United States Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Ohio 34-0196300
------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
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(Address of principal executive offices) (Zip code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------------------ ---------------------------
Common Shares ($.50 par value) The New York Stock Exchange
The Chicago Stock Exchange
The Pacific Stock Exchange
The London Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months and (2) has been subject to such filing requirements for the past ninety days. Yes X
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2002 was $5.1 billion.
As of January 31, 2003, there were 70,779,954 Common Shares outstanding.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2003 annual shareholders' meeting are incorporated by reference into Part III.
Part I
Eaton Corporation (Eaton or Company) is a global diversified industrial manufacturing company. Eaton was incorporated in Ohio in 1916, as a successor to a New Jersey company incorporated in 1911. The Company is a leader in fluid power systems; electrical power quality, distribution and control; automotive engine air management and fuel economy; and intelligent drivetrain systems for fuel economy and safety in trucks. Annual sales in 2002 were $7.2 billion. Headquartered in Cleveland, Ohio, Eaton had 48,000 employees at year-end 2002, which increased to 51,000 in January 2003 due to the acquisition of the electrical business of Delta plc. Eaton sells products in more than 50 countries. More information regarding the Company is available at http://www.eaton.com.
Eaton electronically files or furnishes reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) to the United States Securities and Exchange Commission (Commission), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments to those reports. As soon as reasonably practicable, these reports are available free of charge through the Company's Internet web site at http://www.eaton.com. These filings are also accessible on the Commission's Internet web site at www.sec.gov.
On January 31, 2003, Eaton acquired the electrical business of Delta plc for approximately $215 million. This business, which will be included in the Industrial & Commercial Controls segment, had 2001 sales of approximately $379 million (at the foreign exchange rate on the date the transaction was completed). The Delta electrical business has 3,400 employees and is headquartered in the United Kingdom. The business' major electrical brands include MEM(R), Holec(TM), Bill(TM), Home Automation(TM), Elek(TM) and Tabula(TM).
In November 2002, the Boston Weatherhead business of Dana Corporation was purchased for $130 million. This business, which had 2001 sales of $207 million, manufactures hose, tubing, and fluid connectors for fluid power systems primarily for industrial distribution, mobile off-highway and heavy-duty truck markets. In June 2002, the remaining 40% interest in Jining Eaton Hydraulics Company, Ltd. (JEHYCO), a hydraulics systems manufacturer located in Jining, China, was acquired. This business manufactures hydraulic pumps and motors for mobile and industrial markets. These businesses will be included in the Fluid Power segment.
On July 15, 2002, Eaton sold the Navy Controls business for $92 million. This business was part of the Industrial & Commercial Controls segment.
Competition - Principal methods of competition in this segment are price, geographic coverage, service and product performance. Eaton occupies a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.
Significant Customers - Approximately 11% of this segment's net sales in 2002 were made to two manufacturers of vehicles in the United States and Europe. These customers are also significant customers of the Automotive segment.
Competition - Principal methods of competition in this segment are price, geographic coverage, service and product performance. Eaton occupies a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.
Significant Customers - Approximately 16% of this segment's net sales in 2002 were made to one customer located in the United States, which is not a significant customer of any other segment.
Seasonal Fluctuations - Sales of the Automotive segment historically have been lower in the third quarter than in the second quarter as a result of the normal seasonal pattern of automotive industry production.
Competition - Principal methods of competition in this segment are price, service and product performance. Eaton occupies a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.
Significant Customers - Approximately 56% of this segment's net sales in 2002 were made to divisions and subsidiaries of five large original equipment manufacturers of vehicles and one automotive component supplier. All of these customers are concentrated in North America and Europe. Eaton has been conducting business with each of these companies for many years. Sales to these companies include a number of different products and different models or types of the same product, sales of which are not dependent upon one another. With respect to many of the products sold, various divisions and subsidiaries of each of the companies are in the nature of separate customers, and sales to one division or subsidiary are not dependent upon sales to other divisions or subsidiaries. Two of these customers are also significant customers of the Truck segment, while two others are also significant customers of the Fluid Power Segment.
Competition - Principal methods of competition in this segment are price, service and product performance. Eaton occupies a strong competitive position in relation to the many competitors in this segment and, with respect to many products, is considered among the market leaders.
Significant Customers - Approximately 74% of this segment's net sales in 2002 were made to divisions and subsidiaries of five original equipment manufacturers of heavy-, medium-, and light-duty trucks and off-highway vehicles, concentrated in North America, Europe and South America. Two of these customers are also significant customers of the Automotive segment.
Raw Materials - Principal raw materials used are iron, steel, copper, nickel, aluminum, brass, silver, rubber, plastic and insulating materials. Materials are purchased in various forms, such as pig iron, metal sheets and strips, forging billets, bar stock and plastic pellets. Raw materials, as well as parts and other components, are purchased from many suppliers and, under normal circumstances, the Company has no difficulty obtaining them.
Order Backlog - Since a significant portion of open orders placed with Eaton by original equipment manufacturers of cars, trucks and off-highway vehicles are historically subject to month-to-month releases by customers during each model year, such orders are not considered technically firm. In measuring backlog of orders, the Company includes only the amount of such orders released by such customers as of the dates listed. Using this criterion, total backlog at December 31, 2002 and 2001 was approximately $1.2 billion at each year-end. Backlog should not be relied upon as being indicative of results of operations for future periods.
Research and Development - Research and development expenses for new products and improvement of existing products in 2002, 2001 and 2000 (in millions) were $203, $228 and $269, respectively. Over the past five years, the Company has invested approximately $1.2 billion in research and development.
Protection of the Environment - Operations of the Company involve the use and disposal of certain substances regulated under environmental protection laws. Eaton continues to modify certain processes on an ongoing, regular basis in order to reduce the impact on the environment, including the reduction or elimination of certain chemicals used in and wastes generated from operations. Compliance with Federal, State and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, is not expected to have a material adverse effect upon earnings or the competitive position of the Company. Eaton's estimated capital expenditures for environmental control facilities are not expected to be material for 2003 and 2004. Information regarding the Company's liabilities related to environmental matters is presented in "Protection of the Environment" on page F-20 of this report.
Part II
Part III
A listing of Eaton's officers, their ages, positions and offices held over the past five years, as of January 31, 2003, follows:
Name Age Position (Date elected to position)
---- --- -----------------------------------
Alexander M. Cutler 51 Chairman and Chief Executive Officer; President
(August 1, 2000 - present)
President and Chief Operating Officer
(September 1, 1995 - July 31, 2000)
Director (1993 - present)
Richard H. Fearon 46 Executive Vice President - Chief Financial and
Planning Officer (April 24, 2002 - Present)
Partner, Willow Place Partners LLC (2001 - 2002)
Senior Vice President - Corporate Development,
Transamerica Corporation (1997 - 2000)
Craig Arnold 42 Senior Vice President and Group Executive - Fluid
Power (October 25, 2000 - present)
Corporate Vice President of General Electric and
President of GE Lighting Services Ltd.
(1999 - 2000)
Corporate Vice President and President of GE
Plastics, Greater China (1998 - 1999)
Corporate Vice President and President of GE
Appliances, Asia (1997 - 1998)
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Stephen M. Buente 52 Senior Vice President and Group Executive -
Automotive (August 21, 2000 - present)
Operations Vice President - Automotive Controls
(1999 - 2000)
Operations Vice President - Engine Components
(1995 - 1999)
Randy W. Carson 52 Senior Vice President and Group Executive -
Cutler-Hammer (January 1, 2000 - present)
Vice President - Growth Initiatives (1999)
Senior Vice President at Rockwell Automation
(1992 - 1998)
James E. Sweetnam 50 Senior Vice President and Group Executive -
Truck (July 1, 2001 - present)
Vice President - Heavy-Duty Transmission, Clutch
and Aftermarket (2000 - 2001)
Vice President and General Manager - Heavy-Duty
Transmission Division (1997 - 1999)
Kristen M. Bihary 49 Vice President - Communications
(July 28, 1999 - present)
Vice President - External Affairs, Internal and
Marketing Communications at Shell Chemical
Company (1998 - 1999)
Vice President - Public Affairs at Varity
Corporation (1995 - 1998)
Donald H. Bullock 43 Vice President - Information Technologies
(August 1, 2000 - present)
Director of Finance Reengineering
(1998 - 2000)
Principal at CSC Index (1992 - 1998)
Susan J. Cook 55 Vice President - Human Resources
(January 16, 1995 - present)
Earl R. Franklin 59 Vice President and Secretary
(April 24, 2002 - present)
Secretary and Associate General Counsel
(September 1, 1991 - April 23, 2002)
J. Robert Horst 59 Vice President and General Counsel
(January 1, 2000 - present)
Deputy General Counsel (1998 - 1999)
Associate General Counsel (1991 - 1998)
John S. Mitchell 46 Vice President - Taxes
(November 22, 1999 - present)
Vice President - Taxes at The Limited, Inc.
(1997 - 1999)
Robert E. Parmenter 50 Vice President and Treasurer
(January 1, 1997 - present)
Billie K. Rawot 51 Vice President and Controller
(March 1, 1991 - present)
Ken D. Semelsberger 41 Vice President - Strategic Planning
(April 28, 1999 - present)
Director - Corporate Development and Planning
(1998 - 1999)
Director - Strategic Planning
(1995 - 1998)
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There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors; provided, however, that any officer is subject to removal with or without cause, at any time, by a vote of a majority of the Board of Directors.
Number of
securities
remaining
(A) available
Number of for future
securities Weighted- issuance
to be average under equity
issued upon exercise compensation
exercise of price of plans
outstanding outstanding (excluding)
options, options, securities
warrants warrants reflected in
Plan category and rights and rights column(A))
---------------------- ----------- ----------- ------------
Equity compensation
plans approved by
security holders(1) 9,792,650 (3) $63.40 (5) 3,249,313
Equity compensation
plans not approved
by security holders(2) 765,834 (4) N/A 147,040
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Total 10,558,484 $63.40 (5) 3,396,353
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(1) The equity compensation plans of the Company that have been approved by the Company's shareholders are the 2002 Stock Plan, 1998 Stock Plan, 1995 Stock Plan, 1991 Stock Option Plan and Incentive Compensation Deferral Plan (amended and restated as of October 1, 1997).
(2) The equity compensation plans of the Company that have not been submitted to the Company's shareholders for approval are the 1996 Non-Employee Director Fee Deferral Plan and the Deferred Incentive Compensation Plan (amended and restated as of March 31, 2000).
Under the 1996 Non-Employee Director Fee Deferral Plan, all non-employee directors may defer payment of their fees at a rate of return which varies, depending on whether the director defers the fees as retirement compensation or as short-term compensation. At least 50% of retirement compensation, or any greater portion which the director elects, is converted to Company Common Share units and earns Common Share price appreciation and dividend equivalents. The balance of retirement compensation earns 10-year U.S. Treasury note returns plus 300 basis points. Short-term compensation earns 13-week U.S. Treasury bill returns. These arrangements provide for accelerated lump sum or installment payments upon a failure by the Company to pay or termination of service in the context of a change in control of the Company. After retirement or other termination of services as a director, the Governance Committee of the Board determines whether fees deferred are to be paid in a lump sum or periodic installments and whether the amounts converted to Common Share units are to be paid in cash or Common Shares.
Under the Deferred Incentive Compensation Plan, participants, which include officers and other eligible executives, may elect to defer receipt of their incentive compensation award as either short-term deferrals (5 years) or retirement compensation. Amounts deferred until retirement earn the greater of Company Common Share price appreciation plus dividend equivalents or 13-week U.S. Treasury bill returns. Short-term deferrals earn 13-week U.S. Treasury bill returns. Amounts deferred as retirement compensation which are converted to Company Common Share units are payable in either lump sum or periodic installments of Common Shares. The Compensation and Organization Committee of the Board determines the method of payment for elected officers upon retirement or other termination. The Corporate Compensation Committee, which is comprised of Company officers, determines the method of payment for appointed officers and other executives who participate in the plan upon retirement or other termination.
(3) Includes 7,334,952 time-vesting stock options, 98,780 restricted shares and 2,196,342 of performance-based stock options. Also included are 162,576 shares underlying stock units, payable on a one-for-one basis, credited to stock unit accounts as of December 31, 2002 under the Incentive Compensation Deferral Plan (amended and restated as of October 1, 1997).
(4) Represents shares underlying stock units, payable on a one-for-one basis, credited to stock unit accounts as of December 31, 2002 under the 1996 Non-Employee Director Fee Deferral Plan and the Deferred Incentive Compensation Plan (amended and restated as of March 31, 2000).
(5) Weighted average exercise price of outstanding stock options; excludes restricted stock and deferred compensation share units.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
Part IV
(a) (1) The report of independent auditors, consolidated financial statements and notes to consolidated financial statements, included in Item 8 above, are filed as a separate section of this report:
Report of Independent Auditors - Page F-1
Statements of Consolidated Income - Years ended December 31, 2002, 2001 and 2000 - Page F-2
Consolidated Balance Sheets - December 31, 2002 and 2001 - Page F-3
Statements of Consolidated Cash Flows - Years ended December 31, 2002, 2001 and 2000 - Page F-4
Statements of Consolidated Shareholders' Equity - Years ended December 31, 2002, 2001 and 2000 - Page F-5
Notes to Consolidated Financial Statements - Pages F-6 through F-32
(2) All schedules for which provision is made in Regulation S-X of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(3) Exhibits
3(a) Amended Articles of Incorporation (amended and restated as of April 27, 1994) - Filed in conjunction with this Form 10-K
3(b) Amended Regulations (amended and restated as of April 26, 2000)- Incorporated by reference to the Form 10-Q for the six months ended June 30, 2000
4(a) Instruments defining rights of security holders, including indentures (Pursuant to Regulation S-K Item 601(b)(4), the Company agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long- term debt)
4(b) Rights Agreement (Dated as of June 28, 1995) - Filed in conjunction with this Form 10-K
10 Material contracts - Each of the following is either a management contract or a compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and restated as of March 31, 2000) - Incorporated by reference to the Form 10-K for the year ended December 31, 2000
(b) Executive Strategic Incentive Plan I (Amended and Restated as of January 1, 2001) - Filed in conjunction with this Form 10-K
(c) Group Replacement Insurance Plan (GRIP), effective as of June 1, 1992 - Incorporated by reference to the Form 10-K for the year ended December 31, 1992
(d) 1991 Stock Option Plan - Filed in conjunction with this Form 10-K
(e) 1995 Stock Plan - Filed in conjunction with this Form 10-K
(f) Incentive Compensation Deferral Plan (amended and restated as of October 1, 1997) - Incorporated by reference to the Form 10-K for the year ended December 31, 2000
(g) Form of Change of Control Agreement entered into with officers of Eaton Corporation - Filed in conjunction with this Form 10-K
(h) Form of Indemnification Agreement entered into with officers of Eaton Corporation - Filed in conjunction with this Form 10-K
(i) Limited Eaton Service Supplemental Retirement Income Plan (amended and restated as of January 1, 2003) - Filed in conjunction with this Form 10-K
(j) Supplemental Benefits Plan (amended and restated as of January 1, 1989) (which provides supplemental retirement benefits) - Filed in conjunction with this Form 10-K
(k) Excess Benefits Plan (Amended and Restated Effective January 1, 1989) (with respect to Section 415 limitations of the Internal Revenue Code) - Filed in conjunction with this Form 10-K
(l) Executive Incentive Compensation Plan - Incorporated by reference to the Form 10-K for the year ended December 31, 2000
(m) Plan for the Deferred Payment of Directors' Fees (Originally adopted in 1985 and amended effective as of September 24, 1996 and January 28, 1998) - Filed in conjunction with this Form 10-K
(n) Plan for the Deferred Payment of Directors' Fees (Originally adopted in 1980 and amended and restated in 1989 and 1996) - Filed in conjunction with this Form 10-K
(o) 1996 Non-Employee Director Fee Deferral Plan (amended and restated as of October 22, 2002) - Filed in conjunction with this Form 10-K
(p) Trust Agreement - Outside Directors (dated December 6, 1996)
- Filed in conjunction with this Form 10-K
(q) Trust Agreement - Officers and Employees (dated December 6, 1996) - Filed in conjunction with this Form 10-K
(r) 1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998
(s) 2002 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 15, 2002
(t) Executive Strategic Incentive Plan II (Effective as of January 1, 2001) - Filed in conjunction with this Form 10-K
12 Ratio of Earnings to Fixed Charges - Filed in conjunction with this Form 10-K
21 Subsidiaries of Eaton Corporation - Filed in conjunction with this Form 10-K
23 Consent of Independent Auditors - Filed in conjunction with this Form 10-K
24 Power of Attorney - Filed in conjunction with this Form 10-K
(b) Reports on Form 8-K
On October 15, 2002, the Company filed a Current Report on Form 8-K regarding the third quarter 2002 earnings release.
On January 21, 2003, the Company filed a Current Report on Form 8-K regarding the fourth quarter 2002 earnings release.
(c) Exhibits
Certain exhibits required by this portion of Item 15 are filed as a separate section of this report.
(d) Financial Statement Schedules
None required to be filed.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 21, 2003 /s/ Richard H. Fearon
----------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning
Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Date: March 21, 2003
Signature Title
--------- -----
*
-------------------
Alexander M. Cutler Chairman and Chief Executive Officer; President
Director
*
---------------
Billie K. Rawot Vice President and Controller;
Principal Accounting Officer
*
-------------------
Michael J. Critelli Director
*
-----------
Ernie Green Director
*
-----------------
Ned C. Lautenbach Director
*
----------------
Deborah L. McCoy Director
*
--------------
John R. Miller Director
*
-----------------
Furman C. Moseley Director
*
----------------
Victor A. Pelson Director
*
--------------
Gary L. Tooker Director
*By /s/ Richard H. Fearon
--------------------------------------
Richard H. Fearon, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
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Certification
I, Alexander M. Cutler, certify that:
1. I have reviewed this annual report on Form 10-K of Eaton Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003 /s/ Alexander M. Cutler
-------------------------------------
Alexander M. Cutler
Chairman and Chief Executive Officer;
President
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Certification
I, Richard H. Fearon, certify that:
1. I have reviewed this annual report on Form 10-K of Eaton Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003 /s/ Richard H. Fearon
------------------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning Officer
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Eaton Corporation 2002 Annual Report on Form 10-K
Report of Independent Auditors Consolidated Financial Statements
Notes to Consolidated Financial Statements
To the Board of Directors & Shareholders Eaton Corporation
We have audited the accompanying consolidated balance sheets of Eaton Corporation as of December 31, 2002 and 2001, and the related statements of consolidated income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Eaton Corporation at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in "Goodwill and Other Intangible Assets" in the Notes to Consolidated Financial Statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002.
/s/ Ernst & Young LLP
---------------------
Cleveland, Ohio
January 20, 2003
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Eaton Corporation
Statements of Consolidated Income
Year ended December 31
------------------------
2002 2001 2000
(Millions except for per share data) ---- ---- ----
Net sales $7,209 $7,299 $8,309
Costs & expenses
Costs of products sold 5,272 5,503 6,092
Selling & administrative 1,217 1,220 1,299
Research & development 203 228 269
------ ------ ------
6,692 6,951 7,660
------ ------ ------
Income from operations 517 348 649
Other income (expense)
Interest expense-net (104) (142) (177)
Gains on sales of businesses 18 61
Other-net (32) 11 80
------ ------ ------
(118) (70) (97)
------ ------ ------
Income from continuing operations before
income taxes 399 278 552
Income taxes 118 109 189
------ ------ ------
Income from continuing operations 281 169 363
Income from discontinued operations 90
------ ------ ------
Net income $ 281 $ 169 $ 453
====== ====== ======
Net income per Common Share assuming dilution
Continuing operations $ 3.92 $ 2.39 $ 5.00
Discontinued operations 1.24
------ ------ ------
$ 3.92 $ 2.39 $ 6.24
====== ====== ======
Average number of Common Shares outstanding 71.7 70.5 72.6
Net income per Common Share basic
Continuing operations $ 3.98 $ 2.43 $ 5.06
Discontinued operations 1.25
------ ------ ------
$ 3.98 $ 2.43 $ 6.31
====== ====== ======
Average number of Common Shares outstanding 70.6 69.4 71.8
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.76
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The notes on pages F-6 to F-32 are an integral part of the consolidated financial statements.
Eaton Corporation
Consolidated Balance Sheets
December 31
---------------
2002 2001
(Millions) ---- ----
ASSETS
Current assets
Cash $ 75 $ 112
Short-term investments 353 199
Accounts receivable 1,032 1,070
Inventories 698 681
Deferred income taxes 181 153
Other current assets 118 172
------ ------
2,457 2,387
Property, plant & equipment
Land & buildings 790 763
Machinery & equipment 3,044 3,053
------ ------
3,834 3,816
Accumulated depreciation (1,879) (1,766)
------ ------
1,955 2,050
Goodwill 1,910 1,902
Other intangible assets 510 533
Other assets 306 774
------ ------
$7,138 $7,646
====== ======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 47 $ 58
Current portion of long-term debt 154 130
Accounts payable 488 418
Accrued compensation 199 158
Accrued income & other taxes 225 258
Other current liabilities 621 647
------ ------
1,734 1,669
Long-term debt 1,887 2,252
Postretirement benefits other than pensions 652 670
Deferred income taxes & other liabilities 563 580
Shareholders' equity
Common Shares (70.6 in 2002 and 69.5 in 2001) 35 35
Capital in excess of par value 1,413 1,348
Retained earnings 1,603 1,447
Accumulated other comprehensive income (loss) (699) (299)
Deferred compensation plans (50) (56)
------ ------
2,302 2,475
------ ------
$7,138 $7,646
====== ======
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The notes on pages F-6 to F-32 are an integral part of the consolidated financial statements.
Eaton Corporation
Statements of Consolidated Cash Flows
Year ended December 31
----------------------
2002 2001 2000
(Millions) ---- ---- ----
Net cash provided by operating activities
of continuing operations
Income from continuing operations $ 281 $ 169 $ 363
Adjustments to reconcile to net cash provided
by operating activities
Depreciation & amortization 353 355 364
Amortization of goodwill & other
intangible assets 23 94 98
Deferred income taxes (51) 58 44
Pension assets (4) (84) (67)
Other long-term liabilities (1) 30 35
Gains on sales of businesses & corporate assets (18) (61) (22)
Other non-cash items in income 22 2 (6)
Changes in working capital, excluding
acquisitions & sales of businesses
Accounts receivable 59 98 (39)
Inventories 13 149 (13)
Accounts payable 41 64 (16)
Accrued income & other taxes 101 75 (86)
Other current liabilities (14) (129) (44)
Other working capital accounts 47 (53) (81)
Other-net 48 (2) (11)
----- ----- -----
900 765 519
Net cash used in investing activities
of continuing operations
Expenditures for property, plant & equipment (228) (295) (386)
Acquisitions of businesses, less cash acquired (153) (35) (115)
Sales of businesses & corporate assets 96 403 122
Proceeds from initial public offering of subsidiary 349
(Purchases) sales of short-term investments (135) (154) 40
Other-net 5 22 (34)
----- ----- -----
(415) (59) (24)
Net cash used in financing activities
of continuing operations
Borrowings with original maturities of more
than three months
Proceeds 419 1,481 1,555
Payments (635) (1,419) (1,560)
Borrowings with original maturities of less
than three months-net (228) (643) 150
Cash dividends paid (123) (120) (127)
Purchase of Common Shares (12) (417)
Proceeds from exercise of employee stock options 45 37 11
----- ----- -----
(522) (676) (388)
----- ----- -----
Total (decrease) increase in cash
from continuing operations (37) 30 107
Net cash used in discontinued operations (104)
----- ----- -----
Total (decrease) increase in cash (37) 30 3
Cash at beginning of year 112 82 79
----- ----- -----
Cash at end of year $ 75 $ 112 $ 82
===== ===== =====
|
The notes on pages F-6 to F-32 are an integral part of the consolidated financial statements.
Eaton Corporation
Statements of Consolidated Shareholders' Equity
Accumulated Total
Common Shares Capital in other Deferred share-
--------------- excess of Retained comprehensive compensa- holders'
Shares Dollars par value earnings income (loss) tion plans equity
(Millions) ------ ------- --------- -------- ------------- ---------- -------
Balance at January 1, 2000 74.0 $37 $1,041 $1,804 $(220) $(38) $2,624
Net income 453 453
Other comprehensive income (loss) (47) (47)
------
Total comprehensive income 406
Cash dividends paid (127) (127)
Issuance of shares under
employee benefit plans,
including tax benefit .3 57 (1) 6 62
Put option obligation 7 7
Purchase of shares (6.0) (3) (112) (302) (1) (418)
Initial public offering and
spin-off of subsidiary 272 (416) (144)
Other-net 1 (1) 0
---- --- ------ ------ ----- ---- ------
Balance at December 31, 2000 68.3 34 1,266 1,410 (267) (33) 2,410
Net income 169 169
Other comprehensive income (loss) (32) (32)
------
Total comprehensive income 137
Cash dividends paid (120) (120)
Issuance of shares under
employee benefit plans,
including tax benefit 1.1 1 64 (2) (1) 62
Issuance of shares to trust .3 22 (22) 0
Purchase of shares (.2) (4) (8) (12)
Other-net (2) (2)
---- --- ------ ----- ----- ---- ------
Balance at December 31, 2001 69.5 35 1,348 1,447 (299) (56) 2,475
Net income 281 281
Other comprehensive income (loss) (400) (400)
------
Total comprehensive loss (119)
Cash dividends paid (123) (123)
Issuance of shares under
employee benefit plans,
including tax benefit 1.0 (a) 61 (2) 8 67
Issuance of shares to trust .1 5 (5) 0
Other-net (1) 3 2
---- --- ------ ------ ----- ---- ------
Balance at December 31, 2002 70.6 $35 $1,413 $1,603 $(699) $(50) $2,302
==== === ====== ====== ===== ==== ======
|
(a) Balance less than $1.
The notes on pages F-6 to F-32 are an integral part of the consolidated financial statements.
Dollars and shares in millions, except per share data (per share data assume dilution)
The Company does not have off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons known as "special purpose entities" (SPEs). In the ordinary course of business, Eaton leases certain real properties, primarily sales and office facilities, and equipment, as described in "Lease Commitments" below. Transactions with related parties are in the ordinary course of business, are conducted on an arm's-length basis, and are not material to the Company's financial position, net income or cash flows.
Effective January 1, 2002, Eaton adopted Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The Statement addresses the conditions under which an impairment charge should be recorded related to long-lived assets to be held and used, except goodwill, and those to be disposed of by sale or otherwise. Long-lived assets, except goodwill, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value. The adoption of this Statement did not have an impact on the Company's financial position, net income or cash flows.
All derivative financial instruments are recognized as either assets or liabilities on the balance sheet and are measured at fair value. Accounting for the gain or loss resulting from the change in the financial instrument's fair value depends on whether it has been designated, and effective, as a hedge and, if so, on the nature of the hedging activity. Financial instruments can be designated 1) as hedges of changes in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire an asset or liability, 2) as hedges of variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of an asset or liability, or 3) as hedges of foreign currency exposure from a net investment in one of the Company's foreign operations. Gains and losses related to a hedge are either 1) recognized in income immediately to offset the gain or loss on the hedged item or 2) deferred and reported as a component of Other Comprehensive Income (Loss) in Shareholders' Equity and subsequently recognized in net income when the hedged item affects net income. The ineffective portion of the change in fair value of a financial instrument is recognized in income immediately.
The gain or loss related to financial instruments that are not designated as hedges, are recognized immediately in net income.
In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition when a company voluntarily changes to the fair value based method of recognizing expense in the income statement for stock-based employee compensation, including stock options granted to employees and directors. As allowed by SFAS No. 123, Eaton has adopted the Statement's disclosure-only provisions and does not recognize expense for stock options granted to employees. If Eaton accounted for stock options under the fair value based method of expense recognition in SFAS No. 123, net income per Common Share would have been reduced by $.19 in 2002, $.22 in 2001 and $.25 in 2000, as described further in "Shareholders' Equity" below.
In November 2002, the Boston Weatherhead business of Dana Corporation was purchased for $130. This business, which had 2001 sales of $207, manufactures hose, tubing, and fluid connectors for fluid power systems primarily for industrial distribution, mobile off-highway and heavy-duty truck markets. The allocation of the purchase price for this acquisition is preliminary and will be finalized in 2003. In June 2002, the remaining 40% interest in Jining Eaton Hydraulics Company, Ltd. (JEHYCO), a hydraulics systems manufacturer located in Jining, China, was acquired. This business manufactures hydraulic pumps and motors for mobile and industrial markets. The operating results of these businesses are reported in Business Segment Information in Fluid Power.
In March 2001, the remaining 50% interest of Sumitomo Eaton Hydraulics Company (now named Eaton Fluid Power Ltd.), the former joint venture with Sumitomo Heavy Industries Ltd., was acquired. This business manufactures a complete line of hydraulic motors under the Orbit(TM) and Orbitol(TM) brand names, primarily for the Japanese mobile equipment market. The operating results of this business are reported in Business Segment Information in Fluid Power. During July 2001, the commercial clutch manufacturing assets of Transmisiones TSP, S.A. de C.V. in Mexico were acquired. In October 2001, the European portion of the vehicle mirror actuator business of Donnelley Corporation, located in Manorhamilton, Ireland was acquired.
In September 2000, the industrial cylinder business of International Motion Control Incorporated was acquired. This business manufactures industrial cylinders which are primarily used by machine and equipment builders to transfer and apply fluid power. The operating results of this business are reported in Business Segment Information in Fluid Power.
In July 2002, the Navy Controls business was sold resulting in a pretax gain of $18 ($13 after-tax, or $.18 per Common Share).
Sales of businesses in 2001 included the Vehicle Switch/Electronics Division (VS/ED), the Air Conditioning and Refrigeration business, and certain assets of the Automotive and Truck segments. The sales of these businesses resulted in a net pretax gain of $61 ($22 after-tax, or $.30 per share).
Sales of certain corporate assets and product lines in 2000 resulted in a net pretax gain of $22 ($14 after-tax or $.19 per share).
The net gains on the sales of businesses in 2002 and 2001 were reported as a separate line item in the Statements of Consolidated Income and Business Segment Information. The net gain on the sales of corporate assets and product lines in 2000 was included in the Statements of Consolidated Income in Other Income-Net and in Business Segment Information in Corporate & Other-Net. The operating results of VS/ED are reported in Business Segment Information as Divested Operations.
Additional restructuring charges related to past acquisitions were incurred in Fluid Power. In accordance with generally accepted accounting principles, these charges were recorded as restructuring expense as incurred. The additional acquisition-related charges consisted of $22 of workforce reductions for 841 employees and $4 of asset write-downs and plant consolidation and other expenses. The charges recorded primarily related to the closure of facilities in Glenrothes, Scotland and Livorno, Italy, and for the closure of the Mooresville, North Carolina facility, which was announced in the third quarter of 2002 and is expected to be completed in the first quarter of 2003.
Restructuring charges of $13 in the Industrial & Commercial Controls business consisted primarily of workforce reductions of 449 employees. The workforce reductions, primarily in the sales force, resulted in severance and other employee benefits being paid. Asset write-downs and plant consolidation and other expenses of $3 were also recorded as a result of restructuring actions.
Restructuring charges in the Truck business consisted of $6 for workforce reductions of 251 employees and $10 for asset write-downs and plant consolidation and other expenses. The charges primarily relate to the closure of the heavy-duty transmission plant in Shelbyville, Tennessee due to depressed conditions in the truck industry over the past two years and Eaton's efforts to rationalize manufacturing capacity to better manage the cyclical nature of the truck industry.
Restructuring charges related to corporate staff consisted of $3 of workforce reductions for 133 employees. The Company also recorded a charge of $10 representing a contribution to the Eaton Charitable Fund.
Restructuring charges in the Industrial & Commercial Controls business consisted of $21 for workforce separation costs for the termination of 887 personnel, primarily manufacturing, and $9 for plant consolidation and other expenses.
Restructuring charges in the Truck business consisted of $35 of workforce reductions for 1,038 employees and $20 of asset write-downs and plant consolidation and other expenses. The workforce reductions consisted of severance and other employee benefits for the elimination of salary positions within the organization and manufacturing personnel at the closed facilities. The Company completed the closure of manufacturing facilities in Hillsville, Virginia, and in Tipton, Gloucester and Aycliffe, United Kingdom, consolidating production to a facility in Gdansk, Poland, as well as completing the closure of the heavy-duty transmission plant in St. Nazaire, France.
Restructuring charges related to corporate staff consisted of $8 for workforce reductions, representing 10% of the corporate staff, as well as $4 for asset writedowns and other expenses. A corporate charge of $10 related to an arbitration was recorded in the second quarter of 2001. The arbitration award related to a contractual dispute over supply arrangements initiated in February 1999 against Vickers, Incorporated (now named Eaton Hydraulics Inc.), a subsidiary of Aeroquip-Vickers, Inc., which was acquired by Eaton in April 1999.
2002 2001 2000
---- ---- ----
Operational restructuring charges
Fluid Power $ 26 $ 22 $ 47
Industrial & Commercial Controls 16 30
Automotive 1
Truck 16 55
Corporate restructuring charges 3 12 5
----- ----- -----
62 119 52
Other corporate charges 10 10
----- ----- -----
Pretax $ 72 $ 129 $ 52
===== ===== =====
After-tax $ 47 $ 86 $ 34
Per Common Share .66 1.21 .47
|
The operational restructuring charges are included in the Statements of Consolidated Income in Income from Operations and reduced operating profit of the related business segment. The corporate restructuring charges are included in the Statements of Consolidated Income in Income from Operations and the other corporate charges are included in Other Expense-Net. All of the corporate restructuring and other corporate charges are included in Business Segment Information in Corporate & Other-Net.
Plant
Workforce reductions Inventory & consoli-
-------------------- other asset dation
Employees Dollars write-downs & other Total
--------- ------- ----------- ------- -----
2001 charges 2,310 $ 71 $ 20 $ 28 $119
Utilized in 2001 (1,966) (50) (20) (26) (96)
----- ---- ---- --- ----
Liabilities remaining
at December 31, 2001 344 21 0 2 23
2002 charges 1,994 45 8 9 62
Utilized in 2002 (1,844) (55) (8) (6) (69)
----- ---- ---- --- ---
Liabilities remaining
at December 31, 2002 494 $ 11 $ 0 $ 5 $16
===== ==== ==== === ===
|
In 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses the reporting of expenses related to exit and disposal activities, including business restructurings, and is effective for actions initiated after 2002. This Statement does not alter the accounting for exit or disposal activities associated with acquired businesses. The Statement will require an evaluation of the facts and circumstances in determining the proper accounting recognition of expenses related to each exit or disposal activity. It is expected the Statement will spread out the recognition of these expenses, but not alter the related cash flows.
2002 2001 2000
---- ---- ----
Reported income from continuing operations $ 281 $ 169 $ 363
Add back amortization of goodwill &
indefinite life intangible assets,
net of income taxes 63 64
----- ----- -----
Adjusted income from continuing operations $ 281 $ 232 $ 427
===== ===== =====
Reported income from continuing operations
per Common Share assuming dilution $3.92 $2.39 $5.00
Add back amortization of goodwill &
indefinite life intangible assets,
net of income taxes .88 .89
----- ----- -----
Adjusted income from continuing operations
per Common Share $3.92 $3.27 $5.89
===== ===== =====
|
A summary of goodwill and other intangible assets follows:
2002 2001
------------------------- -------------------------
Historical Accumulated Historical Accumulated
cost amortization cost amortization
---------- ------------ ---------- ------------
Goodwill $2,232 $322 $2,218 $316
====== ==== ====== ====
Intangible assets not
subject to amortization
(primarily trademarks) $ 333 $ 24 $ 330 $ 24
====== ==== ====== ====
Intangible assets subject
to amortization
Patents $ 192 $ 78 $ 190 $ 63
Other 153 66 176 76
------ ---- ------ ----
$ 345 $144 $ 366 $139
====== ==== ====== ====
|
Expense related to intangible assets subject to amortization for 2002 was $23. Estimated annual pretax expense for intangible assets subject to amortization recorded at December 31, 2002 for each of the next five years follows: 2003, $22; 2004, $18; 2005, $17; 2006, $16; and 2007, $15.
The consolidated financial statements present the semiconductor equipment operations as a discontinued operation for 2000. Operating results of discontinued operations in 2000 were net sales of $679, pretax income of $132 and net income of $90.
Long-term debt, including the current portion, follows:
2002 2001
---- ----
7.05% debentures due 2002 $ 100
Variable rate notes due 2003 $ 150 150
6.95% notes due 2004
(converted to floating rate by
interest rate swap) 250 250
1.62% Yen notes due 2006 42 38
8% debentures due 2006 86 86
8.9% debentures due 2006
(converted to floating rate by
interest rate swap) 100 100
6% Euro 200 million notes due 2007
(converted to floating rate by
interest rate swap) 209 177
5.75% notes due 2012
($175 converted to floating rate by
interest rate swap) 300
8.1% debentures due 2022 100 100
7-5/8% debentures due 2024 66 66
6-1/2% debentures due 2025
(due 2005 at option of debenture holders) 145 145
7.875% debentures due 2026 82 82
7.65% debentures due 2029 200 200
6.4% to 7.6% medium-term notes due at
various dates through 2018 131 157
Commercial paper 30 630
Other 150 101
------ ------
2,041 2,382
Less current portion of long-term debt (154) (130)
------ ------
$1,887 $2,252
====== ======
|
Eaton has credit facilities of $900, of which $500 expire in May 2003 and $400 expire in April 2005.
The Company has entered into interest rate swaps to manage interest rate risk. A summary of these instruments outstanding at December 31, 2002, excluding certain immaterial instruments, follows (currency in millions):
Interest rates(b)
Interest rate Hedge Notional ---------------- Floating interest
rate swaps (a) type amount Receive Pay rate basis
----------------- ---------- ------ ------- --- --------------------
Fixed to floating Fair value $250 6.95% 5.1% 6 month LIBOR+3.7%
Fixed to floating Fair value $100 8.9% 5.6% 6 month LIBOR+3.9%
Fixed Euro to
floating Euro Fair value 200 6.0% 3.8% 6 month EURIBOR+.54%
Euro
Fixed to floating Fair value $175 5.75% 2.5% 6 month LIBOR+0.58%
|
a The maturity of the swaps correspond with the maturity of the hedged item
as noted in the long-term debt table.
b Interest rates are as of year-end 2002.
The weighted-average interest rate on short-term borrowings, including commercial paper classified as long-term debt, was 3.9% at December 31, 2002 and 3.3% at December 31, 2001.
Aggregate mandatory annual maturities of long-term debt for each of the next five years are as follows: 2003, $154; 2004, $255; 2005, $47; 2006, $231; and 2007, $261.
Interest paid was $116 in 2002, $175 in 2001, and $205 in 2000.
The carrying values of cash, short-term investments and short-term debt in the balance sheet approximate their estimated fair values. The estimated fair values of other financial instruments outstanding are as follows:
2002 2001
--------------------------- ---------------------------
Notional Carrying Fair Notional Carrying Fair
amount value value amount value value
------ ----- ----- ------ ----- -----
Long-term debt,
current portion
of long-term debt
& foreign currency
principal swaps $(2,041) $(2,202) $(2,382) $(2,514)
Commodity contracts $ 10 (a) (a) $ 14 (a) (a)
Foreign currency
forward exchange
contracts 275 (7) (6) 122 (5) (11)
Interest rate swaps
Fixed to floating 811 59 59 509 10 10
Floating to floating 92 (a) (a)
Floating to fixed 13 (3) (3) 113 (3) (3)
|
(a) Balance less than $1.
The estimated fair values of financial instruments are principally based on quoted market prices. The fair value of foreign currency forward exchange contracts, which primarily relate to the Euro, British Pound and Japanese Yen and which mature in 2003, and foreign currency principal and interest rate swaps were estimated based on quoted market prices of comparable contracts, adjusted through interpolation where necessary for maturity differences.
Other
postretirement
Pension benefits benefits
----------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Projected benefit obligation
at beginning of year $(1,856) $(1,762) $(894) $(827)
Service cost (76) (61) (15) (14)
Interest cost (126) (124) (60) (62)
Actuarial loss (118) (128) (3) (72)
Benefits paid 205 213 91 79
Effect of translation (43) 14
Other 18 (8) 3 2
------- ------- ----- -----
Projected benefit obligation
at end of year (1,996) (1,856) (878) (894)
------- ------- ----- -----
Fair value of plan assets at
beginning of year 1,836 2,209
Actual return on plan assets (196) (183)
Employer contributions 30 37 92 80
Benefits paid (205) (213) (91) (79)
Effect of translation 25 (11)
Other (10) (3) (1) (1)
------- ------- ----- -----
Fair value of plan assets at
end of year 1,480 1,836 0 0
------- ------- ----- -----
Benefit obligations with
no plan assets (91) (82) (878) (894)
Benefit obligations
(in excess of)less than
plan assets (425) 62
Not recognized through net income
Net loss 846 333 186 190
Prior service cost 12 33 3 (2)
Other 2 1 9 7
------- ------- ----- -----
Net amount recognized $ 344 $ 347 $(680) $(699)
======= ======= ===== =====
Amounts recognized in the balance
sheet consist of:
Accrued asset $ 23 $ 430
Accrued liability (310) (121) $(680) $(699)
Intangible asset 14 7
Accumulated other comprehensive
income 617 31
------- ------- ----- -----
Net amount recognized $ 344 $ 347 $(680) $(699)
======= ======= ===== =====
|
Statement of Financial Accounting Standards No. 87 requires recognition of a minimum liability for those pension plans with accumulated benefit obligations in excess of the fair values of plan assets at the end of the year. Accordingly, in the fourth quarter of 2002, Eaton recorded a non-cash charge of $586 ($386 after-tax) related to the additional minimum liability for certain underfunded pension plans which reduced Accumulated Other Comprehensive Income in Shareholders' Equity. Pension funding requirements are not currently affected by the recording of this charge. Further, the charge did not impact net income, and will be reversible should the fair value of the pension plans' assets again exceed the accumulated benefit obligations at the end of 2003.
The components of pension benefit income (cost) for continuing operations are as follows:
2002 2001 2000
---- ---- ----
Service cost $ (76) $ (61) $ (63)
Interest cost (126) (124) (119)
Expected return on plan assets 213 213 200
Other (8) 6 6
----- ----- -----
3 34 24
Curtailment loss (4) (3) (2)
Settlement (loss) gain (21) 21 18
----- ----- -----
$ (22) $ 52 $ 40
===== ===== =====
|
Actuarial assumptions used in the calculation of amounts recognized for pensions are as follows:
United States &
non-United States
United States plans plans weighted-average
------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
Return on pension plan assets 10.00% 10.00% 9.85% 9.85%
Rate of compensation increase 3.75% 4.00% 3.73% 3.74%
Discount rate 6.75% 7.25% 6.53% 6.56%
|
United States pension plans represent 76% of the total projected benefit obligation. For non-United States plans, assumptions reflect economic conditions applicable to the respective country.
The return on pension plan assets of 10.00% for United States plans and the weighted-average rate of 9.85% for United States and non-United States plans for 2002 and 2001 were utilized in the calculation of benefit cost for the respective year. The return on pension plan assets for 2003 will be lowered to 8.75% for United States plans and a weighted-average rate of 8.71% for United States and non-United States plans.
The discount rates of 6.75% and 7.25% for United States plans and the weighted-average rates of 6.53% and 6.56% for United States and non-United States plans for 2002 and 2001, respectively, were utilized in the calculation of the amounts recognized in the balance sheet at year-end. The discount rates also affect the benefit cost expensed in the prospective year.
The Company also has various defined-contribution benefit plans, primarily consisting of the Eaton Savings Plan (ESP). Total contributions related to these plans charged to expense were $34 in 2002, $43 in 2001, and $75 in 2000.
The components of other postretirement benefit cost of continuing operations are as follows:
2002 2001 2000
---- ---- ----
Service cost $ (15) $ (14) $ (16)
Interest cost (60) (62) (60)
Net amortization (4) 3
----- ----- -----
(79) (73) (76)
Curtailment gain 1
Settlement loss (2)
----- ----- -----
$ (81) $ (73) $ (75)
===== ===== =====
|
Actuarial assumptions used in the calculation of amounts recognized for other postretirement benefits are as follows:
2002 2001
---- ----
Discount rate 6.75% 7.25%
Projected health care cost trend rate 10.00% 8.00%
Ultimate health care cost trend rate 5.00% 5.00%
Year ultimate health care cost trend
rate is achieved 2007 2007
|
The discount rates of 6.75% and 7.25% for 2002 and 2001, respectively, were utilized in the calculation of the amounts recognized in the balance sheet at year-end. The discount rates also affect the benefit cost expensed in the prospective year.
Assumed health care cost trend rates have a significant effect on the amounts reported for other postretirement benefits. A one-percentage point change in the assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease
----------- -----------
2002 benefit cost $ 2 $ (2)
Recorded liability
at December 31, 2002 28 (25)
|
As a result of past operations, Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party (PRP) under the Federal Superfund law at a number of waste disposal sites.
A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated (without discounting) the costs of remediation, which will be incurred over a period of several years. The Company accrues an amount consistent with the estimates of these costs when it is probable that a liability has been incurred. At December 31, 2002 and 2001, the balance sheet included a liability for these costs of $64 and $62, respectively. With regard to some of the matters included in the liability, Eaton has rights of recovery from non-affiliated parties for a portion of these estimated costs.
Based upon the Company's analysis and subject to the difficulty in estimating these future costs, Eaton expects that any sum it may be required to pay in connection with environmental matters is not reasonably likely to exceed the liability by an amount that would have a material adverse effect on its financial position, net income or cash flows. All of these estimates are forward-looking statements and, given the inherent uncertainties in evaluating environmental exposures, actual results can differ from these estimates.
The Company has plans which permit certain employees and directors to defer a portion of their compensation. Eaton has deposited $45 of Common Shares and marketable securities into a trust to fund a portion of these liabilities. The marketable securities are included in Other Assets and the Common Shares are included in Shareholders' Equity.
During 1997 and 1998, the Company granted special performance-vested stock options with a 10-year vesting term in lieu of more standard employee stock options. These options have a provision for accelerated vesting if and when Eaton achieves certain net income and Common Share price targets. If the targets are not achieved, these options become exercisable 10 days before the expiration of their 10-year term. As of December 31, 2002, 2.2 special performance-vested stock options were outstanding of which .9 were exercisable.
A summary of stock option activity follows:
2002 2001 2000
--------------- ---------------- ---------------
Average Average Average
price price price
per per per
option Options option Options option Options
------ ------- ------ ------- ------ -------
Outstanding January 1 $59.97 9.9 $57.30 10.2 $65.89 8.7
Granted 80.85 1.1 72.67 1.1 71.90 1.5
Exercised 46.67 (1.0) 42.00 (.9) 33.76 (.3)
Canceled 70.55 (.4) 67.04 (.5) 83.05 (.6)
---- ---- ----
Options outstanding before
spin-off of Axcelis 66.89 9.3
Cancellation of options
of Axcelis employees 72.39 (.5)
Adjustment for spin-off
of Axcelis 1.4
---- ---- ----
Outstanding December 31 $63.40 9.6 $59.97 9.9 $57.30 10.2
==== ==== ====
Exercisable December 31 $58.87 6.3 $55.94 6.1 $51.51 5.8
Reserved for future
grants December 31 3.1 1.4 2.0
|
The following table summarizes information about stock options outstanding and exercisable at December 31, 2002:
Weighted- Weighted-
Weighted- average average
average exercise exercise
Options remaining price per Options price per
Range of exercise out- contractual outstanding exerci- exercisable
prices per option standing life (years) option sable option
----------------- -------- ----------- ----------- ----- -----------
$33.86 - $39.99 .1 .1 $33.91 .1 $33.91
$40.00 - $49.99 1.7 2.2 45.50 1.7 45.50
$50.00 - $59.99 .1 6.8 57.76 .1 57.47
$60.00 - $69.99 4.6 5.5 61.79 3.5 61.78
$70.00 - $79.99 1.9 6.8 74.27 .8 74.38
$80.00 - $88.41 1.2 8.8 82.00 .1 87.67
--- ---
9.6 6.3
=== ===
|
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation". If Eaton accounted for its stock options under the fair value method of SFAS No. 123, net income and net income per Common Share would have been as indicated below:
2002 2001 2000
---- ---- ----
Net income
As reported $ 281 $ 169 $ 453
Assuming fair value method 267 153 435
Net income per Common Share assuming
dilution
As reported $3.92 $2.39 $6.24
Assuming fair value method 3.73 2.17 5.99
Net income per Common Share basic
As reported $3.98 $2.43 $6.31
Assuming fair value method 3.79 2.21 6.06
|
The fair value of each option grant was estimated using the Black-Scholes option pricing model with the following assumptions:
2002 2001 2000
---- ---- ----
Dividend yield 2.5% 2.5% 3%
Expected volatility 29% 26% 23%
Risk-free interest rate 2.6% to 4.3% 3.7% to 5% 6% to 6.8%
Expected option life in years 4 4 4 or 5
Weighted-average per
share fair value of
options granted
during the year $18.34 $15.71 $15.47
|
When the Rights become exercisable, the holder of each Right, other than the acquiring person, is entitled 1) to purchase for $250, one one-hundredth of a Series C Preferred Share, 2) to purchase for $250, that number of Eaton's Common Shares or common stock of the acquiring person having a market value of twice that price, or 3) at the option of the Company, to exchange each Right for one Common Share or one one-hundredth of a Preferred Share.
Unrealized Deferred Minimum Foreign gain (loss) gain pension currency on available (loss)on liability
translation for sale cash flow adjust-
adjustments investments hedges ment Total
----------- ----------- --------- --------- -----
Balance at
January 1, 2000 $(220) $ 0 $ 0 $ 0 $(220)
2000 adjustment,
net of income taxes (47) (4) (51)
Adjustment for
spin-off of Axcelis 4 4
----- --- --- ----- -----
Balance at
December 31, 2000 (263) (4) 0 0 (267)
2001 adjustment,
net of income taxes (20) 5 (5) (21) (41)
Recognition in income
of adjustment related
to divested businesses 9 9
----- --- --- ----- -----
Balance at
December 31, 2001 (274) 1 (5) (21) (299)
2002 adjustment,
net of income taxes (15) 1 (386) (400)
----- --- --- ----- -----
Balance at
December 31, 2002 $(289) $ 1 $(4) $(407) $(699)
===== === === ===== =====
|
A discussion of the minimum pension liability adjustment recorded in 2002 is included in "Retirement Benefit Plans" above.
Income from continuing
operations before income taxes
------------------------------
2002 2001 2000
---- ---- ----
United States $ 56 $ 60 $264
Non-United States 343 227 288
Write-off of foreign currency translation
adjustments related to divested businesses (9)
---- ---- ----
$399 $278 $552
==== ==== ====
|
Income tax expense of continuing operations follows:
2002 2001 2000
---- ---- ----
Current
United States
Federal $123 $ (8) $ 89
State & local 6 (5) 10
Non-United States 42 65 56
---- ---- ----
171 52 155
Deferred
United States Federal (71) 64 27
Non-United States 18 (7) 7
---- ---- ----
(53) 57 34
---- ---- ----
$118 $109 $189
==== ==== ====
|
Reconciliations of income taxes of continuing operations at the United States Federal statutory rate to the effective income tax rate follow:
2002 2001 2000
---- ---- ----
Income taxes at the United States
statutory rate 35.0% 35.0% 35.0%
United States state & local income taxes 1.4 (1.7) 1.8
Other United States-net 1.4 (9.3) 4.9
Non-United States operations (earnings
taxed at other than United States tax (8.3) 4.2 (10.1)
rate)
Amortization of goodwill 4.8 2.6
Sales of businesses 6.4
---- ---- ----
29.5% 39.4% 34.2%
==== ==== ====
|
Eaton has manufacturing operations in Puerto Rico which operate under certain United States tax law incentives related to the repatriation of earnings that, at this point, are not expected to be available after 2005. Management believes that the loss of these incentives will not have a material adverse impact on net income. Income tax credits claimed under these incentives were $33 in 2002, $41 in 2001 and $46 in 2000.
