United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 1996
Commission file number 1-1396
Eaton Corporation
- - ------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0196300
- - ------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
Eaton Center, Cleveland, Ohio 44114-2584
- - ------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(216) 523-5000
- - ------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- - ------------------------------ -----------------------------
Common Shares ($.50 par value) The New York Stock Exchange
The Chicago Stock Exchange
The Pacific Stock Exchange
The London Stock Exchange
7% Debentures, due 2011 The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve months
and (2) has been subject to such filing requirements for the past
ninety days. Yes X
---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
The aggregate market value of voting stock held by non-affiliates
of the registrant as of January 31, 1997 was $5.4 billion. As of
January 31, 1997, there were 77,173,291 Common Shares outstanding.
<PAGE>
Page 2
Documents Incorporated By Reference
Portions of the Proxy Statement for the 1997 annual shareholders'
meeting are incorporated by reference into Part III.
Part I
Item 1. Business
Eaton Corporation (Eaton or Company), incorporated in 1916, is a
global manufacturer of highly engineered products which serve
industrial, vehicle, construction, commercial and aerospace
markets. Principal products include electrical power distribution
and control equipment, truck transmissions and axles, engine
components, hydraulic products, ion implanters and a wide variety
of controls. Worldwide sales in 1996 reached nearly $7 billion.
At December 31, 1996, the Company had 54,000 employees.
On April 16, 1996, the Company purchased CAPCO Automotive Products
Corporation (CAPCO) for $135 million. CAPCO, a Brazilian
manufacturer of transmissions for light- and medium-duty trucks
and transaxle components for passenger cars, had sales of $176
million in 1995. This acquisition was accounted for as a purchase
and, accordingly, the statements of consolidated income include
the results of CAPCO from the effective date of acquisition.
Information regarding principal products, net sales, operating
profit and identifiable assets by business segment and geographic
region is presented under "Business Segment and Geographic Region
Information" on pages 34 through 37 of this report. Additional
information regarding Eaton's business segments and business in
general is presented below.
Electrical and Electronic Controls
Patents and Trademarks - Eaton owns, controls or is licensed under
many patents related to this business segment. The EATON, EATON
(logomark), CH CONTROL, CHALLENGER, COMMANDER, CUTLER-HAMMER,
DOLE, DURANT, HEINEMANN, IKU (and design), LECTRON, L/P (and
design) and PANELMATE trademarks are used in connection with
marketing products included in this business segment. In
addition, the Company has the right to use the WESTINGHOUSE
trademark in marketing certain products until 2004.
Competition - Principal methods of competition in this business
segment are price, geographic coverage, service and product
performance. The number of competitors varies with respect to the
different products. Eaton occupies a strong competitive position
in this business segment and, with respect to many products, is
considered among the market leaders.
Major Customers - Approximately 10% of net sales in 1996 of the
Electrical and Electronic Controls segment were made to WESCO
Distribution, Inc. Also, approximately 6% of net sales in 1996 of
this segment were made to divisions and subsidiaries of Ford Motor
Company, which is a major customer of the Vehicle Components
segment.
<PAGE>
Page 3
Vehicle Components
Patents and Trademarks - Eaton owns, controls or is licensed under
many patents related to this business segment. Although the
Company emphasizes the EATON and EATON (logomark) trademark in
marketing many products within this business segment, it also
markets under a number of other trademarks, including CHAR-LYNN,
DILL, FULLER, ROADRANGER and TOP SPEC.
Seasonal Fluctuations - Sales of truck, passenger car and off-
highway vehicle components are generally reduced in the third
quarter of each year as a result of preparations by vehicle
manufacturers for the upcoming model year and temporary shut-downs
for taking physical inventories.
Competition - Principal methods of competition in this business
segment are price, service and product performance. Eaton
occupies a strong competitive position in relation to many
competitors in this business segment and, with respect to many
products, is considered among the market leaders.
Major Customers - Approximately 17% of net sales in 1996 of the
Vehicle Components segment were made to divisions and subsidiaries
of Ford Motor Company. Also, approximately 40% of net sales in
1996 of this segment were made to divisions and subsidiaries of
six other large original equipment manufacturers of trucks,
passenger cars and off-highway vehicles generally concentrated in
North America. Eaton has been conducting business with each of
these companies for many years. Sales to these companies include
a number of different products and different models or types of
the same product, sales of which are not dependent upon one
another. With respect to many of the products sold, various
divisions and subsidiaries of each of the companies are in the
nature of separate customers, and sales to one division or
subsidiary are not dependent upon sales to other divisions or
subsidiaries.
Defense Systems
Patents and Trademarks - Eaton owns, controls or is licensed under
many patents related to this business segment. The AIL and
HYPERMANUAL trademarks are used in connection with marketing
products included in this business segment.
Competition - Principal methods of competition in this business
segment are price, technological capability and product
performance. The number of competitors is limited and varies with
respect to the different technologies.
Major Customers - Substantially all net sales in 1996 of the
Defense Systems segment were made to the United States Government.
All contracts with the United States Government are subject to
termination at the election of the Government.
<PAGE>
Page 4
Information Concerning Eaton's Business in General
Raw Materials - Principal raw materials used are iron, steel,
copper, aluminum, brass, insulating materials, silver, rubber and
plastic. Materials are purchased in various forms, such as pig
iron, metal sheets and strips, forging billets, bar stock and
plastic pellets. Raw materials, as well as parts and other
components, are purchased from many suppliers and, under normal
circumstances, the Company has no difficulty obtaining them.
Order Backlog - Since a significant portion of open orders placed
with Eaton by original equipment manufacturers of trucks,
passenger cars and off-highway vehicles are historically subject
to month-to-month releases by customers during each model year,
such orders are not considered technically firm. In measuring
backlog of orders, the Company includes only the amount of such
orders released by such customers as of dates listed. Using this
criterion, total backlog at December 31, 1996 and 1995 (in
billions) was approximately $1 and $1.1, respectively. Backlog
should not be relied upon as being indicative of results of
operations for future periods.
Research and Development - Research and development expenses for
new products and improvement of existing products in 1996, 1995
and 1994 (in millions) were $267, $227 and $213, respectively.
Over the past five years, the Company has invested over $1 billion
in research and development with significant increases in the past
three years.
Protection of the Environment - Operations of the Company involve
the use and disposal of certain substances regulated under
environmental protection laws. The Company continues to modify,
on an ongoing, regular basis, certain processes in order to reduce
the impact on the environment, including the reduction or
elimination of certain chemicals used in and wastes generated from
operations. Compliance with Federal, State and local provisions
which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the
protection of the environment, is not expected to have a material
adverse effect upon earnings or competitive position of the
Company. Eaton's estimated capital expenditures for environmental
control facilities are not expected to be material for 1997 and
1998. Information regarding the Company's liabilities related to
environmental matters is presented under "Protection of the
Environment" on pages 26 and 27 of this report.
Item 2. Properties
Eaton's world headquarters is located in Cleveland, Ohio. The
Company maintains manufacturing facilities at 155 locations in 26
countries. The Company is a lessee under a number of operating
leases for certain real properties and equipment, none of which
are material to the Company's operations.
Eaton's principal research facilities are located in Southfield,
Michigan, Milwaukee, Wisconsin, and Willoughby Hills, Ohio. In
addition, certain divisions conduct research in their own
facilities.
<PAGE>
Page 5
Management believes that the manufacturing facilities are adequate
for operations, and such facilities are maintained in good
condition.
Item 3. Legal Proceedings
None required to be reported.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Company's Common Shares are listed for trading on the New
York, Chicago, Pacific and London stock exchanges. Information
regarding cash dividends paid and high and low market price per
Common Share for each quarter in 1996 and 1995 is presented under
"Quarterly Data" on page 33 of this report. At December 31, 1996,
there were 13,275 holders of record of the Company's Common
Shares. Additionally, 21,117 employees were shareholders through
participation in the Company's Share Purchase and Investment Plan.
Item 6. Selected Financial Data
Information regarding selected financial data is presented under
"Five-Year Consolidated Financial Summary" on page 48 of this
report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" is included on pages 39 through 47 of this
report.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements, financial review and the
report of independent auditors are presented on pages 14 through
37 of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE>
Page 6
Part III
Item 10. Directors and Executive Officers of the Registrant
Information contained on pages 5 through 7 in the definitive Proxy
Statement dated March 17, 1997, with respect to directors, is
incorporated by reference.
A listing of Eaton's officers, their ages and their current
positions and offices, as of January 31, 1997 follows:
Name Age Position (Date elected to position)
- - ------------------- --- ---------------------------------------
Stephen R. Hardis 61 Chairman and Chief Executive Officer
(January 1, 1996 and September 1, 1995,
respectively); Director
Alexander M. Cutler 45 President and Chief Operating Officer
(September 1, 1995); Director
Gerald L. Gherlein 58 Executive Vice President and General
Counsel (September 4, 1991)
Adrian T. Dillon 43 Vice President - Chief Financial and
Planning Officer (September 1, 1995)
Brian R. Bachman 51 Senior Vice President - Semiconductor
and Specialty Systems (January 1, 1996)
Joseph L. Becherer 54 Senior Vice President - Cutler-Hammer
(September 1, 1995)
Robert J. McCloskey 57 Senior Vice President - Controls and
Hydraulics (September 1, 1995)
Thomas W. O'Boyle 54 Senior Vice President - Truck
Components (September 1, 1995)
Larry M. Oman 55 Senior Vice President - Automotive
Components (September 1, 1995)
Susan J. Cook 49 Vice President - Human Resources
(January 16, 1995)
Patrick X. Donovan 61 Vice President - International (April
27, 1988)
Earl R. Franklin 53 Secretary and Associate General Counsel
(September 1, 1991)
John W. Hushen 61 Vice President - Corporate Affairs
(August 1, 1991)
Stanley V. Jaskolski 58 Vice President - Technical Management
(October 1, 1990)
Ronald L. Leach 62 Vice President - Accounting (December
1, 1981)
Joseph J. Mikelonis 46 Vice President - Taxes (May 1, 1996)
William T. Muir 54 Vice President - Manufacturing
Technologies (April 1, 1989)
Derek R. Mumford 55 Vice President - Information
Technologies (April 1, 1992)
Robert E. Parmenter 44 Vice President and Treasurer (January
1, 1997)
Billie K. Rawot 45 Vice President and Controller (March
1, 1991)
<PAGE>
Page 7
All of the officers listed above have served in various capacities
with Eaton over the past five years, except for Susan J. Cook and
Brian R. Bachman. For the three years prior to joining Eaton, Ms.
Cook was Vice President-Human Resources at Tandem Computers, Inc.
Prior to joining Tandem Computers, Inc. in 1988, Ms. Cook had a
seventeen-year career in human resources at IBM Corporation. For
the four years prior to joining Eaton, Mr. Bachman was Vice
President and General Manager for the Standard Products Business
Group of Philips Semiconductor. Earlier in his career, he was
President of the General Semiconductor Industry Unit of Square D
Corporation.
There are no family relationships among the officers listed, and
there are no arrangements or understandings pursuant to which any
of them were elected as officers. All officers hold office for
one year and until their successors are elected and qualified,
unless otherwise specified by the Board of Directors; provided,
however, that any officer is subject to removal with or without
cause, at any time, by a vote of a majority of the Board of
Directors.
Item 11. Executive Compensation
Information contained on pages 10 through 20 in the definitive
Proxy Statement dated March 17, 1997, with respect to executive
compensation, is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information contained on pages 20 and 21 of the definitive Proxy
Statement dated March 17, 1997, with respect to security ownership
of certain beneficial owners and management, is incorporated by
reference.
Item 13. Certain Relationships and Related Transactions
None required to be reported.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) (1) The following consolidated financial statements and
financial review are filed as a separate section of
this report:
Consolidated Balance Sheets - December 31, 1996 and
1995 - Pages 15 and 16
Statements of Consolidated Income - Years ended
December 31, 1996, 1995 and 1994 - Page 17
Statements of Consolidated Cash Flows - Years ended
December 31, 1996, 1995 and 1994 - Page 18
<PAGE>
Page 8
Statements of Consolidated Shareholders' Equity -
Years ended December 31, 1996, 1995 and 1994 - Page
19
Financial Review - Pages 20 through 37
(2)(a) Summarized financial information for Eaton ETN
Offshore Ltd. on page 38 is filed as a separate
section of this report.
(2)(b) All schedules for which provision is made in
Regulation S-X of the Securities and Exchange
Commission, are not required under the related
instructions or are inapplicable and, therefore,
have been omitted.
