<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 23, 1994
REGISTRATION NO. 33-52333
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
PRE-EFFECTIVE
AMENDMENT
NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
Under The Securities Act of 1933
------------------
EATON CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
OHIO 34-0196300
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114-2584, (216) 523-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
E. R. FRANKLIN, Secretary
Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114-2584, (216) 523-4103
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
Copies to:
ARNE HOVDESVEN, Esq.
Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022, (212)
848-4000
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
From time to time after the effective date of this Registration Statement.
------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / / If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. /X/
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE> 2
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securites in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED FEBRUARY 23, 1994
- --------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
(To Prospectus dated , 1994)
- --------------------------------------------------------------------------------
3,500,000 Shares
Common Shares
($.50 par value)
------------------
Of the 3,500,000 common shares, par value $.50 per share (the "Common Shares"),
of Eaton Corporation ("Eaton" or the "Company") being offered hereby (the
"Offered Shares"), 2,800,000 shares (the "U.S. Shares") are being
offered in the United States and Canada by the U.S. Underwriters (the
"U.S. Offering") and 700,000 shares (the "International Shares") are
being concurrently offered outside the United States and Canada
by the Managers (the "International Offering" and, together
with the U.S. Offering, the "Offerings"). The price to
public and the underwriting discount per share are
identical for the Offerings. See "Underwriting".
The Common Shares of Eaton Corporation are listed on the New York Stock Exchange
under the symbol "ETN". On February 22, 1994, the last reported sale price of
the Common Shares on the New York Stock Exchange Composite
Transactions Tape was $58 1/2 per share.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount Company(1)
- ---------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ---------------------------------------------
Total(2) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Before deduction of expenses payable by the Company estimated at
$ .
(2) The Company has granted the U.S. Underwriters and Managers an option,
exercisable by the representatives of the U.S. Underwriters for 30 days from
the date of the public offering of the Common Shares offered hereby, to
purchase a maximum of 525,000 additional Common Shares, in the aggregate,
solely to cover over-allotments, if any. If the option is exercised in full,
the total Price to Public will be $ , Underwriting Discount will be
$ and Proceeds to Company will be $ . See "Underwriting".
------------------
The U.S. Shares are offered by the several U.S. Underwriters when, as and
if issued by the Company, delivered to and accepted by the U.S. Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
the Common Shares will be ready for delivery on or about , 1994.
CS First Boston
Lehman Brothers
Merrill Lynch & Co.
- --------------------------------------------------------------------------------
The date of this Prospectus Supplement is , 1994
<PAGE> 3
IN CONNECTION WITH THE OFFERINGS, CS FIRST BOSTON CORPORATION ON BEHALF OF
THE U.S. UNDERWRITERS AND THE MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS
WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES AT A LEVEL
ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS
MAY BE EFFECTED ON THE NEW YORK, PACIFIC, LONDON OR CHICAGO STOCK EXCHANGES, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE> 4
PROSPECTUS SUPPLEMENT SUMMARY
The following information is qualified in its entirety by the detailed
information and financial statements found elsewhere in this Prospectus
Supplement and in the accompanying Prospectus including the documents
incorporated herein by reference. Unless otherwise indicated, the information
contained in this Prospectus Supplement assumes that the U.S. Underwriters' and
Managers' over-allotment option is not exercised.
THE COMPANY
Eaton Corporation ("Eaton" or the "Company") is a leading global
manufacturer of vehicle powertrain components and a broad variety of controls
serving the transportation, industrial, commercial, aerospace and military
markets. The Company offers high-quality products worldwide and derives a
significant majority of its net sales from products that are number one or
number two in the markets that they serve. Principal products include truck
transmissions and axles, engine components, industrial and commercial controls,
automotive and appliance controls and specialty controls. Eaton's products are
often essential components of a variety of final products ranging from heavy
duty trucks and home appliances to the Space Shuttle. The Company currently has
approximately 150 manufacturing facilities in 20 countries.
Vehicle Components. Eaton occupies a strong competitive position in the
vehicle components market and is considered a market leader in many of its
product lines. Eaton's vehicle component product lines include truck components
(34% of 1993 net sales), passenger car components (12% of 1993 net sales) and
off-highway vehicle components (7% of 1993 net sales). Major customers for
Eaton's vehicle components are original equipment manufacturers of trucks,
passenger cars and off-highway vehicles.
Electrical and Electronic Controls. Eaton is a market leader in the
manufacture of electrical and electronic controls, holding the number one or
number two domestic market positions with the majority of its core products. The
Company's product lines include industrial and commercial controls (18% of 1993
net sales), automotive and appliance controls (17% of 1993 net sales) and
specialty controls (8% of 1993 net sales). Eaton markets its electrical and
electronic control products to commercial, industrial, automotive, appliance,
aerospace and government customers.
Defense Systems. Eaton manufactures defense electronics systems (4% of 1993
net sales). Eaton's defense product line includes strategic countermeasures,
tactical jamming systems, electronic intelligence systems and electronic support
measures.
Recent Acquisition. On January 31, 1994, the Company completed the
acquisition of Westinghouse Electric Corporation's Distribution and Control
Business Unit ("DCBU") for $1.1 billion in cash plus the assumption of certain
liabilities. DCBU is a manufacturer and distributor of electrical distribution
and control equipment. In 1993, DCBU had total sales of $1.1 billion. This
addition to the electrical and electronic controls segment of Eaton's business
is expected to increase that segment's share to more than one-half of Eaton's
consolidated net sales, thereby expanding the end-market diversification of
Eaton's sales and lessening its dependence on the truck and automotive markets.
See "Recent Developments -- Acquisition of DCBU".
S-3
<PAGE> 5
THE OFFERINGS
<TABLE>
<S> <C>
Securities Offered................... Common Shares, par value $.50 per share
Common Shares Offered by the
Company:...........................
U.S. Offering...................... 2,800,000
International Offering............. 700,000
Total........................... 3,500,000
Common Shares to be Outstanding after
the Offerings......................
Dividends on Common Shares........... The Company is currently paying quarterly cash
dividends of $.30 per share on its Common Shares. See
"Market Price of Common Shares and Dividends".
Use of Proceeds...................... To repay a portion of the debt incurred in connection
with the acquisition of DCBU. See "Use of Proceeds".
New York Stock Exchange Symbol....... ETN
</TABLE>
S-4
<PAGE> 6
THE COMPANY
Eaton Corporation ("Eaton" or the "Company") is a leading global
manufacturer of vehicle powertrain components and a broad variety of controls
serving the transportation, industrial, commercial, aerospace and military
markets. The Company offers high-quality products worldwide and derives a
significant majority of its net sales from products that are number one or
number two in the markets that they serve. Principal products include truck
transmissions and axles, engine components, industrial and commercial controls,
automotive and appliance controls and specialty controls. Eaton's products are
often essential components of a variety of final products ranging from heavy
duty trucks and home appliances to the Space Shuttle. Eaton maintains and
expands its market positions by focusing on the development and production of
high-quality, higher value-added products and by investing in superior product
and process technologies. The Company currently has approximately 150
manufacturing facilities in 20 countries.
On January 31, 1994, the Company completed the acquisition of Westinghouse
Electric Corporation's Distribution and Control Business Unit ("DCBU") for $1.1
billion in cash plus the assumption of certain liabilities. DCBU is a
manufacturer and distributor of electrical distribution and control equipment.
In 1993, DCBU had total sales of $1.1 billion. This addition to the electrical
and electronic controls segment of Eaton's business is expected to increase that
segment's share to more than one-half of Eaton's consolidated net sales, thereby
expanding the end-market diversification of Eaton's sales and lessening its
dependence on the truck and automotive markets. See "Recent Developments --
Acquisition of DCBU".
VEHICLE COMPONENTS
Eaton occupies a strong competitive position in the vehicle components
market and is considered a market leader in many of its product lines. Eaton's
vehicle component product lines include truck components (34% of 1993 net
sales), passenger car components (12% of 1993 net sales) and off-highway vehicle
components (7% of 1993 net sales). Major customers for Eaton's vehicle
components are original equipment manufacturers ("OEMs") of trucks, passenger
cars and off-highway vehicles.
Truck Components -- The Company manufactures over 100 models of medium-and
heavy-duty truck transmissions. The Company is the leading manufacturer of
manual transmissions for heavy-duty trucks. The market for heavy-duty truck
transmissions is affected significantly by the overall level of economic
activity. In 1993, North American heavy-duty truck production totaled 188,000
units, which was up from 130,000 units in 1992. The Company also manufactures
axles, brakes and engine valves for trucks, leaf springs for light trucks, sport
utility vehicles and vans, and other truck components.
Passenger Car Components -- The Company manufactures engine valves,
hydraulic valve lifters, viscous fan drives, fans and fan shrouds, locking
differentials, superchargers, tire valves and other passenger car components.
Off-Highway Vehicle Components -- Eaton products are also used on farm
tractors, backhoes, pavers, excavators, grain combines, drill rigs, garden
tractors and riding mowers. These products include low-speed, high-torque
motors, light-, medium-and heavy-duty hydrostatic transmissions, hydrostatic
power steering units, a variety of hydraulic pumps, motors, valves and cylinders
and a family of hydrostatic transaxles.
ELECTRICAL AND ELECTRONIC CONTROLS
Eaton is a market leader in the manufacture of electrical and electronic
controls, holding number one or number two domestic market positions with the
majority of its core products. The Company's product lines include industrial
and commercial controls (18% of 1993 net sales), automotive and appliance
controls (17% of 1993 net sales) and specialty controls (8% of 1993 net sales).
Eaton markets its electrical and electronic control products to commercial,
industrial, automotive, appliance, aerospace and government customers.
Industrial and Commercial Controls -- Eaton offers a wide range of products
under the Cutler-Hammer, Westinghouse and Challenger brand names to control the
distribution of electric power and to protect and govern electric motors. As a
consequence of the DCBU acquisition, Eaton now holds a leadership position in
the power distribution industry. Eaton's power distribution products include
circuit breakers, loadcenters, safety switches, panelboards and switchboards.
These products serve residential, light commercial and
S-5
<PAGE> 7
industrial construction markets. For industrial control markets, Eaton products
include contactors, overload relays, pushbuttons, sensors, variable speed
drives, electronic operator interface devices, industrial workstations, count
controls and logic products. Switches and controls are used on portable power
tools, communication equipment, medical tools, computer equipment and
construction and agricultural machinery. Eaton also supplies switches, controls
and other products used on commercial and military aircraft and ships.
These control products are sold through a network of over 1,500 independent
distributors. The acquisition of DCBU has broadened significantly Eaton's
electrical and electronic control product lines and distribution network. See
"Recent Developments -- Acquisition of DCBU".
Automotive and Appliance Controls -- Eaton is a supplier of control
products for two large markets -- vehicle manufacturers and appliance makers.
Eaton has a comprehensive line of switches which are sold to major global
automobile manufacturers. Other vehicle products include steering column control
switches and speed control and climate control components. Appliance controls
include electronic and electro-mechanical control products, including timers,
water valves and pressure switches. Timers control cycles on clothes washers,
dryers and dishwashers; water valves regulate flow into clothes washers,
dishwashers, refrigerator water dispensers and icemakers; and pressure switches
govern water levels in clothes washers. Eaton also offers controls for ranges
and other cooking appliances.
Specialty Controls -- The major products of this segment are Eaton-Kenway
automated materials handling systems and semiconductor manufacturing equipment,
primarily ion implanters. Eaton offers a complete line of ion implanters which
are used by major semiconductor manufacturers to make microprocessors for a wide
variety of products. Other products included within this segment are golf grips,
engineered fasteners and industrial clutches and brakes.
DEFENSE SYSTEMS
Eaton manufactures defense electronics systems (4% of 1993 net sales).
Eaton's defense product line includes strategic countermeasures, tactical
jamming systems, electronic intelligence systems and electronic support
measures.
The Company's principal executive office is located at Eaton Center, 1111
Superior Avenue, Cleveland, Ohio 44114-2584; telephone (216) 523-5000.
RECENT DEVELOPMENTS
ACQUISITION OF DCBU
On January 31, 1994, the Company completed the acquisition of DCBU, a
leader in the U.S. electrical distribution industry and in niche industrial
control market segments. In 1993, DCBU had total sales of $1.1 billion. Like
Eaton, DCBU holds number one or number two market positions with the majority of
its core products. In addition, DCBU is a specified and often sole-source
supplier to most major electrical OEMs. Its full line of products and over one
half of a century of operations have led to one of the largest installed product
bases in the industry.
The purchase price of DCBU was $1.1 billion in cash plus the assumption of
certain liabilities and is subject to adjustment based upon changes in DCBU's
net assets since the acquisition agreement was signed. The purchase price of
DCBU was initially financed through the liquidation of $170 million of
short-term investments and the issuance of $930 million of commercial paper
backed by the Company's revolving credit facilities. See "Use of Proceeds".
Simultaneously with the closing, the Company sold certain DCBU and Eaton assets
representing $41 million of 1993 annual sales to satisfy government antitrust
concerns.
The Company is combining DCBU with its Industrial Control and Power
Distribution Operations ("ICPDO") to create a business unit which would have had
1993 sales of approximately $1.6 billion and which is now called Cutler-Hammer.
As a result, this addition to the electrical and electronic controls segment of
Eaton's business is expected to increase that segment's share to more than
one-half of Eaton's consolidated net sales, thereby expanding the end-market
diversification of Eaton's sales and lessening its dependence on the truck and
automotive markets.
S-6
<PAGE> 8
DCBU and its predecessor organizations have manufactured and marketed
electrical distribution equipment and industrial control products for over 60
years. Prior to the acquisition, DCBU was organized into four divisions:
- The Electrical Components Division ("ECD") manufactures a broad range of
circuit protection and motor control components for use in electrical
assemblies manufactured by other DCBU units as well as for sale to
electrical OEMs and construction, industrial and utility customers.
Principal electrical distribution products of ECD include circuit
breakers, vacuum interrupters, power fuses and automatic transfer
switches. Principal industrial control products include motor starters,
pilot and logic devices and solid-state motor controls. ECD comprised
approximately 25% of 1993 DCBU net sales.
- The Construction Equipment Division ("CED") manufactures electrical
distribution and control assemblies which incorporate DCBU's advanced
circuit breakers and control components for construction, industrial and
utility customers. Principal electrical distribution products of CED
include panelboards, switchboards, switchgear and busway. Principal
industrial control products include enclosed controls, motor control
centers and medium voltage control products. CED comprised approximately
39% of 1993 DCBU net sales.
- Challenger Electrical Equipment Corp. ("Challenger"), which was acquired
by Westinghouse in 1987, manufactures and markets electrical components
and assemblies for residential and light commercial markets. Challenger's
primary products include loadcenters, multiple metering products, safety
switches and outlet boxes. Challenger comprised approximately 22% of 1993
DCBU net sales.
- The International Operations Division serves as a manufacturing or
marketing channel for DCBU products to the world market. Principal
international operations are located in Canada, Brazil, Venezuela and the
United Kingdom. This division comprised approximately 14% of 1993 DCBU
net sales.
DCBU utilizes 75 plants and warehouses in the United States, Puerto Rico,
Central and South America, Canada, and the United Kingdom and has approximately
12,500 employees.
The combination of DCBU with the Company's existing ICPDO business will
strengthen Eaton's competitive position and provide the opportunity for
significant cost savings resulting from the complementary fit of the two
businesses. Management intends to achieve substantial efficiencies by combining
these two operations. The Company has a comprehensive integration plan which is
focused on the rationalization of product lines and manufacturing operations,
the integration of sales and distribution functions and the reduction of
administrative expenses. Significant duplication of capacity exists between DCBU
and ICPDO. The combined operations have a total of 97 plants and warehouses. The
Company has a substantial consolidation program which includes plant closures
over the next few years. In 1994, it intends to close eight facilities and to
relocate several product lines, affecting a total of approximately 1,200
employees. The cost of the consolidation program for ICPDO locations was
included in Eaton's $55 million pretax integration charge accrued in 1993. For
DCBU locations, such cost will be included in the allocation of the purchase
price.
PRIVATE PLACEMENTS OF COMMON SHARES
In private placements, the Company sold to a single purchaser, 1.3 million
Common Shares in 1993 for aggregate net proceeds of $62 million and an
additional 800,000 Common Shares in January, 1994 for aggregate net proceeds of
$38 million. Beginning in April 1995, the purchaser of these shares has the
right to require the Company to register these shares under the Federal
securities laws. See "Underwriting".
S-7
<PAGE> 9
USE OF PROCEEDS
The net proceeds from the sale of the Offered Shares by the Company will be
used to repay a portion of the debt issued to finance the DCBU acquisition. See
"Recent Developments". Currently, the Company has approximately $930 million of
such debt outstanding. This debt is backed by the Company's revolving credit
facilities and bears interest on the date hereof at an average rate of 3.28% per
annum with an average maturity of 45 days.
CAPITALIZATION
The following table presents the historical capitalization of Eaton and its
consolidated subsidiaries at December 31, 1993, and as adjusted to reflect (1)
the $930 million of debt issued, and $6 million of short-term debt assumed,
related to Eaton's acquisition of DCBU in January 1994, (2) the private
placement of 800,000 Common Shares in January 1994 for net proceeds of $38
million, together with a portion of the proceeds of the private placement of
Common Shares in 1993, which were used to redeem the $89 million outstanding
balance of 8.5% debentures in January 1994, and (3) the sale pursuant to this
offering of 3.5 million Common Shares for net proceeds of $201 million. The
information in the table should be read in conjunction with the historical
financial statements and related notes of Eaton and the unaudited pro forma
combined condensed financial statements which reflect Eaton's acquisition of
DCBU, included in this Prospectus Supplement.
<TABLE>
<CAPTION>
AS FURTHER ADJUSTED FOR
------------------------------
SALE OF
AS ADJUSTED 800,000
FOR COMMON SHARES SALE OF
DEC. 31, ACQUISITION AND COMMON SHARES
1993 OF REDEMPTION OFFERED
HISTORICAL DCBU OF DEBENTURES HEREBY
---------- ----------- ------------- -------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Short-term debt and current portion
of long-term debt................. $ 124 $ 505 $ 416 $ 215
---------- ----------- ------------- -------------
---------- ----------- ------------- -------------
Long-term debt...................... $ 649 $ 1,204 $ 1,204 $ 1,204
Shareholders' equity
Common Shares..................... 36 36 36 38
Capital in excess of par value.... 535 535 573 772
Retained earnings................. 708 708 708 708
Foreign currency translation
adjustments.................... (78) (78) (78) (78)
Unallocated ESOP shares........... (96) (96) (96) (96)
---------- ----------- ------------- -------------
1,105 1,105 1,143 1,344
---------- ----------- ------------- -------------
Total capitalization................ $1,754 $ 2,309 $ 2,347 $ 2,548
---------- ----------- ------------- -------------
---------- ----------- ------------- -------------
</TABLE>
S-8
<PAGE> 10
MARKET PRICE OF COMMON SHARES AND DIVIDENDS
The Common Shares are traded on the New York Stock Exchange under the
symbol "ETN". The Common Shares are also traded on the Pacific, London and
Chicago Stock Exchanges, and options on the Common Shares are traded on the
Chicago Board Options Exchange.
The following table sets forth the high and low intra-day sales prices of
the Common Shares on the New York Stock Exchange Composite Transactions Tape and
the cash dividends paid per Common Share during the indicated fiscal quarters.
For the closing price of the Common Shares as of a recent date, see the cover
page of this Prospectus Supplement.
<TABLE>
<CAPTION>
CASH DIVIDENDS
PAID PER
HIGH LOW COMMON SHARE
---- ---- --------------
<S> <C> <C> <C>
1991
First Quarter....................... $30 5/8 $23 3/8 $.27 1/2
Second Quarter...................... 32 26 1/2 .27 1/2
Third Quarter....................... 33 1/8 30 3/8 .27 1/2
Fourth Quarter...................... 32 3/8 27 1/4 .27 1/2
1992
First Quarter....................... 39 3/8 30 7/8 .27 1/2
Second Quarter...................... 41 5/8 35 1/2 .27 1/2
Third Quarter....................... 40 1/4 35 7/8 .27 1/2
Fourth Quarter...................... 40 7/8 35 .27 1/2
1993
First Quarter....................... 43 3/4 38 1/4 .27 1/2
Second Quarter...................... 47 1/8 41 1/2 .27 1/2
Third Quarter....................... 51 3/4 43 .30
Fourth Quarter...................... 55 3/8 48 .30
1994
First Quarter (through February
22)............................... 61 3/8 50 3/8
</TABLE>
Dividends on the Common Shares of the Company are payable at the discretion
of the Company's Board of Directors out of funds legally available therefor.
Future payments of dividends (and the amounts thereof) will depend on the
Company's financial condition, results of operations, capital requirements and
such other factors as the Board of Directors of the Company deems relevant.
PRO FORMA COMBINED STATEMENT OF INCOME
The following unaudited pro forma combined statement of income has been
prepared by Eaton's management. This statement reflects Eaton's acquisition of
DCBU and combines, for the period indicated, the historical consolidated
statements of income of Eaton and DCBU using the purchase method of accounting.
The unaudited pro forma combined statement of income reflects adjustments
as if the acquisition had occurred at the beginning of 1993. This pro forma
statement should be read in conjunction with the historical consolidated
financial statements and related notes of Eaton included in this Prospectus
Supplement and of DCBU incorporated herein by reference. This pro forma
statement includes preliminary estimates and assumptions which Eaton's
management believes are reasonable. The pro forma results are not necessarily
indicative of the results which would have occurred if the business combination
had been in effect on the date indicated, or which may result in the future and
do not include any cost savings or other effects of the planned integration of
DCBU and ICPDO.
S-9
<PAGE> 11
The pro forma results do not reflect a $55 million integration charge
before income tax credits recorded by Eaton in the fourth quarter of 1993
related to the acquisition of DCBU and the integration of ICPDO's product lines
and operations with DCBU. The pro forma results do not reflect a $3 million
extraordinary loss related to the redemption of debentures.
The pro forma statement of income has been prepared using the following
facts and assumptions:
- Eaton acquires the assets and liabilities of DCBU in exchange for a total
cash payment of $1.1 billion.
- Eaton liquidates $170 million of short-term investments to fund a portion
of the $1.1 billion acquisition price.
- Eaton borrows $930 million to finance the remaining portion of the $1.1
billion acquisition price.
- Simultaneously with the acquisition of DCBU, Eaton divests a minor
portion of DCBU and ICPDO, having annual net sales of $41 million and net
assets of $14 million, in exchange for common stock of the buyer with an
estimated fair value of $14 million.
- The acquired assets and liabilities of DCBU are recorded at estimated
fair values as determined by Eaton's management based on information
currently available and on current tentative assumptions as to the future
operations of DCBU. No adjustment has been made to record the estimated
excess of the fair value over book value of DCBU's patents, trademarks
and licenses since such fair values have not yet been determined. Eaton
will be obtaining appraisals of the fair values and remaining useful
lives of the property, plant and equipment acquired and will be reviewing
the fair value of the other acquired assets and assumed liabilities.
Accordingly, the allocation of the purchase price to the acquired assets
and liabilities of DCBU is subject to revision as a result of the final
determination of appraised and other fair values.
S-10
<PAGE> 12
PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
----------------------------------------------------------------------
EATON OPERATIONS PRO PRO
CORPORATION DCBU SOLD BY FORMA FORMA
HISTORICAL HISTORICAL EATON(1) ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 3,286 $ 795 $(30) $ (7)(2a) $4,044
Costs and expenses
Cost of products sold.............. 2,466 478 (18) (3)(2a)
22(2b)
15(2c)
16(2d)
(5)(2e) 2,971
Selling and administrative
expense......................... 439 214 (6) 3(2b) 650
Research and development expense... 115 28 (1) 1(2b) 143
Depreciation and amortization...... 29 (3)(2f)
(26)(2b)
----------- ---------- ---------- ----------- --------
3,020 749 (25) 20 3,764
----------- ---------- ---------- ----------- --------
Income from operations............... 266 46 (5) (27) 280
Other income and (expense)
Interest expense................... (61) (21) 18(2g)
(24)(2h) (88)
Interest income.................... 6 (4)(2i) 2
Other income-net................... 14 14
----------- ---------- ---------- ----------- --------
(41) (21) (10) (72)
----------- ---------- ---------- ----------- --------
Income before income taxes........... 225 25 (5) (37) 208
Income taxes......................... 75 4 (2) (13)(2j) 64
----------- ---------- ---------- ----------- --------
Income before extraordinary item..... $ 150 $ 21 $ (3) $ (24) $ 144
----------- ---------- ---------- ----------- --------
----------- ---------- ---------- ----------- --------
Average number of Common Shares
outstanding (in millions).......... 69.6 69.6
Income before extraordinary item per
Common Share (2k).................. $2.17 $2.07
</TABLE>
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<PAGE> 13
The adjustments to give pro forma effect to Eaton's acquisition of DCBU and
the estimated purchase price allocation are as follows:
<TABLE>
<C> <S> <C>
1) To reflect the divestiture by Eaton of a portion of DCBU and ICPDO, simultaneously
with Eaton's acquisition of DCBU.
2) To reflect the purchase price allocation and other adjustments as follows:
a)
Eliminate intercompany sales and cost of products sold.
b)
Reclassify depreciation expense to cost of products sold, selling and
administrative expense, and research and development expense.
c)
Recognize over nine years additional depreciation for write-up of property, plant
and equipment to fair value.
d)
Amortize over an average period of twenty-five years the excess of purchase price
of DCBU over estimated fair value of net assets acquired, including intangible
assets.
e)
Adjust expense for pensions and postretirement benefits other than pensions for
employee benefit liabilities retained by Westinghouse and to reflect Eaton's
current actuarial assumptions.
f)
Eliminate amortization of the excess of cost over net assets acquired related to
DCBU's acquisitions of businesses in prior years.
g)
Eliminate Westinghouse's interest expense allocated to DCBU.
h)
Recognize additional interest expense due to $930 million increase in debt to
fund the acquisition (assumed interest rate of 3.45%).
i)
Reduce interest income to reflect the $170 million liquidation of short-term
investments to fund the acquisition (assumed interest rate of 3.20%).
j)
Record the income tax effect of the above adjustments assuming a 35% income tax
rate.
k)
Pro forma net income per Common Share is computed by dividing net income by the
average month-end number of shares outstanding during each period.