Significant components of current and long-term deferred income taxes follow:
2002 2001
-------------------- ---------------------
Current Long-term Current Long-term
assets assets assets liabilities
------- --------- ------- -----------
Accruals & other
adjustments
Employee benefits $ 53 $ 346 $ 56 $ 167
Depreciation &
amortization (405) (436)
Other 117 36 89 23
Other items 11 8 8 12
United States income
tax credit carryforwards 46 14
United States foreign tax
credit carryforwards 33 38
Tax loss carryforwards 54 61
Valuation allowance (78) (87)
---- ----- ---- -----
$181 $ 40 $153 $(208)
==== ===== ==== =====
|
At the end of 2002, United States income tax credit carryforwards of $46 are available to reduce future Federal income tax liabilities, including $26 which expire at the end of 20 years and $20 of which are not subject to expiration. Foreign tax credit carryforwards of $33 are also available to reduce United States Federal income tax liabilities during the next five years. A full valuation allowance has been recorded for the foreign tax credit carryforwards.
At December 31, 2002, certain non-United States subsidiaries had tax loss carryforwards aggregating $161 that are available to offset future taxable income. Carryforwards of $107 expire at various dates from 2003 through 2012 and the balance have no expiration date. A valuation allowance of $45 has been recorded for the tax effect of these tax loss carryforwards.
No provision has been made for income taxes on undistributed earnings of consolidated non-United States subsidiaries of $873 at December 31, 2002, since the earnings retained have been reinvested by the subsidiaries. It is not practicable to estimate the additional income taxes and applicable foreign withholding taxes that would be payable on the remittance of such undistributed earnings.
Worldwide income tax cash flows were payments of $61 in 2002 and $210 in 2000, and a refund of $11 in 2001.
The components of inventories follow:
2002 2001
---- ----
Raw materials $ 283 $ 260
Work in process 160 217
Finished goods 289 238
----- ----
Inventories at FIFO 732 715
Excess of FIFO over LIFO cost (34) (34)
----- -----
Net inventories $ 698 $ 681
===== =====
|
Gross inventories accounted for using the LIFO method were $478 at the end of 2002 and $440 at the end of 2001.
2002 2001
---- ----
Balance at the beginning of the year $ 128 $ 157
Current year accruals 129 92
Claims paid/satisfied (119) (108)
Other (11) (13)
----- -----
Balance at the end of the year $ 127 $ 128
===== =====
|
Rental expense was $102 in 2002, $113 in 2001, and $118 in 2000.
2002 2001 2000
---- ---- ----
Net income $ 281 $ 169 $ 453
===== ===== =====
Average number of Common Shares
outstanding assuming dilution 71.7 70.5 72.6
Less dilutive effect of stock options 1.1 1.1 .8
----- ----- -----
Average number of Common Shares
outstanding basic 70.6 69.4 71.8
===== ===== =====
Net income per Common Share
assuming dilution
Continuing operations $3.92 $2.39 $5.00
Discontinued operations 1.24
----- ----- -----
$3.92 $2.39 $6.24
===== ===== =====
Net income per Common Share
basic
Continuing operations $3.98 $2.43 $5.06
Discontinued operations 1.25
----- ----- -----
$3.98 $2.43 $6.31
===== ===== =====
|
Employee and director stock options to purchase 3.0 Common Shares in 2002, 2.2 in 2001, and 6.0 in 2000 were outstanding but were not included in the computation of net income per Common Share assuming dilution, since they would have had an antidilutive effect on earnings per share.
The principal markets for Industrial & Commercial Controls are industrial, construction, commercial, automotive and government customers. These customers are generally concentrated in North America; however, sales are made globally. Sales are made directly by the Company and indirectly through distributors and manufacturers' representatives to such customers.
No single customer represented more than 10% of net sales of continuing operations in 2002, 2001 or 2000. Sales from ongoing United States and Canadian operations to customers in foreign countries were $503 in 2002, $520 in 2001 and $599 in 2000 (7% of sales for all years presented).
The accounting policies of the segments are generally the same as the policies described under "Accounting Policies" above, except that inventories and related cost of products sold of the segments are accounted for using the FIFO method and operating profits only reflect the service cost component related to pensions and other postretirement benefits. Intersegment sales and transfers are accounted for at the same prices as if the sales and transfers were made to third parties.
Identifiable assets exclude general corporate assets, which principally consist of cash, short-term investments, deferred income taxes, certain accounts receivable, certain property, plant and equipment, and certain other assets.
Business Segment Information
2002 2001 2000
---- ---- ----
Net sales
Fluid Power $2,456 $2,507 $2,607
Industrial & Commercial Controls 1,993 2,199 2,421
Automotive 1,594 1,479 1,502
Truck 1,166 1,029 1,456
------ ------ ------
Total ongoing operations 7,209 7,214 7,986
Divested operations 85 323
------ ------ ------
Total net sales $7,209 $7,299 $8,309
====== ====== ======
Operating profit (loss)
Fluid Power $ 187 $ 183 $ 235
Industrial & Commercial Controls 149 163 251
Automotive 225 194 214
Truck 90 (64) 107
------ ------ ------
Total ongoing operations 651 476 807
Corporate
Divested operations 6 8
Amortization of goodwill & other
intangible assets (23) (94) (95)
Interest expense-net (104) (142) (177)
Gains on sales of businesses 18 61
Corporate & other-net (143) (29) 9
------ ------ ------
Income from continuing operations before
income taxes 399 278 552
Income taxes 118 109 189
------ ------ ------
Income from continuing operations 281 169 363
Income from discontinued operations 90
------ ------ ------
Net income $ 281 $ 169 $ 453
====== ====== ======
|
Income from continuing operations before income taxes was reduced by unusual items as follows:
Fluid Power $ 26 $ 22 $ 47
Industrial & Commercial Controls 16 30
Automotive 1
Truck 16 55
Corporate 13 22 5
------ ------ ------
$ 72 $ 129 $ 52
====== ====== ======
F-30
|
2002 2001 2000
---- ---- ----
Identifiable assets
Fluid Power $1,439 $1,345 $1,518
Industrial & Commercial Controls 847 1,016 1,099
Automotive 819 781 816
Truck 605 651 710
------ ------ ------
Total ongoing operations 3,710 3,793 4,143
Goodwill 1,910 1,902 1,985
Other intangible assets 510 533 553
Corporate 1,008 1,418 1,215
Divested operations 284
------ ------ ------
Total assets $7,138 $7,646 $8,180
====== ====== ======
Expenditures for property, plant & equipment
Fluid Power $ 53 $ 61 $ 95
Industrial & Commercial Controls 34 54 71
Automotive 75 96 96
Truck 56 64 81
------ ------ ------
Total ongoing operations 218 275 343
Corporate 10 17 28
Divested operations 3 15
------ ------ ------
Total expenditures for property, plant &
equipment $ 228 $ 295 $ 386
====== ====== ======
Depreciation of property, plant & equipment
Fluid Power $ 91 $ 96 $ 97
Industrial & Commercial Controls 70 72 74
Automotive 69 66 65
Truck 54 56 57
------ ------ ------
Total ongoing operations 284 290 293
Corporate 22 23 21
Divested operations 14
------ ------ ------
Total depreciation of property, plant &
equipment $ 306 $ 313 $ 328
====== ====== ======
|
Geographic Region Information
Ongoing operations
--------------------------
Long-
Net Operating lived
sales profit assets
------ ------ ------
2002
United States $5,605 $ 483 $1,338
Canada 185 15 13
Europe 1,110 65 351
Latin America 403 45 160
Pacific Region 358 43 93
Eliminations (452)
------ ------ ------
$7,209 $ 651 $1,955
====== ====== ======
2001
United States $5,677 $ 414 $1,419
Canada 177 11 15
Europe 1,108 (5) 322
Latin America 406 37 203
Pacific Region 310 19 91
Eliminations (464)
------ ------ ------
$7,214 $ 476 $2,050
====== ====== ======
2000
United States $6,483 $ 679 $1,532
Canada 182 15 14
Europe 1,232 46 352
Latin America 412 47 193
Pacific Region 253 20 79
Eliminations (576)
------ ------ ------
$7,986 $ 807 $2,170
====== ====== ======
|
Net sales and operating profit are attributed to geographical regions based upon the location of the selling unit.
Long-lived assets consist of property, plant and equipment-net.
Operating profit was reduced by unusual items as follows:
2002 2001 2000
---- ---- ----
United States $ 49 $ 67 $ 42
Europe 10 37 4
Latin America 2 1
Pacific Region 1
------ ------ ------
$ 59 $ 107 $ 47
====== ====== ======
|
Dollars in millions, except for per share data (per share data assume dilution)
Worldwide net sales were $7,209 in 2002. Although 1% lower than 2001, sales reflected levels that outperformed a number of the Company's end markets. Net income was $281 in 2002 ($3.92 per Common Share), up 66% from $169 in 2001 ($2.39 per share). The increase was primarily due to the result of the benefits of restructuring actions taken in 2002 and prior years. Before unusual items in both years, operating earnings were $315 in 2002 ($4.40 per share), up 35% from $233 in 2001 ($3.30 per share). Unusual items reported in both years included restructuring charges, other unusual charges and gains on sales of businesses.
Eaton's results in 2002 were aided by actions taken in 2002 and earlier years to comprehensively restructure operations. With these actions, the Company incurred restructuring and other unusual charges of $72 in 2002 ($.66 per Common Share) and $129 in 2001 ($1.21 per share), and delivered $130 of savings in 2002. These savings helped the Company to post significantly higher earnings despite end markets showing yet another year of decline. In addition, 2002 results were favorably impacted by $.88 per Common Share due to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which ceased the amortization of goodwill and certain intangible assets. These positive effects on income were partially offset by additional pension expense and other postretirement benefit expense in 2002 of $.52 per share. The Company also reported gains on sales of businesses of $.18 per share in 2002 compared to $.30 per share in 2001.
Throughout 2002, Eaton continued to focus on strengthening the balance sheet. Cash flow from operations in 2002 was an all-time high of $900, and cash flow after capital expenditures and cash dividends (free cash flow) for the year was $549. As a result, total debt was reduced by $352 during the year and cash and short-term investments increased by $117. The net debt to total capital ratio at the end of 2002 was 41.9%, down from 46.2% at year-end 2001. This ratio would have dropped to 38.2% but for the recognition of a $386 reduction of Shareholders' Equity related to the recognition of a minimum pension liability for certain pension plans at the end of 2002.
Sales in the United States increased to $5,605 in 2002, 1% above 2001 after excluding the impact of the divestitures of businesses in 2002 and 2001, primarily the result of continued strong performance in the Automotive segment and the mid-year surge in the Truck segment. Sales in international markets were $2,056 in 2002, only slightly above 2001. Sales in 2002 of $1,110 in Europe, $403 in Latin America and $185 in Canada were all flat compared to 2001, as these economies remained weak. Sales in the Pacific region increased to $358, 15% higher than 2001, primarily due to improved performance of Fluid Power, Automotive and Truck operations in this region.
As the weak economic conditions of 2001 continued into 2002, Eaton undertook additional restructuring actions to further reduce fixed operating costs across its business segments and certain corporate functions. During 2002, $62 of operational restructuring charges were recorded, including $26 for Fluid Power, $16 for Industrial & Commercial Controls and $16 for Truck. These compared to similar restructuring charges of $119 in 2001. In addition, unusual corporate charges of $10 in each of 2002 and 2001 were recorded which related to non-operating activities. On an after-tax basis, these restructuring and unusual charges reduced net income for 2002 by $47 ($.66 per Common Share) and for 2001 by $86 ($1.21 per share). The operational restructuring charges are included in the Statements of Consolidated Income in Income from Operations and reduced Operating Profit of the related business segment. The corporate restructuring charges are included in the Statements of Consolidated Income in Income from Operations and the other corporate charges are included in Other Expense-Net. All of the corporate restructuring and other corporate charges are included in Business Segment Information in Corporate & Other-Net.
Results for 2002 were favorably impacted by the adoption of SFAS No. 142, which ceased the amortization of goodwill and indefinite life intangible assets recorded in connection with current and previous business acquisitions. This accounting change increased pretax income for 2002 by $73 ($63 after- tax, or $.88 per Common Share) compared to 2001. Income for 2002 was reduced by $57 ($37 after-tax, or $.52 per share) compared to 2001 due to increased pension expense and other postretirement benefit expense which reflected the decline in the market value of equity investments in Eaton's pension fund, coupled with lower discount rates associated with pension and other postretirement benefit liabilities.
As displayed in the Statements of Consolidated Income, despite slightly lower sales, income from Operations of $517 in 2002 increased $169 over 2001, rising to 7.2% of sales from 4.8% of sales in 2001. These increases were primarily attributable to the benefits of the aggressive restructuring actions described above, which generated $130 of savings in 2002. The increases also reflected lower restructuring charges recorded in 2002 compared to 2001 and reduced amortization expense in 2002 related to the change in accounting for goodwill and indefinite life intangible assets described above. Offsetting these positive effects on income was increased pension expense and other postretirement benefit expense in 2002, as described above.
In the third quarter of 2002, Eaton sold the Navy Controls business, which resulted in a pretax gain of $18 ($13 after-tax, or $.18 per Common Share). During 2001, VS/ED, the Air Conditioning and Refrigeration business and certain assets of Automotive and Truck businesses were sold. The sales of businesses in 2001 resulted in a net pretax gain of $61 ($22 after-tax, or $.30 per share). The gains for both years are reported as a separate line item in the Statements of Consolidated Income and Business Segment Information. In Business Segment Information, the operating results of VS/ED are included in divested operations.
The effective income tax rate for 2002 was 29.5% compared to 39.4% for 2001. The higher rate in 2001 was primarily the result of the tax effect of book/tax basis differences related to businesses sold in the first quarter of 2001 and the amortization of non-deductible goodwill in 2001. Excluding the negative tax consequences related to the sales of businesses and non-deductible goodwill in 2001, the effective tax rate for 2001 was 28.2% compared to 29.5% in 2002.
Before restructuring charges, other unusual charges and gains on the sales of businesses, operating earnings were $315 in 2002 ($4.40 per Common Share), 35% above 2001 on a similar basis. These improvements were primarily the result of the factors described above. Net income for 2002, including unusual charges and gains on sales of businesses, was $281 ($3.92 per share), 66% higher compared to $169 in 2001 ($2.39 per share).
Operating profits before restructuring charges were $213 in 2002, 4% higher than $205 posted in 2001. These profits represented a return on sales of 8.7% in 2002, up from 8.2% in 2001. In spite of general weakness in end markets, profits in 2002 were higher than 2001, primarily the result of the benefits of aggressive restructuring actions taken to resize this business in prior periods. Restructuring charges recognized in 2002 were $26 compared to $22 in 2001. Profits after restructuring charges were $187 in 2002, up from $183 in 2001.
In the fourth quarter of 2002, two acquisitions were completed in this segment. The Company purchased the Boston Weatherhead business of Dana Corporation for $130. This business, which had 2001 sales of $207, manufactures hose, tubing, and fluid connectors for fluid power systems primarily for the industrial distribution, mobile off-highway and heavy-duty truck markets. In addition, the aerospace circuit breaker business of Mechanical Products was purchased during the fourth quarter.
During the second quarter of 2002, Eaton purchased the remaining 40% interest in its hydraulics systems joint venture company, Jining Eaton Hydraulics Company, Ltd. (JEHYCO), located in Jining, China. JEHYCO is the Company's fourth wholly-owned business in China.
In 2002, Eaton announced a multi-year contract with Lockheed Martin to supply the wing fluid distribution package on the supersonic multi-role Joint Strike Fighter, the F-35, which represents Eaton's second major contract for this aircraft. The award is for the system design and development phase of the program, which is expected to total 14 aircraft and generate an estimated $3 of revenue over the next two years. Based on the projected manufacture of 3,000 aircraft and additional foreign military sales over the planned lifetime of the F-35, this award has the potential of generating revenue for Eaton of $1 billion over the 35 year life of the program. The Company also announced it had been selected to receive $84 in business as a result of the U.S. Air Force's decision to purchase an additional 60 C-17 cargo aircraft in 2004 through 2007.
During 2002, the Company also announced a multi-year contract with Airbus to provide products for hydraulic fluid conveyance in the new Airbus 380, the world's largest commercial aircraft. The contract has potential revenue of $70 over the next 20 years. This was the second contract awarded to Eaton for the A380, with the combined contracts expected to generate revenues of approximately $270 over the next 20 years. Additionally, during 2002, Eaton was awarded a multi-year contract by BMW to provide fluid hose assemblies for two major automobile production models. This contract is expected to have revenues in excess of $150 over the next six years.
Operating profits before restructuring charges were $165 in 2002, down from $193 in 2001. These profits represented a return on sales of 8.3% in 2002 compared to 8.8% in 2001. Profits declined 15% from 2001, but were down 12% after excluding Navy Controls which was sold in mid-2002. The decline in profits was primarily the result of declining sales volume due to weak market conditions in most of the sectors this segment serves and the effects of product mix. Restructuring charges recognized in 2002 were $16 compared to $30 in 2001. Profits after restructuring charges were $149 in 2002 compared to $163 in 2001.
In January 2003, Eaton completed the acquisition of the electrical business of Delta plc for $215. This business, which had 2001 sales of $379, includes major electrical brands such as MEM(R), Holec(TM), Bill(TM), Home Automation(TM), Elek(TM) and Tabula(TM). The Delta business represents a significant addition to the capabilities and geographic footprint of the Industrial & Commercial Controls business. Additionally, in early January 2003 the acquisition of the power systems business of Commonwealth Sprague Capacitor was completed. This business will add to offerings in the areas of power quality and energy management.
During the second quarter of 2002, Eaton announced the formation of its new Performance Power Solutions organization, created to expand the Company's position in the power quality and assurance market, as well as to create a new business relationship with Johnson Controls. This business expansion is expected to result in $300 of new business revenue over the next four years.
Operating profits before restructuring charges were $226 in 2002, up 16% from $194 in 2001. The segment produced a return on sales of 14.2% in 2002, up from 13.1% in 2001. The increases in profits and margins were primarily the result of the increase in sales during 2002.
In 2002, the Company announced the acquisition, from McLaren Performance Technologies, of the technology, trademarks, and engineering assets related to the Gerodisc(TM) product line. The addition of this product line to Eaton's existing products broadens the product range sold to the light-duty automotive differential market. During the year, Eaton also increased its investment to 49% in Cyltec, an associate company that manufactures cylinder heads for the light vehicle market in North America. In late 2002, Eaton won a contract from the Chrysler Group to provide electronic differentials for the front and rear axles of a future vehicle platform.
Further progress was made in growing Eaton's supercharger business in 2002. In Brazil, the smallest supercharger ever produced on a commercial basis was launched for use on the new Ford Fiesta, and delivery began of a high-efficiency supercharger for use with the new M-271 engine program of Mercedes. The Company is providing superchargers, intake and exhaust valves, roller rocker arms and lash adjusters for the M-271 program.
In the first quarter of 2002, Eaton announced the receipt of a contract from General Motors Corporation's Tier One mirror suppliers to provide memory glass and power-folding mirror actuators for a wide range of pick-up trucks and sport utility vehicles.
Operating profits before restructuring charges were $106 in 2002 compared to a loss of $9 in 2001. These profits represented a return on sales of 9.1% in 2002. The positive impact of the extensive restructuring actions in this segment over the last two years can be seen in the $115 of increased profit before restructuring costs in 2002 on increased sales of $137. Restructuring charges recognized in 2002 were $16 compared to $55 in 2001. Profits after restructuring charges were $90 in 2002 compared to a loss of $64 in 2001.
During 2002, Eaton announced two new contracts in South America with Volvo and AGCO to supply transmissions for heavy-duty trucks and farm tractors. These contracts are expected to generate more than $190 of sales over the next eight years.
Net interest expense of $104 in 2002 decreased by $38 compared to 2001. The decrease was primarily related to the reduction in debt of $352 from the end of 2001 to the end of 2002, as well as a reduction of interest rates in 2002.
Corporate and other expense-net was $143 in 2002 compared to $29 in 2001. The increase was primarily the result of increased pension expense and other postretirement benefit expense of $57 in 2002 compared to 2001. This increase was due to the effect of the decline in the market value of equity investments in Eaton's pension fund, coupled with lower discount rates associated with pension and other postretirement benefit liabilities. The increase in corporate and other expense-net also reflected other expenses including profits owed to minority interests in subsidiaries, foreign currency, environmental and legal, as well as other corporate office accruals.
Operating activities generated cash of $900 in 2002, an all-time record and in excess of the strong cash flow generation of $765 in 2001. Further progress was made in reducing operating capital, resulting in a lowering of the number of inventory days-on-hand by six days, a decrease in accounts receivable days outstanding of three days, and reduction in capital expenditures. Capital expenditures for 2002 were $228, $67 lower than 2001 and just over 3% of sales. As a result, the Company was able to complete with cash the acquisitions of Boston Weatherhead and the aerospace circuit breaker business of Mechanical Products in November 2002 while still reducing debt by $352 during 2002 and increasing cash and short-term investments by $117 at the end of 2002.
Total debt of $2,088 at the end of 2002 decreased $352 from the end of 2001. In addition to the contribution from strong operating cash flow, debt was paid down from the proceeds from the sale of Navy Controls. As a result of lower debt and increased cash and short-term investments, the net debt to capital ratio was reduced to 41.9% at the end of 2002 from 46.2% at year-end 2001. This ratio would have dropped to 38.2% but for a $386 reduction of Shareholders' Equity related to the recognition of a minimum pension liability for certain pension plans at the end of 2002. The Company has credit facilities of $900, of which $500 expire in May 2003 and $400 in April 2005.
In 2002, Eaton issued $300 of 5.75% Notes due 2012. The net proceeds from the Notes were used to reduce outstanding commercial paper and repay a portion of more expensive indebtedness incurred in connection with the 1999 acquisition of Aeroquip-Vickers, Inc. During 2002, the Company also reached an agreement with the Internal Revenue Service relating to the treatment of its broad-based company-owned life insurance plans for the years 1993 through 1998. Pursuant to the agreement, the Company terminated its remaining broad-based company-owned life insurance plans. The settlement of this issue resulted in no material effect on Eaton's financial position, net income or cash flows.
Eaton is in compliance with all covenants and other requirements set forth in its credit agreements and indentures, and it is not reasonably likely that this condition would change in the foreseeable future. The Company does not have any rating downgrade triggers that would accelerate the maturity dates of its debt.
At the end of 2002, Shareholders' Equity was reduced by a non-cash after-tax charge of $386 related to the recognition of a minimum liability for certain pension plans. This charge is further described in "Retirement Benefit Plans" in the Notes to the Consolidated Financial Statements. The charge did not impact net income, and will be reversible should the pension plans again become overfunded at the end of 2003. Pension funding requirements are not currently affected by the recording of this non-cash charge.
Cash dividends paid were $123 in 2002. Dividends per Common Share of $1.76 in 2002 were the same as in 2001. Eaton has paid dividends on Common Shares each year since 1923.
The Company does not anticipate a recovery in the traditional mobile and industrial hydraulics markets until the second half of 2003. The decline in the commercial aerospace market has occurred as expected. Eaton believes that the commercial aerospace markets are near bottom, but may not recover significantly until 2004. Military aerospace markets remain strong and are expected to improve further over the course of 2003.
Eaton expects that the electrical distribution equipment market will begin to recover in 2003, but not until the fourth quarter. The residential market was strong in 2002, but is expected to weaken slightly during 2003.
NAFTA automobile production is forecasted to be 15.9 million units in 2003 and 16.1 million units in Europe. The Company expects that North American heavy-truck production during 2003 could approach 190,000 units, with volumes lower in the first quarter and strengthening during the balance of the year.
The Company expects to record additional growth during 2003 from the recently completed acquisitions of the Boston Weatherhead fluid power hose and fittings business, the electrical division of Delta plc, the aerospace circuit breaker business of Mechanical Products, and the power systems business of Commonwealth Sprague Capacitor. Eaton anticipates these acquisitions could add approximately $500 to 2003 revenues.
Restructuring expenses for 2003 are expected to be approximately $50, evenly spread over the year. These charges relate substantially to the integration of the recently acquired Boston Weatherhead fluid power business and the electrical business of Delta plc.
Capital expenditures for 2003 are forecasted to be $335 and will be funded primarily by cash flow from operations.
Due to the decline in stock market valuations during 2002 and the reduced general level of interest rates, certain key assumptions used to calculate pension and other postretirement benefit expense for 2003 will be adjusted, including the lowering of the assumption used for the return on pension plan assets from 10.00% to 8.75% and the discount rate from 7.25% to 6.75%. These changes in assumptions are expected to result in an increase of approximately $72 in pension expense and other postretirement benefit expense in 2003.
Before restructuring charges, Eaton projects 2003 operating earnings per Common Share to be between $5.00 and $5.25. In 2003, the Company expects restructuring charges to be approximately $.50 per share, resulting in a projection of net income after restructuring charges of between $4.50 and $4.75 per share. As a result of the continuing soft market conditions, Eaton will continue to exercise tight control over all expenditures. The Company anticipates that it should be significantly cash flow positive again in 2003.
For 2003, certain key assumptions used to calculate pension and other postretirement benefit expense have been adjusted, including the lowering of both the assumed return on pension plan assets from 10.00% to 8.75% and the discount rate from 7.25% to 6.75%. These changes are expected to result in increased pension and other postretirement benefit expense of approximately $72 in 2003 compared to 2002.
Eaton uses straightforward, non-leveraged, financial instruments for which quoted market prices are readily available from a number of independent services, to manage exposure to fluctuations in foreign currencies, interest rates and commodity prices.
Eaton is subject to interest rate risk as it relates to long-term debt. The table below presents principal cash flows and related weighted-average interest rates by expected maturity dates of long-term debt and capital leases, excluding foreign currency principal swaps and immaterial long-term debt of certain international operations.
2002
Expected maturity date
-------------------------------------------- Fair
2003 2004 2005 2006 2007 After Total value
---- ---- ---- ---- ---- ----- ----- -----
Long-term debt, including
current portion
Fixed rate (US$) $250 $ 15 $186 $ 50 $1,013 $1,514 $1,656
Average interest rate 7.0% 6.4% 8.5% 7.0% 7.0% 7.2%
Fixed rate (Yen in 2006
and Euro in 2007) $ 42 $209 $251 $270
Average interest rate 1.6% 6.0% 5.3%
Variable rate debt (US$) $150 $ 30 $180 $180
Average interest rate 2.6% 1.4% 2.4%
2001
Expected maturity date
-------------------------------------------- Fair
2002 2003 2004 2005 2006 After Total value
---- ---- ---- ---- ---- ----- ----- -----
Long-term debt, including
current portion
Fixed rate (US$) $125 $250 $ 15 $186 $762 $1,338 $1,451
Average interest rate 7.0% 7.0% 6.4% 8.5% 7.5% 7.5%
Fixed rate (Yen in 2006
and Euro in 2007) $ 38 $177 $215 $232
Average interest rate 1.6% 6.0% 5.2%
Variable rate debt (US$ $380 $400 $780 $780
Average interest rate 3.0% 3.0% 3.0%
|
By the end of 2002, approximately 43% of Eaton's long-term debt was swapped to floating interest rates. Additional information related to long-term debt and related interest rate swaps can be found in "Debt and Other Financial Instruments" in the Notes to the Consolidated Financial Statements.
Minimum rental commitments for 2003 under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, are $83 and decline substantially thereafter.
Net sales in the United States and Canada decreased 12% in 2001 to $5,854, primarily the result of weak economic conditions. In 2001, sales in Europe fell 10% to $1,108, as the European economy weakened as well. Sales in the United States and Europe also were lower due to the divestiture in the first quarter of 2001 of VS/ED, which had sales of $323 in 2000. Sales in Latin America were $406, down 1% from the prior year. Sales in the Pacific region increased 23% to $310, primarily due to the acquisition of the remaining 50% interest in Sumitomo Eaton Hydraulics Company (now named Eaton Fluid Power Ltd).
In response to the weakening global business environment in early 2001, and the anticipated delay in recovery of the economy and Eaton's end markets until the second half of 2002, the Company took restructuring actions in 2001 to help maintain a competitive advantage in the current economic environment and reduce structural costs across its businesses. Operational restructuring charges totaled $119 in 2001, including $55 related to the Truck business, $30 for the Industrial & Commercial Controls business, and $22 for actions to continue the integration of the former Aeroquip-Vickers operations and other recent acquisitions within Fluid Power. Restructuring charges in 2001 for reductions in corporate staff and other actions were $12. A charge of $10 was also recorded in 2001 related to an arbitration award in connection with a contractual dispute over supply arrangements associated with a subsidiary of Eaton. The arbitration award resulted from a legal action initiated in February 1999 against Vickers, Inc. (now named Eaton Hydraulics Inc.), part of Aeroquip-Vickers, Inc., which was acquired by Eaton in April 1999.
All restructuring charges and other unusual pretax charges totaled $129 in 2001 ($86 after-tax, or $1.21 per Common Share), compared to similar pretax charges of $52 in 2000 ($34 after-tax, or $.47 per share). Unusual charges for 2000 included operational restructuring charges of $47 related to the Fluid Power business segment and $5 for actions to restructure corporate staff. The operational restructuring charges in 2001 and 2000 are included in the Statements of Consolidated Income in Income from Operations and reduced operating profit of the related business segment. The corporate charges are included in the Statements of Consolidated Income in Income from Operations, except for $11 in 2001 included in Other Income-Net that primarily related to the arbitration award discussed above. In Business Segment Information, all corporate charges are included in Corporate & Other-Net.
As displayed in the Statements of Consolidated Income, Income from Operations in 2001 of $348 declined 46% from $649 in 2000. The decline was the result of the difficult operating conditions in most of Eaton's businesses in 2001, especially the Truck segment, coupled with the increased levels of restructuring charges recorded in 2001.
During 2001, Eaton sold businesses resulting in a net pretax gain of $61 ($22 after-tax, or $.30 per Common Share). In the first quarter, VS/ED, which had sales of $323 in 2000, was divested along with certain assets of the Truck segment. In the third quarter, the Air Conditioning & Refrigeration business, which had sales of $75 in 2000, was sold along with certain assets of the Automotive segment. These gains are reported as a separate line item in the Statements of Consolidated Income and Business Segment Information. In Business Segment Information, the operating results of VS/ED are included in Divested Operations.
Income in 2000 was increased by a net pretax gain on the sales of corporate assets of $22 ($14 after-tax, or $.19 per Common Share). These gains were included in the Statements of Consolidated Income in Other Income-Net and in Business Segment Information in Corporate and Other-Net.
Before restructuring and the other unusual charges and gains on the sales of businesses, operating earnings were $233 in 2001 ($3.30 per Common Share), down 39% from $383 in 2000 ($5.28 per share). The decline was the result of the difficult operating conditions in most of Eaton's businesses in 2001, especially in the Truck segment. Income from continuing operations, including unusual charges and gains on sales of businesses, was $169 in 2001 ($2.39 per share), down 53% from $363 in 2000 ($5.00 per share).
Operating profits before restructuring charges were $205 in 2001, down from $282 in 2000. These profits represented a return on sales of 8.2% in 2001 compared to 10.8% in 2000. The decrease in profit was primarily attributable to weak market conditions, which resulted in a significant decrease in sales volumes during 2001. In response to these weak market conditions, this segment accelerated the integration of Aeroquip-Vickers and other recent acquisitions. The elimination of 600 positions announced in April 2001 was expanded to 1,000 positions in the third quarter and was completed before year-end. Restructuring charges recognized in 2001 were $22 compared to $47 in 2000. Profits after restructuring charges were $183 in 2001, down from $235 in 2000.
In the first quarter of 2001, Eaton completed the purchase of the remaining 50% interest in Sumitomo Eaton Hydraulics Company (now named Eaton Fluid Power Ltd.), the former joint venture with Sumitomo Heavy Industries Ltd. located in Kyoto, Japan. This acquisition had annualized sales of $76 in the Pacific region.
Operating profits before restructuring charges were $193 in 2001, down from $251 in 2000. These profits represented a return on sales of 8.8% in 2001 compared to 10.4% in 2000. Weak markets in the industrial and commercial sectors and distributor businesses, as well as the effects of product mix and restructuring charges, were responsible for the decreased profits in 2001. In response to weakening market conditions in this business, restructuring actions were implemented, including the elimination of 887 positions within the organization. Restructuring charges recognized in 2001 were $30. Profits after restructuring charges were $163 in 2001, down from $251 in 2000.
In the first quarter of 2001, the Company announced it had formed a 50-50 joint venture with Hager Electro SA, creating Eletromar Ltda. This operation manufactures International Electrical Code residential circuit breakers in Brazil for the South American marketplace.
Operating profits were $194 in 2001, down 9% from $214 in 2000. These profits represented a return on sales of 13.1% in 2001 compared to 14.2% in 2000. These results reflected the reduced level of sales in 2001 and were achieved in spite of difficult market conditions and increased engineering and research and development costs associated with new product launches for model years 2002-2004.
In 2001, the Company announced the acquisition of the European portion of the vehicle mirror actuator business of Donnelley Corporation, located in Manorhamilton, Ireland. A portion of Eaton's existing mirror actuator business was relocated to the new facility in Ireland and that operation is expected to reach sales levels of $50 over the next two to three years.
Operating losses before restructuring charges were $9 in 2001 compared to profits of $107 in 2000. The decrease in profit was primarily attributable to the significant decrease in sales volumes during 2001, the result of very weak market conditions. This segment completed restructuring actions during 2001 related to the European medium-duty and heavy-duty truck businesses. After restructuring charges of $55 in 2001, operating losses were $64 in 2001 compared to profits of $107 in 2000.
During 2001, Eaton acquired the commercial clutch manufacturing assets of Transmisiones TSP, S.A. de C.V. This business was relocated to the new Truck facility in San Luis Potosi, Mexico, when that plant became operational in 2002.
Corporate & other-net expense of $29 in 2001 compared to income of $9 in 2000. The decline was due to a $22 pretax gain recorded in 2000 on the sales of corporate assets and a charge of $10 recorded in 2001 related to an arbitration award, both of which are discussed above.
QUARTERLY DATA
--------------
(Unaudited)
Quarter ended in 2002 Quarter ended in 2001
-------------------------------------- --------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- ------- ------- -------- ------- -------
(Millions except for per share data)
Net sales $1,775 $1,830 $1,881 $1,723 $1,695 $1,750 $1,871 $1,983
Gross margin 469 514 517 437 415 424 471 486
Percent of sales 26% 28% 27% 25% 24% 24% 25% 25%
Income before income taxes 92 132 127 48 39 61 74 104
Net income $ 67 $ 93 $ 88 $ 33 $ 30 $ 40 $ 49 $ 50
Net income per Common Share
Assuming dilution $ .94 $ 1.30 $ 1.21 $ .47 $ .42 $ .57 $ .69 $ .72
Basic .95 1.32 1.24 .48 .42 .58 .70 .73
Cash dividends paid per Common Share $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44 $ .44
Market price per Common Share
High $80.30 $73.94 $87.11 $83.98 $76.00 $76.90 $81.43 $74.97
Low 59.10 59.83 69.06 65.90 58.34 55.12 66.16 63.75
A reconciliation of net income to
operating earnings follows:
Net income $ 67 $ 93 $ 88 $ 33 $ 30 $ 40 $ 49 $ 50
Excluding (after-tax)
Unusual charges 2 10 2 33 17 22 17 30
Gains on sales of businesses (13) (15) (7)
------ ------ ------ ------ ------ ------ ------ ------
Operating earnings $ 69 $ 90 $ 90 $ 66 $ 47 $ 47 $ 66 $ 73
====== ====== ====== ====== ====== ====== ====== ======
Net income per Common Share assuming
dilution $ .94 $ 1.30 $ 1.21 $ .47 $ .42 $ .57 $ .69 $ .72
Per share impact of unusual items .04 (.04) .03 .46 .23 .09 .25 .33
------ ------ ------ ------ ------ ------ ------ ------
Operating earnings per Common Share $ .98 $ 1.26 $ 1.24 $ .93 $ .65 $ .66 $ .94 $ 1.05
====== ====== ====== ====== ====== ====== ====== ======
|
Seven-Year Consolidated Financial Summary
-----------------------------------------
2002 2001 2000 1999 1998 1997 1996
---- ---- ---- ---- --- ---- ----
(Millions except for per share data)
Continuing operations
Net sales $7,209 $7,299 $8,309 $8,005 $6,358 $7,104 $6,515
Income before income taxes 399 278 552 943 616 730 428
Income after income taxes 281 169 363 603 430 526 305
Percent of net sales 3.9% 2.3% 4.4% 7.5% 6.7% 7.4% 4.7%
Extraordinary item - redemption of debentures (54)
Income (loss) from discontinued operations 90 14 (81) (62) 44
------ ------ ------ ------ ------ ------ ------
Net income $ 281 $ 169 $ 453 $ 617 $ 349 $ 410 $ 349
====== ====== ====== ====== ====== ====== ======
Net income per Common Share assuming dilution
Continuing operations $ 3.92 $ 2.39 $ 5.00 $ 8.17 $ 5.91 $ 6.72 $ 3.89
Extraordinary item (.69)
Discontinued operations 1.24 .19 (1.11) (.79) .57
------ ------ ------ ------ ------ ------ ------
$ 3.92 $ 2.39 $ 6.24 $ 8.36 $ 4.80 $ 5.24 $ 4.46
====== ====== ====== ====== ====== ====== ======
Average number of Common Shares outstanding 71.7 70.5 72.6 73.7 72.7 78.2 78.2
Net income per Common Share basic
Continuing operations $ 3.98 $ 2.43 $ 5.06 $ 8.31 $ 6.02 $ 6.85 $ 3.93
Extraordinary item (.71)
Discontinued operations 1.25 .20 (1.13) (.80) .57
------ ------ ------ ------ ------ ------ ------
$ 3.98 $ 2.43 $ 6.31 $ 8.51 $ 4.89 $ 5.34 $ 4.50
====== ====== ====== ====== ====== ====== ======
Average number of Common Shares outstanding 70.6 69.4 71.8 72.5 71.4 76.8 77.4
Cash dividends paid per Common Share $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.76 $ 1.72 $ 1.60
----------------------------------------------------------------------------------------------------------
Total assets $7,138 $7,646 $8,180 $8,342 $5,570 $5,497 $5,290
Long-term debt 1,887 2,252 2,447 1,915 1,191 1,272 1,062
Total debt 2,088 2,440 3,004 2,885 1,524 1,376 1,092
Shareholders' equity 2,302 2,475 2,410 2,624 2,057 2,071 2,160
Shareholders' equity per Common Share $32.61 $35.61 $35.29 $35.44 $28.69 $27.72 $28.00
Common Shares outstanding 70.6 69.5 68.3 74.0 71.7 74.7 77.1
----------------------------------------------------------------------------------------------------------
A reconciliation of income from continuing
operations to operating earnings of
continuing operations follows:
Income from continuing operations $ 281 $ 169 $ 363 $ 603 $ 430 $ 526 $ 305
Excluding (after-tax)
Unusual charges 47 86 34 20 44 15 31
Gains on sales of businesses (13) (22) (198) (28) (69)
Gains on sales of corporate assets (14)
------ ------ ------ ------ ------ ------ ------
Operating earnings from continuing
operations $ 315 $ 233 $ 383 $ 425 $ 446 $ 472 $ 336
====== ====== ====== ====== ====== ====== ======
Income from continuing operations
per Common Share assuming dilution $ 3.92 $ 2.39 $ 5.00 $ 8.17 $ 5.91 $ 6.72 $ 3.89
Per share impact of unusual items .48 .91 .28 (2.41) .23 (.69) .40
------ ------ ------ ------ ------ ------ ------
Operating earnings per Common Share of
continuing operations $ 4.40 $ 3.30 $ 5.28 $ 5.76 $ 6.14 $ 6.03 $ 4.29
====== ====== ====== ====== ====== ====== ======
|
Eaton Corporation 2002 Annual Report on Form 10-K
Exhibit Index
Exhibits
3(a) Amended Articles of Incorporation (amended and restated as of April 27, 1994) - Filed in conjunction with this Form 10-K
3(b) Amended Regulations (amended and restated as of April 26, 2000)- Incorporated by reference to the Form 10-Q for the six months ended June 30, 2000
4(a) Instruments defining rights of security holders, including indentures (Pursuant to Regulation S-K Item 601(b)(4), the Company agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long- term debt)
4(b) Rights Agreement (Dated as of June 28, 1995) - Filed in conjunction with this Form 10-K
10 Material contracts - Each of the following is either a management contract or a compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and restated as of March 31, 2000) - Incorporated by reference to the Form 10-K for the year ended December 31, 2000
(b) Executive Strategic Incentive Plan I (Amended and Restated as of January 1, 2001) - Filed in conjunction with this Form 10-K
(c) Group Replacement Insurance Plan (GRIP), effective as of June 1, 1992 - Incorporated by reference to the Form 10-K for the year ended December 31, 1992
(d) 1991 Stock Option Plan - Filed in conjunction with this Form 10-K
(e) 1995 Stock Plan - Filed in conjunction with this Form 10-K
(f) Incentive Compensation Deferral Plan (amended and restated as of October 1, 1997) - Incorporated by reference to the Form 10-K for the year ended December 31, 2000
(g) Form of Change of Control Agreement entered into with officers of Eaton Corporation - Filed in conjunction with this Form 10-K
(h) Form of Indemnification Agreement entered into with officers of Eaton Corporation - Filed in conjunction with this Form 10-K
(i) Limited Eaton Service Supplemental Retirement Income Plan (amended and restated as of January 1, 2003) - Filed in conjunction with this Form 10-K
(j) Supplemental Benefits Plan (amended and restated as of January 1, 1989) (which provides supplemental retirement benefits) - Filed in conjunction with this Form 10-K
(k) Excess Benefits Plan (Amended and Restated Effective January 1, 1989) (with respect to Section 415 limitations of the Internal Revenue Code) - Filed in conjunction with this Form 10-K
(l) Executive Incentive Compensation Plan - Incorporated by reference to the Form 10-K for the year ended December 31, 2000
(m) Plan for the Deferred Payment of Directors' Fees (Originally adopted in 1985 and amended effective as of September 24, 1996 and January 28, 1998) - Filed in conjunction with this Form 10-K
(n) Plan for the Deferred Payment of Directors' Fees (Originally adopted in 1980 and amended and restated in 1989 and 1996) - Filed in conjunction with this Form 10-K
(o) 1996 Non-Employee Director Fee Deferral Plan (amended and restated as of October 22, 2002) - Filed in conjunction with this Form 10-K
(p) Trust Agreement - Outside Directors (dated December 6, 1996)
- Filed in conjunction with this Form 10-K
(q) Trust Agreement - Officers and Employees (dated December 6, 1996) - Filed in conjunction with this Form 10-K
(r) 1998 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 13, 1998
(s) 2002 Stock Plan - Incorporated by reference to the definitive Proxy Statement dated March 15, 2002
(t) Executive Strategic Incentive Plan II (Effective as of January 1, 2001) - Filed in conjunction with this Form 10-K
12 Ratio of Earnings to Fixed Charges - Filed in conjunction with this Form 10-K
21 Subsidiaries of Eaton Corporation - Filed in conjunction with this Form 10-K
23 Consent of Independent Auditors - Filed in conjunction with this Form 10-K
24 Power of Attorney - Filed in conjunction with this Form 10-K
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 3 (a)
Certificate of Amended Articles of Incorporation of Eaton Corporation
W.E. Butler, Chairman and Chief Executive Officer, and E. R. Franklin, Secretary, of Eaton Corporation, an Ohio corporation, do hereby certify that an annual meeting of the shareholders of said corporation was duly called and held on the 27th day of April, 1994, at which meeting a quorum of such shareholders was present in person or by proxy, and that at such meeting by the affirmative vote of the holders of shares entitling them to exercise more than a majority of the voting power of the corporation on such proposal, the following resolutions were adopted:
RESOLVED: That the following Amended Articles of Incorporation of Eaton Corporation be, and the same hereby are, adopted to supersede the existing Amended Articles of Incorporation of said corporation:
FIRST: The name of said corporation shall be
EATON CORPORATION
SECOND: The place in the State of Ohio where its principal office is to be located is Cleveland, Cuyahoga County.
THIRD: Said corporation is formed for the following purposes, to wit:
1. To produce, manufacture, service, buy or otherwise acquire, deal and traffic in and sell or otherwise dispose of goods, products, merchandise and real and personal property of every class and description; and to acquire, own, hold, lease, sell, mortgage or otherwise deal in and dispose of such real estate and personal property as may be necessary or useful in connection with said business or the carrying out of any of the purposes of the corporation.
2. To acquire by purchase, subscription, or otherwise, and to own, hold for investment or otherwise, and to use, sell, assign, transfer, mortgage, pledge, exchange or otherwise dispose of shares of stock, bonds, debentures, notes, scrip, securities, evidences of indebtedness, contracts or obligations of any government or governmental body, corporation, association, firm or individual, and also to issue in exchange therefor stocks, bonds or other securities or evidences of indebtedness of this corporation, and while the owner or holder of any such property to receive, collect and dispose of the interest, dividends, income and other rights accruing on or from such property and to possess and exercise in respect thereof all of the rights, powers and privileges of ownership, including all voting powers connected therewith.
3. To aid in any manner any corporation, association, firm or individual, any shares of stock in which or any bonds, debentures, notes, securities, evidences of indebtedness, contracts or obligations of which are held by or for this corporation, directly or indirectly, or in which or in the welfare of which this corporation shall have any interest, direct or indirect, and to aid or participate in the reorganization, consolidation or merger of any corporation, association or firm in which, or in the welfare of which, this corporation shall have any interest.
4. To carry on any lawful business and in connection therewith to do any and everything necessary, suitable or proper, and to have all the rights, powers and privileges now or hereafter conferred by the laws of the State of Ohio upon corporations organized under Sections 1701.01 et seq. of the Ohio Revised Code or under any act amendatory thereof, supplementary thereto or substituted therefor.
In furtherance and not in limitation of the general powers conferred by the laws of the State of Ohio and in furtherance and not in limitation of the purposes hereinbefore stated, it is hereby expressly provided that this corporation shall also have the following authority and powers, to wit:
(a) To do any and all things hereinabove or hereinafter set forth to the same extent and as fully as natural persons might or could do, either as principal, agent, contractor or otherwise, and either alone or in conjunction with any other individuals, firms, associations, corporations, syndicates or bodies politic;
(b) To borrow or raise money, without limit, upon any terms, for any purpose of this corporation or of any corporation, association, firm, syndicate or individual having a business or property which this corporation determines to finance, promote or become interested in; to issue, sell and dispose of this corporation's bonds, debentures, notes, certificates of indebtedness and other obligations, secured or unsecured, and however evidenced, upon any terms, and as security therefor to mortgage, pledge or grant any charge or impose any lien upon all or any part of the real or personal property, rights, interests or franchises of this corporation, whether owned by it at the time or thereafter acquired;
(c) To make, execute, endorse and accept promissory notes, bills of exchange and other negotiable instruments and to redeem any debt or other obligation before the same shall fall due on any terms and on any advance or premium;
(d) To guarantee the payment of dividends upon any capital stock, and, by endorsement or otherwise, to guarantee the payment of the principal or interest, or both, on any bonds, debentures, notes, scrip or other obligations or evidences of indebtedness, or the performance of any contracts, leases or obligations of any other corporation or association or of any firm, individual or syndicate in which or in whose welfare this corporation may have any interest;
(e) To pay for any property, rights or interests acquired by this corporation in cash or other property, rights or interests held by this corporation, or by issuing and delivering in exchange therefor its own stock, bonds, debentures, notes, certificates of indebtedness or other obligations, or any of them, however evidenced; to purchase or otherwise acquire, hold, sell, pledge, transfer or otherwise dispose of and to reissue any shares of its own capital stock (so far as may be permitted by law) and its bonds, debentures, notes or other securities or evidences of indebtedness;
(f) To do all and everything necessary and proper for the accomplishment of the objects herein enumerated or necessary or incidental to the protection and benefit of this corporation, and in general to carry on such lawful businesses necessary or incidental to the attainment of the purposes of this corporation, whether such businesses are similar in nature to the objects and powers hereinabove set forth or otherwise.
The foregoing provisions of this Article THIRD shall not be construed as imposing any limitation upon the purpose of the corporation to engage in any lawful act or activity for which corporations may be formed under the laws of the State of Ohio, and nothing herein shall be deemed to limit or exclude in any manner any capacity, power, right or privilege given to this corporation by law or the authority which it is or might be permitted to exercise under the statutes of the State of Ohio.
FOURTH: The authorized number of shares of the corporation is Three Hundred Fourteen Million One Hundred Six Thousand Three Hundred Ninety-Four (314,106,394) classified and designated as follows:
A. Serial Preferred Shares: Fourteen Million One Hundred Six Thousand Three Hundred Ninety-Four (14,106,394) shares are classified and designated as Serial Preferred Shares without par value and are herein called the "Serial Preferred Shares"; and
B. Common Shares: Three Hundred Million (300,000,000) shares are classified and designated Common Shares with a par value of Fifty Cents (50(cent)) each and are herein called the "Common Shares".
The express terms of such classes of shares are as follows:
DIVISION A - SERIAL PREFERRED SHARES
1. Issuance in Series: The Serial Preferred Shares may be issued from time to time in series. All Serial Preferred Shares shall be of equal rank and shall be identical, except in respect of matters that may be fixed by the Board of Directors as herein provided, and each share of a particular series shall be identical with all the other shares of such series, except that in the case of series on which dividends are cumulative the dates from which dividends are cumulative may vary to reflect differences in the dates of issue. Subject to the provisions of Sections 2 to 8, both inclusive, of this Division A, which provisions shall apply to all Serial Preferred Shares, the Board of Directors is
hereby authorized to cause Serial Preferred Shares to be issued in one or more series, and with respect to each such series and prior to the issuance thereof, to fix:
(a) The designation of the series, which may be by distinguishing number, letter or title;
(b) The number of shares of the series, which number the Board of Directors may (except where otherwise provided in the creation of the series) increase or decrease (but not below the number of shares thereof then outstanding), the shares removed from any series to be available for reissuance in other series;
(c) The dividend rate of the series;
(d) The dates at which dividends, if declared, shall be payable, and in the case of series on which dividends are cumulative the dates from which dividends shall be cumulative;
(e) The redemption rights and price or prices, if any, for shares of the series;
(f) The terms, conditions and amount of any sinking fund provided for the purchase or redemption of the shares of the series;
(g) The amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the corporation;
(h) Whether the shares of the series shall be convertible into Common Shares or shares of any other series or class, and, if so, the conversion price or prices and the adjustments thereof, and all other terms and conditions upon which such conversion may be made; and
(i) Restrictions (in addition to those set forth in 6(b) and 6(c) of this Division A) on the issuance of shares of the same series or of any other class or series.
The Board of Directors is authorized to adopt from time to time and without further shareholder approval, amendments to the Amended Articles of Incorporation of the corporation fixing, with respect to each such series the matters described in clauses (a) to (i), both inclusive, of this Section 1.
