTORS -- Employee directors are not compensated for their
services as directors. Non-employee directors receive an annual retainer of
$60,000. The Chairman of the Finance Committee receives an annual retainer of
$5,000; the Chairman of the Compensation and Organization Committee and the
Governance Committee each receives an annual retainer of $7,500; and the
Chairman of the Audit Committee receives an annual retainer of $10,000.
Non-employee directors also receive 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 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 Stock Plans, 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
11
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, 2003, the Board of
Directors revised the Board of Directors Governance Policies, as recommended by
the Governance Committee of the Board. The revised Governance Policies are
attached as Appendix E to this proxy statement.
STATEMENT ON ETHICAL BUSINESS CONDUCT -- The Company's current Statement on
Ethical Business Conduct, dated January 1, 2002, is attached as Appendix F to
this proxy statement. The Statement applies to all directors, officers and
employees of the Company. Initially adopted in 1976 and updated occasionally
thereafter, the Statement has helped the Company to maintain an exceptionally
high standard of ethical business conduct. To assist the Company in making sure
that this high standard is continued in the years ahead, and to address new
legal and regulatory requirements, the Company will revise the Statement during
2003 and will include the revised Statement in next year's proxy materials.
EXECUTIVE COMPENSATION -- The following table summarizes the total compensation
of the Chairman and Chief Executive Officer of Eaton and the four other most
highly compensated executive officers for fiscal year 2002. The table also
summarizes compensation of the named executive officers for fiscal years 2001
and 2000.
12
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 2002 $950,004 $1,745,633 $87,245 $ 944,790 112,000 $918,496 $31,497
Chairman, 2001 941,670 654,588 14,923 699,100 90,000 317,771 25,579
Chief Executive Officer 2000 797,940 636,043 0 0 104,553 929,978 39,128
and President
C. Arnold 2002 $399,125 $ 456,934 $ 0 $ 204,500 22,000 $326,552 $22,464
Senior Vice President 2001 384,375 135,780 0 174,775 20,100 126,911 12,099
and Group Executive -- 2000 85,336 150,202 0 4,410,433 0 434,731 0
Fluid Power
S. M. Buente 2002 $393,517 $ 486,816 $ 0 $ 204,500 22,000 $294,535 $11,177
Senior Vice President 2001 359,374 156,282 0 174,775 20,100 132,548 18,297
and Group Executive -- 2000 303,243 140,216 0 0 15,102 169,394 23,504
Automotive
R. W. Carson 2002 $418,614 $ 515,456 $ 1,054 $ 204,500 22,000 $363,468 $28,576
Senior Vice President 2001 420,121 148,405 0 174,775 20,100 132,715 20,474
and Group Executive -- 2000 383,360 257,489 0 0 104,554 0 23,849
Cutler-Hammer
J. E. Sweetnam 2002 $373,344 $ 438,589 $ 0 $ 204,500 22,000 $264,079 $19,513
Senior Vice President 2001 299,879 89,773 0 63,990 17,500 15,864 4,833
and Group Executive -- 2000 249,552 82,597 0 0 9,293 69,917 10,399
Truck
---------------------------------------------------------------------------------------------------------------------------
(1) Reported in this column is annual compensation representing (i) amounts
reimbursed by the Company for the payment of income taxes on certain
executive perquisites and (ii) $59,143 in executive perquisites received in
2002, including $37,840 which represents the incremental cost for the
personal use of company-owned aircraft by Mr. Cutler. Due to concerns for
his personal security, the Board of Directors has directed Mr. Cutler to use
the company-owned aircraft for his personal travel.
(2) At year end 2002 the number and value of unvested restricted shares held by
each of the named executive officers were as follows: A. M. Cutler, 19,550,
$1,527,051; R. W. Carson, 4,500, $351,495; S. M. Buente, 4,500, $351,495; C.
Arnold, 54,335, $4,244,107 and J. E. Sweetnam, 3,175, $247,999. Value is
calculated by multiplying the closing price of an Eaton share on that date
by the number of restricted shares. 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. The
restricted shares granted to Mr. Arnold in 2000 have been adjusted to
reflect the spin off of the Company's ownership interest in Axcelis
Technologies, Inc. Dividends are paid to the executives with respect to the
unvested restricted shares they hold at the same rate and time as dividends
are paid on outstanding Company shares generally.
(3) All Other Compensation contains several components. Beginning in 2002, the
Eaton Savings Plan permits an employee to contribute from 1% to 5% of his or
her salary to the matching portion of the plan. Eaton makes a matching
contribution which equals $1.00 for each dollar contributed by the
participating employee with respect to the first 3% of his or her salary
contributed to the plan and $.50 for each dollar contributed by the
participating employee with respect to the next 2% of his or her salary
contributed to the plan. Prior to 2002, Company matching contributions
ranged between $.25 and $1.00 for each dollar contributed by the
participating employee, up to 6% of his or her salary, as determined under a
formula based on Eaton's quarterly earnings per share. The amount the
Company contributed during 2002 for the named executive officers was as
follows: C. Arnold, $6,508; S. M. Buente, $7,801; A. M. Cutler, $7,990; R.
W. Carson, $7,622 and J. E. Sweetnam, $7,922. 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 2002 for each of the
named executive officers were as follows: C. Arnold, $0; S. M. Buente, $0;
A. M. Cutler, $2,326; R. W. Carson, $0 and J. E. Sweetnam, $0. Under a
Company program, each executive officer may acquire an automobile at an
approximate cost to the Company for each of the named executive officers for
2002 as follows: C. Arnold, $13,536; S. M. Buente, $0; A. M. Cutler,
$13,345; R. W. Carson, $15,790 and J. E. Sweetnam, $8,457. 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 2002 for each of the named executive
officers were as follows: C. Arnold, $2,420; S. M. Buente, $3,376; A. M.