</TABLE>
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<PAGE> 14
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table presents historical financial information concerning
Eaton and its consolidated subsidiaries. The historical financial information in
the table and the related notes should be read in conjunction with the financial
statements and related notes contained in Eaton's Annual Report on Form 10-K for
the year ended December 31, 1992, the Quarterly Reports on Form 10-Q for the
quarters ended March 31, June 30 and September 30, 1993 and the 1993 financial
statements included in this Prospectus Supplement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
HISTORICAL
--------------------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ ------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales.................................................... $4,401 $4,101 $3,659 $4,083 $4,228
Net sales by business segment
Vehicle Components......................................... 2,357 2,093 1,806 2,015 2,105
Electrical and Electronic Controls......................... 1,852 1,776 1,575 1,624 1,566
Defense Systems............................................ 192 232 278 444 557
Operating Profit........................................... 332 264 174 325 444
Operating profit by business segment
Vehicle Components......................................... 247 170 63 178 253
Electrical and Electronic Controls......................... 83 85 88 122 154
Defense Systems............................................ 2 9 23 25 37
Income before extraordinary item and cumulative effect of
accounting changes......................................... 180(a) 140 74(c) 179 225
Extraordinary item........................................... (7)(b)
Cumulative effect of accounting changes
Postemployment benefits other than pensions................ (274)
Income taxes............................................... 6
Net income (loss)............................................ 173 (128) 74 179 225
INCOME PER COMMON SHARE
Income before extraordinary item
and cumulative effect of accounting changes................ $ 2.57(a) $ 2.03 $ 1.09(c) $ 2.53 $ 3.00
Extraordinary item........................................... (.10)(b)
Cumulative effect of accounting changes
Postemployment benefits other than pensions................ (3.97)
Income taxes............................................... 0.09
Net income................................................... 2.47 (1.85) 1.09 2.53 3.00
BALANCE SHEET DATA
Working capital.............................................. $ 679 $ 751 $ 666 $ 669 $ 854
Total assets................................................. 3,268 3,220 3,184 3,140 3,189
Short-term debt and current portion of long-term debt........ 124(b) 49 132 60 62
Long-term debt............................................... 649 833 795 755 861
Shareholders' equity......................................... 1,105 948 1,153 1,140 1,145
OTHER DATA
Depreciation and amortization................................ $ 196 $ 200 $ 185 $ 181 $ 165
Capital expenditures......................................... 227 186 194 192 217
Cash dividends............................................... 83 76 75 75 75
</TABLE>
- ---------------
(a) Results for 1993 include a charge of $55 million before income tax credits
($34 million after income tax credits, or $.49 per Common Share) for
acquisition integration related to the January 1994 acquisition of
Westinghouse Electric Corporation's Distribution and Control Business Unit.
See "Recent Developments -- Acquisition of DCBU".
(b) In March 1993, the Company called for redemption, in April 1993, the $74
million outstanding balance of its 9% debentures, and in December 1993, the
Company called for redemption, in January 1994, the $89 million outstanding
balance of its 8.5% debentures. The extraordinary loss on these redemptions,
including the write-off of debt issue costs, was $11 million before income
tax credits ($7 million after income tax credits, or $.10 per Common Share).
(c) In 1991, as a result of the review of operating strategies and in order to
improve competitiveness and future profitability, the Company recorded a
restructuring charge of $39 million before income tax credits ($25 million
after income tax credits, or $.38 per Common Share).
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<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company experienced an extraordinary year of achievement in 1993.
Income after income taxes for the year increased to $214 million in 1993
before the recognition of a $34 million acquisition integration charge and a $7
million extraordinary loss on the redemption of debentures. This represents a
53% increase compared to income of $140 million in 1992 (before the cumulative
effect of 1992 accounting changes). Earnings per Common Share, before the
special charges, rose to $3.06 in 1993, a 51% increase over $2.03 (before the
impact of accounting changes) in 1992.
On January 31, 1994, the Company acquired Westinghouse Electric
Corporation's Distribution and Control Business Unit (DCBU), and in December of
1993 recorded a $55 million charge ($34 million after income tax credits, or
$.49 per Common Share) for the integration of the Company's Industrial Control
and Power Distribution Operations (ICPDO) with DCBU to form the Cutler-Hammer
business unit. This acquisition provides greater product depth with world class
technology and substantially increases product offering and distribution
opportunities.
During March and December 1993, the Company called for redemption a total
of $163 million of debentures. The loss on the redemptions was accounted for as
an extraordinary item in each of those periods. In June, a two-for-one common
stock split was distributed, effected in the form of a 100% stock dividend, and
the quarterly dividend on Common Shares was increased by 2 1/2 cents (9%) to 30
cents per share, the third dividend increase in seven years.
In June, the Company reconsolidated the net assets and operating results of
its remaining discontinued operations. Prior years have been restated to include
those results.
1993 COMPARED TO 1992
Net Sales. Net sales in 1993 increased by 7% to $4.40 billion, over $4.10
billion in 1992. The increase occurred principally in the United States and was
largely due to a strengthened North American market for heavy and light trucks,
vans and sport utility vehicles, responding to a U.S. economic recovery. The
improvement in North America more than offset the effects of the continued deep
European recession. In North America, certain markets, which had been sluggish
through most of 1993, showed sales improvements in the fourth quarter.
The Vehicle Components business segment net sales increased to $2.36
billion for 1993, rising 13% over 1992 sales of $2.09 billion. This improvement
was largely due to significant growth in sales of truck components, following
the best factory sales of heavy trucks in North America since 1979. The
passenger car and light truck markets also showed improvement in 1993.
Off-highway equipment markets, which had been down for several years, improved
considerably. Strong sales growth in North America was partially offset by
reduced sales in Europe where vehicle markets remain weak.
The Electrical and Electronic Components business segment showed a net
sales increase of 4% in 1993 to $1.85 billion compared to $1.78 billion in 1992.
This increase was largely due to increased sales in the areas of industrial and
commercial controls and specialty controls. Strong North American markets for
automotive and appliance controls were largely offset, however, by the continued
weakness in the corresponding European markets due to the economic recession and
the negative impact of foreign currency exchange rate fluctuations. Rising
demand for portable tools, factory equipment and residential housing drove the
increase in sales of industrial and commercial controls. Sales of the Company's
industrial and power distribution equipment, which tend to lag any North
American economic recovery, rose sharply in the fourth quarter. The
semiconductor equipment business, included in specialty controls, experienced
strong results throughout the year, with a 19% improvement in sales for 1993
over 1992.
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<PAGE> 16
Operating Results. Gross margin increased to $1.12 billion (25.4% of
sales) in 1993, rising from $967 million (23.6% of sales) in 1992, due to
significant sales growth as well as benefits achieved through ongoing cost
containment and productivity improvements. This improvement in margin was
achieved in spite of a $9 million charge, included in cost of products sold in
1993, for the restructuring of certain vehicle components operations in Europe.
Selling and administrative expenses showed an increase of 2% in 1993
compared to 1992, with expense of $591 million in 1993 and $578 million in 1992.
This level of increase is a clear indication of the results of cost control and
restructuring efforts, which is further evidenced by their relationship to net
sales, 13% in 1993 compared to 14% in 1992.
Research and development expenses for 1993 were $154 million, rising from
$151 million in 1992. This level of expenditure reflects the continued
commitment to achieving expressed corporate targets in product innovation and
enhancements and to maintaining leading-edge technology.
The Vehicle Components segment operating profit rose to $247 million (10%
of sales) for 1993, a substantial improvement over $170 million (8% of sales)
for 1992 despite a $9 million restructuring charge recorded in 1993 for
restructuring certain European operations. This improvement was largely a result
of the improved market in North America for heavy and light trucks, vans and
sport utility vehicles. Other factors contributing to increased profits were
continuing stringent cost containment efforts and the economies achieved through
restructuring certain businesses, which have better positioned operations to
benefit from further growth in vehicle markets.
The Electrical and Electronic Controls business segment operating profit
significantly improved, before the effect of the $55 million acquisition
integration charge, rising 62% to $138 million in 1993 (7% of sales) from $85
million (5% of sales) in 1992. This improved segment profit picture is partially
due to the sales growth experienced in certain controls markets, but is also a
clear reflection of the continuing emphasis placed on containing and controlling
costs and the realization of anticipated benefits of earlier restructuring
efforts. The depressed European economy negatively impacted the controls
businesses, particularly automotive and appliance controls. Profit for this
segment was also reduced by a $55 million pretax charge recorded in December
1993 for the integration of ICPDO product lines and operations with DCBU to form
the new Cutler-Hammer business unit. The DCBU acquisition will bring a more even
balance in sales and earnings between the Electrical and Electronic Controls
segment and the historically strong Vehicle Components segment.
Interest expense declined to $75 million for 1993, the lowest level since
1986, from $89 million for 1992 largely due to the reduction of higher interest
rate debt, lower debt levels during 1993 and increased capitalized interest.
Other income -- net was $12 million in 1993, down from $23 million in 1992,
largely due to the $11 million pretax gain on the sale of the Company's interest
in a limited partnership which had been recorded in 1992.
An analysis of changes in income taxes and the effective income tax rate is
presented under "Income Taxes" in the Financial Review.
In 1992, the Company adopted two new accounting standards for
postretirement benefits other than pensions and for income taxes, which together
reduced net income by $268 million due to the recognition of their cumulative
effect for prior years.
Changes in Financial Condition. The Company's financial condition remained
strong during 1993. The current ratio was 1.9 at December 31, 1993 compared to
2.0 at December 31, 1992. The decline in working capital to $679 million at
year-end 1993 from $751 million at year-end 1992 was primarily the result of an
increase in the current portion of long-term debt due to the decision to redeem,
in early 1994, the $89 million outstanding balance of 8.5% debentures. Cash and
short-term investments increased by $84 million to $300 million at December 31,
1993 due to improved cash flow from operations and the sale of 1.3 million
Common Shares in 1993 for net proceeds of $62 million. In spite of the increase
in sales in 1993 to record levels, heightened emphasis on efficient asset
management is reflected in the $21 million decline in inventories to
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<PAGE> 17
$434 million at December 31, 1993. An increase in accounts receivable resulting
from improved 1993 sales was more than offset by a reduction due to the
collection of receivables at AIL as a consequence of the definitization of
contract modifications as agreed to with the United States Air Force late in
1992; the net impact of the increase and offsetting decrease resulted in a $78
million decline in accounts receivable to $550 million at December 31, 1993. In
addition, accounts receivable days sales outstanding at December 31, 1993 was
43, historically one of the lowest levels, in spite of the expanding economy and
sales growth.
Long-term debt declined to $649 million at year-end 1993 from $833 million
at the end of 1992 primarily due to the call for redemption of $74 million of 9%
debentures in March 1993 and $89 million of 8.5% debentures in December 1993.
In private placements, the Company sold 1.3 million Common Shares in 1993
for aggregate net proceeds of $62 million and, in January 1994, an additional
800,000 Common Shares for $38 million. Beginning in April 1995, the holder of
these shares has the right to require the Company to register these shares under
the Federal securities law.
Capital expenditures were $227 million, one of the Company's highest
levels, in 1993 compared with $186 million in 1992, as the Company maintained
its emphasis on enhancing manufacturing efficiencies and capabilities. Capital
expenditures in 1994 are anticipated to be higher than 1993 for those businesses
unrelated to the acquisition of DCBU. Further capital expenditures are planned
relative to the combining of DCBU and the Company's ICPDO. During 1993, the
Company invested $14 million in small businesses, primarily to establish a joint
venture, which will round out product lines and open avenues for market
expansion.
Net cash provided by operating activities increased to $435 million for
1993 from $381 million for 1992. This increase resulted primarily from improved
net income, reflecting higher sales and rigorous cost controls. Changes in
operating assets and liabilities also contributed to the increase in net cash
provided by operating activities in 1993. Operating cash flow and proceeds from
the sale of Common Shares during 1993 were more than adequate to fund capital
expenditures, cash dividends, the investment in certain small businesses and
other corporate purposes.
On May 25, 1993, the Company redeemed its share purchase rights at a
redemption price of 3 1/3 cents for each right for a total payment of $2
million.
At the end of 1993, as a result of the trend of declining long-term
interest rates, the discount rate used to measure the projected benefit
obligation for pensions was reduced to 7.25% from 8.25%. This change had the
effect of increasing the accumulated pension benefit obligation by $103 million
with an offsetting decrease in the unamortized net gain. In addition, the rates
used to measure the projected benefit obligation for postretirement benefits
other than pensions were changed. The changes in rates included a reduction in
the discount rate to 7.25% from 8.5%, and in the annual rate of increase in per
capita cost of covered health care benefits. These rate changes had the effect
of increasing the accumulated postretirement benefit obligation by $49 million
with an offsetting increase in the unamortized net loss. The effect on future
expense for pensions and postretirement benefits other than pensions will be
immaterial.
At December 31, 1993 and 1992, the Company had net deferred income tax
assets included in current and long-term assets. Management believes it is more
likely than not that these tax benefits will be realized through the reduction
of future taxable income. Significant factors considered by management in its
determination of the probability of the realization of the deferred tax assets
include the historical operating results of the Company, expectations of future
earnings and the extended period of time over which the postretirement health
care liability will be paid.
On January 31, 1994, the Company acquired DCBU from Westinghouse Electric
Corporation and issued $930 million of short-term commercial paper to finance
the acquisition. The Company plans to reduce these short-term financings by the
middle of 1994 through expanded use of equity and long-term debt financings. The
timing and mix of these financings will depend on market conditions. Of these
short-term financings, $555 million will be classified as long-term debt because
the Company intends, and has the ability under a new five-year $555 million
revolving credit agreement entered into in January 1994, to refinance this debt
on a long-term basis. Also, in January 1994, the Company entered into a $555
million 364-day revolving credit agreement. Strong cash flow, reinforced by the
projected results of the newly created Cutler-Hammer business
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<PAGE> 18
unit, should permit the repayment of the financings within the next five years.
The Company is maintaining the strength of its balance sheet, and two major
debt-rating agencies, Standard and Poor's and Moody's, have confirmed the "A"
rating on its long-term debt.
The Company expects that the economic and market growth experienced in
North America during 1993 will continue to expand to additional markets in 1994;
however, that growth will likely be moderated by lingering weakness in Europe.
Long-range plans continue to be focused on enhancements in quality, productivity
and growth in all its major markets. The acquisition of DCBU and integration
with ICPDO should create permanent value by streamlining product lines,
manufacturing capacity and organization structure and will enable the businesses
to realize the synergies resulting from complementary product offerings,
operations and technical expertise. This acquisition will reinforce the goal of
improving the balance in sales and earnings between the historically strong
Vehicle Components segment and the Electrical and Electronic Controls segment.
Investments in the form of research and development, marketing and manufacturing
programs continue in all key product lines, and plans are to continue to make
niche acquisitions which will promote the Company's position in worldwide
markets. The Company believes capital resources available in the form of working
capital on hand, lines of credit and funds provided by operations will more than
adequately meet anticipated capital requirements for capital expenditures and
business expansion through niche acquisitions. The acquisition of DCBU required
the additional capital resources discussed above.
The operations of the Company involve the use, disposal and cleanup of
certain substances regulated under environmental protection laws, as further
discussed under "Protection of the Environment" in the Financial Review. Subject
to the difficulty in estimating future environmental costs, the Company expects
that any sum it may have to pay in connection with environmental matters in
excess of the amounts recorded or disclosed will not have a material adverse
effect on its financial condition or results of operations.
1992 COMPARED TO 1991
Net Sales. Net sales for 1992 were $4.10 billion, up 12% from $3.66 billion
in 1991. Certain markets in North America experienced a modest recovery in 1992.
However, economies in Europe, Japan and South America continued to weaken,
affecting businesses in those areas, and offsetting some strength in North
America.
The Vehicle Components segment net sales increased to $2.09 billion for
1992, 16% higher than sales of $1.81 billion recorded for 1991. North American
sales of heavy and light trucks, vans and sport utility vehicles were strong
throughout the year. A marked increase in heavy truck production in North
America during the second half of 1992 had a significant favorable impact on
this segment's results. Heavy truck production increased 30% in 1992 over prior
year levels. Strategic investments also contributed to sales growth through
expansion of business into new products and territories. Sales of passenger car
and off-highway vehicle equipment slowed in the last half of the year, after
showing increases during the first half. Overseas vehicle markets, primarily in
Europe, were depressed, and weakened further in the fourth quarter.
The Electrical and Electronic Controls segment had net sales of $1.78
billion for 1992, rising 13% from sales of $1.58 billion in 1991. This increase
reflects the acquisition of Kirsten, a European automotive controls manufacturer
with 1992 sales of approximately $120 million, and other smaller acquisitions
during 1992 and 1991. Existing automotive and appliance controls businesses
experienced a strong rebound in their markets, adding to the improved results.
Sales from industrial and commercial controls businesses were flat, with the
recovery in residential markets offset by continued contraction in military and
commercial aircraft industries. Sales from specialty controls businesses
declined slightly, reflecting the continued weakening of the North American
automated materials handling market, as well as significant softening of the
semiconductor equipment markets in the United States and Japan.
Operating Results. Higher sales levels, benefits of recent restructurings
and rigorous inventory controls produced an improved gross margin of $967
million in 1992 (24% of sales), up from $851 million in 1991 (23% of sales).
Gross margin in 1992 was reduced by $17 million of increased expense related to
the accounting change for postretirement benefits other than pensions.
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<PAGE> 19
Selling and administrative expenses were held level relative to sales due
to stringent cost controls, as well as the benefits of recent restructurings,
with $578 million reported in 1992 compared to $520 million in 1991 (14% of
sales in both years).
The Company's continued commitment to improvement of established product
lines, and to product innovation and development in markets offering the
greatest potential for growth, was reflected in the increase in research and
development expenses to $151 million in 1992 from $138 million in 1991.
The Vehicle Components segment operating profit showed a substantial
increase to $170 million for 1992 over profit of $63 million in 1991. Profit for
1992 was reduced by $14 million due to recognition of additional expenses for
postretirement benefits other than pensions. The improved profit was largely a
result of increased demand for heavy and light trucks, vans and sport utility
vehicles previously described and, additionally, benefitted from recent
restructurings, for which a $22 million charge was recorded in 1991. Strict cost
containment also contributed to growth in profit. Strategic investments in
marketing, research and development, and manufacturing improvements should
further promote sustainable growth and increases in profit as markets served by
this segment strengthen.
The Electrical and Electronic Controls segment operating profit was $85
million in 1992 compared to $88 million in 1991. Profit for this segment for
1992 was reduced by $11 million due to recognition of additional expenses
related to the accounting change for postretirement benefits other than
pensions. Profit for 1991 was reduced by a $17 million restructuring charge
recorded in the first quarter. Start-up costs for integration of Kirsten and
other acquisitions depressed 1992 profits, but these investments should provide
opportunities for growth and profit improvement in the future. The acquisition
of Kirsten, a European automotive controls manufacturer with operations in
Germany, France and Spain, is a good example of the Company's investment in
growth businesses through acquisitions. Restructuring costs due to downsizing of
military-related operations reduced profits. In addition, profits for 1992 were
affected by depressed sales in certain businesses, as discussed above, the costs
of long-range programs in marketing, research and development, and manufacturing
improvement, and cost/price pressures.
Other income -- net rose to $23 million for 1992 from $18 million for 1991,
primarily due to an $11 million pretax gain on the sale of the Company's
interest in a limited partnership recorded in 1992.
An analysis of changes in income taxes and the effective income tax rate is
presented under "Income Taxes" in the Financial Review.
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<PAGE> 20
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON SHARES
The following discussion concerns the material United States federal income
and estate tax consequences of the ownership and disposition of Common Shares
applicable to Non-U.S. Holders. In general, a "Non-U.S. Holder" is any person
holding Common Shares other than (i) a citizen or resident of the United States,
(ii) a corporation (a "U.S. corporation") or partnership (a "U.S. partnership")
created or organized under the laws of the United States or of any State, or
(iii) an estate or trust whose income is included in gross income for United
States federal income tax purposes regardless of its source. The following
summary does not consider any specific facts or circumstances that may apply to
a particular Non-U.S. Holder (including the fact that, in the case of a Non-U.S.
Holder that is a partnership, the U.S. tax consequences of purchasing, holding
and disposing of Common Shares may be affected by certain determinations made at
the partner level). This summary is based on provisions of the Internal Revenue
Code and administrative and judicial interpretations as of the date hereof, all
of which are subject to change, possibly on a retroactive basis. This summary
does not deal with U.S. state and local or non-U.S. tax consequences and, except
as specifically noted, does not address the effects of any tax treaties the
United States has concluded with other countries.
ALL PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING
THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF COMMON SHARES.
DIVIDENDS
In general, dividends paid by a U.S. corporation to a Non-U.S. Holder will
be subject to United States withholding tax at a 30% rate (or any lower rate
prescribed by an applicable tax treaty) unless the dividends are (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States, and (ii) if an applicable tax treaty so provides, attributable to
a United States permanent establishment maintained by the Non-U.S. Holder. To
determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country.
Proposed Treasury Regulations, if finally adopted, would require Non-U.S.
Holders to file certain forms to obtain the benefit of any applicable tax treaty
providing for a lower rate of withholding tax on dividends. Such forms would
contain, among other things, the holder's name, address and an official
statement by the competent authority in the foreign country (as designated in
the applicable tax treaty) attesting to the holder's status as a resident
thereof.
Dividends effectively connected with a trade or business and, if
applicable, attributable to a permanent establishment, will not be subject to
withholding (if the Non-U.S. Holder annually files Internal Revenue Service Form
4224 in duplicate with the payor of the dividend), but will be subject to United
States federal income tax at the same rates applicable to U.S. Holders. In the
case of a Non-U.S. Holder that is a corporation, such effectively connected
income also may be subject to the branch profits tax, which is generally imposed
on a foreign corporation with respect to its earnings and profits attributable
to income that is effectively connected to a U.S. trade or business, subject to
any applicable tax treaty.
SALE OF COMMON SHARES
Generally, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the disposition of such Holder's Common
Shares unless (i) the gain is effectively connected with a trade or business
carried on by the Non-U.S. Holder within the United States and, if an applicable
tax treaty so provides, attributable to a permanent establishment maintained by
the Non-U.S. Holder in the United States; (ii) the Common Shares are disposed of
by Non-U.S. Holders who are individuals and have a "tax home" in the United
States, who hold the Common Shares as a capital asset and who are present in the
United States for 183 days or more in the taxable year of the disposition; or
(iii) the Company is or has been a "U.S. real property holding corporation" for
federal income tax purposes and, for so long as the Common Shares are "regularly
traded on an established securities market," the Non-U.S. Holder held, directly
or
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<PAGE> 21
indirectly at any time during the five-year period ending generally on the date
of disposition, more than 5% of the Common Shares. The Company believes that it
has not been, is not currently and is not likely to become, a United States real
property holding company.
ESTATE TAX
Common Shares owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States federal estate tax purposes)
of the United States at the time of death will be includable in the individual's
gross estate for United States federal estate tax purposes, unless an applicable
tax treaty provides otherwise, and may be subject to United States federal
estate tax.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Company generally must report annually to the Internal Revenue Service
and to each Non-U.S. Holder the amount of dividends paid to, and the tax
withheld with respect to, such Non-U.S. Holder. These reporting requirements
apply regardless of whether withholding was reduced or eliminated by an
applicable tax treaty. Copies of these information returns also may be made
available under the provisions of a specific treaty or agreement to the tax
authorities in the country in which the Non-U.S. Holder resides. United States
backup withholding tax (which generally is a withholding tax imposed at the rate
of 31% on certain payments to persons who fail to furnish the information
required under the United States information reporting requirements) will
generally not apply, under existing Treasury Regulations, to dividends paid on
Common Shares to a Non-U.S. Holder at an address outside the United States. This
exemption may be affected, on a prospective basis, if the Treasury Regulations
are revised to eliminate the foreign address method for determining the
applicability of the 30% withhholding tax or any lower treaty rate as discussed
above.
The payment of the proceeds from the disposition of Common Shares to or
through the United States office of a broker will be subject to information
reporting and backup withholding unless the owner certifies, among other things,
its status as a Non-U.S. Holder, or otherwise establishes an exemption. The
payment of the proceeds from the disposition of Common Shares to or through a
non-U.S. office of a non-U.S. broker will not be subject to backup withholding
and generally will not be subject to information reporting. Under the existing
Treasury Regulations, unless the broker has documentary evidence in its files
that the owner is a Non-U.S. Holder, information reporting will apply, however,
to disposition through (a) a non-U.S. office of a U.S. broker, and (b) a
non-U.S. office of a non-U.S. broker that is either a "controlled foreign
corporation" for the United States federal income tax purposes or a person 50%
or more of whose gross income from all sources for a certain three-year period
was effectively connected with a United States trade or business.
The backup withholding and information reporting rules are currently under
review by the Treasury Department and their application to the Common Shares is
subject to change.
S-20
<PAGE> 22
DESCRIPTION OF COMMON SHARES
Reference is made to "Description of Common Shares" in the accompanying
Prospectus for a description of the Common Shares, including the Common Shares
offered hereby.
UNDERWRITING
The Underwriters named below (the "U.S. Underwriters"), for whom CS First
Boston Corporation, Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated are acting as representatives (the "U.S. Representatives"),
have severally agreed to purchase from the Company, pursuant to a terms
agreement dated , 1994 and related underwriting agreement
(collectively, the "Underwriting Agreement"), the following respective number of
U.S. Shares set forth opposite their names:
<TABLE>
<CAPTION>
NUMBER OF
U.S.
U.S. UNDERWRITER SHARES
- ------------------------------------------------------------------------- ---------
<S> <C>
CS First Boston Corporation..............................................
Lehman Brothers Inc......................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
---------
Total....................................................... 2,800,000
---------
---------
</TABLE>
The Underwriting Agreement between the Company and the several U.S.
Underwriters provides that the obligations of the U.S. Underwriters are subject
to certain conditions precedent, and that the U.S. Underwriters will be
obligated to purchase all of the U.S. Shares being offered hereby if any are
purchased.
The Company has granted to the U.S. Underwriters and the Managers of the
International Offering (the "Managers") an option, exercisable by the U.S.
Representatives, expiring at the close of business on the 30th day after the
date of the initial public offering of the U.S. Shares, to purchase up to
525,000 additional Common Shares (the "Option Shares"), at the initial public
offering price less the underwriting discount, all as set forth on the cover
page of this Prospectus Supplement. The U.S. Representatives may exercise such
option only to cover over-allotments in the sale of the Common Shares. To the
extent that this option to purchase is exercised, each U.S. Underwriter and
Manager will become obligated, subject to certain conditions, to purchase
approximately the same percentage of Option Shares being sold to the U.S.
Underwriters and the Managers as the number set forth next to such U.S.
Underwriter's name in the preceding table bears to the total number of shares in
such table and as the number set forth next to such Manager's name in the
corresponding table in the Prospectus Supplement relating to the International
Offering bears to the total number of shares in such table (the "International
Shares").
The Company has been advised by the U.S. Representatives that the U.S.
Underwriters propose to offer the U.S. Shares to the public in the United States
and Canada initially at the offering price set forth on the cover page of this
Prospectus Supplement and through the U.S. Representatives to certain dealers at
such price less a concession of $ per Common Share; that the U.S.
Underwriters and such dealers may allow a discount of $ per Common Share on
sales to other dealers; and that, after the initial public offering, the public
offering price and concession and discount to dealers may be changed upon the
mutual agreement of the U.S. Representatives and CS First Boston Limited on
behalf of the Managers.
The Company has entered into a Subscription Agreement (the "Subscription
Agreement") with the Managers providing for the concurrent offer and sale of the
International Shares outside the United States and Canada. The offering price,
the aggregate underwriting discount per share and the per share discount to
S-21
<PAGE> 23
dealers for the U.S. Offering and the concurrent International Offering are
identical. The closing of the U.S. Offering is a condition to the closing of the
International Offering, and vice versa.