(3) Exhibits
3(a) Amended Articles of Incorporation (amended
and restated as of May 19, 1994) -
Incorporated by reference to the Form 8-K
Report dated May 19, 1994
3(b) Amended Regulations (amended and restated
as of April 27, 1988) - Incorporated by
reference to the Annual Report on Form 10-K
for the year ended December 31, 1994
4(a) Instruments defining rights of security
holders, including indentures (Pursuant to
Regulation S-K Item 601(b)(4), the Company
agrees to furnish to the Commission, upon
request, a copy of the instruments defining
the rights of holders of long-term debt)
4(b) Eaton Corporation Rights Agreement dated June
28, 1995 - Incorporated by reference to the
Form 8-K Report dated June 28, 1995
10 Material contracts
The following are either a management
contract or a compensatory plan or
arrangement:
(a) Deferred Incentive Compensation Plan
(amended and restated as of September
24, 1996)(filed as a separate section of
this report)
(b) Executive Strategic Incentive Plan
(amended and restated as of June 21,
1994 and July 25, 1995)(filed as a
separate section of this report)
<PAGE>
Page 9
(c) Group Replacement Insurance Plan (GRIP),
effective as of June 1, 1992 -
Incorporated by reference to the Annual
Report on Form 10-K for the year ended
December 31, 1992
(d) 1991 Stock Option Plan - Incorporated by
reference to the definitive Proxy
Statement dated March 18, 1991
(e) 1995 Stock Option Plan - Incorporated by
reference to the definitive Proxy
Statement dated March 17, 1995
(f) Incentive Compensation Deferral Plan
(amended and restated as of September
24, 1996)(filed as a separate section of
this report)
(g) Strategic Incentive and Option Plan
(amended and restated as of September
24, 1996)(filed as a separate section of
this report)
(h) Form of "Change in Control" Agreement
entered into with officers of Eaton
Corporation as of November 1, 1996
(filed as a separate section of this
report)
(i) The following are incorporated by
reference to the Quarterly Report on
Form 10-Q for the quarter ended June 30,
1990:
(i) Limited Eaton Service
Supplemental Retirement Income
Plan (amended and restated as of
January 1, 1989)
(ii) Amendments to the 1980 and 1986
Stock Option Plans
(iii) Eaton Corporation Supplemental
Benefits Plan (amended and
restated as of January 1, 1989)
(which provides supplemental
retirement benefits)
(iv) Eaton Corporation Excess
Benefits Plan (amended and
restated as of January 1, 1989)
(with respect to Section 415
limitations of the Internal
Revenue Code)
<PAGE>
Page 10
(j) Executive Incentive Compensation Plan,
effective January 1, 1995 (filed as a
separate section of this report)
(k) Plan for the Deferred Payment of
Directors' Fees (amended and restated
as of September 24, 1996)(filed as a
separate section of this report)
(l) Plan for the Deferred Payment of
Directors' Fees (originally adopted in
1980 and amended effective February 25,
1997)(filed as a separate section of
this report)
(m) 1996 Non-Employee Director Fee Deferral
Plan (amended effective February 25,
1997)(filed as a separate section of
this report)
(n) Eaton Corporation Trust Agreement -
Outside Directors (dated December 6,
1996)(filed as a separate section of
this report)
(o) Eaton Corporation Trust Agreement -
Officers and Employees (dated December
6, 1996)(filed as a separate section of
this report)
11 Statement regarding computations of net
income per Common Share (filed as a separate
section of this report)
21 Subsidiaries of Eaton Corporation (filed as a
separate section of this report)
23 Consent of Independent Auditors (filed as a
separate section of this report)
24 Power of Attorney (filed as a separate
section of this report)
27 Financial Data Schedule (filed as a separate
section of this report)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the
fourth quarter of 1996.
(c) & (d) Exhibits and Financial Statement Schedules
Certain exhibits required by this portion of Item 14
are filed as a separate section of this report.
<PAGE>
Page 11
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Eaton Corporation
----------------------------
Registrant
Date: March 21, 1997 /s/ Adrian T. Dillon
----------------------------
Adrian T. Dillon
Vice President and Chief
Financial and Planning
Officer; Principal Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date
indicated.
DATE: March 21, 1997
Signature Title
- - ----------------------- --------------------------------------
*
- - -----------------------
Stephen R. Hardis Chairman and Chief Executive Officer;
Principal Executive Officer;
Director
*
- - -----------------------
Alexander M. Cutler President and Chief Operating Officer;
Director
*
- - -----------------------
Ronald L. Leach Vice President - Accounting; Principal
Accounting Officer
/s/ Billie K. Rawot
- - -----------------------
Billie K. Rawot Vice President and Controller
*
- - -----------------------
Neil A. Armstrong Director
<PAGE>
Page 12
*
- - -----------------------
Phyllis B. Davis Director
*
- - -----------------------
Ernie Green Director
*
- - -----------------------
Charles E. Hugel Director
*
- - -----------------------
John R. Miller Director
- - -----------------------
Furman C. Moseley Director
*
- - -----------------------
Victor A. Pelson Director
*
- - -----------------------
A. William Reynolds Director
*
- - -----------------------
Gary L. Tooker Director
*By /s/ Adrian T. Dillon
--------------------------------------
Adrian T. Dillon, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
<PAGE>
Page 13
Eaton Corporation
1996 Annual Report on Form 10-K
Items 5, 6, 7, 8 & Item 14(a)(1), 14(a)(2),
14(c) and 14(d)
Report of Independent Auditors
Consolidated Financial Statements and Financial Review
Summary Financial Information for Eaton ETN Offshore Ltd.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Five-Year Consolidated Financial Summary
Exhibits
<PAGE>
Page 14
REPORT OF INDEPENDENT AUDITORS
- - ------------------------------
To the Shareholders
Eaton Corporation
We have audited the accompanying consolidated balance sheets of Eaton
Corporation and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the
summary financial information of Eaton ETN Offshore Ltd. listed in
Item 14 (a). These financial statements and summary financial
information are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and summary financial information 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Eaton Corporation at December 31, 1996 and
1995, and the consolidated results of its operations and cash flows
for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in
our opinion, the related summary financial information, when
considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set
forth therein.
Ernst & Young LLP
Cleveland, Ohio
January 20, 1997
<PAGE>
Page 15
<TABLE>
Eaton Corporation
<CAPTION>
Consolidated Balance Sheets December 31
-------------------
(Millions) 1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash $ 22 $ 56
Short-term investments 38 28
Accounts receivable 985 932
Inventories 729 735
Deferred income taxes 165 150
Other current assets 78 66
------ ------
2,017 1,967
Property, plant and equipment
Land and buildings 700 630
Machinery and equipment 2,796 2,584
------ ------
3,496 3,214
Accumulated depreciation (1,704) (1,561)
------ ------
1,792 1,653
Excess of cost over net assets of
businesses acquired 968 895
Other assets 530 538
------ ------
$5,307 $5,053
====== ======
The Financial Review on pages 20 to 37 is an integral part of
the consolidated financial statements.
</TABLE>
<PAGE>
Page 16
<TABLE>
Eaton Corporation
<CAPTION>
Consolidated Balance Sheets December 31
-------------------
(Millions) 1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 10 $ 30
Current portion of long-term debt 20 20
Accounts payable 512 486
Accrued compensation 181 168
Accrued income and other taxes 97 62
Other current liabilities 410 379
------ ------
1,230 1,145
Long-term debt 1,062 1,084
Postretirement benefits other than pensions 585 579
Other liabilities 270 270
Shareholders' equity
Common Shares (77.1 in 1996 and 77.6 in 1995) 39 39
Capital in excess of par value 830 812
Retained earnings 1,402 1,232
Foreign currency translation adjustments (68) (55)
Shares in trust
Employee Stock Ownership Plan (36) (53)
Deferred compensation plans (7)
------ ------
2,160 1,975
------ ------
$5,307 $5,053
====== ======
The Financial Review on pages 20 to 37 is an integral part of
the consolidated financial statements.
</TABLE>
<PAGE>
Page 17
<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Income Year ended December 31
--------------------------
(Millions except for per share data) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $6,961 $6,822 $6,052
Costs and expenses
Cost of products sold 5,165 5,028 4,397
Selling and administrative 995 927 890
Research and development 267 227 213
------ ------ ------
6,427 6,182 5,500
------ ------ ------
Income from operations 534 640 552
Other income (expense)
Interest expense (85) (86) (83)
Interest income 6 6 7
Other income--net 30 32 12
------ ------ ------
(49) (48) (64)
------ ------ ------
Income before income taxes 485 592 488
Income taxes 136 193 155
------ ------ ------
Net income $ 349 $ 399 $ 333
====== ====== ======
Per Common Share
Net income $ 4.50 $ 5.13 $ 4.40
Cash dividends paid 1.60 1.50 1.20
Average number of Common Shares outstanding 77.4 77.8 75.6
The Financial Review on pages 20 to 37 is an integral part of
the consolidated financial statements.
</TABLE>
<PAGE>
Page 18
<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Cash Flows Year ended December 31
----------------------------------
(Millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net cash provided by operating activities
Net income $ 349 $ 399 $ 333
Adjustments to reconcile to net cash provided by
operating activities
Depreciation 270 238 216
Amortization 50 43 35
Deferred income taxes (12) 1 35
Long-term liabilities (2) 19 40
Other non-cash items in income (8) 22 37
Changes in operating assets and liabilities,
excluding acquisitions and divestitures of
businesses
Accounts receivable (32) (20) (190)
Inventories 36 (30) (115)
Accounts payable and other accruals 42 (10) 129
Other--net (15) 2
------- ------- -------
693 647 522
Net cash used in investing activities
Acquisitions of businesses, less cash acquired (151) (143) (1,058)
Divestitures of businesses 11 61
Expenditures for property, plant and equipment (347) (399) (267)
Maturities and sales of short-term investments 6 252
Other--net 6 18 2
------- ------- -------
(492) (507) (1,010)
Net cash provided by (used in) financing activities
Borrowings with original maturities of more than
three months
Proceeds 169 368 731
Payments (148) (251) (609)
Borrowings with original maturities of less than
three months--net (87) (73) 173
Proceeds from sale of Common Shares 252
Proceeds from exercise of stock options 18 11 18
Cash dividends paid (124) (117) (91)
Purchase of Common Shares (63) (40)
------- ------- -------
(235) (102) 474
------- ------- -------
Total increase (decrease) in cash (34) 38 (14)
Cash at beginning of year 56 18 32
------- ------- -------
Cash at end of year $ 22 $ 56 $ 18
======= ======= =======
The Financial Review on pages 20 to 37 is an integral part of
the consolidated financial statements.
</TABLE>
<PAGE>
Page 19
<TABLE>
Eaton Corporation
<CAPTION>
Statements of Consolidated Shareholders' Equity
Shares in trust
Foreign ----------------- Total
Common Shares Capital in currency Deferred share-
------------- excess of Retained translation compensa- holders'
Shares Amount par value earnings adjustments ESOP tion plans equity
------ ------ --------- -------- ----------- ---- ---------- --------
(Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 71.3 $36 $535 $ 708 ($78) ($96) $0 $1,105
Net income 333 333
Cash dividends paid, net of
Employee Stock Ownership
Plan (ESOP) tax benefit (89) (89)
Issuance of shares under
employee benefit plans,
including tax benefit .5 21 21
Sale of shares 4.6 2 250 252
Issuance of shares in a
pooling-of-interests 1.6 1 25 26
Net unrealized gain on
available-for-sale
securities 11 11
Shares allocated to employees 14 14
Net translation adjustments 7 7
---- --- ---- ------ ---- ---- --- ------
Balance at December 31, 1994 78.0 39 806 988 (71) (82) 0 1,680
Net income 399 399
Cash dividends paid, net of
ESOP tax benefit (116) (116)
Issuance of shares under
employee benefit plans,
including tax benefit .4 14 (1) 13
Net unrealized loss on
available-for-sale
securities (6) (6)
Purchase of shares (.8) (8) (32) (40)
Shares allocated to employees 29 29
Net translation adjustments 16 16
---- --- ---- ------ ---- ---- --- ------
Balance at December 31, 1995 77.6 39 812 1,232 (55) (53) 0 1,975
Net income 349 349
Cash dividends paid, net of
ESOP tax benefit (123) (123)
Issuance of shares under
employee benefit plans,
including tax benefit .5 23 (1) 22
Net unrealized loss on
available-for-sale
securities (4) (4)
Purchase of shares (1.1) (12) (51) (63)
Shares allocated to employees 17 17
Issuance of shares to trust .1 7 (7)
Net translation adjustments (13) (13)
---- --- ---- ------ ---- ---- --- ------
Balance at December 31, 1996 77.1 $39 $830 $1,402 ($68) ($36) ($7) $2,160
==== === ==== ====== ==== ==== === ======
The Financial Review on pages 20 to 37 is an integral part of
the consolidated financial statements.
</TABLE>
<PAGE>
Page 20
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 in associate companies and joint ventures
where the Company has a 20% to 50% ownership interest.
Foreign Currency Translation
- - ----------------------------
The functional currency for principally all subsidiaries outside the
United States is the local currency. Financial statements for these
subsidiaries are translated into United States 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.
Inventories
- - -----------
Inventories are carried at lower of cost or market. Inventories in
the United States are generally accounted for using the last-in,
first-out (LIFO) method. Remaining United States and all other
inventories are accounted for using the first-in, first-out (FIFO)
method.
Depreciation and Amortization
- - -----------------------------
Depreciation and amortization are computed by the straight-line
method for financial statement purposes. Cost of buildings is
depreciated over forty years and machinery and equipment over
principally three to ten years. Identified intangible assets
primarily consist of patents, trademarks and tradenames, which are
amortized over an average life of fifteen years. Excess of cost over
net assets of businesses acquired is amortized over principally
forty years. Excess of cost over net assets of businesses acquired
and certain other long-lived assets are reviewed for impairment
losses whenever events or changes in circumstances indicate the
carrying amount may not be recovered through future net cash flows
generated by the assets.
Financial Instruments
- - ---------------------
The Company selectively uses straightforward, nonleveraged financial
instruments as part of foreign exchange and interest rate risk
management programs. The Company does not buy and sell financial
instruments solely for trading purposes, except for nominal amounts
authorized under limited, controlled circumstances. Credit loss has
never been experienced, and is not anticipated, as the counterparties
to various financial instruments are major international financial
institutions with strong credit ratings and due to control over the
limit of positions entered into with any one party. Although
financial instruments are an integral part of the Company's risk
management programs, their incremental effect on financial condition
and results of operations is not material.