2. Dividend Rights: The holders of Serial Preferred Shares of each series, in preference to the dividend rights of any class of shares of the corporation, shall be entitled to receive out of any funds legally available and when and as declared by the Board of Directors dividends in cash at the rate for such series fixed in accordance with the provisions of Section 1 of this Division A, and no more, payable quarterly on the dates fixed for such series. Such dividends shall be cumulative, in the case of shares of each particular series, from and after the date or dates fixed with respect to such series.
No dividend for any quarterly dividend period shall be paid upon or declared and set apart for any of the Serial Preferred Shares for any quarterly dividend period unless:
(a) as to each series of Serial Preferred Shares entitled to cumulative dividends, dividends for all past dividend periods shall have been paid or shall have been declared and a sum sufficient for the payment thereof set apart; and
(b) as to all series of Serial Preferred Shares, dividends for the current dividend period shall have been paid or be or have been declared and a sum sufficient for the payment thereof set apart ratably in accordance with the amounts which would be payable as dividends on the shares of the respective series for the current dividend period if all dividends for the current dividend period were declared and paid in full.
No dividend in respect of past dividend periods shall be paid upon or declared and set apart for payment on any of the Serial Preferred Shares entitled to cumulative dividends unless there shall be or have been declared and set apart for payment on all outstanding shares of Serial Preferred Shares entitled to cumulative dividends, dividends for past dividend periods ratably in accordance with the amounts which would be payable on the shares of the series entitled to cumulative dividends if all dividends due for all past dividend periods were declared and paid in full.
3. Dividends and Acquisitions of Shares: So long as any Serial Preferred Shares are outstanding, no dividend, except a dividend payable in Common Shares or in any other shares of the corporation ranking junior to the Serial Preferred Shares, shall be paid or declared or any distribution be made, except as aforesaid, on the Common Shares or on any other shares of the corporation, nor shall any Common Shares or any other shares of the corporation be purchased, retired or otherwise acquired by the corporation or any sinking fund payment with respect to any other shares of the corporation be made (except out of the proceeds of the sale of Common Shares or any other shares of the corporation ranking junior to the Serial Preferred Shares received by the corporation subsequent to January 31, 1968):
(a) Unless in each case all dividends on the Serial Preferred Shares for past quarterly dividend periods and the full dividends for the current quarterly dividend period shall have been declared and paid or a sum sufficient for payment thereof set apart; and
(b) Unless in each case there shall be no default with respect
to the redemption of Serial Preferred Shares of any series from, and no
default with respect to any required payment into, any sinking fund
provided for shares of such series in accordance with the provisions of
Section 1 of this Division A.
4. Redemption: (a) Subject to the express terms of each series and to the provisions of Section 6(b) (iii) of this Division A, the corporation (i) may from time to time redeem all or any part of the Serial Preferred Shares of any series at the time outstanding at the option of the Board of Directors at the applicable redemption price for such series fixed in accordance with the provisions of Section 1 of this Division A, or (ii) shall from time to time make such redemptions of the Serial Preferred Shares as may be required to fulfill the requirements of any sinking fund provided for shares of such series at the
applicable sinking fund redemption price fixed in accordance with the provisions of Section 1 of this Division A, together in each case with accrued and unpaid dividends to the redemption date.
(b) Notice of every such redemption shall be mailed, by first-class mail, postage prepaid, to the holders of record of the Serial Preferred Shares to be redeemed, at their respective addresses then appearing on the books of the corporation, not less than 30 nor more than 60 days prior to the date fixed for such redemption. At any time before or after notice has been given as above provided, the corporation may deposit the aggregate redemption price of the Serial Preferred Shares to be redeemed, together with accrued and unpaid dividends thereon to the redemption date, with any bank or trust company in Cleveland, Ohio, or New York, New York, having capital and surplus of more than $5,000,000, named in such notice, directed to be paid to the respective holders of the Serial Preferred Shares so to be redeemed, in amounts equal to the redemption price of all Serial Preferred Shares so to be redeemed, together with accrued and unpaid dividends thereon to the redemption date, on surrender of the stock certificate or certificates held by such holders, and upon the giving of such notice and the making of such deposit such holders shall cease to be shareholders with respect to such shares, and after such notice shall have been given and such deposit shall have been made such holders shall have no interest in or claim against the corporation with respect to such shares except only to receive such money from such bank or trust company, without interest, or the right to exercise, before the redemption date, any unexpired rights of conversion. In case less than all of the outstanding shares of Serial Preferred Shares are to be redeemed, the corporation shall select by lot the shares so to be redeemed in such manner as shall be prescribed by the Board of Directors.
If the holders of Serial Preferred Shares which shall have been called for redemption shall not, within six years after such deposit, have claimed the amount deposited for the redemption thereof, any such bank or trust company shall, upon demand, pay over to the corporation such unclaimed amounts and thereupon such bank or trust company and the corporation shall be relieved of all responsibility in respect thereof and to such holders.
(c) Any Serial Preferred Shares which are redeemed by the corporation pursuant to the provisions of this Section 4 of this Division A and any Serial Preferred Shares which are purchased and delivered in satisfaction of any sinking fund requirements provided for shares of such series and any Serial Preferred Shares which are converted in accordance with their express terms shall be cancelled and not reissued. Any Serial Preferred Shares otherwise acquired by the corporation shall be restored to the status of authorized and unissued Serial Preferred Shares without serial designation.
5. Rights Upon Liquidation: (a) The holders of Serial Preferred Shares of any series shall in case of liquidation, dissolution or winding up of the corporation, or any reduction of its capital, be entitled to receive in full out of the assets of the corporation, including its capital, before any amount shall be paid or distributed among the holders of Common Shares or any other shares of the corporation, the amounts fixed with respect to shares of such series in accordance with Section 1 of this Division A, plus in any such event an amount equal to all dividends accrued and unpaid thereon to the date of payment of the amount due pursuant to such liquidation, dissolution or winding up of the corporation. In case the net assets of the corporation legally available
therefor are insufficient to permit the payment upon all outstanding Serial Preferred Shares of the full preferential amount to which they are respectively entitled, then such net assets shall be distributed ratably upon outstanding shares of Serial Preferred Shares in proportion to the full preferential amount to which each such share is entitled.
After payment to holders of Serial Preferred Shares of the full preferential amounts as aforesaid, holders of Serial Preferred Shares as such shall have no right or claim to any of the remaining assets of the corporation.
In this Division "dividends accrued and unpaid" on any share means an amount computed by dividing the annual dividend payable on the share (whether earned, declared, paid or not) by 365 and multiplying the result by the number of days from the date on which dividends on the share first became cumulative through the date of payment of the amount due or the redemption date, as the case may be, and subtracting from the product the sum of dividends paid (without interest) on the share and of dividends declared on the share for whose payment a sufficient sum has been set aside.
(b) The merger or consolidation of the corporation into or with any other corporation, or the merger of any other corporation into it, or the sale, lease, or conveyance of all or any part of the property or business of the corporation, shall not be deemed to be a dissolution, liquidation or winding up of the corporation for the purposes of this Section 5 of this Division A. No purchase, redemption or retirement of any shares of the corporation in any manner authorized or permitted by these Amended Articles of Incorporation shall be considered a reduction of capital within the meaning of this Section 5 of this Division A.
6. Voting Rights: (a) The holders of Serial Preferred Shares shall be entitled to one vote for each such share upon all matters presented to shareholders; and, except as otherwise provided herein or required by law, the holders of Serial Preferred Shares and the holders of Common Shares shall vote together as one class on all matters.
If, and so often as, the corporation shah be in default in the payment of the equivalent of six quarterly dividends (whether or not consecutive) on any series of Serial Preferred Shares at the time outstanding, whether or not earned or declared, the holders of Serial Preferred Shares of all series voting separately as a class and in addition to all other rights to vote for directors shall be entitled to elect, as herein provided, two members of the Board of Directors of the corporation; provided, however, that the holders of Serial Preferred Shares shall not have or exercise such special class voting rights except at meetings of the shareholders for the election of directors at which the holders of not less than a majority of the outstanding Serial Preferred Shares of all series are present in person or by proxy; and provided further that the special class voting rights provided for herein when the same shall have become vested shall remain so vested until all dividends on the Serial Preferred Shares of all series then outstanding for past quarterly dividend periods and for the current quarterly dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart, whereupon the holders of Serial Preferred Shares shall be divested of their special class voting rights in respect of subsequent elections of directors, subject to the revesting of such special class voting rights in the event hereinabove specified in this Section 6(a).
At any time after such voting power shall have been so vested in the holders of the Serial Preferred Shares, the Secretary of the corporation may, and, upon the written request of the holders of record of 10% or more of the Serial Preferred Shares then outstanding, addressed to him at the principal office of the corporation in the State of Ohio, shall, call a special meeting of the holders of the Serial Preferred Shares for the election of the directors to be elected by them as herein provided to be held within 30 days after such call and at the place and upon the notice provided by law and in the Code of Regulations for the holding of meetings of shareholders; provided, however, that the Secretary shall not be required to call such special meeting in the case of any such request received less than 90 days before the date fixed for any annual meeting of shareholders.
If any such special meeting required to be called as provided shall not be called by the Secretary within the 30 days after the receipt of any such request, then the holders of record of 10% or more of the Serial Preferred Shares then outstanding may designate in writing one of their number to call such meeting, and the person so designated may call such meeting to be held at the place and upon the notice above provided and for that purpose shall have access to the stock ledger of the corporation. No such special meeting and no adjournment thereof shall be held on a date later than 30 days before the annual meeting of the shareholders or special meeting held in place thereof next succeeding the time when the holders of the Serial Preferred Shares become entitled to elect directors as above provided. If any such special meeting shall be called as above provided, then, by vote of the holders of at least a majority of those Serial Preferred Shares which are present or represented by proxy at such meeting, the then authorized number of directors of the corporation shall be increased by two and at such meeting, the holders of the Serial Preferred Shares shall be entitled to elect the additional directors so provided for, but any directors so elected shall not hold office beyond the annual meeting of the shareholders or special meeting held in place thereof next succeeding the time when the holders of the Serial Preferred Shares become entitled to elect directors as above provided.
Whenever the holders of the Serial Preferred Shares shall be divested of the voting power as above provided, the terms of office of all persons elected as directors by the holders of the Serial Preferred Shares as a class shall forthwith terminate and the number of directors shall be reduced accordingly.
The two directors who may be elected by the holders of Serial Preferred Shares pursuant to the foregoing provisions shall be in addition to any other directors then in office or proposed to be elected otherwise than pursuant to such provisions, and nothing in such provisions shall prevent any change otherwise permitted in the total number of directors of the corporation or require the resignation of any director elected otherwise than pursuant to such provisions.
(b) The vote or consent of the holders of at least two-thirds of the then outstanding shares of Serial Preferred Shares, given in person or by proxy, either in writing or at a meeting called for the purpose at which the holders of Serial Preferred Shares shall vote separately as a class, shall be necessary to effect any one or more of the following (but so far as the holders of Serial Preferred Shares are concerned, such action may be effected with such vote or consent):
(i) Any amendment, alteration or repeal of any of the provisions of the Amended Articles of Incorporation or of the Code of Regulations of the corporation which affects adversely the voting powers, rights or preferences of the holders of Serial Preferred Shares; provided, however, that for the purpose of this clause (i) only, neither the amendment of the Amended Articles of Incorporation of the corporation to authorize, or to increase the authorized or outstanding number of shares of Serial Preferred Shares or of any shares of any class ranking on a parity with or junior to the Serial Preferred Shares, nor the increase by the shareholders pursuant to the Code of Regulations of the number of directors of the corporation shall be deemed to affect adversely the voting powers, rights or preferences of the holders of Serial Preferred Shares; and provided, further, that if such amendment, alteration or repeal affects adversely the rights or preferences of one or more but not all of the then outstanding series of Serial Preferred Shares, only the vote or consent of the holders of at least two-thirds of the number of the then outstanding shares of the series so affected shall be required;
(ii) The authorization of, or the increase in the authorized number of, any shares of any class ranking prior to the Serial Preferred Shares; or
(iii) The purchase or redemption (whether for sinking fund purposes or otherwise) of less than all the then outstanding Serial Preferred Shares except in accordance with a purchase offer made to all holders of record of Serial Preferred Shares, unless all dividends on all Serial Preferred Shares then outstanding for all previous quarterly dividend periods shall have been declared and paid or funds therefor set apart and all accrued sinking fund obligations applicable to all Serial Preferred Shares shall have been complied with.
(c) The vote or consent of the holders of at least a majority of the then outstanding Serial Preferred Shares, given in person or by proxy, either in writing or at a meeting called for the purpose at which the holders of Serial Preferred Shares shall vote separately as a class, shall be necessary (but so far as the holders of Serial Preferred Shares are concerned such action may be effected with such vote or consent) to authorize any shares ranking on a parity with the Serial Preferred Shares or an increase in the authorized number of shares of Serial Preferred Shares.
7. No holder of Serial Preferred Shares of any series shall be entitled as such as a matter of right to subscribe for or purchase any part of any issue of shares of the corporation, of any class whatsoever, or any part of any issue of securities convertible into shares of the corporation, of any class whatsoever, and whether issued for cash, property, services, or otherwise.
8. For the purposes of this Division A:
(a) Whenever reference is made to shares "ranking prior to the Serial Preferred Shares", such reference shall mean and include all shares of the corporation in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding
up of the corporation are given preference over the rights of the holders of Serial Preferred Shares.
(b) Whenever reference is made to shares "on a parity with the Serial Preferred Shares", such reference shall mean and include all shares of the corporation in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the corporation rank on an equality with the rights of the holders of Serial Preferred Shares.
(c) Whenever reference is made to shares "ranking junior to the Serial Preferred Shares", such reference shall mean and include all shares of the corporation in respect of which the rights of the holders thereof as to the payment of dividends and as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the corporation are junior or subordinate to the rights of the holders of Serial Preferred Shares.
DIVISION B - COMMON SHARES
1. Dividend Rights: After full dividends on all the outstanding Serial Preferred Shares for all past dividend periods and also the full dividend on such shares for the current dividend period shall have been paid or declared and set apart for payment in accordance with paragraph 2 of Division A above, then out of any funds lawfully available for dividends under the laws of the State of Ohio, dividends may be paid upon the Common Shares and upon any other shares, to the exclusion of the Serial Preferred Shares, if, when and as declared by the Board of Directors in its discretion.
2. Distribution of Assets: In the event of any liquidation, dissolution or winding up of the corporation, or any reduction of its capital, resulting in any distribution of its assets to its shareholders, after there shall have been paid or set apart for the holders of the Serial Preferred Shares the full preferential amounts to which they are entitled under the provisions of paragraph 6 of Division A above, the holders of the Common Shares shall be entitled to receive as a class, pro rata, to the exclusion of the Serial Preferred Shares, the assets of the corporation remaining for distribution to its shareholders.
3. Voting Power: The holders of the Common Shares shall, subject to the provisions of the Code of Regulations of the corporation and of the statutes of the State of Ohio relating to the fixing of a record date, be entitled to one vote for each Common Share held by them respectively, for the election of directors (excepting directors to be elected by holders of the Serial Preferred Shares voting as a class) and for all other purposes.
FIFTH: The corporation, by its Board of Directors, shall have full power and authority, without any consent or vote of the shareholders or any class thereof, from time to time to purchase shares of any class issued by the corporation to the extent permitted by law except as may be otherwise provided in these Amended Articles.
SIXTH: Notwithstanding any provision of law requiring for any action the vote of a designated proportion of the voting power of the corporation, such action may be taken by the vote of the holders of shares entitling them to exercise a majority of the voting power of this corporation; and notwithstanding any provision of law requiring (or permitting as an alternative to a vote) for any action the written consent of the holders of any designated proportion of the outstanding shares of a corporation, such action may be taken by the written consent of the holders of a majority of the outstanding shares of this corporation-except in each case as may be otherwise provided in these Amended Articles or by the Amended Regulations of the corporation.
The affirmative vote or written consent of the holders of shares entitling them to exercise two-thirds of the voting power of this corporation, given in person or by proxy at a meeting called for the purpose, shall be necessary:
1. to approve
(a) the sale, exchange, lease, transfer or other disposition by the corporation of all, or substantially all, of its assets or business, or
(b) the consolidation of the corporation, or its merger, into another corporation, or
(c) the merger into the corporation of another corporation or corporations if the merger involves the issuance or transfer by the corporation to the shareholders of the other constituent corporation or corporations of such number of shares of the corporation as entitle the holders thereof to exercise at least one-sixth of the voting power of the corporation in the election of directors immediately after the consummation of the merger, or
(d) a combination or majority share acquisition in which the corporation is the acquiring corporation and its voting shares are issued or transferred to another corporation if the combination or majority share acquisition involves the issuance or transfer by the corporation to the shareholders of the other corporation or corporations of such number of shares of the corporation as entitle the holders thereof to exercise at least one-sixth of the voting power of the corporation in the election of directors immediately after the consummation of the combination or majority share acquisition; or
2. to approve any agreement, contract or other arrangement providing for any of the transactions described in subparagraph 1 above; or
3. to effect any amendment of the Amended Articles of Incorporation of the corporation which changes the provisions of these subparagraphs 1, 2 or 3 or the aforesaid affirmative vote or consent requirements.
For purposes of these Amended Articles of Incorporation, the terms "combination", "majority share acquisition" and "acquiring corporation" shall have the meaning given them by Section 1701.01 of the Ohio General Corporation Law or any similar provision hereinafter enacted.
SEVENTH: No holder of Common Shares of the corporation shall be entitled, as such, as a matter of right to subscribe for or purchase any part of any issue of shares of the corporation of any class whatsoever, or any part of any issue of securities convertible into shares of the corporation of any class whatsoever and whether issued for cash, property, services or otherwise.
EIGHTH: These Amended Articles of Incorporation shall supersede the heretofore existing Amended Articles of Incorporation of the corporation.
RESOLVED FURTHER: That the Chairman and Chief Executive Officer, the President, the Vice Chairman or any Vice President, and the Secretary or an Assistant Secretary, of this corporation, be and hereby are authorized and directed to execute and to file in the office of the Secretary of State of Ohio a certificate containing a copy of these resolutions and a statement of the manner of their adoption and to execute, deliver and file any other certificate or instrument which they may deem necessary or appropriate to render effective or otherwise fully to carry out the intent and purpose of these resolutions.
IN WITNESS WHEREOF, said W. E. Butler, Chairman and Chief Executive Officer, and E. R. Franklin, Secretary, of Eaton Corporation, acting for and on behalf of said corporation, have hereunto subscribed their names and caused the seal of said corporation to be hereunto affixed this 27th day of April, 1994.
By: /S/ W.E. BUTLER
-------------------------------------------
Chairman and Chief Executive Officer
By: /S/ E.R. FRANKLIN
-------------------------------------------
Secretary
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Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 4 (b)
EATON CORPORATION
and
SOCIETY NATIONAL BANK
Rights Agreement
Dated as of June 28, 1995
TABLE OF CONTENTS
Page
Section 1. Certain Definitions............................................................................2
Section 2. Appointment of Rights Agent....................................................................6
Section 3. Issue of Right Certificates....................................................................6
Section 4. Form of Right Certificates.....................................................................9
Section 5. Countersignature and Registration..............................................................9
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen
Right Certificates............................................................................10
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.................................11
Section 8. Cancellation and Destruction of Right Certificates............................................13
Section 9. Availability of Preferred Shares..............................................................13
Section 10. Preferred Shares Record Date..................................................................14
Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights............................15
Section 12. Certificate of Adjusted Purchase Price or Number of Shares....................................26
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power..........................26
Section 14. Fractional Rights and Fractional Shares.......................................................27
Section 15. Rights of Action..............................................................................29
Section 16. Agreement of Right Holders....................................................................30
Section 17. Right Certificate Holder Not Deemed a Stockholder.............................................30
Section 18. Concerning the Rights Agent...................................................................31
Section 19. Merger or Consolidation or Change of Name of Rights Agent.....................................32
Section 20. Rights and Duties of Rights Agent.............................................................33
Section 21. Change of Rights Agent........................................................................35
Section 22. Issuance of New Right Certificates............................................................37
Section 23. Redemption....................................................................................37
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TABLE OF CONTENTS
(continued)
Section 24. Exchange......................................................................................38 Section 25. Notice of Certain Events......................................................................40 Section 26. Notices.......................................................................................41 Section 27. Supplements and Amendments....................................................................42 Section 28. Successors....................................................................................43 Section 29. Benefits of this Agreement....................................................................43 Section 30. Severability..................................................................................43 Section 31. Governing Law.................................................................................43 Section 32. Counterparts..................................................................................44 Section 33. Descriptive Headings..........................................................................44 Signatures ..............................................................................................45 |
Exhibit A - Form of Certificate of Amendment
Exhibit B - Form of Right Certificate
Exhibit C - Summary of Rights to Purchase Preferred Shares
Agreement, dated as of June 28, 1995, between Eaton
Corporation, an Ohio corporation (the "Company"), and Society National Bank, a
national banking association (the "Rights Agent").
The Board of Directors of the Company has authorized and
declared a dividend of one preferred share purchase right (a "Right") for each
Common Share (as hereinafter defined) of the Company outstanding on July 12,
1995 (the "Record Date"), each Right representing the right to purchase one
one-hundredth of a Preferred Share (as hereinafter defined), upon the terms and
subject to the conditions herein set forth, and has further authorized and
directed the issuance of one Right with respect to each Common Share that shall
become outstanding between the Record Date and the earliest of the Distribution
Date, the Redemption Date and the Final Expiration Date (as such terms are
hereinafter defined).
Accordingly, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as
such term is hereinafter defined) of 20% or more of the Common Shares of the
Company then outstanding, but shall not include the Company, any Subsidiary (as
such term is hereinafter defined) of the Company, any employee benefit plan of
the Company or any Subsidiary of the Company, or any entity holding Common
Shares for or pursuant to the terms of any such plan. Notwithstanding the
foregoing, no Person shall become an "Acquiring Person" as the result of an
acquisition of Common Shares by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 20% or more of the Common Shares of the Company then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 20% or more of the Common Shares of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an "Acquiring Person". Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person", as defined pursuant to the foregoing provisions of this paragraph (a), has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an "Acquiring Person," as defined pursuant to the foregoing provisions of this paragraph (a), then such Person shall not be deemed to be or have ever been an "Acquiring Person" for any purposes of this Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or Associates has
(A) the right to acquire (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement, arrangement or
understanding (other than
customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than these Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or in
directly, by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities) for the purpose of acquiring, holding,
voting (except to the extent contemplated by the proviso to Section
1(c)(ii)(B)) or disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with
reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday, or a
day on which banking institutions in [Ohio] are authorized or obligated by law
or executive order to close.
(e) "Close of business" on any given date shall mean 5:00 P.M., Cleveland,
Ohio time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 P.M., Cleveland, Ohio time, on the next succeeding
Business Day.
(f) "Common Shares" when used with reference to the Company shall mean the
shares of common stock, par value $.50 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(g) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(h) "Final Expiration Date" shall have the meaning set forth in Section 7
hereof.
(i) "Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
(j) "Preferred Shares" shall mean shares of Series A Participating
Preferred Stock, without par value, of the Company having the rights and
preferences set forth in the Form of Certificate of Amendment attached to this
Agreement as Exhibit A.
(k) "Redemption Date" shall have the meaning set forth in
Section 7 hereof.
(l) "Shares Acquisition Date" shall mean the first date of
public announcement by the Company or an Acquiring Person that an Acquiring
Person has become such.
(m) "Subsidiary" of any Person shall mean any corporation or
other entity of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such Person.
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to act as agent for the Company and the holders of the
Rights (who, in accordance with Section 3 hereof, shall prior to the
Distribution Date also be the holders of the Common Shares) in accordance with
the terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-Rights Agents as
it may deem necessary or desirable.
Section 3. Issue of Right Certificates. (a) Until the earlier
of (i) the tenth day after the Shares Acquisition Date or (ii) the tenth
business day (or such later date as may be determined by action of the Board of
Directors prior to such time as any Person becomes an Acquiring Person) after
the date of the commencement by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company or any entity holding Common Shares for or pursuant to
the terms of any such plan) of, or of the first public announcement of the
intention of any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of the Company or
any entity holding Common Shares for or pursuant to the terms of any such plan)
to commence, a tender or exchange offer the consummation of which would result
in any Person becoming the Beneficial Owner of Common Shares aggregating 20% or
more of the then outstanding Common Shares (including any such date which is
after the date of this Agreement and prior to the issuance of the Rights; the
earlier of such dates being herein referred to as the "Distribution Date"), (x)
the Rights will be evidenced (subject to the provisions of Section 3(b) hereof)
by the certificates for Common Shares registered in the names of the holders
thereof (which certificates shall also be deemed to be Right Certificates) and
not by separate Right Certificates, and (y) the right to receive Right
Certificates will be transferable only in connection with the transfer of Common
Shares. As soon as practicable after the Distribution Date, the Company will
prepare and execute, the Rights Agent will countersign, and the Company will
send or cause to be sent (and the Rights Agent will, if requested, send) by
first-class, insured, postage-prepaid mail, to each record holder of Common
Shares as of the close of business on the Distribution Date, at the address of
such holder shown on the records of the Company, a Right Certificate, in
substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing
one Right for each Common Share so held. As of the Distribution Date, the Rights
will be evidenced solely by such Right Certificates.
The Company shall notify the Rights Agent in writing
immediately upon the occurrence of the Distribution Date and, if such
notification is given orally, the Company shall confirm same in writing on or
prior to the Business Day next following. Until such notice is received by the
Rights Agent, the Rights Agent may presume conclusively for all purposes that
the Distribution Date has not occurred.
(b) On the Record Date, or as soon as practicable thereafter,
the Company will send a copy of a Summary of Rights to Purchase Preferred
Shares, in substantially the form of Exhibit C hereto (the "Summary of Rights"),
by first-class, postage-prepaid mail, to each record holder of Common Shares as
of the close of business on the Record Date, at the address of such holder shown
on the records of the Company. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders thereof
together with a copy of the Summary of Rights attached thereto. Until the
Distribution Date (or the earlier of the Redemption Date or the Final Expiration
Date), the surrender for transfer of any certificate for Common Shares
outstanding on the Record Date, with or without a copy of the Summary of Rights
attached thereto, shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby.
(c) Certificates for Common Shares which become outstanding
(including, without limitation, reacquired Common Shares referred to in the last
sentence of this paragraph (c)) after the Record Date but prior to the earliest
of the Distribution Date, the Redemption Date or the Final Expiration Date shall
have impressed on, printed on, written on or otherwise affixed to them the
following legend:
This certificate also evidences and entitles the holder hereof
to certain rights as set forth in a Rights Agreement between
Eaton Corporation and Society National Bank, dated as of June
28, 1995 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is
on file at the principal executive offices of Eaton
Corporation. Under certain circumstances, as set forth in the
Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this
certificate. Eaton Corporation, will mail to the holder of
this certificate a copy of the Rights Agreement without charge
after receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, Rights
issued to any Person who becomes an Acquiring Person (as
defined in the Rights Agreement) may become null and void.
With respect to such certificates containing the foregoing legend, until the Distribution Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby. In
the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed cancelled and retired so that the Company shall
not be entitled to exercise any Rights associated with the Common Shares which
are no longer outstanding.
Section 4. Form of Right Certificates. The Right Certificates
(and the forms of election to purchase Preferred Shares and of assignment to be
printed on the reverse thereof) shall be substantially the same as Exhibit B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage. Subject to the provisions of Section 22 hereof, the Right Certificates
shall entitle the holders thereof to purchase such number of one one-hundredths
of a Preferred Share as shall be set forth therein at the price per one
one-hundredth of a Preferred Share set forth therein (the "Purchase Price"), but
the number of such one one-hundredths of a Preferred Share and the Purchase
Price shall be subject to adjustment as provided herein.
Section 5. Countersignature and Registration. The Right
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its Chief Executive Officer, its President, any of its Vice Presidents,
or its Treasurer, either manually or by facsimile signature, shall have affixed
thereto the Company's seal or a facsimile thereof, and shall be attested by the
Secretary or an Assistant Secretary of the Company, either manually or by
facsimile signature.
The Right Certificates shall be manually countersigned by
the Rights Agent and shall not be valid for any purpose unless countersigned. In
case any officer of the Company who shall have signed any of the Right
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of the Company to sign such Right
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office, books for registration and transfer
of the Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
Subject to the provisions of Section 14 hereof, at any time after the close of
business on the Distribution Date, and at or prior to the close of business on
the earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates,
entitling the registered holder to purchase a like number of one one-hundredths
of a Preferred Share as the Right Certificate or Right Certificates surrendered
then entitled such holder to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Right Certificate or Right
Certificates shall make such request in writing delivered to the Rights Agent,
and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the principal office of the
Rights Agent. Thereupon the Rights Agent shall countersign and deliver to the
person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date
of Rights. (a) The registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each one one-hundredth of a
Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the close of business on July 12, 2005 (the "Final Expiration
Date"), (ii) the time at which the Rights are redeemed as provided in Section 23
hereof (the "Redemption Date"), or (iii) the time at which such Rights are
exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-hundredth of a
Preferred Share purchasable pursuant to the exercise of a Right shall initially
be $250, and shall be subject to adjustment from time to time as provided in
Section 11 or 13 hereof and shall be payable in lawful money of the United
States of America in accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase duly executed,
accompanied by payment of the Purchase Price for the shares to be purchased and
an amount equal to any applicable transfer tax required to be paid by the holder
of such Right Certificate in accordance with Section 9 hereof by certified
check, cashier's check or money order payable to the order of the Company, the
Rights Agent shall thereupon promptly (i) (A) requisition from any transfer
agent of the Preferred Shares certificates for the number of Preferred Shares to
be purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) requisition from the depositary agent
depositary receipts representing such number of one one-hundredths of a
Preferred Share as are to be purchased (in which case certificates for the
Preferred Shares represented by such receipts shall be deposited by the transfer
agent with the depositary agent) and the Company hereby directs the depositary
agent to comply with such request, (ii) when appropriate, requisition from the
Company the amount of cash to be paid in lieu of issuance of fractional shares
in accordance with Section 14 hereof, (iii) after receipt of such certificates
or depositary receipts, cause the same to be delivered to or upon the order of
the registered holder of such Right Certificate, registered in such name or
names as may be designated by such holder and (iv) when appropriate, after
receipt, deliver such cash to or upon the order of the registered holder of such
Right Certificate.
(d) In case the registered holder of any Right Certificate
shall exercise less than all the Rights evidenced thereby, a new Right
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 14 hereof.
Section 8. Cancellation and Destruction of Right Certificates.
All Right Certificates surrendered for the purpose of exercise, transfer, split
up, combination or exchange shall, if surrendered to the Company or to any of
its agents, be delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no
Right Certificates shall be issued in lieu thereof except as expressly permitted
by any of the provisions of this Rights Agreement. The Company shall deliver to
the Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all cancelled Right Certificates to the Company, or shall, at the written
request of the Company, destroy such cancelled Right Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. Availability of Preferred Shares. The Company
covenants and agrees that it will cause to be reserved and kept available out of
its authorized and unissued Preferred Shares or any Preferred Shares held in its
treasury, the number of Preferred Shares that will be sufficient to permit the
exercise in full of all outstanding Rights in accordance with Section 7. The
Company covenants and agrees that it will take all such action as may be
necessary to ensure that all Preferred Shares delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such Preferred Shares
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Right Certificates
or of any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose
name any certificate for Preferred Shares is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of the
Preferred Shares represented thereby on, and such certificate shall be dated,
the date upon which the Right Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made; provided, however, that if the date of such surrender and
payment is a date upon which the Preferred Shares transfer books of the Company
are closed, such person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the Preferred Shares transfer books of the Company are open. Prior to
the exercise of the Rights evidenced thereby, the holder of a Right Certificate
shall not be entitled to any rights of a holder of Preferred Shares for which
the Rights shall be exercisable, including, without limitation, the right to
vote, to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or
Number of Rights. The Purchase Price, the number of Preferred Shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Shares
payable in Preferred Shares, (B) subdivide the outstanding Preferred
Shares, (C) combine the outstanding Preferred Shares into a smaller
number of Preferred Shares or (D) issue any shares of its capital stock
in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a), the Purchase Price in effect
at the time of the record date for such dividend or of the effective
date of such subdivision, combination or reclassification, and the
number and kind of shares of capital stock issuable on such date, shall
be proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive the aggregate number and
kind of shares of capital stock which, if such Right had been exercised
immediately prior to such date and at a time when the Preferred Shares
transfer books of the Company were open, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification; provided, however, that
in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital
stock of the Company issuable upon exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any
Person becomes an Acquiring Person, each holder of a Right shall
thereafter have a right to receive, upon exercise thereof at a price
equal to the then current Purchase Price multiplied by the number of
one one-hundredths of a Preferred Share for which a Right is then
exercisable, in accordance with the terms of this Agreement and in lieu
of Preferred Shares, such number of Common Shares of the Company as
shall equal the result obtained by (x) multiplying the then current
Purchase Price by the number of one one-hundredths of a Preferred Share
for which a Right is then exercisable and dividing that product by (y)
50% of the then current per share market price of the Company's Common
Shares (determined pursuant to Section 11(d) hereof) on the date of the
occurrence of such event. In the event that any Person shall become an
Acquiring Person and the Rights shall then be outstanding, the Company
shall not take any action which would eliminate or diminish the
benefits intended to be afforded by the Rights.
From and after the occurrence of such event, any Rights that
are or were acquired or beneficially owned by any Acquiring Person (or
any Associate or Affiliate of such Acquiring Person) shall be void and
any holder of such Rights shall thereafter have no right to exercise
such Rights under any provision of this Agreement. No Right Certificate
shall be issued pursuant to Section 3 that represents Rights
beneficially owned by an Acquiring Person whose Rights would be void
pursuant to the preceding sentence or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the
transfer of any Rights to an Acquiring Person whose Rights would be
void pursuant to the preceding sentence or any Associate or Affiliate
thereof or to any nominee of such Acquiring Person, Associate or
Affiliate; and any Right Certificate delivered to the Rights Agent for
transfer to an Acquiring Person whose Rights would be void pursuant to
the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but unissued to permit
the exercise in full of the Rights in accordance with the foregoing
subparagraph (ii), the Company shall take all such action as may be
necessary to authorize additional Common Shares for issuance upon
exercise of the Rights. In the event the Company shall, after good
faith effort, be unable to take all such action as may be necessary to
authorize such additional Common Shares, the Company shall substitute,
for each Common Share that would otherwise be issuable upon exercise of
a Right, a number of Preferred Shares or fraction thereof such that the
current per share market price of one Preferred Share multiplied by
such number or fraction is equal to the current per share market price
of one Common Share as of the date of issuance of such Preferred Shares
or fraction thereof.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred
Shares entitling them (for a period expiring within 45 calendar days
after such record date) to subscribe for or purchase Preferred Shares
(or shares having the same rights, privileges and preferences as the
Preferred Shares ("equivalent preferred shares")) or securities
convertible into Preferred Shares or equivalent preferred shares at a
price per Preferred Share or equivalent preferred share (or having a
conversion price per share, if a security convertible into Preferred
Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section
11(d)) on such record date, the Purchase Price to be in effect after
such record date shall be determined by multiplying the Purchase Price
in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of Preferred Shares outstanding
on such record date plus the number of Preferred Shares which the
aggregate offering price of the total number of Preferred Shares and/or
equivalent preferred shares so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be
offered) would purchase at such current market price and the
denominator of which shall be the number of Preferred Shares
outstanding on such record date plus the number of additional Preferred
Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so
to be offered are initially convertible); provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right
be less than the aggregate par value of the shares of capital stock of
the Company issuable upon exercise of one Right. In case such
subscription price may be paid in a consideration part or all of which
shall be in a form other than cash, the value of such consideration
shall be as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed
with the Rights Agent. Preferred Shares owned by or held for the
account of the Company shall not be deemed outstanding for the purpose
of any such computation. Such adjustment shall be made successively
whenever such a record date is fixed; and in the event that such
rights, options or warrants are not so issued, the Purchase Price shall
be adjusted to be the Purchase Price which would then be in effect if
such record date had not been fixed.
(c) In case the Company shall fix a record date for the making
of a distribution to all holders of the Preferred Shares (including any
such distribution made in connection with a consolidation or merger in
which the Company is the continuing or surviving corporation) of
evidences of indebtedness or assets (other than a regular quarterly
cash dividend or a dividend payable in Preferred Shares) or
subscription rights or warrants (excluding those referred to in Section
11(b) hereof), the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of
which shall be the then current per share market price of the Preferred
Shares on such record date, less the fair market value (as determined
in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights
Agent) of the portion of the assets or evidences of indebtedness so to
be distributed or of such subscription rights or warrants applicable to
one Preferred Share and the denominator of which shall be such current
per share market price of the Preferred Shares; provided, however, that
in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital
stock of the Company to be issued upon exercise of one Right. Such
adjustments shall be made successively whenever such a record date is
fixed; and in the event that such distribution is not so made, the
Purchase Price shall again be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security" for the
purpose of this Section 11(d)(i)) on any date shall be deemed to be the
average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares, or (B) any subdivision, combination or reclassification of such Security and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of
Directors of the Company. The term "Trading Day" shall mean a day on
which the principal national securities exchange on which the Security
is listed or admitted to trading is open for the transaction of
business or, if the Security is not listed or admitted to trading on
any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder,
the "current per share market price" of the Preferred Shares
shall be determined in accordance with the method set forth in
Section 11(d)(i). If the Preferred Shares are not publicly
traded, the "current per share market price" of the Preferred
Shares shall be conclusively deemed to be the current per
share market price of the Common Shares as determined pursuant
to Section 11(d)(i) (appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring
after the date hereof), multiplied by one hundred. If neither
the Common Shares nor the Preferred Shares are publicly held
or so listed or traded, "current per share market price" shall
mean the fair value per share as determined in good faith by
the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
the Purchase Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one one-millionth
of a Preferred Share or one ten-thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section
11(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock of the Company other than Preferred
Shares, thereafter the number of such other shares so receivable upon exercise
of any Right shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-hundredths of a Preferred Share (calculated to the nearest one
one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number
of one one-hundredths of a share covered by a Right immediately prior to this
adjustment by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of one one-hundredths of a Preferred Share purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-hundredths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein and shall be
registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-hundredths of a Preferred Share issuable upon the
exercise of the Rights, the Right Certificates theretofore and thereafter issued
may continue to express the Purchase Price and the number of one one-hundredths
of a Preferred Share which were expressed in the initial Right Certificates
issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below one one-hundredth of the then par value, if
any, of the Preferred Shares issuable upon exercise of the Rights, the Company
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that it in its sole discretion shall determine
to be advisable in order that any consolidation or subdivision of the Preferred
Shares, issuance wholly for cash of any Preferred Shares at less than the
current market price, issuance wholly for cash of Preferred Shares or securities
which by their terms are convertible into or exchangeable for Preferred Shares,
dividends on Preferred Shares payable in Preferred Shares or issuance of rights,
options or warrants referred to hereinabove in Section 11(b), hereafter made by
the Company to holders of its Preferred Shares shall not be taxable to such
stockholders.
(n) In the event that at any time after the date of this
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-hundredths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-hundredths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
Section 12. Certificate of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Section 11 or 13
hereof, the Company shall promptly (a) prepare a certificate setting forth such
adjustment, and a brief statement of the facts accounting for such adjustment,
(b) file with the Rights Agent and with each transfer agent for the Common
Shares or the Preferred Shares a copy of such certificate and (c) mail a brief
summary thereof to each holder of a Right Certificate in accordance with Section
25 hereof.
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power. In the event, directly or indirectly, at any time after
a Person has become an Acquiring Person, (a) the Company shall consolidate with,
or merge with and into, any other Person, (b) any Person shall consolidate with
the Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of any other Person (or the Company) or cash or any
other property, or (c) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person other than the Company or one or more of its wholly-owned
Subsidiaries, then, and in each such case, proper provision shall be made so
that (i) each holder of a Right (except as otherwise provided herein) shall
thereafter have the right to receive, upon the exercise thereof at a price equal
to the then current Purchase Price multiplied by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of such other Person (including the Company as
successor thereto or as the surviving corporation) as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable and
dividing that product by (B) 50% of the then current per share market price of
the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer; (ii) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or transfer, all
the obligations and duties of the Company pursuant to this Agreement; (iii) the
term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such
issuer shall take such steps (including, but not limited to, the reservation of
a sufficient number of its Common Shares in accordance with Section 9 hereof) in
connection with such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to the Common Shares thereafter deliverable upon the exercise of
the Rights. The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and such issuer shall have
executed and delivered to the Rights Agent a supplemental agreement so
providing. The Company shall not enter into any transaction of the kind referred
to in this Section 13 if at the time of such transaction there are any rights,
warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights. The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares. (a) The
Company shall not be required to issue fractions of Rights or to distribute
Right Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Right Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right. For the purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price for any day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Rights
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Board of Directors of
the Company. If on any such date no such market maker is making a market in the
Rights, the fair value of the Rights on such date as determined in good faith by
the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute
certificates which evidence fractional Preferred Shares (other than fractions
which are integral multiples of one one-hundredth of a Preferred Share).
Fractions of Preferred Shares in integral multiples of one one-hundredth of a
Preferred Share may, at the election of the Company, be evidenced by depositary
receipts, pursuant to an appropriate agreement between the Company and a
depositary selected by it; provided, that such agreement shall provide that the
holders of such depositary receipts shall have all the rights, privileges and
preferences to which they are entitled as beneficial owners of the Preferred
Shares represented by such depositary receipts. In lieu of fractional Preferred
Shares that are not integral multiples of one one-hundredth of a Preferred
Share, the Company shall pay to the registered holders of Right Certificates at
the time such Rights are exercised as herein provided an amount in cash equal to
the same fraction of the current market value of one Preferred Share. For the
purposes of this Section 14(b), the current market value of a Preferred Share
shall be the closing price of a Preferred Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect
of this Agreement, excepting the rights of action given to the Rights Agent
under Section 18 hereof, are vested in the respective registered holders of the
Right Certificates (and, prior to the Distribution Date, the registered holders
of the Common Shares); and any registered holder of any Right Certificate (or,
prior to the Distribution Date, of the Common Shares), without the consent of
the Rights Agent or of the holder of any other Right Certificate (or, prior to
the Distribution Date, of the Common Shares), may, in his own behalf and for his
own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect of, his
right to exercise the Rights evidenced by such Right Certificate in the manner
provided in such Right Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a
Right, by accepting the same, consents and agrees with the Company and the
Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate (or, prior to the Distribution Date,
the associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder.
No holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to
pay to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense (including, without
limitation, the reasonable expenses of legal counsel), incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of its duties under this Agreement.
The Rights Agent shall be protected and shall incur no
liability for, or in respect of any action taken, suffered or omitted by it in
connection with, its administration of this Agreement, in reliance upon any
Right Certificate or certificate for the Preferred Shares or Common Shares or
for other securities of the Company, instrument of assignment or transfer, power
of attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper person or persons, or otherwise upon the advice of counsel as set
forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of
Rights Agent. Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the stock transfer business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Right Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
In case at any time the name of the Rights Agent shall be
changed and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Right Certificates so countersigned; and in
case at that time any of the Right Certificates shall not have been
countersigned, the Rights Agent may countersign such Right Certificates either
in its prior name or in its changed name; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
Section 20. Rights and Duties of Rights Agent. The Rights
Agent undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Right Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel shall be full
and complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect thereof
be herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company
and any other Person only for its own negligence, bad faith or willful
misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any Right Certificate;
nor shall it be responsible for any change in the exercisability of the Rights
(including the Rights becoming void pursuant to Section 11(a)(ii) hereof) or any
adjustment in the terms of the Rights (including the manner, method or amount
thereof) provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after actual
notice that such change or adjustment is required); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Secretary or the Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered by it in
good faith in accordance with instructions of any such officer or for any delay
in acting while waiting for those instructions.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct, provided reasonable care was exercised in
the selection and continued employment thereof.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' notice in writing mailed to the Company and to each
transfer agent of the Common Shares or Preferred Shares by registered or
certified mail, and to the holders of the Right Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares or Preferred Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the States of Ohio or New York (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the States of Ohio or New York), in good standing, having an office in the States of Ohio or New York, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Shares
or Preferred Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, at its option, issue new Right Certificates
evidencing Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or kind or
class of shares or other securities or property purchasable under the Right
Certificates made in accordance with the provisions of this Agreement.
Section 23. Redemption. (a) The Board of Directors of the
Company may, at its option, at any time prior to such time as any Person becomes
an Acquiring Person, redeem all but not less than all the then outstanding
Rights at a redemption price of $.01 per Right, appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such redemption price being hereinafter referred to as the
"Redemption Price"). The redemption of the Rights by the Board of Directors may
be made effective at such time, on such basis and with such conditions as the
Board of Directors in its sole discretion may establish.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights pursuant to paragraph (a) of
this Section 23, and without any further action and without any notice, the
right to exercise the Rights will terminate and the only right thereafter of the
holders of Rights shall be to receive the Redemption Price. The Company shall
promptly give public notice of any such redemption; provided, however, that the
failure to give, or any defect in, any such notice shall not affect the validity
of such redemption. Within 10 days after such action of the Board of Directors
ordering the redemption of the Rights, the Company shall mail a notice of
redemption to all the holders of the then outstanding Rights at their last
addresses as they appear upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agent for the
Common Shares. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made. Neither the Company nor any of its Affiliates or Associates may
redeem, acquire or purchase for value any Rights at any time in any manner other
than that specifically set forth in this Section 23 or in Section 24 hereof, and
other than in connection with the purchase of Common Shares prior to the
Distribution Date.
Section 24. Exchange. (a) The Board of Directors of the
Company may, at its option, at any time after any Person becomes an Acquiring
Person, exchange all or part of the then outstanding and exercisable Rights
(which shall not include Rights that have become void pursuant to the provisions
of Section 11(a)(ii) hereof) for Common Shares at an exchange ratio of one
Common Share per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such exchange
ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding
the foregoing, the Board of Directors shall not be empowered to effect such
exchange at any time after any Person (other than the Company, any Subsidiary of
the Company, any employee benefit plan of the Company or any such Subsidiary, or
any entity holding Common Shares for or pursuant to the terms of any such plan),
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to paragraph (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive that number of Common Shares equal to
the number of such Rights held by such holder multiplied by the Exchange Ratio.
The Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such action as may be necessary to authorize additional
Common Shares for issuance upon exchange of the Rights. In the event the Company
shall, after good faith effort, be unable to take all such action as may be
necessary to authorize such additional Common Shares, the Company shall
substitute, for each Common Share that would otherwise be issuable upon exchange
of a Right, a number of Preferred Shares or fraction thereof such that the
current per share market price of one Preferred Share multiplied by such number
or fraction is equal to the current per share market price of one Common Share
as of the date of issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional Common Shares would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Common Share. For the
purposes of this paragraph (d), the current market value of a whole Common Share
shall be the closing price of a Common Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events. (a) In case the Company
shall propose (i) to pay any dividend payable in stock of any class to the
holders of its Preferred Shares or to make any other distribution to the holders
of its Preferred Shares (other than a regular quarterly cash dividend), (ii) to
offer to the holders of its Preferred Shares rights or warrants to subscribe for
or to purchase any additional Preferred Shares or shares of stock of any class
or any other securities, rights or options, (iii) to effect any reclassification
of its Preferred Shares (other than a reclassification involving only the
subdivision of outstanding Preferred Shares), (iv) to effect any consolidation
or merger into or with, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one or
more transactions, of 50% or more of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the Common Shares and/or Preferred Shares, whichever shall be the
earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof
shall occur, then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under Section 11(a)(ii)
hereof.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows:
Eaton Corporation
Eaton Center
Cleveland, Ohio 44114
Attention: Office of the Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows:
Society National Bank
Attention:
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. The Company may from
time to time supplement or amend this Agreement without the approval of any
holders of Right Certificates in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provisions herein, or to make any other provisions with respect
to the Rights which the Company may deem necessary or desirable, any such
supplement or amendment to be evidenced by a writing signed by the Company and
the Rights Agent; provided, however, that from and after such time as any Person
becomes an Acquiring Person, this Agreement shall not be amended in any manner
which would adversely affect the interests of the holders of Rights. Without
limiting the foregoing, the Board of Directors of the Company may at any time
prior to such time as any Person becomes an Acquiring Person amend this
Agreement to lower the thresholds set forth in Sections 1(a) and 3(a) to not
less than the greater of (i) the sum of .001% and the largest percentage of the
outstanding Common Shares then known by the Company to be beneficially owned by
any Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any entity
holding Common Shares for or pursuant to the terms of any such plan) and (ii)
10%.
Section 28. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Rights Agent and the registered holders of the Right Certificates
(and, prior to the Distribution Date, the Common Shares) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Ohio and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written.
EATON CORPORATION
Attest:
By: /s/ E.R. Franklin By: /s/ J.M. Carmont
---------------------------- ------------------------------------
Title: Secretary Title: Vice President and Treasurer
SOCIETY NATIONAL BANK,
as Rights Agent
Attest:
By: /s/ Laura Thoms By: /s/ William Bedy
---------------------------- ---------------------------------------
Title: Assistant Vice President Title: Vice President
|
Exhibit A
FORM
of
CERTIFICATE OF AMENDMENT
by
DIRECTORS
of
EATON CORPORATION
William E. Butler, Chairman of the Board and Chief Executive Officer, and Earl R. Franklin, Secretary of Eaton Corporation, an Ohio corporation for profit with its principal place of business at Cleveland, Ohio (hereinafter called the "Corporation"), hereby certify that at a meeting of the Board of Directors called and held on the 28th day of June, 1995 the following resolution was adopted pursuant to Section 1701.70(B)(1) of the Ohio General Corporation Law:
RESOLVED, that pursuant to the authority vested in the Board of Directors (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Ohio General Corporation Law, as amended, and by Article FOURTH of the Corporation's Amended Articles of Incorporation, such Article FOURTH is amended to add a new paragraph 9 to Division A providing for a series of Serial Preferred Shares, without par value, of the Corporation and that the designation and the authorized number of shares of, and the relative rights, preferences, and limitations of, such series are as follows:
Series A Participating Preferred Stock:
Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 900,000.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any class of preferred stock ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $.50 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights:
(A) Each share of Series A Preferred Stock shall entitle the holder thereof to 1 vote on all matters submitted to a vote of the stockholders of the Corporation. The holders of fractional Series A Preferred Stock shall not be entitled to any vote on any matter submitted to a vote of the shareholders of the Corporation.
(B) Subject to the provisions of Paragraph 6 of Division A of this Article FOURTH, the holders of Serial Preferred Shares shall be entitled to elect two directors of the Corporation whenever dividends payable on any series of Serial Preferred Shares shall be in default as qualified therein. For purposes of the holders of Serial Preferred Shares exercising such right, the provisions of the Corporation's Code of Regulations and other provisions of law shall apply, as if the Serial Preferred Shares were the only class of shares of the Corporation outstanding.
(C) Except as otherwise provided herein, in the Amended Articles of Incorporation of the Corporation, in any other Certificate of Amendment creating a series of Serial Preferred Shares or any
similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.
(D) Except as set forth herein, in the Amended Articles of Incorporation of the Corporation, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued Serial Preferred Shares and may be reissued as part of a new series of Serial Preferred Shares subject to the conditions and restrictions on issuance set forth herein, in the Amended Articles of Incorporation, or in any other Certificate of Amendment creating a series of Serial Preferred Shares or any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, on a parity with any other series of Serial Preferred Shares and shall rank junior to any series of any other class of preferred stock of the Corporation which by its terms is senior to the Serial Preferred Shares.