Pursuant to an Agreement Between U.S. Underwriters and Managers (the
"Agreement Between") relating to the Offerings, each of the U.S. Underwriters
has agreed or will agree that, as part of the distribution of the U.S. Shares
and subject to certain exceptions, (a) it is not purchasing any Common Shares
for the account of anyone other than a U.S. or Canadian Person and (b) it has
not offered or sold, and will not offer to sell, directly or indirectly, any
Common Shares or distribute any prospectus relating to the Common Shares to any
person outside the United States or Canada or to anyone other than a U.S. or a
Canadian Person nor to any dealer who does not so agree. Each of the Managers
has agreed or will agree that, as part of the distribution of the International
Shares and subject to certain exceptions, (i) it is not purchasing any Common
Shares for the account of any U.S. or Canadian Person and (ii) it has not
offered or sold, and will not offer or sell, directly or indirectly, any Common
Shares, or distribute any prospectus relating to the Common Shares, in the
United States or Canada or to any U.S. or Canadian Person nor to any dealer who
does not so agree. The foregoing limitations do not apply to stabilization
transactions or to transactions between the U.S. Underwriters and the Managers
pursuant to the Agreement Between. As used herein, "United States" means the
United States of America (including the States and the District of Columbia),
its territories and possessions and other areas subject to its jurisdiction,
"Canada" means Canada, its provinces, territories and possessions and other
areas subject to its jurisdiction, and "U.S. or Canadian Person" means a citizen
or resident of the United States or Canada, a corporation, partnership or other
entity created or organized in or under the laws of the United States or Canada
(other than a foreign branch of such an entity) and includes any United States
or Canadian branch of a non-U.S. or non-Canadian Person.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the Managers of such number of Common Shares as may be mutually
agreed upon. The price of any Common Shares so sold will be the public offering
price, less such amount as may be mutually agreed upon by the U.S.
Representatives and CS First Boston Limited, on behalf of the Managers, but such
amount will not exceed the selling concession applicable to such shares. To the
extent there are sales between the U.S. Underwriters and the Managers pursuant
to the Agreement Between, the number of Common Shares initially available for
sale by the U.S. Underwriters or by the Managers may be more or less than the
amount appearing on the cover page of this Prospectus Supplement. Neither the
U.S. Underwriters nor the Managers are obligated to purchase from the other any
unsold Common Shares.
The Company has agreed that, for a period of 90 days after the date of this
Prospectus Supplement, it will not, without the prior written consent of CS
First Boston Corporation, on behalf of the U.S. Representatives and the
Managers, directly or indirectly, offer, sell, contract to sell or otherwise
dispose of any Common Shares or any security convertible into or exercisable or
exchangeable for Common Shares other than to the U.S. Underwriters or the
Managers pursuant to the Underwriting and Subscription Agreements and other than
(a) issuances and sales of Common Shares in accordance with the terms of any
employee or director stock option plan, stock ownership plan, stock bonus plan,
stock compensation plan or dividend reinvestment plan of the Company as in
effect on the date of this Prospectus Supplement and (b) issuances of Common
Shares issuable upon the conversion of securities outstanding at the date of
this Prospectus Supplement.
The Company has agreed to indemnify the U.S. Underwriters and the Managers
against certain liabilities, including civil liabilities under the Securities
Act of 1933, as amended, or to contribute to payments that the U.S. Underwriters
and the Managers may be required to make in respect thereof.
Certain of the U.S. Underwriters and Managers and their affiliates have
from time to time performed, and continue to perform, various investment banking
and commercial banking services for the Company, for which customary
compensation has been received. In private placements, the Company sold to an
affiliate of Lehman Brothers Inc., one of the U.S. Underwriters named herein, an
aggregate of 2,100,000 Common Shares in 1993 and 1994 for aggregate proceeds of
$100 million. See "Recent Developments -- Private Placements of Common Shares".
S-22
<PAGE> 24
EATON CORPORATION
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Years Ended December 31, 1993, 1992 and 1991
Consolidated Balance Sheets...................................... F-2
Statements of Consolidated Income................................ F-4
Statements of Consolidated Cash Flows............................ F-5
Statements of Consolidated Shareholders' Equity.................. F-6
Financial Review................................................. F-7
Report of Independent Auditors................................... F-23
Nine Months Ended September 30, 1993 and 1992 (unaudited)
Unaudited Pro Forma Combined Condensed Financial Statements...... F-24
Unaudited Pro Forma Combined Condensed Balance Sheet............. F-25
Unaudited Pro Forma Combined Statements of Income................ F-27
</TABLE>
F-1
<PAGE> 25
EATON CORPORATION
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1993 1992
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash................................................................ $ 32 $ 30
Short-term investments.............................................. 268 186
Accounts receivable................................................. 550 628
Inventories......................................................... 434 455
Deferred income taxes............................................... 127 120
Other current assets................................................ 55 61
---------- ----------
1,466 1,480
Property, plant and equipment
Land................................................................ 41 41
Buildings........................................................... 486 482
Machinery and equipment............................................. 1,959 1,896
---------- ----------
2,486 2,419
Accumulated depreciation............................................ (1,298) (1,238)
---------- ----------
1,188 1,181
Excess of cost over net assets of businesses acquired................. 265 275
Deferred income taxes................................................. 112 61
Other assets.......................................................... 237 223
---------- ----------
$3,268 $3,220
---------- ----------
---------- ----------
</TABLE>
The Financial Review on pages F-7 to F-22 is an integral part of the
consolidated financial statements.
F-2
<PAGE> 26
EATON CORPORATION
CONSOLIDATED BALANCE SHEETS
(MILLIONS OF DOLLARS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1993 1992
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt..................................................... $ 14 $ 30
Current portion of long-term debt................................... 110 19
Accounts payable.................................................... 266 251
Accrued compensation................................................ 106 95
Accrued income and other taxes...................................... 23 48
Other current liabilities........................................... 268 286
---------- ----------
787 729
Long-term debt........................................................ 649 833
Postretirement benefits other than pensions........................... 509 511
Other long-term liabilities........................................... 218 199
Shareholders' equity
Common Shares (71.3 million in 1993 and 34.7 million in 1992)....... 36 17
Capital in excess of par value...................................... 535 452
Retained earnings................................................... 708 636
Foreign currency translation adjustments............................ (78) (47)
Unallocated Employee Stock Ownership Plan shares.................... (96) (110)
---------- ----------
1,105 948
---------- ----------
$3,268 $3,220
---------- ----------
---------- ----------
</TABLE>
The Financial Review on pages F-7 to F-22 is an integral part of the
consolidated financial statements.
F-3
<PAGE> 27
EATON CORPORATION
STATEMENTS OF CONSOLIDATED INCOME
(MILLIONS OF DOLLARS EXCEPT FOR PER SHARE DATA)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1993 1992 1991
---------- ------ ------
<S> <C> <C> <C>
Net sales......................................................... $4,401 $4,101 $3,659
Costs and expenses
Cost of products sold........................................... 3,284 3,134 2,808
Selling and administrative expense.............................. 591 578 520
Research and development expense................................ 154 151 138
Acquisition integration charge.................................. 55
Restructuring charge............................................ 39
---------- ------ ------
4,084 3,863 3,505
---------- ------ ------
Income from operations............................................ 317 238 154
Other income and (expense)
Interest expense................................................ (75) (89) (83)
Interest income................................................. 8 9 12
Other income--net............................................... 12 23 18
---------- ------ ------
(55) (57) (53)
---------- ------ ------
Income before income taxes........................................ 262 181 101
Income taxes...................................................... 82 41 27
---------- ------ ------
Income before extraordinary item and cumulative effect of
accounting changes.............................................. 180 140 74
Extraordinary item................................................ (7)
Cumulative effect of accounting changes
Postretirement benefits other than pensions..................... (274)
Income taxes.................................................... 6
---------- ------ ------
Net income (loss)................................................. $ 173 $ (128) $ 74
---------- ------ ------
---------- ------ ------
Per Common Share
Income before extraordinary item and cumulative effect of
accounting changes........................................... $ 2.57 $ 2.03 $ 1.09
Extraordinary item.............................................. (.10)
Cumulative effect of accounting changes
Postretirement benefits other than pensions.................. (3.97)
Income taxes................................................. .09
---------- ------ ------
Net income (loss)............................................... $ 2.47 $(1.85) $ 1.09
---------- ------ ------
---------- ------ ------
Cash dividends paid............................................. $ 1.15 $ 1.10 $ 1.10
Average number of Common Shares outstanding (in millions)......... 69.8 68.9 68.0
</TABLE>
The Financial Review on pages F-7 to F-22 is an integral part of the
consolidated financial statements.
F-4
<PAGE> 28
EATON CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(MILLIONS OF DOLLARS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1993 1992 1991
---------- ---- ----
<S> <C> <C> <C>
Operating activities
Income before extraordinary item and cumulative effect of
accounting changes......................................... $180 $140 $ 74
Adjustments to reconcile to net cash provided by operating
activities
Depreciation and amortization.............................. 196 200 185
Acquisition integration charge............................. 55
Long-term liabilities for postretirement benefits other
than pensions............................................ 21
Deferred income taxes...................................... (65) (26) (63)
Other long-term liabilities and other non-cash items in
income................................................... (6) (40) 4
Changes in operating assets and liabilities, excluding
purchases of businesses
Accounts receivable................................... 40 58 (91)
Inventories........................................... 12 11 (17)
Other current assets.................................. 6 (5) (5)
Accounts payable and other accruals................... 29 (8) (26)
Accrued income and other taxes........................ (15) (9) (11)
Other--net................................................. 3 39 (2)
---------- ---- ----
Net cash provided by operating activities....................... 435 381 48
Investing activities
Expenditures for property, plant and equipment................ (227) (186) (194)
Acquisitions of businesses.................................... (14) (22) (17)
Purchases of short-term investments........................... (108) (86) (39)
Maturities and sales of short-term investments................ 22 138
Other--net.................................................... 8 36 5
---------- ---- ----
Net cash used in investing activities........................... (319) (258) (107)
Financing activities
Long-term borrowings.......................................... 99 203
Payments of long-term debt.................................... (98) (151) (107)
Proceeds from sale of Common Shares........................... 62
Proceeds from exercise of stock options by employees.......... 19 29 5
Cash dividends paid........................................... (83) (76) (75)
Net change in short-term debt................................. (14) (15) 24
---------- ---- ----
Net cash (used in) provided by financing activities............. (114) (114) 50
---------- ---- ----
Total increase (decrease) in cash............................... 2 9 (9)
Cash at beginning of year....................................... 30 21 30
---------- ---- ----
Cash at end of year............................................. $ 32 $ 30 $ 21
---------- ---- ----
---------- ---- ----
</TABLE>
The Financial Review on pages F-7 to F-22 is an integral part of the
consolidated financial statements.
F-5
<PAGE> 29
EATON CORPORATION
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(SHARES IN THOUSANDS, DOLLARS IN MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOREIGN TOTAL
COMMON SHARES CAPITAL IN CURRENCY UNALLOCATED SHARE-
---------------- EXCESS OF RETAINED TRANSLATION ESOP HOLDERS'
SHARES AMOUNT PAR VALUE EARNINGS ADJUSTMENTS SHARES EQUITY
------ ------ ---------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1991.............. 33,948 $ 17 $411 $837 $ 9 $(134) $1,140
Net income.............................. 74 74
Cash dividends paid, net of Employee
Stock Ownership Plan (ESOP) tax
benefit............................... (72) (72)
Issuance of shares under employee
benefit plans, including tax
benefit............................... 145 7 7
Purchase of shares for treasury......... (24 ) (1) (1)
Reduction of unallocated ESOP shares.... 12 12
Foreign currency translation
adjustments........................... (7) (7)
------ ------ ----- -------- ----- ----------- --------
Balance at December 31, 1991............ 34,069 17 418 838 2 (122) 1,153
Net loss................................ (128) (128)
Cash dividends paid, net of ESOP tax
benefit............................... (74) (74)
Issuance of shares under employee
benefit plans, including tax
benefit............................... 598 34 34
Reduction of unallocated ESOP shares.... 12 12
Foreign currency translation
adjustments........................... (49) (49)
------ ------ ----- -------- ----- ----------- --------
Balance at December 31, 1992............ 34,667 17 452 636 (47) (110) 948
Net income.............................. 173 173
Cash dividends paid, net of ESOP tax
benefit............................... (83) (83)
Issuance of shares under employee
benefit plans, including tax
benefit............................... 483 22 22
Two-for-one stock split................. 34,867 18 (18)
Sale of shares.......................... 1,287 1 61 62
Reduction of unallocated ESOP shares.... 14 14
Foreign currency translation
adjustments........................... (31) (31)
------ ------ ----- -------- ----- ----------- --------
Balance at December 31, 1993............ 71,304 $ 36 $535 $708 $ (78) $ (96) $1,105
------ ------ ----- -------- ----- ----------- --------
------ ------ ----- -------- ----- ----------- --------
</TABLE>
The Financial Review on pages F-7 to F-22 is an integral part of the
consolidated financial statements.
F-6
<PAGE> 30
FINANCIAL REVIEW
On June 28, 1993, the Company distributed a two-for-one stock split
effected in the form of a 100% stock dividend. Accordingly, all per share
amounts, average shares outstanding used in the calculation of per share amounts
and stock option information have been adjusted retroactively to reflect the
stock split.
In June 1993, the Company reconsolidated the net assets and operating
results of its remaining discontinued operations. Prior years have been restated
to include these results. The Company has concluded that, although it would
still prefer to divest these operations, due to the ongoing contraction in the
defense industry and uncertainty in the defense electronics market at the
present time, it would be extremely difficult to implement its divestiture plans
on an acceptable basis. Financial information for these operations is presented
under Defense Systems in "Business Segment Information" in the Financial Review.
ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include accounts of the Company and
all majority-owned subsidiaries. The equity method of accounting is used for
investments where the Company has a 20% to 50% ownership interest.
FOREIGN CURRENCY TRANSLATION
Financial statements for subsidiaries outside the United States, except
those in highly inflationary economies, are translated into U.S. dollars at
year-end exchange rates as to assets and liabilities and weighted average
exchange rates as to revenues and expenses. The resulting translation
adjustments are recorded in shareholders' equity. Financial statements for
subsidiaries in highly inflationary economies are translated into U.S. dollars
in the same manner except for inventories and property, plant and equipment-net,
and related expenses, which are translated at historical exchange rates. The
resulting translation adjustments are included in net income.
SHORT-TERM INVESTMENTS
Short-term investments are carried at cost and are not considered to be
cash equivalents for purposes of classification in the statements of
consolidated cash flows.
INVENTORIES
Inventories are carried at lower of cost or market. Inventories in the
United States, other than those associated with long-term contracts, are
accounted for using the last-in, first-out (LIFO) method and all other
inventories using the first-in, first-out (FIFO) method.
LONG-TERM CONTRACTS
Income and costs on long-term contracts, which relate primarily to the
Defense Systems business segment, are recognized on the percentage-of-completion
method. Provision is made for anticipated losses on uncompleted contracts.
Certain government contracts provide for incentive awards or penalties which are
reflected in operations at the time amounts can be reasonably determined.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed by the straight-line method for
financial statement purposes. Depreciation of plant and equipment is provided
over the useful lives of the various classes of assets. Excess of cost over net
assets of businesses acquired is amortized over fifteen to forty years
(accumulated amortization was $78 million and $69 million at the end of 1993 and
1992, respectively). Other intangible assets, principally patents, are amortized
over their respective lives.
F-7
<PAGE> 31
INCOME TAXES
In 1992, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes", as discussed under "Accounting
Changes" in the Financial Review. Deferred income taxes are not provided for
undistributed earnings of consolidated subsidiaries outside the United States
when such earnings are reinvested for an indefinite period of time by the
subsidiaries.
FINANCIAL INSTRUMENTS
Gains or losses on interest rate swap and cap agreements which hedge
interest on debt are accrued in interest expense. Gains or losses on foreign
currency forward exchange contracts and options which hedge specific
transactions are recognized in net income, offsetting the underlying foreign
currency transaction gains or losses. Gains or losses on foreign currency
forward exchange contracts and options which hedge net investments in
consolidated subsidiaries outside the United States are accrued in shareholders'
equity. Premiums related to interest rate swap and cap agreements and foreign
currency forward exchange contracts and options are amortized to net income over
the life of the agreement.
NET INCOME PER COMMON SHARE
Net income per Common Share is computed by dividing net income by the
average month-end number of shares outstanding during each period. The dilutive
effect of common stock equivalents is not material.
SUBSEQUENT EVENT -- ACQUISITION OF DCBU AND INTEGRATION CHARGE
On January 31, 1994, the Company acquired the Distribution and Control
Business Unit (DCBU) of Westinghouse Electric Corporation for a purchase price
of $1.1 billion, plus the assumption of certain liabilities. The purchase price
is subject to adjustment based upon changes in DCBU's net assets since the
acquisition agreement was signed. This acquisition will be accounted for as a
purchase in 1994. DCBU had sales of $1.1 billion in 1993 and has estimated net
assets of $600 million. DCBU is a leading North American manufacturer of
electrical distribution equipment and industrial controls, headquartered in
Pittsburgh, Pennsylvania. It has approximately 12,500 employees who are located
at 36 plants and facilities in the United States, Puerto Rico, Central and South
America, Canada and the United Kingdom, and at 27 satellite operations and 12
distribution centers. The purchase includes Challenger Electrical Equipment
Corporation, which was acquired by Westinghouse in 1987.
DCBU will be combined with Eaton's Industrial Control and Power
Distribution Operations (ICPDO), which market Cutler-Hammer products, to form a
Cutler-Hammer business unit with annual sales of $1.6 billion. Eaton's
consolidated sales are expected to increase by 25% as a result of the
acquisition.
In order to finance the acquisition, the Company issued $930 million of
short-term commercial paper. The Company plans to reduce these short-term
financings by the middle of 1994 through equity and long-term debt financings.
The timing and mix of these financings will depend on market conditions. Of
these short-term financings, $555 million will be classified as long-term debt
because the Company intends, and has the ability under a new five-year $555
million revolving credit agreement entered into in January 1994, to refinance
this debt on a long-term basis. Also, in January 1994, the Company entered into
a $555 million 364-day revolving credit agreement.
In 1993, the Company entered into several interest rate hedge agreements
related to the planned financing of the acquisition. In September 1993, the
Company entered into four interest rate swaps commencing on January 18, 1994.
Two thirty-year swaps will effectively convert $100 million of floating rate
debt into fixed rate debt at an average rate of 6.685%, and two ten-year swaps
will effectively convert $100 million of floating rate debt into fixed rate debt
at an average rate of 5.788%. In October 1993, the Company purchased a one-year
interest rate cap commencing on January 1, 1994 that effectively places a 5.5%
ceiling on $400 million of floating rate debt, and a ten-month interest rate cap
commencing January 1, 1995 that effectively places a 5.5% ceiling on $100
million of floating rate debt.
F-8
<PAGE> 32
In December 1993, in conjunction with the acquisition, the Company recorded
a $55 million acquisition integration charge before income tax credits ($34
million after income tax credits, or $.49 per Common Share). Part of a
comprehensive business plan, the charge addresses the costs of the integration
of ICPDO product lines and operations with DCBU, related workforce reductions
and an $8 million write-down of assets, largely in the United States.
Expenditures are expected to occur over approximately the next four years and
will be funded through cash flow from the combined operations. The Company
anticipates that integration of the businesses will create permanent value by
streamlining product lines, manufacturing capacity and organization structure
and enable the businesses to attain maximum benefit from synergy of
complementary product offerings, operations and technical expertise. Positive
incremental benefits are anticipated following the first year of integration
activities.
EXTRAORDINARY ITEM AND RESTRUCTURING CHARGE
In March 1993, the Company called for redemption, in April 1993, the $74
million outstanding balance of its 9% debentures, and in December 1993, the
Company called for redemption, in January 1994, the $89 million outstanding
balance of its 8.5% debentures. The extraordinary loss on these redemptions,
including the write-off of debt issue costs, was $11 million before income tax
credits ($7 million after income tax credits, or $.10 per Common Share).
In 1991, as a result of the review of operating strategies and in order to
improve competitiveness and future profitability, the Company recorded a
restructuring charge of $39 million before income tax credits ($25 million after
income tax credits, or $.38 per Common Share). The charge included provisions
for restructuring, relocation and rationalization of product lines and
operations and permanent workforce reductions involving a significant number of
operations, primarily in the United States and Europe.
ACCOUNTING CHANGES
In 1992, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". SFAS No. 106 requires accrual of
these benefits, primarily postretirement health care and life insurance for
retirees in the United States, over the working lives of employees rather than
recognition of expenses as claims are incurred. Included in net income for 1992
is the cumulative effect of this accounting change for prior years of $442
million before income tax credits ($274 million after income tax credits, or
$3.97 per Common Share). As a result of this accounting change, 1992
postretirement health care and life insurance costs increased $25 million before
income tax credits ($16 million after income tax credits, or $.23 per Common
Share). Results for 1991 have not been restated for this accounting change. SFAS
No. 106 has no effect on cash flows since claims will continue to be paid as
incurred.
In 1992, the Company also adopted SFAS No. 109, "Accounting for Income
Taxes". The adoption of this standard changed the method of accounting for
income taxes to the liability method from the deferred method. The liability
method requires recognition of deferred income taxes based on temporary
differences between the financial reporting and income tax bases of assets and
liabilities, using currently-enacted income tax rates and regulations. Included
in net income for 1992 is the cumulative effect of this accounting change for
prior years of $6 million, or $.09 per Common Share. Results for 1991 have not
been restated for this accounting change. SFAS No. 109 has no effect on cash
flows.
ACCOUNTS RECEIVABLE
Included in accounts receivable at December 31, 1993 and 1992 were unbilled
amounts of $23 million and $91 million, respectively, primarily related to
long-term contracts of the Defense Systems business segment with the United
States Government. These receivables will be billed in accordance with
applicable contract terms and are expected to be collected within one year.
Accounts receivable are net of an allowance for doubtful accounts of $10
million at the end of 1993 and 1992.
F-9
<PAGE> 33
INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1993 1992
---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Raw materials......................................................... $141 $128
Work in process....................................................... 238 264
Finished goods........................................................ 139 146
---- ----
Gross inventories at FIFO........................................... 518 538
Excess of current cost over LIFO cost................................. (84) (83)
---- ----
Net inventories at LIFO............................................. $434 $455
---- ----
---- ----
</TABLE>
Gross inventories accounted for using the LIFO method were $314 million and
$294 million at the end of 1993 and 1992, respectively.
DEBT AND OTHER FINANCIAL INSTRUMENTS
Information related to the 1994 financing of the acquisition of DCBU is
contained under "Subsequent Event -- Acquisition of DCBU and Integration Charge"
in the Financial Review.
The Company has lines of credit, primarily short-term, aggregating $119
million from various banks worldwide. Most of these arrangements do not have
termination dates, but are reviewed periodically for renewal. At December 31,
1993, the Company had $24 million outstanding under lines of credit with banks.
A summary of long-term debt, excluding the current portion, follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1993 1992
---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
9% notes payable, due 2001....................................... $100 $100
8% debentures, due 2006 (due 1996 at option of debenture
holder)........................................................ 86 86
8.9% debentures, due 2006........................................ 100 100
7% debentures, due 2011, net of unamortized discount of $95
million
in 1993 and $96 million in 1992 (effective interest rate
14.6%)......................................................... 105 104
8 7/8% debentures, due 2019 (due 2004 at option of debenture
holder)........................................................ 38 38
8.1% debentures, due 2022........................................ 100 100
Notes payable of Employee Stock Ownership Plan due through
1999........................................................... 82 96
8.5% sinking fund debentures..................................... 89
9% sinking fund debentures....................................... 74
Other............................................................ 38 46
---- ----
$649 $833
---- ----
---- ----
</TABLE>
During 1993, the Company called for redemption the $74 million outstanding
balance of its 9% debentures and the $89 million outstanding balance of its 8.5%
debentures, resulting in an extraordinary loss of $7 million.
Notes payable of the Employee Stock Ownership Plan (ESOP), which are
guaranteed by the Company, consist of $65 million at a floating interest rate
(3.00% at December 31, 1993) based on LIBOR and $31 million at a fixed interest
rate of 7.62%. The Company has entered into a series of interest rate swaps,
which expire ratably through 1999, and which change the interest rate on the $31
million of fixed interest rate notes payable to fixed interest rates of 7.07%
and 6.85% as to $9 million and $18 million, respectively, and to a floating
interest rate (2.075% at December 31, 1993) based on LIBOR as to $4 million.
In 1991, an unrelated party exercised its option under a 1990 agreement to
enter into an interest rate swap expiring in 2000 with the Company. The
agreement effectively converts $100 million of floating rate debt into
F-10
<PAGE> 34
fixed rate obligations. Payments are received at a floating interest rate
(3.375% at December 31, 1993) based on LIBOR and are made at a fixed interest
rate of 9%.
Aggregate mandatory sinking fund requirements and annual maturities of
long-term debt are as follows (in millions): 1994, $110; 1995, $21; 1996, $106;
1997, $21; and 1998, $22. The amount for 1994 includes $89 million of 8.5%
debentures called for redemption in January 1994. The amount for 1996 includes
$86 million of 8% debentures due in 1996 at the option of the debenture holder.
Interest cost capitalized as part of acquisition or construction of major
assets (in millions) was $12, $8, and $7 in 1993, 1992 and 1991, respectively.
Interest paid (in millions) was $90, $94 and $81 in 1993, 1992 and 1991,
respectively.
At December 31, 1993, the Company held foreign currency forward exchange
contracts and options, which primarily mature in 1994, for purchase or sale of
largely European and Canadian currencies to hedge foreign currency transactions
and net investment positions. Open purchase contracts totaled $63 million and
open sales contracts totaled $290 million.
Counterparties to various hedging instruments are a number of major
international financial institutions. While the Company may be exposed to credit
losses in the event of nonperformance by these counterparties, it does not
anticipate losses due to its control over the limit of positions entered into
with any one party and the strong credit ratings of these institutions.
The following table summarizes the carrying amount and fair value of
financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Cash and short-term investments......... $300 $300 $216 $216
Equity investments and marketable
securities, included in other
assets................................ 53 61 54 67
Short-term debt......................... (14) (14 ) (30) (30 )
Long-term debt and current portion of
long-term debt........................ (759) (941 ) (852) (954 )
Foreign currency forward exchange
contracts and options................. 6 7 8 14
Interest rate derivatives............... (13 ) (12 )
</TABLE>
The fair value of equity investments, marketable securities, long-term debt
and interest rate derivatives was principally based on quoted market prices. The
fair value of foreign currency forward exchange contracts and options was
estimated based on quoted market prices of comparable contracts, adjusted
through interpolation where necessary for maturity differences. The carrying
amount of financial instruments is not affected by the fair value measurement.