<PAGE>
Page 21
The Company and its subsidiaries, operating in Canada, Europe, Latin
America and the Pacific Region, are exposed to fluctuations in
foreign currencies in the normal course of business. The Company
seeks to reduce exposure to foreign currency fluctuations, primarily
the European and Canadian currencies, through the use of foreign
currency forward exchange contracts and options. Gains or losses on
those financial instruments which hedge net investments in
subsidiaries outside the United States are recorded in shareholders'
equity. Gains or losses on those financial instruments which hedge
specific transactions are recognized in net income, offsetting the
underlying foreign currency transaction gains or losses. Cash
premiums and discounts related to these financial instruments are
amortized to other income--net over the lives of the agreements.
In the normal course of business, the Company's operations are also
exposed to fluctuations in interest rates. The Company seeks to
reduce the cost of and exposure to interest rate fluctuations through
the use of interest rate swaps and caps. Gains or losses on interest
rate swaps are included in interest expense since they hedge interest
on debt. Cash premiums related to interest rate caps are amortized
to interest expense over the lives of the agreements.
Options for Common Shares
- - -------------------------
The Company applies the intrinsic value based method to account for
stock options granted to employees to purchase Common Shares. Under
this method, no compensation expense is recognized on the grant date
since on that date the option price equals the market price of the
underlying Common Shares. Net income and net income per Common Share
for 1996 and 1995 would not have been significantly different from
reported amounts if compensation expense had been determined based on
the fair value method in Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation."
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, comprised solely of
options for Common Shares, is not material.
Estimates
- - ---------
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements and notes.
Actual results could differ from these estimates.
ACQUISITIONS AND DIVESTITURES OF BUSINESSES
- - -------------------------------------------
On April 16, 1996, the Company purchased CAPCO Automotive Products
Corporation (CAPCO) for $135 million. CAPCO, a Brazilian
manufacturer of transmissions for light- and medium-duty trucks and
transaxle components for passenger cars, had sales of $176 million in
1995. This acquisition was accounted for as a purchase and,
accordingly, the statements of consolidated income include the
results of CAPCO from the effective date of acquisition.
<PAGE>
Page 22
On January 31, 1994, the Company purchased the Distribution and
Control Business Unit (DCBU) of Westinghouse Electric Corporation for
$1.050 billion. DCBU was a manufacturer of electrical distribution
equipment and industrial controls. The assets acquired and
liabilities assumed in the acquisition follow (in millions):
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired including
identified intangible assets of $95 million $ 742
Liabilities assumed (298)
Excess of cost over net assets acquired 606
------
Purchase price, net of cash acquired $1,050
======
</TABLE>
During 1996, 1995 and 1994, the Company also acquired and divested
other smaller operations.
DEBT AND OTHER FINANCIAL INSTRUMENTS
- - ------------------------------------
The Company's subsidiaries outside the United States have lines of
credit, primarily short-term, aggregating $138 million from various
banks worldwide. At December 31, 1996, the Company had $15 million
outstanding under these lines of credit. The weighted average
interest rate on short-term debt, excluding immaterial amounts for
highly inflationary countries, at December 31, 1996 and 1995 was 7.2%
and 6.3%, respectively.
<TABLE>
Long-term debt at December 31, excluding the current portion, follows
(in millions):
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
6-3/8% notes due 1999
(effective interest rate 4.8%) $ 100 $ 100
9% notes due 2001 100 100
8% debentures due 2006 86 86
8.9% debentures due 2006 100 100
7% debentures due 2011, net of unamor-
tized discount of $90 million in 1996
and $92 million in 1995
(effective interest rate 14.6%) 110 108
8.1% debentures due 2022 100 100
7-5/8% debentures due 2024
(effective interest rate 7.1%) 100 100
6-1/2% debentures due 2025
(due 2005 at option of debenture holders) 150 150
Unsecured notes (5.3% to 6.1%) 150 142
Other (effective interest rate 8.5%) 66 98
------ ------
$1,062 $1,084
====== ======
</TABLE>
The Company has a $500 million revolving credit agreement, which
expires in 2000, to provide funds for working capital and general
corporate purposes. The unsecured notes are classified as long-term
debt because the Company intends, and has the ability under the
revolving credit agreement, to refinance these notes on a long-term
basis.
<PAGE>
Page 23
In July 1996, the Company terminated, and settled for cash, $50
million of a $100 million 9% interest rate swap expiring in 2000.
The $3.1 million pretax loss on the partial termination of the swap
is being amortized to interest expense through 2000 when the swap
matures. In addition, the Company has two interest rate swaps
aggregating $50 million that also expire in 2000 which adjust the
effect of the remaining $50 million of the 9% interest rate swap.
The net effect of these outstanding swaps at December 31, 1996 is to
convert $50 million of floating rate debt to LIBOR plus 3.1%.
In March 1996, the Company sold a five-year interest rate cap which
effectively converts $50 million of fixed rate debt into floating
rate debt when six-month LIBOR exceeds 8.31%.
In June 1995, the Company entered into an agreement that expires in
1999 which effectively converts $40 million of United States dollar
debt into Dutch Guilder denominated debt. This agreement was
designated as a hedge of the Company's net investment in a
Netherlands subsidiary.
The Company has interest rate swap agreements that effectively
convert interest expense on $115 million of United States dollar
fixed rate debt to fixed rates of 3.2% as to $50 million and 1.3% as
to $25 million, and to a floating rate (5.0% at December 31, 1996)
based on the Amsterdam Interbank Offered Rate plus 1.89% as to the
remaining $40 million.
Aggregate mandatory sinking fund requirements and annual maturities
of long-term debt are as follows (in millions): 1997, $20; 1998, $4;
1999, $102; 2000, $151; and 2001, $101.
Interest capitalized as part of acquisition or construction of major
fixed assets (in millions) was $8 in 1996, and $10 in 1995 and 1994.
Interest paid (in millions) was $96 in 1996 and 1995 and $93 in 1994.
<TABLE>
Financial instruments outstanding at December 31 are as follows (in
millions):
<CAPTION>
1996 1995
--------------------------- --------------------------
Notional Carrying Fair Notional Carrying Fair
amount amount value amount amount value
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Cash and short-term
investments $ 60 $ 60 $ 84 $ 84
Marketable equity
investments 22 22 42 42
Marketable debt securities 44 44 19 19
Short-term debt (10) (10) (30) (30)
Long-term debt, current
portion of long-term
debt and foreign
currency principal swaps (1,082) (1,206) (1,104) (1,290)
Foreign currency forward
exchange contracts and
options $ 23 (10) (8) $150 (2) (4)
Interest rate swaps
Fixed to floating 127 1 96 1 5
Floating to fixed 64 (5) 120 (1) (16)
Fixed to fixed 90 2 (2) 90 1 4
Interest rate caps sold (50) (1) (1)
</TABLE>
<PAGE>
Page 24
The fair values of short-term investments, marketable equity
investments and debt securities, short-term and long-term debt, and
interest rate swaps and caps are principally based on quoted market
prices. The fair value of foreign currency forward exchange
contracts and options, which primarily mature in 1997, and foreign
currency principal and interest rate swaps are estimated based on
quoted market prices of comparable contracts, adjusted through
interpolation where necessary for maturity differences.
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.
<TABLE>
The components of pension expense for the years ended December 31
follow (in millions):
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during year $ (58) $ (51) $ (55)
Interest cost on projected benefit
obligation (105) (104) (94)
Actual return on assets 350 347 36
Net amortization and deferral (194) (208) 99
----- ----- -----
$ (7) $ (16) $ (14)
===== ===== =====
</TABLE>
<PAGE>
Page 25
<TABLE>
The pension asset (liability), by funded status of the plan, at
December 31 follows (in millions):
<CAPTION>
1996 1995
--------------- ---------------
Over- Under- Over- Under-
funded funded funded funded
------ ------ ------ ------
<S> <C> <C> <C> <C>
Accumulated pension benefit
obligation
Vested $1,275 $ 87 $1,059 $ 218
Nonvested 94 7 64 29
------ ------ ------ ------
1,369 94 1,123 247
Value of future salary projections 155 11 132 10
------ ------ ------ ------
Total projected pension benefit
obligation 1,524 105 1,255 257
Fair value of plan assets 1,937 6 1,535 146
------ ------ ------ ------
Plan assets in excess of (less
than) projected benefit
obligation 413 (99) 280 (111)
Unamortized
Initial net (asset) obligation (21) 3 (34) 10
Net (gain) loss (327) 12 (180) (6)
Prior service cost 26 5 11 18
Adjustment to recognize minimum
liability (11) (12)
------ ------ ------ ------
$ 91 $ (90) $ 77 $ (101)
====== ====== ====== ======
</TABLE>
As a result of the merger of several underfunded pension plans into
overfunded pension plans, the vested accumulated pension benefit
obligation for underfunded plans decreased by $116 million in 1996,
with an offsetting increase in the overfunded plans.
<TABLE>
Actuarial assumptions used in the calculation of the pension asset
(liability) are as follows:
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.25% 7.25% 8.50%
Compensation growth rate 4.70% 4.70% 5.95%
Long-term rate of return on plan assets 10% 9.50% 10%
</TABLE>
Plan assets are invested in equity and fixed income securities and
other instruments. Underfunded plans are associated principally with
operations outside the United States.
POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS
- - ------------------------------------------------
Generally, United States employees become eligible for postretirement
benefits other than pensions, primarily health care and life
insurance, upon retirement. These benefits are payable for life,
although the Company retains the right to modify or terminate the
plans providing these benefits. The plans are contributory, with
retiree contributions adjusted annually, and contain other cost-
<PAGE>
Page 26
sharing features, including deductibles and co-payments. Certain
plans 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.
<TABLE>
Expense for postretirement benefits other than pensions for the years
ended December 31 follows (in millions):
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during year $(12) $(12) $(13)
Interest cost on projected benefit
obligation (47) (49) (43)
Amortization 5 8 5
---- ---- ----
$(54) $(53) $(51)
==== ==== ====
</TABLE>
<TABLE>
The liability for postretirement benefit plans other than pensions at
December 31 follows (in millions):
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $465 $442
Eligible plan participants 58 55
Non-eligible plan participants 182 180
Unamortized
Prior service cost 53 61
Net loss (138) (125)
---- ----
$620 $613
==== ====
</TABLE>
<TABLE>
Actuarial assumptions used in the calculation of the liability for
postretirement benefits other than pensions are as follows:
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.25% 7.25% 8.50%
Projected health care cost trend rate 9% 10% 11%
Ultimate trend rate 5% 5% 6.25%
Year ultimate trend rate is achieved 2001 2001 2000
</TABLE>
An increase of 1% in assumed health care cost trend rates would
increase the accumulated postretirement benefit obligation as of
December 31, 1996 by $35 million and the net periodic cost for 1996
by $3 million.
PROTECTION OF THE ENVIRONMENT
- - -----------------------------
The Company has been named a potentially responsible party (PRP)
under the Comprehensive Environmental Response, Compensation and
Liability Act and the Resource Conservation and Recovery Act or
similar state and local laws and regulations at a number of waste
disposal sites. Although these laws technically impose joint and
several liability upon each PRP at each site, the extent of the
Company's required financial contribution to the cleanup of these
<PAGE>
Page 27
sites is expected to be limited based on the number and financial
strength of the other named PRP's and the volume and types 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 currently-
owned or formerly-owned plants.
Environmental and related remediation costs are difficult to quantify
for a number of reasons including the numbers of parties involved at
many sites, the determination of the extent of contamination, the
length of time remediation may require, the complexity of
environmental regulation and the continuing advancement of
remediation technology. The Company's environmental engineers,
consultants and legal counsel have developed estimates of these costs
for each site. The Company accrues the best estimates of these costs
when it is probable that a liability has been incurred. At December
31, 1996 and 1995, the balance sheet included an accrual for these
costs (in millions) of approximately $35 and $38, respectively. The
Company has rights of recovery from non-affiliated parties as to a
portion of these costs with regard to several of these sites.
Management estimates that these costs may reasonably be expected to
range up to approximately $52 million and that such costs would be
incurred over a period of several years. This maximum of the range
of estimated costs is less than the $70 million estimate for 1995 due
to the consideration of cost-sharing agreements, additional site
data, completion of clean-up or settlement of the liability, or the
passage of time with no regulatory activity. All of these estimates
are forward looking statements and given the inherent uncertainties
in evaluating environmental exposures, actual results can differ from
these estimates.
Based upon the Company's analyses and subject to the difficulty in
estimating these future costs, the Company expects that any sum it
may be required to pay in connection with environmental matters is
not reasonably likely to exceed the amounts recorded or disclosed in
an amount which would have a material adverse effect on financial
condition, results of operations or liquidity.
SHAREHOLDERS' EQUITY
- - --------------------
There are 300 million Common Shares authorized. At December 31,
1996, there were 1.6 million Common Shares held in treasury and there
were 13,275 holders of record of Common Shares. Additionally, 21,117
employees were shareholders through participation in the Share
Purchase and Investment Plan.
In March 1994, in order to partially refinance the acquisition of
DCBU, the Company sold 3.8 million Common Shares to the public for
aggregate net proceeds of $214 million. In January 1994, in a
private placement, the Company sold 800,000 Common Shares for
aggregate net proceeds of $38 million.
Stock 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
(shares in millions):
<PAGE>
Page 28
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
Average Average
price price
per per
share Shares share Shares
------- ------ ------- ------
<S> <C> <C> <C> <C>
Outstanding, January 1 $41.12 4.6 $37.94 4.0
Granted 53.10 1.1 48.60 1.1
Exercised 33.57 (.6) 28.94 (.4)
Canceled 51.79 (.1) 50.58 (.1)
--- ---
Outstanding, December 31 $44.32 5.0 $41.12 4.6
=== ===
Exercisable, December 31 3.7 3.3
Reserved for future
grants, December 31 4.2 5.2
</TABLE>
The Company sponsors a Share Purchase and Investment Plan (SPIP) for
United States operations under which eligible participating employees
may choose to contribute up to 15% of their base pay to the SPIP.