Section 10. Amendment. Subject to the provisions of Article FOURTH of the Corporation's Amended Articles of Incorporation, the Amended Articles of Incorporation and the Code of Regulations of the Corporation shall not be amended, altered or repealed in any manner which would affect adversely the voting powers, rights or preferences of the holders of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class.
IN WITNESS WHEREOF, this Certificate of Amendment is executed on behalf of the Corporation by its Chairman of the Board and Chief Executive Officer and attested by its Secretary this ________________ day of ____________, 1995.
Chairman of the Board and Chief Executive Officer
Attest:
Secretary
Exhibit B
Form of Right Certificate
Certificate No. R- Rights
NOT EXERCISABLE AFTER JULY 12, 2005 OR EARLIER IF REDEMPTION
OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT
$.01 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE
RIGHTS AGREEMENT.
|
Right Certificate
EATON CORPORATION
This certifies that_________________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of June 28, 1995 (the "Rights Agreement"), between Eaton Corporation, an Ohio corporation (the "Company"), and Society National Bank (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., Cleveland, Ohio time, on July 12, 2005 at the principal office of the Rights Agent, or at the office of its successor as Rights Agent, one one-hundredth of a fully paid non-assessable share of Series A Participating Preferred Stock, without par value (the "Preferred Shares"), of the Company, at a purchase price of $250 per one one-hundredth of a Preferred Share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate (and the number of one one-hundredths of a Preferred Share which may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of June 28, 1995, based on the Preferred Shares as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of one one-hundredths of a Preferred Share which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon surrender at the principal office of the Rights Agent, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Preferred Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (i) may be redeemed by the Company at a redemption price of $.01 per Right or (ii) may be exchanged in whole or in part for Preferred Shares or shares of the Company's Common Stock, par value $.50 per share.
No fractional Preferred Shares will be issued upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of _____________________, 199__.
EATON CORPORATION
Countersigned:
Society National Bank
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED _________________________ hereby sells, assigns and transfers unto______________________________________________________________
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ___________________________ Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution.
Dated: _______________, 199_
Signature
Signature Guaranteed:
Signatures must be guaranteed by a participant in the Securities Transfer Agent Medallion Program, the Stock Exchanges Medallion Program or the New York Stock Exchange, Inc. Medallion Signature Program.
The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement).
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights represented by the Right Certificate.)
To: EATON CORPORATION
The undersigned hereby irrevocably elects to exercise _______________________Rights represented by this Right Certificate to purchase the Preferred Shares issuable upon the exercise of such Rights and requests that certificates for such Preferred Shares be issued in the name of:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
Dated: _______________________, 199_
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States.
The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement).
Signature
NOTICE
The signature in the Form of Assignment or Form of Election to Purchase, as the case may be, must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever.
In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Assignment or Election to Purchase will not be honored.
SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES
Introduction
On June 28, 1995, the Board of Directors of Eaton Corporation (the "Company") declared a dividend of one preferred share purchase right (a "Right") for each outstanding common share, par value $.50 per share (the "Common Shares"), of the Company. The dividend is payable on July 12, 1995 (the "Record Date") to the shareholders of record on that date. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Society National Bank, as Rights Agent (the "Rights Agent"). The Rights contain important "flip-over" and "flip-in" features designed to protect the Company from unfair takeovers.
Purchase Price
Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Participating Preferred Stock, without par value (the "Preferred Shares"), of the Company at a price of $250 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment.
Flip-Over
If the Company is acquired in a merger or other business combination or 50% or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person (as defined below), each holder of a Right will thereafter have the right to receive, upon exercise, that number of shares of common stock of the acquiring company which then will have a market value of two times the exercise price of the Right.
Flip-In
If any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right.
Transfer and Detachment
Until the Distribution Date, the Rights will be evidenced, with respect to any of the Common Share certificates outstanding as of the Record Date, by such Common Share certificate with a copy of this Summary of Rights attached thereto. Until the Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be transferred with and only with the Common Shares, and transfer of those certificates will also constitute transfer of those
Rights.
As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date and such separate Right Certificates alone will thereafter evidence the Rights.
Distribution Date
The "Distribution Date" is the earlier of:
(i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 20% or more of the outstanding Common Shares; or
(ii) 10 business days (or such later date as may be determined by action of the Board of Directors before any person or group becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20% or more of the outstanding Common Shares.
Exercisability
The Rights are not exercisable until the Distribution Date. The Rights will expire on July 12, 2005 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, as described below.
Adjustments
The Purchase Price, and the number of Preferred Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution, in the event of:
(i) a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Shares,
(ii) the grant to holders of the Preferred Shares of certain rights to subscribe for or purchase Preferred Shares at a price, or securities convertible into Preferred Shares with a conversion price, less than the then-current market price of the Preferred Shares, or
(iii) the distribution to holders of the Preferred Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Preferred Shares) or of subscription rights or warrants (other than those referred to above).
The number of outstanding Rights is also subject to adjustment upon certain occurrences prior to the Distribution Date.
With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional Preferred Shares will be issued (other than fractions which are integral multiples of one one-hundredth of a Preferred Share, which may, at the election of the Company, be evidenced by depositary receipts) and in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Shares on the last trading day prior to the date of exercise.
Preferred Shares
Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to a minimum preferential quarterly dividend payment of $1 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per Common Share. In the event of liquidation, the holders of the Preferred Shares will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment of 100 times the payment made per Common Share. Each Preferred Share will have 1 vote, voting together with the Common Shares. Finally, in the event of any merger, consolidation or other transaction in which Common Shares are exchanged, each Preferred Share will be entitled to receive 100 times the amount received per Common Share. The dividend and liquidation rights and rights upon a merger, consolidation or other transaction are protected by customary antidilution provisions.
The value of the one one-hundredth interest in a Preferred Share purchasable upon exercise of each Right should, because of the nature of the Preferred Shares' dividend and liquidation rights, approximate the value of one Common Share.
Exchange
At any time after any person or group becomes an Acquiring Person, and prior to the acquisition by that person or group of 50% or more of the outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by the Acquiring Person, which will have become void), in whole or in part, at an exchange ratio of one Common Share, or one one-hundredth of a Preferred Share (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).
Redemption
At any time prior to any person or group becoming an Acquiring Person, the Board of Directors of the Company may redeem all the Rights at a price of $.01 per Right (the "Redemption Price"). The redemption may be made effective at such time, on such basis and with such conditions as the Board of Directors in its sole discretion may establish. Immediately upon any redemption, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price.
Amendments
The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, including an amendment to lower the 20% threshold described above to not less than the greater of (i) the sum of .001% and the largest percentage of the outstanding Common Shares then known to the Company to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%, except that after any person or group becomes an Acquiring Person no such amendment may adversely affect the interests of the holders of the Rights.
Rights as Holders
Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends.
Further Information
A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated , 1995. A copy of the Rights Agreement is available free of charge from the Company's Shareholder Relations Department. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference.
03/08/01
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (b)
EATON CORPORATION
EXECUTIVE STRATEGIC INCENTIVE PLAN I
(Effective as of January 1, 1991 and
Amended and Restated as of June 21, 1994, July 25, 1995, April 21, 1998, April 1, 1999, and January 1, 2001)
EATON CORPORATION
EXECUTIVE STRATEGIC INCENTIVE PLAN I
1. PURPOSE
The purpose of the Executive Strategic Incentive Plan I (the "Plan") is to promote the growth and profitability of Eaton Corporation (the "Company") through the granting of incentives intended to motivate executives of the Company to achieve demanding long-term corporate objectives and to attract and retain executives of outstanding ability.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan shall be administered by the Compensation and Organization Committee (the "Committee") of the Company's Board of Directors (the "Board") which shall consist of at least three directors of the Company selected by the Board.
Except as otherwise expressly provided herein, the Committee shall have complete authority to: (i) interpret all provisions of the Plan consistent with law; (ii) designate the executives to participate under the Plan; (iii) determine the incentive targets and performance objectives applicable to participants; (iv) adopt, amend and rescind general and special rules and regulations for the Plan's administration; and (v) make all other determinations necessary or advisable for the administration of the Plan.
3. ELIGIBILITY
Any executive of the Company designated by the Committee in its sole discretion shall be eligible to participate in the Plan.
4. INCENTIVE TARGETS
(A) Establishment of Incentive Amounts and Conversion to Phantom Common Share Units
Individual Incentive Amounts for each participant with respect
to each Plan Award Period (as defined below) shall be
determined by the Committee. With respect to Award Periods
beginning on or after January 1, 1998, participant incentive
targets will be expressed in the form of Phantom Common Share
Units which will be determined by the Committee by: (a) first
establishing the Individual Incentive Amount in cash for each
participant with respect to each Award Period and (b) then
dividing such Individual Incentive Amount by the average of
the mean prices for the Company's common shares for the first
twenty(20) trading days of each Award Period. In all cases,
the resulting Phantom Common Share Units shall be rounded up
to the nearest 50 whole units. For purposes of the Plan, "mean
price" shall be the mean of the highest and lowest selling
prices for Company common shares quoted on the New York Stock
Exchange List of Composite Transactions on the relevant
trading day. Notwithstanding the foregoing provisions of this
Section 4(A), the Committee may, in its sole discretion, use a
different method for establishing incentive targets for
participants under the Plan.
(B) Award Periods
Each Award Period shall be the four-calendar year period commencing as of the first day of the calendar year in which the performance objectives are established for the Award Period as described in Section 4(C). A new Award Period shall commence as of the first day of each calendar year, unless otherwise specified by the Committee.
(C) Establishment of Company Performance Objectives
As soon as practicable at the beginning of each Award Period, threshold, target, and maximum Company performance objectives for such Award Period shall be established by the Committee. For Award Periods commencing on or after January 1, 1998,
unless otherwise determined by the Committee in its sole discretion, performance objectives will be established using a CFROGC/EPS Growth Performance Matrix which shall use the Company's average cash flow return on gross capital ("CFROGC") for such period along one axis and the Company's cumulative earnings per share ("EPS") for such period along the second axis. Within sixty (60) days after the performance objectives have been established by the Committee, each participant will be provided with written notice of his or her established objectives. In its sole discretion, the Committee may modify previously established performance objectives due to any change in conditions, the occurrence of any events or other factors which make such objectives unsuitable. Notwithstanding the foregoing, after a Change in Control (as hereinafter defined), neither the Committee nor the Board shall have the authority to modify performance objectives in any manner which could prove detrimental to the interests of the Plan's participants.
(D) Determination of Payments
For each Award Period, payments ranging from 50% to 200% of the Phantom Common Share Units credited under Section 4(A) will be determined by the Committee for the attainment of performance objectives between either threshold and target or target and maximum.
For Award Periods beginning on or after January 1, 1998, Final Individual Phantom Common Share Unit Awards shall be determined by the Committee as promptly as practicable after the completion of the Award Period: (a) determining the CFROGC/EPS Growth Matrix Performance Percentage applicable for the Award Period (equal to (i) 50% upon attainment of the threshold performance objective; (ii) 100% upon attainment of the target performance objective; and (iii) 200% upon attainment of the maximum performance; or the applicable percentage for performance between threshold and target or target and maximum); (b) multiplying such percentage by the
number of Performance Share Units credited to the participant and (c) further multiplying the result by an Individual Performance Rating which will be a whole percentage between zero and 150% established by the Committee in its sole discretion after considering the recommendations of Company management.
The Final Individual Phantom Common Share Unit Award shall be converted to cash at a market value of Company common shares as determined by the Committee based on the average of the mean prices for the Company's common shares for the final twenty (20) trading days of the Award Period), and distributed to the participate within ninety (90) days, unless the participant has made an irrevocable election to defer all or part of the amount of his or her award pursuant to any long term incentive compensation deferral plan adopted by the Committee or the Company.
5. PRORATA PAYMENTS
A participant must be employed by the Company or one of its subsidiaries at the end of an Award Period in order to be entitled to a payment in respect to such Award Period; provided, however, that a payment, prorated for the participant's length of service during the Award Period, may be authorized by the Committee, in its sole discretion, in the event the employment of a participant terminates before the end of an Award Period due to death, permanent disability, normal or early retirement, closure or divestiture of an Eaton facility or any other reason. Notwithstanding the foregoing, upon any termination of the Plan by the Committee during the term of any Award Period, payments to all participants will be made, prorated for each participant's length of service during the Award Period prior to the date of Plan termination.
6. OTHER PROVISIONS
(A) Adjustments upon Certain Changes
In the event of changes to the structure or corporate organization of the Company's businesses which affect the participants and/or the performance prospects of the Company, the Committee may make appropriate adjustments to individual participant Incentive Targets or to the established performance objectives for incomplete Award Periods. Adjustments under this Section 6 shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. Notwithstanding the foregoing, after a Change in Control, neither the Committee nor the Board shall have the authority to change established Performance Objectives in any manner which could prove detrimental to the interests of the participant.
(B) Change in Control Defined
For purposes of the Plan, a Change in Control shall be deemed to have occurred if:
(i) a tender offer shall be made and consummated for the ownership of 25% or more of the outstanding voting securities of the Company,
(ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company as the same shall have existed immediately prior to such merger or consolidation,
(iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Company,
(iv) a "person" within the meaning of Section 3(a)(9) or of Section 13(d)(3) of the Securities Exchange Act of 1934 (as in effect on the effective date of the Plan) shall acquire 25% or more of the outstanding voting
securities of the Company (whether directly, indirectly, beneficially or of record). For purposes of the Plan, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(I) under the Securities Exchange Act of 1934 (as in effect on the effective date of the Plan), or
(v) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
(C) Non-Transferability
No right to payment under the Plan shall be subject to debts, contract liabilities, engagements or torts of the participant, nor to transfer, anticipation, alienation, sale, assignment, pledge or encumbrance by the participant except by will or the law of descent and distribution or pursuant to a qualified domestic relations order.
(D) Compliance with Law and Approval of Regulatory Bodies
No payment shall be made under the Plan except in compliance with all applicable federal and state laws and regulations including, without limitation, compliance with tax requirements.
(E) No Right to Employment
Neither the adoption of the Plan nor its operation, nor any document describing or referring to the Plan, or any part thereof, shall confer upon any participant under the Plan any right to continue in the employ of the Company or any subsidiary, or shall in any way affect the right and power of
the Company or any subsidiary to terminate the employment of any participant under the Plan at any time with or without assigning a reason therefore, to the same extent as the Company might have done if the Plan had not been adopted.
(F) Interpretation of the Plan
Headings are given to the sections of the Plan solely as a convenience to facilitate reference; such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of the Plan or any provisions thereof. The use of the masculine gender shall also include within its meaning the feminine. The use of the singular shall also include within its meaning the plural and vice versa.
(G) Amendment and Termination
The Committee may at any time suspend, amend or terminate the Plan. Notwithstanding the foregoing, upon the occurrence of a Change in Control, no amendment, suspension or termination of the Plan shall, without the consent of the participant, alter or impair any rights or obligations under the Plan with respect to such participant.
(H) Effective Dates of the Plan
The Plan was adopted by the Board on April 24, 1991 but the effective date of the Plan shall be January 1, 1991. The Plan was amended and restated as of June 21, 1994, July 25, 1995, April 21, 1998, April 1, 1999 and January 1, 2001 (which includes changes which affect Awards granted on or after January 1, 1998).
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (d)
EATON CORPORATION
1991 STOCK OPTION PLAN
1. Purpose
The Plan enables professional and management employees who contribute significantly to the success of Eaton Corporation (the "Company") to participate in its future prosperity and growth and further to identify their interests with those of the shareholders. The purpose of the Plan is to provide long-term incentive for gain through outstanding service to the Company and its shareholders and to assist in recruiting and retaining people of ability and initiative in professional and management positions.
2. Administration
The Plan shall be administered by the Compensation Committee of the Board of Directors (the "Committee") which shall consist of at least three directors selected by the Board. The Board may also select one or more directors as alternate members of the Committee, who may take the place of any absent member or members at any meeting of the Committee. Members of the Committee are not eligible to be granted an option under the Plan and each shall be a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 ("Rule 16b-3"). The Committee shall have complete authority to interpret all provisions of the Plan consistent with law, to prescribe the form of instruments evidencing any option or Stock Appreciation Rights granted under the Plan, to adopt, amend and rescind general and special rules and regulations for its administration, and to make all other determinations necessary or advisable for the administration of the Plan.
3. Eligibility
Any salaried employee (including officers) of the Company and any of its subsidiaries (including any subsidiary acquired after adoption of the Plan) who in the judgment of the Committee occupies a professional or management position in which his efforts contribute to the profits or growth of the Company or a subsidiary may be granted an option. Directors of the Company who are not also salaried employees are not eligible to participate in the Plan.
The Committee will designate employees to whom options are to be granted and will specify the number of shares subject to each option.
4. Shares Subject to Option
Options may be granted under the Plan on or after May 1, 1991. Each option so granted will give the employee the right to purchase a designated number of the Company's common shares with a par value of 50(cent) each ("shares"), (subject to adjustment under Section 9 hereof). Upon exercise of any option or Stock Appreciation Rights, the Company may deliver to the employee authorized but unissued shares, treasury shares, or any combination thereof.
The Committee will maintain records showing the cumulative total of all shares
subject to options outstanding under the Plan. The number of shares delivered
under the Plan shall not exceed in the aggregate 1,250,000. This number may be
adjusted to reflect any change in the capitalization of the Company resulting
from a stock dividend or a stock split or other adjustment contemplated by
Section 9 hereof and occurring after the adoption of the Plan. Subject to
Section 6(D) hereof, if an option is terminated or cancelled, in whole or in
part, for any reason other than the exercise thereof, the shares allocated to
the option or portion thereof so terminated or cancelled may be reallocated to
another option or options to be granted under the Plan.
5. Stock Options
(A) Allotment of Shares
(1) Subject to the limitations specified in Section 5(A) (2) hereof, the Committee may grant to participants (i) options which are intended to qualify as incentive stock options ("Incentive Stock Options") under Section 422A of the Internal Revenue Code, as amended (the "Code"); (ii) options which are not intended to qualify as Incentive Stock Options; or (iii) both of the foregoing if not granted to a participant in tandem where the exercise of one type of option would reduce the shares available under the other type of option.
(2) The aggregate fair market value (determined at the time the option is granted) of the shares with respect to Stock Options are exercisable for the first time by any participant during any calendar year (under all plans of the Company and its subsidiaries) shall not exceed $100,000.
(3) Options which are not Incentive Stock Options may be granted to any participant without regard to the limitation stated in Section 5(A)(2), hereof.
(B) Option Price
The price per share for shares purchased by the exercise of any option granted under the Plan will be the fair market value per share of such shares at the time the option is granted.
(C) Option Period
Each option shall expire on such date as the Committee shall determine, but not later than the tenth anniversary of the date on which the option is granted.
(D) Exercise of Options
(1) By a Participant During Continuous Employment
Subject to the provisions of the Plan, each option granted hereunder shall be exercisable on such date or dates and during such period and for such number of shares as the Committee may determine; provided, however, that in no event shall an option be exercisable prior to six months from the date of grant.
Subject to the provisions of subparagraphs (2) and (3) of paragraph (D) of this Section 5, an employee may not exercise any part of an option granted under the Plan unless, at the time of such exercise, he has been in the continuous employment of the Company or a subsidiary of the Company since the date the option was granted. The Committee may decide in each case to what extent leaves of absence for government or military service, illness, temporary disability, or other reasons shall not for this purpose be deemed interruptions of continuous employment.
No option shall be exercisable after the expiration of ten years from the date the option was granted. During the lifetime of an employee to whom an option is granted, the option may be exercised only by the employee, his attorney-in-fact, or his guardian as hereinafter provided.
On a case-by-case basis, the Committee may, in its sole discretion, accelerate the schedule of the time or times when an option granted under the Plan may be exercised.
(2) By a Former Employee
No person may exercise an option after he ceases to be an employee of the Company or any subsidiary unless he ceases to be an employee of the Company as a result of normal retirement, early retirement, or disability retirement, either physical or mental, or because of physical or mental disability. In these instances, the option may be exercised by him, his attorney-in-fact, or his guardian, as appropriate, at any time after the date on which he ceases to be an employee (but no later than the end of the fixed term of the option) for the number of shares for which the option could have been exercised at the time he ceased to be an employee, or for such greater number of shares subject to the option as to which the Committee may authorize an acceleration of the schedule of the time or times of exercise under the option.
(3) In Case of Death
If an employee or former employee who was granted an option dies, and at the time of death was entitled to exercise any option granted under the Plan, the option may be exercised within twelve months after the death of the employee or former employee (but no later than the end of the fixed term of the option) by his estate, or by a person who acquires the right to exercise the option by bequest or inheritance. The option may be exercised only for the number of shares for which it could have been exercised at the time the employee or former employee died, or for such greater number of shares subject to the option for which the Committee may authorize an acceleration of the schedule of the time or times of exercise under the option.
(4) Purchase of Options Following Death
Following the death of an employee or former employee who at the time of his death was entitled to exercise any option granted under the Plan, the Company may, at its election, upon the request of the then holder of the option, at any time prior to its exercise, purchase the option at an aggregate price (payable in cash or shares or a combination of both) equal to the excess of the fair market value per share on the date of receipt by the Company of the request over the option price per share, multiplied by the number of shares to which the option was then subject to exercise. Only the number of shares, if any, transferred in payment for options purchased by the Company pursuant to the foregoing sentence shall be charged against the maximum number of shares which may be delivered under the Plan as set forth in Section 4 hereof.
6. Stock Appreciation Rights
(A) The Committee may grant Stock Appreciation Rights in connection with all or part of any option granted under the Plan, either at the time of the grant of the option or at any time thereafter during the term of the option.
(B) Stock Appreciation Rights entitle the holder of an option in connection with which such Stock Appreciation Rights are granted, upon exercise of the Stock Appreciation Rights, to surrender the option, or any applicable portion thereof, to the extent unexercised, and to receive a number of shares, or cash and shares, determined pursuant to subparagraphs (3) and (4) of paragraph (C) of this Section 6. The option shall, to the extent so surrendered, thereupon cease to be exercisable.
(C) Stock Appreciation Rights shall be subject to the following terms and conditions and to other terms and conditions not inconsistent with the Plan as shall from time to time be approved by the Committee:
(1) Stock Appreciation Rights shall be exercisable at such time or times and to the extent, but only to the extent, that the option to which they relate shall be exercisable.
(2) Stock Appreciation Rights shall in no event be exercisable unless and until the holder of the Stock Appreciation Rights has completed at least twelve months of continuous service with the Company or a subsidiary of the Company, or both, immediately following the date upon which the Stock Appreciation Rights were granted.
(3) Upon exercise of Stock Appreciation Rights, the holder shall be entitled to receive a number of shares equal in aggregate fair market value to the amount by which the fair market value per share on the date of such exercise shall exceed the option price per share of the related option, multiplied by the number of shares in respect of which the Stock Appreciation Rights have been exercised.
(4) As the Committee shall determine in its discretion, up to one-half of the
Company's obligation arising from an exercise of Stock Appreciation Rights
may be settled by the payment of cash. Any exercise of Stock Appreciation
Rights by an officer of the Company subject to Section 16(b) of the
Securities Exchange Act of 1934 involving a partial cash settlement may be
made, in accordance with Rule 16b-3, only during a period of time beginning
on the third business day following the date of release for publication of
any annual or quarterly summary statement of the Company's revenues and
earnings and ending on the twelfth business day following that date.
Notwithstanding the provisions of subparagraph (3) of paragraph (C) of this
Section 6, the Committee shall determine a single fair market value of the
shares for each exercise period referred to in the preceding sentence, which
fair market value shall not be higher than the highest sale price of the
shares during the exercise period, as reported on the New York Stock Exchange
list of composite transactions, which shall be applicable to all Stock
Appreciation Rights exercised by any of the officers of the Company subject
to Section 16(b) during the exercise period which involve a partial cash
settlement.
(D) To the extent that Stock Appreciation Rights shall be exercised, the option in connection with which the Stock Appreciation Rights have been granted shall be deemed to have terminated for a reason other than the exercise thereof for the purpose of the limitation on the aggregate number of shares that may be delivered under the Plan, and only the number of shares delivered upon the exercise of the Stock Appreciation Rights shall be charged against the maximum number of shares which may be delivered under the Plan, as set forth in Section 4 hereof.
7. Method of Exercise
Each option or Stock Appreciation Right granted under the Plan shall be deemed exercised when the holder shall indicate the decision to do so in writing delivered to the Company, and, in the case of an option, shall at the same time tender to the Company payment in full for the shares for which the option is exercised, and shall comply with such other reasonable requirements as the Committee may establish pursuant to Section 10 hereof. Payment for the shares shall be made in cash or, in the discretion of the Committee, through delivery of shares or a combination of cash and shares. No person, estate or other entity shall have any of the rights of a shareholder with reference to shares subject to an option or Stock Appreciation Right until a certificate or certificates for the shares have been delivered to such person, estate or other entity.
An option or Stock Appreciation Right granted under the Plan may be exercised for any lesser number of shares than the full amount for which it could be exercised. Such partial exercise of an option or Stock Appreciation Right shall not affect the right to exercise the option or Stock Appreciation Right from time to time in accordance with the Plan for the remaining shares subject to the option or Stock Appreciation Right.
8. Assignability
No option or Stock Appreciation Right granted to an employee under the Plan shall be transferable by him except by will or the laws of descent and distribution,
9. Adjustment upon Change of Shares
In the event of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, stock dividend, rights offering or other events affecting shares of the Company, the number and class of shares then subject to options previously granted under the Plan, and the price per share payable upon exercise of such options, shall be equitably adjusted by the Committee to reflect the change.
10. Compliance with Law and Approval of Regulatory Bodies
No option and no Stock Appreciation Right shall be exercisable and no shares will be delivered under the Plan except in compliance with all applicable federal and state laws and regulations, including without limitation, compliance with withholding tax requirements and with the rules of all domestic stock exchanges on which the Company's shares may be listed. Any share certificate issued to evidence shares for which an option is exercised may bear legends and statements the Committee shall deem advisable to assure compliance with federal and state laws and regulations. No option and no Stock Appreciation Right shall be exercisable, and no shares will be delivered under the Plan, until the Company has obtained consent or approval from regulatory bodies, federal or state, having jurisdiction over such matters as the Committee may deem advisable.
In the case of the exercise of an option by a person or estate acquiring the right to exercise the option by bequest or inheritance, the Committee may require reasonable evidence as to the ownership of the option and may require such consents and releases of taxing authorities that it may deem advisable.
11. General Provisions
Neither the adoption of the Plan nor its operation, nor any document describing or referring to the Plan, or any part thereof, shall confer upon any employee any right to continue in the employ of the Company or any subsidiary, or shall in any way affect the right and power of the Company or any subsidiary to terminate the employment of any employee at any time with or without assigning a reason therefor to the same extent as the Company might have done if the Plan had not been adopted.
Headings are given to the sections of the Plan solely as a convenience to facilitate reference; such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of the Plan or any provisions thereof. The use of the masculine gender shall also include within its meanings the feminine. The use of the singular shall also include within its meaning the plural, and vice versa.
12. Amendment
The Board of Directors of the Company may alter, amend or terminate the Plan from time to time, except that no amendment to the Plan may become effective for which approval of the shareholders is necessary for the continued applicability to the Plan of Rule 16b-3.
13. Duration of the Plan
No option or Stock Appreciation Right shall be granted under the Plan after December 31, 2000. Options and Stock Appreciation Rights granted before that date shall remain valid thereafter in accordance with their terms.
14. Effective Date of Plan
The Plan was adopted by the Board of Directors of the Company on January 23, 1991. It will become effective if and when approved by shareholders holding a majority of the Company's outstanding common shares entitled to vote at the Annual Meeting of Shareholders in 1991.
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (e)
EATON 1995 STOCK PLAN
1. Purpose
The Plan enables non-employee directors and professional and management employees who contribute significantly to the success of Eaton Corporation (the "Company") to participate in its future prosperity and growth and to identify their interests with those of the shareholders. The purpose of the Plan is to provide long-term incentive through outstanding service to the Company and its shareholders and to assist in recruiting and retaining people of outstanding ability and initiative in non-employee director, professional and management positions.
2. Administration
(A) Employee Awards
With respect to employee awards, the Plan shall be administered by the Compensation Committee of the Board of Directors (the "Committee"), which shall consist of at least three non-employee directors selected by the Board. All other non-employee directors also may serve as alternate members of the Committee, who may take the place of any absent member or members at any meeting of the Committee.
(B) Non-employee Director Options
With respect to non-employee director options, the Plan shall be administered by the Non-employee Director Options Committee, which shall be comprised of the members of the Board who are employees of the Company.
(C) Authority of Committees
With respect only to those awards for which it has administrative responsibility, the Committee and the Non-employee Director Options Committee shall each have complete authority to interpret all provisions of the Plan consistent with law, to determine the type and terms of awards consistent with the provisions of the Plan, to prescribe the form of instruments evidencing awards, to adopt, amend and rescind general and special rules and regulations for its administration, and to make all other determinations necessary or advisable for its administration of the Plan. The determinations of each committee shall be final and conclusive. The committees may act by resolution or in any other manner permitted by law.
3. Shares Available
The aggregate of (a) the number of Eaton common shares delivered by the Company in payment and upon exercise of awards to employees and non-employee directors and (b) the number of shares subject to outstanding awards to employees and non-employee directors shall not exceed 5,000,000 at any one time, subject to adjustments as authorized herein. Shares related to awards that are forfeited, terminated, unexercised upon expiration, settled in cash in lieu of shares or in such manner that all or some of the shares covered by an award are not issued, or exchanged for awards that do not involve shares, shall immediately become available for other awards. Shares available for awards may consist, in whole or in part, of authorized and unissued shares or treasury shares.
The maximum aggregate number of shares or share units underlying options or related to other awards that may be granted to any employee during any three consecutive calendar year period is 500,000.
Awards may be made under the Plan on or after January 1, 1995, subject to approval of the Plan by shareholders at the 1995 annual meeting.
4. Eligibility for Employee Awards
Any salaried employee (including officers) of the Company or any of its
subsidiaries occupying a professional or management position may be granted an
award. The Committee (a) will designate employees to whom grants are to be made,
(b) will specify the number of options, stock appreciation rights, performance
shares, restricted shares or other stock-based awards subject to each grant, and
(c) subject to Section 5(C), will specify the price of the award.
5. Stock Options
(A) Employee Stock Options
Grants. The Committee may grant to eligible employees (i) options which are intended to qualify as incentive stock options ("Incentive Stock Options") under the Internal Revenue Code, or (ii) options which are not intended to qualify as Incentive Stock Options. Each option will give the employee the right to purchase a designated number of the Company's common shares with a par value of 50(cent) each ("shares"). The aggregate fair market value (at the time of grant) of shares for Incentive Stock Options under all plans of the Company which become initially exercisable by an employee during any calendar year shall not exceed $100,000 (or such other amount as may be provided by the Internal Revenue Code or regulations thereunder).
Exercise. Each option shall be exercisable on such date or dates, during such period and for such number of shares, as shall be determined by the Committee as of the date of grant, although grants to employees subject to Section 16(b) of the Securities Exchange Act of 1934 ("16b") shall not be exercisable for at least six months after those options are granted. The Committee may, in its sole discretion, accelerate the times when an option may be exercised and the Management Compensation Committee (comprised of Company officers) may do likewise for employees who are not subject to 16b.
(B) Non-employee Director Stock Options
Grants. Subject to approval by shareholders at the 1995 annual meeting, each person serving as a non-employee director on January 24, 1995 and who continues serving in that capacity after the annual meeting of shareholders on April 26, 1995, has been granted an option for 5,000 shares at an exercise price of $48.56. Each person who becomes a non-employee director after January 24, 1995 automatically shall be granted an option for 5,000 shares upon the date of his or her election. Each non-employee director shall automatically be granted an option for 1,000 shares on each granting date that he or she continues to serve in that capacity, beginning in the year after that director receives his or her initial grant. The granting date is the Tuesday immediately before the fourth Wednesday of each January.
Term. The term of each option shall be ten years from the date of grant.
Exercise. An option shall be fully exercisable six months following the later of the date of grant or shareholder approval of the Plan.
(C) Price
Each employee and non-employee director option shall state the number of shares to which it pertains and the option price. The option price shall be the fair market value of the shares subject to the option on the date of grant. The fair market value shall be the mean between the high and low prices as quoted on the New York Stock Exchange Composite Transactions.
(D) Payment
The price at which shares may be purchased upon exercise of an employee or non-employee director option shall be paid in full at the time of exercise in cash, or, if permitted by the applicable committee, by means of tendering shares or other consideration valued at fair market value on the date of exercise, or any combination thereof. The applicable committee shall determine acceptable methods of tendering shares or other consideration.
6. Stock Appreciation Rights
The Committee may grant stock appreciation rights to eligible employees in connection with any option granted under the Plan, or separate and apart from any option.
Stock appreciation rights granted in conjunction with an option entitle the holder of an option, upon exercise of the stock appreciation rights, to surrender the option, or any applicable portion thereof, to the extent unexercised, and to receive a number of shares, or cash and shares, as the Committee may determine. The cash or number of shares that the holder shall be entitled to receive shall equal in aggregate fair market value the amount by which the fair market value per share on the date of such exercise (as determined by the Committee in its sole discretion) shall exceed the option price per share of the related option, multiplied by the number of shares in respect of which the stock appreciation rights have been exercised. Stock appreciation rights granted separate and apart from any option entitle the holder, upon exercise of such rights, to receive a payment measured by the increase in the fair market value of a number of shares designated by such rights from the date of grant to the date of exercise.
The number of shares subject to a stock appreciation right shall be counted against the individual limit on the maximum number of shares that may be awarded to any employee during any three consecutive calendar year period, and against the maximum number of shares which may be delivered under the Plan. The number of shares subject to a stock appreciation right granted in conjunction with an option shall be deemed to be the number of shares subject to the option. The number of shares subject to a freestanding stock appreciation right shall be the number of shares to which the right applies.
7. Performance Shares
The Committee may grant performance shares to any eligible employee for no cash consideration, if permitted by applicable law, or for such consideration as may be determined by the Committee and specified in the grant. The Committee shall establish award periods and shall establish the number of performance shares to be earned if Company performance objectives are met. The performance objectives shall be stated in terms of cash flow return on gross capital employed in the Company's business ("CRC"). CRC equals the total of net income plus depreciation, goodwill amortization and after-tax net interest divided by the total of capital plus accumulated depreciation minus goodwill and short-term investments. After performance shares have been awarded and performance objectives have been established, the Committee may not increase the number of performance shares that may be earned by any employee upon attainment of those performance objectives within a performance period. The actual levels of CRC to be achieved, and the length of the performance period and other terms and conditions of the performance shares, shall be determined by the Committee.
To the extent performance shares are forfeited or the grant of performance shares has expired or is surrendered, canceled or terminated, the shares subject to the grant shall be available for future grants if within other plan limitations.
8. Other Awards
The Committee may grant other share-based awards to any eligible employee for no cash consideration, if permitted by applicable law, or for such consideration as may be determined by the Committee and specified in the grant. Such grants may include restricted shares. The Committee may specify such criteria or periods for payment as it shall determine and the extent to which such criteria or periods have been met shall be conclusively determined by the Committee. Other share-based grants may be paid in shares or other consideration related to shares, as specified by the grant, and shall have such terms and conditions as shall be determined by the Committee.
9. Assignability
Awards intended to be exempt from 16b are transferable only by will or the laws of descent and distribution or to such greater extent as permitted by applicable 16b regulations. Such awards are exercisable during the grantee's lifetime only by him or by his guardian or legal representative or by such others as permitted by applicable 16b regulations. The appropriate committee shall have discretionary authority to grant awards not intended to be exempt from 16b which are transferable to members of an award holder's immediate family, including trusts for the benefit of such family members and partnerships in which such family members are the only partners. A transferred award may be exercised or transferred by the transferee only to the extent that the grantee would have been entitled had the award not been transferred. Notwithstanding anything herein to the contrary, the exercise of incentive stock options shall be limited as required by the Internal Revenue Code and applicable regulations.
10. Adjustments
In the event of a reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split, stock
dividend, rights offering or similar event affecting shares of the Company, the
appropriate committee shall equitably adjust (a) the number and class of shares
(i) reserved under he Plan, (ii) for which awards may be granted to an
individual, and (iii) covered by outstanding awards denominated in shares or
share units, (b) the prices relating to outstanding awards, and (c) the
appropriate fair market value and other price determinations for such awards.
11. General Provisions
The Company shall have the right to deduct from any cash payment made under the Plan any taxes required by law to be withheld. It shall be a condition to the obligation of the Company to deliver shares that the participant pay the Company such amount as it may request for the purpose of satisfying any such tax liability. Any award under the Plan may provide that the participant may elect, in accordance with any applicable committee regulations, to pay the amount of such withholding taxes in shares.
No person, estate or other entity shall have any of the rights of a shareholder with reference to shares subject to an award until a certificate or certificates for the shares have been delivered to that person, estate or other entity. The Plan shall not confer upon any non-employee director or employee any right to continue in that capacity. The Plan and all determinations made and actions taken pursuant hereto, to the extent not governed by the laws of the United States, shall be governed by the laws of Ohio.
12. Amendment
The Board of Directors of the Company may alter, amend or terminate the Plan from time to time, except that the Plan may not be amended without shareholder approval to (i) materially increase the aggregate number of shares which may be issued, (ii) increase the maximum number of shares which may be granted to any employee, (iii) grant options or stock appreciation rights at a purchase price below fair market value on date of grant, or (iv) materially modify the requirements as to eligibility for participation in the Plan. The provisions of the Plan pertaining to the awards to non-employee directors may not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder.
13. Effective and Termination Dates
The Plan will become effective as of January 1, 1995, if and when approved by shareholders holding a majority of the Company's outstanding common shares entitled to vote at the 1995 annual meeting of shareholders.
No awards shall be granted under the Plan after December 31, 2004. Awards granted before that date shall remain valid thereafter in accordance with their terms.
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (g)
CHANGE OF CONTROL
AGREEMENT
AGREEMENT by and between Eaton Corporation, an Ohio corporation (the "Company") and ______________ (the "Executive"), dated as of the ____ day of ____________, 20__.
The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
(a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or
(b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred as a result of any transaction or series of transactions which the Executive, or any entity in which the Executive is a partner, officer or more than 50% owner initiates, if immediately following the transaction or series of transactions that would otherwise constitute a Change in Control, the Executive, either alone or together with other individuals who are executive officers of the Company immediately prior thereto, beneficially owns, directly or indirectly, more than 10% of the then outstanding shares of common stock of the Company or the corporation resulting from the transaction or series of transactions, as applicable, or of the combined voting power of the then outstanding voting securities of the Company or such resulting corporation.
3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period").
4. Terms of Employment.
(a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned to the Executive at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be increased no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date, and thereafter at least annually, in each case by a percentage not less than the average annual percentage merit increase in the Executive's base salary during the five (5) full calendar years immediately preceding the Effective Date. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash in an amount (the "Annual Bonus Amount") at least equal to the Executive's Incentive Potential (as defined in the Eaton Incentive Compensation Plan) for the most recent year for which an Incentive Potential was established before the Effective Date under the Eaton Incentive Compensation Plan, adjusted by the average of the Executive's individual performance rating for each of the three most recent years ended before the Effective Date, but eliminating any Corporate Performance Factor (as defined in the Eaton Incentive Compensation Plan). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies (including without limitation the Company's Deferred Incentive Compensation Plan, Limited Eaton Service Supplemental Retirement Income Plan, long-term Executive Strategic Incentive Plan and Supplemental and/or Excess Benefits Plans, as and to the extent those plans are in effect from time to time), but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall
terminate automatically upon the Executive's death during the Employment Period.
If the Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date;
(iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive.
(d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary through the Date
of Termination, to the extent not theretofore paid to the Executive, (2) the
amount, if any, which has been earned by the Executive with respect to any
completed Incentive Year under the Eaton Incentive Compensation Plan or any
successor thereto, and any completed Award Period under the Eaton Executive
Strategic Incentive Plan or any successor thereto, in each case to the extent
not theretofore paid to the Executive, and (3) with respect to each Award Period
under the Eaton Executive Strategic Incentive Plan or any successor thereto
which begins before and ends after the Date of Termination, an amount equal to
(x) 100% of the Executive's Individual Incentive Target (as defined in such
plan) for such Award Period times (y) a fraction, the numerator of which is the
number of days in such Award Period before the Date of Termination, and the
denominator of which is the total number of days in such Award Period (the sum
of the amounts described in clauses (1), (2) and (3) shall be hereinafter
referred to as the "Accrued Obligations"); and
B. the product of (1) the Multiple (as defined below) and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Annual Bonus Amount;
(ii) for a number of years after the Executive's Date of Termination equal to the lesser of two and the Multiple, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes re-employed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility, and for purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed for a number of years after the Date of Termination equal to the lesser of two and the Multiple and to have retired on the last day of such period;
(iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits").
The "Multiple" means the lesser of (i) three and (ii) the number of years and portions thereof (expressed as a decimal fraction) from the Date of Termination until the Executive's 65th birthday.
(b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) the Annual Base Salary through the Date of Termination and (y) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to the last sentence of this Section 7 and to Section 13(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. Notwithstanding the foregoing, if the Executive becomes entitled to receive severance benefits under Section 6(a) hereof, such severance benefits shall be in lieu of any benefits under any severance or separation plan, program or policy of the Company or any of its affiliated companies to which the Executive would otherwise have been entitled.
8. Full Settlement; Legal Fees. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and except as specifically provided in Section 6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (whether such contest is between the Company and the Executive or between either of them and any third party, and including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
(b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company relating to such claim,
(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. Trust Deposit.
(a) Upon the occurrence of a Proposed Change of Control (as defined below) during the Change of Control Period, the Company shall deposit in trust or escrow with a third party cash in an amount sufficient to provide all of the benefits and other payments to which the Executive would be entitled hereunder if a Change of Control occurred on the date of the Proposed Change of Control and the Executive's employment were terminated by the Executive for Good Reason immediately thereafter. Upon such deposit, references hereunder to any payment by the Company shall be deemed to refer to a payment from such trust or escrow; provided, however, that nothing contained herein shall relieve the Company of its obligation to make the payments required of it hereunder in the event any such payment is not made from the trust or escrow.
(b) "Proposed Change of Control" means:
(i) the commencement of a tender or exchange offer by any third person (other than a tender or exchange offer which, if consummated, would not result in a Change of Control) for 25% or more of the Outstanding Company Common Stock or combined voting power of the Outstanding Company Voting Securities;
(ii) the execution of an agreement by the Company, the consummation of which would result in the occurrence of a Change of Control;
(iii) the public announcement by any person (including the Company) of an intention to take or to consider taking actions which if consummated would constitute a Change of Control other than through a contested election for directors of the Company; or
(iv) the adoption by the Board, as a result of other circumstances, including circumstances similar or related to the foregoing, of a resolution to the effect that, for purposes of this Agreement, a Proposed Change of Control has occurred.
13. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
If to the Company:
Eaton Corporation
Eaton Center
Cleveland, Ohio 44114-2584
Attention: General Counsel
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, the Executive's employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed in its name on its behalf, all as of the day and year first above written.
EATON CORPORATION
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (h)
INDEMNIFICATION AGREEMENT
This Agreement, made this ______ day of _____________, 20__, by and between
Eaton Corporation, an Ohio corporation (the "Company"), and ___________________,
[title] ("Indemnitee");
WHEREAS, the Company and Indemnitee are each aware of the exposure to litigation of officers, Directors and representatives of the Company as such persons exercise their duties to the Company;
WHEREAS, the Company and Indemnitee are also aware of conditions in the insurance industry that have affected and may affect in the future the Company's ability to obtain appropriate directors' and officers' liability insurance on an economically acceptable basis;
WHEREAS, the Company desires to continue to benefit from the services of highly qualified, experienced and otherwise competent persons such as Indemnitee; and
WHEREAS, Indemnitee desires to serve or to continue to serve the Company as an officer of the Company, or, if requested to do so by the Company, as a director, officer, trustee, employee, representative or agent of another corporation, joint venture, trust or other enterprise, for so long as the Company continues to provide on an acceptable basis adequate and reliable indemnification against certain liabilities and expenses which may be incurred by Indemnitee;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows:
1. INDEMNIFICATION.
(a) The Company shall indemnify Indemnitee to the fullest extent permitted by law with respect to his activities as an officer of the Company and/or as a person who is serving or has served at the request of the Company as a director, officer, trustee, employee, representative or agent of another corporation, joint venture, trust or other enterprise, domestic or foreign, against expenses (including, without limitation, attorneys' fees, judgments, fines, and amounts paid in settlement) actually and reasonably incurred by him ("Expenses") in connection with any claim against Indemnitee, whether or not such claim is brought by any party who may be an "insured person" under the Company's directors' and officers' liability insurance, which is the subject of any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, investigative or otherwise and whether formal or informal (a "Proceeding"), to which Indemnitee was, is, or is threatened to be made a party by reason of anything done or not done by Indemnitee in any such capacity.
(b) The rights of Indemnitee hereunder shall be in addition to any rights Indemnitee may now or hereafter have to indemnification by the Company or otherwise. More specifically, the parties hereto intend that Indemnitee shall be entitled to receive, as determined by Indemnitee, payment to the maximum extent permitted by one or any combination of the following:
(I) the payments provided by the Company's Amended Regulations in effect on the date hereof, a copy of the relevant portions of which are attached hereto as Exhibit I;
(ii) the payments provided by the Articles of Incorporation, Code of Regulations, or By-laws or their equivalent of the Company in effect at the time Expenses are incurred by Indemnitee;
(iii) the payments allowable under Ohio law in effect at the date hereof;
(iv) the payments allowable under the law of the jurisdiction under which the Company is incorporated at the time Expenses are incurred by Indemnitee;
(v) the payments available under liability insurance obtained by the Company; and
(vi) such other payments as are or may be otherwise available to Indemnitee.
Combination of two or more of the payments provided by (I) through (vi) shall be available to the extent that the Applicable Document, as hereafter defined, does not require that the payments provided therein be exclusive of other payments. The document or law providing for any of the payments listed in items (I) through (vi) above is referred to in this Agreement as the "Applicable Document." The Company hereby undertakes to use its best efforts to assist Indemnitee, in all proper and legal ways, to obtain the payments selected by Indemnitee under items (I) through (vi) above.
(c) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans for employees of the Company or of any of its subsidiaries without regard to ownership of such plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to any employee benefit plan; references to "serving at the request of the Company" shall include any service as a director, officer, trustee, employee, representative or agent of the Company which imposes duties on, or involves services by, Indemnitee with respect to an employee benefit plan, its participants or beneficiaries; references to the masculine shall include the feminine; references to the singular shall include the plural and vice versa; and if Indemnitee acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, he shall be deemed to have acted in a manner consistent with the standards required for indemnification by the Company under the Applicable Documents.
2. INSURANCE.
The Company shall maintain directors' and officers' liability insurance which is at least as favorable to Indemnitee as the policy in effect on the date hereof and for so long as Indemnitee's services are covered hereunder, provided and to the extent that such insurance is available on a reasonable commercial basis. However, Indemnitee shall continue to be entitled to the indemnification rights provided hereunder regardless of whether liability or other insurance coverage is at any time obtained or retained by the Company. Any payments in fact made to Indemnitee under an insurance policy obtained or retained by the Company shall reduce the obligation of the Company to make payments hereunder by the amount of the payments made under any such insurance policy. In the event that insurance becomes unavailable in the amount or scope of coverage of the policy in effect on the date hereof on a reasonable commercial basis and the Company foregoes maintenance of all or a portion of such insurance coverage, the Company shall stand as a self-insurer with respect to the coverage, or portion thereof, not retained, and shall indemnify Indemnitee against any loss arising out of the reduction or cancellation of such insurance coverage.
3. PAYMENT OF EXPENSES.
At Indemnitee's request, the Company shall pay the Expenses as and when incurred by Indemnitee, after receipt of written notice pursuant to Paragraph 6 hereof and an undertaking in the form of Exhibit II attached hereto by or on behalf of Indemnitee (I) to repay such amounts so paid on Indemnitee's behalf if it shall ultimately be determined under the Applicable Document that Indemnitee is required to repay such Expenses and (ii) to reasonably cooperate with the Company concerning the Proceeding. That portion of Expenses which represents attorneys' fees and other costs incurred in defending any Proceeding shall be paid by the Company within thirty (30) days of its receipt of such notice, together with reasonable documentation evidencing the amount and nature of such Expenses.
4. ESCROW RESERVE.
The Company shall dedicate up to an aggregate of ten million dollars ($10,000,000) as collateral security for the initial funding of its obligations hereunder and under similar agreements with other directors, officers and representatives by depositing assets or bank letters of credit in escrow or reserving lines of credit that may be drawn down by an escrow agent in the dedicated amount (the "Escrow Reserve"); provided, however, that the terms of any such Escrow Reserve may provide that the cash, securities or letters or lines of credit available therefor shall only be utilized for the indemnification or advancement of expenses provided for herein in the event that there shall have occurred within the preceding five years a Change in Control of the Company, as defined below. The Company shall promptly provide Indemnitee with a true and complete copy of the agreement relating to the establishment and operation of the Escrow Reserve, together with such additional documentation or information with respect to the escrow as Indemnitee may from time to time reasonably request. The Company shall promptly deliver an executed copy of this Agreement to the Escrow Reserve agent to evidence to the agent that Indemnitee is a beneficiary of the Escrow Reserve and shall deliver to Indemnitee the escrow agent's signed receipt evidencing that delivery. For purposes of this Agreement, a "Change in Control" of the Company shall have occurred if at any time any of the following events shall occur: (i) a tender offer shall be made and consummated for the ownership of securities of the Company representing 25% or more of the combined voting power of Company's then outstanding voting securities, (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Company, (iv) any person (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (v) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. For purposes of this Agreement, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect).
5. ADDITIONAL RIGHTS.
The indemnification provided in this Agreement shall not be exclusive of any other indemnification or right to which Indemnitee may be entitled and shall continue after Indemnitee has ceased to occupy a position as an officer, director or representative as described in Paragraph 1 above with respect to Proceedings relating to or arising out of Indemnitee's acts or omissions during his service in such position.
6. NOTICE TO COMPANY.
Indemnitee shall provide to the Company prompt written notice of any Proceeding brought, threatened, asserted or commenced against Indemnitee with respect to which Indemnitee may assert a right to indemnification hereunder; provided that failure to provide such notice shall not in any way limit Indemnitee's rights under this Agreement.
7. COOPERATION IN DEFENSE AND SETTLEMENT.
Indemnitee shall not make any admission or effect any settlement with respect to a Proceeding without the Company's written consent unless Indemnitee shall have determined to undertake his own defense in such matter and has waived the benefits of this Agreement in writing delivered to the Company. The Company shall not settle any Proceeding to which Indemnitee is a party in any manner which would impose any Expense on Indemnitee without his written consent. Neither Indemnitee nor the Company will unreasonably withhold consent to any proposed settlement. Indemnitee and the Company shall cooperate to the extent reasonably possible with each other and with the Company's insurers, in attempts to defend or settle such Proceeding.
8. ASSUMPTION OF DEFENSE.
Except as otherwise provided below, to the extent that it may wish, the Company jointly with any other indemnifying party similarly notified will be entitled to assume Indemnitee's defense in any Proceeding, with counsel mutually satisfactory to Indemnitee and the Company. After notice from the Company to Indemnitee of the Company's election so to assume such defense, the Company will not be liable to Indemnitee under this Agreement for Expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at Indemnitee's expense unless:
(a) the employment of counsel by Indemnitee has been authorized by the Company;
(b) counsel employed by the Company initially is unacceptable or later becomes unacceptable to Indemnitee and such unacceptability is reasonable under then existing circumstances;
(c) Indemnitee shall have reasonably concluded that there may be a conflict of interest between Indemnitee and the Company in the conduct of the defense of such Proceeding; or
(d) the Company shall not have employed counsel promptly to assume the defense of such Proceeding.