PROTECTION OF THE ENVIRONMENT
The Company has been named a potentially responsible party (PRP) under the
Federal Superfund law at a number of waste disposal sites. Although this law
technically imposes joint and several liability upon each PRP at each site, the
extent of the Company's required financial contribution to the cleanup of these
sites is expected to be limited based on the number and financial strength of
the other named PRP's and the volumes of waste involved which might be
attributable to the Company. The Company is also involved in remedial response
and voluntary environmental cleanup expenditures at a number of other sites
which are not the subject of any Superfund law proceeding, including certain of
its currently-owned or formerly-owned plants. Although it is difficult to
quantify the potential financial impact of compliance with environmental
protection laws, management estimates that there is a reasonable possibility
that the remediation and other costs associated with all of these sites may
range between $10 million and $68 million, and that such costs would be incurred
over a period of several years. The Company accrues for these costs when it is
probable that a liability
F-11
<PAGE> 35
has been incurred and the amount of the loss can be reasonably estimated. At
December 31, 1993, the Company's balance sheet included an accrual for the
estimated remediation and other environmental costs of approximately $14
million. Actual costs to be incurred at identified sites in future periods may
vary from the estimates, given inherent uncertainties in evaluating
environmental exposures. Subject to the difficulty in estimating future
environmental costs, the Company expects that any sum it may be required to pay
in connection with environmental matters in excess of the amounts recorded or
disclosed above will not have a material adverse effect on its financial
condition or results of operations.
With respect to the DCBU operations acquired at January 31, 1994, to date
the Company has conducted only a due diligence, preacquisition review of the
environmental loss contingencies and expenditures at these operations. Although
additional investigation and review is in progress, the Company is not yet able
to evaluate conclusively the scope of any environmental issues. The Company
expects that these operations will have environmental exposure similar to that
of other electrical equipment manufacturers. The Company's exposure is limited,
however, by the agreement between the Company and Westinghouse Electric
Corporation, pursuant to which the Company acquired DCBU. With respect to
environmental conditions existing prior to the acquisition, Westinghouse has
agreed to retain certain responsibilities, to share the cost of others and to
indemnify the Company for its share of those costs to the extent that they
exceed $3.5 million annually. For locations in the United States, this
obligation to share and to indemnify extends for ten years, and for locations
elsewhere it extends for fifteen years.
The Company continues to modify, on an ongoing, regular basis, certain of
its processes in order to reduce the impact on the environment. Efforts in this
regard include the removal of many underground storage tanks and the reduction
or elimination of certain chemicals and wastes in its operations.
OPTIONS FOR COMMON SHARES
Options have been granted to certain employees, under various plans, to
purchase the Company's Common Shares at prices equal to fair market value as of
date of grant. These options expire ten years from date of grant. A summary of
stock option activity follows:
<TABLE>
<CAPTION>
1993 1992
---------------------- -----------------------
AVERAGE AVERAGE
PRICE PRICE
PER SHARE SHARES PER SHARE SHARES
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Outstanding, January 1....................... $ 28.81 3,368,670 $ 26.33 3,836,274
Granted...................................... 39.34 831,730 34.10 808,070
Exercised.................................... 27.28 (657,353) 24.50 (1,221,610)
Canceled..................................... 32.52 (109,197) 29.47 (54,064)
--------- ----------
Outstanding, December 31..................... $ 31.53 3,433,850 $ 28.81 3,368,670
--------- ----------
--------- ----------
Shares exercisable
January 1.................................. 2,334,758 2,903,104
December 31................................ 2,401,683 2,334,758
Shares reserved for future grants
January 1.................................. 2,856,882 3,703,528
December 31................................ 2,133,630 2,856,882
</TABLE>
F-12
<PAGE> 36
SHAREHOLDERS' EQUITY
There are 150 million Common Shares authorized. There were 11 million and
12 million Common Shares held in treasury at the end of 1992 and 1991,
respectively, which were reissued in conjunction with the June 1993 two-for-one
stock split. At December 31, 1993, 5.8 million Common Shares were reserved
principally for exercise and grant of stock options. At December 31, 1993, there
were 15,417 holders of record of Common Shares. Additionally, 15,508 employees
were shareholders through participation in the Share Purchase and Investment
Plan.
In private placements the Company sold 1.3 million Common Shares in 1993
for aggregate net proceeds of $62 million, and sold an additional 800,000 Common
Shares in January 1994 for aggregate net proceeds of $38 million. In May 1993,
the Company redeemed its share purchase rights at a redemption price of 3 1/3
cents for each right, for a total payment of $2 million.
The Company's Employee Stock Ownership Plan (ESOP) was established to
prefund a portion of the anticipated matching contributions through 1999 to its
Share Purchase and Investment Plan (SPIP) for participating United States
employees. That portion of SPIP expense related to the ESOP is calculated by
first determining the ratio of shares allocated to employee ESOP accounts
relative to shares released, and then applying that ratio to the amount
contributed to the ESOP. That amount, along with dividends on unallocated Common
Shares held by the ESOP, is used to repay the notes, including interest, in
level installments. Unallocated ESOP shares are allocated to employee ESOP
accounts in aggregate amounts based on loan principal payments made by the ESOP.
LEASE COMMITMENTS
Future minimum rental commitments as of December 31, 1993, under
noncancelable operating leases, which expire at various dates and in most cases
contain renewal options, are as follows (in millions): 1994, $28; 1995, $23;
1996, $17; 1997, $14; 1998, $12; and after 1998, $91.
Rental expense in 1993, 1992 and 1991 (in millions) was $43, $45 and $49,
respectively.
PENSION PLANS
The Company has non-contributory defined benefit pension plans covering the
majority of employees. Plans covering salaried and certain hourly employees
provide benefits that are generally based on years of service and final average
compensation. Benefits for other hourly employees are generally based on years
of service. Company policy is to fund at least the minimum amount required by
applicable regulations. In the event of a change in control of the Company,
excess pension plan assets of North American operations may be dedicated to
funding of health and welfare benefits for employees and retirees.
The components of pension (expense) income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1993 1992 1991
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost -- benefits earned during year.................... $(42) $(39) $(39)
Interest cost on projected benefit obligation.................. (97) (96) (92)
Actual return on assets........................................ 155 203 216
Net amortization and deferral.................................. (17) (73) (90)
---- ---- ----
$ (1) $ (5) $ (5)
---- ---- ----
---- ---- ----
</TABLE>
F-13
<PAGE> 37
The following table sets forth, by funded status, the asset (liability)
recognized in the consolidated balance sheets for pension plans:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------- -------------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
---------- ----------- ---------- -----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Accumulated pension benefit
obligation
Vested........................... $ 979 $ 136 $ 900 $ 101
Nonvested........................ 53 10 57 8
---------- ----------- ---------- -----------
1,032 146 957 109
Value of future salary
projections...................... 143 10 147 14
---------- ----------- ---------- -----------
Total projected pension benefit
obligation....................... 1,175 156 1,104 123
Fair value of plan assets.......... 1,371 68 1,372 40
---------- ----------- ---------- -----------
Plan assets in excess of or (less
than) projected benefit
obligation....................... 196 (88) 268 (83)
Unamortized amounts not yet
recognized
Initial net (asset) obligation... (48) 7 (63) 8
Net (gain) loss.................. (116) 3 (198) (2)
Prior service cost............... 27 12 34 11
Adjustment to recognize minimum
liability..................... (12) (8)
---------- ----------- ---------- -----------
$ 59 $ (78) $ 41 $ (74)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
Measurement of the projected benefit obligation was based on a discount
rate of 7.25% in 1993 and 8.25% in 1992 and 1991. The expected compensation
growth rate was 4.95% in 1993 and 5.95% in 1992 and 1991. The expected long-term
rate of return on assets was 10% in all three years; actual returns during each
of these three years exceeded the expected 10% rate. Plan assets were invested
in equity and fixed income securities and other instruments. Underfunded plans
are associated principally with operations outside the United States. The change
in the discount rate to 7.25% at the end of 1993 had the effect of increasing
the accumulated pension benefit obligation by $103 million with an offsetting
decrease in the unamortized net gain. This change will have an immaterial effect
on future expense.
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS
Generally, employees become eligible for postretirement benefits other than
pensions, primarily health care and life insurance for retirees in the United
States, when they retire. These benefits are payable for life, although the
Company retains the right to modify or terminate the plans providing these
benefits. The plans are primarily contributory, with retiree contributions
adjusted annually, and contain other cost-sharing features, including
deductibles and co-payments. Effective January 1, 1993, certain plans were
amended to limit the annual amount of the Company's future contributions towards
employees' postretirement health care benefits. Company policy is to pay claims
as they are incurred since, unlike pensions, there is no effective method to
obtain a tax deduction for prefunding of these benefits under existing United
States income tax regulations.
Expense for postretirement benefits other than pensions, with amounts for
1993 and 1992 calculated under SFAS No. 106, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1991 1992 1993
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost-benefits earned during year.................... $ (7) $(12)
Interest cost on projected benefit obligation............... (37) (44)
Amortization of unrecognized prior service cost............. 9
Claims incurred and expensed................................ $(27)
---- ---- ----
$(35) $(56) $(27)
---- ---- ----
---- ---- ----
</TABLE>
F-14
<PAGE> 38
The liability recognized in the consolidated balance sheets for
postretirement benefit plans other than pensions is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1993 1992
---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees........................................................... $368 $345
Eligible plan participants......................................... 38 45
Noneligible plan participants...................................... 120 161
Unamortized amounts not yet recognized
Prior service cost................................................. 91
Net loss........................................................... (73) (5)
---- ----
$544 $546
---- ----
---- ----
</TABLE>
Measurement of the accumulated postretirement benefit obligation at
December 31, 1993, was based on a 12% annual rate of increase in per capita cost
of covered health care benefits (13% for 1992). For 1993, the rate was assumed
to decrease ratably to 5% through 2000 and remain at that level thereafter (6%
for 1992). The discount rate was 7.25% in 1993 and 8.5% in 1992. An increase of
1% in assumed health care cost trend rates would increase the accumulated
postretirement benefit obligation as of December 31, 1993 by $34 million and the
net periodic cost for 1993 by $2 million. The changes in assumed rates had the
effect of increasing the accumulated postretirement benefit obligation by $49
million with an offsetting increase in the unamortized net loss. This change
will have an immaterial effect on future expense.
INVESTMENT IN LIFE INSURANCE
In 1993, the Company purchased company-owned life insurance policies
insuring the lives of a portion of its active United States employees. These
policies offer an attractive means of accumulating assets to meet future
liabilities including the payment of employee benefits such as health care. At
December 31, 1993, the investment in this life insurance, included in other
assets, was $7 million, net of policy loans of $110 million. Net life insurance
expense of $2 million, including interest expense of $4 million in 1993, was
included in selling and administrative expense.
INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1993 1992 1991
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Income before income taxes
United States.................................................. $214 $147 $ 85
Outside the United States...................................... 48 34 16
---- ---- ----
$262 $181 $101
---- ---- ----
---- ---- ----
</TABLE>
F-15
<PAGE> 39
Income taxes, with amounts for 1993 and 1992 derived under SFAS No.109, are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1993 1992 1991
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Current
United States
Federal................................................ $108 $ 42 $ 64
State and local........................................ 7 5 10
Outside the United States................................. 30 20 10
---- ---- ----
145 67 84
Deferred
United States
Increase in statutory tax rate......................... (5)
Other Federal.......................................... (50) (14) (47)
State and local........................................ (2) (1) (8)
Outside the United States
Operating loss carryforwards........................... (7) (11)
Reduction of valuation allowance for deferred tax
assets.............................................. (5)
Increase in statutory tax rate......................... (1)
Other.................................................. 7 (2)
---- ---- ----
(63) (26) (57)
---- ---- ----
$ 82 $ 41 $ 27
---- ---- ----
---- ---- ----
</TABLE>
...Significant components of net current and net long-term deferred income
taxes derived under SFAS
No. 109 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------------------
CURRENT LONG-TERM LONG-TERM
ASSETS ASSETS LIABILITIES
------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Accruals and other adjustments
Employee benefits............................. $ 44 $ 209 $ (4)
Inventory..................................... 15
Long-term contracts........................... 16
Restructuring................................. 15 13
Depreciation and amortization................. (140) (15)
Other......................................... 22 5
Operating loss carryforwards.................... 50 2
Valuation allowance............................. (15)
Other items..................................... 15 (10) 7
------- --------- ---------
$ 127 $ 112 $ (10)
------- --------- ---------
------- --------- ---------
</TABLE>
F-16
<PAGE> 40
<TABLE>
<CAPTION>
DECEMBER 31, 1992
-------------------------------------
CURRENT LONG-TERM LONG-TERM
ASSETS ASSETS LIABILITIES
------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Accruals and other adjustments
Employee benefits............................. $ 28 $ 209 $ (3)
Inventory..................................... 26
Long-term contracts........................... 17 (9)
Restructuring................................. 14
Depreciation and amortization................. (137) (19)
Other......................................... 23 4
Operating loss carryforwards.................... 42 4
Valuation allowance............................. (20)
Other items..................................... 12 (28) 4
------- --------- ---------
$ 120 $ 61 $ (14)
------- --------- ---------
------- --------- ---------
</TABLE>
The deferred income tax provision of $57 million for 1991 related primarily
to long-term contracts.
At December 31, 1993 certain subsidiaries outside the United States had tax
loss carryforwards aggregating $115 million. Carryforwards of $68 million have
no expiration dates and the balance expire at various dates from 1995 through
2005.
A reconciliation of income taxes at the United States Federal statutory
rate to the effective income tax rate, with amounts for 1993 and 1992 derived
under SFAS No. 109, follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1993
---------------- 1992 1991
AMOUNT RATE RATE RATE
------ ---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Income taxes at the United States
statutory rate.................................... $ 92 35.0% 34.0% 34.0%
Adjustment of deferred income taxes for
change in statutory income tax rates.............. (6) (2.3)
State and local income taxes........................ 4 1.5 .9 2.1
Adjustment of worldwide tax
liabilities....................................... 3 1.4 (6.0) (4.1)
Effective tax rate differential on earnings of
consolidated subsidiaries and associate companies
outside the United States......................... (5) (2.0) (3.9) (2.1)
Other-net........................................... (6) (2.1) (2.2) (3.4)
------ ---- ---- ----
$ 82 31.5% 22.8% 26.5%
------ ---- ---- ----
------ ---- ---- ----
</TABLE>
The adoption of SFAS No. 109 reduced 1992 income tax expense by $11 million
and the effective income tax rate by 6%, in comparison to the prior accounting
method.
The parent company has not provided income taxes on undistributed earnings
of consolidated subsidiaries outside the United States of $332 million at
December 31, 1993, since the earnings retained have been reinvested by the
subsidiaries. If distributed, such remitted earnings would be subject to
withholding taxes but substantially free of United States income taxes.
Worldwide income tax payments, including Federal and state income taxes in
the United States, in 1993, 1992 and 1991 (in millions) were $156, $71 and $97,
respectively.
F-17
<PAGE> 41
QUARTERLY DATA
(UNAUDITED)
(MILLIONS OF DOLLARS EXCEPT FOR PER SHARE DATA)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
------- -------- ------- -------
<S> <C> <C> <C> <C>
1993
Net sales.............................................. $1,115 $1,053 $1,147 $1,086
Gross margin........................................... 297 266 279 275
Percent of sales..................................... 27 % 25% 24 % 25 %
Income before extraordinary item....................... 30 44 53 53
Extraordinary item..................................... (4 ) (3 )
Net income............................................. 26 44 53 50
Per Common Share
Income before extraordinary item..................... $ .41 $ .63 $ .77 $ .76
Extraordinary item................................... (.05 ) (.05 )
Net income........................................... .36 .63 .77 .71
Cash dividends paid.................................. .30 .30 .275 .275
Market price
High.............................................. 55 3/8 51 3/4 47 1/8 43 3/4
Low............................................... 48 43 41 1/2 38 1/4
1992
Net sales.............................................. $1,030 $1,012 $1,064 $ 995
Gross margin........................................... 253 223 256 235
Percent of sales..................................... 24 % 22% 24 % 24 %
Income before cumulative effect of accounting
changes.............................................. 39 28 41 32
Cumulative effect of accounting changes
Postretirement benefits other than pensions.......... (274 )
Income taxes......................................... 6
Net income (loss)...................................... 39 28 41 (236 )
Per Common Share
Income before cumulative effect of accounting
changes........................................... $ .57 $ .40 $ .60 $ .46
Cumulative effect of accounting changes
Postretirement benefits other than pensions....... (4.00 )
Income taxes...................................... .09
Net income (loss).................................... .57 .40 .60 (3.45 )
Cash dividends paid.................................. .275 .275 .275 .275
Market price
High.............................................. 40 7/8 40 3/8 41 5/8 39 3/8
Low............................................... 35 35 7/8 35 1/2 30 7/8
</TABLE>
The fourth quarter of 1993 includes an acquisition integration charge of
$55 million before income tax credits ($34 million after income tax credits, or
$.49 per Common Share).
The redemption of debentures in 1993 resulted in extraordinary losses of $5
million and $6 million before income tax credits in the first and fourth
quarters, respectively ($3 million and $4 million after income tax credits, or
$.05 per Common Share in each quarter). The previously reported first quarter
results were restated to segregate the extraordinary loss.
Gross margin for the second quarter of 1993 was reduced by a charge of $9
million for the restructuring of certain vehicle components operations in
Europe.
F-18
<PAGE> 42
The third quarter of 1992 includes an $11 million gain, before income
taxes, on the sale of an interest in a limited partnership. The gain was
partially offset by the accrual in the third quarter of 1992 of the contribution
to the Company's charitable trust of marketable securities with a market value
of $8 million.
In 1992, the Company adopted the new accounting standards for
postretirement benefits other than pensions and income taxes, retroactive to
January 1, 1992. Net income in the first quarter of 1992 includes the cumulative
effect of the accounting change for postretirement benefits other than pensions
for prior years of $442 million before income tax credits ($274 million after
income tax credits, or $4.00 per Common Share). Net income in the first quarter
of 1992 also includes the cumulative effect of the accounting change for income
taxes for prior years of $6 million, or $.09 per Common Share.
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
Operations are classified among three business segments: Vehicle
Components, Electrical and Electronic Controls and Defense Systems. The major
classes of products included in each segment and other information follow.
VEHICLE COMPONENTS
Truck Components -- Heavy and medium duty mechanical transmissions; power
take-offs; drive, trailer and steering axles; brakes; locking differentials;
engine valves; valve lifters; leaf springs; viscous fan drives; fans and fan
shrouds; power steering pumps; tire pressure control systems; tire valves.
Passenger Car Components -- Engine valves; hydraulic valve lifters; viscous
fan drives; fans and fan shrouds; locking differentials; spring fluid dampers;
superchargers; tire valves.
Off-Highway Vehicle Components -- Mechanical and automatic transmissions;
drive and steering axles; brakes; engine valves; hydraulic valve lifters; gear
and piston pumps and motors; transaxles and steering systems; geroters; control
valves and cylinders; forgings; tire valves.
The principal market for these products is original equipment manufacturers
of trucks, passenger cars and off-highway vehicles. Most sales of these products
are made directly from the Company's plants to such manufacturers.
ELECTRICAL AND ELECTRONIC CONTROLS
Industrial and Commercial Controls -- Electromechanical and electronic
controls: motor starters, contactors, overloads and electric drives;
programmable controllers, counters, man/machine interface panels and
pushbuttons; photoelectric, proximity, temperature and pressure sensors; circuit
breakers; loadcenters; safety switches; panelboards; switchboards; dry type
transformers; busway; meter centers; portable tool switches; commercial
switches; relays; illuminated panels; annunciator panels; electrically actuated
valves and actuators.
Automotive and Appliance Controls -- Electromechanical and electronic
controls: convenience, stalk and concealed switches; knock sensors; climate
control components; speed controls; timers; pressure switches; water valves;
range controls; thermostats; gas valves; infinite switches; temperature and
humidity sensors.
Specialty Controls -- Automated material handling systems; automated guided
vehicles; stacker cranes; ion implanters; engineered fasteners; golf grips;
industrial clutches and brakes.
The principal markets for these products are industrial, commercial,
automotive, appliance, aerospace and government customers. Sales are made
directly by the Company or indirectly through distributors and manufacturers'
representatives.
DEFENSE SYSTEMS
Strategic countermeasures; tactical jamming systems; electronic
intelligence; electronic support measures.
F-19
<PAGE> 43
The principal market for these products is the United States Government.
OTHER INFORMATION
Operating profit represents net sales less operating expenses for each
segment and geographic region and excludes interest expense and income, and
general corporate expenses -- net.
Identifiable assets for each segment and geographic region represent those
assets used in operations (including excess of cost over net assets of
businesses acquired) and exclude general corporate assets (consisting
principally of short-term investments, deferred income taxes, investments
carried at equity, property and other assets).
Net sales to divisions and subsidiaries of one customer, primarily from the
Vehicle Components business segment, were $541 million in 1993, $491 million in
1992 and $394 million in 1991 (12% of sales in 1993, 12% in 1992 and 11% in
1991).
GEOGRAPHIC REGION INFORMATION
<TABLE>
<CAPTION>
UNITED LATIN PACIFIC ELIMIN-
(MILLIONS OF DOLLARS) STATES CANADA EUROPE AMERICA REGION ATIONS TOTALS
------ ------ ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1993
Net sales................ $3,404 $183 $769 $ 202 $81 $ 238 $4,401
Operating profit......... 275 21 17 9 10 332
Identifiable assets...... 1,726 101 548 103 48 60 2,466
1992
Net sales................ $3,002 $175 $861 $ 184 $66 $ 187 $4,101
Operating profit......... 201 20 29 8 6 264
Identifiable assets...... 1,781 74 630 98 48 59 2,572
1991
Net sales................ $2,768 $166 $679 $ 153 $58 $ 165 $3,659
Operating profit......... 151 12 6 5 174
Identifiable assets...... 1,886 84 626 100 48 71 2,673
</TABLE>
Operating profit in 1993 was reduced by an acquisition integration charge
of $53 million in the United States and $2 million in Canada, and by a
restructuring charge of $9 million in Europe.
Operating profit for the United States in 1992 was reduced by $25 million
of expense related to the accounting change for postretirement benefits other
than pensions.
Operating profit in 1991 was reduced by a restructuring charge of $24
million in the United States, $2 million in Canada and $13 million in Europe.
Geographic region information (table above) does not include results of
associate companies and joint ventures in which the Company holds a 20%-50%
ownership interest, which are accounted for by the equity method, and which had
total sales as follows:
<TABLE>
<CAPTION>
UNITED LATIN PACIFIC
(MILLIONS OF DOLLARS) STATES EUROPE AMERICA REGION TOTALS
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
1993......................................... $ 7 $ 13 $15 $ 169 $204
1992......................................... 6 18 6 136 166
1991......................................... 39 40 7 189 275
</TABLE>
F-20
<PAGE> 44
BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Net sales by classes of similar products
Vehicle Components
Truck Components................................. $1,504 $1,244 $1,022
Passenger Car Components......................... 524 542 477
Off-Highway Vehicle Components................... 329 307 307
------ ------ ------
2,357 2,093 1,806
Electrical and Electronic Controls
Industrial and Commercial Controls............... 779 745 730
Automotive and Appliance Controls................ 735 723 529
Specialty Controls............................... 338 308 316
------ ------ ------
1,852 1,776 1,575
Defense Systems..................................... 192 232 278
------ ------ ------
$4,401 $4,101 $3,659
------ ------ ------
------ ------ ------
Operating profit
Vehicle Components.................................. $ 247 $ 170 $ 63
Electrical and Electronic Controls (includes $55
million acquisition integration charge in
1993)............................................ 83 85 88
Defense Systems..................................... 2 9 23
------ ------ ------
332 264 174
Interest expense...................................... (75) (89) (83)
Interest income....................................... 8 9 12
General corporate expenses -- net..................... (3) (3) (2)
------ ------ ------
Income before income taxes............................ $ 262 $ 181 $ 101
------ ------ ------
------ ------ ------
Identifiable assets
Vehicle Components.................................. $1,230 $1,194 $1,244
Electrical and Electronic Controls.................. 1,119 1,128 1,089
Defense Systems..................................... 117 250 340
------ ------ ------
2,466 2,572 2,673
General corporate assets............................ 802 648 511
------ ------ ------
Total assets.......................................... $3,268 $3,220 $3,184
------ ------ ------
------ ------ ------
Capital expenditures
Vehicle Components.................................. $ 124 $ 93 $ 107
Electrical and Electronic Controls.................. 68 67 55
Defense Systems..................................... 7 14 24
Corporate........................................... 28 12 8
------ ------ ------
$ 227 $ 186 $ 194
------ ------ ------
------ ------ ------
Depreciation
Vehicle Components.................................. $ 101 $ 103 $ 99
Electrical and Electronic Controls.................. 58 59 48
Defense Systems..................................... 13 14 14
Corporate........................................... 10 8 8
------ ------ ------
$ 182 $ 184 $ 169
------ ------ ------
------ ------ ------
</TABLE>
Operating profit of the Electrical and Electronic Controls segment was
reduced in 1993 by an acquisition integration charge of $55 million. Operating
profit of the Vehicle Components segment was reduced in 1993 by a restructuring
charge of $9 million.
F-21
<PAGE> 45
Operating profit in 1992 was reduced by expense related to the accounting
change for postretirement benefits other than pensions of $14 million for the
Vehicle Components segment and $11 million for the Electrical and Electronic
Controls segment.
Operating profit in 1991 was reduced by a restructuring charge of $22
million for the Vehicle Components segment and $17 million for the Electrical
and Electronic Controls segment.
F-22
<PAGE> 46
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Eaton Corporation
We have audited the consolidated balance sheets of Eaton Corporation as of
December 31, 1993 and 1992, and the related statements of consolidated income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1993. 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 generally accepted auditing
standards. 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, 1993 and 1992, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
As described under "Accounting Changes" in the Financial Review, in 1992
the Company changed its method of accounting for postretirement benefits other
than pensions and for income taxes.
ERNST & YOUNG
Cleveland, Ohio
February 1, 1994
F-23
<PAGE> 47
EATON CORPORATION AND DCBU
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following unaudited pro forma combined condensed financial statements
have been prepared by Eaton's management. These financial statements reflect
Eaton's acquisition of DCBU and combine for the periods or date indicated the
historical consolidated financial statements of Eaton and DCBU, using the
purchase method of accounting.
The unaudited pro forma combined condensed balance sheet reflects
adjustments as if the acquisition had occurred on September 30, 1993. The
unaudited pro forma combined statements of income reflect adjustments as if the
acquisition had occurred at the beginning of the year indicated. These pro forma
financial statements should be read in conjunction with the historical
consolidated financial statements and related notes of Eaton and DCBU. The pro
forma financial statements include preliminary estimates and assumptions which
Eaton's management believes are reasonable. The pro forma results are not
necessarily indicative of the results which would have occurred if the business
combination had been in effect on the dates indicated, or which may result in
the future and do not include any cost savings or other effects of the planned
integration of DCBU and ICPDO.