Cutler, $7,836; R. W. Carson, $5,164 and J. E. Sweetnam, $3,134. Each
executive officer is responsible for paying individual income taxes due with
respect to the Company's automobile and insurance programs.
13
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES -- The following table
contains information concerning the exercise of stock options during fiscal year
2002 and the value of unexercised stock options at the end of fiscal year 2002
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 24,744 $1,178,054 385,759 351,318 $7,476,646 $2,565,519
C. Arnold 0 0 6,633 35,467 31,374 63,699
S. M. Buente 2,907 124,786 80,328 64,474 1,541,914 432,821
R. W. Carson 15,000 434,522 113,069 56,921 1,225,040 283,508
J. E. Sweetnam 17,875 415,404 24,818 60,118 246,908 116,161
---------------------------------------------------------------------------------------------------------
OPTION GRANTS -- The following table gives information concerning grants of
stock options made during fiscal year 2002 to each of
the named executive officers. No stock
appreciation rights were granted during fiscal
year 2002.
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 112,000 10% $81.21 2/26/2012 $0 $ 5,730,178 $ 14,461,877
C. Arnold 22,000 2% 81.21 2/26/2012 0 1,125,571 2,840,726
S. M. Buente 22,000 2% 81.21 2/26/2012 0 1,125,571 2,840,726
R. W. Carson 22,000 2% 81.21 2/26/2012 0 1,125,571 2,840,726
J. E. Sweetnam 22,000 2% 81.21 2/26/2012 0 1,125,571 2,840,726
All Shareholders(2) 0 3,621,265,240 9,139,383,701
---------------------------------------------------------------------------------------------------------------
(1) Based on a total of 1,100,723 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 $81.21, the value of all 70,779,954 shares outstanding on
January 31, 2003, would increase by the amounts shown. There can be no
assurance that the market price of Eaton shares will increase in the future.
--------------------------------------------------------------------------------
14
LONG-TERM INCENTIVE PLAN AWARDS -- The following table gives information
regarding long-term incentive plan awards made during fiscal year 2002 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 21,850 4 years 10,925 21,850 43,700
C. Arnold 5,650 4 years 2,825 5,650 11,300
S. M. Buente 5,650 4 years 2,825 5,650 11,300
R. W. Carson 5,650 4 years 2,825 5,650 11,300
J. E. Sweetnam 5,650 4 years 2,825 5,650 11,300
---------------------------------------------------------------------------------------------------
(1) These units were awarded during 2002 under the Company's long-term incentive
plan at a target price per unit of $71.41. 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.
STOCK OWNERSHIP GUIDELINES -- The Company maintains stock ownership guidelines
for senior executives for the purpose of aligning their motivations with the
interests of the Company's owners and assuring that the individuals principally
responsible for the Company's stewardship and growth have a significant personal
stake in its progress.
The guidelines call for executives to reach the following levels of Eaton stock
ownership over a five-year period:
Chief Executive
Officer 3-5 times base salary
Other officers 2-4 times base salary
General managers and
key staff managers 1 time base salary
For purposes of achieving these guideline levels, the following shares are
included: Eaton shares owned outright by the executive, Eaton share units
credited to the executive's Eaton Savings Plan account, and Eaton share units
credited to the executive's deferred compensation accounts.
COMPENSATION AND ORGANIZATION COMMITTEE REPORT -- The Committee, consisting of
four independent non-employee directors, met four times in 2002. 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 these studies 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 has 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. Sixty-three percent of the 2002 aggregate cash compensation of the
executive officers named in the compensation table was based directly on
specific financial performance
15
objectives. For 2002, the Committee targeted base salaries at approximately the
median range of compensation paid by similar companies included in the survey
databases 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 typically considers
performance against annual plans, accomplishment of other objectives and the
financial results of similar companies. The Committee 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 and Chief
Executive Officer. Due to the continued depressed end market conditions and the
Company's 2001 financial results, the Chairman and Chief Executive Officer
requested that he not receive a 2002 base salary increase, and management
requested that only those elected officers and key executives whose current
salaries were below the market median should be considered for 2002 salary
adjustments. The Committee endorsed these requests and, as a result, the Board
of Directors approved 2002 salary increases for only a small number of elected
officers.
Short-Term Incentives -- Annual performance awards for 2002 were based on
individual target opportunities for each executive expressed as a percentage of
the participant's base salary. 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 CFR 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 2002 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. Individual incentive targets are expressed
as phantom share units, and final awards are paid in cash, instead of shares.
Final
16
phantom share unit awards are determined based upon Company and individual
performance as described above. In light of the significant adverse changes in
the global economy in recent years, the Committee determined that the original
performance objectives for open award periods (1999-2002, 2000-2003 and
2001-2004) no longer provided effective incentives. The Committee therefore
approved separate performance objectives for the remaining years of these
periods. The aggregate awards with respect to both the original performance
objectives and these separate recovery plan objectives were capped at 100%, 125%
and 150%, of the original target incentive opportunities for the periods ending
2002, 2003 and 2004, respectively. For the award period ending in 2002, the
Company's performance exceeded the original performance objectives necessary to
earn a minimum award, and exceeded the recovery plan performance objectives
necessary to earn a maximum award. Aggregate awards were capped at 100%, and
were adjusted to reflect individual performance.