In each of the cases set forth in items (a) through (d) above, the fees and expenses of counsel shall be at the expense of the Company and subject to payment pursuant to this Agreement. The Company shall not be entitled to assume the defense of Indemnitee in any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have reached either of the conclusions provided for in clauses (b) or (c) above.
9. ENFORCEMENT.
In the event that any dispute or controversy shall arise under this Agreement between Indemnitee and the Company with respect to whether Indemnitee is entitled to indemnification in connection with any Proceeding or with respect to the amount of Expenses incurred, then with respect to each such dispute or controversy Indemnitee may seek to enforce this Agreement through legal action or, at Indemnitee's sole option and request, through arbitration. If arbitration is requested, such dispute or controversy shall be submitted by the parties to binding arbitration in the City of Cleveland, State of Ohio, before a single arbitrator agreeable to both parties. If the parties cannot agree on a designated arbitrator within fifteen (15) days after arbitration is requested in writing by either of them, the arbitration shall proceed in the City of Cleveland, State of Ohio, before an arbitrator appointed by the American Arbitration Association. In either case, the arbitration proceeding shall commence promptly under the rules then in effect of that Association and the arbitrator agreed to by the parties or appointed by that Association shall be an attorney other than an attorney who has, or is associated with a firm having associated with it an attorney which has, been retained by or performed services for the Company or Indemnitee at any item during the five (5) years preceding the commencement of arbitration. The award shall be rendered in such form that judgment may be entered thereon in any court having jurisdiction thereof. The prevailing party shall be entitled to prompt reimbursement of any costs and expenses (including, without limitation, reasonable attorney's fees) incurred in connection with such legal action or arbitration provided that Indemnitee shall not be obligated to reimburse the Company unless the arbitrator or court which resolves the dispute determines that Indemnitee acted in bad faith in bringing such action or arbitration.
10. EXCLUSIONS.
Notwithstanding the scope of indemnification which may be available to Indemnitees from time to time under any Applicable Document, no indemnification, reimbursement or payment shall be required of the Company hereunder with respect to:
(a) any claim or any part thereof as to which Indemnitee shall have been adjudged by a court of competent jurisdiction from which no appeal is or can be taken, by clear and convincing evidence, to have acted or failed to act with deliberate intent to cause injury to the Company or with reckless disregard for the best interests of the Company;
(b) any claim or any part thereof arising under Section 16(b) of the Exchange Act pursuant to which Indemnitee shall be obligated to pay any penalty, fine, settlement or judgment;
(c) any obligation of Indemnitee based upon or attributable to Indemnitee gaining in fact any personal gain, profit or advantage to which he was not entitled; or
(d) any Proceeding initiated by Indemnitee without the consent or
authorization of the Board of Directors of the Company, provided that this
exclusion shall not apply with respect to any claims brought by Indemnitee
(I) to enforce his rights under this Agreement or (ii) in any Proceeding
initiated by another person or entity whether or not such claims were
brought by Indemnitee against a person or entity who was otherwise a party
to such Proceeding.
Nothing in this Paragraph 10 shall eliminate or diminish the Company's obligations to advance that portion of Indemnitee's Expenses which represent attorneys' fees and other costs incurred in defending any Proceeding pursuant to Paragraph 3 of this Agreement.
11. EXTRAORDINARY TRANSACTIONS.
The Company covenants and agrees that, in the event of any merger, consolidation or reorganization in which the Company is not the surviving entity, any sale of all or substantially all of the assets of the Company or any liquidation of the Company (each such event is hereinafter referred to as an "extraordinary transaction"), the Company shall:
(a) Have the obligations of the Company under this Agreement expressly assumed by the survivor, purchaser or successor, as the case may be, in such extraordinary transaction; or
(b) Otherwise adequately provide for the satisfaction of the Company's obligations under this Agreement, in a manner acceptable to Indemnitee.
12. NO PERSONAL LIABILITY.
Indemnitee agrees that neither the Directors nor any officer, employee, representative or agent of the Company shall be personally liable for the satisfaction of the Company's obligations under this Agreement, and Indemnitee shall look solely to the assets of the Company and the Escrow Reserve referred to in Paragraph 4 hereof for satisfaction of any claims hereunder.
13. PERIOD OF LIMITATIONS.
No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company or any affiliate of the Company against Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal representatives after the expiration of two (2) years from the date of accrual of such cause of action, and any claim or cause of action of the Company or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action such shorter period shall govern.
14. SEVERABILITY.
If any provision, phrase, or other portion of this Agreement should be determined by any court of competent jurisdiction to be invalid, illegal or unenforceable, in whole or in part, and such determination should become final, such provision, phrase or other portion shall be deemed to be severed or limited, but only to the extent required to render the remaining provisions and portions of this Agreement enforceable, and this Agreement as thus amended shall be enforced to give effect to the intention of the parties insofar as that is possible.
15. SUBROGATION.
In the event of any payment under this Agreement, the Company shall be subrogated to the extent thereof to all rights to indemnification or reimbursement against any insurer or other entity or person vested in Indemnitee, who shall execute all instruments and take all other action as shall be reasonably necessary for the Company to enforce such rights.
16. GOVERNING LAW.
The parties hereto agree that this Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Ohio.
17. NOTICES.
All notices, requests, demands and other communications hereunder shall be in writing and shall be considered to have been duly given if delivered by hand and receipted for by the party to whom the notice, request, demand or other communication shall have been directed, or mailed by certified mail, return receipt requested, with postage prepaid:
(a) If to the Company, to: EATON CORPORATION Eaton Center Cleveland, Ohio 44114-2584 Attention: General Counsel
or to such other or further address as shall be designated from time to time by Indemnitee or the Company to the other.
18. TERMINATION.
This Agreement may be terminated by either party upon not less than sixty
(60) days' prior written notice delivered to the other party, but such
termination shall not in any way diminish the obligations of the Company
hereunder (including the obligation to maintain the Escrow Reserve referred to
in Paragraph 4 hereof) with respect to Indemnitee's activities prior to the
effective date of the termination.
19. AMENDMENTS.
This Agreement and the rights and duties of Indemnitee and the Company hereunder may not be amended, modified or terminated except by written instrument signed and delivered by the parties hereto.
20. BINDING EFFECT.
This Agreement is and shall be binding upon and shall inure to the benefit of the parties thereto and their respective heirs, executors, administrators, successors and assigns.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.
INDEMNITEE EATON CORPORATION
-------------------- ------------------------------
[Name] By J. R. Horst
Title: Title: Vice President and
General Counsel
|
Title: Secretary
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (i)
LIMITED EATON SERVICE
SUPPLEMENTAL RETIREMENT INCOME PLAN
Eaton Corporation (the "Company") hereby establishes a Supplemental Retirement Income Plan (herein referred to as the "Limited Service Plan") for certain executives of the Company designated by the Board of Directors of the Company. The Plan was originally effective as of May 1, 1979. This amendment and restatement of the Plan shall be effective as of January 1, 2003.
Upon becoming employed by the Company, certain key executives may have foregone retirement benefits from their former employer and may not be able to earn adequate pension benefits from the Company. The Company believes that it is in the best interest of the Company to be able to attract and retain such mid-career executives. The purpose of the Limited Service Plan is to provide each such executive with retirement income in an amount as set forth in the Agreement (as hereinafter defined) between such executive and the Company, and thereby provide a total pension benefit that is comparable to the benefit the executive would have received if he or she had not agreed to the mid-career change in employment.
All officers of the Company and any other executive of the Company designated by the Board of Directors of the Company (the "Board") shall be eligible to participate under the Limited Service Plan (a "Participant"). Each Participant shall be required to enter into an Agreement with the Company to evidence that participation.
As used in the Plan the following definitions shall apply:
"Agreement." The written agreement between the Company and Participant entered into pursuant to the Limited Service Plan and which sets forth the Supplement payable to the Participant under the plan.
"Cause." For purposes of this Agreement, the Company shall have "Cause" to terminate Participant's employment hereunder upon (i) the willful and continued failure by Participant to substantially perform Participant's duties with the Company (other than any such failure resulting from Participant's incapacity due to physical or mental illness), after a demand for substantial performance is delivered to Participant by the Board which specifically identifies the manner in which the Board believes that Participant has not substantially performed Participant's duties, or (ii) the willful engaging by Participant in gross misconduct materially and demonstrably injurious to the Company. For purposes of this definition, no act, or failure to act, on Participant's part shall be considered "willful" unless done, or omitted to be done, by Participant not in good faith and without reasonable belief that Participant's action or omission was in the best interest of the Company. Notwithstanding the foregoing, Participant's employment shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Participant a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Participant and an opportunity for Participant, together with Participant's counsel, to be heard before the Board), finding that in the good faith opinion of the Board Participant was guilty of conduct set forth above in clauses (i) or (ii) of this definition and specifying the particulars thereof in detail.
"Change in Control of the Company." A "Change in Control of the Company" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities, (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company, (iv) any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (v) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. For purposes of the Plan, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect).
"Committee." The Compensation and Organization Committee of the Board of Directors of Eaton Corporation.
"Credited Service." The service credited to a Participant as "Credited Service" under the Pension Plan.
"Disability." Any termination of employment which entitles Participant to a disability benefit under the Pension Plan.
"Good Reason." Any termination of employment under the following circumstances shall be for "Good Reason":
(i) without Participant's express written consent, the assignment to Participant of any duties inconsistent with Participant's positions, duties, responsibilities and status with the Company immediately prior to a Change in Control of the Company, or a change in Participant's reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control of the Company, or any removal of Participant from or any failure to re-elect Participant to any of such positions, except in connection with the termination of Participant's employment for Cause, Disability or as a result of Participant's death;
(ii) a reduction by the Company in Participant's base salary as in effect immediately prior to the Change in Control of the Company or as the same may be increased from time to time thereafter; or the failure by the Company to increase such base salary each year after a Change in Control of the Company by an amount which at least equals, on a percentage basis, the average annual percentage merit increase in Participant's base salary during the five (5) full calendar years immediately preceding a Change in Control of the Company;
(iii) a failure by the Company to continue Participant's participation in the Plan, the Company's Executive Incentive Compensation Plan, Deferred Incentive Compensation Plan, Executive Strategic Incentive Plan, Eaton Incentive Compensation Deferral Plan, Excess Benefits Plan and Supplemental Benefit Plan, as each plan may be modified from time to time but substantially in the form presently in effect (collectively, the "Plans"), on at least the basis as in effect immediately prior to the Change in Control of the Company or to pay Participant any amounts earned under the Plans in accordance with the terms of the Plans.
(iv) the relocation of the Company's principal executive offices to a location outside Cuyahoga County, Ohio or any county adjoining Cuyahoga County, Ohio, or the Company's requiring Participant to be based anywhere other than the Company's principal executive offices or the location where Participant is based immediately prior to the Change in Control of the Company except for required travel on the Company's business to an extent substantially consistent with Participant's business travel obligations in effect immediately prior to the Change in Control of the Company, or, in the event Participant consents to any such relocation of the Company's principal executive offices, the failure by the Company to pay (or reimburse Participant for) all reasonable moving expenses incurred by Participant relating to a change of Participant's principal residence in connection with such relocation and to indemnify Participant against any loss (defined as the difference between the actual sale price of such residence and the higher of (a) Participant's aggregate investment in such residence or (b) the fair market value of such residence as determined by any real estate appraiser designated by Participant and reasonably satisfactory to the Company) realized in the sale of Participant's principal residence in connection with any such change of residence;
(v) the failure by the Company to continue in effect any benefit or compensation plan (including but not limited to the Plans), pension plan, life insurance plan, health and accident plan or disability plan in which Participant is participating at the time of a Change in Control of the Company (or plans providing Participant with substantially similar benefits), the taking of any action by the Company which would adversely affect Participant's participation in or materially reduce Participant's benefits under any of such plans or deprive Participant of any material fringe or personal benefit enjoyed by Participant at the time of the Change in Control of the Company, or the failure by the Company to provide Participant with the number of paid vacation days to which Participant is then entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect immediately prior to the Change in Control of the Company;
(vi) the failure of the Company to obtain the agreement by any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the assets of the Company, by agreement in form and substance satisfactory to Participant, to expressly assume this Agreement and the obligations of the Company hereunder; or
(vii) any purported termination of Participant's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of a Notice of Termination as herein defined (and, if applicable, the definition of "Cause" as herein defined); and for purposes of the Plan, no such purported termination shall be effective.
"Notice of Termination." Any termination of Participant's employment by the Company for Cause or Disability or by Participant for Good Reason shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Participant's employment under the provision so indicated.
"Pension Plan." The Pension Plan for Eaton Corporation Employees.
"Supplement." The annual amount of retirement income or the lump sum payable to Participant in accordance with the provisions of the Limited Service Plan and the Agreement.
Section 4.01. General Obligation. The Company will pay the Supplement to Participant for life in equal monthly installments, commencing on the first business day of the month following the month in which Participant retires under the terms of the Pension Plan after attaining age 55 or on the first business day of the month following the month in which Participant's employment terminated due to Disability, unless the Committee in its sole discretion decides that the Supplement shall be paid in some other form (including, but not limited to, a lump sum payment). In connection with such determination, the Committee may take into account the wishes and needs of Participant. If the Committee decides upon such other form of benefit, the Supplement shall be actuarially adjusted using the same actuarial factors used under the Pension Plan. Notwithstanding anything herein to the contrary, the Company shall have no obligation to pay the Supplement to Participant if Participant terminates employment with the Company (a) for any reason prior to age 55, or (b) with less than ten (10) years of Credited Service unless the Participant is age 65 at the time of termination of employment.
Section 4.02. Death. If Participant has at least five (5) years of Credit Service and dies prior to attaining age 65 but after attaining age 55 and while employed by the Company, the Company will pay a benefit to Participant's surviving spouse calculated in accordance with the Limited Service Plan and the Agreement.
By accepting payments hereunder Participant covenants that for a period of three (3) years after Participant leaves the employment of the Company, he or she will not engage in any activities which, in the opinion of the Company, are in competition with the Company or any of its subsidiaries without first obtaining the written consent of the Company; provided, however, that this provision shall not apply if, within five (5) years after a Change in Control of the Company, Participant's employment with the Company is terminated by Participant for Good Reason or by the Company without Cause.
If Participant fails to observe or perform any of the covenants by Participant contained herein in any material respect, Participant shall forfeit all rights which he or she may have to any benefits for which provision is made herein.
Section 7.01. Automatic Payment. Except as provided below in this Article
VII, upon the date of a Proposed Change in Control, as defined in Section 7.02
hereof, the Company shall make an immediate Lump Sum Payment, as defined in
Section 7.03 hereof, to each Participant or his or her surviving spouse, as the
case may be. At any time prior to a Proposed Change in Control, the Board may
decide that the Lump Sum Payment shall not be made, upon a Proposed Change in
Control, because any such payment is not then advisable, in the Board's
judgment, in order to protect the benefits of Participants under the Limited
Service Plan. If the Board makes such a decision, it may thereafter (i) take no
further action, in which event the Lump Sum Payments will not be made, (ii)
reconsider such decision and decide at a later date (which may be subsequent to
a Proposed Change in Control) to make Lump Sum Payments, (iii) provide funding
for the Plan benefits by depositing funds in trust for such purpose or (iv) take
no action to protect the Plan benefits.
Section 7.02. Proposed Change in Control. A Proposed Change in Control shall mean the first to occur of any of the following events (including the expiration of the periods specified therein):
(a) Twenty (20) days after the commencement of a tender offer shall be made for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities (unless such tender offer shall have been withdrawn);
(b) Twenty (20) days after the commencement of solicitation of proxies or consents for a merger or consolidation with another corporation and as a result of such merger or consolidation less than 75%, in the Company's view, of the outstanding voting securities of the surviving or resulting corporation would be owned in the aggregate by the former shareholders of the Company, other than the party and any affiliates (within the meaning of the Exchange Act) of any party, to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation;
(c) Upon the date that the Company shall have entered into an agreement to sell substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Company;
(d) Within twenty (20) days after any "person" (as such term is used in Sections 3(a)(9) and l3(d)(3) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing l5% or more of the combined voting power of the Company's then outstanding securities; or
(e) Upon the date that individuals who, at the beginning of any period of two consecutive years, constitute the Board, cease for any reason to constitute at least 76% thereof, unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
For purposes of this Section 7.02, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule l3d-3(d)(l)(i) of the Exchange Act (as then in effect).
In exercising its discretion not to make Lump Sum Payments in connection with any Proposed Change in Control, the Board will take into account whether such Proposed Change in Control is, in its view, management initiated.
Section 7.03. Determination of Lump Sum Payment. Lump Sum Payment means an amount equal to the present value of the total number of annual payments which otherwise would have been made under the Limited Service Plan based on the assumption that the Participant's employment with the Company has terminated as of the date of the Proposed Change in Control and as calculated using the mortality tables used for the Pension Plan and a rate of interest equal to "Moody's Corporate Bond Yield Average--Monthly (Average Corporate)" as then most recently published. In the event the Participant or the Participant's surviving spouse has begun to receive benefit payments under the Plan prior to the date of the Proposed Change in Control, the amount of such Lump Sum Payment shall be equal to the present value of the remaining annual payments which otherwise would have been made, calculated as described in this Section 7.03.
Section 7.04. Participation after a Proposed Change in Control. In the event that the Limited Service Plan is not terminated after a Proposed Change in Control, any future payment made under the Plan to a Participant who has received a Lump Sum Payment shall be reduced by taking into account the amount of such Lump Sum Payment in a manner determined by the Company at the time of such Lump Sum Payment.
Section 8.01. Assignment. Except as otherwise provided herein, neither Participant nor any beneficiary for which provision is made herein shall have the right to sell, alienate, anticipate, assign, transfer, pledge, encumber or otherwise convey the right to receive the Supplement.
Section 8.02. No Contract of Employment. The Limited Service Plan shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Company to discharge Participant, or restrict the right of Participant to terminate his or her employment with the Company.
Section 8.03. Security. The rights of Participant under the Limited Service Plan shall be solely those of an unsecured creditor of the Company. Any securities or fixed or other assets acquired by the Company in order to be able to satisfy the liabilities assumed by it hereunder, shall not be deemed to be held under any trust for the benefit of Participant or to be considered security for the performance of the obligations of the Company but shall be, and remain, general, unpledged, unrestricted assets of the Company.
Section 8.04. Conflict. In the case of a conflict between the Limited Service Plan and the Agreement the terms of the Agreement shall control.
Section 8.05. Governing Law. The Plan shall be subject to and construed under the laws of the State of Ohio, without giving effect to any conflicts of laws principles thereunder.
Section 8.06. Amendment and Termination. The Company may at any time amend or terminate the Limited Service Plan. Notwithstanding the foregoing, upon the occurrence of a Change in Control of the Company, no amendment or termination shall, without the consent of Participant, alter or impair any vested rights of Participant under the Limited Service Plan based upon Participant's age and years of Credited Service at the time of such amendment or termination or the manner in which amounts are to be paid to Participant or his or her surviving spouse under the Limited Service Plan.
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (j)
EATON CORPORATION
SUPPLEMENTAL BENEFITS PLAN
(Effective January 1, 1989)
The Eaton Corporation Excess Benefits Plan, an unfunded, nonqualified deferred compensation plan originally adopted by the Corporation in 1976, and amended in 1985, is hereby amended and restated effective as of January 1, 1989 into two plans: the Eaton Corporation Excess Benefits Plan, which is set forth in a separate document, and the Eaton Corporation Supplemental Benefits Plan, which is set forth below.
1. Purpose. The purpose of the Supplemental Benefits Plan is to provide benefits in excess of the limitations imposed by the Code with respect to certain employees who participate in the Pension Plan.
2. Definitions. The following definitions are used throughout the Plan:
(a) "Pension Administration Committee" means the committee comprised of officers of the Corporation appointed by the Board of Directors from time to time to administer the Corporation's retirement benefit programs.
(b) "Board of Directors" means the Board of Directors of the Corporation.
(c) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time.
(d) "Compensation Committee" means the Compensation Committee of the Board of Directors.
(e) "Corporation" means Eaton Corporation, an Ohio corporation.
(f) "Participant" means a participant in the Pension Plan who is eligible to receive benefits under the Plan. The term "Participant" shall include the beneficiary of a deceased Participant.
(g) "Plan" or "Supplemental Benefits Plan" means the Eaton Corporation Supplemental Benefits Plan as amended from time to time.
(h) "Pension Plan" means the Pension Plan for Salaried Employees sponsored
by the Corporation, which is a defined benefit plan intended to qualify under
Section 401(a) of the Code, and each other defined benefit plan sponsored by a
subsidiary of the Corporation that is intended to qualify under Section 401(a)
of the Code.
3. Eligibility. An employee of the Corporation who is a participant in the
Pension Plan and who is "highly compensated" within the meaning of Code Section
401(a)(4) shall be eligible to receive a benefit in an amount determined under
Section 4.
4. Pension Plan Supplemental Benefits. A Participant who is eligible to receive a benefit under the Pension Plan shall be entitled to receive a benefit under the Plan in an amount equal to the difference between (i) and (ii), where:
(i) equals the aggregate amount of monthly income payable to the Participant under the Pension Plan on the normal benefit commencement date specified in the Pension Plan as determined under the normal retirement benefit formula of the Pension Plan before applying any provision reducing pension benefits because of the provisions of the Code limiting the maximum amount of an employee's compensation which may be taken into account for purposes of calculating benefits under the Pension Plan; and
(ii) equals the aggregate amount of monthly income determined in paragraph (i) after applying the provisions of the Code limiting the maximum amount of an employee's compensation which may be taken into account for purposes of calculating benefits under the Pension Plan.
Notwithstanding the foregoing, in no event shall the benefit hereunder duplicate the benefit provided under the Eaton Corporation Excess Benefits Plan.
5. Vesting. Subject to the rights of general creditors as set forth in
Section 8 and the right of the Corporation to discontinue the Plan as provided
in Section 11(c), a Participant shall have a vested, and nonforfeitable interest
in benefits payable under Section 4 to the same extent and in the same manner as
benefits are vested under the Pension Plan.
6. Commencement of Benefits.
(a) The benefit payable to a Participant under Section 4 shall be paid or
shall begin at the same time as the Participant's benefit is paid or begins
under the Pension Plan. If the Participant elects under the Pension Plan to
receive or begin receiving an actuarially reduced benefit before the normal
benefit commencement date, the benefit payable under Section 4 shall also be
actuarially reduced by applying the same actuarial factors that are applied
under the Pension Plan. In the event of the termination of the Pension Plan and
the distribution to a Participant of a fully-paid, individual annuity contract,
payments received under such contract shall be deemed to be benefits paid under
the Pension Plan for purposes of the Plan. If a Participant receives a lump sum
cash distribution on termination of the Pension Plan, the benefit payable under
Section 4 shall be paid at the earliest time the Participant could have elected
to receive a benefit under the Pension Plan following termination of employment
if the Pension Plan had not terminated.
7. Form of Benefits.
(a) The benefit payable under Section 4 shall be paid to the Participant in the same form as the form of annuity payments as provided under the Pension Plan, unless the Benefits Committee in its sole discretion decides to make the payment of the Section 4 benefit in any optional form of benefit available under the Pension Plan (including a lump sum benefit). If the Benefits Committee decides upon such an optional form of benefit, the benefit payable under Section 4 shall be actuarially adjusted by using the same actuarial factors as used under the Pension Plan for converting the normal form of benefit to an actuarially equivalent optional benefit. A Participant need not receive the benefit payable under Section 4 in the same form as the form of benefit elected by the Participant under the Pension Plan.
(b) Except as provided below, upon the date of a Proposed Change in Control, the Corporation shall make an immediate Lump Sum Payment to each plan Participant. At any time prior to a Proposed Change in Control, the Board of Directors may decide that a Lump Sum Payment shall not be made upon a Proposed Change in Control, because any such payment is not then advisable or effective in the Board's judgment, in order to protect the benefits of the Participants under the Plan. If the Board makes such a decision, it may thereafter (1) take no further action, in which case the Lump Sum Payments will not be made, (2) reconsider such decision and decide (at a date which may be before or after a Proposed Change in Control) to make Lump Sum Payments, either before or after a Proposed Change in Control, (3) provide funding for the Plan benefits by depositing funds in trust for such purpose in accordance with Section 8(b) hereof, or (4) take any other action to protect the Plan benefits. If the Board takes no action prior to a Proposed Change in Control, the Lump Sum Payments will be made.
A Proposed Change in Control shall mean the first to occur of any of the following events (including the expiration of any periods specified therein):
(i) twenty days after the commencement of a tender offer shall be made for the ownership of securities of the Corporation, representing 25% or more of the combined voting power of the Corporation's then outstanding voting securities (unless such tender offer shall have been withdrawn),
(ii) twenty days after the commencement of solicitation of proxies or consents for a merger or consolidation with another corporation and as a result of such merger or consolidation less than 75%, in the Corporation's view, of the outstanding voting securities of the surviving or resulting corporation would be owned in the aggregate by the former shareholders of the Corporation, other than the party and any affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party, to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation,
(iii) upon the date that the Corporation shall have entered into an agreement to sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Corporation,
(iv) twenty days after any "person" (as such term is used in Section 3(a)(9) and 13(d)(3) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 15% or more of the combined voting power of the Corporation's then outstanding securities; or
(v) upon the date that individuals who, at the beginning of any period of two consecutive years, constitute the Board of Directors of the Corporation (the "Board"), cease for any reason to constitute at least seventy-six percent thereof, unless the election, or the nomination for election by the Corporation's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
For purposes of this Plan, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect).
In exercising its discretion not to make Lump Sum Payments in connection with any Proposed Change in Control, the Board will take into account whether such Proposed Change in Control was, in its view, management-initiated, and intends not to permit Lump Sum Payments in any such case.
"Lump Sum Payment" means a single payment in cash to a Participant of his or her vested benefit determined in accordance with Section 4, actuarially adjusted by using the same actuarial factors as under the Pension Plan for converting the normal form of benefit to an actuarially equivalent optional benefit. These payments would be based upon "final average annual compensation" and "years of service" as they exist upon the date of the Proposed Change in Control, and would be based upon the assumption (only for purposes of computing this payment) that the Participant would retire upon that same date (even though the employee might not otherwise be of retirement age).
Notwithstanding anything herein to the contrary, no Lump Sum Payment shall be paid to any Participant herein who ceases to be an employee of the Corporation prior to attaining the age at which he or she is eligible to take early retirement at his or her option.
8. Funding of Benefits.
(a) The Plan shall be unfunded. All benefits payable under the Plan shall be paid from the Corporation's general assets, and nothing contained in the Plan shall require the Corporation to set aside or hold in trust any funds for the benefit of a Participant, who shall have the status of a general unsecured creditor with respect to the Corporation's obligation to make payments under the Plan. Any funds of the Corporation available to pay benefits under the Plan shall be subject to the claims of general creditors of the Corporation and may be used for any purpose by the Corporation.
(b) Notwithstanding the provisions of subsection (a), the Corporation may, at the direction, and in the absolute discretion, of the Pension Administration Committee, transfer to the trustee of one or more irrevocable trusts established for the benefit of one or more Participants' assets from which all or a portion of the benefits provided under the Plan will be satisfied, provided that such assets held in trust shall at all times be subject to the claims of general unsecured creditors of the Corporation and no Participant shall at any time have a prior claim to such assets.
9. Administration of the Plan. The Pension Administration Committee shall administer the Plan and shall keep a written record of its action and proceedings regarding the Plan and all dates, records and documents relating to its administration of the Plan. The Pension Administration Committee is authorized to interpret the Plan, to make, amend and rescind such rules as it deems necessary for the proper administration of the Plan, to make all other determinations necessary or advisable for the administration of the Plan and to correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent that the Pension Administration Committee deems desirable to carry the Plan into effect. The powers and duties of the Pension Administration Committee shall include, without limitation, the following:
(a) Determining the amount of benefits payable to Participants and authorizing and directing the Corporation with respect to the payment of benefits under the Plan;
(b) Construing and interpreting the Plan whenever necessary to carry out its intention and purpose and making and publishing such rules for the regulation of the Plan as are not inconsistent with the terms of the Plan; and
(c) Compiling and maintaining all records it determines to be necessary, appropriate or convenient in connection with the administration of the Plan.
No member of the Pension Administration Committee shall vote on any matter relating specifically to such member. In the event that a majority of the members of the Pension Administration Committee will be specifically affected by any action proposed to be taken (as opposed to being affected in the same manner as each other Participant in the Plan), such action shall be taken by the Compensation Committee.
10. Claims Procedure.
(a) If a Participant (hereinafter referred to as the "Applicant") does not receive the timely payment of the benefits which the Applicant believes are due under the Plan, the Applicant may make a claim for benefits in the manner hereinafter provided.
All claims for benefits under the Plan shall be made in writing and shall be signed by the Applicant. Claims shall be submitted to a representative designated by the Pension Administration Committee and hereinafter referred to as the "Claims Coordinator." If the Applicant does not furnish sufficient information with the claim for the Claims Coordinator to determine the validity of the claim, the Claims Coordinator shall indicate to the Applicant any additional information which is necessary for the Claims Coordinator to determine the validity of the claim.
Each claim hereunder shall be acted on and approved or disapproved by the Claims Coordinator within 30 days following the receipt by the Claims Coordinator of the information necessary to process the claim.
In the event the Claims Coordinator denies a claim for benefits in whole or in part, the Claims Coordinator shall notify the Applicant in writing of the denial of the claim and notify the Applicant of his right to a review of the Claims Coordinator's decision by the Benefits Committee. Such notice by the Claims Coordinator shall also set forth, in a manner calculated to be understood by the Applicant, the specific reason for such denial, the specific provisions of the Plan on which the denial is based, a description of any additional material or information necessary to perfect the claim with an explanation of the Plan's appeals procedure as set forth in this Section.
If no action is taken by the Claims Coordinator on an Applicant's claim within 30 days after receipt by the Claims Coordinator, such claim shall be deemed to be denied for purposes of the following appeals procedure.
(b) Any Applicant whose claim for benefits is denied in whole or in part may appeal for a review of the decision by the Pension Administration Committee. Such appeal must be made within three months after the Applicant has received actual or constructive notice of the denial as provided above. An appeal must be submitted in writing within such period and must:
(i) request a review by the Pension Administration Committee of the claim for benefits under the Plan;
(ii) set forth all of the grounds upon which the Applicant's request for review is based on any facts in support thereof; and
(iii) set forth any issues or comments which the Applicant deems pertinent to the appeal.
The Pension Administration Committee shall regularly review appeals by Applicants. The Pension Administration Committee shall act upon each appeal within 30 days after receipt thereof unless special circumstances require an extension of the time for processing, in which case a decision shall be rendered by the Pension Administration Committee as soon as possible but not later than 60 days after the appeal is received by the Pension Administration Committee.
The Pension Administration Committee shall make a full and fair review of each appeal and any written materials submitted by the Applicant in connection therewith. The Pension Administration Committee may require the Applicant to submit such additional facts, documents or other evidence as the Pension Administration Committee in its discretion deems necessary or advisable in making its review. The Applicant shall be given the opportunity to review pertinent documents or materials upon submission of a written request to the Pension Administration Committee, provided the Pension Administration Committee finds the requested documents or materials are pertinent to the appeal.
On the basis of its review, the Pension Administration Committee shall make an independent determination of the Applicant's eligibility for benefits under the Plan.
In the event the Pension Administration Committee denies an appeal in whole or in part, the Pension Administration Committee shall give written notice of the decision to the Applicant, which notice shall set forth, in a manner calculated to be understood by the Applicant, the specific reasons for such denial and which shall make specific reference to the pertinent provisions of the Plan on which the Pension Administration Committee's decision is based.
11. Miscellaneous.
(a) Nothing in the Plan shall confer upon a Participant the right to continue in the employ of the Corporation or an affiliate of the Corporation or shall limit or restrict the right of the Corporation or any affiliate to terminate the employment of a Participant at any time or without cause.
(b) Neither the Corporation nor any Participant hereunder shall assign, transfer or delegate this Plan or any rights or obligations hereunder except as expressly provided herein. Without limiting the generality of the foregoing, no right or interest under this Plan of a Participant shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Participant. If any Participant shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge or otherwise encumber his benefits hereunder or any part thereof, or if by reason of his bankruptcy or other event happening at any time such benefits would devolve upon anyone else or would not be enjoyed by him, then the Corporation, acting through the Benefits Committee, in its discretion, may terminate his interest in any such benefit to the extent the Corporation considers necessary or advisable to prevent or limit the effects of such occurrence. Termination shall be effected by filing a written "termination declaration" with the Plan's records and making reasonable efforts to deliver a copy to the Participant (the "Terminated Participant") whose interest is adversely affected.
As long as the Terminated Participant is alive, any benefits affected by the termination shall be retained by the Corporation and, in the Corporation's sole and absolute judgment, may be paid to or expended for the benefit of the terminated Participant, his spouse, his children or any other person or persons in fact dependent upon him in such a manner as the Corporation shall deem proper. Upon the death of the Terminated Participant, all benefits withheld from him and not paid to others in accordance with the preceding sentence shall be paid to the Terminated Participant's then living descendants, including adopted children, per stirpes, or, if there are none then living, to his estate.
(c) The Plan may be amended at any time by the Pension Administration Committee provided such amendment does not have the effect of increasing, directly or indirectly, the benefit of any Participant. The Plan may also be amended or terminated by the Board of Directors at any time, and any amendment adopted by the Board of Directors shall supersede any prior or later amendment adopted by the Pension Administration Committee that is inconsistent with the action of the Board of Directors. No amendment shall have the effect of impairing or decreasing a Participant's accrued benefit, including the form of payment thereof. No amendment may amend or modify the preceding sentence.
(d) The Plan is intended to provide benefits for "management or highly compensated" employees within the meaning of Sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and therefore to be exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Plan shall terminate and no further benefits shall accrue hereunder in the event it is determined by a court of competent jurisdiction or by an opinion of counsel that the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA which is not so exempt.
(e) If any provision in the Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue to full force and effect without being impaired or invalidated in any way.
(f) The Plan shall be construed and governed in all respects in accordance with applicable federal law and, to the extent not preempted by such federal law, in accordance with the law of the State of Ohio.
The Eaton Corporation Supplemental Benefits Plan, in the form attached hereto, is herby approved and adopted.
/s/ John D. Evans -------------------------------------------- /s/ G. L. Gherlein -------------------------------------------- Dated: April 25, 1990 |
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (k)
EATON CORPORATION EXCESS BENEFITS PLAN
(As Amended and Restated Effective January 1, 1989)
The Eaton Corporation Excess Benefits Plan, an unfunded, nonqualified deferred compensation plan originally adopted by the Corporation in 1976 and amended in 1985, is hereby amended and restated effective as of January 1, 1989 into two plans: the Eaton Corporation Employee Supplemental Benefits Plan, which is set forth in a separate document, and the Eaton Corporation Excess Benefits Plan, which is set forth below.
1. Purpose. The purpose of the Excess Benefits Plan is to provide benefits in excess of the limitations under Section 415 of the Code for employees who participate in a Salaried Pension Plan sponsored by the Corporation or one of its operating subsidiaries.
2. Definitions. The following definitions are used throughout the Plan.
(a) "Benefits Committee" means the pension administration committee comprised of corporate officers.
(b) "Board of Directors" means the Board of Directors of the Corporation.
(c) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time.
(d) "Compensation Committee" means the Compensation Committee of the Board of Directors.
(e) "Corporation" means Eaton Corporation, an Ohio corporation.
(f) "Lump Sum Payments" has the meaning set forth in Section 7(b).
(g) "Participant" means a participant in the Pension Plan who is eligible to receive benefits under the Plan. The term "Participant" shall include the beneficiary of a deceased Participant.
(h) "Pension Plan" means the Pension Plan for Salaried Employees sponsored
by the Corporation, which is a defined benefit plan intended to qualify under
Section 401(a) of the Code, and each other defined benefit plan sponsored by a
subsidiary of the Corporation that is intended to qualify under section 401(a)
of the Code.
(i) "Plan" or "Excess Benefits Plan" means the Eaton Corporation Excess Benefits Plan as amended from time to time.
(j) "Proposed Change in Control" has the meaning set forth in Section 7(b).
3. Eligibility. A Participant who is eligible to receive a benefit under the Pension Plan shall also be eligible to receive a benefit in an amount determined under Section 4.
4. Excess Benefits. A Participant who is eligible to receive a benefit under the Pension Plan shall be entitled to receive a benefit under the Plan in an amount equal to the difference between (i) and (ii), where:
(i) equals the aggregate amount of monthly income payable to the Participant under the Pension Plan on the normal benefit commencement date specified in the Pension Plan as determined under the normal retirement benefit formula of the Pension Plan before applying any provision reducing pension benefits because of the maximum benefit limitations under Section 415 of the Code; and
(ii) equals the aggregate amount of monthly income determined in paragraph
(i) after applying the maximum benefit limitations of Section 415 of the Code.
Notwithstanding the foregoing, in no event shall the benefit hereunder
duplicate, in whole or in part, the benefit provided under the Eaton Corporation
Supplemental Benefit Plan.
5. Vesting. Subject to the rights of general creditors as set forth in
Section 8 and the right of the Corporation to discontinue the Plan as provided
in Section 10(c), a Participant shall have a vested and nonforfeitable interest
in the benefit payable under Section 4 to the same extent and in the same manner
as the Participant's benefit is vested under the Pension Plan.
6. Commencement of Benefits. The benefit payable to a Participant under
Section 4 shall be paid or shall begin at the same time as the Participant's
benefit is paid or begins under the Pension Plan. If the Participant elects
under the Pension Plan to receive or begin receiving an actuarially reduced
benefit before the normal benefit commencement date, the benefit payable under
Section 4 shall also be actuarially reduced by applying the same actuarial
factors that are applied under the Pension Plan. In the event of the termination
of the Pension Plan and the distribution to a Participant of a fully-paid,
individual annuity contract, payments received under such contract shall be
deemed to be benefits paid under the Pension Plan for purposes of the Plan. If a
Participant receives a lump sum cash distribution on termination of the Pension
Plan, the benefit payable under Section 4 shall be paid at the earliest time the
Participant could have elected to receive a benefit under the Pension Plan
following termination of employment if the Pension Plan had not terminated.
7. Form of Benefits.
(a) The benefit payable under Section 4 shall be paid to the Participant in the same form as the form of annuity payments as provided under the Pension Plan, unless the Benefits Committee in its sole discretion decides to make payment of the Section 4 benefit in any optional form of benefit available under the Pension Plan (including a lump sum benefit). If the Benefits Committee decides upon such an optional form of benefit, the benefit payable under Section 4 shall be actuarially adjusted by using the same actuarial factors under the Pension Plan for converting the annuity form of benefit to an actuarially equivalent optional benefit. A Participant need not receive the benefit payable under Section 4 in the same form as the form of benefit elected by the Participant under the Pension Plan.
(b) Except as provided below, upon the date of a Proposed Change in Control, the Corporation shall make an immediate Lump Sum Payment to each Participant. At any time prior to a Proposed Change in Control, the Board of Directors may decide that a Lump Sum Payment shall not be made upon a Proposed Change in Control, because any such payment is not then advisable or effective in the Board's judgment, in order to protect the benefits of the Participants under the Plan. If the Board makes such a decision, it may thereafter (1) take no further action, in which case the Lump Sum Payments will not be made, (2) reconsider such decision and decide (at a date which may be before or after a Proposed Change in Control) to make Lump Sum Payments, either before or after a Proposed Change in Control, (3) provide funding for the Plan benefits by depositing funds in trust for such purpose in accordance with Section 8(b) hereof, or (4) take any other action to protect the Plan benefits. If the Board takes no action prior to a Proposed Change in Control, the Lump Sum Payments will be made.
A Proposed Change in Control shall mean the first to occur of any of the following events (including the expiration of any periods specified therein):
(i) twenty days after the commencement of a tender offer shall be made for the ownership of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding voting securities (unless such tender offer shall have been withdrawn),
(ii) twenty days after the commencement of solicitation of proxies or consents for a merger or consolidation with another corporation and as a result of such merger or consolidation less than 75%, in the Corporation's view, of the outstanding voting securities of the surviving or resulting corporation would be owned in the aggregate by the former shareholders of the Corporation, other than the party and any affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party, to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation,
(iii) upon the date that the Corporation shall have entered into an agreement to sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Corporation,
(iv) twenty days after any "person" (as such term is used in Section 3(a)(9) and 13(d)(3) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 15% or more of the combined voting power of the Corporation's then outstanding securities; or
(v) upon the date that individuals who, at the beginning of any period of two consecutive years, constitute the Board of Directors of the Corporation (the "Board"), cease for any reason to constitute at least seventy-six percent thereof, unless the election, or the nomination for election by the Corporation's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
For purposes of this Plan, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect).
In exercising its discretion not to make Lump Sum Payments in connection with any Proposed Change in Control, the Board will take into account whether such Proposed Change in Control was, in its view, management-initiated, and intends not to permit Lump Sum Payments in any such case.
"Lump Sum Payment" means a single payment in cash to a Participant of his or her vested benefit determined in accordance with Section 4, actuarially adjusted by using the same actuarial factors as under the Pension Plan for converting the normal form of benefit to an actuarially equivalent optional benefit. These payments would be based upon "final average annual compensation" and "years of service" as they exist upon the date of the Proposed Change in Control, and would be based upon the assumption (only for purposes of computing this payment) that the employee would retire upon that same date (even though the Participant might not otherwise be of retirement age).
Notwithstanding anything herein to the contrary, no Lump Sum Payment shall be paid to any Participant herein who ceases to be an employee of the Corporation prior to attaining the age at which he or she is eligible to take early retirement at his or her option.
8. Funding of Benefits.
(a) The Plan shall be unfunded. All benefits payable under the Plan shall be paid from the Corporation's general assets, and nothing contained in the Plan shall require the Corporation to set aside or hold in trust any funds for the benefit of a Participant, who shall have the status of a general unsecured creditor with respect to the Corporation's obligation to make payments under the Plan. Any funds of the Corporation available to pay benefits under the Plan shall be subject to the claims of general creditors of the Corporation and may be used for any purpose by the Corporation.
(b) Notwithstanding the provisions of subsection (a), the Corporation may, at the direction, and in the absolute discretion, of the Benefits Committee, transfer to the trustee of one or more irrevocable trusts established for the benefit of one or more Participants assets from which all or a portion of the benefits provided under the Plan will be satisfied, provided that such assets held in trust shall at all times be subject to the claims of general unsecured creditors of the Corporation and no Participant shall at any time have a prior claim to such assets.
9. Administration of the Plan. The Benefits Committee shall administer the Plan and shall keep a written record of this action and proceedings regarding the Plan and all dates, records and documents relating to its administration of the Plan. The Benefits Committee is authorized to interpret the Plan, to make, amend and rescind such rules as it deems necessary for the proper administration of the Plan, to make all other determinations necessary or advisable for the administration of the Plan and to correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent that the Benefits Committee deems desirable to carry the Plan into effect. The powers and duties of the Benefits Committee shall include, without limitation, the following:
(a) Determining the amount of benefits payable to Participants and authorizing and directing the Corporation with respect to the payment of benefits under the Plan;
(b) Construing and interpreting the Plan whenever necessary to carry out its intention and purpose and making and publishing such rules for the regulation of the Plan as are not inconsistent with the terms of the Plan; and
(c) Compiling and maintaining all records it determines to be necessary, appropriate or convenient in connection with the administration of the Plan.
No member of the Benefits Committee shall vote on any matter relating specifically to such member. In the event that a majority of the members of the Benefits Committee will be specifically affected by any action proposed to be taken (as opposed to being affected in the same manner as each other Participant in the Plan), such action shall be taken by the Compensation Committee.
10. Miscellaneous.
(a) Nothing in the Plan shall confer upon a Participant the right to continue in the employ of the Corporation or an affiliate of the Corporation or shall limit or restrict the right of the Corporation or any affiliate to terminate the employment of a Participant at any time or without cause.
(b) Neither the Corporation nor any Participant hereunder shall assign, transfer or delegate this Plan or any rights or obligations hereunder except as expressly provided herein. Without limiting the generality of the foregoing, no right or interest under this Plan of a Participant shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance or other legal process or in any manner be liable for or subject to the debts or liabilities of any such Participant. If any Participant shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge or otherwise encumber his benefits hereunder or any part thereof, or if by reason of his bankruptcy or other event happening at any time such benefits would devolve upon anyone else or would not be enjoyed by him, then the Corporation, acting through the Benefits Committee, in its discretion, may terminate his interest in any such benefit to the extent the Corporation considers necessary or advisable to prevent or limit the effects of such occurrence. Termination shall be effected by filing a written "termination declaration" with the Plan's records and making reasonable efforts to deliver a copy to the Participant (the "Terminated Participant") whose interest is adversely affected.
As long as the Terminated Participant is alive, any benefits affected by the termination shall be retained by the Corporation and, in the Corporation's sole and absolute judgment, may be paid to or expended for the benefit of the Terminated Participant, his spouse, his children or any other person or persons in fact dependent upon him in such a manner as the Corporation shall deem proper. Upon the death of the Terminated Participant, all benefits withheld from him and not paid to others in accordance with the preceding sentence shall be paid to the Terminated Participant's then living descendants, including adopted children, per stirpes, or, if there are none then living, to his estate.
(c) The Plan may be amended at any time by the Benefits Committee provided such amendment does not have the effect of increasing, directly or indirectly, the benefit of any Participant. The Plan may also be amended or terminated by the Board of Directors at any time, and any amendment adopted by the Board of Directors shall supersede any prior or later amendment adopted by the Benefits Committee that is inconsistent with the action of the Board of Directors. No amendment shall have the effect of decreasing or impairing a Participant's accrued benefit, including the form of payment. No amendment may amend or modify the preceding sentence.
(d) The Plan is intended to be an "excess benefit plan" as defined in
Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and exempt from the provisions of Title I of ERISA pursuant to ERISA
Section 4(b)(5). In the event the Plan does not qualify for the exemption under
ERISA Section 4(b)(5) and it is also determined by a court of competent
jurisdiction or by an opinion of counsel that the Plan constitutes an employee
pension benefit plan within the meaning of Section 3(2) of ERISA which is not
exempt from the provisions of Sections 201, 301 and 401 of ERISA as a plan that
provides benefits for "management or highly compensated" employees within the
meaning of such Sections, the Plan shall terminate, and except for accrued
benefits and benefits in pay status, no further benefits shall accrue or be paid
hereunder. In addition, in the absolute discretion of the Benefits Committee the
benefit of each Participant which has accrued or is in pay status under the Plan
on the date of termination shall be paid immediately to such Participant in a
lump sum.
(e) If any provision in the Plan is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nevertheless continue to full force and effect without being impaired or invalidated in any way.
(f) The Plan shall be construed and governed in all respects in accordance with applicable federal law and, to the extent not preempted by such federal law, in accordance with the law of the State of Ohio.
The Eaton Corporation Excess Benefits Plan, in the form attached hereto, is hereby approved and adopted.
/s/ John D. Evans
--------------------------------------------
/s/ G. L. Gherlein
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Dated: April 25, 1990
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Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (m)
Plan for the Deferred Payment of Directors' Fees (originally adopted in 1985 and amended effective as of September 24, 1996 and January 28, 1998)
ARTICLE I
ESTABLISHMENT OF PLAN
1.01 "Establishment of Plan and Effective Date": Eaton corporation (the "Company") has established this Plan or the Deferred Payment of Directors' Fees (the Plan") effective as of October 23, 1985. The Plan was amended and restated as of September 24, 1996 and amended as of January 28, 1998.
1.02 "Statement of Purpose": It is the purpose of the Plan to attract and retain qualified persons to serve as Directors of the Company by enabling such Directors to defer some or all fees which may be payable to them for future services as a member of the Board of Directors of the Company or as chairman or a member of any committee of the Board.
ARTICLE II
DEFINITIONS
When used herein the following terms shall have the meanings indicated unless a different meaning is clearly required by the context:
2.01 "Board": The Board of Directors of Eaton Corporation.
2.02 "Change in Control of the Company": For purposes of the Plan, a "Change in Control of the Company" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities, (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Company, (iv) any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities, or (v) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new Director was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of the period. For purposes of the Plan, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect).
2.03 "Committee": The Corporate Compensation Committee of the Company which shall have full power and authority to administer and interpret, in its sole discretion, the provisions of the Plan.
2.04 "Company": Eaton Corporation and its corporate successors.
2.05 "Compensation": The total annual fees paid to a Participant for services as a Director of the Company including the annual retainer fee, Board meeting attendance fees, additional annual retainer fees paid to Board Committee chairmen and any other fees paid by the Company for services as a Director of the Company.
2.06 "Deferral Plans": The Company's plan of the same name as this Plan and this Plan.
2.07 "Deferred Account Balance": At any particular date, the total of all Compensation deferred under the Plan and earnings credited thereto less the amount of any deferred Compensation previously paid to the Participant.
2.08 "Deferred Compensation Agreement": The written agreement between the Company and a Participant substantially in the form attached hereto as Exhibit A and made a part hereof.
2.09 "Designated Beneficiary": One or more beneficiaries, as designated by a Participant in a written form filed with the Vice President and Secretary of the Company and approved by the Committee, to whom payments otherwise due to or for the benefit of the Participant hereunder shall be made in the event of his death prior to the commencement of benefit payments hereunder or the complete payment of such benefit. In the event no such written designation is made by a Participant or if such Designated Beneficiary shall not be in existence at the time of the Participant's death or if such Designated Beneficiary predeceases the Participant, the Participant shall be deemed to have designated his estate as the Designated Beneficiary.
2.10 "Failure to Pay": The circumstances described in either (i) or (ii) have occurred:
(i) Any Participant shall have notified the Company and the Trustee in writing that the Company shall have failed to pay to the Participant, when due, either directly or by direction to the trustee of any trust holding assets for the payment of benefits pursuant to the Plan, at least 75% of any and all amounts which the Participant was entitled to receive at any time in accordance with the terms of the Plan, and that such amounts remain unpaid. Such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he or she was entitled to receive under the Plan. The failure to make such payment shall have continued for a period of 30 days after receipt of such notice by the Company, and during such 30-day period the Company shall have failed to prove, by clear and convincing evidence as determined by the Trustee in its sole and absolute discretion, that such amount was in fact paid or was not due and payable; or
(ii) More than two Participants shall have notified the Company and the Trustee in writing that they have not been paid when due, either directly or by direction to the Trustee, amounts to which they are entitled under the Plan and that such amounts remain unpaid. Each such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he or she was entitled to receive under the Plan. Within 15 days after receipt of each such notice, the Trustee shall determine, on a preliminary basis, whether any failure to pay such Participants has resulted in a failure to pay when due, directly or by direction, at least 75% of the aggregate amount due to all Participants under all the Deferral Plans in any two-year period, and that such amounts remain unpaid. If the Trustee determines that such a failure has occurred, then it shall so notify the Company and the Participants in writing within the same 15 day period. Within a period of 20 days after receipt of such notice from the Trustee, the Company shall have failed to prove by clear and convincing evidence, in the sole and absolute discretion of the Trustee, that such amount was paid or was not due and payable.
2.11 "Funded Amount": With respect to the account of any Participant, the value of any assets which have been placed in a grantor trust established by the Company to pay benefits with respect to that account, as determined at the time initial payments are to be made pursuant to the selections made by the Participants in accordance with Section 6.03 .