The pro forma results for 1993 do not reflect a $55 million integration
charge before income tax credits recorded by Eaton in the fourth quarter of 1993
related to the acquisition of DCBU and the integration of ICPDO's product lines
and operations with DCBU. The pro forma results for 1993 do not reflect a $3
million extraordinary loss related to the redemption of debentures and results
for 1992 do not reflect a $268 million net loss related to the cumulative effect
of the adoption of new accounting principles for postretirement benefits other
than pensions and income taxes.
The pro forma financial statements have been prepared using the following
facts and assumptions:
- Eaton acquires the assets and liabilities of DCBU in exchange for a total
cash payment of $1.1 billion.
- Eaton liquidates $170 million of short-term investments to fund a portion
of the $1.1 billion acquisition price.
- Eaton borrows $930 million to finance the remaining portion of the $1.1
billion acquisition price.
- Simultaneously with the acquisition of DCBU, Eaton divests a minor
portion of DCBU and ICPDO, having annual net sales of $41 million and net
assets of $14 million, in exchange for common stock of the buyer with an
estimated fair value of $14 million.
- The acquired assets and liabilities of DCBU are recorded at estimated
fair values as determined by Eaton's management based on information
currently available and on current tentative assumptions as to the future
operations of DCBU. No adjustment has been made to record the estimated
excess of the fair value over book value of DCBU's patents, trademarks
and licenses since such fair values have not yet been determined. Eaton
will be obtaining appraisals of the fair values and remaining useful
lives of the property, plant and equipment acquired and will be reviewing
the fair value of the other acquired assets and assumed liabilities.
Accordingly, the allocation of the purchase price to the acquired assets
and liabilities of DCBU is subject to revision as a result of the final
determination of appraised and other fair values.
F-24
<PAGE> 48
EATON CORPORATION AND DCBU
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1993
(MILLIONS OF DOLLARS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EATON OPERATIONS PRO PRO
CORPORATION DCBU SOLD BY FORMA FORMA
HISTORICAL HISTORICAL EATON(1) ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash............................... $ 18 $ 2 $ 20
Short-term investments............. 227 $(170)(2) 57
Accounts receivable................ 599 154 753
Inventories........................ 439 187 $ (5) 10(4a) 631
Other current assets............... 198 39 11(4b) 248
----------- ---------- ---------- ----------- --------
1,481 382 (5) (149) 1,709
Property, plant and equipment-net.... 1,173 240 (9) (4)(4c)
175(4d) 1,575
Excess of cost over net assets of
businesses acquired-net............ 267 133 (133)(4e)
546(4k) 813
Other assets......................... 298 11 14 31(4b)
(19)(4f) 335
----------- ---------- ---------- ----------- --------
$ 3,219 $ 766 $ 0 $ 447 $4,432
----------- ---------- ---------- ----------- --------
----------- ---------- ---------- ----------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt and current portion
of long-term debt............... $ 42 $ 6 $ 375(3) $ 423
Other liabilities and accruals..... 690 118 31(4g) 839
----------- ---------- ---------- ----------- --------
732 124 406 1,262
Long-term debt....................... 746 555(3) 1,301
Postretirement benefits other than
pensions........................... 510 51(4h) 561
Other long-term liabilities.......... 189 58 48(4g)
(10)(4i)
(19)(4f) 266
Net assets of DCBU................... 584 (584)(4j)
Shareholders' equity................. 1,042 1,042
----------- ---------- ---------- ----------- --------
$ 3,219 $ 766 $ 0 $ 447 $4,432
----------- ---------- ---------- ----------- --------
----------- ---------- ---------- ----------- --------
</TABLE>
See accompanying notes.
F-25
<PAGE> 49
EATON CORPORATION AND DCBU
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The adjustments to give pro forma effect to reflect Eaton's acquisition of
DCBU and the estimated purchase price allocation at September 30, 1993 are as
follows:
1) The divestiture by Eaton of a portion of DCBU and ICPDO,
simultaneous with the acquisition of DCBU by Eaton, in exchange for
common stock in the buyer with an estimated fair value of $14
million.
2) The liquidation of $170 million of short-term investments to
partially fund the $1.1 billion acquisition price for DCBU.
3) The borrowing by Eaton of $930 million to finance the remaining
portion of the $1.1 billion acquisition price. Of these borrowings,
$555 million are classified on the balance sheet as long-term debt
because Eaton intends, and has the ability under a new five-year
$555 million revolving credit agreement entered into in January
1994, to refinance this amount on a long-term basis.
4) The allocation of the aggregate purchase price of DCBU, and the
recognition of the excess of aggregate purchase price over the
estimated fair value of net assets acquired, is as follows (in
millions):
<TABLE>
<S> <C>
a) Adjust inventories acquired to estimated fair value.............. $ 10
b) Establish deferred income taxes assuming an income tax rate of
35%............................................................... 42
c) Property, plant and equipment retained by Westinghouse........... (4)
d) Adjust property, plant and equipment acquired to estimated fair
value............................................................. 175
e) Eliminate the excess of cost over net assets acquired related to
DCBU's acquisitions of businesses in prior years.................. (133)
f) Reclassify deferred income tax liabilities to other assets....... 0
g) Adjust and provide for estimated accrued liabilities related to
post-acquisition integration...................................... (79)
h) Recognize unfunded liability for postretirement benefits other
than pensions..................................................... (51)
i) Liabilities retained by Westinghouse............................. 10
j) Eliminate net assets of DCBU, prior to pro forma adjustments..... 584
k) Adjust for excess of purchase price over estimated fair value of
net assets acquired, including intangible assets.................. 546
------
Aggregate purchase price............................................. $1,100
------
------
</TABLE>
F-26
<PAGE> 50
EATON CORPORATION AND DCBU
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1993
(MILLIONS OF DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EATON OPERATIONS PRO PRO
CORPORATION DCBU SOLD BY FORMA FORMA
HISTORICAL HISTORICAL EATON(1) ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 3,286 $ 795 $(30) $ (7)(2a) $4,044
Costs and expenses
Cost of products sold.............. 2,466 478 (18) (3)(2a)
22(2b)
15(2c)
16(2d)
(5)(2e) 2,971
Selling and administrative
expense......................... 439 214 (6) 3(2b) 650
Research and development expense... 115 28 (1) 1(2b) 143
Depreciation and amortization...... 29 0(2f)
(3)(2g)
(26)(2b)
----------- ---------- ---------- ----------- --------
3,020 749 (25) 20 3,764
----------- ---------- ---------- ----------- --------
Income from operations............... 266 46 (5) (27) 280
Other income and (expense)
Interest expense................... (61) (21) 18(2h)
(24)(2i) (88)
Interest income.................... 6 (4)(2j) 2
Other income-net................... 14 14
----------- ---------- ---------- ----------- --------
(41) (21) (10) (72)
----------- ---------- ---------- ----------- --------
Income before income taxes........... 225 25 (5) (37) 208
Income taxes......................... 75 4 (2) (13)(2k) 64
----------- ---------- ---------- ----------- --------
Income before extraordinary item..... $ 150 $ 21 $ (3) $ (24) $ 144
----------- ---------- ---------- ----------- --------
----------- ---------- ---------- ----------- --------
Average number of Common Shares
outstanding (in millions).......... 69.6 69.6
Income before extraordinary item per
Common Share (2l).................. $2.17 $2.07
</TABLE>
See accompanying notes.
F-27
<PAGE> 51
EATON CORPORATION AND DCBU
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1992
(MILLIONS OF DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EATON OPERATIONS PRO PRO
CORPORATION DCBU SOLD BY FORMA FORMA
HISTORICAL HISTORICAL EATON(1) ADJUSTMENTS COMBINED
----------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 4,101 $1,087 $ (41) $ (9)(2a) $5,138
Costs and expenses
Cost of products sold.............. 3,134 660 (22) (4)(2a)
28(2b)
19(2c)
22(2d)
(9)(2e) 3,828
Selling and administrative
expense......................... 578 288 (8) 4(2b) 862
Research and development expense... 151 39 (1) 1(2b) 190
Depreciation and amortization...... 38 (1)(2f)
(4)(2g)
(33)(2b)
----------- ---------- ---------- ----------- --------
3,863 1,025 (31) 23 4,880
----------- ---------- ---------- ----------- --------
Income from operations............... 238 62 (10) (32) 258
Other income and (expense)
Interest expense................... (89) (28) 25(2h)
(36)(2i) (128)
Interest income.................... 9 (6)(2j) 3
Other income-net................... 23 (6) 2 19
----------- ---------- ---------- ----------- --------
(57) (34) 2 (17) (106)
----------- ---------- ---------- ----------- --------
Income before income taxes........... 181 28 (8) (49) 152
Income taxes......................... 41 8 (3) (17)(2k) 29
----------- ---------- ---------- ----------- --------
Income before cumulative effect of
accounting changes................. $ 140 $ 20 $ (5) $ (32) $ 123
----------- ---------- ---------- ----------- --------
----------- ---------- ---------- ----------- --------
Average number of Common Shares
outstanding (in millions).......... 68.9 68.9
Income before cumulative effect of
accounting changes (2l)............ $ 2.03 $ 1.78
</TABLE>
See accompanying notes.
F-28
<PAGE> 52
EATON CORPORATION AND DCBU
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The adjustments to give pro forma effect to Eaton's acquisition of DCBU and
the estimated purchase price allocation are as follows:
<TABLE>
<C> <S> <C>
1) To reflect the divestiture by Eaton of a portion of DCBU and ICPDO, simultaneous with
Eaton's acquisition of DCBU.
2) To reflect the purchase price allocation and other adjustments as follows:
a)
Eliminate intercompany sales and cost of products sold.
b)
Reclassify depreciation expense to cost of products sold, selling and
administrative expense, and research and development expense.
c)
Recognize over nine years additional depreciation for write-up of property, plant
and equipment to fair value.
d)
Amortize over an average period of twenty-five years the excess of purchase price
of DCBU over estimated fair value of net assets acquired, including intangible
assets.
e)
Adjust expense for pensions and postretirement benefits other than pensions for
employee benefit liabilities retained by Westinghouse and to reflect Eaton's
current actuarial assumptions.
f)
Eliminate depreciation expense related to property, plant and equipment of DCBU
retained by Westinghouse.
g)
Eliminate amortization of the excess of cost over net assets acquired related to
DCBU's acquisitions of businesses in prior years.
h)
Eliminate Westinghouse's interest expense allocated to DCBU.
i)
Recognize additional interest expense due to $930 million increase in short-term
debt to fund the acquisition (assumed interest rate 3.85% in 1992 and 3.45% in
1993).
j)
Reduce interest income to reflect the $170 million liquidation of short-term
investments to fund the acquisition (assumed interest rate 3.75% in 1992 and
3.20% in 1993).
k)
Record the income tax effect of the above adjustments assuming a 35% income tax
rate in 1993 and 34% in 1992.
l)
Pro forma net income per Common Share is computed by dividing net income by the
average month-end number of shares outstanding during each period.
</TABLE>
F-29
<PAGE> 53
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
Subject to Completion: February 23, 1994.
PROSPECTUS
Eaton Corporation
Debt Securities, Debt Warrants, Common Shares
and Preferred Shares
------------------
Eaton Corporation (the "Company") may offer from time to time its unsecured
debt securities, which may be either senior (the "Senior Securities") or
subordinated (the "Subordinated Securities") and, if subordinated, may be
convertible into common shares (the "Common Shares") of the Company (the
"Convertible Subordinated Securities", and together with the Senior Securities
and any other Subordinated Securities, the "Debt Securities"), warrants to
purchase the Senior Securities (the "Debt Warrants"), Common Shares or preferred
shares (the "Preferred Shares"), on terms to be determined at the time of
offering, in an aggregate amount of up to $ (or the equivalent
thereof if any of the Securities are denominated in a currency other than the
U.S. Dollar, such amount being the aggregate issue price of all Debt Warrants
and Common Shares issued, the stated value of all Preferred Shares issued, the
principal face amount of all Debt Securities issued at their principal face
amount and the issue price rather than the principal amount of any Debt
Securities issued at original issue discount and the exercise price of any Debt
Securities issuable upon the exercise of a Debt Warrant). The Debt Securities
may be issued under this Prospectus in one or more series with the same or
varying maturities. The Debt Securities, Debt Warrants, Common Shares and
Preferred Shares (collectively, the "Securities") may be offered either together
or separately and (except with respect to the Common Shares) in one or more
series, in amounts, at prices and on terms to be set forth at the time of the
offering in one or more supplements to this Prospectus (each a "Prospectus
Supplement"). The Debt Securities of any series may be in registered or bearer
form and may be represented by a single global security registered in the name
of a securities depository. The specific terms of the Securities in respect of
which this Prospectus is being delivered, including, where applicable, the
designation, aggregate amount, form, authorized denominations, initial public
offering price, purchase price, currency or currencies, currency unit or units
or composite currency or currencies ("Currency" or "Currencies") of denomination
and payment maturity, rate (or manner of calculation thereof) and time of
payment of any interest, any index, formula or other method pursuant to which
principal (and premium, if any) or interest may be determined, any sinking fund,
any terms of redemption at the option of the Company or the holder, any
conversion terms of Convertible Subordinated Securities or Preferred Shares
which are convertible into Common Shares and other terms with respect to Debt
Securities, the duration, offering price, exercise price, detachability and
other terms with respect to Debt Warrants, and the specific title and stated
value, any dividend, liquidation, redemption, conversion and other voting
rights, the initial public offering price and other terms with respect to
Preferred Shares are set forth in the accompanying Prospectus Supplement,
together with a description of the terms of offering of the Securities and the
use of the net proceeds from such offering.
The Senior Securities will rank equally with all other unsubordinated and
unsecured indebtedness of the Company. The Subordinated Securities will be
subordinated to all existing and future Senior Indebtedness of the Company, as
defined. See "Description of Debt Securities."
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
The Securities may be sold directly to purchasers, or through agents
designated from time to time, or through underwriters or dealers. If any agents
of the Company or any underwriters or dealers are involved in the sale of the
Securities, their names and any applicable fee, commission or discount
arrangements with them are set forth in the accompanying Prospectus Supplement.
See "Plan of Distribution." No Securities may be sold without delivery of a
Prospectus Supplement describing such series or issue of securities and the
method and the terms thereof.
------------------
The date of this Prospectus is , 1994.
<PAGE> 54
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT, IN CONNECTION WITH THE
OFFERING CONTEMPLATED HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING PROSPECTUS SUPPLEMENT
CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR
THE ACCOMPANYING PROSPECTUS SUPPLEMENT, NOR ANY SALE MADE HEREUNDER OR
THEREUNDER, SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy material and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
material or other information concerning the Company and the Registration
Statement can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, Room 1024, and at the following Regional Offices of the
Commission: 7 World Trade Center, New York, New York 10048, 13th Floor and
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661, 14th
Floor. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Such reports, proxy material and other information concerning
the Company and the Registration Statement can also be inspected at the offices
of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005,
the Chicago Stock Exchange, Incorporated, 120 South LaSalle Street, Chicago,
Illinois 60603 and the Pacific Stock Exchange, 301 Pine Street, San Francisco,
California 94104.
The Company has filed with the Commission a registration statement on Form
S-3 (which together with the exhibits thereto is herein referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
1-1396) are hereby incorporated by reference in this Prospectus:
1. Annual Report on Form 10-K for the year ended December 31, 1992.
2. Quarterly Reports on Form 10-Q for the quarter ended March 31, 1993,
June 30, 1993 and September 30, 1993.
3. Form 11-K Annual Report dated June 25, 1993 for the year ended December
31, 1992.
4. Current Report on Form 8-K dated February 14, 1994, amended February 18,
1994.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Securities shall be deemed to be incorporated
by reference in this Prospectus and to be a part of this Prospectus from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified and superseded, to constitute a part of
this Prospectus.
The Company undertakes to provide without charge to each person to whom a
copy of this Prospectus is delivered, upon the written or oral request of such
person, a copy of any or all of the documents incorporated herein by reference
(not including the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to Eaton Corporation, Shareholder Relations, Eaton
Center, 1111 Superior Avenue, Cleveland, Ohio 44114-2584 (telephone (216)
523-4350).
2
<PAGE> 55
THE COMPANY
The Company, an Ohio corporation established in 1916, is a leading
manufacturer of vehicle powertrain components and a broad variety of controls
serving transportation, industrial, commercial, aerospace and military markets.
Principal products include truck transmissions and axles, engine components,
electrical equipment and controls.
The Company's principal executive office is located at Eaton Center, 1111
Superior Avenue, Cleveland, Ohio 44114-2584 and its telephone number is (216)
523-5000. As used in this Prospectus, the term "Company" means Eaton Corporation
and its consolidated subsidiaries, unless the context otherwise requires.
RISK FACTORS RELATING TO CURRENCIES
Debt Securities denominated or payable in foreign Currencies may entail
significant risks. These risks include, without limitation, the possibility of
significant fluctuations in the foreign currency markets, the imposition or
modification of foreign exchange controls and potential illiquidity in the
secondary market. These risks will vary depending upon the Currency or
Currencies involved. These risks will be more fully described in the applicable
Prospectus Supplement. See "Description of Debt Securities."
USE OF PROCEEDS
Unless otherwise provided in a Prospectus Supplement, the net proceeds from
the sale of the Securities will be added to the general funds of the Company and
will be used for working capital and general corporate purposes. Such net
proceeds also may be used to repay a portion of the debt issued in connection
with the acquisition of the Distribution and Control Business Unit of
Westinghouse Electric Corporation, or in connection with possible future
acquisitions.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges of
the Company for each of the five years in the period ended December 31, 1993(1):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges...... 3.53 2.59 1.99 3.43 4.33
<FN>
- ---------------
(1) For the purpose of computing the ratios described above, "earnings" consist
of consolidated income before income taxes and minority interest in the
income (losses) of consolidated subsidiaries, less undistributed income
(losses) of 20% to less than 50% owned associate companies and wholly-owned
finance subsidiaries held for sale (which were sold in 1989), plus 1)
interest expense capitalized in prior periods and amortized in the current
period, 2) the Company's proportionate share of income before income taxes
of 50% owned associate companies, and 3) fixed charges described below,
excluding capitalized interest. "Fixed charges" consist of 1) interest
expensed and capitalized on borrowed funds, excluding amounts related to
wholly-owned finance subsidiaries held for sale in 1989 and prior years
only, 2) amortization of debt issue costs, 3) that portion of rent expense
representing interest, and 4) the Company's proportionate share of the fixed
charges of 50% owned associate companies.
</TABLE>
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<PAGE> 56
DESCRIPTION OF DEBT SECURITIES
The Senior Securities may be issued in one or more series under an
indenture (the "Senior Indenture"), dated as of , 1994, between
the Company and Chemical Bank, trustee (the "Senior Trustee"). The Subordinated
Securities may be issued in one or more series under an indenture (the
"Subordinated Indenture"), dated as of , 1994, between the
Company and Chemical Bank, trustee (the "Subordinated Trustee"). The Senior
Indenture and Subordinated Indenture (collectively, the "Indentures") are
exhibits to the Registration Statement.
The statements under this caption relating to the Indentures and the Debt
Securities are summaries and do not purport to be complete. Such summaries are
qualified in their entirety by express reference to the Indentures, including
the definitions of certain terms. Whenever any particular provision of, or term
defined in, the Indentures is referred to, such provision or defined term is
incorporated herein by reference.
The Indentures are subject to and governed by the Trust Indenture Act of
1939, as amended (the "TIA"). Parenthetical references below are to the
Indentures or to the TIA, as applicable. Capitalized terms used under this
caption without definition have the meanings ascribed thereto in the Indentures.
The description below sets forth certain general terms and provisions of
the Debt Securities. The specific terms of the Debt Securities offered by any
Prospectus Supplement (the "Offered Debt Securities"), as well as any
modifications of or additions to the general terms of the Debt Securities set
forth below that may be applicable in the case of the Offered Debt Securities,
are described in the Prospectus Supplement relating to such Offered Debt
Securities. Accordingly, for a description of the terms of the Offered Debt
Securities, reference must be made to both the Prospectus Supplement relating
thereto and the description of Debt Securities set forth in this Prospectus.
Reference is made to the Prospectus Supplement for the following terms of
the Offered Debt Securities: (1) the title of the Offered Debt Securities and
whether such Debt Securities are Senior Securities or Subordinated Securities,
including whether Subordinated Securities are Convertible Subordinated
Securities; (2) the aggregate principal amount of the Offered Debt Securities
and any limit on the aggregate principal amount of Debt Securities of such
series and any limit on the aggregate principal amount of Debt Securities of
such series; (3) the date or dates, or the method by which such date or dates
shall be determined or extended, on which the principal (and premium, if any) of
the Offered Debt Securities is payable; (4) the rate or rates (which may be
fixed or variable), or the method of determination thereof, at which the Offered
Debt Securities shall bear interest, if any, the date or dates from which such
interest shall accrue or the method by which such date or dates shall be
determined, the date or dates on which such interest shall be payable and for
any Registered Securities the Regular Record Dates for such interest payment
dates, and the basis on which any interest shall be calculated if other than on
the basis of a 360-day year of twelve 30-day months; (5) whether the amount of
payments of principal of (and premium, if any) or interest, if any, on the Debt
Securities may be determined with reference to an index, formula or other method
(which index, formula or method may be based on one or more Currencies,
commodities, equity indices or other indices) and the manner in which such
amounts shall be determined; (6) the period or periods within which, the price
or prices at which, the Currency or Currencies in which and the other terms and
conditions upon which Offered Debt Securities may be redeemed, in whole or in
part, at the option of the Company, if the Company is to have that option; (7)
the obligation, if any, of the Company to redeem, repay or purchase the Offered
Debt Securities pursuant to any sinking fund or analogous provisions or at the
option of a holder thereof and the period or periods within which or the date or
dates on which, the price or prices at which, the Currency or Currencies in
which, and the other terms and conditions upon which Offered Debt Securities
shall be redeemed, repaid or purchased in whole or in part pursuant to such
obligation; (8) the Currency or Currencies in which the Offered Debt Securities
are to be issuable and in which payment of the principal of, premium, if any, or
Additional Amounts, if any, and interest, if any, on, the Offered Debt
Securities will be payable, if other than the coin or currency of the United
States; (9) if other than denominations of $1,000 and any integral multiple
thereof, the denominations in which the Offered Debt Securities shall be
issuable and, if other than the denomination of $5,000, the denomination or
denominations in which any Bearer Securities shall be issuable; (10) the
percentage of the principal amount at which the Offered Debt Securities will be
issued and, if other than the principal amount thereof, the portion of the
principal amount of Offered Debt Securities which shall
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<PAGE> 57
be payable upon declaration of acceleration of maturity or the method by which
such portion shall be determined; (11) whether the Offered Debt Securities are
to be issuable as Registered Securities or Bearer Securities or both, any
restrictions applicable to the offer, sale or delivery of Bearer Securities and
the terms upon which Bearer Securities of the series may be exchanged for
Registered Securities of the series and vice versa (if permitted by applicable
laws and regulations) and whether the Offered Debt Securities are to be issued
in the form of one or more temporary or permanent global securities (each, a
"Global Security") registered in the name of a depository ("the Depository")
identified in the Prospectus Supplement related to such Offered Debt Securities
with or without coupons and, if so, whether beneficial owners of interests in
any such permanent global security may exchange such interests for Debt
Securities of such series and of like tenor of any authorized form and
denomination and the circumstances under which any such exchanges may occur, if
other than in the manner provided in the applicable Indenture; (12) any
additional means of satisfaction and discharge of the applicable Indenture with
respect to Offered Debt Securities, any additional conditions to defeasance or
covenant defeasance and the application, if any, of defeasance or covenant
defeasance; (13) any deletions or modifications of or additions to the Events of
Default or covenants of the Company pertaining to the Offered Debt Securities,
whether or not such Events of Default or covenants are consistent with the
Events of Default or covenants set forth in the applicable Indenture as
originally executed; (14) the place or places, if any, other than or in addition
to New York, New York, where the principal of (and premium, if any) and any
interest or any Additional Amounts on such Debt Securities shall be payable;
(15) the place or places, if any, other than or in addition to New York, New
York, where any Registered Security may be surrendered for registration of
transfer, such Debt Securities may be surrendered for exchange, and notices or
demands to or upon the Company in respect of such Debt Securities may be served;
(16) whether the amount of payments of principal of (and premium, if any) or
interest on such Debt Securities may be determined with reference to an index,
formula or other method (which index, formula or method may, without limitation,
be based on one or more Currencies, commodities, equity indices or other
indices) and the manner in which such amounts shall be determined; (17) whether
the Company or a holder may elect payment of the principal of (and premium, if
any) or interest, if any, on such Debt Securities in one or more Currencies
other than that in which such Debt Securities are stated to be payable, and the
period or periods within which, and the terms and conditions upon which, such
election may be made, and the time and manner of determining the exchange rate
between the Currency or Currencies in which such Debt Securities are stated to
be payable and the Currency or Currencies in which such Debt Securities are to
be so payable; (18) if other than the applicable Trustee, the identity of each
Security Registrar and/or Paying Agent; (19) the designation of the Exchange
Rate Agent, if applicable; (20) the Person to whom any interest on any
Registered Security of the series shall be payable, if other than the Person in
whose name such Registered Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, the manner in which, or the Person to whom any interest on any Bearer
Security of the series shall be payable, if otherwise than upon presentation and
surrender of the coupons appertaining thereto as they severally mature, and the
extent to which, or the manner in which, any interest payable on a temporary
Global Security on an Interest Payment Date will be paid if other than in the
manner provided in the applicable Indenture; (21) whether and under what
circumstances the Company will pay Additional Amounts as contemplated by Section
1005 of the applicable Indenture on the Offered Debt Securities to any holder
who is not a United States Person (including any modification to the definition
of such term as contained in the applicable Indenture as originally executed) in
respect of any tax, assessment or governmental charge and, if so, whether the
Company will have the option to redeem the Offered Debt Securities rather than
pay such Additional Amounts (and the terms of any such option); (22) the
provisions, if any, granting special rights to the holders of the Offered Debt
Securities upon the occurrence of such events as may be specified; (23) in the
case of Subordinated Securities, any terms modifying the subordination
provisions affecting such securities; (24) in the case of Convertible
Subordinated Securities, any terms by which such securities may be convertible
into Common Shares of the Company; (25) if the Debt Securities are to be
issuable in definitive form (whether upon original issue or upon exchange of a
temporary Debt Security of such series) only upon receipt of certain
certificates or other documents or satisfaction of other conditions, the form
and/or terms of such certificates, documents and conditions; (26) if the Debt
Securities are to be issued upon the exercise of Debt Warrants, the time, manner
and place for such Debt Securities to be authenticated and delivered; (27) any
other terms, conditions, rights and preferences (or limitations on such rights
and preferences) of such Debt Securities not inconsistent with the provisions of
the applicable Indenture. In addition, principal,
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<PAGE> 58
premium, if any, and interest, if any, will be payable, and such Debt Securities
will be transferable, in the manner described in the accompanying Prospectus
Supplement.
If any series of Debt Securities are sold for, are payable in or are
denominated in one or more foreign Currencies, applicable restrictions,
elections, tax consequences, specific terms and other information with respect
to such series of Debt Securities and such Currency or Currencies, shall be set
forth in the Prospectus Supplement relating thereto.