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 and the Committee periodically
reviews the progress of individual executives toward their ownership goals.
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 rights. The Committee has 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. No more than
10% of the total number of shares authorized for delivery under the 2002 Stock
Plan may be granted as restricted shares, performance shares, stock appreciation
rights or other share 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 restricted shares, performance 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 authorized shares, the vesting period must exceed one
year, with no more than one third of those shares becoming vested at the end of
each of the twelve-month periods following the date of grant.
Chief Executive Officer Compensation -- The 2002 compensation for Mr. Cutler was
earned pursuant to the arrangements described above.
Due to the very difficult business environment throughout the past year, Mr.
Cutler recommended to the Committee that he not be considered for a base salary
adjustment in 2002. The Committee endorsed this recommendation and the Board of
Directors approved it.
Mr. Cutler's 2002 short-term incentive payout reflected the award formula of the
Company's
17
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 2002. 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 leadership in developing and implementing the Eaton Business
System, achieving profit plan goals, strengthening the balance sheet, outgrowing
end markets, continuing to implement cost reduction measures, completing the
two-year comprehensive corporate wide restructuring program, acquiring two
businesses to supplement the Fluid Power Group, divesting a non-strategic
business, reassessing and strengthening corporate governance procedures,
recruiting and developing an outstanding leadership team, continuing success in
improving the Company's diversity profile, implementing a new retirement income
strategy and communicating the Company's vision as a premier diversified
industrial company.
Mr. Cutler's earned payouts from the long-term incentive plans for the periods
ending in 2002 were based upon the Company's CFR and cumulative earnings per
share performance as described above, 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 2002 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
18
COMPANY STOCK PERFORMANCE -- The following graph compares the cumulative total
return for Eaton common shares with its peer companies and two indexes, the S&P
1500 Industrial Machinery and the S&P 500. The peer group is the same as used in
2002, consisting of: ArvinMeritor, Inc., Borg Warner Automotive, Inc., Cooper
Industries, Inc., Cummins Engine Company, Inc., Dana Corporation, Emerson
Electric Co., Honeywell International, Inc., Hubbell, Inc., Johnson Controls,
Inc., Navistar International Corporation, PACCAR Inc., Parker-Hannifin
Corporation, Rockwell Automation, Inc., SPX Corporation, TRW Inc., and Thomas &
Betts Corporation.
In an effort to provide the best comparison and to preclude peer group revisions
due to changes in strategy or acquisition and divestiture activities (e.g.,
Northrop Grumman's acquisition of TRW), the Company has evaluated the use of
commercially available indexes. These evaluations have shown that the S&P 1500
Industrial Machinery index is a more appropriate benchmark for comparisons than
the peer group. Therefore, in the future this index will be used in place of the
peer group. Both indexes are displayed in the graph.
PEERS S&P 1500 IND MACH EATON S&P 500
----- ----------------- ----- -------
1997 100.00 100.00 100.00 100.00
1998 103.00 92.00 81.00 129.00
1999 113.00 103.00 85.00 156.00
2000 113.00 97.00 90.00 141.00
2001 103.00 105.00 105.00 125.00
2002 97.00 98.00 113.00 97.00
Assumes $100 invested on December 31, 1997 in Eaton common shares, stock of the
peer companies, the S&P 1500 Industrial Machinery index and the S&P 500 index.
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.
19
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 $ 64,709 $ 86,279 $107,849 $129,418 $150,988 $ 172,558
400,000 87,209 116,279 145,349 174,418 203,488 232,558
500,000 109,709 146,279 182,849 219,418 255,988 292,558
600,000 132,209 176,279 220,349 264,418 308,488 352,558
700,000 154,709 206,279 257,849 309,418 360,988 412,558
800,000 177,209 236,279 295,349 354,418 413,488 472,558
900,000 199,709 266,279 332,849 399,418 465,988 532,558
1,000,000 222,209 296,279 370,349 444,418 518,488 592,558
1,100,000 244,709 326,279 407,849 489,418 570,988 652,558
1,200,000 267,209 356,279 445,349 534,418 623,488 712,558
1,300,000 289,709 386,279 482,849 579,418 675,988 772,558
1,400,000 312,209 416,279 520,349 624,418 728,488 832,558
1,500,000 334,709 446,279 557,849 669,418 780,988 892,558
1,600,000 357,209 476,279 595,349 714,418 833,488 952,558
1,700,000 379,709 506,279 632,849 759,418 885,988 1,012,558
1,800,000 402,209 536,279 670,349 804,418 938,488 1,072,558
1,900,000 424,709 566,279 707,849 849,418 990,988 1,132,558
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
($37,212 for 2002 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 13) 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, 27.4; C. Arnold, 2.3; R. W. Carson, 4; S. M. Buente,
26.3; J. E. Sweetnam, 5.2.
---------------
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
20
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. Currently, it is expected that nine officers would receive a
benefit under the plan, including C. Arnold, R. W. Carson and J. E. Sweetnam,
who are named in the Summary Compensation Table on page 13. The estimated annual
benefits payable under this plan are $85,208 to Mr. Arnold, $216,272 to Mr.
Carson and $89,116 to Mr. Sweetnam, 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 officers, including those named
in the Summary Compensation Table on page 13, 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 608,603 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.
21
2. RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee of 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 2003. The submittal of this matter to the
shareholders at the annual meeting is not required by law or by Eaton's Amended
Regulations. It is nevertheless being submitted 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 Audit
Committee 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.