2.12 "Lump Sum Payment": The lump sum amount which is equal to the then present value of the payment, in fifteen annual payments commencing on the date of the lump sum payment, of the Participant's Deferred Account Balance plus a rate of return thereon equal to the rate or rates of interest specified in the Participant's Deferred Compensation Agreement throughout that fifteen year period, discounted with a rate of interest equal to "Moody's Corporate Bond Yield Average - Monthly (Average Corporates)" most recently published by Moody's Investor Services, Inc., or any successor thereto, at the time of the calculation.
2.13 "Normal Retirement": Retirement as a Director of the Company at the Normal Retirement Date.
2.14 "Normal Retirement Date": The date a Participant retires from the Board of Directors after attaining the age of sixty-eight (68).
2.15 "Participant": A Director who is or hereafter becomes eligible to participate in the Plan and does participate by electing, in the manner specified herein, to defer Compensation pursuant to the Plan.
2.16 "Plan": This Plan for the Deferred Payment of Directors' Fees as contained herein which was originally effective as of October 23, 1985, and which has been amended from time to time thereafter.
2.17 "Regular Annuity Starting Date": The April 1st immediately following a Participant's Normal Retirement Date.
2.18 "Termination and Change in Control": The termination of the service as a Director of a Participant for any reason whatsoever prior to a Change in Control, upon a Change in Control or during the three-year period immediately following a Change in Control.
2.19 "Trustee": Shall mean the trustee of any trust which holds assets for the payment of the benefits provided by the Plan.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.01 "Eligibility": Any Director of the Company who is separately compensated for his services on the Board and who is first elected to the Board prior to 1996 shall be eligible to participate under the Plan. Directors who serve as either an officer or an employee of the Company, or who are first elected after 1995, shall not be eligible to participate under the Plan.
3.02 "Manner of Election":
(a) Any person wishing to commence participation in the Plan must file a signed copy of the Deferred Compensation Agreement in the form attached as Exhibit A with the Vice President and Secretary of the Company at Eaton Center, Cleveland, Ohio 44114. If the Company accepts the Election, an eligible Director shall become a Participant in the Plan as of December 1, 1985 for an Election filed in 1985 and as of the January 1st immediately following the date an Election is filed in any year after 1985 if such Election is filed prior to December 1 of such year. Upon the request of a Participant, the Committee may in its sole discretion approve the termination of future deferrals by such Participant.
(b) The Board shall be vested with the authority to deny Participants the opportunity to defer future Compensation pursuant to the Plan for any reason if such denial is applied equitably to all Participants; provided, however, that the foregoing authority does not apply to any Participant's right to continue to defer the amount constituting his then existing Deferred Account Balance and any past and future earnings thereon, which amounts shall continue to be deferred and/or paid in accordance with the other terms and conditions of this Plan.
3.03 "Limits on Deferred Compensation":
(a) Subject to required minimum and maximum annual limitations on the amount of Compensation which may be deferred equal to $5,000 and $30,000, respectively, a Participant may defer all or any portion of his future Compensation which is earned during a period of at least four (4) years (16 full calendar quarters) or for the period to his Normal Retirement Date, if earlier, or for any period of time longer than four years which ends prior to his Normal Retirement Date. Future Compensation in excess of the $30,000 annual limitation may be deferred pursuant to the Company's Plan for Deferred Payment of Directors' Fees adopted as of June 1, 1980 (the "1980 Plan"), which plan continues to be effective.
(b) Notwithstanding the annual limitations imposed under Section 3.03(a), an eligible Participant under the Plan may elect, in the manner specified in Section 3.02, prior to December 1, 1985, to have all or part of his Compensation which was deferred under the 1980 Plan to be held and distributed in accordance with the terms and conditions of the Plan.
ARTICLE IV
RETIREMENT BENEFITS
4.01 "Normal Retirement Benefit":
(a) The Normal Retirement Benefit is a level fifteen (15) year annuity
payable to a Participant who has attained Normal Retirement in fifteen
(15) equal annual installments commencing on the Participant's Regular
Annuity Starting Date and continuing on the anniversary of that date
each year thereafter until fifteen (15) annual payments have been
made;
(b) The Normal Retirement Benefit shall be calculated by reference to the Participant's total Compensation deferred under the Plan and the rate or rates of interest specified in his Deferred Compensation Agreement; provided, however, that the Committee may determine, in its sole discretion, to pay the Normal Retirement Benefit in a Lump Sum Payment.
4.02 "Early Termination Benefit": The Normal Retirement Benefit provided under the Plan is based on the assumption that each Participant will defer a specified amount of Compensation for a specified period of time of not less than (4) years or to his Normal Retirement Date, if earlier. In the event a Participant has not deferred Compensation in accordance with the terms and conditions of the Plan for at least four (4) years, resigns as a Director of the Company on a date which is before i) the end of the deferral period he elected or ii) his Normal Retirement Date, and iii) any Proposed Change in Control of the Company, then in lieu of the Normal Retirement Benefit described in Section 4.01(a) hereof, the Participant shall be entitled to receive an Early Termination Benefit either at age 68 or at the date of his termination as a Director, as determined by the Committee in its sole discretion. The Early Termination Benefit shall be equal to his Deferred Account Balance at the time of his termination as Director and shall be payable in a lump sum or in up to fifteen (15) equal annual installments, as determined by the Committee in its sole discretion. To the Early Termination Benefit payable to a Participant under this Section 4.02 shall be added interest at the rate specified in his Deferred Compensation Agreement, compounded annually, and credited on the unpaid deferred Compensation from the date of termination until the date paid by the Company.
4.03 "Entitlement to Normal Retirement Benefit After a Change in Control of the Company": Notwithstanding anything to the contrary herein, if within three years after a Change in Control of the Company any Participant who, before his Normal Retirement Date, is removed as a Director of the Company by a vote of the shareholders, resigns as a Director of the Company, completes his term of office as a Director of the Company and is not re-elected for the next successive term or is otherwise unable to defer additional Compensation for a full (4) years or until his Normal Retirement Date, whichever is earlier, because of any amendment, suspension or termination of the Plan, shall be entitled to receive the Normal Retirement Benefit payable as provided in Section 4.01(a) based upon his then existing Deferred Account Balance.
ARTICLE V
SURVIVOR BENEFIT
5.01 "Survivor Benefit": Upon the occurrence of any of the following events, the Company shall pay to a Participant's Designated Beneficiary a benefit as defined in this ARTICLE V (herein referred to as a "Survivor Benefit"):
(a) The death of a Participant while serving as a Director of the Company; or
(b) The death of a Participant after becoming entitled to a Normal Retirement Benefit or an Early Termination Benefit but prior to commencement of payment of either such benefit.
5.02 "Amount of Survivor Benefit": The Survivor Benefit shall be an amount equal to the Participant's Deferred Account Balance at the date of his death together with interest thereon, compounded annually, from the date Compensation was deferred until the date it is completely paid by the Company (a "Deferral Period") at a rate equal to the prime rate announced by AmeriTrust Company National Association in Cleveland, Ohio (or any successor thereto) (hereinafter referred to as the "Prime Rate") from time to time during the Deferral Period. The Survivor Benefit shall be paid either in a lump sum or in up to fifteen (15) annual installments, as determined by the Committee in its sole discretion.
5.03 "Survivor Benefit After Commencement of Benefit Payments to the Participant": In the event a Participant who has begun to receive benefit installment payments under the Plan dies prior to full payment of his Normal Retirement Benefit or Early Termination Benefit, all remaining payments due hereunder shall be made to such Participant's Designated Beneficiary, either in a lump sum or in installments, in such amounts and over such periods, not exceeding the remaining period from the date of the Participant's death, as the Committee may direct in its sole discretion.
ARTICLE VI
CERTAIN PAYMENTS TO PARTICIPANTS
6.01 "Termination and Change in Control": Notwithstanding anything herein to the contrary, upon the occurrence of a Termination and Change in Control, the Participants shall be entitled to receive from the Company the payments as provided in Section 6.03.
6.02 "Failure to Pay": Notwithstanding anything herein to the contrary, upon the occurrence of a Failure to Pay, each Participant covered by the situation described in clause (i) of the definition of Failure to Pay, or each of the Participants in the event of a situation described in clause (ii) of that definition, as the case may be, shall be entitled to receive from the Company the payments as provided in Section 6.03.
6.03 "Payment Requirement": No later than the first to occur of (i) six months
following the date hereof for any current Participant, (ii) a Termination
and Change in Control or a Failure to Pay for any current Participant or
(iii) the date upon which any person who is not a current Participant upon
the date hereof becomes a Participant, each Participant shall select one of
the payment alternatives set forth below with respect to that portion of
the Participant's account equal to the full amount of the account minus the
Funded Amount, and with respect to that portion of the account equal to the
Funded Amount. The payment alternatives selected with respect to the two
portions of the account need not be the same. The payment alternatives are
as follows:
(a) a Lump Sum Payment within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be;
(b) payment in monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as selected by the Participant at the time provided in the first paragraph of this Section 6.03, commencing within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be, which are substantially equal in amount, except that earnings attributable to periods following Termination and Change in Control or Failure to Pay at the rate or rates of interest specified in the Participant's Deferred Compensation Agreement shall be included with each payment. Payment shall be made to each such Participant in accordance with his or her selected alternative as provided in Sections 6.01 and 6.02.
ARTICLE VII
AMENDMENT AND TERMINATION
7.01 "Right to Amend and Terminate the Plan": The Company fully expects to continue the Plan but it reserves the right, at any time or from time to time, by action of the Board, to modify or amend the Plan, in whole or in part. In addition, the Company reserves the right by action of the Board to terminate the Plan, in whole or in part, at any time and for any reason, including, but not limited to, adverse changes in the federal tax laws. Notwithstanding anything herein to the contrary, no amendment, modification or termination of the Plan shall, without the consent of the Participant, alter this provision or impair any of the Participant's rights under the Plan with respect to benefits accrued prior to such amendment, modification or termination.
7.02 "Plan Termination Benefit":
(a) In the event of the complete termination of the Plan, each Participant shall be entitled to receive an amount equal to his then Deferred Account Balance (other than amounts initially deferred under the l980 Plan which will continue to be held in accordance with the terms of the Plan) together with interest thereon at the Prime Rate in effect from time to time during such Deferral Period, compounded annually, and credited from the date of deferral until the date paid by the Company (hereinafter referred to as a "Plan Termination Benefit"). As determined by the Committee in its sole discretion, the Plan Termination Benefit shall be payable either in a lump sum or in up to fifteen (15) annual installments commencing at the time elected by the Participant in his Deferred Compensation Agreement prior to the Deferral Period.
(b) In the event of a Participant's death prior to the complete payment of the benefits provided under this Section 8.02, all remaining payments due hereunder shall be made to the Participant's Designated Beneficiary in the same amount as was being received by the Participant.
7.03 "Right to Amend or Terminate the Plan After a Change in Control of the Company": Notwithstanding anything to the contrary herein, no amendment shall be made to the Plan after a Change in Control of the Company which would alter or impair this Section 7.03 or any rights or obligations under the Plan in relation to any Participant without the prior written consent of the Participant; and in the event of complete termination of the Plan after a Change in Control of the Company, each Participant shall be entitled to receive his Normal Retirement Benefit, if greater than the Plan Termination Benefit, payable as provided in Section 4.01(a) based upon his then existing Deferred Account Balance.
ARTICLE VIII
MISCELLANEOUS
8.01 "Non-Alienation of Benefits": Subject to any federal statute to the contrary, no right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefits. If a Participant or his Designated Beneficiary (if entitled to benefits under the Plan) shall become bankrupt, or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right hereunder, then such right or benefit shall, in the discretion of the Committee, cease and terminate, and in such event, the Company may hold or apply the same or any part thereof for the benefit of the Participant or his spouse, children, or other dependents, or any of them, in such manner and in such amounts and proportions as the Committee may deem proper.
8.02 "No Trust Created": The obligations of the Company to make payments hereunder shall constitute a liability of the Company to the Participant. Such payments shall be made from the general funds of the Company, and the Company shall not be required to establish or maintain any special or separate fund, or purchase or acquire life insurance on a Participant's life, or otherwise to segregate assets to assure that such payments shall be made, and neither a Participant nor Designated Beneficiary shall have any interest in any particular asset of the Company by reason of its obligations hereunder. Nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between the Company and a Participant or any other person.
8.03 "No Employment Agreement": The Plan shall not be deemed to constitute a contract of employment between the Company and a Participant. Neither shall the execution of the Plan nor any action taken by the Company pursuant to the Plan be held or construed to confer on a Participant any legal right to be continued as Director of the Company, in an executive position or in any other capacity with the Company whatsoever; nor shall any provision herein restrict the right of any Participant to resign as a Director.
8.04 "Binding Effect": Obligations incurred by the Company pursuant to the Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Participant or his Designated Beneficiary.
8.05 "Claims for Benefits": Each Participant or Designated Beneficiary must claim any benefit to which he may be entitled under this Plan by filing a written notification with the Vice President and Secretary of the Company. The Committee shall make all determinations with respect to such claims for benefits. If a claim is denied by the Committee, it must be denied within a reasonable period of time in a written notice stating the following:
(a) The specific reason for the denial.
(b) The specific reference to the Plan provision on which the denial is based.
(c) A description of additional information necessary for the claimant to present his claim, if any, and an explanation of why such information is necessary.
(d) An explanation of the Plan's claims review procedure.
The claimant may have a review of the denial by the Committee by filing a written notice with the Vice President and Secretary of the Company within sixty (60) days after the notice of the denial of his claim.
The written decision by the Committee with respect to the review must be given within one hundred and twenty (120) days after receipt of the written request.
8.06 "Entire Plan": This document and any amendments hereto contain all the terms and provisions of the Plan and shall constitute the entire Plan, any other alleged terms or provisions being of no effect.
ARTICLE IX
CONSTRUCTION
9.01 "Governing Law": The Plan shall be construed and governed in accordance with the law of the State of Ohio.
9.02 "Gender": The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary.
9.03 "Headings, etc.": The cover page of the Plan, the Table of Contents and all headings used in this Plan are for convenience of reference only and are not part of the substance of the Plan.
Exhibit A
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT is made this ________ day of ___________________, 20_, between EATON CORPORATION (hereinafter the "Company"), an Ohio corporation, and _______________________, a non-employee Director of the Company (hereinafter called "Participant").
WHEREAS, the Board of Directors of the Company has approved a Plan for the Deferred Payment of Directors' Fees (the "Plan") for the purpose of attracting and retaining qualified persons to serve as Directors of the Company;
WHEREAS, the Plan provides that a Director becomes a participant under the Plan upon the execution and delivery by him of a Deferred Compensation Agreement, in the form of this Agreement, to the Administrative Committee under the Plan, and the acceptance of such agreement by the Company;
NOW, THEREFORE, in consideration of the mutual agreements herein contained, the Company and the Participant hereby agree as follows:
1. Participation. This Agreement is made to evidence the Participant's participation in the Plan, to set forth the amount of the Participant's Compensation to be deferred thereunder and to establish the interest rates to be used to calculate the Participant's Normal Retirement Benefit and his Early Termination Benefit under the Plan.
2. The Plan Controls. The Plan (and all its provisions), as it now exists and as it may be amended hereafter, is incorporated herein and made a part of this Agreement, and the provisions of the Plan, as it may be amended from time to time, shall control the terms and conditions of this Agreement and anything contained herein which is inconsistent with the Plan, as so amended, shall be of no force or effect.
3. Definitions. When used herein, the terms which are defined in the Plan shall have the meanings given them in the Plan.
4. No Interest Created. Neither the Participant nor his Designated Beneficiary shall have any interest in any specific asset of the Company, including policies of insurance. The Participant and his Designated Beneficiary shall have only the right to receive the benefits provided under the Plan.
5. Deferrals. Pursuant to ARTICLE III of the Plan, the Participant hereby elects to defer the receipt of, and the Company hereby elects to defer the payment of, future Compensation in the amount of_________________ dollars ($_______________________ ) for each calendar year during the period of________________________ to ____________________.
6. Normal Retirement Benefit Interest Rate. The Participant's Normal Retirement Benefit shall be determined by crediting interest to the Participant's total Compensation deferred under the Plan (including amounts transferred from the Company's Plan for the Deferred Payment of Directors' Fees established as of June 1, 1980) at the rate of ____ % compounded annually from the date of deferral until paid by the Company.
7. Early Termination Benefit Interest Rate. In accordance with ARTICLE IV of the Plan, interest shall be credited to the Early Termination Benefit at a rate equal to ____%, compounded annually.
8. Disposition In the Event of Plan Termination. In the event the Company determines to terminate the Plan, the Participant hereby elects to have his Plan Termination Benefit (other than amounts transferred from the 1980 Plan) distributed as indicated by the Participant below: (The Participant should check only one of the boxes below and sign his initials in the opposite blank).
_________ I hereby elect to have payment of the Plan
Termination
initials Benefit commence within a reasonable period of
time after the Plan termination date; or
--
_________ I hereby elect to have the Plan Termination Benefit
be retained by the Company, credited with
initials interest during the Deferral Period,
compounded annually, at the Prime
Rate and paid commencing upon the
earlier to occur of my Normal
Retirement or my resignation from
the Board of Directors of the
Company.
|
The Company shall determine in its sole discretion whether the Plan Termination Benefit shall be paid in a lump sum or in up to fifteen (15) annual installments.
9. Entire Agreement. This Agreement contains the entire agreement and understanding by and between the Company and the Participant, and no representations, promises, agreements, or understandings, written or oral, not contained herein shall be of any force or effect.
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (n)
PLAN FOR DEFERRED PAYMENT OF DIRECTORS' FEES
(Originally adopted in 1980 and amended and restated in 1989 and 1996)
1. Purpose of Plan. It is the purpose of this Plan for Deferred Payment of Directors' Fees (the "Plan") to enable each Director of Eaton Corporation (the "Company") to defer some or all fees which may be payable to the Director for future services to be performed by him as a member of the Board of Directors of the Company, or as a member of any committee thereof.
2. Eligibility. Any Director of the Company who is separately compensated for his services on the Company's Board of Directors, or on any committee of such Board, and who is first elected to the Board prior to 1996, shall be eligible to participate in the Plan. Directors who are first elected to the Board after 1995 shall not be eligible to participate in the Plan.
3. Manner of Election. Any person wishing to participate in the Plan must file with the Secretary of the Company at Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114-2584, a written notice, on the Notice of Election form attached as Exhibit A, electing to defer payment of all or a portion of his compensation as a Director (an "Election"). An Election shall become effective upon the effective date of the Plan if filed within thirty (30) days following such date. Thereafter, a person for whom an Election is not in effect may elect to participate in the Plan as follows: (a) with respect to Directors' fees payable for any calendar year by filing an Election, in accordance with the procedure described above. on or before December 31 of the preceding calendar year; and (b) with respect to Directors' fees payable for any portion of a calendar year which remains at the time of such person's initial election to the Office of Director of the Company, or any subsequent re-election if immediately prior thereto he was not serving as a Director, by filing an Election, in accordance with the procedure described above, within thirty (30) days subsequent to such election or re-election. An effective Election may not be revoked or modified with respect to Directors' fees payable for the calendar year or portion of a calendar year for which such Election is effective and such Election, unless terminated or modified as described below, shall apply to Directors' fees payable with respect to each subsequent calendar year. An effective Election may be terminated or modified for any subsequent calendar year by the filing, as described above, of either a new Election, in regard to modifications, or a Notice of Termination, on the form attached as Exhibit B, in regard to terminations, on or before December 31 immediately preceding the calendar year for which such modification or termination is to be effective. An effective Election shall also terminate on the date a person ceases to be a Director. A person for whom an effective Election is terminated may thereafter file a new Election for future calendar years for which he is eligible to participate in the Plan.
Notwithstanding anything herein to the contrary, a Director may elect to have held and distributed in accordance with the terms and conditions of the 1996 Non-Employee Director Fee Deferral Plan all or part of his or her compensation which was deferred under the Plan.
4. Compensation Account. The amount of any Directors' fees deferred in accordance with an Election shall be credited to a deferred compensation account maintained by the Company in the name of the Director ("Deferred Compensation Account").
5. Adjustment of Deferred Compensation Account. As of each Accounting Date (as defined below,), the Deferred Compensation Account for each Director shall be adjusted for the period elapsed since the last preceding Accounting Date as follows:
(a) First, the account shall be charged with any distribution made during the period in accordance with Paragraph 7, below.
(b) Then, the account shall be credited with the Interest Factor for that period, as defined in Paragraph 6, below.
(c) Finally, the account shall be credited with the amount, if any, of any Director's fees deferred during that period in accordance with an effective Election under Paragraph 3, above.
For purposes of this Plan, the term "Accounting Date" means each March 31, June 30, September 30 and December 31.
6. Interest Factor. As at any Accounting Date, the term "Interest Factor" means an amount, if any, determined by multiplying (i) an amount equal to the balance of the Director's Deferred Compensation Account as of the close of business on the next preceding Accounting Date by (ii) a percentage determined by multiplying (A) the average of the price rates of interest in effect at Key Bank (or any successor thereto), Cleveland, Ohio on the Accounting Date and the next preceding Accounting Date by (B) 1/4.
7. Manner of Payment. A Director's deferred fees will be paid to him or, in the event of his death, to his designated beneficiary, in accordance with his Election. If a Director elects to receive payment of his deferred fees in installments rather than in a lump-sum, the payment period shall not exceed ten years following the Payment Commencement Date, as defined in Paragraph 8 below. The amount of any installment payment shall be determined by multiplying (i) the balance in the Director's Deferred Compensation Account on the date of such installment by (ii) a fraction, the numerator of which is one and the denominator of which is the number of remaining unpaid installments. The balance of the account shall be appropriately reduced in accordance with Paragraph 5, above, to reflect the installment payments made hereunder. Amounts held pending distribution pursuant to this Paragraph 7 shall continue to be credited with the Interest Factor described in Paragraph 6 above.
8. Payment Commencement Date. Payments of accounts deferred pursuant to an election under the Plan shall commence on March 30 of the first year of deferred payment selected by a Director in his Election. If a Director dies prior to the first year of deferred payment selected by him, payments shall commence on March 30 of the calendar year immediately following the year of his death.
9. Beneficiary Designation. A Director may designate, in the Beneficiary Designation form attached as Exhibit C, any person to whom payments are to be made if the Director dies before receiving payment of all amounts due hereunder. A beneficiary designation will be effective only after the signed Beneficiary Designation form is filed with the Secretary of the Company while the Director is alive and will cancel all beneficiary designations signed and filed earlier. If the Director fails to designate a beneficiary as provided above, or if all designated beneficiaries of the Director die before the Director or before complete payment of all amounts due hereunder, remaining unpaid amounts shall be paid in one lump sum to the estate of the last to die of the Director or the Director's designated beneficiaries, if any.
10. Certain Payments to Directors.
(a) Notwithstanding anything herein to the contrary, upon the occurrence
of a Termination and Change in Control, the Directors shall be
entitled to receive from the Company the payments as provided in
Section 10(c).
(b) Notwithstanding anything herein to the contrary, upon the occurrence of a Failure to Pay, each Director covered by the situation described in clause (i) of the definition of Failure to Pay, or each of the Directors in the event of a situation described in clause (ii) of that definition, as the case may be, shall be entitled to receive from the Company the payments as provided in Section 10(c).
(c) No later than the first to occur of (i) six months following the date hereof for any current Director, (ii) a Termination and Change in Control or a Failure to Pay for any current Director or (iii) thirty days after the date upon which any person who is not a current Director upon the date hereof becomes a Director, each Director shall select one of the payment alternatives set forth below with respect to that portion of the Director's Deferred Compensation Account equal to the full amount of the account minus the Funded Amount, and with respect to that portion of the account equal to the Funded Amount. The payment alternatives selected with respect to the two portions of the account need not be the same. The payment alternatives are as follows:
(I) a lump sum payment within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be;
(II) payment in monthly, quarterly, semiannual or annual payments,
over a period not to exceed fifteen years, as selected by the
Director at the time provided in the first paragraph of this
Section 10(c), commencing within 30 days following the
Termination and Change in Control or Failure to Pay, as the case
may be, which are substantially equal in amount, except that
earnings attributable to periods following Termination and Change
in Control or Failure to Pay shall be included with each payment.
Payment shall be made to each such Director in accordance with his other selected alternative as provided in Sections 10(a) and 10(b).
11. Non-Alienability of Benefits. Neither the Director nor any beneficiary designated by him shall have any right to, directly or indirectly, alienate, assign or encumber any amount that is or may be payable hereunder.
12. Administration of Plan. Full power and authority to construe, interpret and administer the Plan shall be vested in the Company's Board of Directors. Decisions of the Board shall be final, conclusive and binding upon all parties/ Notwithstanding the terms of an Election made by a participant hereunder, the Board of Directors of the Company may, in its sole discretion, change the terms of such Election upon the request of a participant or his representative, or a participant's beneficiary or such beneficiary's representative, after considering the needs of the Company and of the participant or the participant's beneficiary.
13. Certain Definitions.
"Deferral Plans" - The Company's plan of the same name as this Plan and this Plan.
"Failure to Pay" - The circumstances described in either (i) or (ii) have occurred:
(i) Any Director shall have notified the Company and the Trustee in writing that the Company shall have failed to pay to the Director, when due, either directly or by direction to the trustee of any trust holding assets for the payment of benefits pursuant to the Plan, at least 75% of any and all amounts which the Director was entitled to receive at any time in accordance with the terms of the Plan, and that such amounts remain unpaid. Such notice must set forth the amount, if any, which was paid to Director, and the amount which the Director believes he or she was entitled to receive under the Plan. The failure to make such payment shall have continued for a period of 30 days after receipt of such notice by the Company, and during such 30-day period the Company shall have failed to prove, by clear and convincing evidence as determined by the Trustee in its sole and absolute discretion, that such amount was in fact paid or was not due and payable; or
(ii) More than two Directors shall have notified the Company and the Trustee in writing that they have not been paid when due, either directly or by direction to the Trustee, amounts to which they are entitled under the Plan and that such amounts remain unpaid. Each such notice must set forth the amount, if any, which was paid to the Director, and the amount which the Director believes he or she was entitled to receive under the Plan. Within 15 days after receipt of each such notice, the Trustee shall determine, on a preliminary basis, whether any failure to pay such Directors has resulted in a failure to pay when due, directly or by direction, at least 75% of the aggregate amount due to all Directors under all the Deferral Plans in any tow-year period, and that such amounts remain unpaid. If the Trustee determines that such a failure has occurred, then it shall so notify the Company and the Directors in writing within the same 15 day period. Within a period of 20 days after receipt of such notice from the Trustee, the Company shall have failed to prove by clear and convincing evidence, in the sole and absolute discretion of the Trustee, that such amount was paid or was not due and payable.
"Funded Amount" - With respect to the Deferred Compensation Account of any Director, the value of any assets which have been placed in a grantor trust established by the Company to pay benefits with respect to that account, as determined at the time initial payments are to be made pursuant to the selections made by the Participants in accordance with Section 10(c).
"Termination and Change in Control" - The termination of the service as a Director of a Director for any reason whatsoever prior to a Change in Control, upon a Change in Control or during the three-year period immediately following a Change in Control.
"Trustee" - The trustee of any trust which holds assets for the payment of the benefits provided by the Plan.
14. Governing Law. The provisions of the Plan shall be interpreted and construed in accordance with the laws of the State of Ohio.
15. Effective Date and Amendment. This amendment and restatement of the Plan shall become effective on September 24, 1996. The Committee may amend or terminate the Plan at any time; provided that no such amendment or termination shall adversely affect the amounts in any then-existing Deferred Compensation Account or the payment thereof in accordance with each Director's Election.
APPROVAL AND ADOPTION
The Plan for Deferred Payment of Directors' Fees, in the form attached hereto, is hereby approved and adopted.
/s/ Susan J. Cook ---------------------- |
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (o)
1996 Non-Employee Director Fee Deferral Plan
I. Purpose
The 1996 Non-Employee Director Fee Deferral Plan (the "Plan") enables each Director of Eaton Corporation ("Eaton" or the "Company") who is not employed by the Company to defer receipt of fees that may be payable to him or her for future services as a member of the Board of Directors of the Company (the "Board") or as chairman or as a member of any committee of the Board. The purpose of the Plan is to help attract and retain highly qualified individuals to serve as members of the Company's Board of Directors and as members of committees thereof.
II. Eligibility
All members of the Board who are not employed by the Company are eligible to participate in the Plan with respect to amounts earned as fees for services as a member of the Board or as chairman or a member of any committee of the Board.
III. Definitions
The terms used herein shall have the following meanings:
Account - A bookkeeping account established by Eaton for a Participant to which may be credited Deferred Fees and earnings or losses thereon.
Agreement - A written agreement between Eaton and a Participant deferring the receipt of Fees and indicating the term of the deferral.
Beneficiary - The person or entity designated in writing executed and delivered by the Participant to the Committee. If that person or entity is not living or in existence at the time any unpaid balance of Deferred Fees becomes due after the death of a Participant, the term "Beneficiary" shall mean the Participant's estate or legal representative or any person, trust or organization designated in such Participant's will.
Board - The Board of Directors of Eaton Corporation.
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
Change in Control of Eaton - Shall be deemed to occur if (i) a tender offer
shall be consummated for 25% or more of the combined voting power of Eaton's
then outstanding voting securities, (ii) Eaton shall be merged or consolidated
with another corporation and as a result less than 75% of the outstanding voting
securities of the resulting corporation shall be owned by the former
shareholders of Eaton, other than affiliates (within the meaning of the
Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such
merger or consolidation, as the same shall have existed immediately prior to
such merger or consolidation, (iii) Eaton shall sell substantially all of its
assets to another corporation that is not a wholly owned subsidiary of Eaton,
(iv) any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the
Exchange Act) is or becomes the beneficial owner, directly or indirectly, of 25%
or more of the combined voting power of Eaton's then outstanding securities; or
(v) during any period of two consecutive years, individuals who at the beginning
of that period constitute the Board cease to constitute at least a majority
thereof unless the election, or the nomination for election by Eaton's
shareholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period. For purposes of this Plan, ownership of voting securities shall take
into account and include ownership as determined by applying the provisions of
Rule 13d-3(d)(l)(i) of the Exchange Act (as then in effect).
Committee - The Compensation and Organization Committee of the Board or such other committee as the Board may from time to time designate for purposes of administration of the Plan.
Common Share Retirement Deferred Fees - Retirement Deferred Fees that are converted into share units in accordance with Article VI.
Deferral Plans - This Plan and any other prior plan sponsored by the Company pursuant to which Fees may be deferred.
Deferred Fees - That portion of Fees deferred pursuant to the Plan.
Eaton - Eaton Corporation, an Ohio corporation, and its subsidiaries and successors and assigns.
Eaton Common Shares - The common shares of Eaton Corporation with a par value of 50? each.
Failure to Pay - The circumstances described in either (i) or (ii) have occurred:
(i) Any Participant shall have notified the Company and the Trustee in writing that the Company shall have failed to pay to the Participant, when due, either directly or by direction to the trustee of any trust holding assets for the payment of benefits pursuant to the Plan, at least 75% of any and all amounts which the Participant was entitled to receive at any time in accordance with the terms of the Plan, and that such amounts remain unpaid. Such notice must set forth the amount, if any, which was paid to the Participant by the Company, and the amount which the Participant believes he or she was entitled to receive under the Plan. The failure to make such payment shall have continued for a period of 30 days after receipt of such notice by the Company, and during such 30-day period the Company shall have failed to prove, by clear and convincing evidence as determined by the Trustee in its sole and absolute discretion, that such amount was in fact paid or was not due and payable; or
(ii) More than two Participants shall have notified the Company and the Trustee in writing that they have not been paid when due, either directly or by direction to the Trustee, amounts to which they are entitled under the Plan and that such amounts remain unpaid. Each such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he or she was entitled to receive under the Plan. Within 15 days after receipt of each such notice, the Trustee shall determine, on a preliminary basis, whether any failure to pay such Participants has resulted in a failure to pay when due, directly or by direction, at least 75% of the aggregate amount due to all Participants under all the Deferral Plans in any two-year period, and that such amounts remain unpaid. If the Trustee determines that such a failure has occurred, then it shall so notify the Company and the Participants in writing within the same 15 day period. Within a period of 20 days after receipt of such notice from the Trustee, the Company shall have failed to prove by clear and convincing evidence, in the sole and absolute discretion of the Trustee, that such amounts were paid or were not due and payable.
Fees - Any amount payable to a Participant for services as a member of the Board or as chairman or a member of any committee of the Board.
Funded Amount - With respect to the Account of any Participant, the value of any assets which have been placed in a grantor trust established by the Company to pay benefits with respect to that Account, as determined at the time initial payments are to be made pursuant to the selections made by the Participants in accordance with Section 10.03.
Interest Rate Retirement Deferred Fees - Retirement Deferred Fees that are credited with Treasury Note Based Interest in accordance with Article VII.
Participant - A member of the Board who is not an employee of Eaton and who elects to defer receipt of Fees.
Periodic Installments - Monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as determined by the Committee in its sole discretion, which are substantially equal in amount, or, in the case of Common Share Retirement Deferred Fees, substantially equal in the number of share units being valued and paid or the number of Eaton Common Shares being distributed, except that earnings attributable to periods following Retirement or Termination of Service as a Director shall be included with each payment.
Plan - This 1996 Non-Employee Director Fee Deferral Plan pursuant to which Fees may be deferred for later payment.
Retirement - The Termination of Service as a Director of a Participant who is age 55 or older and who has at least ten years of service as a member of the Board, who is age 68 or older, or who is approved by the Committee to qualify as a retirement.
Retirement Deferred Fees - That portion of Fees deferred for payment at Retirement, at one year following Retirement, at two years following Retirement or in Periodic Installments commencing after Retirement.
Short-Term Deferred Fees - That portion of Fees deferred for payment as determined by the Committee in accordance with Article V.
Termination and Change in Control - The Termination of Service as a Director of a Participant for any reason whatsoever prior to a Change in Control if there is a subsequent Change in Control or the Termination of Service as a Director of a Participant for any reason whatsoever during the three-year period immediately following a Change in Control.
Termination of Service as a Director - The time when a Participant shall no longer be a member of the Board, whether by reason of retirement, death, voluntary resignation, divestiture, removal (with or without cause), or disability.
Treasury Bill Interest Equivalent - A rate of interest equal to the quarterly average yield of 13-week U.S. Government Treasury Bills.
Treasury Note Based Interest - A rate of interest equal to the average yield of 10-year U.S. Government Treasury Notes plus 300 basis points.
Trustee - The trustee of any trust which holds assets for the payment of the benefits provided by the Plan.
IV. Election to Defer
Section 4.01 Deferral Options. For each calendar year commencing with 1997, a Participant may elect to defer the receipt of all or part of his or her Fees as Short-Term Deferred Fees or Retirement Deferred Fees. Once a Participant has made an effective election, he or she may not thereafter change that election or change any allocation between Short-Term Deferred Fees or Retirement Deferred Fees.
Section 4.02 Amount Deferred. Not less than 10% of Fees payable for any calendar year may be deferred under the Plan. If a Participant elects to allocate a portion of Fees to both Short-Term Deferred Fees and Retirement Deferred Fees, the amount allocated to each shall be not less than 10% of the Fees payable for any calendar year.
Section 4.03 Election Deadline. To be in effect, a Participant's election must be completed, signed and filed with the Committee on or before such date as is necessary to defer inclusion of the Fees in the Director's gross income for Federal income tax purposes.
Section 4.04 Transfers. Notwithstanding anything herein to the contrary, a Participant may elect to have held and distributed in accordance with the terms and conditions of the Plan all or part of his or her compensation which was deferred under the 1980 Plan for Deferred Payment of Directors? Fees, and any such election with respect to amounts to be held and distributed as Retirement Deferred Fees for any Participant in payment status upon the effective date of such election may be held only as Interest Rate Deferred Fees if to do otherwise would be administratively impractical.
V. Short-Term Deferred Fees
If elected by a Participant, payment of the amount of Fees allocated to Short-Term Deferred Fees will be deferred. Short-Term Deferred Fees shall be credited to the Participant on the date such amount would have been distributed to him or her if there had been no valid deferral election by establishing an Account in the Participant?s name. Treasury Bill Interest Equivalents shall be credited quarterly to the Participant's Short-Term Deferred Fees Account until such compensation is paid to the Participant. Short-Term Deferred Fees, together with credited Treasury Bill Interest Equivalents, shall be paid to the Participant in a lump sum or in not more than five annual installments as determined by the Committee.
VI. Retirement Deferred Fees
Section 6.01 Duration. If elected by a Participant, payment of the amount of Fees allocated to Retirement Deferred Fees will be deferred to Retirement or to one year after Retirement or to two years after Retirement, but subject to Committee discretion as to date of payment as provided herein. Retirement Deferred Fees shall be credited to the Participant on the date such amount would have been distributed to him or her if there had been no valid deferral election by establishing an Account in the Participant's name.
Section 6.02 Common Share Retirement Deferred Fees. Between 50% and 100%, as elected by the Participant, of the amount allocated to Retirement Deferred Fees shall be credited to Common Share Retirement Deferred Fees, and the balance shall be credited to Interest Rate Retirement Deferred Fees.
Common Share Retirement Deferred Fees shall be converted into a number of share units based upon the average of the mean prices for Eaton Common Shares for the twenty trading days of the New York Stock Exchange during which Eaton Common Shares were traded immediately preceding the end of the calendar quarter in which the Fees to be deferred were earned. For purposes of the Plan, "mean price" shall be the mean of the highest and lowest selling prices for Eaton Common Shares quoted on the New York Stock Exchange List of Composite Transactions on the relevant trading day. On each Eaton Common Share dividend payment date, dividend equivalents equal to the actual Eaton Common Share dividends paid shall be credited to the share units in the Participant's Account, and shall in turn be converted into share units utilizing the mean price for Eaton Common Shares on the dividend payment date.
Upon payment of Common Share Retirement Deferred Fees in Eaton Common Shares, the share units standing to the Participant's credit shall be converted to the same number of Eaton Common Shares for distribution to the Participant.
Upon payment of Common Share Retirement Deferred Fees in cash, including any installment thereof in the case of Periodic Installments, the share units required to make the cash payment shall be converted to an amount equal to the greater of: (a) the product of the average of the mean prices for an Eaton Common Share for the last twenty trading days of the New York Stock Exchange during which Eaton Common Shares were traded in the month immediately preceding the month in which the date of payment occurs, multiplied by the number of share units then credited to the Participant's Account, or (b) if a Change in Control of Eaton shall have occurred at any time within thirty-six months immediately preceding the payment, the product of the number of share units credited to the Participant's Account at the time of payment multiplied by the highest of (i) the highest price paid for an Eaton Common Share in any tender offer in connection with the Change in Control of Eaton; (ii) the price received for an Eaton Common Share in any merger, consolidation or similar event in connection with the Change in Control of Eaton; or (iii) the highest price paid for an Eaton Common Share as reported in any Schedule 13D within the sixty-day period immediately preceding the Change in Control of Eaton.
Section 6.03 Interest Rate Retirement Deferred Fees. Retirement Deferred Fees not credited to Common Share Retirement Deferred Fees shall be credited to Interest Rate Retirement Deferred Fees. Interest Rate Retirement Deferred Fees shall be credited to the Interest Rate Retirement Deferred Fees Account, which shall earn Treasury Note Based Interest, compounded quarterly, until paid.
Section 6.04 Periodic Installments. Upon the death of a Participant who has commenced receiving Periodic Installments, the entire remaining amount of his or her Retirement Deferred Fees shall be distributed to the Participant's Beneficiary. Such distributions may be made either in a lump sum or in installments in such amounts and over such periods, not exceeding the remaining number of annual installments from the date of death of the Participant, as the Committee may direct in its sole discretion.
Section 6.05 Termination of Service as a Director. The Retirement Deferred Fees Account of a Participant whose Termination of Service as a Director occurs for reasons other than Retirement shall be distributed in a lump sum or in Periodic Installments, as the Committee may determine in its sole discretion. The lump sum payment shall be made, or the Periodic Installments shall commence, when the Committee may determine in its sole discretion, no later than February 1 of the calendar year immediately after the calendar year that includes the earliest of: (i) the Participant's death, (ii) the Participant's attainment of age 55 if he or she was credited with at least 10 years of service for Eaton (or an affiliate of Eaton), (iii) the Participant's attainment of age 68, or (iv) the fifth anniversary of the Participant's Termination of Service as a Director.
Earnings shall be credited on undistributed Retirement Deferred Fees Accounts, and annual installment payments shall be adjusted to reflect such additional earnings, based on the remaining number of installment payments to be distributed and based on Treasury Note Based Interest, computed quarterly.
VII. Amendment and Termination
Eaton fully expects to continue the Plan but it reserves the right, except as otherwise provided herein, at any time by action of the Board, to modify, amend or terminate the Plan for any reason, including adverse changes in the federal tax laws. Notwithstanding the foregoing, upon the occurrence of a Change in Control of Eaton, no amendment, modification or termination of the Plan shall, without the consent of any particular Participant, alter or impair any rights or obligations under the Plan with respect to that Participant.
VIII. Administration
The Plan shall be administered by the Committee. The Committee shall interpret the provisions of the Plan where necessary and may adopt procedures for the administration of the Plan which are consistent with the provisions of the Plan and any rules adopted by the Committee.
After Retirement or other Termination of Service as a Director, the
Committee shall determine in its sole discretion (i) whether Retirement Deferred
Fees shall be paid in a lump sum or in Periodic Installments, (ii) the date on
which a lump sum payment will be made or Periodic Installments will commence,
which in the case of Retirement shall be not later than one year following the
date to which the deferral was made, and in the case of Termination of Service
as a Director for reasons other than Retirement shall be in accordance with
Section 6.05, (iii) whether to change the Periodic Installments or the number of
years over which they are to be paid, and (iv) whether Common Share Retirement
Deferred Fees will be paid in cash or in Eaton Common Shares. In making these
determinations, the Committee may consider the wishes and needs of the
Participant or his or her Beneficiary.
Each Participant or Beneficiary must claim any benefit to which such Beneficiary may be entitled under the Plan by a written notification to the Committee. If a claim is denied, it must be denied within a reasonable period of time in a written notice stating the specific reasons for the denial. The claimant may have a review of the denial by the Committee by filing a written notice with the Committee within sixty days after the notice of the denial of his or her claim. The written decision by the Committee with respect to the review must be given within 120 days after receipt of the written request.
The determinations of the Committee shall be final and conclusive.
IX. Termination and Change in Control - Failure to Pay
Section 9.01 Termination and Change in Control. Notwithstanding anything herein to the contrary, upon the occurrence of a Termination and Change in Control, the Participants shall be entitled to receive from the Company the payments as provided in Section 9.03.
Section 9.02 Failure to Pay. Notwithstanding anything herein to the contrary, upon the occurrence of a Failure to Pay, each Participant covered by the situation described in clause (i) of the definition of Failure to Pay, or each of the Participants in the event of a situation described in clause (ii) of that definition, as the case may be, shall be entitled to receive from the Company the payments as provided in Section 9.03.
Section 9.03 Payment Requirement. No later than (i) the first to occur of six months following the date hereof, a Termination and Change in Control or a Failure to Pay for any person who is a Participant upon such event or (ii) the date upon which any person who is not subject to clause (i) becomes a Participant, each Participant shall select one of the payment alternatives set forth below with respect to that portion of the Participant?s Account equal to the full amount of the Account minus the Funded Amount, and with respect to that portion of the Account equal to the Funded Amount. The payment alternatives selected with respect to the two portions of the Account need not be the same. The payment alternatives are as follows:
(a) a Lump Sum Payment within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be;
(b) payment in monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as selected by the Participant at the time provided in the first paragraph of this Section 9.03, commencing within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be, which are substantially equal in amount or in the number of share units being valued and paid or in the number of Eaton Common Shares being distributed, except that earnings attributable to periods following Termination and Change in Control or Failure to Pay shall be included with each payment.
Payment of such amounts shall be made to each such Participant in accordance with his or her selected alternative as provided in Section 9.01 and 9.02.
X. Miscellaneous
Section 10.01 Adjustments. In the event of a reorganization, merger, consolidation, reclassification, recapitalization, combination or exchange of shares, stock split, stock dividend, rights offering or similar event affecting shares of the Company, the Committee shall equitably adjust the number of share units previously allocated to the Accounts of Participants as Common Share Retirement Deferred Fees.
Section 10.02 Designation of Beneficiaries. Each Participant shall have the right, by written instruction to the Committee, on a form supplied by the Committee, to designate one or more primary and contingent Beneficiaries (and the proportion to be paid to each, if more than one is designated) to receive his or her Account balance upon his or her death. Any such designation shall be revocable by the Participant.
Section 10.03 Committee Actions. All actions of the Committee hereunder may be taken with or without a meeting, as permitted by law and by the Company's Amended Regulations.
Section 10.04 Assignment. No benefit under the Plan shall be subject to anticipation, alienation, sale, transfer or encumbrance, and any attempt to do so shall be void. No benefit hereunder shall in any manner be liable for the debts, contracts, or liabilities of the person entitled to such benefits. If a Participant or Beneficiary shall become bankrupt, or attempt to anticipate, alienate, sell, transfer or encumber any benefit hereunder, then such benefit shall, in the discretion of the Committee, cease and terminate, and the Committee may hold or apply the same for the benefit of the Participant or his or her spouse, children, or other dependents, or any of them, in such manner and in such amounts and proportions as the Committee may deem proper. During a Participant's lifetime, rights hereunder are exercisable only by the Participant or the Participant?s guardian or legal representative. Notwithstanding the foregoing, nothing in this Section shall prohibit the transfer of any benefit by will or by the laws of descent and distribution or (if permitted by applicable regulations under Section 16(b) of the Securities Exchange Act) pursuant to a qualified domestic relations order, as defined under the Internal Revenue Code and the Employee Retirement Income Security Act.
Section 10.05 No Funding Required. The obligations of Eaton to make payments shall be a liability of Eaton to the Participant. Eaton shall not be required to maintain any separate fund or reserve, or purchase or acquire life insurance on a Participant's life, or otherwise segregate assets to assure that any particular asset of Eaton is available to make such payments by reason of Eaton's obligations hereunder. Nothing contained in the Plan shall be construed as creating a trust or other fiduciary relationship between Eaton and a Participant or any other person.
Section 10.06 No Contract for Services. The Plan shall not be deemed to constitute a contract for services between Eaton and a Participant. Neither the execution of the Plan nor any action taken by Eaton or the Committee pursuant to the Plan shall confer on a Participant any legal right to be continued as a member of the Board or in any other capacity with Eaton whatsoever.
Section 10.07 Governing Law. The Plan shall be construed and governed in accordance with the law of the State of Ohio to the extent not covered by Federal law.
The 1996 Non-Employee Director Fee Deferral Plan, in the form attached hereto, is hereby approved and adopted.
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (p)
Eaton Corporation Trust Agreement - Outside Directors
This Trust Agreement (the "Trust Agreement") is made this 6th day of December, 1996, by and between Eaton Corporation (the "Company"), an Ohio corporation with its principal offices at Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114 and Wachovia Bank of North Carolina, N.A. (the "Trustee") with its principal office in Winston-Salem, North Carolina.
Recitals
(a) WHEREAS, the Company has adopted the nonqualified deferred compensation plans, programs and agreements as listed in Attachment A (individually a "Plan" and collectively the "Plans");
(b) WHEREAS, the Company has incurred or expects to incur liability under the terms of the Plans with respect to the Participants;
(c) WHEREAS, the Company has previously established a trust agreement (the "Prior Trust") between Eaton Corporation and National City Bank, as trustee (the "Prior Trustee") dated April 22, 1987;
(d) WHEREAS, the Prior Trust is revocable by the Company at any time prior to a change of control and the Company has determined to revoke such Prior Trust and to remove the Prior Trustee as Trustee;
(e) WHEREAS, the Board of Directors of the Company has authorized the establishment of a grantor trust to be used to fund certain deferred compensation obligations under the Plans;
(f) WHEREAS, the Company intends to contribute assets to the Trust that shall be held subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to Participants in such manner and at such times as specified in the Plans and in this Trust Agreement;
(g) WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds to assist it in satisfying its liabilities under the Plans;
(h) WHEREAS, it is the intention of the parties that the Trust shall constitute an unfunded arrangement and shall not affect the status of the Plans as unfunded plans maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974.
NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:
Section 1 Establishment of the Trust
1.01 Appointment of Trustee. The Company hereby appoints Wachovia Bank of North Carolina, N.A., a national banking association with trust powers, to serve as Trustee for the Trust under the terms of this Trust Agreement, and the Trustee hereby accepts its appointment. The Trust shall be called the Eaton Corporation Grantor Trust Agreement dated__________, 1996, and shall be effective on the same date.
1.02 Grantor Trust. The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly.
1.03 Revocability. The Trust shall be irrevocable by the Company at any time after the first to occur of one year from the date hereof, a Change of Control or such other date as shall be mutually agreeable to the Company and the Trustee. Prior to that date, the Trust shall be unilaterally revocable by the Company.
1.04 Deposit of Trust Assets. The Company hereby deposits $1,000 with the Trustee, in trust, which shall become the initial principal of the Trust, and the Company may at any time make additional deposits with the Trustee of cash or other property in accordance with the Trust Agreement. All such deposits shall be held, administered and disposed of by the Trustee as provided in the Trust Agreement.
1.05 Use of Trust Assets. The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of the Company and, except as otherwise expressly provided herein, shall be used exclusively for the uses and purposes of Participants, general creditors of the Company and Trust expenses, in each case as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. All rights created under the Plans and Trust shall be unsecured rights of Participants against the Company. Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of Insolvency, as defined herein.
1.06 Agent. At the effective date of this Trust or at such time as may be determined by the Company, the Company may designate an agent (the "Agent") for administering the Plans. The Agent may be the Trustee or a third party professional administrator familiar with deferred compensation Plans, and shall perform record keeping and administrative duties. If the Company fails to appoint an Agent, then the Company shall perform those duties. Following a Change of Control or a Failure to Pay, the Trustee shall appoint the Agent (who may have been the Agent prior to the Change of Control), and the Company may no longer perform the record keeping and administrative duties. The Trustee may be protected from acting upon advice or direction of the Agent within its area of responsibility to the same extent that it could rely upon advice or direction from the Company.
Section 2 Benefit Schedule and Plans
2.01 Plans. Within 30 days after the effective date of this Trust, the Company shall provide the Trustee with complete, current copies of the Plans. The Company shall provide the Trustee with all changes to these Plans within 30 days after such changes are effective. The Company shall also furnish the Trustee, upon the Trustee's request, such information as the Trustee shall deem necessary for its determination under Section 2.06. The Trustee is authorized to rely on the latest copy of the Plans provided to it by the Company, provided that any Plan amendments submitted to the Trustee may not be inconsistent with the plan amendment provisions of those Plans.
2.02 Benefit Schedule - Contents. The Company shall provide a schedule (the "Benefit Schedule") to the Trustee and to each Participant as it relates to that Participant, indicating (i) the amounts payable to or in respect of each Participant under each Plan, or providing formulae or instructions acceptable to the Trustee, utilizing readily determinable and objective information, for determining such amounts, (ii) the form in which such amounts are to be paid (as provided for or available under the Plans) or the method of determining such form of payment, and (iii) the timing of such payments or the method of determining such timing, (iv) Beneficiary designations for each Participant, and (v) any other information within the possession or control of the Company reasonably necessary for the Trustee to use to determine benefits under the Trust.