The Company matches employee contributions up to 6% of a
participant's base pay as limited by United States income tax
regulations. The matching contribution, which is determined each
quarter based on net income per Common Share, ranges from 25% to 100%
of a participant's contribution and is invested in the Company's
Common Shares.
In 1989, the Company prefunded, through 1999, a portion of
anticipated matching contributions to the SPIP by creating an
Employee Stock Ownership Plan (ESOP) under the SPIP and selling 5
million Common Shares for $150 million to the ESOP. The shares held
by the ESOP which have not yet been allocated to employee accounts
are included in shareholders' equity as "ESOP Shares in Trust" and
the notes payable of the ESOP, which are guaranteed by the Company,
are included in long-term debt. Unallocated shares in the ESOP are
released at historical cost based on the ratio of the annual
principal payment on the notes payable compared to the original
principal amount of the notes payable and allocated to employee
accounts. Cash dividends paid on shares in the ESOP are charged
against retained earnings and, along with Company contributions, are
used to repay the principal and interest due on the notes payable.
Unallocated shares in the ESOP, which are considered outstanding for
purposes of computing net income per Common Share, at the end of 1996
and 1995 (in millions) were 1.2 and 1.9, respectively. Compensation
expense related to the SPIP match, including the effect of shares
released by the ESOP at historical cost, (in millions) was $10 in
1996, $17 in 1995 and $15 in 1994.
The Company has plans which permit eligible employees and directors
to defer a portion of their compensation. In the fourth quarter of
1996, the Company established a trust to fund a portion of these
liabilities. The trust was funded with $22 million of marketable
securities, which are included in other assets, and 105,000 treasury
shares with a fair value of $7 million, which are included in
shareholders' equity.
<PAGE>
Page 29
PREFERRED SHARE PURCHASE RIGHTS
- - -------------------------------
In June 1995, the Company declared a dividend of one Preferred Share
Purchase Right (Right) for each outstanding Common Share. The Rights
become exercisable only if a person or group acquires, or offers to
acquire, 20% or more of the Company's Common Shares. The Company is
authorized to reduce the 20% threshold for triggering the Rights to
not less than 10%. The Rights expire on July 12, 2005, unless
redeemed earlier at one cent per Right.
When the Rights become exercisable, the holder of each Right, other
than the acquiring person, is entitled (1) to purchase for $250, one
one-hundredth of a Series C Preferred Share (Preferred Share), (2) to
purchase for $250, that number of the Company's Common Shares or
common stock of the acquiring person having a market value of twice
that price, or (3) at the option of the Company, to exchange each
Right for one Common Share or one one-hundredth of a Preferred Share.
INCOME TAXES
- - ------------
<TABLE>
Income before income taxes for the years ended December 31 follows
(in millions):
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States $385 $471 $396
Non-United States 100 121 92
---- ---- ----
$485 $592 $488
==== ==== ====
</TABLE>
<TABLE>
Income taxes for the years ended December 31 follows (in millions):
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current
United States
Federal $ 81 $109 $ 81
State and local 21 24 15
Non-United States 34 59 44
---- ---- ----
136 192 140
Deferred
United States
Reduction of valuation allowance
for deferred income tax assets (11)
Other Federal (5) 26 24
State and local 1 1
Non-United States
Operating loss carryforwards 11 (4) (8)
Reduction of valuation allowance
for deferred income tax assets (3)
Other (6) (11) 1
---- ---- ----
0 1 15
---- ---- ----
$136 $193 $155
==== ==== ====
</TABLE>
<PAGE>
Page 30
<TABLE>
Reconciliations of income taxes at the United States Federal
statutory rate to the effective income tax rate for the years ended
December 31 follow (in millions):
<CAPTION>
1996
------------- 1995 1994
Amount Rate Rate Rate
------ ---- ---- ----
<S> <C> <C> <C> <C>
Income taxes at the United
States statutory rate $170 35.0% 35.0% 35.0%
State and local income taxes 14 2.9 3.1 2.8
Adjustment of worldwide tax
liabilities 4 .9 2.0 1.6
Possessions credit related to
Puerto Rican operations (35) (7.2) (5.4) (5.2)
Reduction of valuation allowance
for deferred income tax assets (1.8) (.6)
Foreign source income (13) (2.6) 1.5 1.1
Other--net (4) (.8) (1.8) (2.8)
---- ----- ----- -----
$136 28.2% 32.6% 31.9%
==== ===== ===== =====
</TABLE>
<TABLE>
Significant components of current and long-term deferred income taxes
at December 31 follow (in millions):
<CAPTION>
Current Long-term Long-term
assets assets liabilities
------- --------- -----------
<S> <C> <C> <C>
1996
Accruals and other adjustments
Employee benefits $ 57 $241 $ (5)
Depreciation and amortization (190) (10)
Other 102 43
Operating loss carryforwards of
non-United States subsidiaries 79
Other items 6 32 4
Valuation allowance (56)
---- ---- ----
$165 $149 $(11)
==== ==== ====
1995
Accruals and other adjustments
Employee benefits $ 56 $240 $ (4)
Depreciation and amortization (161) (24)
Other 85 16 6
Operating loss carryforwards of
non-United States subsidiaries 86
Other items 9 18 12
Valuation allowance (36)
---- ---- ----
$150 $163 $(10)
==== ==== ====
</TABLE>
At December 31, 1996, certain non-United States subsidiaries
had operating loss carryforwards aggregating $198 million.
Carryforwards of $163 million have no expiration dates and the
balance expire at various dates from 1997 through 2005.
<PAGE>
Page 31
The Company has manufacturing facilities in Puerto Rico which operate
under tax relief and other incentives that will no longer be
available after 2005.
No provision has been made for income taxes on undistributed earnings
of consolidated non-United States subsidiaries of $459 million at
December 31, 1996, 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 in 1996, 1995 and 1994 (in millions)
were $154, $166 and $109, respectively.
OTHER INFORMATION
- - -----------------
Accounts Receivable
- - -------------------
Accounts receivable are net of an allowance for doubtful accounts of
$15 million at the end of 1996 and 1995.
Inventories
- - -----------
<TABLE>
The components of inventories at December 31 follow (in millions):
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials $270 $225
Work in process 312 369
Finished goods 240 235
---- ----
Gross inventories at FIFO 822 829
Excess of current cost over LIFO cost (93) (94)
---- ----
Net inventories $729 $735
==== ====
</TABLE>
Gross inventories accounted for using the LIFO method (in millions)
were $431 and $328 at the end of 1996 and 1995, respectively.
Excess of Cost Over Net Assets of Businesses Acquired
- - -----------------------------------------------------
Accumulated amortization of excess of cost over net assets of
businesses acquired (in millions) was $162 and $129 at the end of
1996 and 1995, respectively.
Investments in Life Insurance
- - -----------------------------
The Company has company-owned life insurance policies insuring the
lives of a portion of active United States employees. The policies
accumulate asset values to meet future liabilities including the
payment of employee benefits such as health care. At December 31,
1996 and 1995, the investment in the policies included in other
assets (in millions) was $11 and $10, net of policy loans of $347 and
$348, respectively. Net life insurance expense (in millions) of $9
in 1996, $7 in 1995 and $5 in 1994, including interest expense of
$35, $27 and $15 in 1996, 1995 and 1994, respectively, was included
in selling and administrative expense.
<PAGE>
Page 32
Lease Commitments
- - -----------------
Minimum rental commitments for 1997 under noncancelable operating
leases, which expire at various dates and in most cases contain
renewal options, are $56 million and decline substantially
thereafter.
Rental expense in 1996, 1995 and 1994 (in millions) was $71, $67 and
$65, respectively.
Page 33
<TABLE>
QUARTERLY DATA
- - --------------
(Unaudited)
<CAPTION>
Quarter ended
(Millions except for -----------------------------------
per share data) Dec. 31 Sept. 30 June 30 Mar. 31
------- -------- ------- -------
<S> <C> <C> <C> <C>
1996
Net sales $1,724 $1,719 $1,782 $1,736
Gross margin 424 438 476 458
Percent of sales 25% 25% 27% 26%
Net income 66 85 103 95
Per Common Share
Net income $ .85 $ 1.11 $ 1.32 $ 1.23
Cash dividends paid .40 .40 .40 .40
Market price
High 70-7/8 61-1/4 62-3/8 61-7/8
Low 57-3/4 53 56-7/8 50-3/8
1995
Net sales $1,661 $1,672 $1,758 $1,731
Gross margin 430 429 469 466
Percent of sales 26% 26% 27% 27%
Net income 90 91 110 108
Per Common Share
Net income $ 1.16 $ 1.18 $ 1.41 $ 1.39
Cash dividends paid .40 .40 .40 .30
Market price
High 56-1/4 62-1/2 61-1/4 55-7/8
Low 49-1/2 52-3/8 51-7/8 45-3/8
Income in 1996 was reduced by pretax restructuring charges of $50
million. Of these restructuring charges, $29 million was recorded in
the fourth quarter of 1996 and the remaining $21 million was recorded
evenly throughout the first nine months of 1996.
In the fourth quarter of 1996, the effective income tax rate for full
year 1996 was adjusted to 28.2% from 29.9%. This adjustment reduced
income tax expense for the fourth quarter by $7 million, which relates
to the first nine months of 1996.
In the third quarter of 1996, the estimated effective income tax rate
for full year 1996 was adjusted to 29.9% from 31.6%. This adjustment
reduced income tax expense for the third quarter by $5 million, which
relates to the first half of 1996.
In the fourth quarter of 1995, the effective income tax rate for full
year 1995 was adjusted to 32.6% from 33.5%. This adjustment reduced
income tax expense for the fourth quarter by $4 million, which relates
to the first nine months of 1995.
</TABLE>
<PAGE>
Page 34
BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
- - --------------------------------------------------
Eaton is a global manufacturer of highly engineered products which
serve the industrial, vehicle, construction, commercial and aerospace
markets with operations located in 26 countries. Operations are
classified among three business segments: Electrical and Electronic
Controls, Vehicle Components and Defense Systems. The major classes
of products included in each segment and other information follows.
Electrical and Electronic Controls
- - ----------------------------------
Industrial and Commercial Controls - Electromechanical and electronic
controls including motor starters, contactors, overloads and electric
drives; programmable controllers, counters, man/machine interface
panels and pushbuttons; photoelectric, proximity, temperature and
pressure sensors; residential, molded case, hydraulic, air and vacuum
circuit breakers; loadcenters; safety switches; lighting control
systems; panelboards; switchboards; switchgear components; switchgear
dry type transformers; busway; meter centers; crane controls;
portable tool switches; commercial switches; relays; vacuum
interrupters; illuminated pushbuttons and panels; annunciator panels;
electrically actuated valves and actuators; pressure transducers and
switches; and Navy motor control and power conversion systems.
Automotive and Appliance Controls - Electromechanical and electronic
controls including 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; transmission
valves; speed sensitive steering systems; tone generators and chimes;
lighting controls; emission control valves; collision warning
systems; remote keyless entry systems and remote actuated solenoids.
Specialty Controls - Ion implanters; thermal processing systems; flat
panel display equipment; plastic and steel spring fasteners; retainer
rings; clamps; golf grips; industrial rubber products; industrial
clutches and brakes.
The markets for these products are industrial, construction,
commercial, automotive, appliance, aerospace and government customers
concentrated principally in North America, however, sales are made
globally. Sales are made directly by the Company and indirectly
through distributors and manufacturers' representatives to such
customers.
Vehicle Components
- - ------------------
Truck Components - Heavy-, medium- and light-duty mechanical and
automatic transmissions; power take-offs; drive, trailer and steering
axles; brakes; anti-lock brake systems; locking differentials; engine
valves; valve lifters; leaf springs; viscous fan drives; fans and fan
shrouds; power steering pumps; tire pressure control systems; tire
valves; fleet management systems and advanced drivetrain controls.
<PAGE>
Page 35
Passenger Car Components - Engine valves; hydraulic valve lifters;
viscous fan drives; fans and fan shrouds; locking differentials;
spring fluid dampers; transaxle components; superchargers and tire
valves.
Off-Highway Vehicle Components - Mechanical and automatic
transmissions; drive and steering axles; specialty axle products;
brakes; engine valves; hydraulic valve lifters; gear and piston pumps
and motors; transaxles and steering systems; geroters; control valves
and cylinders; forgings; central tire inflation systems and tire
valves.
The principal market for these products is original equipment
manufacturers of heavy-, medium- and light-duty trucks, passenger
cars and off-highway vehicles. These original equipment
manufacturers are generally concentrated in North America, however,
sales are made on a global basis. Most sales of these products are
made directly to such manufacturers.
Defense Systems
- - ---------------
Strategic countermeasures; tactical jamming systems; electronic
intelligence; electronic support measures and radar surveillance.
The principal market for these products is the United States
Government.
Other Information
- - -----------------
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,
which consist principally of short-term investments, deferred income
taxes, investments in associate companies and joint ventures,
property and other assets.
Net sales to divisions and subsidiaries of one customer, primarily
from the Vehicle Components business segment (in millions), were $739
in 1996, $740 in 1995 and $623 in 1994 (11% of sales in 1996 and 1995
and 10% in 1994). Sales from the Company's United States operations
to customers in foreign countries, primarily Canada, (in millions)
were $743 in 1996 and $709 in 1995 (11% and 10% of sales in 1996 and
1995, respectively).