3. 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. 7,935,127(1) 11.255%
82 Devonshire Street
Boston, MA 02109
Vanguard Windsor Funds 3,880,500(2) 5.50%
100 Vanguard Blvd.
Malvern, PA 19355
Wellington Management 4,227,500(3) 5.88%
Company, LLP
75 State Street
Boston, Massachusetts 02109
--------------------------------------------------
(1) FMR Corp. has filed with the Securities and Exchange Commission a Schedule
13G dated February 13, 2003, which reports the beneficial ownership of
7,935,127 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 779,837
shares and sole power to dispose or to direct the disposition of 7,935,127
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 13,
2003, which reports the beneficial ownership of 3,880,500 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 3,880,500 shares and
shared power to dispose or to direct the disposition of 3,880,500 common
shares.
(3) Wellington Management Company, LLP has filed with the Securities and
Exchange Commission a Schedule 13G dated February 14, 2003, which reports
the beneficial ownership of 4,227,500 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 209,600 common shares
and shared power to dispose or to direct the disposition of 4,227,500 common
shares.
22
The following table shows the beneficial ownership, reported to the Company as
of January 31, 2003, of Company common shares by each director and nominee, each
executive officer named in the Summary Compensation Table on page 13 and all of
those individuals and all other officers as a group and also sets forth the
number of share units held under various deferred compensation plans. Gregory R.
Page and Kiran M. Patel, both nominated by the Board on February 26, own 500
shares and 750 shares, respectively.
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 75,059(5) -- 1,456 76,515
S. M. Buente 108,426(5) -- 16,301 124,727
R. W. Carson 145,713(5) -- 10,559 156,272
M. J. Critelli 15,231 -- -- 15,231
A. M. Cutler 531,130(5,6) -- 103,896 635,026
E. Green 19,028 -- 1,954 20,982
N. C. Lautenbach 18,289 -- 5,299 23,588
D. L. McCoy 11,756 -- 2,702 14,458
J. R. Miller 23,028 -- -- 23,028
F. C. Moseley 30,128(6) -- 3,112 33,240
V. A. Pelson 20,528(6) -- 4,134 24,662
J. E. Sweetnam 45,719(5) -- 4,355 50,074
G. L. Tooker 21,528(6) -- 2,330 23,858
Directors, Nominees and
Executive Officers as a group
of 23 1,519,891 -- 216,953 1,736,844
--------------------------------------------------------------------------------------------------
(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, 2003 upon the exercise of outstanding stock options as
follows: C. Arnold, 20,526; S.M. Buente, 97,698; R.W. Carson, 134,862; A.M.
Cutler, 472,168; J.E. Sweetnam, 37,712; and all directors, nominees and
executive officers as a group, 1,289,524 shares.
(3) Each of the individuals listed holds less than 1% of outstanding common
shares.
(4) For descriptions of these units, see pages 11 and 16.
(5) Includes shares held under the Eaton Savings Plan as of January 31, 2003.
(6) Includes shares held jointly or in other capacities, such as by trust.
23
Employee benefit plans of the Company and its subsidiaries on January 31, 2003
held 6,443,115 common shares for the benefit of participating employees, or
approximately 9.1% 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 2002, with the exception that, due to an
oversight by the Company's administrative staff, R.W. Carson had one late report
of two exercises of employee stock options and related open market sale
transactions.
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 2004 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 14, 2003.
By order of the Board of Directors
/s/ Earl R. Franklin
Earl R. Franklin
Vice President and
Secretary
March 14, 2003
APPENDIX A
CHARTER OF AUDIT COMMITTEE
The Audit Committee shall be responsible to assist the Board of Directors in
overseeing (1) the integrity of the Company's financial statements and its
systems of internal accounting and financial controls, (2) the independence,
qualifications and performance of the Company's independent auditor, (3) the
performance of the Company's internal auditors and (4) the Company's compliance
with legal and regulatory requirements.
The Audit Committee shall be comprised of at least three Directors recommended
by the Governance Committee or by a majority of the independent members of the
Board and appointed by the Board. Each Committee member shall meet the
independence requirements, and all Committee members collectively shall meet the
other requirements, of the New York Stock Exchange, the Sarbanes-Oxley Act of
2002, and rules adopted thereunder by the Securities and Exchange Commission. No
Committee member shall concurrently serve on the audit committees of more than
two other publicly-held companies. Members of the Audit Committee may be removed
at any time by the Board of Directors upon the recommendation of the Governance
Committee or a majority of the independent members of the Board.
The Committee shall exercise sole authority to appoint, terminate and compensate
the independent auditor, which shall report directly to the Committee.
The Audit Committee shall have the authority to retain and terminate special
legal, accounting or other consultants to advise the Committee. The Committee
shall exercise sole authority to approve the fees and other retention terms for
such consultants, who will report directly to 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 Company shall provide appropriate funding to the Audit Committee to
compensate the auditors and any advisors to the Committee.
24
The Audit Committee shall establish procedures for the receipt, retention and
treatment of complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and the confidential, anonymous
submission by employees of concerns regarding questionable accounting or
auditing matters.
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 at least annually and
recommend any proposed changes to the Board for approval.
2. Pre-approve all auditing services and permitted non-audit services
(including the fees and terms thereof) to be performed for the Company by
the independent auditor. The Committee shall be responsible to resolve any
disagreements between the independent auditor and the Company's management.
3. Non-audit engagements with the independent auditor shall exclude in any
event non-audit services prohibited by law.
4. At least annually, obtain and review a report by the independent auditor
delineating all relationships between the independent auditor and the
Company, consider the compatibility of the independent auditor's non-audit
services (if any) with its independence and take appropriate action to
satisfy itself of the independence of the independent auditor.