2.03 Benefit Schedule - When Furnished. A copy of the Benefit Schedule is
attached hereto as Attachment B and is hereby made a part of this Trust
Agreement. The Company shall provide a current version of the Benefit
Schedule (i) not later than 45 days after the end of each calendar year,
(ii) following a Proposed Change of Control and before a Change of Control,
as of the date of the Proposed Change of Control, (iii) within 45 days
after a Change of Control or a Failure to Pay, as of the date of such event
and (iv) at such other times as may in the judgment of the Company be
appropriate in view of any change in circumstances.
2.04 Amendments to Attachment A. Not later than 45 days after the end of each calendar year and at such other times as may in the judgment of the Company be appropriate, the Company shall furnish to the Trustee and to each affected Participant (as it pertains to such Participant) any amendment to Attachment A and any corresponding amendment to the Benefit Schedule required as a result of such amendment to Attachment A.
2.05 Agreement Between Company and Participant. If the Company and each Participant do not agree upon the Benefit Schedule, as it may be updated from time to time as provided in Sections 2.03 and 2.04, and any amendment to Attachment A, as the same pertains to the Participant's benefits, then the provisions of Section 2.06 shall control.
2.06 Trustee Resolves Disagreement. Upon written notification to the Trustee by the Company or any Participant of the failure of the Company and such Participant to agree as provided in Section 2.05, the Trustee shall, to the extent necessary in the sole judgment of the Trustee, (i) recompute the amount payable hereunder to any Participant, as set forth in the Benefit Schedule, and (ii) notify the Company and the Participant in writing of its computations. Thereafter, this Trust Agreement and the Benefit Schedule shall be amended to the extent of such Trustee determinations without further action; provided, however, that the failure of the Company to furnish any amendment, restatement or successor to the Plans, or compensation or other information shall in no way diminish the rights of any Participant hereunder or thereunder. If the Trustee has not completed its recomputation within 30 days after receipt of written notification of the failure of the Company and the Participant to agree, as provided above, the Trustee shall make any payments to the Participant from his or her account hereunder, in accordance with the terms hereof, based upon the Benefit Schedule which is in effect at that time. Following the recomputation, any overpayments by reason of the foregoing shall be repaid to the Trust without interest. The Trustee, however, shall have no obligation to enforce repayment of any such overpayments, nor shall it incur any liability to any party whatsoever, including without limitation any liability to the Company or to any other Participant, for having made any such overpayment. The obligation to enforce repayment of any such overpayment shall rest solely with the Company.
Section 3 Contributions to the Trust
3.01 No Company Obligation. The Company may make contributions to the Trust to provide assets for payment of benefits under the Plans at such times as it shall determine in its sole discretion as grantor. The Company shall have no obligation to make contributions to the Trust, except as otherwise expressly provided in Section 3.03.
3.02 Allocation of Contributions. At the time it makes contributions to the Trust, the Company shall identify the Plans, or the Participant Plan accounts and the Plans, for which such contributions are made and the amount contributed for each such Participant Plan account or Plan. The amounts contributed for a Plan (as contrasted with the amounts contributed for Participant Plan accounts) shall be allocated among the accounts for the Participants in the Plan in proportion to the benefits accrued thereunder prior to 1996, and in proportion to those accrued thereunder in 1996 or thereafter, as may be specified by the Company. If it is determined by the Trustee that the balance of a Participant's account for any Plan reflects Trust assets that will clearly never be required to pay benefits to the Participant, such excess assets shall be reallocated first in proportion to the balances of the separate accounts of the remaining Participants in that Plan, and after such Plan is fully funded, then in proportion to the balances of the separate accounts of the Participants in the other Plans.
3.03 Change of Control or Failure to Pay. Upon a Change of Control or a Failure to Pay as defined in clause (ii) of the definition of that term, the Company shall make a contribution to the Trust in an amount that is sufficient to fund 100% of the amount necessary to pay each Participant the benefits to which the Participant would be entitled pursuant to the terms of the Plans as of the date of the Change of Control or such Failure to Pay.
3.04 Assets Contributed. Assets contributed by the Company to the Trust must be, in the sole and absolute discretion of the Trustee, easily liquidated. Equity securities must be traded on a national securities exchange or on the NASDAQ National Market System. Debt securities must be at least "investment grade" as that term is commonly used by the debt rating agencies. Subject to the foregoing, prior to a Change of Control or a Failure to Pay, the Company may contribute equity (but not debt) securities of the Company or any affiliate. Thereafter, the Company may not contribute such securities.
3.05 Expense Account. The Company may, in its sole and absolute discretion, deliver to the Trustee from time to time assets to be allocated to an account to be used to pay Trustee administrative and other expenses not included with the Trustee's fees as contemplated by Section 11.02 ("Expense Account"). All amounts in the Expense Account, including contributions and earnings thereon, may be used only for these purposes. Notwithstanding the foregoing, upon a Change of Control or a Failure to Pay, the Company shall deliver an amount to the Trustee to be allocated to the Expense Account such that the amount in that account will then be $250,000.
Section 4 Payments to Participants
4.01 Prior to a Termination and Change of Control or a Failure to Pay.
Prior to a Termination and Change of Control or a Failure to Pay:
(a) Distributions from the Trust shall be made by the Trustee to Participants only at the direction of the Company. The Company shall provide such directions annually for each Plan, and such directions (when considered together with payments to Participants by the Company from sources other than Trust assets) must provide for payments to Participants which are in accordance with the Benefit Schedule and the Plans. Such directions may not provide for distributions from a Participant's Plan account which bear a greater proportion to the total payment then being made to the Participant, than the amount in the Participant's Plan account under the Trust bears to the Plan Participant's accrued benefit under the Plan ("Prorata Payment"). If no directions are given or if the directions provide for a distribution from the Trust to a Participant which is less than a Prorata Payment, then in either case an amount necessary to achieve a Prorata Payment will be removed from the Participant's Plan account by the Trustee and reallocated amongst the accounts of all the Participants in the Plan in proportion to the balances in their respective accounts, including the Participant from whom the Trustee removed an amount in accordance with this sentence.
(b) The Company may make benefit payments pursuant to the Plans (other than distributions from the Trust) directly to Participants as the payments become due, or it may remit the amount needed for such payments to the Trustee, in which case the Trustee will make such payments. The Company shall notify the Trustee of its decision prior to the time amounts are payable to the Participant. The Company shall be responsible for all tax withholdings and reportings for payments it makes. The Trustee shall make all tax withholdings or payments from the Trust assets. Such withholdings shall be remitted to the tax authorities, or to the Company for remission to the tax authorities, as the Trustee and the Company may agree.
4.02 After a Termination and Change of Control or a Failure to Pay.
(a) Notwithstanding anything herein to the contrary, upon the occurrence of a Termination and Change in Control, the Participants shall be entitled to receive from the Trust the payments provided in Section 4.02(c).
(b) Notwithstanding anything herein to the contrary, upon the occurrence
of a Failure to Pay, each Participant covered by the situation
described in clause (i) of the definition of Failure to Pay, or each
of the Participants in the event of a situation described in clause
(ii) of that definition, as the case may be, shall be entitled to
receive from the Trust the payments as provided in Section 4.02(c).
(c) No later than the first to occur of (i) six months following the date
hereof for any person who is a Participant prior to the first of the
events described in clause (i) or (ii), (ii) a Termination and Change
in Control or a Failure to Pay for any person who is a Participant
prior to the first of the events described in clause (i) or (ii), or
(iii) the date upon which any person who is not a Participant prior to
the first to occur of the events described in (i) or (ii) becomes a
Participant, each Participant shall select one of the following
payment alternatives with respect to each Plan, and payment shall be
made to each such Participant in accordance with his or her selected
alternative as provided in Sections 4.02(a) and 4.02(b):
A lump sum payment of the full amount in the Participant's Plan account within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be;
Payment of the full amount in the Participant's Plan account in monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as selected by the Participant at the time provided in the first paragraph of this Section 4.02(c), commencing within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be, which are substantially equal in amount or in the number of share units being valued and paid or in the number of Eaton shares being distributed, except that earnings attributable to periods following Termination and Change in Control or Failure to Pay shall be included with each payment.
4.03 Tax Payments.
(a) Either before or after Termination and Change of Control or a Failure to Pay, if any Participant is determined to be subject to federal income tax on any amount to the credit of his or her account under any Plan prior to the time of actual payment hereunder, whether or not due to the establishment of or contributions to this Trust, a portion of such taxable amount equal to the taxes, including interest and penalties, owed on such taxable amount, shall be distributed by the Trustee from the Participant's Plan account to such Participant within thirty days after receipt of notice from the Participant, with a copy to the Company, setting forth the amount of such tax, interest and penalties and a certification by the Participant that such tax, interest and penalties have not otherwise been paid by the Company.
(b) For purposes of this Section 4.03, a Participant shall be deemed to pay state and local taxes at the highest marginal rate of taxation in the state in which the Participant resides or is employed (or both) where a tax is imposed, and federal income taxes at the highest marginal rate of taxation, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.
(c) An amount to the credit of a Participant's account shall be determined to be subject to federal income tax for purposes of this Section 4.03 upon the earliest of: (i) a final determination by the United States Internal Revenue Service addressed to the Participant which is not appealed to the courts; (ii) a final determination by the United States Tax Court or any other federal court affirming any such determination by the Internal Revenue Service; or (iii) an opinion by the Company's tax counsel, addressed to the Company and the Trustee, to the effect that by reason of Treasury Regulations, amendments to the Internal Revenue Code, published Internal Revenue Service rulings, court decisions or other substantial precedent, amounts to the credit of Participants hereunder are subject to federal income tax prior to payment.
(d) The Company shall undertake at its sole expense to defend any tax claims described herein which are asserted by the Internal Revenue Service against any Participant, including attorney fees and cost of appeal, and shall have the sole authority to determine whether or not to appeal any determination made by the Service or by a lower court. The Company will reimburse any Participant for any interest or penalties in respect of tax claims hereunder upon receipt of documentation of same. In consideration of such undertaking, the Participant shall notify the Company and the Trustee promptly upon receipt by such Participant of any notification or communication, whether written or oral, from any taxing authority, or any representative or agent thereof, asserting that any amounts to the credit of such Participant are subject to tax prior to payment.
(e) Any distributions from the Trust to a Participant under this Section shall be applied in accordance with the provisions of the Plans to reduce the Company's liabilities to such Participant and/or Beneficiary under the Plan and the Benefit Schedule. Such reductions shall be made on a prorata basis over the term of benefit payments under the Plan and Benefit Schedule. Any such reduction shall be determined by the Company prior to a Change of Control or a Failure to Pay, and by the Trustee following such events.
4.04 Distribution Limit - Benefit Schedule Pursuant to Plan. Under no circumstances shall a Participant receive a distribution which is greater than the amount then credited to the Participant's Plan account under the Trust. Payments made in accordance with the Benefit Schedule shall be deemed to be pursuant to the Plans for purposes of the Trust.
4.05 Company Obligation Continues. Notwithstanding any distribution made to a Participant in accordance with this Section 4, the Company shall remain obligated to pay any amounts due the Participant under the Plans which have not been paid from the assets of the Trust.
Section 5 Payments to the Company
Except as otherwise expressly provided in this Trust Agreement (including without limitation as provided in Section 1.03), the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all benefit payments have been made to Participants pursuant to the terms of the Plans and the Benefit Schedule. If the Trustee determines, in its sole and absolute discretion, that certain assets will clearly never be required to pay benefits to the Participants, or to pay Trust expenses, then such assets will be returned to the Company.
Section 6 Creditors and Insolvency
6.01 No Liens Created. Notwithstanding anything herein to the contrary, nothing in this Trust Agreement shall constitute a mortgage, lien, pledge, charge or security interest of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest ("Liens") with respect to any indebtedness of the Company the terms of which restrict the Company's ability to incur Liens.
6.02 Insolvency. The Trustee shall cease payment of benefits to Participants if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.
6.03 Claims of Creditors. At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below.
(a) The Board of Directors or the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing that the Company is Insolvent. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants.
(b) Unless the Trustee has actual knowledge that the Company is Insolvent, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's Insolvency.
(c) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Participants and shall hold the assets of the Trust for the benefit of the Company's general creditors as a court of competent jurisdiction may direct. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their Beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Plans or otherwise.
(d) The Trustee shall resume the payment of benefits to Participants in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent).
6.04 Resumption of Payments. If the Trustee discontinues the payment of benefits from the Trust pursuant to Section 6.02 and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants under the terms of the Plans for the period of such discontinuance, less the aggregate amount of any payments made to Participants by the Company in lieu of the payments provided for hereunder during any such period of discontinuance.
Section 7 Investment Authority
7.01 General Authority and Investment Guidelines. In no event shall any rights associated with assets of the Trust be exercisable by or rest with Participants. Except as otherwise expressly provided herein, all rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee. The Trustee shall invest and reinvest the principal and income of the Trust, without distinction between principal and income, in accordance with the investment guidelines as may be furnished by the Company from time to time prior to Termination and Change of Control or a Failure to Pay. Each Plan may have investment guidelines which are different from those of other Plans. The Company may amend, from time to time and in its sole and absolute discretion, the investment guidelines of each Plan prior to a Change of Control or a Failure to Pay. Following a Termination and Change of Control or a Failure to Pay, the Trustee is authorized, in its sole and absolute discretion, but subject to the fiduciary standards set forth below, to disregard the investment guidelines furnished to the Trustee by the Company.
7.02 Company May Appoint Investment Manager. Prior to a Termination and Change of Control or a Failure to Pay, the Company shall have the right to direct the Trustee in accordance with this Section.
(a) The Company may from time to time direct the Trustee to segregate all or any portion of the Trust assets in a separate investment account or accounts and may appoint one or more investment managers and/or an investment committee established by the Company to direct the investment and reinvestment of each such investment account or accounts. In such event, the Company shall notify the Trustee of the appointment of each such investment manager and/or investment committee. Members of the investment committee may be employees of the Company, but may not be Participants. In exercising its responsibilities hereunder, any such investment managers or investment committee shall have the same duties of loyalty and care as the Trustee would have in connection with investment of Trust assets.
(b) After the appointment of an investment manager in accordance with
Section 7.02(a), the Trustee shall make every sale or investment with
respect to such investment account as directed in writing by the
investment manager or investment committee, unless the Trustee
determines that such directions, if implemented, would not be in
accordance with the requirements of this Trust Agreement or with the
standard of conduct for a fiduciary imposed by the Employee Retirement
Income Security Act of 1974, as amended.
(c) Notwithstanding the foregoing, the Trustee, without obtaining prior
approval or direction from an investment manager or investment
committee, shall invest cash balances held by it from time to time in
U.S. Treasury Bills, commercial paper (including such forms of
commercial paper as may be available through the Trustee) which are
rated _________ or higher by ______________, certificates of deposit
(including certificates issued by the Trustee in its separate
corporate capacity) issued by a commercial bank organized and existing
under the laws of the United States or any state thereof having a
combined capital of at least [$1 billion], and similar types of
securities, with a maturity not to exceed one year. The Trustee shall
sell such short term investments as may be necessary to carry out the
instructions of an investment manager or investment committee
regarding more permanent type investments and directed distributions.
(d) The Company may from time to time direct the Trustee with respect to
the voting of any trust assets.
7.03 Trustee Duties and Delegation. Following a Change of Control or a
Failure to Pay:
(a) In exercising its discretion to manage the investment of the Trust
assets, the Trustee shall consider the needs of the Plans, the need
for matching of the Trust assets with the liabilities of the Plans and
the duty of the Trustee to act solely in the best interests of the
Participants.
(b) The Trustee shall have the right, in its sole and absolute discretion,
to delegate its investment responsibility to an investment manager who
may be an affiliate of the Trustee. In the event the Trustee shall
exercise this right, the Trustee shall remain, at all times
responsible for the acts of an investment manager. The Trustee shall
have the right, in its sole and absolute discretion to remove any such
investment manager.
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7.04 Company may Substitute Assets. The Company shall have the right at any time, and from time to time and in its sole and absolute discretion, to substitute assets of equal fair market value for any asset held by the Trust, provided that such assets satisfy the requirements of Section 3.04. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity.
7.05 Commingling. Subject to the investment guidelines for each Plan, the Trustee is hereby authorized to commingle any or all of the assets of the Plans for investment purposes. The Trustee, however, shall maintain the investment results separately by Plan, and the investment experience of each Plan shall be maintained and allocated to each Plan separately as earnings. The investment experience of a Plan shall not be shared with other Plans for purposes of this Trust.
7.06 Asset Rights. All rights associated with assets of the Trust shall be exercised only as expressly provided herein.
Section 8 Permissible Investments and Additional Authority
Subject to the investment guidelines while in effect in accordance with the terms of this Agreement and to the fiduciary duties of the Trustee as provided herein, the Trustee shall have the power in connection with the Trust in its sole and absolute discretion:
(a) To invest and reinvest in any readily marketable common and preferred stocks, bonds, notes, debentures and convertible stocks and securities (including any such equity securities of the Company, but not including any debt securities of the Company or any stock or security of the Trustee other than a de minimis amount held in a collective or mutual fund), certificates of deposit or demand or time deposits (including any such deposits with the Trustee) and shares of investment companies and mutual funds (including mutual funds maintained by the Trustee), without being limited to the classes or property in which the Trustee is authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of the Trust Assets;
(b) To enter into interest rate, equity and currency exchange or swap transactions, cap transactions, commodity swaps, collar transactions, interest rate options, forward foreign exchange transactions, floor transactions or any other similar transaction; provided, however, that none of such transactions may involve leveraged financial instruments, instruments bought or sold solely for the purpose of earning a profit due to changes in the market price of the instruments, or counter parties which are not major international financial institutions;
(c) To invest and reinvest all or any portion of the Trust assets collectively through the medium of any common, collective or commingled trust fund that may be established and maintained by the Trustee, subject to the instrument or instruments establishing such trust fund or funds and with the terms of such instrument or instruments, as from time to time amended, being incorporated into this Trust Agreement to the extent of the equitable share of the Trust in any such common collectively or commingled trust fund;
(d) To retain any property at any time received by the Trustee;
(e) To sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future;
(f) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by an person;
(g) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power thereto, and to pay part of the expenses and compensation thereof and any assessments levied with respect to any such property so deposited;
(h) To extend the time of payment of any obligation held by it;
(i) To hold uninvested any moneys received by it, without liability for interest thereon, but only in anticipation of payments due for investments, reinvestments, expenses or disbursements;
(j) To exercise the right to vote any securities or other property held by it, except as otherwise provided in Section 7.02(d);
(k) Solely for the benefit of Participants and subject to the provisions of any agreements relating to indebtedness of the Company existing prior to a Change of Control or a Failure to Pay, to borrow money from others, including the Company, in such amounts and for such terms as are advisable, to issue its promissory note or notes therefor, and to secure the repayment thereof by pledging any property held by it;
(1) To employ suitable contractors and counsel, who may be counsel to the Company or to the Trustee, and to pay their reasonable expenses and compensation from the Trust assets to the extent not paid by the Company;
(m) To register investments in its own name or in the name of a nominee; to hold any investment in bearer form; and to combine certificates representing securities with certificates of the same issue held by it in other fiduciary capacities or to deposit or to arrange for the deposit of such securities with any depository, even though, when so deposited, such securities may be held in the name of the nominees of such depository with other securities deposited therewith by other persons, or to deposit or to arrange for the deposit of any securities issued or guaranteed by the United States government, or any agency or instrumentality thereof, including securities evidenced by book entries rather than by certificates, with the United States Department of the Treasury or a Federal Reserve Bank, even though, when so deposited, such securities may not be held separate from securities deposited therein by other persons; provided, however, that no securities held in the Trust shall be deposited with the United States Department of the Treasury or a Federal Reserve Bank or other depository in the same account as any individual property of the Trustee, and provided, further, that the books and records of the Trustee shall at all times show that all such securities are part of the Trust assets;
(n) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust, to commence or defend suits or legal proceedings to protect any interest of the Trust, and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; provided, however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by the Company to its reasonable satisfaction against liability or expenses it might incur therefrom;
(o) To acquire, hold, retain and be the owner of any individual or group policies of life insurance, annuity contracts, and other property of any kind which policies are contributed to the Trust by the Company or are purchased by the Trustee as directed by the Company. To the extent that the Trustee is directed by the Company prior to a Change of Control or a Failure to Pay to invest part or all of the Trust assets in insurance contracts, the type and amount thereof shall be specified by the Company. The Trustee shall be under no duty to make inquiry as to the propriety of the type or amount so specified. Each insurance contract issued shall provide that the Trustee shall be the owner thereof with the power to exercise all rights, privileges, options and elections granted by or permitted under such contract or under the rules of the insurer. The exercise by the Trustee of any incidents of ownership under any contract shall, prior to a Change of Control or a Failure to Pay, be subject to the direction of the Company. The Trustee shall have all such rights, except that the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustees, or to loan to any person the proceeds of any borrowing against an insurance policy held in the Trust. No insurer shall be deemed to be a party to the Trust and an insurer's obligations shall be measured and determined solely by the terms of contracts and other agreements executed by the insurer.
(p) To hold any other class of assets contributed by the Company that is deemed prudent by the Trustee, unless expressly prohibited herein;
(q) To form corporations or partnerships and to create trusts to hold title to any property, upon such terms and conditions as may be advisable;
(r) To hold all or part of the Trust uninvested;
(s) To sell, exchange or transfer any equity securities of the Company held by the Trust, provided that if the Trustee elects to sell, exchange or transfer any such equity securities, the Company must be offered the right of first refusal to engage in a transaction on terms at least equal to those offered the Trust in an open market transaction;
(t) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the Trust assets or the administration of the Trust, including communicating with Participants.
Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or pursuant to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code.
Section 9 Accounting by the Trustee
9.01 Accounting Records and Reports. The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements and all other Trust transactions. All such records shall be open to reasonable inspection and audit by the Company and by any Participant. The Trustee shall deliver written reports of its administration of the Trust setting forth for each Participant, for each Plan and for the Trust in the aggregate:
(a) For the period covered by the report, all contributions, investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold and the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately);
(b) All cash, securities and other property held at the beginning and at the end of the period covered by the report.
The Trustee shall provide such reports as follows:
(c) To the Company, covering each of the first three quarters of each calendar year, beginning with the first calendar quarter ending after the effective date of this Trust Agreement, and provided within 60 days following the close of each such quarter;
(d) To the Company and to each Participant, covering each calendar year, and provided within 60 days following the end of such year;
(e) To the Company and to each Participant, covering the period from the close of the last preceding year to the date of any resignation or removal of the Trustee, and provided within 60 days after such resignation or removal.
In the absence of the Company's filing with the Trustee of objections to any such account within 180 days after its receipt, the Company shall be deemed to have so approved such account. In such case, or upon the written approval by the Company of any such account, the Trustee shall, to the extent permitted by law, be discharged from all liability to the Company for its acts or failures to act described by such account. The foregoing, however, shall not preclude the Trustee from having its accounting settled by a court of competent jurisdiction.
9.02 Separate Participant Accounts. The Trustee shall maintain a separate account for each Participant under each Plan. The Trustee shall credit or debit each Participant's account or accounts as appropriate to reflect his or her allocable portion of the Trust assets, as such Trust assets may be adjusted from time to time pursuant to the terms of this Trust Agreement, to reflect contributions, investment earnings and losses, and distributions. All contributions to the Trust shall be allocated in accordance with the terms of this Trust Agreement. Investment earnings and losses for each Plan shall be allocated to Participants' accounts under that Plan based on the proportion which each Participant account for that Plan bears to the total of all Participant accounts for that Plan. During the period that the Trust is revocable, the Trustee and the Company shall mutually agree upon procedures to assure the proper allocation of account balances in accordance with the requirements of this Section 9.02.
Section 10 Trustee Rights, Duties and Indemnification
10.01 Duties of Loyalty and Care. Following a Change of Control or a Failure to Pay, the Trustee shall act solely in the interest of and for the benefit of the Participants under the terms of the Plans and this Trust. At all times, whether before or after a Change of Control or a Failure to Pay, the Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Plans, the Benefit Schedule or this Trust Agreement, and is given in writing by the Company.
10.02 Participant Payment Determinations. In making any determination required or permitted to be made by the Trustee concerning any distribution to Participants, the Trustee shall, in each such case, reach its own independent determination, in its absolute and sole discretion, as to the Participant's entitlement to the payment under the Plans, the Benefit Schedule and this Trust Agreement. The Company waives any right to contest any amount distributed by the Trustee hereunder pursuant to a good faith determination made by the Trustee, notwithstanding any claim by or on behalf of the Company (absent a manifest abuse of discretion by the Trustee) that such payments should not be made. The Trustee shall, to the maximum extent permitted by applicable law, be fully protected and held harmless in making such payments.
10.03 No Legal Action by Trustee. Following a Change of Control or a Failure to Pay, the Trustee agrees that it will not itself institute any action at law or at equity, whether in the nature of an accounting, interpleading action, request for a declaratory judgment or otherwise, requesting a court or administrative or quasi-judicial body to make any determination required to be made by the Trustee hereunder in the place and stead of the Trustee.
10.04 Indemnification. Unless the Trustee has been negligent or engaged in misconduct, the Company hereby indemnifies the Trustee against losses, liabilities, claims, costs and expenses (other than costs and expenses included in the standard fee schedule) incurred in connection with the administration of the Trust, including (a) liability to which the Trustee may be subjected by carrying out any directions of an investment manager (except for an affiliated investment manager appointed pursuant to Section 7.03(b)) or investment committee issued pursuant hereto, (b) liability for failure to act in the absence of directions of the investment manager (except for an affiliated investment manager appointed pursuant to Section 7.03(b)) or investment committee and (c) liability for all expenses reasonably incurred by the Trustee if it undertakes or defends any litigation arising in connection with this Trust or to protect a Participant's rights under the Plans.
10.05 Counsel. Prior to a Change of Control or Failure to Pay, the Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. Following a Change of Control or Failure to Pay, the Trustee shall select independent legal counsel and may consult with counsel or other persons with respect to its duties and with respect to the rights of Participants under the Plans.
10.06 Agents. The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder and, provided the Trustee has not breached its duties in selecting or retaining such persons, may rely on any determinations made by such agents to the same extent as if such determinations had been made by the Trustee. The use of such persons shall not entitle the Trustee to any additional compensation to the extent that the services of such agents are included in the Trustee's standard fee schedule.
10.07 Powers. The Trustee shall have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein, except that the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulation promulgated pursuant to the Internal Revenue Code.
Section 11 Compensation and Expenses of the Trustee
11.01 Taxes. With respect to any taxes levied or assessed upon the Trust, the Trustee at the Company's expense or the Company, whichever may be elected by the Company, may contest the validity of such taxes in any manner deemed appropriate by the Company. The Company shall pay any taxes of any and all kinds whatsoever, which at any time are levied or assessed upon or become payable with respect of the Trust, the income or any property forming a part thereof, or any security transaction pertaining thereto. To the extent that any taxes levied or assessed upon the Trust are not paid by the Company when due, the Trustee shall pay such taxes out of the Trust assets. The Trustee shall notify each Participant in writing of the failure of the Company to pay taxes.
11.02 Fees and Expenses. The Trustee shall be paid compensation by the Company in accordance with the Trustee's regular schedule of fees for trust services, as in effect from time to time, unless otherwise agreed by the Company and Trustee. The Trustee shall be reimbursed for its reasonable expenses related to management and administration of the Trust, including reasonable expenses incurred in connection with the appointment of a successor trustee, and reasonable compensation of counsel and any actuary or other agent engaged by the Trustee to assist it in such management and administration, to the extent not included in the regular schedule of fees for trust services.
11.03 Failure to Pay Fees and Expenses - Expense Account. If the Company does not pay the Trustee's fees and expenses as provided herein, then the Trustee may withdraw from the Expense Account the amounts required for payment of those fees and expenses (including taxes) to the extent there is a balance in the Expense Account. If there is an inadequate balance in the Expense Account, the Trustee may satisfy such obligation from the Trust assets and shall charge such to the appropriate Plan, or if there is no appropriate Plan, then it shall charge all Plans in proportion to the aggregate of the account balances or accrued benefits under the Plans. The Trustee shall notify all Participants or Beneficiaries of any failure by the Company to reimburse the Trust for fees and expenses payable hereunder.
Section 12 Resignation and Removal of the Trustee
12.01 Resignation. Prior to a Change of Control or a Failure to Pay, the Trustee may resign at any time by written notice to the Company, which shall be effective 90 days after receipt of such notice by the Company unless the Company and the Trustee agree otherwise. Following a Change of Control or a Failure to Pay, the Trustee may resign only after at least 90 days notice to the Company and the Participants and the effective appointment of a successor Trustee.
12.02 Removal. Prior to a Change of Control or a Failure to Pay, the Trustee may be removed by the Company with or without cause on 90 days notice or upon shorter notice acceptable to the Trustee. Subsequent to a Change of Control or a Failure to Pay, the Trustee may only be removed by the Company if both of the following conditions are satisfied:
(a) The Company shall give notice to the Trustee of its removal, the appointment of a successor Trustee and the acceptance by the successor of its appointment in writing.
(b) The Company shall then notify each Participant of the removal and designation of the successor Trustee, each Participant shall then vote for or against such action, and a majority of the Participants vote for such action.
12.03 Successor Trustee. The appointment of a successor trustee shall become effective upon agreement by it to assume the Agreement as Trustee, except that following a Change of Control or a Failure to Pay, the appointment of a successor trustee shall become effective only after the successor trustee has also been approved by a vote of the majority of all Participants.
12.04 Transfer of Assets. Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 90 days after the effective date of the resignation or removal, unless the Company extends the time limit.
Section 13 Successor Trustee
13.01 Qualifications of Successor Trustee. Any successor Trustee must be a bank or national banking association with a market capitalization exceeding $1 billion. The successor Trustee shall have all of the rights and powers of the former Trustee. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the appointment of the successor Trustee and the transfer of Trust assets to it.
13.02 Responsibilities. The successor Trustee need not examine the records and acts of any prior Trustee. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee.
Section 14 Amendment and Termination
14.01 Amendment. During the period that this Trust Agreement is revocable, it may be amended in any respect by the Company and the Trustee. Thereafter, this Trust Agreement may be amended only if such amendment does not have an adverse effect upon the Participants and their rights hereunder or if the amendment is approved in writing by 90% of all Participants. Any permitted amendment to this Trust Agreement shall be evidenced by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no amendment shall conflict with the terms of the Plans or shall make the Trust revocable after it has become irrevocable in accordance with its terms.
14.02 Termination. The Trust shall not terminate until the first to occur of (a) the date on which Participants have received all of the benefits due to them under the terms and conditions of the Plans, or (b) 90% of all Participants give their written approval to the termination of the Trust. Upon termination and the payment of all expenses, any assets remaining in the Trust shall be returned to the Company.
Section 15 Definitions.
For purposes of this Trust, the following terms shall be defined as set forth below:
"Agent" shall have the meaning set forth in Section 1.06.
"Benefit Schedule" shall have the meaning set forth in Section 2.02.
"Change of Control" shall mean:
(a) a tender offer shall be made and consummated for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities,
(b) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger of consolidation;
(c) the Company shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company;
(d) any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or
(e) during the period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company (the "Board") cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
For purposes of this definition, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect).
The Company shall advise the Trustee whether or not a Change of Control has occurred. The Trustee shall be entitled to rely upon such advice, but if the Trustee receives notice of a Change of Control from another source, then the Trustee shall make its own independent determination. "Expense Account" shall have the meaning set forth in Section 3.05.
"Failure to Pay" shall mean that the circumstances described in either (i) or (ii) have occurred:
(i) Any Plan Participant shall have notified the Trustee and the Company in writing that the Company shall have failed to pay to the Participant, when due, either directly or by direction to the Trustee in accordance with the terms hereof, at least 75% of any and all amounts which the Participant was entitled to receive at any time in accordance with the terms of any Plan, the Benefit Schedule or this Trust Agreement, and that such amount remains unpaid. Such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he or she was entitled to receive under the Plans, the Benefit Schedule and this Trust Agreement. Subject to Section 2.06, the failure to make such payment shall have continued for a period of 30 days after receipt of such notice by the Trustee and by the Company, and during such 30-day period the Company shall have failed to prove, by clear and convincing evidence as determined by the Trustee in its sole and absolute discretion, that such amount was in fact paid or was not due and payable; or
(ii) More than two Plan Participants shall have notified the Trustee and
the Company in writing, either individually or jointly, that they have
not been paid, when due, amounts to which they are entitled under the
Plans, the Benefit Schedule or this Trust Agreement, and that such
amount remains unpaid. Each such notice must set forth the amount, if
any, which was paid to the Participant, and the amount which the
Participant believes he or she was entitled to receive under the
Plans, the Benefit Schedule and this Trust Agreement. Within 15 days
after receipt of each such notice, the Trustee shall determine, on a
preliminary basis, whether any failure to pay such Participants has
resulted in a failure to pay when due, directly or by direction, at
least 75% of the aggregate amount due to all Participants under all
the Plans, the Benefit Schedule and this Trust Agreement in any
two-year period, and that such amount remains unpaid. Subject to
Section 2.06, if the Trustee determines that such a failure has
occurred, then it shall so notify the Company and the Participants in
writing within the same 15-day period. Within a period of 20 days
after receipt of such notice from the Trustee, the Company shall have
failed to prove by clear and convincing evidence, in the sole and
absolute discretion of the Trustee, that such amount was paid or was
not due and payable.
"Insolvency" shall have the meaning set forth in Section 6.02.
"Liens" shall have the meaning set forth in Section 6.01
"Participant" shall mean the participants in the Plans, and any beneficiaries of any participants who are no longer then surviving.
"Plan" shall have the meaning set forth in the first WHEREAS recital.
"Proposed Change of Control" shall mean:
(a) 20 days after the commencement of a tender offer shall be made for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities (unless such tender offer shall have been withdrawn);
(b) 20 days after the commencement of solicitation of proxies or consents for a merger or consolidation with another corporation and as a result of such merger or consolidation, less than 75% of the outstanding voting securities of the surviving or resulting corporation would be owned in the aggregate by the former shareholder of the Company, other than the party and affiliates (within the meaning of the Exchange Act) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation;
(c) upon the date that the Company shall have entered into an agreement to sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company;
(d) within 20 days after any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 15% or more of the combined voting power of the Company's then outstanding securities, except for any employee benefit plan of the Company; or
(e) upon the date that individuals who, at the beginning of any period of two consecutive years, constitute the Board of Directors of the Company, cease for any reason to constitute at least 76% thereof, unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
For purposes of this definition, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect).
"Prorata Payment" shall have the meaning set forth in Section 4.01(a).
"Termination and Change in Control" shall mean the termination of the employment of a Participant for any reason whatsoever, either at the initiative of the Company or the Participant, prior to a Change in Control if there is a subsequent Change in Control, or the termination of employment of a Participant for any reason whatsoever, either at the initiative of the Company or the Participant, during the three-year period following a Change in Control.
Section 16 Miscellaneous
16.01 Company Obligation Continues. Notwithstanding any distribution made to a Participant in accordance with this Trust Agreement, the Company shall remain obligated to pay any amounts due the Participant under the Plans which have not been paid from the assets of the Trust.
16.02 Trustee Expenses. In discharging its responsibilities hereunder, the Trustee may consult with and make such inquiries of such persons, including Participants or Beneficiaries, the Company, the Agent, legal counsel, actuaries, third-party administrators or any other person the Trustee may reasonably deem necessary. Any reasonable expenses incurred by the Trustee in fulfilling its responsibilities shall be reimbursed by the Company and, to the extent not paid by the Company within a reasonable time, shall be charged to the Trust. If charged to the Trust, the expenses shall first be charged to the Expense Account and if the assets of the Expense Account are insufficient shall be prorated to Participants and Beneficiaries.
16.03 Company Waiver or Right to Contest. If the Company breaches any of its obligations hereunder to provide funds, Plans, the Benefit Schedule or information to the Trustee, the Trustee shall enforce such obligations by legal action if necessary, the Company hereby waives its right to contest any such action by the Trustee and consents to the remedy of specific performance.
16.04 Severability. Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.
16.05 ERISA Compliance. The Company hereby represents and warrants that all of the Plans have been established, maintained and administered in accordance with all applicable laws, including without limitation, ERISA.
16.06 Alienation. Benefits payable to Participants and their Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.
16.07 Counterparts. This Trust Agreement may be executed in multiple copies, each of which shall for all purposes constitute an agreement, binding on the parties, and each party hereby covenants and agrees to execute all duplicates or replacement counterparts of this Trust Agreement as may be required.
16.08 Successors and Assigns. This Trust Agreement shall be binding upon and shall inure to the benefit of the parties, their respective successors and permitted assigns, and each party agrees, on behalf of itself, and its successors and permitted assigns, to execute any instruments which may be necessary or appropriate to carry out the purpose and intention of this Trust Agreement, and hereby authorizes and directs its successors and permitted assigns to execute any and all such instruments.
16.09 Notices. Notices required hereunder shall be deemed to have been given hereunder if delivered personally, by telecopy or sent by certified mail, postage prepaid, as follows:
If to the Company: Secretary
Eaton Corporation
Eaton Center
1111 Superior Avenue
Cleveland, Ohio 44114
If to the Trustee: Mr. Joe Long
Senior Vice President
Wachovia Bank of North Carolina
100 N. Main Street
Winston-Salem, NC 27150
If to the Participants: To their addresses as they may appear on the
records of the Company or the Trustee.
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16.10 Governing Law. This Trust Agreement shall be governed by and construed in accordance with the laws of North Carolina.
Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (q) Eaton Corporation
Eaton Corporation Trust Agreement - Officers and Employees
This Trust Agreement (the "Trust Agreement") is made this 6th day of December, 1996, by and between Eaton Corporation (the "Company"), an Ohio corporation with its principal offices at Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114 and Wachovia Bank of North Carolina, N.A. (the "Trustee") with its principal office in Winston-Salem, North Carolina.
Recitals
(a) WHEREAS, the Company has adopted the nonqualified deferred compensation plans, programs and agreements as listed in Attachment A (individually a "Plan" and collectively the "Plans");
(b) WHEREAS, the Company has incurred or expects to incur liability under the terms of the Plans with respect to the Participants;
(c) WHEREAS, the Company has previously established a trust agreement (the "Prior Trust") between Eaton Corporation and National City Bank, as trustee (the "Prior Trustee") dated April 22, 1987;
(d) WHEREAS, the Prior Trust is revocable by the Company at any time prior to a change of control and the Company has determined to revoke such Prior Trust and to remove the Prior Trustee as Trustee;
(e) WHEREAS, the Board of Directors of the Company has authorized the establishment of a grantor trust to be used to fund certain deferred compensation obligations under the Plans;
(f) WHEREAS, the Company intends to contribute assets to the Trust that shall be held subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to Participants in such manner and at such times as specified in the Plans and in this Trust Agreement;
(g) WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds to assist it in satisfying its liabilities under the Plans;
(h) WHEREAS, it is the intention of the parties that the Trust shall constitute an unfunded arrangement and shall not affect the status of the Plans as unfunded plans maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974.
NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows:
Section 1 Establishment of the Trust
1.01 Appointment of Trustee. The Company hereby appoints Wachovia Bank of North Carolina, N.A., a national banking association with trust powers, to serve as Trustee for the Trust under the terms of this Trust Agreement, and the Trustee hereby accepts its appointment. The Trust shall be called the Eaton Corporation Grantor Trust Agreement dated ________________, 1996, and shall be effective on the same date.
1.02 Grantor Trust. The Trust is intended to be a grantor trust, of which the Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly.
1.03 Revocability. The Trust shall be irrevocable by the Company at any time after the first to occur of one year from the date hereof, a Change of Control or such other date as shall be mutually agreeable to the Company and the Trustee. Prior to that date, the Trust shall be unilaterally revocable by the Company.
1.04 Deposit of Trust Assets. The Company hereby deposits $1,000 with the Trustee, in trust, which shall become the initial principal of the Trust, and the Company may at any time make additional deposits with the Trustee of cash or other property in accordance with the Trust Agreement. All such deposits shall be held, administered and disposed of by the Trustee as provided in the Trust Agreement.
1.05 Use of Trust Assets. The principal of the Trust, and any earnings thereon, shall be held separate and apart from other funds of the Company and, except as otherwise expressly provided herein, shall be used exclusively for the uses and purposes of Participants, general creditors of the Company and Trust expenses, in each case as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. All rights created under the Plans and Trust shall be unsecured rights of Participants against the Company. Any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event of Insolvency, as defined herein.
1.06 Agent. At the effective date of this Trust or at such time as may be determined by the Company, the Company may designate an agent (the "Agent") for administering the Plans. The Agent may be the Trustee or a third party professional administrator familiar with deferred compensation Plans, and shall perform record keeping and administrative duties. If the Company fails to appoint an Agent, then the Company shall perform those duties. Following a Change of Control or a Failure to Pay, the Trustee shall appoint the Agent (who may have been the Agent prior to the Change of Control), and the Company may no longer perform the record keeping and administrative duties. The Trustee may be protected from acting upon advice or direction of the Agent within its area of responsibility to the same extent that it could rely upon advice or direction from the Company.
Section 2 Benefit Schedule and Plans
2.01 Plans. Within 30 days after the effective date of this Trust, the Company shall provide the Trustee with complete, current copies of the Plans. The Company shall provide the Trustee with all changes to these Plans within 30 days after such changes are effective. The Company shall also furnish the Trustee, upon the Trustee's request, such information as the Trustee shall deem necessary for its determination under Section 2.06. The Trustee is authorized to rely on the latest copy of the Plans provided to it by the Company, provided that any Plan amendments submitted to the Trustee may not be inconsistent with the plan amendment provisions of those Plans.
2.02 Benefit Schedule - Contents. The Company shall provide a schedule (the "Benefit Schedule") to the Trustee and to each Participant as it relates to that Participant, indicating (i) the amounts payable to or in respect of each Participant under each Plan, or providing formulae or instructions acceptable to the Trustee, utilizing readily determinable and objective information, for determining such amounts, (ii) the form in which such amounts are to be paid (as provided for or available under the Plans) or the method of determining such form of payment, and (iii) the timing of such payments or the method of determining such timing, (iv) Beneficiary designations for each Participant, and (v) any other information within the possession or control of the Company reasonably necessary for the Trustee to use to determine benefits under the Trust.
2.03 Benefit Schedule - When Furnished. A copy of the Benefit Schedule is
attached hereto as Attachment B and is hereby made a part of this Trust
Agreement. The Company shall provide a current version of the Benefit
Schedule (i) not later than 45 days after the end of each calendar year,
(ii) following a Proposed Change of Control and before a Change of Control,
as of the date of the Proposed Change of Control, (iii) within 45 days
after a Change of Control or a Failure to Pay, as of the date of such event
and (iv) at such other times as may in the judgment of the Company be
appropriate in view of any change in circumstances.
2.04 Amendments to Attachment A. Not later than 45 days after the end of each calendar year and at such other times as may in the judgment of the Company be appropriate, the Company shall furnish to the Trustee and to each affected Participant (as it pertains to such Participant) any amendment to Attachment A and any corresponding amendment to the Benefit Schedule required as a result of such amendment to Attachment A.
2.05 Agreement Between Company and Participant. If the Company and each Participant do not agree upon the Benefit Schedule, as it may be updated from time to time as provided in Sections 2.03 and 2.04, and any amendment to Attachment A, as the same pertains to the Participant's benefits, then the provisions of Section 2.06 shall control.
2.06 Trustee Resolves Disagreement. Upon written notification to the Trustee by the Company or any Participant of the failure of the Company and such Participant to agree as provided in Section 2.05, the Trustee shall, to the extent necessary in the sole judgment of the Trustee, (i) recompute the amount payable hereunder to any Participant, as set forth in the Benefit Schedule, and (ii) notify the Company and the Participant in writing of its computations. Thereafter, this Trust Agreement and the Benefit Schedule shall be amended to the extent of such Trustee determinations without further action; provided, however, that the failure of the Company to furnish any amendment, restatement or successor to the Plans, or compensation or other information shall in no way diminish the rights of any Participant hereunder or thereunder. If the Trustee has not completed its recomputation within 30 days after receipt of written notification of the failure of the Company and the Participant to agree, as provided above, the Trustee shall make any payments to the Participant from his or her account hereunder, in accordance with the terms hereof, based upon the Benefit Schedule which is in effect at that time. Following the recomputation, any overpayments by reason of the foregoing shall be repaid to the Trust without interest. The Trustee, however, shall have no obligation to enforce repayment of any such overpayments, nor shall it incur any liability to any party whatsoever, including without limitation any liability to the Company or to any other Participant, for having made any such overpayment. The obligation to enforce repayment of any such overpayment shall rest solely with the Company.
Section 3 Contributions to the Trust
3.01 No Company Obligation. The Company may make contributions to the Trust to provide assets for payment of benefits under the Plans at such times as it shall determine in its sole discretion as grantor. The Company shall have no obligation to make contributions to the Trust, except as otherwise expressly provided in Section 3.03.
3.02 Allocation of Contributions. At the time it makes contributions to the Trust, the Company shall identify the Plans, or the Participant Plan accounts and the Plans, for which such contributions are made and the amount contributed for each such Participant Plan account or Plan. The amounts contributed for a Plan (as contrasted with the amounts contributed for Participant Plan accounts) shall be allocated among the accounts for the Participants in the Plan in proportion to the benefits accrued thereunder prior to 1996, and in proportion to those accrued thereunder in 1996 or thereafter, as may be specified by the Company. If it is determined by the Trustee that the balance of a Participant's account for any Plan reflects Trust assets that will clearly never be required to pay benefits to the Participant, such excess assets shall be reallocated first in proportion to the balances of the separate accounts of the remaining Participants in that Plan, and after such Plan is fully funded, then in proportion to the balances of the separate accounts of the Participants in the other Plans.
3.03 Change of Control or Failure to Pay. Upon a Change of Control or a Failure to Pay as defined in clause (ii) of the definition of that term, the Company shall make a contribution to the Trust in an amount that is sufficient to fund 100% of the amount necessary to pay each Participant the benefits to which the Participant would be entitled pursuant to the terms of the Plans as of the date of the Change of Control or such Failure to Pay.
3.04 Assets Contributed. Assets contributed by the Company to the Trust must be, in the sole and absolute discretion of the Trustee, easily liquidated. Equity securities must be traded on a national securities exchange or on the NASDAQ National Market System. Debt securities must be at least "investment grade" as that term is commonly used by the debt rating agencies. Subject to the foregoing, prior to a Change of Control or a Failure to Pay, the Company may contribute equity (but not debt) securities of the Company or any affiliate. Thereafter, the Company may not contribute such securities.
3.05 Expense Account. The Company may, in its sole and absolute discretion, deliver to the Trustee from time to time assets to be allocated to an account to be used to pay Trustee administrative and other expenses not included with the Trustee's fees as contemplated by Section 11.02 ("Expense Account"). All amounts in the Expense Account, including contributions and earnings thereon, may be used only for these purposes. Notwithstanding the foregoing, upon a Change of Control or a Failure to Pay, the Company shall deliver an amount to the Trustee to be allocated to the Expense Account such that the amount in that account will then be $250,000.
Section 4 Payments to Participants
4.01 Prior to a Termination and Change of Control or a Failure to Pay. Prior to a Termination and Change of Control or a Failure to Pay:
(a) Distributions from the Trust shall be made by the Trustee to Participants only at the direction of the Company. The Company shall provide such directions annually for each Plan, and such directions (when considered together with payments to Participants by the Company from sources other than Trust assets) must provide for payments to Participants which are in accordance with the Benefit Schedule and the Plans. Such directions may not provide for distributions from a Participant's Plan account which bear a greater proportion to the total payment then being made to the Participant, than the amount in the Participant's Plan account under the Trust bears to the Plan Participant's accrued benefit under the Plan ("Prorata Payment"). If no directions are given or if the directions provide for a distribution from the Trust to a Participant which is less than a Prorata Payment, then in either case an amount necessary to achieve a Prorata Payment will be removed from the Participant's Plan account by the Trustee and reallocated amongst the accounts of all the Participants in the Plan in proportion to the balances in their respective accounts, including the Participant from whom the Trustee removed an amount in accordance with this sentence.
(b) The Company may make benefit payments pursuant to the Plans (other than distributions from the Trust) directly to Participants as the payments become due, or it may remit the amount needed for such payments to the Trustee, in which case the Trustee will make such payments. The Company shall notify the Trustee of its decision prior to the time amounts are payable to the Participant. The Company shall be responsible for all tax withholdings and reportings for payments it makes. The Trustee shall make all tax withholdings or payments from the Trust assets. Such withholdings shall be remitted to the tax authorities, or to the Company for remission to the tax authorities, as the Trustee and the Company may agree.
4.02 After a Termination and Change of Control or a Failure to Pay.
(a) Notwithstanding anything herein to the contrary, upon the occurrence of a Termination and Change in Control, the Participants shall be entitled to receive from the Trust the payments provided in Section 4.02(c).
(b) Notwithstanding anything herein to the contrary, upon the occurrence
of a Failure to Pay, each Participant covered by the situation
described in clause (i) of the definition of Failure to Pay, or each
of the Participants in the event of a situation described in clause
(ii) of that definition, as the case may be, shall be entitled to
receive from the Trust the payments as provided in Section 4.02(c).
(c) No later than the first to occur of (i) six months following the date
hereof for any person who is a Participant prior to the first of the
events described in clause (i) or (ii), (ii) a Termination and Change
in Control or a Failure to Pay for any person who is a Participant
prior to the first of the events described in clause (i) or (ii), or
(iii) the date upon which any person who is not a Participant prior to
the first to occur of the events described in (i) or (ii) becomes a
Participant, each Participant shall select one of the following
payment alternatives with respect to each Plan, and payment shall be
made to each such Participant in accordance with his or her selected
alternative as provided in Sections 4.02(a) and 4.02(b):
A lump sum payment of the full amount in the Participant's Plan account within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be;
Payment of the full amount in the Participant's Plan account in monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as selected by the Participant at the time provided in the first paragraph of this Section 4.02(c), commencing within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be, which are substantially equal in amount or in the number of share units being valued and paid or in the number of Eaton shares being distributed, except that earnings attributable to periods following Termination and Change in Control or Failure to Pay shall be included with each payment.
4.03 Tax Payments.
(a) Either before or after Termination and Change of Control or a Failure to Pay, if any Participant is determined to be subject to federal income tax on any amount to the credit of his or her account under any Plan prior to the time of actual payment hereunder, whether or not due to the establishment of or contributions to this Trust, a portion of such taxable amount equal to the taxes, including interest and penalties, owed on such taxable amount, shall be distributed by the Trustee from the Participant's Plan account to such Participant within thirty days after receipt of notice from the Participant, with a copy to the Company, setting forth the amount of such tax, interest and penalties and a certification by the Participant that such tax, interest and penalties have not otherwise been paid by the Company.
(b) For purposes of this Section 4.03, a Participant shall be deemed to pay state and local taxes at the highest marginal rate of taxation in the state in which the Participant resides or is employed (or both) where a tax is imposed, and federal income taxes at the highest marginal rate of taxation, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.
(c) An amount to the credit of a Participant's account shall be determined to be subject to federal income tax for purposes of this Section 4.03 upon the earliest of: (i) a final determination by the United States Internal Revenue Service addressed to the Participant which is not appealed to the courts; (ii) a final determination by the United States Tax Court or any other federal court affirming any such determination by the Internal Revenue Service; or (iii) an opinion by the Company's tax counsel, addressed to the Company and the Trustee, to the effect that by reason of Treasury Regulations, amendments to the Internal Revenue Code, published Internal Revenue Service rulings, court decisions or other substantial precedent, amounts to the credit of Participants hereunder are subject to federal income tax prior to payment.