<PAGE>
Page 36
<TABLE>
Business Segment Information
<CAPTION>
(Millions) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales by classes of similar products
Electrical and Electronic Controls
Industrial and Commercial Controls $2,096 $1,975 $1,812
Automotive and Appliance Controls 1,144 1,062 839
Specialty Controls 634 574 437
------ ------ ------
3,874 3,611 3,088
Vehicle Components
Truck Components 1,766 1,965 1,798
Passenger Car Components 734 669 616
Off-Highway Vehicle Components 475 458 414
------ ------ ------
2,975 3,092 2,828
Defense Systems 112 119 136
------ ------ ------
$6,961 $6,822 $6,052
====== ====== ======
Operating profit
Electrical and Electronic Controls $ 309 $ 285 $ 239
Vehicle Components 286 414 354
Defense Systems 4 2 1
------ ------ ------
599 701 594
Interest expense (85) (86) (83)
Interest income 6 6 7
General corporate expenses--net (35) (29) (30)
------ ------ ------
Income before income taxes $ 485 $ 592 $ 488
====== ====== ======
Identifiable assets
Electrical and Electronic Controls $2,888 $2,869 $2,512
Vehicle Components 1,677 1,463 1,337
Defense Systems 104 95 114
------ ------ ------
4,669 4,427 3,963
General corporate assets 638 626 719
------ ------ ------
Total assets $5,307 $5,053 $4,682
====== ====== ======
Capital expenditures
Electrical and Electronic Controls $ 183 $ 174 $ 98
Vehicle Components 145 203 149
Defense Systems 6 4 5
Corporate 13 18 15
------ ------ ------
$ 347 $ 399 $ 267
====== ====== ======
Depreciation and amortization
Electrical and Electronic Controls $ 153 $ 134 $ 114
Vehicle Components 141 118 110
Defense Systems 10 13 14
Corporate 16 16 13
------ ------ ------
$ 320 $ 281 $ 251
====== ====== ======
</TABLE>
Operating profit in 1996 was reduced by restructuring charges of
$16 million for the Electrical and Electronic Controls segment
and $34 million for the Vehicle Components segment.
<PAGE>
Page 37
<TABLE>
Geographic Region Information
<CAPTION>
Identi-
Net Operating fiable
(Millions) sales profit assets
------- --------- -------
<S> <C> <C> <C>
1996
United States $5,440 $ 505 $3,399
Canada 297 23 108
Europe 1,113 84 752
Latin America 366 (31) 368
Pacific Region 148 18 136
Eliminations (403) (94)
------ ------ ------
$6,961 $ 599 $4,669
====== ====== ======
1995
United States $5,390 $ 571 $3,369
Canada 282 24 109
Europe 1,153 79 807
Latin America 266 4 151
Pacific Region 136 23 90
Eliminations (405) (99)
------ ------ ------
$6,822 $ 701 $4,427
====== ====== ======
1994
United States $4,807 $ 491 $3,081
Canada 292 30 119
Europe 912 50 636
Latin America 298 9 156
Pacific Region 103 14 57
Eliminations (360) (86)
------ ------ ------
$6,052 $ 594 $3,963
====== ====== ======
</TABLE>
Operating profit in 1996 was reduced by restructuring charges of
$28 million in the United States, $9 million in Europe and $13
million in Latin America.
<TABLE>
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 and which had total
sales as follows (in millions):
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States $ 13 $ 21 $ 10
Europe 14 13 15
Latin America 16 20 10
Pacific Region 326 347 240
------ ------ ------
$ 369 $ 401 $ 275
====== ====== ======
</TABLE>
<PAGE>
Page 38
Summary Financial Information for Eaton ETN Offshore Ltd.
- - ---------------------------------------------------------
Eaton ETN Offshore Ltd. (Eaton Offshore), a wholly-owned subsidiary
of Eaton, was incorporated by Eaton in 1990 under the laws of
Ontario, Canada, primarily for the purpose of raising funds through
the offering of debt securities in the United States and making these
funds available to Eaton or its subsidiaries. Eaton Offshore owns
the common stock of a number of Eaton's subsidiaries which are
engaged principally in the manufacture and/or sale of electrical and
electronic controls, truck transmissions, fasteners, leaf spring
assemblies and engine components. Effective January 31, 1994, Eaton
Offshore, through its subsidiaries, acquired certain of the Canadian
and Brazilian operations of the former Distribution and Control
Business Unit (DCBU) of Westinghouse Electric Corporation. On June
30, 1994 and on April 1, 1995, majority ownership of certain other
assets of DCBU and another subsidiary were transferred to a
subsidiary of Eaton Offshore from Eaton. Summary financial
information for Eaton Offshore and its consolidated subsidiaries for
the years ended December 31 follow (in millions):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income statement data
Net sales $630 $614 $494 $295 $295
Gross margin 98 99 87 42 42
Net income 23 28 20 13 17
Balance sheet data
Current assets $336 $324 $237 $160 $144
Noncurrent assets 153 152 122 109 86
Net intercompany
receivables (payables) (22) (15) (4) (15) 24
Current liabilities 93 97 83 50 51
Noncurrent liabilities 110 117 107 114 115
</TABLE>
<PAGE>
Page 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
- - --------
As anticipated, 1996 proved to be a challenging year. Sales in
1996 were slightly above 1995 while net income decreased 13% from
1995. During 1996, activity in the Company's markets around the
world was much more mixed when compared to 1995. However, as the
year ended, two of the Company's bellwether markets, worldwide
semiconductor equipment and North American heavy-duty trucks,
showed indications of stabilizing. Overall, performance in 1996
demonstrated the better balance in operating results that has
been achieved between the Company's two major business segments:
Electrical and Electronic Controls and Vehicle Components.
The Company was disappointed with its overall financial results,
given the very good performance of the majority of operations
during 1996 and the continued progress in turning around those
operations that have been a drag on operating results in prior
years. Persistent operating issues at a few operations have had
a disproportionate effect on results during 1996. The Company
has been clear about its determination to improve overall
financial performance. Over the course of 1996, $50 million was
invested to restructure those operations which have been lagging.
The Company expects $50 million in annual mature year savings
from these restructurings, with $25 million in net savings
falling to the bottom line in 1997.
1996 COMPARED TO 1995
- - ---------------------
NET SALES
- - ---------
Worldwide sales in 1996 reached nearly $7 billion for the first
time in the Company's history, slightly above 1995. During 1996,
the Company continued to benefit from the diversity of its
product lines as well as from its global markets as the highest
sales growth occurred in international markets.
In 1996, sales for North America, which includes the United
States and Canada, and Europe were flat compared to 1995.
Despite the continued recession in Japan, sales in the Pacific
Region rose 9% in 1996 over 1995, due in part to the acquisition
of the Emwest electrical switchgear and controls business in May
1995. In Latin America, sales increased 38% in 1996 over 1995
despite economic weakness in Mexico, Brazil and Argentina. The
increase in Latin America was attributable to the 1996
acquisition of CAPCO Automotive Products Corporation (CAPCO),
which is more fully discussed under 'Acquisitions and
Divestitures of Businesses' in the Financial Review.
Electrical and Electronic Controls, the Company's largest
segment, continued its trend of growth in sales in 1996, rising
7% in 1996 over 1995, more than doubling from just three years
ago. This segment now represents 56% of total sales. Activity
in the markets served by this segment were more mixed in the
second half of 1996 than earlier in the year.
<PAGE>
Page 40
Aided by continued strength in Cutler-Hammer's electrical power
distribution equipment business, Industrial and Commercial
Controls sales rose 6% in 1996 over 1995. New program launches
in the North American automotive controls business and the
acquisition of the IKU Group in May 1995 contributed to the
Automotive and Appliance Controls' 8% sales increase in 1996 over
1995.
Specialty Controls sales increased 10% in 1996 over 1995 in spite
of the sharp downturn in the worldwide market for semiconductor
capital equipment in the second half of 1996. Sales of
semiconductor equipment stabilized in the second half of 1996 at
23% below first half levels. The Company continues to be
encouraged by increases in the semiconductor industry's book-to-
bill ratio, which are now beginning to be reflected in the
equipment industry's order boards. Looking ahead, the Company
currently anticipates year-to-year improvement in sales beginning
in the second half of 1997.
As the leading worldwide producer of ion implanters, the Company
is strategically positioned to capitalize on the technology and
market trends of this very attractive but volatile industry.
Despite the short-term pain, the Company has sustained a strong
commitment to new product development in order to take full
advantage of Eaton's leading position in this dynamic market.
Vehicle Components segment sales decreased 4% in 1996 from 1995.
The acquisition of CAPCO affected prior year results comparisons.
Excluding the effects of CAPCO, 1996 sales for this segment were
$2.88 billion, 7% below 1995.
Truck Components sales decreased 10% in 1996 from 1995.
Excluding the effects of CAPCO, Truck Components sales declined
13% from the prior year's level. This reduction was primarily
the result of the softening of the North American heavy-duty
truck market from the record levels experienced in the prior two
years. In spite of this softening, North American heavy-duty
truck backlog, which was at 70,000 units at year-end 1996,
remains high by historical standards. In addition, the Company
has seen a clear turn in new heavy-duty truck orders over the
past four to five months. The increasing momentum provides a
solid foundation for the Company's forecast that 1997 North
American factory sales of heavy-duty trucks will be essentially
equal to 1996's 191,000 units.
Passenger Car Components experienced record sales in 1996, rising
10% over 1995, despite flat passenger car production in North
America and Europe. This better-than-market performance can be
attributed to selected market share penetration and the continued
trend towards multivalve engines. Continuing demand for
hydraulic components from the agricultural, construction and
industrial markets enabled Off-Highway Vehicle Components to
report record sales in 1996, rising 4% over 1995, despite
generally flat market activity.
OPERATING RESULTS
- - -----------------
Income from operations declined 17% in 1996 from 1995. This
reduction was primarily attributable to lower sales of Truck
Components offset by increased sales of Electrical and Electronic
<PAGE>
Page 41
Controls, which historically have had a lower gross margin. The
decrease also resulted from increased costs associated with
various major growth programs designed to accelerate the
Company's sustainable growth rate in the years ahead. These
programs are key components of a strategy to position the Company
to take advantage of growth opportunities in the global
marketplace. During 1996, the Company spent $37 million more
than in 1995 on these major growth programs. In the months and
years ahead, the Company believes the fruits of these investments
will be demonstrated in an accelerated flow of new products that
builds upon and extends Eaton's existing strong franchise of
businesses.
Income from operations in 1996 was also markedly affected by $50
million of restructuring charges that are intended to enable
Eaton's 1997 performance to meet the expectations of management
and owners. These restructuring charges principally relate to
workforce reductions. Several business units took these charges
in order to bring the Company's performance back to targeted
levels.
Operating profit for the Electrical and Electronic Controls
segment continued to be strong, improving 8% in 1996 over 1995.
Operating profit was reduced by restructuring charges of $16
million. The improvement in operating profit was primarily
attributable to improved sales volumes and added contributions
from recently acquired businesses. In addition, the Company is
back on track to achieving the performance expected from the 1994
acquisition of Westinghouse's Distribution and Control Business
Unit.
Operating profit for the Vehicle Components segment decreased 31%
in 1996 from 1995. Excluding the effects of CAPCO, 1996
operating profit was $302 million, decreasing 27% from 1995.
Operating results in this segment varied sharply by business unit
and geographic region. Despite these disappointing results, most
of the business units included in this segment demonstrated
excellent performance throughout 1996. The reduction in
operating profit was primarily attributable to lower sales
volumes of Truck Components. This segment's operating results
were below the Company's expectations given its earlier
projection for a 22% downturn in the North American heavy-duty
truck market in 1996 from 1995.
Vehicle Components operating profit for 1996 also was reduced by
$34 million of restructuring charges, including $15 million to
continue the restructuring of the North American axle/brake
business unit, for the purpose of bringing these business units
to acceptable levels of profitability. Of these restructuring
charges, $19 million was recorded in the fourth quarter of 1996
principally relating to the segment's Latin American and European
operations.
The Company has been clear about its disappointment in the
operating results of the Truck Components business unit in 1996,
and about the actions the Company is taking to return it to
traditional levels of performance. The Company is convinced that
the $30 million invested this year in Truck Components
restructuring will pay significant dividends in 1997.
<PAGE>
Page 42
Sustaining superior financial performance while pursuing
opportunities for higher sustainable growth, the necessary
ingredients for genuinely superior long-term performance, has
been challenging. The Company is making progress in both
dimensions of performance and is making the adjustments necessary
to ensure long-term success. The Company is determined to get
its financial results back on track in 1997. The Company will
not take the short-term expedient of mortgaging Eaton's future by
reducing spending on major growth programs designed to increase
the Company's sustainable growth rate in the years ahead.
The Company remains committed to outperforming expectations based
on the cyclical levels of Eaton's traditional markets. Eaton's
owners were patient in 1996 as the Company addressed
unanticipated problems, while staying focused on the actions
required to generate genuinely superior long-term performance.
The Company realizes 1997 is a critical year.
The Company's long-term goal of building sustainable earnings
growth throughout the economic cycle emphasizes the development
of new products, increased expansion into global markets, and
acquisition of businesses and product lines to complement the
Company's existing operations.
To enhance Eaton's existing product portfolio as well as to
develop the products of tomorrow, the Company spent a record
amount in 1996 on research and development. Over the past five
years, the Company has spent more than $1 billion on research and
development with significant increases in the past three years.