There is no requirement that future issues of Debt Securities of the
Company be issued under the Indentures, and the Company will be free to employ
other indentures or documentation, containing provisions different from those
included in the Indentures or applicable to one or more issues of Debt
Securities, in connection with future issues of such other debt securities.
The general provisions of the Indentures do not contain any provisions that
would limit the ability of the Company to incur indebtedness or that would
afford holders of Debt Securities protection in the event of a highly leveraged
or similar transaction involving the Company. However, the general provisions of
the Senior Indenture do provide that neither the Company nor any Restricted
Subsidiary (as defined) will subject certain of its property or assets to any
mortgage or other encumbrance unless the Senior Securities issued under the
Senior Indenture are secured equally and ratably with or prior to such other
indebtedness thereby secured. See "Limitation on Sale and Leaseback
Transactions" and "Limitation on Liens." Reference is made to each Prospectus
Supplement related to Offered Debt Securities for information with respect to
any deletions from, modifications or additions to the Events of Default or
covenants of the Company that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
GENERAL
Each Indenture provides that the Debt Securities referred to on the cover
page of this Prospectus and additional unsecured debt securities of the Company
unlimited as to aggregate principal amount may be issued in one or more series
thereunder, in each case in the aggregate principal amount established in,
pursuant to or in the manner provided in a resolution of the Board of Directors
of the Company, or established by supplemental indenture. The Debt Securities
referred to on the cover page of this Prospectus and any such additional debt
securities so issued under the applicable Indenture are herein collectively
referred to, when a single Trustee is acting for all debt securities issued
under such Indenture, as the "Indenture Securities". Under the Indentures, the
Company will have the ability, in addition to the ability to issue Debt
Securities with terms different from those of Debt Securities previously issued,
without the consent of the holders, to reopen a previous issue of a series of
Debt Securities and issue additional Debt Securities of such series (unless such
reopening was restricted when such series was created), in an aggregate
principal amount determined by the Company. (Section 301 of the Indentures) Each
Indenture also provides that there may be more than one trustee under such
Indenture, each with respect to one or more different series of Indenture
Securities as described below under "-- Concerning the Trustees." At a time when
two or more trustees are acting under either Indenture, each with respect to
only certain series, the term "Indenture Securities" as used herein shall mean
the one or more series with respect to which each trustee is acting. In the
event there shall be more than one trustee under an Indenture, the powers and
trust obligations of each trustee as described below shall extend only to the
one or more series of Indenture Securities for which it is trustee. The effect
of the provisions contemplating that at a particular time there might be more
than one trustee acting is that, in such event, those Indenture Securities
(whether or not more than one series) for which each trustee is acting would be
treated as if issued under a separate indenture.
Each series of Debt Securities will be unsecured obligations of the
Company. The Senior Securities will rank PARI PASSU with other unsecured and
unsubordinated indebtedness of the Company (as defined below). The Subordinated
Securities will be subordinated and junior in right of payment to the prior
payment in full of the Senior Indebtedness of the Company as described below
under "-- Subordination Provisions."
The Debt Securities may be issued as "Original Issue Discount Securities",
which is defined as Debt Securities, including any zero-coupon Debt Securities,
that are issued and sold at a discount from the stated principal amount thereof
and provide that upon acceleration of the maturity thereof an amount less than
the principal amount thereof shall become due and payable. United States federal
income tax consequences and
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<PAGE> 59
other considerations applicable to such Original Issue Discount Securities will
be described in the Prospectus Supplement relating thereto.
DENOMINATIONS, REGISTRATION AND TRANSFER
Debt Securities of a series may be issuable solely as Registered
Securities, solely as Bearer Securities or as both Registered Securities and
Bearer Securities. Registered Securities will be issuable in denominations of
$1,000 and integral multiples of $1,000 and Bearer Securities will be issuable
in the denomination of $5,000 or, in each case, in such other denominations as
may be in the terms of the Debt Securities of any particular series. The
Indentures also provide that Debt Securities of a series may be issuable in
global form. See
"-- Global Securities." Unless otherwise indicated in the related Prospectus
Supplement, Bearer Securities will have interest coupons attached. (Section 201
of the Indentures)
Registered Securities of any series will be exchangeable for other
Registered Securities of the same series and of a like aggregate principal
amount, tenor and rank, and of different authorized denominations. If (but only
if) provided in the related Prospectus Supplement, Bearer Securities (with all
unmatured coupons, except as provided below, and all matured coupons in default)
of any series may be exchanged for Registered Securities of the same series of
any authorized denominations and of a like aggregate principal amount and tenor.
In such event, Bearer Securities surrendered in a permitted exchange for
Registered Securities between a Regular Record Date or a Special Record Date and
the relevant date for payment of interest shall be surrendered without the
coupon relating to such date for payment of interest, and interest will not be
payable on such date for payment of interest in respect of the Registered
Security issued in exchange for such Bearer Security, but will be payable only
to the holder of such coupon when due in accordance with the terms of the
applicable Indenture. Unless otherwise specified in the related Prospectus
Supplement, Bearer Securities will not be issued in exchange for Registered
Securities. (Section 305 of the Indentures)
The Debt Securities may be presented for exchange as provided above, and
Registered Securities may be presented for registration of transfer (duly
endorsed or accompanied by a written instrument of transfer), initially at the
corporate trust office of the applicable Trustee or at the office of any
transfer agent designated by the Company for such purpose with respect to any
series of Debt Securities and referred to in the related Prospectus Supplement.
No service charge will be made for any transfer or exchange of Debt Securities,
but the Company may require payment of a sum sufficient to cover any tax or
other governmental charge payable in connection therewith. (Section 305 of the
Indentures) If a Prospectus Supplement refers to any transfer agent (in addition
to the applicable Trustee) initially designated by the Company with respect to
any series of Debt Securities, the Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that, if Debt Securities of a
series are issuable solely as Registered Securities, the Company will be
required to maintain a transfer agent in each Place of Payment for such series
and, if Debt Securities of a series may be issuable both as Registered
Securities and as Bearer Securities, the Company will be required to maintain
(in addition to the applicable Trustee) a transfer agent in a Place of Payment
for such series located outside the United States. The Company may at any time
designate additional transfer agents with respect to any series of Debt
Securities. (Section 1002 of the Indentures)
In the event of any redemption, the Company shall not be required to (i)
issue, register the transfer of or exchange Debt Securities of any series during
a period beginning at the opening of business 15 days before any selection of
Debt Securities of that series to be redeemed and ending at the close of
business on (A) if Debt Securities of the series are issuable only as Registered
Securities, the day of mailing of the relevant notice of redemption and (B) if
Debt Securities of the series are issuable as Bearer Securities, the day of the
first publication of the relevant notice of redemption, or, if Debt Securities
of the series are also issuable as Registered Securities and there is no
publication, the mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Registered Security, or portion thereof, called for
redemption, except the unredeemed portion of any Registered Security being
redeemed in part; or (iii) exchange any Bearer Security called for redemption,
except to exchange such Bearer Security for a Registered Security of that series
and like tenor which is immediately surrendered for redemption. (Section 305 of
the Indentures)
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PAYMENT AND PAYING AGENTS
Unless otherwise provided in the related Prospectus Supplement, principal,
premium, if any, and interest, if any, and Additional Amounts, if any, on Bearer
Securities will be payable, subject to any applicable laws and regulations, at
the offices of such Paying Agents outside the United States as the Company may
designate from time to time. (Section 1002 of the Indentures) Unless otherwise
provided in the Prospectus Supplement, payment of interest and certain
Additional Amounts on Bearer Securities on any Interest Payment Date will be
made only against surrender of the coupon relating to such Interest Payment
Date. (Section 1001 of the Indentures) Unless otherwise provided in the
Prospectus Supplement, no payment with respect to any Bearer Security will be
made at any office or agency of the Company in the United States or by check
mailed to any address in the United States or by transfer to an account
maintained with a bank located in the United States. (Section 1002 of the
Indentures) Notwithstanding the foregoing, payments of principal, premium, if
any, interest, if any, and Additional Amounts, if any, in respect of Bearer
Securities payable in U.S. dollars will be made at the office of the Company's
Paying Agent in New York, New York, if (but only if) payment of the full amount
thereof in U.S. dollars at all offices or agencies outside the United States is
illegal or effectively precluded by exchange controls or other similar
restrictions. (Section 1002 of the Indentures)
Unless otherwise provided in the related Prospectus Supplement, principal,
premium, if any, and interest, if any, and Additional Amounts, if any, on
Registered Securities will be payable at any office or agency to be maintained
by the Company in New York, New York, except that at the option of the Company
interest (including Additional Amounts, if any) may be paid (i) by check mailed
to the address of the Person entitled thereto as such address shall appear in
the Security Register or (ii) by wire transfer to an account maintained by the
Person entitled thereto as specified in the Security Register. (Sections 301,
1001 and 1002 of the Indentures) Unless otherwise provided in the Prospectus
Supplement, payment of any installment of interest on Registered Securities will
be made to the Person in whose name such Registered Security is registered at
the close of business on the Regular Record Date for such interest. (Section 307
of the Indentures)
Any Paying Agents outside the United States and any other Paying Agents in
the United States initially designated by the Company for the Offered Debt
Securities will be named in the applicable Prospectus Supplement. The Company
may at any time designate additional Paying Agents or rescind the designation of
any Paying Agent or approve a change in the office through which any Paying
Agent acts, except that, if Debt Securities of a series are issuable only as
Registered Securities, the Company will be required to maintain a Paying Agent
in each Place of Payment for such series and, if Debt Securities of a series are
also issuable as Bearer Securities, the Company will be required to maintain (i)
a Paying Agent in New York, New York for payments with respect to any Registered
Securities of the series (and for payments with respect to Bearer Securities of
the series in the circumstances described above, but not otherwise), and (ii) a
Paying Agent in a Place of Payment located outside the United States where Debt
Securities of such series and any coupons appertaining thereto may be presented
and surrendered for payment; PROVIDED that, if the Debt Securities of such
series are listed on any stock exchange located outside the United States and
such stock exchange shall so require, the Company will maintain a Paying Agent
in any required city located outside the United States for the Debt Securities
of such series. (Section 1002 of the Indentures)
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a Depository identified in the Prospectus Supplement relating to such
series.
The Company anticipates that the following provisions will apply to all
depository arrangements. Additional or differing terms of the depository
arrangement with respect to a series of Offered Debt Securities and whether all
or any part of Offered Debt Securities will be issued in one or more Global
Securities will be described in the Prospectus Supplement relating to such
series.
Global Securities will be deposited with, or on behalf of, the Depository
and registered in the name of the Depository's nominee. Except as set forth
below, a Global Security may not be transferred except as a whole among the
Depository and its nominees or by the Depository or any nominee to a successor
of the Depository or a nominee of such successor.
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<PAGE> 61
The Depository holds securities of its participants to facilitate the
clearance and settlement of securities transactions among its participants in
such securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. Upon the issuance of a Global Security, the Depository for such
Global Security will credit, on its book-entry registration and transfer system,
the respective principal amounts of the Debt Securities represented by such
Global Security. Such accounts shall be designated by the underwriters or agents
with respect to such Debt Securities or by the Company if such Debt Securities
are offered and sold directly by the Company. Ownership of beneficial interests
in a Global Security will be limited to persons that have accounts with the
Depository for such Global Security ("participants") or persons that may hold
interests through participants. Ownership of beneficial interests in such Global
Security will be shown on, and the transfer of that ownership will be effected
only through, records maintained by the Depository (with respect to interests of
participants) for such Global Security and on the records of participants (with
respect to interests of persons other than participants). The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in definitive form. Such limits and such laws may impair the
ability to transfer beneficial interests in a Global Security.
So long as the Depository for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
applicable Indenture governing such Debt Securities. Except as provided below,
owners of beneficial interests in a Global Security will not be entitled to have
Debt Securities of the series represented by such Global Security registered in
their names, will not receive or be entitled to receive physical delivery of
Debt Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture governing such Debt Securities.
Accordingly, each person owning a beneficial interest in a Global Security must
rely on the procedures of the Depository and, if such person is not a
participant, on the procedures of the participant through which such person owns
its interests, to exercise any rights of a holder under the applicable Indenture
or such Global Security. The Company understands that, under existing industry
practice, in the event that the Company requests any action of holders
represented by a Global Security or an owner of a beneficial interest in a
Global Security desires to take any action that the holder of such Global
Security is entitled to take, the Depository would authorize the participants to
take such action and that the participants would authorize beneficial owners
owning through such participants to take such action or would otherwise act upon
the instructions of beneficial owners owning through them.
Principal of, premium, if any, and interest payments on Debt Securities
represented by a Global Security registered in the name of a Depository or its
nominee will be made to the Depository or its nominee, as the case may be, as
the registered owner of the Global Security representing such Debt Securities.
Neither the Company, the Trustee for such Debt Securities, any Paying Agent nor
the Security Registrar for such Debt Securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests of the Global Security for such Debt
Securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Company expects that the Depository for a series of Debt Securities
represented by a Global Security or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of a Global Security, will
credit immediately participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the principal amount of the Global
Security for such Debt Securities as shown on the records of such Depository or
its nominee. The Company also expects that payments by participants to owners of
beneficial interests in such Global Security held through such participants will
be governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name", and will be the responsibility of such participants.
If the Depository for a series of Debt Securities is at any time unwilling
or unable to continue as depository and a successor depository is not appointed
by the Company within 90 days, the Company will issue Debt Securities of such
series in definitive form in exchange for each Global Security representing such
series of Debt Securities. In addition, the Company may at any time determine
not to have Debt Securities represented by a Global Security, and, in such
event, will issue Debt Securities in certificated form in
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exchange for the Global Security representing such Debt Securities. In any such
instance, an owner of a beneficial interest in a Global Security will be
entitled to physical delivery in definitive form of Debt Securities of the
series represented by such Global Security equal in principal amount to such
beneficial interest and to have such Debt Securities registered in its name.
Debt Securities of such series so issued in definitive form will be issued in
denominations, unless otherwise specified by the Company, of U.S. $1,000 and
integral multiples thereof.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
Under the terms of the Senior Indenture, the Company will not, and will not
permit any Restricted Subsidiary (as defined), to sell or transfer any
manufacturing plant owned by the Company or any Restricted Subsidiary with the
intention of taking back a lease on such property unless: (i) the sale or
transfer of property is made within 120 days after the later of the date of (a)
the acquisition of such property, (b) the completion of construction of such
property or (c) the commencement of full operation thereof; (ii) such lease has
a term, including permitted extensions and renewals, of not more than three
years, and it is intended that the use by the Company or the Restricted
Subsidiary of the manufacturing plant covered by such lease will be discontinued
on or before the expiration of such term; (iii) the amount realized from such
sale or transfer, together with the value (as defined) of then outstanding sale
and leaseback transactions not otherwise permitted by the Senior Indenture and
the outstanding aggregate principal amount of mortgage, pledge or lien
indebtedness not otherwise permitted by the Senior Indenture shall not exceed
10% of Consolidated Net Tangible Assets (as defined); or (iv) the Company shall
cause an amount equal to the value (as defined) of the manufacturing plant to be
sold or transferred and leased to be applied to the retirement (other than any
mandatory retirement) within 120 days of the effective date of such sale and
leaseback transaction of either the Indenture Securities or other funded
indebtedness of the Company which is equal in rank to the Indenture Securities,
or both. (Section 1010 of the Senior Indenture)
LIMITATION ON LIENS
Under the terms of the Senior Indenture, with certain exceptions, the
Company will not, directly or indirectly, and the Company will not permit any
Restricted Subsidiary to, create or assume any mortgage, pledge or other lien of
or upon any of its or their assets unless all of the outstanding Indenture
Securities of each series are secured by such mortgage, pledge or lien equally
and ratably with any and all other obligations and indebtedness thereby secured
for so long as any such other obligations and indebtedness shall be so secured.
Among the exceptions is (i) the creation of any mortgage or other lien on any
property of the Company or any Restricted Subsidiary to secure indebtedness
incurred prior to, at the time of, or within 120 days after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property and (ii) mortgages or liens on any property acquired
by the Company or any Restricted Subsidiary after the date of the Senior
Indenture existing at the time of such acquisition; provided that such
indebtedness so secured shall have been incurred for the purpose of financing
all or any part of the acquisition or construction of any such property. In
addition, the Company or any Restricted Subsidiary may create or assume any
mortgage, pledge or other lien not otherwise permitted by the Senior Indenture
for the purpose of securing indebtedness or other obligations so long as the
aggregate of all such indebtedness and other obligations then outstanding,
together with the value of all outstanding sale and leaseback transactions not
otherwise permitted, shall not exceed 10% of Consolidated Net Tangible Assets.
(Section 1009 of the Senior Indenture)
DEFINITIONS
The term "Consolidated Net Tangible Assets" is defined in the Senior
Indenture as total assets of the Company and its consolidated subsidiaries,
including the investment in (at equity) and the net amount of advances to and
accounts receivable from corporations which are not consolidated subsidiaries
less the following: (i) current liabilities of the Company and its consolidated
subsidiaries, including an amount equal to indebtedness required to be redeemed
by reason of any sinking fund payment due in 12 months or less from the date as
of which current liabilities are to be determined; (ii) all other liabilities of
the Company and its consolidated subsidiaries other than Funded Debt (as
defined), deferred income taxes and liabilities for
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employee post-retirement health plans recognized in accordance with Statement of
Financial Accounting Standards No. 106; (iii) all depreciation and valuation
reserves and all other reserves (except for reserves for contingencies which
have not been allocated to any particular purpose) of the Company and its
consolidated subsidiaries; (iv) the book amount of all segregated intangible
assets of the Company and its consolidated subsidiaries, including, but without
limitation, such items as goodwill, trademarks, trade names, patents and
unamortized debt discount and expense less unamortized debt premium; and (v)
appropriate adjustments on account of minority interests of other persons
holding stock in subsidiaries. Consolidated Net Tangible Assets is to be
determined on a consolidated basis in accordance with generally accepted
accounting principles and as provided in the Senior Indenture. (Section 101 of
the Senior Indenture)
The term "Restricted Subsidiary" is defined in the Senior Indenture as any
subsidiary of the Company except (i) any subsidiary substantially all the assets
of which are located, or substantially all of the business of which is carried
on, outside of the United States and Canada, or any subsidiary substantially all
the assets of which consist of stock or other securities of such a subsidiary,
(ii) any subsidiary principally engaged in the business of financing notes and
accounts receivable and any subsidiary substantially all the assets of which
consist of the stock or other securities of such subsidiary or (iii) any
subsidiary acquired or organized after the date of the Indenture, unless the
Board of Directors of the Company has designated it as a Restricted Subsidiary
and such designation will not result in the breach of any covenant or agreement
in the Senior Indenture. (Section 101 of the Senior Indenture)
The term "Funded Debt" is defined in the Senior Indenture as indebtedness
for borrowed money owed or guaranteed by the Company or any consolidated
subsidiary, and any other indebtedness which under generally accepted accounting
principles would appear as debt on the balance sheet of such corporation, which
matures by its terms more than twelve months from the date as of which Funded
Debt is to be determined or is extendible or renewable at the option of the
obligor to a date more than twelve months from the date as of which Funded Debt
is to be determined. (Section 101 of the Senior Indenture)
For purposes of the Limitation on Liens and Limitation on Sale and
Leaseback Transactions, the term "value" with respect to a manufacturing plant
is defined in the Senior Indenture as the amount equal to the greater of (i) the
net proceeds of the sale or transfer of such manufacturing plant or (ii) the
fair value of such manufacturing plant at the time of entering into such Sale
and Leaseback Transaction, as determined by the Board of Directors of the
Company, in either case divided first by the number of full years of the term of
the lease and then multiplied by the number of full years of such term remaining
at the time of determination, without regard to renewal or extension options
contained in such lease. (Section 1010 of the Senior Indenture)
CONSOLIDATION, MERGER OR SALE OF ASSETS
Subject to the limitation set forth in the following paragraph, under each
Indenture, the Company may consolidate or merge with or into any other
corporation or sell or convey the property of the Company as an entirety, or
substantially as an entirety, to any other Person; provided that any such
consolidation, merger, sale or conveyance shall be upon the condition that (i)
immediately after such consolidation, merger, sale or conveyance the corporation
(whether the Company or such other corporation) formed by or surviving any such
consolidation or merger, or the Person to which such sale or conveyance shall
have been made, shall not be in default in the performance or observance of any
of the terms, covenants and conditions of the applicable Indenture to be kept or
performed by the Company; (ii) the corporation (if other than the Company)
formed by or surviving any such consolidation or merger, or the Person to which
such sale or conveyance shall have been made (if such Person is a Corporation),
shall be a corporation organized under the laws of the United States or any
State thereof; and (iii) the due and punctual payment of the principal of (and
premium, if any) and interest on all of the Indenture Securities of each series,
according to their tenor, and the due and punctual performance and observance of
all the covenants and conditions of the applicable Indenture to be performed or
observed by the Company, shall be expressly assumed, by supplemental indenture
complying with the requirements of such Indenture, satisfactory in form to the
Senior Trustee or Subordinated Trustee, as the case may be, executed and
delivered to such Trustee by the corporation formed by such consolidation, or
into which the Company shall have been merged, or by the Person which shall have
acquired such property. (Section 801 of the Indentures)
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If, upon any consolidation or merger of the Company with or into any other
corporation, or upon any consolidation or merger of any other corporation with
or into the Company or upon any sale or conveyance of the properties and assets
of the Company as an entirety or substantially as an entirety to any other
Person, any of the properties or assets owned by the Company or any Restricted
Subsidiary immediately prior thereto would thereupon become subject to any
mortgage, pledge, encumbrance or lien not permitted by the provisions described
under "Limitation on Liens" above, the Company, prior to such consolidation,
merger, sale or conveyance, will secure, or cause to be secured, all of the
outstanding Indenture Securities of each series (equally and ratably with any
other indebtedness of the Company then entitled thereto) by a direct lien on all
such properties and assets of the Company prior to all liens other than any
theretofore existing thereon. (Section 803 of the Senior Indenture)
In the event a successor corporation assumes the obligations of the
Company, such successor corporation shall succeed to and be substituted for the
Company under the Indentures and under the Indenture Securities. (Section 802 of
the Indentures)
DEFEASANCE AND COVENANT DEFEASANCE
Each Indenture provides that, if the provisions of Article Fourteen
relating to defeasance or covenant defeasance as described below are made
applicable to the Debt Securities of any series pursuant to Section 301 of the
Indentures, the Company may elect either (i) to defease and be discharged from
any and all obligations with respect to such Debt Securities (except for the
obligations to register the transfer or exchange of such Debt Securities, to
replace mutilated, destroyed, lost or stolen Debt Securities, to maintain an
office or agency in respect of the Debt Securities and to hold moneys for
payment in trust) ("defeasance") or (ii) in the case of the Senior Indenture, to
be released from its obligations with respect to such Debt Securities under
Sections 1009 and 1010 of the Senior Indenture (being the restrictions described
under "--Limitation on Sale and Leaseback Transactions" and "--Limitation on
Liens", respectively) and, in the case of each Indenture, if provided pursuant
to Section 301 of such Indenture, its obligations with respect to any other
covenant, and any omission to comply with such obligations thereafter shall not
constitute an Event of Default with respect to Debt Securities of such series
("covenant defeasance"), in either case upon the irrevocable deposit with the
Senior Trustee or the Subordinated Trustee, as the case may be (or other
qualifying trustee), in trust, of money and/or U.S. Government Obligations (as
defined) which through the payment of principal and interest in accordance with
their terms will provide money in an amount sufficient to pay the principal of
(and premium, if any) and interest on such Debt Securities, and any mandatory
sinking fund or analogous payments thereon, on the scheduled due dates therefor.
Such a trust may only be established if, among other things, the Company has
delivered to the Senior Trustee or the Subordinated Trustee, as the case may be,
an Opinion of Counsel (as specified in the Indenture) to the effect that the
holders of such Debt Securities will not recognize income, gain or loss for
United States federal income tax purposes as a result of such defeasance or
covenant defeasance and will be subject to United States federal income tax on
the same amounts, in the same manner and at the same time as would have been the
case if such defeasance or covenant defeasance had not occurred. Such opinion,
in the case of defeasance, must refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable United States federal income
tax law occurring after the date of the Indentures. (Article Fourteen of the
Indentures)
In the event the Company effects covenant defeasance with respect to Debt
Securities of any series and the Debt Securities of such series are declared due
and payable because of the occurrence of any Event of Default other than the
Event of Default described in clause (iv) under "Events of Default" with respect
to Sections 1009 and 1010 of the Senior Indenture (which Sections would no
longer be applicable to Debt Securities of that series), the amount of money and
U.S. Government Obligations on deposit with the Senior Trustee or the
Subordinated Trustee, as the case may be, will be sufficient to pay amounts due
on the Debt Securities of such series at the time of their Stated Maturity but
may not be sufficient to pay amounts due on the Debt Securities of such series
at the time of the acceleration resulting from such Event of Default. However,
the Company would remain liable to make payment of such amounts due at the time
of acceleration.
The Prospectus Supplement may further describe the provisions, if any,
permitting such defeasance or covenant defeasance with respect to the Debt
Securities of a particular series.