(d) The Company shall undertake at its sole expense to defend any tax claims described herein which are asserted by the Internal Revenue Service against any Participant, including attorney fees and cost of appeal, and shall have the sole authority to determine whether or not to appeal any determination made by the Service or by a lower court. The Company will reimburse any Participant for any interest or penalties in respect of tax claims hereunder upon receipt of documentation of same. In consideration of such undertaking, the Participant shall notify the Company and the Trustee promptly upon receipt by such Participant of any notification or communication, whether written or oral, from any taxing authority, or any representative or agent thereof, asserting that any amounts to the credit of such Participant are subject to tax prior to payment.
(e) Any distributions from the Trust to a Participant under this Section shall be applied in accordance with the provisions of the Plans to reduce the Company's liabilities to such Participant and/or Beneficiary under the Plan and the Benefit Schedule. Such reductions shall be made on a pro-rata basis over the term of benefit payments under the Plan and Benefit Schedule. Any such reduction shall be determined by the Company prior to a Change of Control or a Failure to Pay, and by the Trustee following such events.
4.04 Distribution Limit - Benefit Schedule Pursuant to Plan. Under no circumstances shall a Participant receive a distribution which is greater than the amount then credited to the Participant's Plan account under the Trust. Payments made in accordance with the Benefit Schedule shall be deemed to be pursuant to the Plans for purposes of the Trust.
4.05 Company Obligation Continues. Notwithstanding any distribution made to a Participant in accordance with this Section 4, the Company shall remain obligated to pay any amounts due the Participant under the Plans which have not been paid from the assets of the Trust.
Section 5 Payments to the Company
Except as otherwise expressly provided in this Trust Agreement (including without limitation as provided in Section 1.03), the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all benefit payments have been made to Participants pursuant to the terms of the Plans and the Benefit Schedule. If the Trustee determines, in its sole and absolute discretion, that certain assets will clearly never be required to pay benefits to the Participants, or to pay Trust expenses, then such assets will be returned to the Company.
Section 6 Creditors and Insolvency
6.01 No Liens Created. Notwithstanding anything herein to the contrary, nothing in this Trust Agreement shall constitute a mortgage, lien, pledge, charge or security interest of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest ("Liens") with respect to any indebtedness of the Company the terms of which restrict the Company's ability to incur Liens.
6.02 Insolvency. The Trustee shall cease payment of benefits to Participants if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.
6.03 Claims of Creditors. At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below.
(a) The Board of Directors or the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing that the Company is Insolvent. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants.
(b) Unless the Trustee has actual knowledge that the Company is Insolvent, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's Insolvency.
(c) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Participants and shall hold the assets of the Trust for the benefit of the Company's general creditors as a court of competent jurisdiction may direct. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their Beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Plans or otherwise.
(d) The Trustee shall resume the payment of benefits to Participants in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent).
6.04 Resumption of Payments. If the Trustee discontinues the payment of benefits from the Trust pursuant to Section 6.02 and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants under the terms of the Plans for the period of such discontinuance, less the aggregate amount of any payments made to Participants by the Company in lieu of the payments provided for hereunder during any such period of discontinuance.
Section 7 Investment Authority
7.01 General Authority and Investment Guidelines. In no event shall any rights associated with assets of the Trust be exercisable by or rest with Participants. Except as otherwise expressly provided herein, all rights associated with assets of the Trust shall be exercised by the Trustee or the person designated by the Trustee. The Trustee shall invest and reinvest the principal and income of the Trust, without distinction between principal and income, in accordance with the investment guidelines as may be furnished by the Company from time to time prior to Termination and Change of Control or a Failure to Pay. Each Plan may have investment guidelines which are different from those of other Plans. The Company may amend, from time to time and in its sole and absolute discretion, the investment guidelines of each Plan prior to a Change of Control or a Failure to Pay. Following a Termination and Change of Control or a Failure to Pay, the Trustee is authorized, in its sole and absolute discretion, but subject to the fiduciary standards set forth below, to disregard the investment guidelines furnished to the Trustee by the Company.
7.02 Company May Appoint Investment Manager. Prior to a Termination and Change of Control or a Failure to Pay, the Company shall have the right to direct the Trustee in accordance with this Section.
(a) The Company may from time to time direct the Trustee to segregate all or any portion of the Trust assets in a separate investment account or accounts and may appoint one or more investment managers and/or an investment committee established by the Company to direct the investment and reinvestment of each such investment account or accounts. In such event, the Company shall notify the Trustee of the appointment of each such investment manager and/or investment committee. Members of the investment committee may be employees of the Company, but may not be Participants. In exercising its responsibilities hereunder, any such investment managers or investment committee shall have the same duties of loyalty and care as the Trustee would have in connection with investment of Trust assets.
(b) After the appointment of an investment manager in accordance with
Section 7.02(a), the Trustee shall make every sale or investment with
respect to such investment account as directed in writing by the
investment manager or investment committee, unless the Trustee
determines that such directions, if implemented, would not be in
accordance with the requirements of this Trust Agreement or with the
standard of conduct for a fiduciary imposed by the Employee Retirement
Income Security Act of 1974, as amended.
(c) Notwithstanding the foregoing, the Trustee, without obtaining prior approval or direction from an investment manager or investment committee, shall invest cash balances held by it from time to time in U.S. Treasury Bills, commercial paper (including such forms of commercial paper as may be available through the Trustee) which are rated _____ or higher by ______________, certificates of deposit (including certificates issued by the Trustee in its separate corporate capacity) issued by a commercial bank organized and existing under the laws of the United States or any state thereof having a combined capital of at least [$1 billion], and similar types of securities, with a maturity not to exceed one year. The Trustee shall sell such short term investments as may be necessary to carry out the instructions of an investment manager or investment committee regarding more permanent type investments and directed distributions.
(d) The Company may from time to time direct the Trustee with respect to the voting of any trust assets.
7.03 Trustee Duties and Delegation. Following a Change of Control or a Failure to Pay:
(a) In exercising its discretion to manage the investment of the Trust assets, the Trustee shall consider the needs of the Plans, the need for matching of the Trust assets with the liabilities of the Plans and the duty of the Trustee to act solely in the best interests of the Participants.
(b) The Trustee shall have the right, in its sole and absolute discretion, to delegate its investment responsibility to an investment manager who may be an affiliate of the Trustee. In the event the Trustee shall exercise this right, the Trustee shall remain, at all times responsible for the acts of an investment manager. The Trustee shall have the right, in its sole and absolute discretion to remove any such investment manager.
7.04 Company may Substitute Assets. The Company shall have the right at any time, and from time to time and in its sole and absolute discretion, to substitute assets of equal fair market value for any asset held by the Trust, provided that such assets satisfy the requirements of Section 3.04. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity.
7.05 Commingling. Subject to the investment guidelines for each Plan, the Trustee is hereby authorized to commingle any or all of the assets of the Plans for investment purposes. The Trustee, however, shall maintain the investment results separately by Plan, and the investment experience of each Plan shall be maintained and allocated to each Plan separately as earnings. The investment experience of a Plan shall not be shared with other Plans for purposes of this Trust.
7.06 Asset Rights. All rights associated with assets of the Trust shall be exercised only as expressly provided herein.
Section 8 Permissible Investments and Additional Authority
Subject to the investment guidelines while in effect in accordance with the terms of this Agreement and to the fiduciary duties of the Trustee as provided herein, the Trustee shall have the power in connection with the Trust in its sole and absolute discretion:
(a) To invest and reinvest in any readily marketable common and preferred stocks, bonds, notes, debentures and convertible stocks and securities (including any such equity securities of the Company, but not including any debt securities of the Company or any stock or security of the Trustee other than a de minimis amount held in a collective or mutual fund), certificates of deposit or demand or time deposits (including any such deposits with the Trustee) and shares of investment companies and mutual funds (including mutual funds maintained by the Trustee), without being limited to the classes or property in which the Trustee is authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of the Trust Assets;
(b) To enter into interest rate, equity and currency exchange or swap transactions, cap transactions, commodity swaps, collar transactions, interest rate options, forward foreign exchange transactions, floor transactions or any other similar transaction; provided, however, that none of such transactions may involve leveraged financial instruments, instruments bought or sold solely for the purpose of earning a profit due to changes in the market price of the instruments, or counter parties which are not major international financial institutions;
(c) To invest and reinvest all or any portion of the Trust assets collectively through the medium of any common, collective or commingled trust fund that may be established and maintained by the Trustee, subject to the instrument or instruments establishing such trust fund or funds and with the terms of such instrument or instruments, as from time to time amended, being incorporated into this Trust Agreement to the extent of the equitable share of the Trust in any such common collectively or commingled trust fund;
(d) To retain any property at any time received by the Trustee;
(e) To sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future;
(f) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by an person;
(g) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power thereto, and to pay part of the expenses and compensation thereof and any assessments levied with respect to any such property so deposited;
(h) To extend the time of payment of any obligation held by it;
(i) To hold uninvested any moneys received by it, without liability for interest thereon, but only in anticipation of payments due for investments, reinvestments, expenses or disbursements;
(j) To exercise the right to vote any securities or other property held by it, except as otherwise provided in Section 7.02(d);
(k) Solely for the benefit of Participants and subject to the provisions of any agreements relating to indebtedness of the Company existing prior to a Change of Control or a Failure to Pay, to borrow money from others, including the Company, in such amounts and for such terms as are advisable, to issue its promissory note or notes therefor, and to secure the repayment thereof by pledging any property held by it;
(1) To employ suitable contractors and counsel, who may be counsel to the Company or to the Trustee, and to pay their reasonable expenses and compensation from the Trust assets to the extent not paid by the Company;
(m) To register investments in its own name or in the name of a nominee; to hold any investment in bearer form; and to combine certificates representing securities with certificates of the same issue held by it in other fiduciary capacities or to deposit or to arrange for the deposit of such securities with any depository, even though, when so deposited, such securities may be held in the name of the nominees of such depository with other securities deposited therewith by other persons, or to deposit or to arrange for the deposit of any securities issued or guaranteed by the United States government, or any agency or instrumentality thereof, including securities evidenced by book entries rather than by certificates, with the United States Department of the Treasury or a Federal Reserve Bank, even though, when so deposited, such securities may not be held separate from securities deposited therein by other persons; provided, however, that no securities held in the Trust shall be deposited with the United States Department of the Treasury or a Federal Reserve Bank or other depository in the same account as any individual property of the Trustee, and provided, further, that the books and records of the Trustee shall at all times show that all such securities are part of the Trust assets;
(n) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust, to commence or defend suits or legal proceedings to protect any interest of the Trust, and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; provided, however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by the Company to its reasonable satisfaction against liability or expenses it might incur therefrom;
(o) To acquire, hold, retain and be the owner of any individual or group policies of life insurance, annuity contracts, and other property of any kind which policies are contributed to the Trust by the Company or are purchased by the Trustee as directed by the Company. To the extent that the Trustee is directed by the Company prior to a Change of Control or a Failure to Pay to invest part or all of the Trust assets in insurance contracts, the type and amount thereof shall be specified by the Company. The Trustee shall be under no duty to make inquiry as to the propriety of the type or amount so specified. Each insurance contract issued shall provide that the Trustee shall be the owner thereof with the power to exercise all rights, privileges, options and elections granted by or permitted under such contract or under the rules of the insurer. The exercise by the Trustee of any incidents of ownership under any contract shall, prior to a Change of Control or a Failure to Pay, be subject to the direction of the Company. The Trustee shall have all such rights, except that the Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustees, or to loan to any person the proceeds of any borrowing against an insurance policy held in the Trust. No insurer shall be deemed to be a party to the Trust and an insurer's obligations shall be measured and determined solely by the terms of contracts and other agreements executed by the insurer.
(p) To hold any other class of assets contributed by the Company that is deemed prudent by the Trustee, unless expressly prohibited herein;
(q) To form corporations or partnerships and to create trusts to hold title to any property, upon such terms and conditions as may be advisable;
(r) To hold all or part of the Trust uninvested;
(s) To sell, exchange or transfer any equity securities of the Company held by the Trust, provided that if the Trustee elects to sell, exchange or transfer any such equity securities, the Company must be offered the right of first refusal to engage in a transaction on terms at least equal to those offered the Trust in an open market transaction;
(t) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the Trust assets or the administration of the Trust, including communicating with Participants.
Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or pursuant to applicable law, Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code.
Section 9 Accounting by the Trustee
9.01 Accounting Records and Reports. The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements and all other Trust transactions. All such records shall be open to reasonable inspection and audit by the Company and by any Participant. The Trustee shall deliver written reports of its administration of the Trust setting forth for each Participant, for each Plan and for the Trust in the aggregate:
(a) For the period covered by the report, all contributions, investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold and the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately);
(b) All cash, securities and other property held at the beginning and at the end of the period covered by the report.
The Trustee shall provide such reports as follows:
(c) To the Company, covering each of the first three quarters of each calendar year, beginning with the first calendar quarter ending after the effective date of this Trust Agreement, and provided within 60 days following the close of each such quarter;
(d) To the Company and to each Participant, covering each calendar year, and provided within 60 days following the end of such year;
(e) To the Company and to each Participant, covering the period from the close of the last preceding year to the date of any resignation or removal of the Trustee, and provided within 60 days after such resignation or removal.
In the absence of the Company's filing with the Trustee of objections to any such account within 180 days after its receipt, the Company shall be deemed to have so approved such account. In such case, or upon the written approval by the Company of any such account, the Trustee shall, to the extent permitted by law, be discharged from all liability to the Company for its acts or failures to act described by such account. The foregoing, however, shall not preclude the Trustee from having its accounting settled by a court of competent jurisdiction.
9.02 Separate Participant Accounts. The Trustee shall maintain a separate account for each Participant under each Plan. The Trustee shall credit or debit each Participant's account or accounts as appropriate to reflect his or her allocable portion of the Trust assets, as such Trust assets may be adjusted from time to time pursuant to the terms of this Trust Agreement, to reflect contributions, investment earnings and losses, and distributions. All contributions to the Trust shall be allocated in accordance with the terms of this Trust Agreement. Investment earnings and losses for each Plan shall be allocated to Participants' accounts under that Plan based on the proportion which each Participant account for that Plan bears to the total of all Participant accounts for that Plan. During the period that the Trust is revocable, the Trustee and the Company shall mutually agree upon procedures to assure the proper allocation of account balances in accordance with the requirements of this Section 9.02.
Section 10 Trustee Rights, Duties and Indemnification
10.01 Duties of Loyalty and Care. Following a Change of Control or a Failure to Pay, the Trustee shall act solely in the interest of and for the benefit of the Participants under the terms of the Plans and this Trust. At all times, whether before or after a Change of Control or a Failure to Pay, the Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. The Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Plans, the Benefit Schedule or this Trust Agreement, and is given in writing by the Company.
10.02 Participant Payment Determinations. In making any determination required or permitted to be made by the Trustee concerning any distribution to Participants, the Trustee shall, in each such case, reach its own independent determination, in its absolute and sole discretion, as to the Participant's entitlement to the payment under the Plans, the Benefit Schedule and this Trust Agreement. The Company waives any right to contest any amount distributed by the Trustee hereunder pursuant to a good faith determination made by the Trustee, notwithstanding any claim by or on behalf of the Company (absent a manifest abuse of discretion by the Trustee) that such payments should not be made. The Trustee shall, to the maximum extent permitted by applicable law, be fully protected and held harmless in making such payments.
10.03 No Legal Action by Trustee. Following a Change of Control or a Failure to Pay, the Trustee agrees that it will not itself institute any action at law or at equity, whether in the nature of an accounting, interpleading action, request for a declaratory judgment or otherwise, requesting a court or administrative or quasi-judicial body to make any determination required to be made by the Trustee hereunder in the place and stead of the Trustee.
10.04 Indemnification. Unless the Trustee has been negligent or engaged in misconduct, the Company hereby indemnifies the Trustee against losses, liabilities, claims, costs and expenses (other than costs and expenses included in the standard fee schedule) incurred in connection with the administration of the Trust, including (a) liability to which the Trustee may be subjected by carrying out any directions of an investment manager (except for an affiliated investment manager appointed pursuant to Section 7.03(b)) or investment committee issued pursuant hereto, (b) liability for failure to act in the absence of directions of the investment manager (except for an affiliated investment manager appointed pursuant to Section 7.03(b)) or investment committee and (c) liability for all expenses reasonably incurred by the Trustee if it undertakes or defends any litigation arising in connection with this Trust or to protect a Participant's rights under the Plans.
10.05 Counsel. Prior to a Change of Control or Failure to Pay, the Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations hereunder. Following a Change of Control or Failure to Pay, the Trustee shall select independent legal counsel and may consult with counsel or other persons with respect to its duties and with respect to the rights of Participants under the Plans.
10.06 Agents. The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder and, provided the Trustee has not breached its duties in selecting or retaining such persons, may rely on any determinations made by such agents to the same extent as if such determinations had been made by the Trustee. The use of such persons shall not entitle the Trustee to any additional compensation to the extent that the services of such agents are included in the Trustee's standard fee schedule.
10.07 Powers. The Trustee shall have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein, except that the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulation promulgated pursuant to the Internal Revenue Code.
Section 11 Compensation and Expenses of the Trustee
11.01 Taxes. With respect to any taxes levied or assessed upon the Trust, the Trustee at the Company's expense or the Company, whichever may be elected by the Company, may contest the validity of such taxes in any manner deemed appropriate by the Company. The Company shall pay any taxes of any and all kinds whatsoever, which at any time are levied or assessed upon or become payable with respect of the Trust, the income or any property forming a part thereof, or any security transaction pertaining thereto.
To the extent that any taxes levied or assessed upon the Trust are not paid by the Company when due, the Trustee shall pay such taxes out of the Trust assets. The Trustee shall notify each Participant in writing of the failure of the Company to pay taxes.
11.02 Fees and Expenses. The Trustee shall be paid compensation by the Company in accordance with the Trustee's regular schedule of fees for trust services, as in effect from time to time, unless otherwise agreed by the Company and Trustee. The Trustee shall be reimbursed for its reasonable expenses related to management and administration of the Trust, including reasonable expenses incurred in connection with the appointment of a successor trustee, and reasonable compensation of counsel and any actuary or other agent engaged by the Trustee to assist it in such management and administration, to the extent not included in the regular schedule of fees for trust services.
11.03 Failure to Pay Fees and Expenses - Expense Account. If the Company does not pay the Trustee's fees and expenses as provided herein, then the Trustee may withdraw from the Expense Account the amounts required for payment of those fees and expenses (including taxes) to the extent there is a balance in the Expense Account. If there is an inadequate balance in the Expense Account, the Trustee may satisfy such obligation from the Trust assets and shall charge such to the appropriate Plan, or if there is no appropriate Plan, then it shall charge all Plans in proportion to the aggregate of the account balances or accrued benefits under the Plans. The Trustee shall notify all Participants or Beneficiaries of any failure by the Company to reimburse the Trust for fees and expenses payable hereunder.
Section 12 Resignation and Removal of the Trustee
12.01 Resignation. Prior to a Change of Control or a Failure to Pay, the Trustee may resign at any time by written notice to the Company, which shall be effective 90 days after receipt of such notice by the Company unless the Company and the Trustee agree otherwise. Following a Change of Control or a Failure to Pay, the Trustee may resign only after at least 90 days notice to the Company and the Participants and the effective appointment of a successor Trustee.
12.02 Removal. Prior to a Change of Control or a Failure to Pay, the Trustee may be removed by the Company with or without cause on 90 days notice or upon shorter notice acceptable to the Trustee. Subsequent to a Change of Control or a Failure to Pay, the Trustee may only be removed by the Company if both of the following conditions are satisfied:
(a) The Company shall give notice to the Trustee of its removal, the appointment of a successor Trustee and the acceptance by the successor of its appointment in writing.
(b) The Company shall then notify each Participant of the removal and designation of the successor Trustee, each Participant shall then vote for or against such action, and a majority of the Participants vote for such action.
12.03 Successor Trustee. The appointment of a successor trustee shall become effective upon agreement by it to assume the Agreement as Trustee, except that following a Change of Control or a Failure to Pay, the appointment of a successor trustee shall become effective only after the successor trustee has also been approved by a vote of the majority of all Participants.
12.04 Transfer of Assets. Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within 90 days after the effective date of the resignation or removal, unless the Company extends the time limit.
Section 13 Successor Trustee
13.01 Qualifications of Successor Trustee. Any successor Trustee must be a bank or national banking association with a market capitalization exceeding $1 billion. The successor Trustee shall have all of the rights and powers of the former Trustee. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the appointment of the successor Trustee and the transfer of Trust assets to it.
13.02 Responsibilities. The successor Trustee need not examine the records and acts of any prior Trustee. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee.
Section 14 Amendment and Termination
14.01 Amendment. During the period that this Trust Agreement is revocable, it may be amended in any respect by the Company and the Trustee. Thereafter, this Trust Agreement may be amended only if such amendment does not have an adverse effect upon the Participants and their rights hereunder or if the amendment is approved in writing by 90% of all Participants. Any permitted amendment to this Trust Agreement shall be evidenced by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no amendment shall conflict with the terms of the Plans or shall make the Trust revocable after it has become irrevocable in accordance with its terms.
14.02 Termination. The Trust shall not terminate until the first to occur of (a) the date on which Participants have received all of the benefits due to them under the terms and conditions of the Plans, or (b) 90% of all Participants give their written approval to the termination of the Trust. Upon termination and the payment of all expenses, any assets remaining in the Trust shall be returned to the Company.
Section 15 Definitions.
For purposes of this Trust, the following terms shall be defined as set forth below:
"Agent" shall have the meaning set forth in Section 1.06.
"Benefit Schedule" shall have the meaning set forth in Section 2.02.
"Change of Control" shall mean:
(a) a tender offer shall be made and consummated for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities;
(b) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger of consolidation;
(c) the Company shall sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company;
(d) any "person" (as such term is used in Sections 3(a) (9) and 13(d) (3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or
(e) during the period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company (the "Board") cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
For purposes of this definition, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d) (1) (i) of the Exchange Act (as then in effect).
The Company shall advise the Trustee whether or not a Change of Control has occurred. The Trustee shall be entitled to rely upon such advice, but if the Trustee receives notice of a Change of Control from another source, then the Trustee shall make its own independent determination.
"Expense Account" shall have the meaning set forth in Section 3.05.
"Failure to Pay" shall mean that the circumstances described in either (i) or
(ii) have occurred:
(i) Any Plan Participant shall have notified the Trustee and the Company in writing that the Company shall have failed to pay to the Participant, when due, either directly or by direction to the Trustee in accordance with the terms hereof, at least 75% of any and all amounts which the Participant was entitled to receive at any time in accordance with the terms of any Plan, the Benefit Schedule or this Trust Agreement, and that such amount remains unpaid. Such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he or she was entitled to receive under the Plans, the Benefit Schedule and this Trust Agreement. Subject to Section 2.06, the failure to make such payment shall have continued for a period of 30 days after receipt of such notice by the Trustee and by the Company, and during such 30-day period the Company shall have failed to prove, by clear and convincing evidence as determined by the Trustee in its sole and absolute discretion, that such amount was in fact paid or was not due and payable; or
(ii) More than two Plan Participants shall have notified the Trustee and
the Company in writing, either individually or jointly, that they have
not been paid, when due, amounts to which they are entitled under the
Plans, the Benefit Schedule or this Trust Agreement, and that such
amount remains unpaid. Each such notice must set forth the amount, if
any, which was paid to the Participant, and the amount which the
Participant believes he or she was entitled to receive under the
Plans, the Benefit Schedule and this Trust Agreement. Within 15 days
after receipt of each such notice, the Trustee shall determine, on a
preliminary basis, whether any failure to pay such Participants has
resulted in a failure to pay when due, directly or by direction, at
least 75% of the aggregate amount due to all Participants under all
the Plans, the Benefit Schedule and this Trust Agreement in any
two-year period, and that such amount remains unpaid. Subject to
Section 2.06, if the Trustee determines that such a failure has
occurred, then it shall so notify the Company and the Participants in
writing within the same 15 day period. Within a period of 20 days
after receipt of such notice from the Trustee, the Company shall have
failed to prove by clear and convincing evidence, in the sole and
absolute discretion of the Trustee, that such amount was paid or was
not due and payable.
"Insolvency" shall have the meaning set forth in Section 6.02.
"Liens" shall have the meaning set forth in Section 6.01.
"Participant" shall mean the participants in the Plans, and any beneficiaries of any participants who are no longer then surviving.
"Plan" shall have the meaning set forth in the first WHEREAS recital.
"Proposed Change of Control" shall mean:
(a) 20 days after the commencement of a tender offer shall be made for the ownership of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities (unless such tender offer shall have been withdrawn);
(b) 20 days after the commencement of solicitation of proxies or consents for a merger or consolidation with another corporation and as a result of such merger or consolidation, less than 75% of the outstanding voting securities of the surviving or resulting corporation would be owned in the aggregate by the former shareholder of the Company, other than the party and affiliates (within the meaning of the Exchange Act) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation;
(c) upon the date that the Company shall have entered into an agreement to sell substantially all of its assets to another corporation which is not a wholly owned subsidiary of the Company;
(d) within 20 days after any "person" (as such term is used in Sections
3(a) (9) and 13(d) (3) of the Exchange Act) becomes the beneficial
owner, directly or indirectly, of securities of the Company
representing 15% or more of the combined voting power of the Company's
then outstanding securities, except for any employee benefit plan of
the Company; or
(e) upon the date that individuals who, at the beginning of any period of two consecutive years, constitute the Board of Directors of the Company, cease for any reason to constitute at least 76% thereof, unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
For purposes of this definition, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d) (1) (i) of the Exchange Act (as then in effect).
"Prorata Payment" shall have the meaning set forth in Section 4.01(a).
"Termination and Change in Control" shall mean the termination of the employment of a Participant for any reason whatsoever, either at the initiative of the Company or the Participant, prior to a Change in Control if there is a subsequent Change in Control, or the termination of employment of a Participant for any reason whatsoever, either at the initiative of the Company or the Participant, during the three-year period following a Change in Control.
Section 16 Miscellaneous
16.01 Company Obligation Continues. Notwithstanding any distribution made to a Participant in accordance with this Trust Agreement, the Company shall remain obligated to pay any amounts due the Participant under the Plans which have not been paid from the assets of the Trust.
16.02 Trustee Expenses. In discharging its responsibilities hereunder, the Trustee may consult with and make such inquiries of such persons, including Participants or Beneficiaries, the Company, the Agent, legal counsel, actuaries, third party administrators or any other person the Trustee may reasonably deem necessary. Any reasonable expenses incurred by the Trustee in fulfilling its responsibilities shall be reimbursed by the Company and, to the extent not paid by the Company within a reasonable time, shall be charged to the Trust. If charged to the Trust, the expenses shall first be charged to the Expense Account and if the assets of the Expense Account are insufficient shall be prorated to Participants and Beneficiaries.
16.03 Company Waiver or Right to Contest. If the Company breaches any of its obligations hereunder to provide funds, Plans, the Benefit Schedule or information to the Trustee, the Trustee shall enforce such obligations by legal action if necessary, the Company hereby waives its right to contest any such action by the Trustee and consents to the remedy of specific performance.
16.04 Severability. Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.
16.05 ERISA Compliance. The Company hereby represents and warrants that all of the Plans have been established, maintained and administered in accordance with all applicable laws, including without limitation, ERISA.
16.06 Alienation. Benefits payable to Participants and their Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.
16.07 Counterparts. This Trust Agreement may be executed in multiple copies, each of which shall for all purposes constitute an agreement, binding on the parties, and each party hereby covenants and agrees to execute all duplicates or replacement counterparts of this Trust Agreement as may be required.
16.08 Successors and Assigns. This Trust Agreement shall be binding upon and shall inure to the benefit of the parties, their respective successors and permitted assigns, and each party agrees, on behalf of itself, and its successors and permitted assigns, to execute any instruments which may be necessary or appropriate to carry out the purpose and intention of this Trust Agreement, and hereby authorizes and directs its successors and permitted assigns to execute any and all such instruments.
16.09 Notices. Notices required hereunder shall be deemed to have been given hereunder if delivered personally, by telecopy or sent by certified mail, postage prepaid, as follows:
If to the Company: Secretary
Eaton Corporation
Eaton Center
1111 Superior Avenue
Cleveland, Ohio 44114
If to the Trustee: Mr. Joe Long
Senior Vice President
Wachovia Bank of North Carolina
100 N. Main Street
Winston-Salem, NC 27150
If to the Participants: To their addresses
as they may appear on the records of the
Company or the Trustee.
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16.10 Governing Law. This Trust Agreement shall be governed by and construed in accordance with the laws of North Carolina.
IN WITNESS WHEREOF, this Trust Agreement has been executed on behalf of the parties hereto on the day and year first above written.
EATON CORPORATION WACHOVIA BANK OF NORTH
CAROLINA, N.A., TRUSTEE
By: By:
------------------------- -------------------------
Its: Its:
------------------------- -------------------------
ATTEST: ATTEST:
By: By:
------------------------- -------------------------
Its: Its:
------------------------- -------------------------
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Eaton Corporation 2002 Annual Report on Form 10-K Item 15 (c) Exhibit 10 (t)
EATON CORPORATION
EXECUTIVE STRATEGIC INCENTIVE PLAN II
(Effective as of January 1, 2001)
EATON CORPORATION
EXECUTIVE STRATEGIC INCENTIVE PLAN II
1. PURPOSE
The purpose of the Executive Strategic Incentive Plan II (the "Plan") is to promote the growth and profitability of Eaton Corporation (the "Company") through the granting of incentives intended to motivate executives of the Company to achieve demanding long-term corporate objectives and to attract and retain executives of outstanding ability.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan shall be administered by the Management Compensation Committee (the "Committee") which shall consist of officers of the Company selected by the Chairman and Chief Executive Officer.
Except as otherwise expressly provided herein, the Committee shall have
complete authority to: (i) interpret all provisions of the Plan consistent
with law; (ii) designate the executives to participate under the Plan;
(iii) determine the incentive targets and performance objectives applicable
to participants; (iv) adopt, amend and rescind general and special rules
and regulations for the Plan's administration; and (v) make all other
determinations necessary or advisable for the administration of the Plan.
3. ELIGIBILITY
Any executive of the Company designated by the Committee in its sole discretion shall be eligible to participate in the Plan.
4. INCENTIVE TARGETS
(A) Establishment of Incentive Amounts and Conversion to Phantom Common Share Units
Individual Incentive Amounts for each participant with respect to each
Plan Award Period (as defined below) shall be determined by the
Committee. With respect to Award Periods beginning on or after January
1, 1998, participant incentive targets will be expressed in the form
of Phantom Common Share Units which will be determined by the
Committee by: (a) first establishing the Individual Incentive Amount
in cash for each participant with respect to each Award Period and (b)
then dividing such Individual Incentive Amount by the average of the
mean prices for the Company's common shares for the first twenty(20)
trading days of each Award Period. In all cases, the resulting Phantom
Common Share Units shall be rounded up to the nearest 50 whole units.
For purposes of the Plan, "mean price" shall be the mean of the
highest and lowest selling prices for Company common shares quoted on
the New York Stock Exchange List of Composite Transactions on the
relevant trading day. Notwithstanding the foregoing provisions of this
Section 4(A), the Committee may, in its sole discretion, use a
different method for establishing incentive targets for participants
under the Plan.
(B) Award Periods
Each Award Period shall be the four-calendar year period commencing as
of the first day of the calendar year in which the performance
objectives are established for the Award Period as described in
Section 4(C). A new Award Period shall commence as of the first day of
each calendar year, unless otherwise specified by the Committee.
(C) Establishment of Company Performance Objectives
Unless otherwise specified by the Committee, the performance objectives will be the same as those established under the Executive Strategic Incentive Plan I for the corresponding Award Periods.
As soon as practicable at the beginning of each Award Period,
threshold, target, and maximum Company performance objectives for such
Award Period shall be approved by the Committee. For Award Periods
commencing on or after January 1, 1998, unless otherwise determined by
the Committee in its sole discretion, performance objectives will be
established using a CFROGC/EPS Growth Performance Matrix which shall
use the Company's average cash flow return on gross capital ("CFROGC")
for such period along one axis and the Company's cumulative earnings
per share ("EPS") for such period along the second axis. Within sixty
(60) days after the performance objectives have been approved by the
Committee, each participant will be provided with written notice of
his or her established objectives. In its sole discretion, the
Compensation and Organization Committee of the Board ("the "C&O
Committee") may modify previously established performance objectives
due to any change in conditions, the occurrence of any events or other
factors which make such objectives unsuitable. Notwithstanding the
foregoing, after a Change in Control (as hereinafter defined), the
Committee, the C&O Committee and the Board shall have no authority to
modify performance objectives in any manner which could prove
detrimental to the interests of the Plan's participants.
(D) Determination of Payments
For each Award Period, payments ranging from 50% to 200% of the Phantom Common Share Units credited under Section 4(A) will be determined by the Committee for the attainment of performance objectives between either threshold and target or target and maximum.
For Award Periods beginning on or after January 1, 1998, Final
Individual Phantom Common Share Unit Awards shall be determined by the
Committee as promptly as practicable after the completion of the Award
Period by: (a) determining the CFROGC/EPS Growth Matrix Performance
Percentage applicable for the Award Period (equal to (i) 50% upon
attainment of the threshold performance objective; (ii) 100% upon
attainment of the target performance objective; and (iii) 200% upon
attainment of the maximum performance; or the applicable percentage
for performance between threshold and target or target and maximum);
(b) multiplying such percentage by the number of Performance Share
Units credited to the participant and (c) further multiplying the
result by an Individual Performance Rating which will be a whole
percentage between zero and 150% established by the Chairman and Chief
Executive Officer in his or her sole discretion.
The Final Individual Phantom Common Share Unit Award shall be
converted to cash at a market value of Company common shares as
determined by the Committee based on the average of the mean prices
for the Company's common shares for the final twenty (20) trading days
of the Award Period), and distributed to the participate within ninety
(90) days, unless the participant has made an irrevocable election to
defer all or part of the amount of his or her award pursuant to any
long term incentive compensation deferral plan adopted by the
Committee or the Company.
5. PRORATA PAYMENTS
A participant must be employed by the Company or one of its subsidiaries at the end of an Award Period in order to be entitled to a payment in respect to such Award Period; provided, however, that a payment, prorated for the participant's length of service during the Award Period, may be authorized by the Committee, in its sole discretion, in the event the employment of a participant terminates before the end of an Award Period due to death, permanent disability, normal or early retirement, closure or divestiture of an Eaton facility or any other reason. Notwithstanding the foregoing, upon any termination of the Plan by the Committee during the term of any Award Period, payments to all participants will be made, prorated for each participant's length of service during the Award Period prior to the date of Plan termination.
6. OTHER PROVISIONS
(A) Adjustments upon Certain Changes
In the event of changes to the structure or corporate organization of the Company's businesses which affect the participants and/or the performance prospects of the Company, the C&O Committee may make appropriate adjustments to individual participant Incentive Targets or to the established performance objectives for incomplete Award Periods. Adjustments under this Section 6 shall be made by the C&O Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. Notwithstanding the foregoing, after a Change in Control, the Committee, the Board and the C&O Committee shall have no authority to change established Performance Objectives in any manner which could prove detrimental to the interests of the participant.
(B) Change in Control Defined
For purposes of the Plan, a Change in Control shall be deemed to have occurred if:
(i) a tender offer shall be made and consummated for the ownership of 25% or more of the outstanding voting securities of the Company,
(ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company as the same shall have existed immediately prior to such merger or consolidation,
(iii) the Company shall sell substantially all of its assets to another corporation which is not a wholly-owned subsidiary of the Company,
(iv) a "person" within the meaning of Section 3(a)(9) or of Section 13(d)(3) of the Securities Exchange Act of 1934 (as in effect on the effective date of the Plan) shall acquire 25% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record). For purposes of the Plan, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(I) under the Securities Exchange Act of 1934 (as in effect on the effective date of the Plan), or
(v) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof unless the election, or nomination for election by the Company's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
(C) Non-Transferability
No right to payment under the Plan shall be subject to debts, contract liabilities, engagements or torts of the participant, nor to transfer, anticipation, alienation, sale, assignment, pledge or encumbrance by the participant except by will or the law of descent and distribution or pursuant to a qualified domestic relations order.
(D) Compliance with Law and Approval of Regulatory Bodies
No payment shall be made under the Plan except in compliance with all applicable federal and state laws and regulations including, without limitation, compliance with tax requirements.
(E) No Right to Employment
Neither the adoption of the Plan nor its operation, nor any document describing or referring to the Plan, or any part thereof, shall confer upon any participant under the Plan any right to continue in the employ of the Company or any subsidiary, or shall in any way affect the right and power of the Company or any subsidiary to terminate the employment of any participant under the Plan at any time with or without assigning a reason therefore, to the same extent as the Company might have done if the Plan had not been adopted.
(F) Interpretation of the Plan
Headings are given to the sections of the Plan solely as a convenience to facilitate reference; such headings, numbering and paragraphing shall not in any case be deemed in any way material or relevant to the construction of the Plan or any provisions thereof. The use of the masculine gender shall also include within its meaning the feminine. The use of the singular shall also include within its meaning the plural and vice versa.
(G) Amendment and Termination
The Committee may at any time suspend, amend or terminate the Plan. Notwithstanding the foregoing, upon the occurrence of a Change in Control, no amendment, suspension or termination of the Plan shall, without the consent of the participant, alter or impair any rights or obligations under the Plan with respect to such participant.
(H) Effective Dates of the Plan
The effective date of the Plan shall be January 1, 2001.
Eaton Corporation 2002 Annual Report on Form 10-K Item 15(c) Exhibit 12 Ratio of Earnings to Fixed Charges
Year ended December 31
-----------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Income from continuing operations before
income taxes & extraordinary item $399 $278 $552 $943 $616
Adjustments
Minority interests in
consolidated subsidiaries 14 8 8 2 (2)
Income of equity investees (1) 0 (1) (1) (1)
Interest expensed 110 149 182 159 93
Amortization of debt issue costs 2 1 1 0 0
Estimated portion of rent expense
representing interest 34 38 39 36 28
Amortization of capitalized interest 13 13 10 8 7
Distributed income of equity
investees 0 0 1 0 1
---- ---- ---- ------ ----
Adjusted income from continuing
operations before income taxes &
extraordinary item $571 $487 $792 $1,147 $742
==== ==== ==== ====== ====
Fixed charges
Interest expensed $110 $149 $182 $ 159 $ 93
Interest capitalized 8 12 22 21 16
Amortization of debt issue costs 2 1 1 0 0
Estimated portion of rent
representing interest 34 38 39 36 28
---- ---- ---- ------ ----
Total fixed charges $154 $200 $244 $216 $137
==== ==== ==== ====== ====
Ratio of earnings to fixed charges 3.71 2.44 3.25 5.31 5.42
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Income from continuing operations before income taxes & extraordinary item for years before 2002 includes amortization expense related to goodwill and other intangible assets. Upon adoption of Statement of Financial Accounting Standard No. 142 on January 1, 2002 the Company ceased amortization of goodwill and indefinite life intangible assets.
Eaton Corporation 2002 Annual Report on Form 10-K Item 15(c) Exhibit 21 Subsidiaries of Eaton Corporation
Eaton is publicly held and has no parent corporation. Eaton's subsidiaries as of December 31, 2002 and the state or country in which each was organized are as follows:
Consolidated subsidiaries (A) Where Organized ----------------------------- --------------- Vorad Safety Systems, Inc. California Aeroquip International Inc. Delaware Cutler-Hammer de Puerto Rico Inc. Delaware Cutler-Hammer Inc. Delaware Integrated Partial Discharge Diagnostics, Inc. Delaware Eaton Administration Corporation Delaware Eaton Aerospace LLC Delaware Eaton ESC Holding Company Delaware Eaton International Corporation Delaware Eaton Truck Systems, Inc. Delaware Eaton USEV Holding Company Delaware Eaton VORAD Technologies, L.L.C. Delaware ERC Corporation Delaware ERC II Corporation Delaware IVHS Technologies, Inc. Delaware Modern Molded Products, Inc. Delaware Kate Patrick Mfg. Inc. Delaware Kelmac Grip, L.P. Delaware Eaton Hydraulics Inc. Delaware Vickers International Inc. Delaware Eaton Asia Investments Corporation Maryland Eaton Aeroquip Inc. Michigan Aeroquip Inoac Company Michigan CAPCO Automotive Products Corporation Michigan G.T. Products, Inc. Michigan Eaton Technologies, Inc. North Carolina Aeroquip-Vickers, Inc. Ohio Cutler-Hammer IDT, Inc. Ohio Eaton Leasing Corporation Ohio Eaton MDH Co. Inc. Ohio Eaton MDH Limited Partnership Ohio Eaton Properties Corporation Ohio U.S. Engine Valve Ohio Eaton S.A. Argentina Vickers Systems Pty. Ltd. Australia Cutler-Hammer Controls Pty. Ltd. Australia Eaton Finance Pty. Ltd. Australia Eaton Finance G.P. Australia Eaton Pty. Ltd. Australia Eaton Specialty Controls Pty. Ltd. Australia Eaton Industries Pty. Ltd. Australia Eaton Holding G.m.b.H. Austria A-VIC Limited Barbados Aeroquip Ltd. Barbados Aeroquip-Vickers Assurance Ltd. Barbados Eaton Holding Limited Barbados Eaton Services Limited Barbados Saturn Insurance Company Ltd. Bermuda Islands Aeroquip do Brasil S.A. Brazil Eaton Ltda. Brazil Eaton Truck Components Ltda. Brazil Vicco Participacoes Ltda. Brazil |
Vickers do Brasil Ltda. Brazil Cutler-Hammer do Brasil Servicos Ltda. Brazil Aeroquip-Vickers Canada Inc. Canada Eaton ETN Offshore Ltd. Canada Eaton Yale Ltd. Canada Cutler-Hammer Company Cayman Islands Eaton Holding I Limited Cayman Islands Eaton Holding II Limited Cayman Islands Eaton Holding III Limited Cayman Islands Eaton Vickers Hydraulics (Shanghai) Co., Ltd. China Eaton Truck and Bus Components Company (Shanghai) Ltd. China Eaton China Investments Co., Ltd. China Jining Eaton Hydraulics Company Ltd. China Shanghai Eaton Engine Components Company, Ltd. China Cutler-Hammer (Suzhou) Electric Co., Ltd. China Eaton Controles Industriales S.A. Costa Rica Eaton Industries s.r.o. Czech Republic Cutler-Hammer, S.A. Dominican Republic Aeroquip-Vickers S.A. France Eaton Technologies S.A. France Aeroquip Wolfsburg Verwaltungs G.m.b.H. Germany Aeroquip-Vickers International G.m.b.H. Germany Eaton Automotive G.m.b.H. Germany Eaton Controls G.m.b.H. & Co. K.G. Germany Eaton Holding G.m.b.H. Germany Eaton Fluid Power G.m.b.H. Germany Eaton Limited Hong Kong Vickers Systems Limited Hong Kong Eaton Industries Private Ltd. India Vickers Systems International Ltd. India Eaton Automotive Ltd. Ireland Eaton Automotive Srl Italy Eaton Srl Italy Eaton Fluid Power Srl Italy Eaton Fluid Power Limited Japan Eaton Japan Co., Ltd. Japan SEH Engineering and Services Co. Japan Vickers Systems Sdn. Bhd. Malaysia Cutler-Hammer Controls Sdn. Bhd. Malaysia ETN Asia International Limited Mauritius Aeroquip de Mexico S.A. de C.V. Mexico Aeroquip Servicios S.A. de C.V. Mexico Controladora Aeroquip-Vickers de Mexico S.A. de C.V. Mexico Cutler-Hammer Mexicana, S.A. Mexico Eaton Controls, S. de R.L. de C.V. Mexico Eaton Molded Products S. de R.L. de C.V. Mexico Eaton Truck Components, S. de R.L. de C.V. Mexico Operaciones de Maquila de Juarez S. de R.L. de C.V. Mexico Eaton Finance, S. de R.L. de C.V. Mexico Eaton s.a.m. Monaco Eaton Automotive B.V. Netherlands Eaton B.V. Netherlands Eaton C.V. Netherlands Eaton Holding B.V. Netherlands Eaton Holding International I B.V. Netherlands Eaton International B.V. Netherlands IKU Holding Montfoort B.V. Netherlands Eaton Finance B.V. Netherlands Hydrowa B.V. Netherlands Eaton Holding I B.V. Netherlands Eaton Holding II B.V. Netherlands Eaton Finance N.V. Netherlands Antilles Vickers Systems Limited New Zealand Aeroquip-Vickers International Inc. Panama |
Cutler-Hammer Asia Corporation Philippines Eaton Automotive Spolka z o.o. Poland Eaton Truck Components S.A. Poland Aeroquip Singapore Pte. Limited Singapore Aeroquip-Vickers Pte. Ltd. Singapore Cutler-Hammer Pte. Ltd. Singapore Vickers Systems Asia Pacific Pte. Ltd. Singapore Aeroquip South Africa (Pty.) Ltd. South Africa Eaton Truck Components (Pty) Limited South Africa Eaton Automotive Controls Limited South Korea Eaton Limited South Korea Aeroquip Iberica S.A. Spain Eaton S.A. Spain Productos Eaton Livia S.A. Spain Vickers Systems AB Sweden Aeroquip A.G. Switzerland Eaton SA Switzerland Eaton Limited - Taiwan Taiwan Modern Molded Products Limited Taiwan Eaton Technologies Limited Thailand Rubberon Technology Corporation Limited Thailand Aeroquip-Vickers Limited United Kingdom Cutler-Hammer Europa Pension Trustees Ltd. United Kingdom Eaton Holding Limited United Kingdom Eaton Limited United Kingdom Eaton Shared Services Limited United Kingdom Cutler-Hammer de Venezuela S.A. Venezuela |
(A) Other Eaton subsidiaries, many inactive, are not listed above. If considered in the aggregate, they would not be material.
Eaton Corporation 2002 Annual Report on Form 10-K Item 15(c) Exhibit 23 Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration Statements and related Prospectuses of our report dated January 20, 2003, with respect to the consolidated financial statements of Eaton Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2002.
Registration
Number Description Filing Date
------------ ----------- -----------
333-97365 Eaton Corporation Incentive Compensation
Deferral Plan - Form S-8 Registration Statement July 30, 2002
333-97373 Cutler-Hammer de Puerto Rico Inc. Retirement
Savings Plan - Form S-8 Registration Statement July 30, 2002
333-97371 Eaton Corporation 2002 Stock Plan - Form S-8
Registration Statement July 30, 2002
333-43876 Eaton Corporation 401(k) Savings Plan - Form
S-8 Registration Statement - 500,000 Shares August 16, 2000
333-35946 Deferred Incentive Compensation Plan - Form
S-8 Registration Statement - 375,000 Shares May 1, 2000
333-86389 Eaton Corporation Executive Strategic Incentive
Plan - Form S-8 Registration Statement Sept. 2, 1999
333-77245 Eaton Corporation 401(k) Savings Plan -
Form S-8 Registration Statement April 28, 1999
333-77243 Eaton Corporation Share Purchase and Investment
Plan - Form S-8 Registration Statement April 28, 1999
333-74355 Eaton Corporation $1,400,000,000 of Debt
Securities, Debt Warrants, Common Shares and
Preferred Shares - Form S-3 Registration
Statement (Including Post-Effective Amendment
No. 1 filed on April 23, 1999 and Amendment
No. 2 filed on May 11, 1999) March 12, 1999
333-62375 Eaton Corporation 1998 Stock Plan -
Form S-8 Registration Statement August 27, 1998
333-62373 Eaton Holding Limited U.K. Savings - Related
Share Option Scheme [1998] - Form S-8
Registration Statement August 27, 1998
333-46861 Eaton Limited U.K. Savings-Related Share
Option Scheme [1991] - Form S-8 Registration
Statement Feb. 25, 1998
333-45575 Eaton Limited U.K. Savings-Related Share Option
Scheme [1991] - Form S-8 Registration Statement Feb. 4, 1998
333-35697 Cutler-Hammer de Puerto Rico Company Retirement
Savings Plan - Form S-8 Registration Statement Sept. 16, 1997
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333-28869 Eaton 401(k) Savings Plan and Trust -
Form S-8 Registration Statement June 10, 1997
333-25693 Eaton Corporation Shareholder Dividend Reinvest-
ment Plan - Form S-3 Registration Statement April 23, 1997
333-23539 Eaton Non-Employee Director Fee Deferral Plan -
Form S-8 Registration Statement March 18, 1997
333-22597 Eaton Incentive Compensation Deferral Plan -
Form S-8 Registration Statement March 13, 1997
333-03599 Eaton Corporation Share Purchase and Investment
Plan - Form S-8 Registration Statement May 13, 1996
333-01365 Eaton Corporation Incentive Compensation Deferral
Plan - Form S-3 Registration Statement March 1, 1996
33-64201 Eaton Corporation $120,837,500 of Debt Securities
and Debt Warrants - Form S-3 Registration
Statement Nov. 14, 1995
33-60907 Eaton 1995 Stock Plan - Form S-8 Registration
Statement July 7, 1995
33-52333 Eaton Corporation $600,000,000 of Debt Securities,
Debt Warrants, Common Shares and Preferred
Shares - Form S-3 Registration Statement Feb. 18, 1994
33-49779 Eaton Limited U.K. Savings-Related Share Option
Scheme [1991] - Form S-8 Registration Statement July 16, 1993
33-49393& Eaton Corporation Stock Option Plans - Form S-8
33-12842 Registration Statement March 9, 1993
33-15582 Eaton Limited U.K. Savings-Related Share Option
Scheme - Form S-8 Registration Statement July 7, 1987
/s/ Ernst & Young LLP
---------------------
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Cleveland, Ohio
March 21, 2003
Eaton Corporation 2002 Annual Report on Form 10-K Item 15(c) Exhibit 24
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS: That each person whose name is signed below has made, constituted and appointed, and by this instrument does make, constitute and appoint, Richard H. Fearon, Billie K. Rawot or William J. Nowak his or her true and lawful attorney, for him or her and in his or her name, place and stead to subscribe, as attorney-in-fact, his or her signature as Director or Officer or both, as the case may be, of Eaton Corporation, an Ohio corporation, to its Annual Report on Form 10-K for the year ended December 31, 2002 pursuant to the Securities Exchange Act of 1934, and to any and all amendments to that Annual Report, hereby giving and granting unto each such attorney-in-fact full power and authority to do and perform every act and thing whatsoever necessary to be done in the premises, as fully as he or she might or could do if personally present, hereby ratifying and confirming all that each such attorney-in-fact shall lawfully do or cause to be done by virtue hereof.
This Power of Attorney shall not apply to any Annual Report on Form 10-K or amendment thereto filed after December 31, 2003.
IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland, Ohio this 26th day of February 2003.
/s/ Alexander M. Cutler /s/ Richard H. Fearon ------------------------------------- ------------------------------- Alexander M. Cutler, Chairman Richard H. Fearon, and Chief Executive Officer; Executive Vice President--Chief President; Principal Executive Financial and Planning Officer; Officer; Director Principal Financial Officer /s/ Billie K. Rawot /s/ Michael J. Critelli ------------------------------ ----------------------------- Billie K. Rawot, Michael J. Critelli, Director Vice President and Controller; Principal Accounting Officer /s/ Ernie Green /s/ Ned C. Lautenbach --------------------- --------------------------- Ernie Green, Director Ned C. Lautenbach, Director /s/ Deborah L. McCoy /s/ John R. Miller -------------------------- ------------------------ Deborah L. McCoy, Director John R. Miller, Director /s/ Furman C. Moseley /s/ Victor A. Pelson --------------------------- -------------------------- Furman C. Moseley, Director Victor A. Pelson, Director /s/ Gary L. Tooker ------------------------ Gary L. Tooker, Director |