The Company continues to be active in pursuing growth in the
world's developing markets, especially in Latin America and the
Pacific Region. Recent examples of this expansion are the
acquisition of CAPCO, a Brazilian light- and medium-duty
transmission and transaxle components manufacturer, the formation
of a 75%-owned joint venture with Suzhou Electrical Apparatus
Group Company in the People's Republic of China, the acquisition
of a South African medium- and heavy-duty truck transmission
manufacturer, the purchase of an additional minority interest in
one of the Company's majority-owned Latin American operations,
and the purchase of the remaining minority interests in two of
the Company's Spanish operations.
As exemplified by the results of CAPCO and all of the Company's
Latin American operations, the short-term cost of pursuing growth
in these volatile markets has been high. The Company has
confirmed that the opportunities to manufacture and sell Eaton
products around the world are extraordinary, and the Company is
committed to taking full advantage of these opportunities.
Developments in the worldwide motor vehicle industry, in which
manufacturers are increasingly seeking suppliers capable of
partnering on a worldwide basis, made CAPCO a strategic
acquisition.
An analysis of changes in income taxes and the effective income
tax rate is presented under 'Income Taxes' in the Financial
Review.
<PAGE>
Page 43
CHANGES IN FINANCIAL CONDITION
- - ------------------------------
The Company remains in a strong financial position and has the
capital resources available in the form of working capital, lines
of credit and funds provided by operations for continued
reinvestment in existing operations, strategic acquisitions and
managing the capital structure. Net working capital was $787
million at year-end 1996 compared to $822 million at year-end
1995 and the current ratio was 1.6 compared to 1.7 at those
dates, respectively.
The accounts receivable and inventory turnover rates as well as
accounts receivable days sales outstanding and days of inventory
on-hand in 1996 were consistent with 1995. The CAPCO
acquisition, as discussed under 'Acquisitions and Divestitures of
Businesses' in the Financial Review, was the principal cause of
the increase in excess of cost over net assets of businesses
acquired from the prior year-end. As discussed under 'Debt and
Other Financial Instruments' in the Financial Review, the Company
has a $500 million five-year revolving credit agreement.
Reflecting the Company's ongoing investment program under long-
range goals to achieve improvements in product quality,
manufacturing productivity and business growth, capital
expenditures for 1996 were the second highest in the Company's
history. Over the past five years, the Company has spent nearly
$1.5 billion in capital expenditures intended to increase
productivity, reduce costs and, selectively, to add capacity. In
order to enhance product quality through technology improvements
and to help achieve long-term growth prospects, capital spending
in 1997 is anticipated to continue at near record levels.
Management believes it is more likely than not that deferred
income tax assets as of December 31, 1996 will be realized
through the reduction of future taxable income. Significant
factors considered by management in the determination of the
probability of realization of deferred tax assets include
historical operating results, expectations of future earnings and
the extended period of time over which the postretirement health
care liability will be paid.
The Company is subject to various inherent financial risks
attributable to operating in a global economy. Derivative
financial instruments are utilized to manage exposures in
interest and foreign exchange markets. The Company has developed
systems to measure and assure that these exposures are evaluated
comprehensively so that appropriate and timely action can be
taken to reduce risk, if necessary. Monitoring of exposures and
the evaluation of risks includes approval of derivative
activities on a discrete basis by senior management. Monthly,
senior management performs an oversight and review of exposures
and derivative activities. The Company diversifies the
counterparties used in these transactions in order to minimize
the impact of any potential credit loss in the event of
nonperformance by the counterparties. Although derivatives are
an integral part of the Company's risk management programs, their
incremental effect on financial condition and results of
operations is not material. Derivative activities are described
in greater detail under 'Debt and Other Financial Instruments' in
the Financial Review.
<PAGE>
Page 44
Operations of the Company involve the use and disposal of certain
substances regulated under environmental protection laws. The
Company continues to modify, on an ongoing, regular basis,
certain processes in order to reduce the impact on the
environment, including the reduction or elimination of certain
chemicals used in and wastes generated from operations. The
Company's liabilities related to environmental matters are
further discussed under 'Protection of the Environment' in the
Financial Review.
Cash dividends paid in 1996 were a record and represented 36% of
net income. Per share dividends in 1996 rose 7% from the
previous year, following a 25% increase from the year before.
The Company has paid dividends on Common Shares annually since
1923.
To avoid dilution of earnings per share resulting from the
exercise of stock options, the Board of Directors authorized, in
1995, the purchase of up to five million outstanding Common
Shares. Under the Board's authorization, the Company may
purchase these shares over a five year period with a maximum of
1.5 million shares to be purchased in any one year. During 1996,
1.1 million shares were repurchased for an aggregate purchase
price of $63 million, or an average price of $57 per share.
Since the initiation of the program, 1.9 million shares have been
repurchased at an average price of $54 per share.
The Company continues to generate substantial cash from
operations, despite record investments in research and
development, which continues to provide the primary source of
funds to finance operating needs. The Company's emphasis on
asset management generated record operating cash flow in 1996,
compared with the previous record in 1995. Cash flow from
operations, supplemented by commercial paper borrowings, was used
to fund business acquisitions, capital expenditures, repayment of
debt, the record level of cash dividends, and repurchase of
Common Shares.
FORWARD-LOOKING STATEMENTS
- - --------------------------
The Company has included in this Annual Report expectations of
the outlook for 1997 and cost reduction strategies and their
anticipated results. Actual results could differ materially from
these expectations, since they are forward-looking statements
which inherently are subject to risks and uncertainties.
Important factors which could cause actual results to differ from
the 1997 expectations include: continuity of business
relationships with and purchases by major customers, product mix,
competitive pressure on sales and pricing, increases in material
and other production costs which cannot be recouped in product
pricing, difficulties in introducing new products as well as
global economic and market conditions. Important assumptions
that could cause actual cost reduction strategy results to differ
from the estimates provided include achieving estimated staff
reductions while maintaining work flow in the functional areas
effected and the transition to consolidated manufacturing and
administrative processes within anticipated time frames at
anticipated costs.
<PAGE>
Page 45
1995 COMPARED TO 1994
- - ---------------------
NET SALES
- - ---------
Net sales in 1995 rose 13% over 1994. The improvement in sales
was broadly based and primarily attributable to higher unit
volumes in both the Electrical and Electronic Controls and the
Vehicle Components segments. During 1995, the Company benefited
from the diversity of its product lines as well as from its
global markets. In 1995, the North American economy favored the
transportation and capital goods markets served by the Company
which was the principal reason for the 11% sales increase in
North America in 1995 over 1994. The European economic recovery
that began in 1994 continued in 1995 and coupled with the IKU
Group acquisition resulted in a 26% sales increase in that region
in 1995 over 1994. In 1995, despite the continued recession in
Japan, sales in the Pacific Region rose 32% over 1994, due in
part to the Emwest electrical switchgear and controls business
acquisition. In Latin America, economic weakness in Mexico,
Brazil and Argentina during 1995 caused an 11% sales decline in
1995 over 1994. The weakness in Mexico, Brazil and Argentina was
partially offset by sales from the Mallory Controles Ltda.
acquisition.
Electrical and Electronic Controls segment experienced
significant growth as sales increased 17% in 1995 over 1994,
which nearly doubled the sales of just two years ago.
An increase in industrial and nonresidential construction,
partially offset by decreases in both residential construction
and sales to the United States Government, resulted in Industrial
and Commercial Controls sales rising 9% in 1995 over 1994. The
27% increase in sales of Automotive and Appliance Controls in
1995 over 1994 was due in part to the acquisitions of Lectron
Products, Inc., Mallory Controles Ltda. and the IKU Group as well
as increased penetration on several new automotive platforms.
Worldwide demand for the Company's semiconductor capital
equipment continued to be extraordinarily strong in 1995. Sales
of the Company's ion implanters in 1995 were at an all-time high,
rising 80% over 1994, which more than doubled the sales of just
two years ago. This demand was the primary contributor to
Specialty Controls' 31% sales increase in 1995 over 1994. Sales
of the joint venture related to this business, which are not
included in the Company's consolidated sales, also benefited
significantly from this increased demand, rising 61% over 1994.
During 1995, the Company was experiencing surging markets as well
as market share gains throughout its entire ion implanter product
line.
Vehicle Components segment sales increased 9% in 1995 over 1994.
Truck Components sales rose 9% in 1995 over 1994. The North
American market for heavy-duty trucks set industry records in
1995, with Class 8 truck sales reaching 245,000 units, 9% above
the previous record set in 1994. However, the soft landing of
the United States economy in the second half of 1995 negatively
impacted sales of heavy-duty trucks in the fourth quarter of
1995. Fourth quarter 1995 heavy-duty truck production declined
6% in response to the sharp drop in orders. Slow growth in
industrial output from the first quarter of 1995 affected truck
<PAGE>
Page 46
tonnage hauled; as a result, the rush to add fleet capacity,
which was at a frenzied pace in 1994 and early 1995, slowed
during the second half of 1995. In the third quarter of 1995,
though production and retail sales of heavy-duty trucks remained
high, net orders were negative as canceled orders exceeded new
incoming orders. In the fourth quarter of 1995, orders rebounded
somewhat but remained well below the levels experienced earlier
in the year.
The Vehicle Components segment also reflected higher sales of
components for sport utility vehicles, minivans and light trucks
in 1995. North American factory sales in 1995 were comparable
with strong 1994 sales. These vehicles, where the Company's
component sales are particularly strong, accounted for nearly
half of the domestic vehicle unit sales of United States based
automobile manufacturers. Passenger Car Components sales rose 9%
in 1995 over 1994 despite a 2% decline in North American
production of passenger cars and a modest 4% rise in Europe.
Sales benefited from the continued trend to multivalve engines
and particular strength in Europe. The continued demand for
hydraulic components from the agricultural, construction and
industrial markets enabled Off-Highway Vehicle Components sales
to remain strong, showing an 11% increase in 1995 over 1994.
OPERATING RESULTS
- - -----------------
Income from operations increased 16% in 1995 over 1994,
reflecting a 9% return on sales for both years. This increase
was primarily a result of the higher sales volumes described
above, as well as the impact of the Company's continued emphasis
on cost reduction efforts and productivity improvement programs.
These improvements enabled the Company to maintain its margins
while pricing products competitively in value-driven world
markets.
Operating profit for the Electrical and Electronic Controls
segment was strong, improving 20% in 1995 over 1994 and
reflecting an 8% return on sales for both years. The improvement
in profits was primarily attributable to improved sales volumes,
but also included added contributions from acquired businesses,
continued stringent cost containment efforts and the realization
of benefits from earlier resizings. On the negative side,
transitional plant integration difficulties, effects of two
September 1995 hurricanes in Puerto Rico and unanticipated
program launch costs on several new automotive platforms reduced
margins in the last half of 1995. Investments in systems and
infrastructure for the Company's semiconductor equipment
operations also reduced margins in 1995.
Operating profit for the Vehicle Components segment was strong,
improving 17% in 1995 over 1994 and reflecting a 13% return on
sales for both years. While the improvement in profits was
primarily attributable to improved sales volumes, other
contributing factors included ongoing cost reduction efforts and
productivity improvement programs, and economies achieved through
organizational rationalizations of certain businesses which have
better positioned operations to benefit from further growth and
market opportunities in global vehicle markets. One such example
was the demand in Europe for the Company's new heavy-duty
synchronized transmission which exceeded expectations.
<PAGE>
Page 47
Increased income from associate companies, a payment received
related to a dividend from a foreign subsidiary and reduced
foreign currency exchange losses primarily caused the increase in
Other income--net in 1995 over 1994.
An analysis of changes in income taxes and the effective income
tax rate is presented under 'Income Taxes' in the Financial
Review.
<PAGE>
Page 48
<TABLE>
Eaton Corporation
<CAPTION>
Five-Year Consolidated Financial Summary
For the year 1996 1995 1994 1993 1992
- - ---------------------------------------------------------------------------------------------------------------------
(Millions except for per share data)
<S> <C> <C> <C> <C> <C>
Net sales $6,961 $6,822 $6,052 $4,401 $4,101
Income before extraordinary item and cumulative
effect of accounting changes 349 399 333 180 140
Extraordinary item (7)
Cumulative effect of accounting changes
Postretirement benefits other than pensions (274)
Income taxes 6
Net income (loss) 349 399 333 173 (128)
Per Common Share
Income before extraordinary item and
cumulative effect of accounting changes $ 4.50 $ 5.13 $ 4.40 $ 2.57 $ 2.03
Extraordinary item (.10)
Cumulative effect of accounting changes
Postretirement benefits other than pensions (3.97)
Income taxes .09
Net income (loss) 4.50 5.13 4.40 2.47 (1.85)
Cash dividends paid 1.60 1.50 1.20 1.15 1.10
Capital expenditures $ 347 $ 399 $ 267 $ 227 $ 186
Research and development expense 267 227 213 154 151
At the year-end
- - ---------------------------------------------------------------------------------------------------------------------
Total assets $5,307 $5,053 $4,682 $3,268 $3,220
Long-term debt 1,062 1,084 1,053 649 833
Total debt 1,092 1,134 1,089 773 882
Shareholders' equity 2,160 1,975 1,680 1,105 948
Income in 1996 was reduced by pretax restructuring charges of $50 million.
Results reflect the acquisition of DCBU on January 31, 1994.
Income in 1993 was reduced by a $55 million acquisition integration charge related to the
purchase of DCBU ($34 million aftertax, or $.49 per Common Share).
Income in 1993 was reduced by an extraordinary loss of $11 million for the redemption of
debentures ($7 million aftertax, or $.10 per Common Share).