5. At least annually, obtain and review a report by the independent auditor
describing the following: (a) the independent auditor's internal
quality-control procedures and (b) any material issues raised by the most
recent internal quality-control review, or peer review, of the independent
auditor, or by any inquiry or investigation by governmental or professional
authorities, within the preceding five years, respecting one or more
independent audits carried out by the independent auditor, and any steps
taken to deal with any such issues.
6. Evaluate the performance of the independent auditor and, if so determined by
the Audit Committee, replace the independent auditor. The evaluation shall
include a review and evaluation of the performance of the independent
auditor's lead partner. The lead partner and the audit partner responsible
for reviewing the Company's audit shall be rotated off the Company's audit
at least once every five years, or any time that the Audit Committee may
determine. The Committee also shall consider whether, in order to assure
continuing auditor independence, it is appropriate to rotate the independent
auditor.
7. Set clear hiring policies for employees or former employees of the
independent auditor that comply with the requirements of the Sarbanes-Oxley
Act of 2002 and the listing standards of the New York Stock Exchange.
8. 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 whether the financial statements should be
included in the annual report to shareholders and annual report on Form
10-K. The Committee's review shall include a discussion of the disclosures
to be made by the Company under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Form 10-K report.
9. 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.
10. Review with management and the independent auditor the Company's quarterly
financial statements prior to the filing of each Form 10-Q report. This
review shall include a discussion of the type of information to be disclosed
in the Company's earnings press release. The Committee's review also shall
include a discussion of the disclosures to be made by the Company under
"Management's
25
Discussion and Analysis of Financial Condition and Results of Operations" in
the Form 10-Q report.
11. Review and discuss quarterly reports by the independent auditor on:
(a) all critical accounting policies and practices to be used;
(b) all alternative treatments of financial information within generally
accepted accounting principles that have been discussed with management,
ramifications of the use of such alternative disclosures and treatments,
and the treatment preferred by the independent auditor;
(c) other material written communications between the independent auditor
and the Company's management, such as a management letter or schedule of
unadjusted differences.
12. Review material changes to the Company's auditing and accounting principles
and practices as suggested by the independent auditor, internal auditors or
management.
13. Discuss with the independent auditor any matters raised by the independent
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.
14. Review with the independent auditor any problems or difficulties the
independent auditor may have encountered in the annual audit.
15. Review with the Company's General Counsel legal matters that may have a
material impact on the Company's financial statements.
16. Meet periodically with management to review the Company's material financial
risk exposures and the steps management has taken to monitor and control
such exposures.
17. Review the report of the Director -- Audits on internal controls and
internal audit results.
18. Review and approve the appointment and any replacement of the Company's
Director -- Audits.
19. 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.
20. Review disclosures by the chief executive officer and chief financial
officer during their certification process for Form 10-K and Form 10-Q
reports in regard to any significant deficiencies in the design or operation
of internal controls or material weaknesses therein and any fraud involving
management or other employees who have a significant role in the Company's
internal controls.
21. Discuss the types of information to be disclosed in earnings guidance to
analysts and others, and the type of presentation to be made to rating
agencies, with the understanding that the Committee need not discuss in
advance each instance in which the Company may provide earnings guidance.
22. Meet several times per year with the Company's chief financial officer,
Director -- Audits and independent auditor in separate executive sessions.
23. Prepare the report required by the rules of the Securities and Exchange
Commission to be included in the Company's annual proxy statement.
24. Assure that performance evaluations of the Audit Committee are conducted
regularly.
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 and disclosures
are complete and accurate and in accordance with generally accepted accounting
principles and applicable rules and regulations. These instead shall be the
responsibility of management and the independent auditor.
26
POLICIES ADOPTED IN 2002 BY THE AUDIT COMMITTEE OR BY THE BOARD OF DIRECTORS
UPON THE RECOMMENDATION OF THE AUDIT COMMITTEE
Upon the recommendation of the Audit Committee, the Board of Directors on July
24, 2002 adopted a policy regarding the Company's not hiring personnel of the
Company's independent auditors. The purpose of the policy is to help assure the
independence of those personnel. In summary, the policy provides: (A) the
Company will not hire in any capacity an individual who has served as an
engagement audit partner, tax partner, senior manager or manager of the
independent auditors and who has worked on the Company's audit during the
previous two years and (B) the Company will not hire in the capacity of Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief
Accounting Officer, or an equivalent position, an individual who has been a
partner, manager or employee of the Company's independent auditors during the
previous five years. Any exceptions to this policy must be approved by the Audit
Committee on the grounds that an exception is in the best interests of the
Company and its shareholders.
---------------
The Audit Committee on October 22, 2002 adopted a policy that the Committee
shall approve all non-audit services to be provided by the Company's independent
auditors and that in no event shall the independent auditors provide any of the
nine types of non-audit services that are prohibited by the Sarbanes-Oxley Act
of 2002.
APPENDIX B
CHARTER OF
COMPENSATION AND ORGANIZATION COMMITTEE
The Compensation and Organization Committee shall be comprised of at least three
Directors, all of whom meet the independence requirements of the New York Stock
Exchange and the Board of Directors. The Committee members shall be appointed by
the Board of Directors upon the recommendation of the Governance Committee or a
majority of the independent members of the Board. Committee members may be
removed by the Board of Directors at any time upon the recommendation of the
Governance Committee or a majority of the independent members of the Board.