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MODIFICATION OF THE INDENTURES
The Company and the Senior Trustee or the Subordinated Trustee, as the case
may be, with the consent of the holders of not less than a majority in aggregate
principal amount of the outstanding Debt Securities of each series to be
affected, may enter into supplemental indentures which modify the indenture
under which such Debt Securities were issued or any supplemental indenture or
the rights of the holders of the Debt Securities of such series; provided that
no such modification shall, without the consent of the holder of each Debt
Security so affected, (i) extend the fixed maturity of any Debt Securities, or
reduce the principal amount thereof, or reduce the rate or extend the time of
payment of interest thereon, or reduce any premium payable upon the redemption
thereof or change the currency of payment of principal or interest (or premium,
if any) or impair the right to institute suit for the enforcement of any such
payment, (ii) reduce the aforesaid percentage of the Debt Securities of any
series, the holders of which are required to consent to any such modification or
(iii) in the case of Convertible Subordinated Securities, impair any right to
convert such Debt Securities into Common Shares of the Company. (Section 902 of
the Indentures)
The holders of a majority in aggregate principal amount of Outstanding Debt
Securities of a series issued under either Indenture have the right to waive
compliance by the Company with certain covenants contained in such Indenture
applicable to such series. (Section 1011 of the Senior Indenture and Section
1008 of the Subordinated Indenture)
Modification and amendment of either Indenture may be made by the Company
and the applicable Trustee thereunder, without the consent of any holder, for
any of the following purposes: (i) to evidence the succession of another Person
to the Company as obligor under such Indenture; (ii) to add to the covenants of
the Company for the benefit of the holders of all or any series of Indenture
Securities issued under such Indenture; (iii) to add Events of Default for the
benefit of the holders of all or any series of such Indenture Securities; (iv)
to add to or change any of the provisions of the applicable Indenture to
facilitate the issuance of Bearer Securities; (v) to change or eliminate any
provisions of the applicable Indenture, provided that any such change or
elimination shall become effective only when there are no such Indenture
Securities Outstanding of any series created prior thereto which are entitled to
the benefit of such provision; (vi) to secure Senior Securities pursuant to the
requirements of Section 803 or Section 1009 of the Senior Indenture, or
otherwise; (vii) to establish the form or terms of such Indenture Securities of
any series and any related coupons; (viii) to provide for the acceptance of
appointment by a successor trustee or facilitate the administration of the
trusts under the applicable Indenture by more than one trustee; (ix) to close
the applicable Indenture with respect to the authentication and delivery of
additional series of Indenture Securities; (x) to cure any ambiguity, defect or
inconsistency in the applicable Indenture, provided such action does not
adversely affect the interests of holders of such Indenture Securities of any
series in any material respect; or (xi) to supplement any of the provisions of
the applicable Indenture to the extent necessary to permit or facilitate
defeasance and discharge of any series of such Indenture Securities, provided
that such action shall not adversely affect the interests of the holders of any
such Indenture Securities in any material respect. (Section 901 of the
Indentures)
Each Indenture provides that in determining whether the holders of the
requisite principal amount of Indenture Securities of a series then Outstanding
have given any request, demand, authorization, direction, notice, consent or
waiver thereunder or whether a quorum is present at a meeting of holders of
Indenture Securities, (i) the principal amount of an Original Issue Discount
Security that shall be deemed to be outstanding shall be the amount of the
principal thereof that would be due and payable as of the date of such
determination upon acceleration of the Maturity thereof, (ii) the principal
amount of an Indenture Security denominated in one or more foreign Currencies
shall be deemed to be the U.S. dollar equivalent, determined on the date of
original issuance of such Indenture Security, of the principal amount (or, in
the case of an Original Issue Discount Security, the U.S. dollar equivalent on
the date of original issuance of such Original Issue Discount Security of the
amount determined as provided in (i) above) of such Indenture Security, and
(iii) the principal amount that shall be deemed outstanding of an Indenture
Security the terms of which provide that the principal amount thereof payable at
Stated Maturity may be more or less than the principal face amount thereof at
original issuance (an "Indexed Security") shall be deemed to be the principal
face amount of such Indenture Security at original issuance. (Section 101 of the
Indentures)
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The Indentures contain provisions for convening meetings of the holders of
Indenture Securities of a series if Indenture Securities of that series are
issuable as Bearer Securities. (Section 1501 of the Senior Indenture and Section
1701 of the Subordinated Indenture) A meeting may be called at any time by the
applicable Trustee, and also, upon request, by the Company or the holders of at
least 10% in principal amount of the Indenture Securities of such series
Outstanding, in any such case upon notice given as provided in the applicable
Indenture. (Section 1502 of the Senior Indenture and Section 1702 of the
Subordinated Indenture) Except for any consent that must be given by the holder
of each Indenture Security affected thereby, as described above, any resolution
presented at a meeting or adjourned meeting at which a quorum is present may be
adopted by the affirmative vote of the holders of a majority in principal amount
of the Indenture Securities of that series; PROVIDED, HOWEVER, that any
resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
holders of a specified percentage, which is less than a majority, in principal
amount of Indenture Securities of a series may be adopted at a meeting or
adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the holders of such specified percentage in principal amount
of the Indenture Securities of that series. Any resolution passed or decision
taken at any meeting of holders of Indenture Securities of any series duly held
in accordance with the applicable Indenture will be binding on all holders of
Indenture Securities of that series and the related coupons. The quorum at any
meeting called to adopt a resolution, and at any reconvened meeting, will be
persons holding or representing a majority in principal amount of the Indenture
Securities of a series; PROVIDED, HOWEVER, that if any action is to be taken at
such meeting with respect to a consent or waiver which may be given by the
holders of not less than a specified percentage in principal amount of the
Indenture Securities of a series, the persons holding or representing such
specified percentage in principal amount of the Indenture Securities of such
series will constitute a quorum.
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of holders of Indenture Securities of any series with respect to any
request, demand, authorization, direction, notice, consent, waiver or other
action that the applicable Indenture expressly provides may be made, given or
taken by the holders of a specified percentage in principal amount of all
Outstanding Indenture Securities affected thereby, or of the holders of such
series and one or more additional series: (i) there shall be no minimum quorum
requirement for such meeting and (ii) the principal amount of the Outstanding
Indenture Securities of such series that vote in favor of such request, demand,
authorization, direction, notice, consent, waiver or other action shall be taken
into account in determining whether such request, demand, authorization,
direction, notice, consent, waiver or other action has been made, given or taken
under such Indenture. (Section 1504 of the Senior Indenture and Section 1704 of
the Subordinated Indenture)
EVENTS OF DEFAULT
The Indentures define an Event of Default with respect to any series of
Debt Securities as being any one of the following unless it is inapplicable or
is specifically deleted or modified in the supplemental indenture under which
such series is issued or in the form of Debt Securities of such series: (i)
failure to pay interest when due, continued for 30 days; (ii) failure to pay
principal when due and payable either at maturity, upon redemption, by
declaration or otherwise; (iii) failure to make or satisfy any sinking fund
payment or analogous obligation when due continued for 30 days; (iv) failure to
perform in any material respect any other covenant or agreement contained in
such Indenture for 60 days after written notice by the Trustee or the holders of
at least 25% in aggregate principal amount of the outstanding Debt Securities of
such series; (v) certain events of bankruptcy, insolvency or reorganization of
the Company; and (vi) any other Event of Default provided in the supplemental
indenture under which such series of Debt Securities is issued or in the form of
Debt Security for such series. No Event of Default with respect to a particular
series of Debt Securities necessarily constitutes an Event of Default with
respect to any other series of Debt Securities. (Section 501 of the Indentures)
Within 90 days after the occurrence of any default with respect to any
series of Debt Securities, the applicable Trustee must give the holders of such
series notice of all such defaults known to such Trustee, unless cured or waived
before the giving of such notice; provided that, except in the case of default
in the payment of principal of or interest on any of the Debt Securities of such
series, the applicable Trustee may withhold such notice. (TIA Section 315)
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In case an Event of Default shall occur (which shall not have been cured or
waived), the applicable Trustee will be required to exercise such of its rights
and powers under the applicable Indenture and to use the degree of care and
skill in its exercise as a prudent man would exercise or use under the
circumstances in the conduct of his own affairs. (TIA Section 315)
Subject to the foregoing, the Trustees are under no obligation to exercise
any of their rights or powers under the Indentures at the request of holders of
the Debt Securities, unless the holders shall have offered to the applicable
Trustee reasonable security or indemnity. (Section 602 of the Indentures)
RIGHTS UPON DEFAULT
No holder of Debt Securities of any series will have any right under either
Indenture to institute any suit, action or proceeding with respect to such
Indenture or for any remedy thereunder, unless such holder previously shall have
given to the applicable Trustee written notice of default and of the continuance
thereof and the holders of not less than 25% in aggregate principal amount of
the then outstanding Debt Securities of such series (or, in the case of an Event
of Default specified in clause (v) or (vi) under "Events of Default", the
holders of at least 25% in aggregate principal amount of the then Outstanding
Indenture Securities) shall have made written request upon such Trustee to
institute such action, suit or proceeding in its own name as Trustee thereunder
and shall have offered to such Trustee reasonable indemnity and the Trustee for
60 days after receipt of such notice shall have neglected or refused to
institute any such suit, action or proceeding. (Section 507 of the Indentures)
In case any Event of Default shall have occurred and shall be continuing
with respect to a particular series of the Debt Securities, the applicable
Trustee or the holders of at least 25% in aggregate principal amount of the then
outstanding Debt Securities of such series (or, in the case of an Event of
Default specified in clause (v) or (vi) under "Events of Default", the holders
of at least 25% in aggregate principal amount of the then Outstanding Indenture
Securities) may declare the principal of such series (or, in the case of
Original Issue Discount Securities, a portion of the principal) to be
immediately due and payable. Under certain circumstances, the holders of a
majority in aggregate principal amount of the Debt Securities of such series may
waive all defaults with respect to such series and may rescind and annul such
declaration and its consequences. (Section 502 of the Indentures)
The holders of a majority in aggregate principal amount of the outstanding
Debt Securities of any series will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the applicable
Trustee, or exercising any trust or power conferred on such Trustee. (Section
512 of the Indentures) Prior to the declaration of the acceleration of the
maturity, the holders of a majority in aggregate principal amount of the
outstanding Debt Securities of any series may on behalf of all holders of the
Debt Securities of such series waive any past default and its consequences with
respect to such series, except a default in the payment of principal, premium or
interest. (Section 513 of the Indentures)
EVIDENCE AS TO COMPLIANCE
Each Indenture requires that the Company deliver to the applicable Trustee,
upon becoming aware of any default with respect to any covenant, agreement or
condition contained in such Indenture, a statement specifying such default and
that the Company deliver to the applicable Trustee each year a statement as to
whether or not, to the knowledge of the officers signing such statement, the
Company is in default with respect to any such covenant, agreement or condition.
(Section 1004 of the Indentures)
CONCERNING THE TRUSTEES
The Senior Trustee and the Subordinated Trustee may each resign or be
removed with respect to one or more series of Debt Securities and a successor
trustee may be appointed to act with respect to such series. (Section 608 of the
Indentures) In the event that two or more persons are acting as trustee with
respect to different series of Debt Securities under either one of the
Indentures, each such trustee shall be a trustee of a trust under such Indenture
separate and apart from the trust administered by any other such trustee.
(Section 609 of the Indentures) Any action described herein to be taken by the
"Trustee" may then be taken
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by each such trustee with respect to, and only with respect to, the one or more
series of Debt Securities for which it is trustee.
Chemical Bank ("Chemical") has agreed to serve as the Trustee under both
Indentures. Chemical is among the banks with which the Company and certain of
its subsidiaries maintain banking relationships in the ordinary course of
business, both in the United States and abroad. Chemical is trustee under the
indentures under which the 8% Debentures due 2006 ("8% Debentures") and the 9%
Debentures of Eaton ETN Offshore Ltd. due 2001 ("9% Debentures") are
outstanding.
In the event that a default occurs under either Indenture or under the
indentures which govern the 8% Debentures (the "8% Debentures Indenture") or the
9% Debentures (the "9% Debentures Indenture") at a time when Indenture
Securities are outstanding under the Subordinated Indenture, unless the default
is cured or waived within 90 days, the provisions of the TIA require that
Chemical resign as Trustee under either the Subordinated Indenture or each of
the Senior Indenture, the 8% Debentures Indenture and the 9% Debentures
Indenture. In such circumstance, the Company expects that Chemical would resign
as Trustee under the Subordinated Indenture.
CONVERSION PROVISIONS OF CONVERTIBLE SUBORDINATED SECURITIES
The holder of Convertible Subordinated Securities of a specified series
will have the right, exercisable at any time up to and including the date
specified in the applicable Prospectus Supplement (except that, in the event
that such Securities or portion thereof shall be called for redemption, such
right shall terminate at the close of business on the day prior to the specified
redemption date) at such holder's option to convert such Securities at the
principal amount thereof (or any portion thereof that is an integral multiple of
$1,000) into Common Shares, at the conversion price and in the manner set forth
in the applicable Prospectus Supplement. Conversions of the Convertible
Subordinated Securities may be effected by delivering them to the office or
agency of the Company maintained for such purpose. Except as described in the
applicable Prospectus Supplement, on conversion no adjustment for interest or
dividends is to be made, but if any holder surrenders a Convertible Subordinated
Security for conversion between the record date for the payment of an
installment of interest and the next interest payment date (unless called for
redemption in whole or in part during such period) such a Convertible
Subordinated Security, when surrendered for conversion, must be accompanied by
payment of an amount equal to the interest thereon which the registered holder
on such record date is to receive on such interest payment date. No fractional
Common Shares will be issued upon conversion, but an appropriate amount in cash
will be paid in lieu of such fractional shares. The Subordinated Indenture
contains provisions requiring adjustment of the conversion price in the event of
(i) the subdivision, combination or reclassification of the outstanding Common
Shares, (ii) the declaration of any dividend on the Common Shares in shares of
the Company's capital stock, (iii) the issuance of certain rights or warrants to
all holders of Common Shares entitling them to acquire Common Shares within 45
days after the record date for determining holders entitled to receive such
rights or warrants at less than the current market price (as defined in the
Subordinated Indenture) of the Common Shares and (iv) the distribution to
holders of Common Shares of evidence of indebtedness or assets (excluding cash
dividends or other distributions made out of earned surplus) or rights or
warrants to subscribe for or purchase Common Shares (other than those referred
to in clause (iii) above). No adjustment in the conversion price will be made
for regular quarterly or other periodic or recurring cash dividends or
distributions or for cash dividends or distributions to the extent paid from
retained earnings. The Company is not required to make adjustments in the
conversion price of less than 1% of such price, but any adjustment that would
otherwise be required to be made will be taken into account in the computation
of any subsequent adjustment. (Article 15 of the Subordinated Indenture)
If at any time the Company makes a distribution of property to its
shareholders that would be taxable to such shareholders as a dividend for United
States federal income tax purposes (including, for example, a distribution of
evidences of indebtedness or assets of the Company, but generally not including
a stock dividend or a distribution of rights to subscribe for Common Shares)
and, pursuant to the anti-dilution provisions of the Subordinated Indenture, the
Conversion Rate is increased (or the Holders of the Convertible Subordinated
Securities otherwise participate in such distribution), such increase (or
participation) may be treated as a taxable dividend to holders of the
Convertible Subordinated Securities. In addition, if the
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Conversion Rate is increased at the discretion of the Company, such increase may
result in taxable income for the holders of the Convertible Subordinated
Securities.
SUBORDINATION PROVISIONS
Payment of the principal of (including any sinking fund payments), premium,
if any, and interest, if any, on the Convertible Subordinated Securities will be
subordinated in right of payment, as set forth in the Subordinated Indenture, to
the prior payment in full of Senior Indebtedness of the Company, and no payment
with respect to the Convertible Subordinated Securities can be made by the
Company while a default exists with respect to Senior Indebtedness of the
Company. "Senior Indebtedness" is defined in the Subordinated Indenture as (i)
indebtedness of the Company theretofore or thereafter created, incurred, assumed
or guaranteed for money borrowed from banks or other lending institutions and
any other indebtedness or obligation of the Company evidenced by a bond,
debenture, note or other similar instrument, including without limitation
over-drafts, letters of credit issued for the account of the Company and
commercial paper, (ii) any other indebtedness constituting purchase money
indebtedness for the payment of which the Company is directly or contingently
liable (excluding trade accounts payable), (iii) any direct or contingent
indebtedness or obligation represented by guarantees or instruments having a
similar effect entered into by the Company (whether prior to the date of the
Subordinated Indenture or thereafter) with reference to lease or purchase money
obligations of any Subsidiary or any affiliate of the Company or any other
corporation as to which the Company holds or has an option to purchase 50% or
more of the outstanding capital stock, and (iv) renewals, extensions and
refundings of any such indebtedness, unless in any such case it is provided by
the terms of the instrument creating or evidencing such indebtedness that such
indebtedness is made on a parity with or is junior in right of payment to the
Subordinated Securities. With respect to the Company, any indebtedness which
becomes indebtedness of the Company by operation of merger, consolidation or
other acquisition, shall constitute Senior Indebtedness if such indebtedness
would have been Senior Indebtedness had it been issued by the Company. By reason
of such subordination, in the event of insolvency, holders of Senior
Indebtedness of the Company may receive more, ratably, and holders of the
Subordinated Securities may receive less, ratably, than the other creditors of
the Company. At January 31, 1994, the outstanding amount of Senior Indebtedness
of the Company was approximately $1,609,473,000. There is no limitation on the
issuance of Senior Indebtedness in the Subordinated Indenture. (Article 16 of
the Subordinated Indenture)
DESCRIPTION OF COMMON SHARES
The following is a summary of certain of the provisions concerning the
Common Shares contained in the Company's Amended Articles of Incorporation
("Articles") and its Amended Regulations ("Regulations"), as affected by debt
agreements with certain lenders. Reference is made to such Articles and
Regulations, which are exhibits to the Registration Statement, for a full and
complete statement of such provisions and rights, and the following statements
are qualified in their entirety by such reference.
AUTHORIZED NUMBER
The Articles authorize the issuance of up to 150,000,000 Common Shares. At
the close of business on January 31, 1994, there were 72,268,764 Common Shares
issued and outstanding. The outstanding Common Shares are fully paid and
non-assessable, and shareholders are not subject to any liability for calls and
assessments. The Company intends to seek shareholder approval at the 1994 annual
meeting of shareholders to increase the total number of authorized Common Shares
to 300,000,000. The Company does not have any current plans to issue any such
additional shares. The Articles also authorize the issuance of up to 14,106,394
shares of preferred stock ("Preferred Shares"). Currently, there are no
Preferred Shares issued and outstanding.
DIVIDEND RIGHTS
Holders of Common Shares are entitled to receive such dividends as may be
declared by the Company's Board of Directors subject to provisions of law.
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VOTING RIGHTS
Each Common Share entitles the holder to one vote, with the right of
cumulative voting in the election of directors.
Notwithstanding any provision of law requiring the vote of a designated
proportion of the voting power of the Company for any action, the Articles
provide that such action may be taken by the vote of the holders of shares
entitling them to exercise a majority of the voting power of the Company, except
in each case as is otherwise provided in the Articles or Regulations. The
Articles and Regulations provide for a voting proportion which is different from
that provided by statutory law in order for shareholders to take action in
certain circumstances, including the following:
(1) Two-thirds vote required to fix or change the number of directors.
(2) Two-thirds vote required for removal of directors.
(3) Fifty percent of the outstanding shares required to call a special
meeting of shareholders.
(4) Two-thirds vote required to amend the Regulations without a
meeting.
(5) Two-thirds vote required to amend the provisions described in
items (1) through (4) above and this provision, unless such action is
recommended by two-thirds of the members of the Board of Directors.
(6) Two-thirds vote required to approve certain transactions, such as
the sale, exchange, lease, transfer or other disposition by the Company of
all, or substantially all, of its assets or business, or the consolidation
of the Company or its merger into another corporation, or certain other
mergers and majority share acquisitions.
(7) Two-thirds vote required to amend the provisions described in item
6, or this provision.
The requirement of a two-thirds vote in certain circumstances may have the
effect of delaying, deferring or preventing a change in control of the Company.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, after the payment or provision for payment of the
debts and other liabilities of the Company and the preferential amounts to which
holders of the Company's Preferred Shares are entitled (if any such Preferred
Shares are then outstanding), the holders of the Common Shares are entitled to
share pro rata in the assets of the Company remaining for distribution to
shareholders.
MISCELLANEOUS RIGHTS, LISTING AND TRANSFER AGENTS
The Common Shares have no pre-emptive or conversion rights and there are no
redemption or sinking fund provisions applicable thereto.
The outstanding Common Shares are listed on the New York, Chicago, Pacific
and London Stock Exchanges.
Society National Bank, headquartered in Cleveland, Ohio, is the transfer
agent and registrar for the Common Shares.
CLASSIFICATION OF BOARD OF DIRECTORS
The Board of Directors of the Company is divided into three approximately
equal classes, having staggered terms of office of three years each. The effect
of a classified Board of Directors, where cumulative voting is in effect, is to
require the votes of more shares to elect one or more members of the Board of
Directors than would be required if the Board of Directors were not classified.
Additionally, the effect of a classified Board of Directors may be to make it
more difficult to acquire control of the Company.
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CERTAIN OHIO STATUTES
Various laws may affect the legal or practical ability of shareholders to
dispose of shares of the Company. Such laws include the Ohio statutory
provisions described below.
Chapter 1704 of the Ohio Revised Code prohibits an interested shareholder
(defined as a beneficial owner, directly or indirectly, of ten percent (10%) or
more of the voting power of any issuing public Ohio corporation) or any
affiliate or associate of an interested shareholder (as defined in Section
1704.01 of the Ohio Revised Code) from engaging in certain transactions with the
corporation during the three-year period after the interested shareholder's
share acquisition date. The prohibited transactions include mergers,
consolidations, majority share acquisitions, certain asset sales, loans, certain
sales of shares, dissolution, and certain reclassifications, recapitalizations,
or other transactions that would increase the proportion of shares held by the
interested shareholder. After expiration of the three-year period, the
corporation may participate in such a transaction with an interested shareholder
only if, among other things, (i) the transaction receives the approval of the
holders of two-thirds of all the voting shares and the approval of the holders
of a majority of the disinterested voting shares (shares not held by the
interested shareholder) or (ii) the transaction meets certain criteria designed
to ensure that the remaining shareholders receive fair consideration for their
shares. The prohibitions do not apply if, before the interested shareholder
becomes an interested shareholder, the board of directors of the corporation
approves either the interested shareholder's acquisition of shares or the
otherwise prohibited transaction. The restrictions also do not apply if a person
inadvertently becomes an interested shareholder or was an interested shareholder
prior to the adoption of the statute on April 11, 1990, unless, subject to
certain exceptions, the interested shareholder increases his, her or its
proportionate share interest on or after April 11, 1990.
Pursuant to Ohio Revised Code Section 1707.043, a public corporation formed
in Ohio may recover profits that a shareholder makes from the sale of the
corporation's securities within eighteen (18) months after making a proposal to
acquire control or publicly disclosing the possibility of a proposal to acquire
control. The corporation may not, however, recover from a person who proves in a
court of competent jurisdiction either (i) that his, her or its sole purpose in
making the proposal was to succeed in acquiring control of the corporation and
there were reasonable grounds to believe that such person would acquire control
of the corporation or (ii) such person's purpose was not to increase any profit
or decrease any loss in the stock and the proposal did not have a material
effect on the market price or trading volume of the stock. Also, before the
corporation may obtain any recovery, the aggregate amount of the profit realized
by such person must exceed $250,000. Any shareholder may bring an action on
behalf of the corporation if a corporation fails or refuses to bring an action
to recover these profits within sixty (60) days of a written request. The party
bringing such an action may recover his, her or its attorneys fees if the court
having jurisdiction over such action orders recovery of any profits.
The Company is also subject to Ohio's Control Share Acquisition Act (Ohio
Revised Code 1701.831). The Control Share Acquisition Act provides that, with
certain exceptions, a person may acquire beneficial ownership of shares in
certain ranges (one-fifth or more but less than one-third, one-third or more but
less than a majority, or a majority or more) of the voting power of the
outstanding shares of an Ohio corporation meeting certain criteria, which the
Company meets, only if such person has submitted an "acquiring person statement"
and the proposed acquisition has been approved by the vote of a majority of the
shares of the corporation represented at a special meeting called for such
purpose and by a majority of such shares of the corporation excluding
"interested shares," as defined in Section 1701.01 of the Ohio Revised Code.
DESCRIPTION OF DEBT WARRANTS
The Company may issue Debt Warrants in registered or bearer certificated
form for the purchase of Senior Securities. Debt Warrants may be issued together
with or separately from any Debt Securities or Preferred Shares offered by any
Prospectus Supplement and, if issued together with any Debt Securities or
Preferred Shares, may be attached to or separate from such Debt Securities. Debt
Warrants are to be issued under warrant agreements (each, a "Debt Warrant
Agreement") to be entered into between the Company and one or more banks or
trust companies, as debt warrant agent (each, a "Debt Warrant Agent"), all as
set forth in the Prospectus Supplement relating to the particular issue of Debt
Warrants. A copy of the form of
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Debt Warrant Agreement, including a form of debt warrant certificate
representing the Debt Warrants (a "Debt Warrant Certificate") are filed as
exhibits to the Registration Statement. The following summaries of certain
provisions of the Debt Warrant Agreement and Debt Warrant Certificates do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all the provisions of the Debt Warrant Agreement and the Debt
Warrant Certificate. Capitalized terms used in this description of Debt Warrants
but not defined herein have the meanings ascribed to such terms in the Debt
Warrant Agreement.
The particular terms of and other information with respect to each issue of
Debt Warrants, as well as any modifications or additions to the general terms of
the Debt Warrant Agreement or Debt Warrant Certificate which may be applicable
in the case of such Debt Warrants, will be described in the Prospectus
Supplement relating to such Debt Warrants. Accordingly, for a description of the
terms of a particular issue of Debt Warrants, reference must be made both to the
Prospectus Supplement relating thereto and to the following description.
GENERAL
The Prospectus Supplement will describe the terms of the Debt Warrants
offered thereby, the Debt Warrant Agreement relating to such Debt Warrants and
the Debt Warrant Certificate representing such Debt Warrants, including the
following: (1) the initial offering price; (2) the title and aggregate number of
such Debt Warrants; (3) the designation, aggregate principal amount and other
terms of the Senior Securities purchasable upon exercise of the Debt Warrants;
(4) if applicable, the designation and terms of the Debt Securities or Preferred
Shares with which the Debt Warrants are issued and the number of Debt Warrants
issued with each such Debt Security or Preferred Share; (5) if applicable, the
date on and after which the Debt Warrants and the related Debt Securities or
Preferred Shares will be separately transferable; (6) the principal amount of
Senior Securities purchasable upon exercise of one Debt Warrant and the price at
which such principal amount of Senior Securities may be purchased upon such
exercise; (7) the date on which the right to exercise the Debt Warrants shall
commence and the date (the "Debt Warrant Expiration Date") on which such right
shall expire; (8) if applicable, a discussion of United States federal income
tax consequences applicable to the exercise of the Debt Warrants and to the
Senior Securities purchasable upon the exercise of the Debt Warrants; (9) the
identity of the Debt Warrant Agent; (10) whether the Debt Warrants represented
by the Debt Warrant Certificates will be issued in registered or bearer form,
and if registered, where they may be transferred or registered; and (11) any
other terms of the Debt Warrants.
Debt Warrant Certificates may be exchanged for new Debt Warrant
Certificates of different denominations and, if in registered form, may be
presented for registration of transfer, and may be exercised at the corporate
trust office of the Debt Warrant Agent or any other office indicated in the
Prospectus Supplement relating thereto. (Section 3.01 of the Debt Warrant
Agreement) Prior to exercise of Debt Warrants, holders of Debt Warrants will not
be entitled to payments of principal of (or premium, if any) or interest, if
any, on the Senior Securities purchasable upon such exercise or to enforce any
of the covenants in the Senior Indenture. (Section 4.01 of the Debt Warrant
Agreement)
EXERCISE OF DEBT WARRANTS
Unless otherwise provided in the Prospectus Supplement, each Debt Warrant
will entitle its holder to purchase such principal amount of Senior Securities
at such exercise price and in the manner as shall in each case be set forth in,
or calculated from, the Prospectus Supplement relating to the Debt Warrants
offered thereby. (Sections 1.01 and 2.01 of the Debt Warrant Agreement.) Debt
Warrants may be exercised at any time up to the close of business on the Debt
Warrant Expiration Date set forth in the Prospectus Supplement relating to such
Debt Warrants offered thereby. After the close of business on the Debt Warrant
Expiration Date (or such later date to which such Debt Warrant Expiration Date
may be extended by the Company), unexercised Debt Warrants will be void.