</TABLE>
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Listing of Exhibits Filed
3(a) Amended Articles of Incorporation (amended and restated
as of May 19, 1994) - Incorporated by reference to the
Form 8-K Report dated May 19, 1994
3(b) Amended Regulations (amended and restated as of April 27,
1988) - Incorporated by reference to the Annual Report
on Form 10-K for the year ended December 31, 1994
4(a) Instruments defining rights of security holders,
including indentures (Pursuant to Regulation S-K Item
601(b)(4), the Company agrees to furnish to the
Commission, upon request, a copy of the instruments
defining the rights of holders of long-term debt)
4(b) Eaton Corporation Rights Agreement dated June 28, 1995 -
Incorporated by reference to the Form 8-K Report dated
June 28, 1995
10 Material contracts
The following are either a management contract or a
compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and
restated as of September 24, 1996)
(b) Executive Strategic Incentive Plan (amended and
restated as of June 21, 1994 and July 25, 1995)
(c) Group Replacement Insurance Plan (GRIP), effective
as of June 1, 1992 - Incorporated by reference to
the Annual Report on Form 10-K for the year ended
December 31, 1992
(d) 1991 Stock Option Plan - Incorporated by reference
to the definitive Proxy Statement dated March 18,
1991
(e) 1995 Stock Option Plan - Incorporated by reference
to the definitive Proxy Statement dated March 17,
1995
(f) Incentive Compensation Deferral Plan (amended and
restated as of September 24, 1996)
(g) Strategic Incentive and Option Plan (amended and
restated as of September 24, 1996)
(h) Form of "Change in Control" Agreement entered into
with officers of Eaton Corporation as of November 1,
1996
<PAGE>
Page 2
(i) The following are incorporated by reference to the
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1990:
(i) Limited Eaton Service Supplemental
Retirement Income Plan (amended and
restated as of January 1, 1989)
(ii) Amendments to the 1980 and 1986 Stock Option
Plans
(iii) Eaton Corporation Supplemental Benefits
Plan (amended and restated as of January 1,
1989) (which provides supplemental
retirement benefits)
(iv) Eaton Corporation Excess Benefits Plan
(amended and restated as of January 1,
1989) (with respect to Section 415
limitations of the Internal Revenue Code)
(j) Executive Incentive Compensation Plan, effective
January 1, 1995
(k) Plan for the Deferred Payment of Directors' Fees
(amended and restated as of September 24, 1996)
(l) Plan for the Deferred Payment of Directors' Fees
(originally adopted in 1980 and amended effective
February 25, 1997)
(m) 1996 Non-Employee Director Fee Deferral Plan
(amended effective February 25, 1997)
(n) Eaton Corporation Trust Agreement - Outside
Directors (dated December 6, 1996)
(o) Eaton Corporation Trust Agreement - Officers and
Employees (dated December 6, 1996)
11 Statement regarding computations of net income per Common
Share
21 Subsidiaries of Eaton Corporation
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (a)
Deferred Incentive Compensation Plan
(amended and restated as of September 24, 1996)
I. PURPOSE
The purpose of the Deferred Incentive Compensation Plan is
to promote the greater success of Eaton Corporation and
its subsidiaries by providing a means to defer Incentive
Compensation for key employees whose level and nature of
position enable them to affect significantly the
profitability, competitiveness and growth of Eaton.
II. CONCEPT
The Plan is based on the concept that the deferral of
Incentive Compensation for later payment to a Participant,
including the later payment during Retirement, will
provide a benefit to each Participant and an incentive to
improve the profitability, competitiveness and growth of
Eaton.
III. DEFINITIONS
Unless otherwise required by the context, the terms used
herein shall have the meanings as set forth below:
ACCOUNT: The account established by Eaton for each
Participant to which may be credited his Deferred
Incentive Compensation, Dividend Equivalents, Treasury
Bill Interest Equivalents and Fixed Rate Interest
Equivalents.
BENEFICIARY: The person or entity (including a trust or
the estate of the Participant) designated in a written
document executed by the Participant and delivered to the
Committee. If at the time when any unpaid balance of
Deferred Incentive Compensation shall be or become due at
or after the death of a Participant, there shall not be
any living person or any entity in existence so
designated, the term "Beneficiary" shall mean the
Participant's estate.
BOARD: The Board of Directors of Eaton.
CAUSE: For the purposes of this Plan, Eaton shall have
"Cause" to terminate the Participant's employment here-
under upon (i) the willful and continued failure by the
Participant to substantially perform the Participant's
duties with Eaton (other than any such failure resulting
from the Participant's incapacity due to physical or
mental illness), after a demand for substantial
performance is delivered to the Participant by the Board
which specifically identifies the manner in which the
Board believes that the Participant has not substantially
performed the Participant's duties, or (ii) the willful
engaging by the Participant in gross misconduct materially
and demonstrably injurious to Eaton. For purposes of this
definition, no act, or failure to act, on the
Participant's part shall be considered "willful" unless
done, or omitted to be done, by the Participant not in
<PAGE>
Page 2
good faith and without reasonable belief that the
Participant's action or omission was in the best interest
of Eaton. Notwithstanding the foregoing, the
Participant's employment shall not be deemed to have been
terminated for Cause unless and until there shall have
been delivered to the Participant a copy of a resolution
duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board at a
meeting of the Board called and held for such purpose
(after reasonable notice to the Participant and an
opportunity for the Participant, together with the
Participant's counsel, to be heard before the Board),
finding that in the good faith opinion of the Board the
Participant was guilty of conduct set forth above in
clauses (i) or (ii) of this definition and specifying the
particulars thereof in detail.
CHANGE IN CONTROL OF EATON: For purposes of this Plan, a
"Change in Control of Eaton" shall be deemed to have
occurred if (i) a tender offer shall be made and
consummated for the ownership of securities of Eaton
representing 25% or more of the combined voting power of
Eaton's then outstanding voting securities, (ii) Eaton
shall be merged or consolidated with another corporation
and as a result of such merger or consolidation less than
75% of the outstanding voting securities of the surviving
or resulting corporation shall be owned in the aggregate
by the former shareholders of Eaton, other than affiliates
(within the meaning of the Securities Exchange Act of 1934
(the "Exchange Act")) of any party to such merger or
consolidation, as the same shall have existed immediately
prior to such merger or consolidation, (iii) Eaton shall
sell substantially all of its assets to another
corporation which is not a wholly owned subsidiary of
Eaton, (iv) any "person" (as such term is used in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or
becomes the beneficial owner, directly or indirectly, of
securities of Eaton representing 25% or more of the
combined voting power of Eaton's then outstanding
securities; or (v) during any period of two consecutive
years, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at
least a majority thereof unless the election, or the
nomination for election by Eaton's shareholders, of each
new director was approved by a vote of at least two-thirds
of the directors then still in office who were Directors
at the beginning of the period. For purposes of this
Plan, ownership of voting securities shall take into
account and include ownership as determined by applying
the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act
(as then in effect).
COMMITTEE: The Corporate Compensation Committee of
Management of Eaton.
COMPENSATION COMMITTEE OF THE BOARD: The Compensation
Committee of the Board of Directors of Eaton.
CONTINGENT SHARE UNITS: Units credited to a Participant's
Account which are equivalent in value to the market value
of Eaton Common Shares.
<PAGE>
Page 3
DEFERRAL PLANS: Shall mean the Incentive Compensation
Deferral Plan, the Strategic Incentive and Option Plan and
this Plan.
DEFERRED INCENTIVE COMPENSATION: That portion of
Incentive Compensation which has been deferred pursuant to
the Plan and any Dividend Equivalents, Treasury Bill
Interest Equivalents, Fixed Rate Interest Equivalents and
Contingent Share Units which are attributable thereto.
DEFERRED INCENTIVE COMPENSATION AGREEMENT: The written
agreement between Eaton and a Participant pursuant to
which Incentive Compensation is deferred under the Plan.
DISABILITY: If, as a result of the Participant's
incapacity due to physical or mental illness, the
Participant shall have been absent from the Participant's
duties with Eaton on a full-time basis for 180 consecutive
business days and within thirty (30) days after written
Notice of Termination the Participant shall not have
returned to the full-time performance of the Participant's
duties, any termination of the Participant's employment by
Eaton shall be for "Disability."
DIVIDEND EQUIVALENT: An amount equal to the per share
dividends paid on Eaton Common Shares.
EATON: Eaton Corporation, an Ohio corporation, and its
subsidiaries and successors and assigns.
EXECUTIVE INCENTIVE COMPENSATION PLAN: An incentive
compensation plan approved (a) by the Board of Directors
of Eaton for participation in this Plan and whose
participants are designated by the Committee on an annual
basis or (b) by the Management Compensation Committee
(comprised solely of officers of the Company) and whose
participants do not include any officers of the Company.
FAILURE TO PAY: Shall mean that the circumstances
described in either (i) or (ii) have occurred:
(i) Any Participant shall have notified Eaton and the
Trustee in writing that Eaton shall have failed to
pay to the Participant, when due, either directly or
by direction to the trustee of any trust holding
assets for the payment of benefits pursuant to the
Plan, at least 75% of any and all amounts which the
Participant was entitled to receive at any time in
accordance with the terms of the Plan, and that such
amounts remain unpaid. Such notice must set forth
the amount, if any, which was paid to the
Participant, and the amount which the Participant
believes he or she was entitled to receive under the
Plan. The failure to make such payment shall have
continued for a period of 30 days after receipt of
such notice by Eaton, and during such 30-day period
Eaton shall have failed to prove, by clear and
convincing evidence as determined by the Trustee in
its sole and absolute discretion, that such amount
was in fact paid or was not due and payable; or
<PAGE>
Page 4
(ii) More than two Plan Participants shall have notified
Eaton and the Trustee in writing that they have not
been paid when due, either directly or by direction
to the Trustee, amounts to which they are entitled
under the Plan and that such amounts remain unpaid.
Each such notice must set forth the amount, if any,
which was paid to the Participant, and the amount
which the Participant believes he or she was entitled
to receive under the Plan. Within 15 days after
receipt of each such notice, the Trustee shall
determine, on a preliminary basis, whether any
failure to pay such Participants has resulted in a
failure to pay when due, directly or by direction, at
least 75% of the aggregate amount due to all
Participants under all the Deferral Plans in any two-
year period, and that such amounts remain unpaid. If
the Trustee determines that such a failure has
occurred, then it shall so notify Eaton and the
Participants in writing within the same 15 day
period. Within a period of 20 days after receipt of
such notice from the Trustee, Eaton shall have failed
to prove by clear and convincing evidence, in the
sole and absolute discretion of the Trustee, that
such amount was paid or was not due and payable.
FIXED RATE INTEREST EQUIVALENT: With respect to any
Participant, the rate of interest as specified in the
Deferred Incentive Compensation Agreement between such
Participant and Eaton.
FUNDED AMOUNT: With respect to the Account of any
Participant, the value of any assets which have been
placed in a grantor trust established by the Company to
pay benefits with respect to that Plan Account, as
determined at the time initial payments are to be made
pursuant to the selections made by the Participants in
accordance with Section 9.03.
GOOD REASON: For purposes of this Plan, any Termination
of Employment by a Participant under the following
circumstances shall be for "Good Reason":
(i) without the Participant's express written consent,
the assignment to the Participant of any duties
inconsistent with the Participant's positions,
duties, responsibilities and status with Eaton
immediately prior to a Change in Control of Eaton,
or a change in the Participant's reporting
responsibilities, titles or offices as in effect
immediately prior to a Change in Control of Eaton,
or any removal of the Participant from or any
failure to re-elect the Participant to any of such
positions, except in connection with the termination
of the Participant's employment for Cause,
Disability or as a result of the Participant's
death;
(ii) a reduction by Eaton in the Participant's base
salary as in effect immediately prior to the Change
in Control of Eaton or as the same may be increased
from time to time; or the failure by Eaton to
increase such base salary each year after a Change
in Control of Eaton by an amount which at least
equals, on a percentage basis, the average annual
<PAGE> Page 5
percentage merit increase in the Participant's base
salary during the five (5) full calendar years
immediately preceding a Change in Control of Eaton;
(iii) a failure by Eaton to continue the Participant's
participation in Eaton's Executive Incentive
Compensation Plan (the "I.C. Plan"), Deferred
Incentive Compensation Plan (the "Deferred I.C.
Plan"), Limited Eaton Service Supplemental
Retirement Income Plan (the "Limited Service
Plan"), Strategic Incentive and Option Plan (the
"SIOP Plan") and Supplemental Benefit Plan
established by the Board as a result of the
limitations on pension benefits imposed by Section
415 of the Internal Revenue Code (the "Supplemental
Plan"), as each plan may be modified from time to
time but substantially in the form presently in
effect, on at least the basis as in effect
immediately prior to the Change in Control of Eaton
or to pay the Participant any amounts earned under
such plans in accordance with the terms of such plans.