The Compensation and Organization Committee shall have the following
responsibilities:
1. Annually evaluate the performance of the Chairman and Chief Executive
Officer, taking into account input from all outside Directors, and review
the performance evaluations of the other elected officers of the Company;
2. Maintain and periodically review a succession plan for key officer positions
of the Company, including the positions of Chairman and Chief Executive
Officer and Chief Operating Officer;
3. Recommend to the Board the individual who should assume the position of
Chairman and Chief Executive Officer if that position becomes vacant due to
unforeseen circumstances;
4. Annually review the aggregate amount of awards to be made under the
Executive Incentive Compensation Plan and adjust that amount as the
Committee deems appropriate within the terms of the Plan;
5. Establish performance objectives under the Company's long-term incentive
compensation plans and determine the attainment of such performance
objectives;
6. Annually recommend to the Board the salary of each elected officer of the
Company;
7. Annually review the awards to be made to the elected officers under the
Executive Incentive Compensation Plan;
8. Annually review the awards to be made to the elected officers under the
Company's long-term incentive compensation plans;
9. Administer the Company's stock plans and periodically approve grants of
stock options and other equity-based awards to Company employees;
10. In determining the compensation of the Chairman and Chief Executive Officer,
the Committee shall (a) review and approve corporate goals and objectives
that the Committee deems to be relevant to Chairman and Chief Executive
Officer compensation, (b) evaluate the Chairman and Chief Executive
Officer's performance
27
in light of those goals and objectives and (c) set the Chairman and Chief
Executive Officer's compensation level based on that evaluation.
11. Review proposed organization or responsibility changes at the officer level;
12. Periodically review all of the Company's compensation and perquisite
practices for employees who are key to the Company's business to confirm
that such practices remain equitable and competitive;
13. Establish such share ownership retention guidelines for Company officers and
other executives as the Committee may deem appropriate and monitor the
administration of those guidelines;
14. Review (a) proposed new employee benefit plans for very large employee
populations, (b) material changes to the basic conceptual direction of any
such existing plans, (c) changes to such plans that would substantially
increase or decrease benefits for officers in any manner that is not
generally similar for all participants and is therefore disproportionate,
(d) proposed new employee benefit plans that are material and primarily for
the benefit of employees who are key to the Company's business, (e) equity
compensation plans which, under the New York Stock Exchange listing
standards, are subject to shareholder approval and (f) changes to any such
existing plans that would substantially increase or decrease the benefits
provided by those plans;
15. Prepare an annual report for the Company's proxy statement regarding
executive compensation, as required by the rules of the Securities and
Exchange Commission and the New York Stock Exchange;
16. Periodically report to the Board concerning the Committee's actions,
conclusions and recommendations; and
17. Assure that performance evaluations of the Committee are conducted
regularly.
The Compensation and Organization Committee shall have the authority to retain
and terminate compensation consultants and other advisors to advise the
Committee in the evaluation of compensation for the Chairman and Chief Executive
Officer and other officers or on other matters. The Committee shall exercise
sole authority to approve the fees and other retention terms for such
consultants or other advisors, who will be directly responsible to the
Committee.
APPENDIX C
CHARTER OF FINANCE COMMITTEE
The Finance Committee shall be comprised of at least three Directors, all of
whom qualify as "independent" under the standards adopted by the New York Stock
Exchange and the Board of Directors. The Committee members shall be appointed by
the Board upon the recommendation of the Governance Committee or a majority of
the independent members of the Board. Committee members may be removed by the
Board at any time upon the recommendation of the Governance Committee or a
majority of the independent members of the Board.
The Finance Committee shall have the following responsibilities:
1. Periodically review the financial condition of the Company, including its
total financial resources, strengths and capabilities, and recommend
financial policies to the Board of Directors;
2. Analyze Company policy with respect to its debt-equity relationship and make
recommendations to the Board with respect thereto;
3. Review the Company's dividend policy and make recommendations to the Board
with respect thereto;
4. Review the Company's cash flow, including its total capital expenditure
program, working capital changes and other current and anticipated financial
requirements;
5. Review proposals for share issuances and repurchases;
6. Review proposals for long- and short-term debt financing;
7. Review the Company's risk management program and its adequacy to safeguard
the Company against extraordinary liabilities and losses;
8. Periodically meet with, and review the performance of, the Pension
Investment Committee, the Pension Administration
28
Committee and any other fiduciaries that the Board may appoint with respect
to the Company's pension and other retirement income plans (including
employee share purchase or similar plans);
9. Annually review the key assumptions used to calculate annual pension
expense, including the assumed long-term return on pension plan assets and
the discount rate used to determine the present value of pension plan
liabilities;
10. Periodically report to the Board concerning the Committee's actions,
conclusions and recommendations;
11. Assure that performance evaluations of the Finance Committee are conducted
regularly.
The Finance Committee shall have the authority to retain and terminate
consultants and other advisors to advise the Committee in the performance of its
responsibilities. The Committee shall exercise sole authority to approve the
fees and other retention terms for such consultants and other advisors, who will
report directly to the Committee.
APPENDIX D
CHARTER OF GOVERNANCE COMMITTEE
The Governance Committee shall be comprised of at least three Directors, all of
whom meet the independence requirements of the New York Stock Exchange and the
Board of Directors. The Committee members shall be appointed by the Board upon
the recommendation of the Governance Committee or a majority of the independent
members of the Board. Committee members may be removed by the Board at any time
upon the recommendation of the Governance Committee or a majority of the
independent members of the Board.
The Governance Committee shall have the following responsibilities:
1. Recommend to the Board improvements in the Company's processes of corporate
governance, including proposed changes in the Board Governance Policies.