(Section 2.02 of the Debt Warrant Agreement)
Debt Warrants may be exercised by delivery to the Debt Warrant Agent of
payment as provided in the Prospectus Supplement of the amount required to
purchase the Senior Securities purchasable upon such exercise together with the
purchase form in the Debt Warrant Certificate duly executed. Debt Warrants will
be deemed to have been exercised upon receipt of the exercise price and the duly
executed and completed
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Debt Warrant Certificate evidencing such Debt Warrants. Upon receipt of such
payment and the Debt Warrant Certificate duly executed and completed at the
corporate trust office of the Debt Warrant Agent or any other office indicated
in the Prospectus Supplement, the Company will, as soon as practicable, issue
and deliver the Debt Securities purchasable upon such exercise. If fewer than
all of the Debt Warrants represented by such Debt Warrant Certificate are
exercised, a new Debt Warrant Certificate will be issued for the remaining
amount of Debt Warrants. (Section 2.03 of the Debt Warrant Agreement)
MODIFICATIONS
The Debt Warrant Agreement and the terms of the Debt Warrants may be
amended by the Company and the Debt Warrant Agent, without the consent of the
holders of any Debt Warrant Certificate, for the purpose of curing any
ambiguity, or curing, correcting or supplementing any defective provision
contained therein, or in any other manner which the Company and the Debt Warrant
Agent may deem necessary or desirable and which will not adversely affect the
interests of the holders of Debt Warrant Certificates. The Company and the Debt
Warrant Agent also may modify or amend the Debt Warrant Agreement and the terms
of the Debt Warrants, with the consent of the beneficial owners of not less than
a majority in number of the then outstanding unexercised Debt Warrants affected,
PROVIDED that no such modification or amendment that increases the exercise
price, shortens the period of time during which the Debt Warrants may be
exercised or otherwise materially and adversely affects the exercise rights of
the owners of the Debt Warrants or reduces the number of Debt Warrants, the
consent of whose owners is required for modification or amendment of the Debt
Warrant Agreement or the terms of the Debt Warrants, may be made without the
consent of the owners affected thereby. (Section 6.03 of the Debt Warrant
Agreement)
MERGER, CONSOLIDATION, SALE OR OTHER DISPOSITIONS
Under the Debt Warrant Agreement, the Company may, to the extent permitted
in the Senior Indenture, consolidate with, or sell or convey all or
substantially all of its assets to, or merge with or into, any other Person. If
at any time there shall be a merger, consolidation, sale, transfer, conveyance
or other disposition of substantially all of the assets of the Company, the
successor or assuming Person shall succeed to and be substituted for the
Company, with the same effect as if it had been named in the Debt Warrant
Agreement and in the Debt Warrants as the Company. The Company shall thereupon
be relieved of any further obligation under the Debt Warrant Agreement or under
the Debt Warrants. (Sections 6.01 and 6.02 of the Debt Warrant Agreement)
ENFORCEABILITY OF RIGHTS BY HOLDERS; GOVERNING LAW
The Debt Warrant Agent will act solely as an agent of the Company in
connection with the Debt Warrant Certificates and will not assume any obligation
or relationship of agency or trust for or with any holders of Debt Warrant
Certificates. (Section 5.02 of the Debt Warrant Agreement) Holders, without the
consent of the Debt Warrant Agent, the Senior Trustee, the holder of any Senior
Securities issued upon exercise of Debt Warrants or the holder of any other Debt
Warrant Certificates, may enforce by appropriate legal action, on their own
behalf, their right to exercise their Debt Warrants in the manner provided in
their Debt Warrant Certificates and the Debt Warrant Agreement. (Section 4.02 of
the Debt Warrant Agreement) Prior to the exercise of their Debt Warrants,
holders of Debt Warrants will not have any of the rights of holders of the
Senior Securities purchasable upon such exercise, including the right to receive
payments of principal of (and premium, if any) or interest, if any, on the
Senior Securities purchasable upon such exercise or to enforce covenants in the
Senior Indenture. (Section 4.01 of the Debt Warrant Agreement) Except as may
otherwise be provided in the Prospectus Supplement relating thereto, each issue
of Debt Warrants and the applicable Debt Warrant Agreement will be governed by
and construed in accordance with the laws of the State of New York. (Section
6.07 of the Debt Warrant Agreement)
DESCRIPTION OF PREFERRED SHARES
The description below sets forth certain general terms and provisions of
the Preferred Shares. The specific terms of and other information with respect
to the Preferred Shares offered by any Prospectus Supplement
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(the "Offered Preferred Shares") including, but not limited to, tax consequences
relating to the purchase, ownership, disposition and conversion of Offered
Preferred Shares will be described in the Prospectus Supplement relating to such
Offered Preferred Shares. The following summaries of certain provisions of the
Preferred Shares do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the Certificate of Designations
relating to the particular series of Preferred Shares, which will be filed with
the Commission at or prior to the time of the sale of such Preferred Shares.
If so indicated in the Prospectus Supplement, the terms of the Offered
Preferred Shares may differ from the terms set forth below, except those terms
required by the Articles.
GENERAL
Under the Articles, the Board of Directors of the Company is authorized at
any time and from time to time and without further shareholder action to adopt
resolutions providing for the issuance, in one or more series, of up to
14,106,394 Preferred Shares, without par value and of equal rank with such
designations, number of shares, dividend rates, dividend payment dates, and
dates from which dividends shall be cumulative, redemption rights or prices,
sinking fund provisions, liquidation prices, conversion rights and restrictions
on the issuance of shares of the same series or any other class or series, as
may be determined by the Board of Directors. As of the date of this Prospectus,
the Company has no Preferred Shares outstanding.
The Preferred Shares shall have the dividend, liquidation, redemption,
voting rights and conversion rights set forth below unless otherwise provided in
the Prospectus Supplement relating to a particular series of Offered Preferred
Shares. The Prospectus Supplement will set forth the following terms of the
Offered Preferred Shares: (1) the title and stated value of the Offered
Preferred Shares, the liquidation preference per share and the number of shares
offered; (2) the price at which the Offered Preferred Shares will be issued; (3)
the dividend rates and dates on which dividends shall be payable, as well as the
dates from which dividends shall commence to cumulate or the method(s) of
calculation thereof; (4) the period or periods within which, the price or prices
at which and the terms and conditions upon which the Offered Preferred Shares
may be redeemed, in whole or in part, at the option of the Company, if the
Company is to have that option; (5) the obligation, if any, of the Company to
redeem or purchase the Offered Preferred Shares pursuant to any sinking fund or
analogous provisions or at the option of a holder thereof and the period or
periods within which, the price or prices at which and the terms and conditions
upon which the Offered Preferred Shares shall be redeemed or purchased in whole
or in part pursuant to such obligation; (6) any rights on the part of the holder
to convert the Offered Preferred Shares into Common Shares of the Company; (7)
any additional dividend, liquidation, redemption, sinking fund, voting and other
rights, preferences, privileges, limitations and restrictions; (8) the terms of
any Debt Warrants being offered together with or separately from the Offered
Preferred Shares; (9) the national securities exchange, if any, upon which the
Offered Preferred Shares will be listed; (10) the procedures for any auction or
remarketing, if any, of the Offered Preferred Shares; and (11) any other terms
of the Offered Preferred Shares.
The Preferred Shares will be fully paid and nonassessable, and for each
share issued, a sum equal to the stated value will be credited to the Company's
preferred stock account.
DIVIDENDS
Holders of the Offered Preferred Shares will be entitled to receive cash
dividends, when and as declared by the Board of Directors of the Company out of
assets of the Company legally available for payment, at such rate and on such
quarterly dates as will be set forth in the applicable Prospectus Supplement.
Each dividend will be payable to holders of record as they appear on the stock
books of the Company on the record dates fixed by the Board of Directors of the
Company. Dividends will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If, for any dividend period or periods, full
cumulative dividends on any Preferred Shares have not been paid or declared and
set apart for payment or the Company is in default with respect to the
redemption of Preferred Shares or any sinking fund for any Preferred Shares, the
Company may not declare any dividends (except a dividend payable in Common
Shares or in any other shares of the Company ranking junior to the Preferred
Shares) on, or make any distribution (except as aforesaid) on the Common Shares
or any other shares of the Company, or make any payment on account of the
purchase,
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redemption or other retirement of, its Common Shares or any other shares of the
Company (except out of the proceeds of the sale of Common Shares or any other
shares ranking junior to the Preferred Shares). If dividends on Preferred Shares
are in arrears, and there shall be outstanding shares of any other series of
Preferred Shares ranking on a parity as to dividends with the Preferred Shares,
the Company, in making any dividend payment on account of such arrears, is
required to make payments ratably upon all outstanding Preferred Shares and such
other series of Preferred Shares in proportion to the respective amounts of
dividends in arrears on such Preferred Shares and shares of such other series.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Offered Preferred Shares will be
entitled to receive out of assets of the Company available for distribution to
shareholders, before any distribution of assets is made to holders of Common
Shares, liquidating distributions in the amount set forth in the applicable
Prospectus Supplement plus all accrued and unpaid dividends. If, upon any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the amounts payable with respect to the Preferred Shares and any other shares of
the Company ranking as to any such distribution on a parity with the Preferred
Shares are not paid in full, the holders of the Preferred Shares and of such
other shares will share ratably in any such distribution of assets of the
Company in proportion to the full respective preferential amounts to which they
are entitled. After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of Preferred Shares will not be entitled
to any further participation in any distribution of assets by the Company. A
consolidation or merger of the Company with or into any other corporation or
corporations or a sale of all or substantially all of the assets of the Company
shall not be deemed to be a liquidation, dissolution or winding up of the
Company.
REDEMPTION
The Offered Preferred Shares will be redeemable in whole or in part at the
option of the Company, at the times and at the redemption prices set forth in
the applicable Prospectus Supplement.
The Company may not redeem less than all the outstanding shares of any
series of Preferred Shares unless full cumulative dividends have been paid or
declared and set apart for payment upon all outstanding shares of such series of
Preferred Shares for all past dividend periods, and unless all matured
obligations of the Company with respect to all sinking funds, retirement funds
or purchase funds for all series of Preferred Shares then outstanding have been
met.
VOTING RIGHTS
The holders of the Offered Preferred Shares are entitled to one vote per
share on all matters presented to shareholders of the Company.
If the equivalent of six quarterly dividends payable on any series of
Preferred Shares are in default (whether or not declared or consecutive), the
holders of all outstanding series of Preferred Shares, voting as a single class
without regard to series, will be entitled to elect two directors until all
dividends in default have been paid or declared and set apart for payment. The
holders of 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 Preferred
Shares of all series are present in person or by proxy.
The affirmative vote of the holders of at least two-thirds of the
outstanding Preferred Shares voting as a single class without regard to series,
will be required (i) for any amendment of the Articles or Regulations that will
adversely affect the preferences, rights or voting powers of the Preferred
Shares, but, in any case in which one or more, but not all, series of Preferred
Shares would be so affected as to their preferences, rights or voting powers,
only the consent of holders of at least two-thirds of the shares of each series
that would be so affected, voting separately as a class, shall be required or
(ii) to issue any class of stock that shall have preference as to dividends or
distribution of assets over any outstanding series of Preferred Shares.
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The affirmative vote of the holders of a majority of the outstanding
Preferred Shares shall be necessary to increase the authorized number of
Preferred Shares or to authorize any shares ranking on a parity with the
Preferred Shares. The Regulations may be amended to increase the number of
directors, without the vote of the holders of outstanding Preferred Shares.
CONVERSION RIGHTS
The Prospectus Supplement for any series of Offered Preferred Shares will
state whether shares in that series are convertible into Common Shares. Unless
otherwise provided in the applicable Prospectus Supplement, if a series of
Preferred Shares is convertible into Common Shares ("Convertible Preferred
Shares"), holders of such Convertible Preferred Shares will have the right, at
their option and at any time, to convert any of such Convertible Preferred
Shares, at the conversion rate set forth in the Prospectus Supplement relating
to such Convertible Preferred Shares, subject to adjustment as specified below,
provided that if such series of Convertible Preferred Shares is called for
redemption, the conversion rights pertaining thereto will terminate at the close
of business on the date before the redemption date.
Unless otherwise indicated in the applicable Prospectus Supplement, the
conversion rate is subject to adjustment in certain events, including the
following: (1) the issuance of Common Shares or capital shares of any other
class as a dividend or distribution on the Common Shares; (2) subdivisions and
combinations of the Common Shares; (3) the issuance to all holders of Common
Shares of certain rights or warrants entitling them to subscribe for or purchase
Common Shares (or securities convertible into Common Shares) within the period
specified in the Prospectus Supplement after the date fixed for the
determination of the shareholders entitled to receive such rights or warrants,
at less than the current market price (as defined in the Certificate of
Designations for such series of Convertible Preferred Shares); and (4) the
distribution to all holders of Common Shares of evidences of indebtedness or
assets of the Company (excluding certain cash dividends and distributions
described above) or rights or warrants (excluding those referred to above).
No adjustments in the conversion rate will be made as a result of regular
quarterly or other periodic or recurring cash dividends or distributions or for
cash dividends or distributions to the extent paid from retained earnings. No
adjustment in the conversion price will be required unless such adjustment would
require a change of at least 1% in the conversion price then in effect or a
period of three years shall have elapsed from the date of occurrence of any
event requiring any such adjustment; PROVIDED that any adjustment that would
otherwise be required to be made shall be carried forward and taken into account
in any subsequent adjustment. The Company reserves the right to make such
increases in the conversion rate in addition to those required in the foregoing
provisions as the Company in its discretion shall determine to be advisable in
order that certain stock-related distributions or subdivisions of the Common
Shares hereafter made by the Company to its shareholders shall not be taxable.
Except as stated above, the conversion rate will not be adjusted for the
issuance of Common Shares or any securities convertible into or exchangeable for
Common Shares, or securities carrying the right to purchase any of the
foregoing.
In the case of (i) any reclassification or change of the Common Shares,
(ii) a consolidation or merger involving the Company or (iii) a sale or
conveyance to another corporation of the property and assets of the Company as
an entirety or substantially as an entirety, in each case as a result of which
holders of Common Shares shall be entitled to receive stock, securities, other
property or assets (including cash) with respect to or in exchange for such
Common Shares, the holders of the Convertible Preferred Shares then outstanding
will be entitled thereafter to convert such Convertible Preferred Shares into
the kind and amount of shares and other securities or property which they would
have received upon such reclassification, change, consolidation, merger,
combination, sale or conveyance had such Convertible Preferred Shares been
converted into Common Shares immediately prior to such reclassification, change,
consolidation, merger, combination, sale or conveyance.
In the event of a taxable distribution to holders of Common Shares (or
other transaction) which results in any adjustment of the conversion rate, the
holders of Convertible Preferred Shares may, in certain circumstances, be deemed
to have received a distribution subject to United States federal income tax as a
dividend; in certain other circumstances, the absence of such an adjustment may
result in a taxable dividend to the holders of Common Shares or the Convertible
Preferred Shares.
24
<PAGE> 77
PLAN OF DISTRIBUTION
The Company may sell Securities in any of three ways: (i) directly to a
limited number of institutional purchasers or to a single purchaser; (ii) to or
through underwriters or dealers; or (iii) through agents. Any such underwriter
or underwriters, dealer or dealers or agent or agents involved in the offer and
sale of Securities in respect of which this Prospectus is delivered (the
"Offered Securities") will be named in the Prospectus Supplement. The Prospectus
Supplement relating to the Offered Securities will also set forth the terms of
the offering of the Offered Securities, including the purchase price of the
Offered Securities and the proceeds to the Company from such sale, any
underwriting discounts and other items constituting underwriters' compensation,
any initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers and any securities exchanges on which the Offered
Securities may be listed.
If underwriters are used in an offering of Offered Securities, the name of
each managing underwriter and any other underwriters and the terms of the
transaction, including any underwriting discounts and other items constituting
compensation of the underwriters and dealers, if any, will be set forth in the
Prospectus Supplement relating to such offering, and the Offered Securities will
be acquired by the underwriters for their own accounts and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices determined at the time of
sale. Any initial public offering price and any discounts or concessions allowed
or reallowed or paid to dealers may be changed from time to time. It is
anticipated that any underwriting agreement pertaining to any Offered Securities
will (1) entitle the underwriters to indemnification by the Company against
certain civil liabilities under the Securities Act, or to contribution with
respect to payments which the underwriters may be required to make in respect
thereof, (2) provide that the obligations of the underwriters will be subject to
certain conditions precedent and (3) provide that the underwriters will be
obligated to purchase all Offered Securities if any are purchased.
If a dealer is used in an offering of Offered Securities, the Company will
sell such Offered Securities to the dealer, as principal. The dealer may then
resell such Offered Securities to the public at varying prices to be determined
by such dealer at the time of resale. The name of the dealer and the terms of
the transaction will be set forth in the Prospectus Supplement relating thereto.
If an agent is used in an offering of Offered Securities, the agent will be
named, and the terms of the agency will be set forth, in the Prospectus
Supplement relating thereto. Unless otherwise indicated in such Prospectus
Supplement, an agent will act on a best efforts basis for the period of its
appointment.
Dealers and agents named in a Prospectus Supplement may be deemed to be
underwriters (within the meaning of the Securities Act) of the Offered
Securities described therein and, under agreements which may be entered into
with the Company, may be entitled to indemnification by the Company against
certain civil liabilities under the Securities Act. Underwriters, dealers and
agents may be customers of, engage in transactions with or perform services for
the Company in the ordinary course of business.
Offers to purchase Offered Securities may be solicited, and sales thereof
may be made, by the Company directly to institutional investors or others, who
may be deemed to be underwriters within the meaning of the Securities Act with
respect to any resales thereof. The terms of any such offer will be set forth in
the Prospectus Supplement relating thereto.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters or other agents of the Company to solicit offers by certain
institutional investors to purchase Offered Securities from the Company pursuant
to contracts providing for payment and delivery at a future date. Institutional
investors with which such contracts may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such purchasers must be
approved by the Company. The obligations of any purchaser under any such
contract will not be subject to any conditions except that (1) the purchase of
the Offered Securities shall not at the time of delivery be prohibited under the
laws of any jurisdiction to which such purchaser is subject and which govern
such investment and (2) if the Offered Securities are also being sold to
underwriters, the Company shall have sold to such underwriters the Offered
Securities not subject to delayed delivery. Underwriters and other agents will
not have any responsibility in respect of the validity or performance of such
contracts.
25
<PAGE> 78
The anticipated date of delivery of Offered Securities will be set forth in
the Prospectus Supplement relating to each offering.
LEGAL OPINIONS
The validity of the Securities will be passed upon for the Company by G. L.
Gherlein, Executive Vice President and General Counsel of the Company, and for
the underwriters, if any, by Shearman & Sterling, 599 Lexington Avenue, New
York, New York 10022. Mr. Gherlein is paid a salary by the Company and
participates in various employee benefit plans offered to officers of the
Company generally.
EXPERTS
The consolidated financial statements and schedules of the Company and its
subsidiaries appearing in the Company's Annual Report on Form 10-K for the year
ended December 31, 1992 have been audited by Ernst & Young, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. The consolidated financial statements at December 31, 1993
and 1992, and for each of the three years in the period ended December 31, 1993,
appearing in the Prospectus Supplement have been audited by Ernst & Young,
independent auditors, as set forth in their report thereon appearing elsewhere
herein. Such consolidated financial statements and schedules are incorporated
herein by reference or included herein in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of DCBU as of December 31, 1992 and
1991 and for each of the two years in the period ended December 31, 1992
incorporated in this Prospectus by reference to the Company's Current Report on
Form 8-K dated February 14, 1994, as amended February 18, 1994, have been so
incorporated in reliance on the report (which contains an explanatory paragraph
relating to DCBU's engagement in various transactions and relationships with
other Westinghouse Electric Corporation entities) of Price Waterhouse,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
26
<PAGE> 79
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary........... S-3
The Company............................. S-5
Recent Developments..................... S-6
Use of Proceeds......................... S-8
Capitalization.......................... S-8
Market Price of Common Shares and
Dividends............................. S-9
Pro Forma Combined Statement of
Income................................ S-9
Selected Historical Financial
Information........................... S-13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ S-14
Certain United States Federal Tax
Considerations for Non-U.S. Holders of
Common Shares......................... S-19
Description of Common Shares............ S-21
Underwriting............................ S-21
Index to Financial Statements........... F-1
PROSPECTUS
Available Information................... 2
Incorporation of Certain Documents by
Reference............................. 2
The Company............................. 3
Risk Factors Relating to Currencies..... 3
Use of Proceeds......................... 3
Ratio of Earnings to Fixed Charges...... 3
Description of Debt Securities.......... 4
Description of Common Shares............ 17
Description of Debt Warrants............ 19
Description of Preferred Shares......... 21
Plan of Distribution.................... 25
Legal Opinions.......................... 26
Experts................................. 26
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,500,000 Shares
Common Shares
($.50 par value)
---------------------------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------------------------
CS First Boston
Lehman Brothers
Merrill Lynch & Co.
------------------------------------------------------
------------------------------------------------------
<PAGE> 80
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Filing Fee for Registration Statement........................ $206,897
Legal Fees and Expenses......................................
Rating Agency Fees...........................................
Blue Sky Fees and Expenses...................................
Printing and Engraving Fees..................................
Accounting Fees and Expenses.................................
Trustee's Fees and Expenses..................................
Miscellaneous Expenses ......................................
----------
TOTAL ............................................. $
----------
----------
</TABLE>
The foregoing expenses, except for the filing fee for the Registration
Statement, are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Paragraph (E) of Section 1701.13 of the Ohio Revised Code grants each
corporation organized under the laws of the State of Ohio, such as the Company,
power to indemnify its directors, officers and other specified persons.
Provisions relating to indemnification of directors and officers of the Company
and other specified persons have been adopted pursuant to the Ohio law and are
contained in Article IV, Section 2 of the Company's Amended Regulations. Under
the Amended Regulations, the Company shall indemnify any director, officer or
other specified person against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement, actually and reasonably incurred by him by
reason of the fact that he is or was such director, officer or other specified
person, to the full extent permitted by applicable law. The foregoing statement
is subject to, and only part of, the detailed provisions of the Ohio Revised
Code and the Company's Amended Regulations referred to herein.
The Company has entered into Indemnification Agreements with all of its
officers and directors. The Agreements provide that the Company shall indemnify
such directors or officers to the full extent permitted by law against expenses
actually and reasonably incurred by them in connection with any claim filed
against them by reason of anything done or not done by them in such capacity.
The Agreements also require the Company to maintain director and officer
insurance which is no less favorable to the director and officer than the
insurance in effect on April 27, 1988 (the date of the Agreements), and to
establish and maintain an escrow account of up to $10 million to fund the
Company's obligations under the Agreements, except that the Company is required
to fund the escrow only upon the occurrence of a change of control of the
Company, as defined under the Agreements.
The Company also maintains insurance coverage for the benefit of directors
and officers with respect to many types of claims that may be made against them,
some of which claims may be in addition to those described in Section 2 of
Article IV of the Amended Regulations. Reference is also made to Section 6 of
the Underwriting Agreement included herein as an exhibit to the Registration
Statement for provisions regarding indemnification of the Company, officers,
directors and controlling persons against certain liabilities.
ITEM 16. EXHIBITS
This Registration Statement includes the following exhibits:
<TABLE>
<S> <C>
*1 ) -- Form of Underwriting Agreement and Underwriting Agreement Basic
Provisions.
*4 ) -- Form of Senior Indenture between the Company and Chemical Bank.
*4 ) -- Form of Fixed Rate Senior Note.
*4 ) -- Form of Subordinated Indenture between the Company and Chemical Bank.
*4 ) -- Form of Fixed Rate Subordinated Note.
</TABLE>
II-1
<PAGE> 81
<TABLE>
<S> <C>
4(e) -- Form of Debt Warrant Agreement between the Company and the Debt Warrant
Agent, including a form of Debt Warrant Certificate, filed as Exhibit
4(c) to Registration Statement No. 33-48851 and incorporated herein by
reference.
*4(f) -- Form of Preferred Shares.
4(g) -- Form of Certificate of Designations filed as Exhibit 4(g) to Registration
Statement No. 33-48851 and incorporated herein by reference.
4(h) -- Amended Articles of Incorporation, as amended and restated as of January
24, 1989 and filed on Form SE on March 13, 1989 (incorporated herein by
reference to Exhibit 3 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1988, File No. 1-1396).
4(i) -- Amended Regulations, as amended and restated as of April 27, 1988 and
filed on Form SE on March 31, 1989 (incorporated herein by reference to
Exhibit 3 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988, File No. 1-1396).
5 -- Opinion of G. L. Gherlein, Executive Vice President and General Counsel,
as to validity of the Debt Securities, Debt Warrants, Preferred Shares and
Common Shares.
12 -- Computation of Ratio of Earnings to Fixed Charges.
24(a) -- Consent of Ernst & Young.
24(b) -- Consent of G. L. Gherlein, Executive Vice President and General Counsel,
contained in his opinion filed as Exhibit 5 to this Registration Statement.
24(c) -- Consent of Price Waterhouse.
25 -- Power of Attorney.
26 -- Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939
of Chemical Bank with respect to the Senior Indenture and Subordinated
Indenture.
<FN>
- ---------------
* To be filed by amendment.
</TABLE>
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to the registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-2
<PAGE> 82
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
* * *
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-3
<PAGE> 83
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS PRE-EFFECTIVE
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CLEVELAND, STATE OF OHIO,
ON THE 23RD DAY OF FEBRUARY, 1994.
EATON CORPORATION
By /s/ G. L. GHERLEIN
G. L. Gherlein
Executive Vice President and
General Counsel
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------------- --------------------------------- ---------------------
<S> <C> <C>
Chairman and Chief Executive
* Officer; Principal
William E. Butler Executive Officer; Director
President and Chief Operating
* Officer -- Vehicle Components;
John S. Rodewig Director
Vice Chairman and Chief Financial
* and Administrative Officer;
Stephen R. Hardis Principal Financial Officer;
Director
Vice President -- Accounting;
* Principal Accounting Officer
Ronald L. Leach
Director
*
Neil A. Armstrong
Director
*
</TABLE>
February 23, 1994
<TABLE>
<S> <C> <C>
Phyllis B. Davis
Director
*
Arthur Dole III
Director
*
Charles E. Hugel
Director
*
John R. Miller
Director
*
Furman C. Moseley
Director
*
Hooper G. Pattillo
Director
*
A. William Reynolds
Director
*
Gary L. Tooker
</TABLE>
*By /s/ DAVID M. O'LOUGHLIN
David M. O'Loughlin,
Attorney-in-Fact
for the officers and directors
signing in the capacities
indicated
II-4
<PAGE> 1
Exhibit 24(c)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 1, 1994, in Pre-Effective Amendment No. 1 to
the Registration Statement (Form S-3 No. 33-52333) and related Prospectus of
Eaton Corporation for the registration of 3,500,000 Common Shares and to the
incorporation by reference therein of our report dated January 29, 1993, with
respect to the consolidated financial statements and schedules of Eaton
Corporation included in its Annual Report (Form 10-K) for the year ended
December 31, 1992, filed with the Securities and Exchange Commission.
/s/ Ernst & Young
-----------------------------
ERNST & YOUNG
Cleveland, Ohio
February 23, 1994