2. Advise the Board on changes in the size and composition of the Board.
3. Make recommendations to the Board regarding the structure and
responsibilities of Board Committees, and annually submit to the Board
candidates to be appointed members and chairman of each standing Committee.
4. In consultation with the Chairman and Chief Executive Officer, identify and
recommend to the Board candidates for Board membership, based on the
criteria for Board membership listed in the Board Governance Policies.
5. Recommend to the Board individuals to be nominated for election or
re-election to the Board, taking into account input from all Directors.
6. Oversee the orientation of new Directors and continuing education for all
Directors relating to their roles and responsibilities as members of the
Board and its Committees. In regard to continuing education, the Committee
will provide guidance and monitor the process.
7. Recommend to the Board compensation of non-employee Directors.
8. Administer the Board's policy on Director retirements and resignations.
9. Administer the Directors' stock ownership guidelines.
10. Recommend to the Board guidelines and procedures to be used by the Directors
to evaluate the Board's performance.
11. Provide oversight regarding significant public policy issues with respect to
the Company's relationships with shareholders, employees, customers,
competitors, suppliers and the communities in which it operates, including
the following areas:
(a) Ethics compliance
(b) Environmental, health and safety issues
(c) Diversity and equal employment opportunity
(d) Community relations
(e) Government relations
(f) Charitable contributions
(g) Shareholder and investor relations, including recommended responses to
shareholder proposals
(h) Eaton Philosophy of Excellence through People
29
12. Review the Company's Code of Ethics, including its programs to promote
ethical and legal conduct, to facilitate anonymous reporting of violations
and to assure protection of employees who report violations in good faith.
13. Periodically report to the Board concerning the Committee's actions,
conclusions and recommendations.
14. Assure that performance evaluations of the Governance Committee are
conducted regularly.
The Governance Committee shall have the authority to retain and terminate
consultants and other advisors to advise the Committee in the performance of its
responsibilities, including search firms to be used to identify Director
candidates and compensation consultants to assist in the evaluation of Director
compensation. The Committee shall exercise sole authority to approve the fees
and other retention terms for such consultants and other advisors, who will
report directly to the Committee.
POLICIES ADOPTED IN 2002 BY THE BOARD OF DIRECTORS UPON THE RECOMMENDATION OF
THE GOVERNANCE COMMITTEE
Upon the recommendation of the Governance Committee, the Board of Directors on
July 24, 2002 adopted a policy regarding any business transactions between the
Company and other businesses in which its non-employee Directors are executive
officers or major shareholders. The purpose of the policy is to assure that all
such transactions are undertaken strictly upon an objective assessment of the
economic value of the transactions to each party, and not because of personal
relationships between the Director and the Company or its executives. The policy
provides, in effect, that in any business transactions between the Company and
such other businesses, there shall be no direct communication between the
Director and any Company personnel and no direct communication between the
Company's Chief Executive Officer and any employees of the Director's business.
The policy further provides that, if a proposed transaction is "potentially
significant" to either the Company or the Director's business, or if the
Director's independence may be compromised (or appear to be compromised), the
Chairman of the Company's Governance Committee shall be so informed.
---------------
Upon the recommendation of the Governance Committee, the Board of Directors on
October 23, 2002 adopted a policy that all non-employee Directors shall be
"independent" according to the standards set forth in the policy. Those
standards are essentially the same as the standards contained in Items #2 and #6
(including the commentary thereunder) of the proposed New York Stock Exchange
listing standards. The purpose of this policy is to assure the independence of
the Company's non-employee Directors.
30
APPENDIX E
EATON CORPORATION
BOARD OF DIRECTORS GOVERNANCE POLICIES
I. BOARD ORGANIZATION AND COMPOSITION
A. Size and Structure of Board. The size of the Board should be in the range of
8-15. 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 meets the criteria set forth in the independence standards of the
New York Stock Exchange or is otherwise determined by the Board to be
independent, as is permitted by those standards, based upon a review of the
Director's individual circumstances.
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 by the Chairman of the Governance Committee in
consultation with 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.
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 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
31
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 Assessment. The Board conducts a self-assessment of its performance
every year.
B. Committee Assessment. The performance of the Audit, Compensation and
Organization, Finance and Governance Committees is also assessed regularly.
C. 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, taking into account input from all
outside Directors. The results of the assessment are reviewed with the Chairman
and Chief Executive Officer by the Chair of the Compensation and Organization
Committee.
D. 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. The Board of
Directors takes these thoughts into account in its evaluation and direction of
succession planning, especially in regard to the position of Chief Executive
Officer.
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, or any other
sources they may desire, information that they consider helpful in the
performance of their duties.
C. Executive Sessions. At each Board meeting, the Board holds an executive
session, in which only the Directors are present. The outside Directors also
meet in executive session at least quarterly or more frequently if recommended
by the Governance Committee or if desired by the outside Directors, without the
Chairman and Chief Executive Officer or other inside Directors present, to
discuss whatever topics they may deem appropriate. These executive sessions are
chaired on a rotating basis by the outside Directors who chair the Board
Committees.
D. Board Meetings on Strategic Planning. The Board devotes one extended 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. Company Spokesperson. The Board of Directors has delegated to the Chairman
and Chief Executive Officer, or his designees, the responsibility to serve as
Company spokesperson.
H. Orientation for New Directors. An orientation process has been developed for
new Directors, including background briefings by the Chairman
32
and Chief Executive Officer, other senior officers and the Secretary.
I. Continuing Education for Directors. All Directors are encouraged to obtain
continuing education relating to their roles and responsibilities as members of
the Board and its Committees. The Governance Committee provides guidance and
monitors the continuing education process.
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 outside 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 outside 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.
33
APPENDIX F
STATEMENT ON ETHICAL BUSINESS CONDUCT
CORPORATE HEADQUARTERS EATON CORPORATION ETHICAL BUSINESS CONDUCT
EATON CENTER JANUARY 1, 2002
CLEVELAND, OH 44114-2584
[Eaton Logo] USA
Eaton Corporation's commitment to the highest degree of integrity and honesty in
the conduct of its business affairs is stated in the following letter. This
letter, and prior versions of it, have been distributed periodically to Eaton
employees since 1976.
Dear Fellow Employee:
Eaton has always had a well-deserved reputation for honesty and integrity--a
reputation that we have all helped build and maintain. My purpose in writing is
to reaffirm Eaton's commitment to the highest standards of ethical behavior. I
particularly want to emphasize that our standards remain consistent even as
Eaton experiences continuing international growth and evolve into a truly global
company.
If you're concerned about any particular situation involving ethics, please
don't hesitate to contact your supervisor or another member of management.
Here are the broad concepts that we regard as fundamental principles of ethical
business behavior:
- OBEYING THE LAW--We respect and obey the laws of the cities, states and
countries where we operate.
- COMPETITION--We respect the rights of competitors, customers and suppliers.
The only competitive advantages we seek are those gained through superior
research, engineering, manufacturing and marketing. We do not engage in unfair
or illegal trade practices.
- CONFLICTS OF INTEREST--We expect Eaton employees to avoid any association that
might conflict with their loyalty to the company or compromise their judgment.
Under this guideline, it would be a conflict of interest for an Eaton employee
to work simultaneously for a competitor, supplier or a customer.
- GOVERNMENT CONTRACTS--Eaton's customers include national, state and local
governments. We must comply with the special laws, rules and regulations that
govern these contracts.
- PAYMENTS TO GOVERNMENT PERSONNEL--We do not make illegal payments to
government officials of any country. In the case of U.S. federal government
employees, we must comply with the stringent rules on business gratuities that
relate to them.
- KICKBACKS AND GRATUITIES--We do not offer or accept kickbacks or bribes, or
gifts of substantial value.
- POLITICAL CONTRIBUTIONS--Our policy prohibits company contributions to
political candidates or parties even where such contributions are lawful. We
encourage individual employees to be involved in the political process and
make personal contributions as they see fit.
It is important that the policies and principles set forth in this letter be
understood and followed by each of us. Our reputation for integrity is an
important corporate asset. The principles as outlined are designed to help us
protect this asset. Anyone violating these principles will face appropriate
disciplinary action. Your commitment to ethical behavior is essential for Eaton
to maintain the highest degree of honesty and integrity in its business
activities.
Sincerely,
/s/ Alexander M. Cutler
Alexander M. Cutler
Chairman and Chief Executive Officer
.................................................................................
COMMITMENT:
I have read and fully understand the above statement on Ethical Business
Conduct. I understand, too, that I should discuss thoroughly with the people
reporting to me the policies and principles set forth here and that I should
advise them of my full endorsement of the company's commitment to these policies
and principles. I agree to abide by them, and I agree to bring to the attention
of management any activity which appears to violate the Eaton standards of
ethical business conduct.
---------------------------------------------------------
Name (please print)
---------------------------------------------------------
Signature Date
---------------------------------------------------------
Title Div/Location
34
EATON CORPORATION
EATON CENTER
CLEVELAND, OHIO 44114-2584
P -------------------------------------------------------------------
R [Eaton Logo]
O
X The undersigned hereby appoints A. M. Cutler, J. R. Horst and E. R.
Y 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 24, 2003, 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 23, 2003, at
10:30 a.m. local time and at any adjournments thereof.
Election of Directors:
(01) A. M. Cutler, (02) G. L. Tooker, (03) D. L. McCoy, (04)
G. R. Page, (05) K. M. Patel
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
WHEN PROPERLY EXECUTED, IT WILL BE VOTED FOR ITEMS #1 AND #2
UNLESS CONTRARY INSTRUCTIONS ARE INDICATED ON THE REVERSE SIDE.
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
SEE REVERSE
SIDE
------------------------------------------------------------------------------
X FOLD AND DETACH HERE X
[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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1 AND #2.
-----------------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of [ ] [ ] 2. Ratification of appointment of Independent Auditors [ ] [ ] [ ]
Directors
(see reverse)
For, except vote withheld from
the following nominee(s):
------------------------------
3. 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 2003 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 23, 2003, at
10:30 a.m. local time and at any adjournments thereof. The Trustee
is hereby instructed to vote FOR items #1 and #2 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 18, 2003 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) A. M. Cutler, (02) G. L. Tooker, (03) D. L. McCoy, (04)
G. R. Page, (05) K. M. Patel
SEE REVERSE
SIDE
--------------------------------------------------------------------------------
X FOLD AND DETACH HERE X
[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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1 AND #2.
-----------------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of [ ] [ ] 2. Ratification of appointment of Independent Auditors [ ] [ ] [ ]
Directors
(see reverse)
For, except vote withheld from
the following nominee(s):
------------------------------
3. 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 2003 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 KeyBank National Association, 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 KeyBank will be kept confidential.
If EquiServe Trust Company, N.A., which is acting as the tabulating agent,
receives your proxy card by April 18, 2003, KeyBank will vote the shares in your
account as instructed.
If EquiServe does not receive your proxy card by that date, KeyBank 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 21, 2003, 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.