(iv) the relocation of Eaton's principal executive
offices to a location outside Cuyahoga County, Ohio
or any county adjoining Cuyahoga County, Ohio, or
Eaton's requiring the Participant to be based any-
where other than Eaton's principal executive offices
or the location where the Participant is based
immediately prior to the Change in Control of Eaton
except for required travel on Eaton's business to
an extent substantially consistent with the Parti-
cipant's business travel obligations in effect
immediately prior to the Change in Control of Eaton,
or, in the event the Participant consents to any
such relocation of Eaton's principal executive
offices, the failure by Eaton to pay (or reimburse
the Participant for) all reasonable moving expenses
incurred by the Participant relating to a change of
the Participant's principal residence in connection
with such relocation and to indemnify the Partici-
pant against any loss (defined as the difference
between the actual sale price of such residence and
the higher of (a) the Participant's aggregate in-
vestment in such residence or (b) the fair market
value of such residence as determined by any real
estate appraiser designated by the Participant and
reasonably satisfactory to Eaton) realized in the
sale of the Participant's principal residence in
connection with any such change of residence;
(v) the failure by Eaton to continue to effect any
benefit or compensation plan (including but not
limited to the plans described under paragraph
(p)(iii) above), pension plan, life insurance plan,
health and accident plan or disability plan in which
the Participant is participating at the time of a
Change in Control of Eaton (or plans providing the
Participant with substantially similar benefits),
the taking of any action by Eaton which would ad-
versely affect the Participant's participation in or
materially reduce the Participant's benefits under
any of such plans or deprive the Participant of any
<PAGE>
Page 6
material fringe or personal benefit enjoyed by the
Participant at the time of the Change in Control of
Eaton, or the failure by Eaton to provide the
Participant with the number of paid vacation days to
which the Participant is then entitled on the basis
of years of service with Eaton in accordance with
Eaton's normal vacation policy in effect immediately
prior to the Change in Control of Eaton;
(vi) the failure of Eaton to obtain the assumption of
this Plan by any successor (whether direct or in-
direct, by purchase, merger, consolidation or other-
wise) to all or substantially all of the assets of
Eaton, by agreement in form and substance satis-
factory to the Participant, to expressly assume this
Plan and the obligations of Eaton hereunder; or
(vii) any purported termination of the Participant's
employment which is not effected pursuant to a
Notice of Termination satisfying the requirements of
a Notice of Termination as herein defined (and, if
applicable, the definition of "Cause" as herein
defined); and for purposes of this Plan, no such
purported termination shall be effective.
INCENTIVE COMPENSATION: The full amount of the annual
Incentive Compensation awarded to a Participant under the
Executive Incentive Compensation Plan.
INCENTIVE YEAR: An incentive year as defined under the
provisions of the Executive Incentive Compensation Plan.
LUMP SUM PAYMENT: Means an amount equal to the total of
the following amounts calculated as of the date of the
payment:
(i) The amount, if any, of the Participant's Periodic
Compensation then credited to his Account and
accrued and unpaid Treasury Bill Interest
Equivalents thereon; plus
(ii) The amount, if any, of the Participant's unpaid
Type A Retirement Compensation calculated in
accordance with Section 6.04 of the Plan and
assuming for purposes of the conversion calculation
that a Change in Control of Eaton has occurred
within the relevant time period so that Section
6.04(b) is applicable; plus
(iii) The amount, if any, payable as a lump sum in
relation to Type B Retirement Compensation,
calculated in accordance with Section 6.10(a)(ii)
of the Plan, assuming that the Type B Retirement
Compensation would be credited with Fixed Rate
Interest Equivalents from the date of the Lump Sum
Payment until paid over the fifteen-year period
following the date of such Lump Sum Payment.
In the event that a Participant or a Participant's
Designated Beneficiary has begun to receive benefit
installment payments under the Plan prior to the date of
the Lump Sum Payment, the amount of such Lump Sum shall be
<PAGE>
Page 7
equal to the present value of the remaining annual
payments which otherwise would have been made calculated
as described in this Section.
MEAN PRICE: The mean between the highest and lowest
quoted selling price of an Eaton Common Share on the New
York Stock Exchange List of Composite Transactions.
NORMAL RETIREMENT DATE: The date a Participant attains
age sixty-five (65).
NOTICE OF TERMINATION: Any termination of the
Participant's employment by Eaton for Cause or Disability
or by the Participant for Good Reason shall be
communicated by written Notice of Termination to the
Participant or Eaton, respectively. For purposes of this
Plan, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this
Plan relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for
termination of the Participant's employment under the
provision so indicated.
PARTICIPANT: An employee of Eaton in a key position
receiving benefits under the Executive Incentive
Compensation Plan and participating under the Plan.
PERIODIC COMPENSATION: That portion of a Participant's
Incentive Compensation which is deferred under the Plan
for payment over a period of five (5) years.
PERIODIC INSTALLMENTS: Equal monthly, quarterly,
semiannual or annual payments, over a period not to exceed
15 years, as determined by the Committee in its sole
discretion.
PLAN: The Deferred Incentive Compensation Plan pursuant
to which all or a portion of Incentive Compensation may be
deferred for later payment to a participant, as amended
and restated as of January 1, 1989.
RETIREMENT: The Termination of Employment of a
Participant who is age fifty-five (55) or older and who
has at least ten (10) years of service with Eaton or who
is age sixty-five (65) or older or under circumstances
making him eligible to receive pension payments under a
pension plan sponsored by Eaton commencing within sixty
(60) days of the date of such Termination of Employment.
RETIREMENT COMPENSATION: That portion of Incentive
Compensation deferred under the Plan for payment to a
Participant upon his Retirement which either shall be
Type A Retirement Compensation or Type B Retirement
Compensation as selected by the Participant in accordance
with Section 4.01.
TERMINATION AND CHANGE IN CONTROL: Shall mean the
termination of the employment of a Participant for any
reason whatsoever prior to a Change in Control, upon a
subsequent Change in Control or termination of the
employment of a Participant for any reason whatsoever
during the three-year period immediately following a
Change in Control.
<PAGE>
Page 8
TERMINATION OF EMPLOYMENT: The time when a Participant
shall no longer be employed by Eaton whether by reason of
Retirement, death, voluntary resignation (with or without
Good Reason), divestiture or closing of a business unit,
plant or facility, discharge (with or without Cause), or
such disability that, under the then current employment
practices of Eaton, the employment of the Participant is
deemed to have been terminated.
TREASURY BILL INTEREST EQUIVALENT: A rate of interest
equal to the quarterly average yield of 13-week U.S.
Government Treasury Bills.
TRUSTEE: Shall mean the trustee of any trust which holds
assets for the payment of the benefits provided by the
Plan.
TYPE A RETIREMENT COMPENSATION: As defined in
Section 6.01.
TYPE B RETIREMENT COMPENSATION: As defined in
Section 6.01.
IV. ELECTION TO DEFER
Section 4.01. With respect to Incentive Compensation for
each Incentive Year commencing in or after 1986, the
Participant shall be given the opportunity to elect, by
signing and delivering to the Committee a Deferred
Incentive Compensation Agreement, the manner and extent to
which the Participant's Incentive Compensation awarded in
respect to such Incentive Year shall be deferred under the
Plan, the allocation between Periodic Compensation and
Retirement Compensation and, with respect to the latter,
the allocation between Type A Retirement Compensation and
Type B Retirement Compensation.
Section 4.02. Not less than 10% of Incentive Compensation
awarded for any Incentive Year may be deferred under the
Plan.
Section 4.03. If a Participant elects to allocate a
portion of Incentive Compensation to both Periodic
Compensation and Retirement Compensation, the amount
allocated to each form of Compensation shall be not less
than 10% of the Incentive Compensation awarded for any
Incentive Year.
Section 4.04. To be in effect for an Incentive Year, a
Participant's election pursuant to Section 4.01 must be
completed on or before June 15 of such Incentive Year;
provided, however, that in order to select Type B
Retirement Compensation such election must be completed on
or before December 2 of the immediately preceding
Incentive Year. Only Participants who have elected to
allocate Deferred Incentive Compensation to Retirement
Compensation for the Incentive Year commencing in 1985
(under the Plan as in effect prior to the October 23, 1985
amendment and restatement thereof) shall be entitled to
allocate all or part of such Deferred Incentive
Compensation to Type B Retirement Compensation.
<PAGE>
Page 9
Section 4.05. Once a Participant has made an effective
election under Section 4.01 with respect to the deferral
and allocation of his Incentive Compensation, he may not
thereafter change that election or change the allocation
between Periodic Compensation and Retirement Compensation
or between Type A Retirement Compensation and Type B
Retirement Compensation.
V. PERIODIC COMPENSATION
Section 5.01. There shall be computed and credited
quarterly to the Participant's Account Treasury Bill
Interest Equivalents on all unpaid Periodic Compensation.
Section 5.02. Commencing in January of the second year
following the Incentive Year for which the Periodic
Compensation was credited to the Participant, the Periodic
Compensation shall be paid to the Participant in five (5)
equal annual installments; and, with each such
installment, there shall be paid to the Participant all
Treasury Bill Interest Equivalents credited to the
Participant and then unpaid.
Section 5.03. Upon Termination of Employment, any unpaid
Periodic Compensation and any unpaid Treasury Bill
Interest Equivalents credited thereon shall be paid to the
Participant, or his Beneficiary, as the case may be,
pursuant to the schedule for payment described in
Section 5.02.
VI. RETIREMENT COMPENSATION
A. General.
Section 6.01. The amount of Deferred Incentive
Compensation allocated to Retirement Compensation shall
correspond with the portion of the Incentive Compensation
award elected by the Participant pursuant to Section 4.01.
Such amount may be allocated between Type A Retirement
Compensation and, subject to Sections 6.08 and 6.09,
Type B Retirement Compensation. Amounts allocated as
Type A Retirement Compensation shall be converted into a
number of Contingent Share Units on such date or dates as
shall correspond with the determination and transfer of
Incentive Compensation ( it being understood that such
transfer may be the payment date of such Incentive
Compensation). The amoounts allocasted as Type A
Retirement Compensation shall be converted into a number
of Contingent Share Units based upon the average of the
Mean Prices for Eaton Common Shares for the twenty trading
days of the New York Stock Exchange during which Eaton
Common Shares were traded immediately following the end of
the Incentive Year in which the Incentive Compensation so
allocated was earned. Amounts allocated as Type B
Retirement Compensation shall not be converted into
Contingent Share Units but shall instead be credited with
Fixed Rate Interest Equivalents, compounded annually,
until paid.
<PAGE>
Page 10
Retirement Compensation which the Participant elects to
have converted into Contingent Share Units is referred to
herein as "Type A Retirement Compensation" and Retirement
Compensation to be credited with Fixed Rate Interest
Equivalents is referred to herein as "Type B Retirement
Compensation."
B. Provisions Regarding Type A Retirement Compensation.
Section 6.02. On each dividend payment date for Eaton
Common Shares, Dividend Equivalents shall be credited to
the Participant's Account with respect to all Contingent
Share Units then credited to such Account and shall be
converted into an appropriate number of Contingent Share
Units utilizing the procedures set forth in Section 6.01
but at the Mean Price on said dividend payment date.
Section 6.03. In determining the number of Contingent
Share Units to be credited to a Participant, whether by
reason of the conversion of Retirement Compensation to
Contingent Share Units or by reason of the conversion of
Dividend Equivalents to Contingent Share Units, such
number may be expressed in fractions of a Contingent Share
Unit computed to the nearest tenth. The number of
Contingent Share Units credited to a Participant shall be
appropriately adjusted to reflect any change in the
capitalization of Eaton resulting from a stock dividend,
stock split, reorganization, merger, consolidation,
recapitalization, combination, exchange of shares or any
other similar events.
Section 6.04. Upon Retirement or other Termination of
Employment of the Participant or upon any other
distribution of Type A Retirement Compensation, all
Contingent Share Units standing to his credit shall be
converted to an amount equal to the greater of the
following: (a) the product of the average of the Mean
Prices for an Eaton Common Share for the twenty (20)
trading days of the New York Stock Exchange during which
Eaton Common Shares were traded immediately preceding the
date of Retirement or other Termination of Employment or
distribution multiplied by the number of Contingent Share
Units then credited to the Participant's Account; (b) if a
Change in Control of Eaton shall have occurred at any time
within the period of thirty-six (36) months immediately
preceding the Participant's Retirement or other
Termination of Employment, the product of the highest of
the following:
(i) the highest price paid for an Eaton Common Share in
any tender offer in connection with the Change in
Control;
(ii) the price received for an Eaton Common Share in any
merger, consolidation or similar event in connection
with the Change in Control; or
(iii) the highest price paid for an Eaton Common Share as
reported in any Schedule 13D within the sixty (60)
day period immediately preceding the Change in
Control;
<PAGE>
Page 11
multiplied by the number of Contingent Share Units
credited to the Participant's Account at the time of his
Retirement or other Termination of Employment or
distribution; or (c) the total of all Incentive
Compensation allocated to Type A Retirement Compensation,
as determined prior to conversion to Contingent Share
Units pursuant to Section 6.01 hereof, and Treasury Bill
Interest Equivalents, compounded quarterly, in respect to
such Incentive Compensation for the period from the date
of allocation to the date of Retirement or other
Termination of Employment or distribution. The amount so
determined shall be credited to the Participant's Account
and held for later payment as set forth in Section 6.05.
Section 6.05. After the Retirement or other Termination
of Employment of a Participant or upon any other
distribution of Type A Retirement Compensation, and after
the calculation of the amount to be credited to the
Participant's Account as set forth in Section 6.04, the
Committee shall determine in its sole discretion the
method of payment of the Type A Retirement Compensation,
whether in a lump sum, to be paid within one year after
Retirement or other Termination of Employment or upon the
date of any of other distribution of such Compensation, or
Periodic Installments; provided, however, that in making
such determination the Committee may consider the wishes
and needs of the Participant or his Beneficiary, as the
case may be, with respect to the payment of Type A
Retirement Compensation.
Section 6.06. There shall be computed on a quarterly
basis and credited to the Participant's Account Treasury
Bill Interest Equivalents on the unpaid amount of Type A
Retirement Compensation determined pursuant to
Section 6.04 until such compensation is paid by Eaton.
Section 6.07. Commencing at such time as the Committee
shall determine, but not later than one (1) year following
Retirement or other Termination of Employment, the amount
determined in accordance with Section 6.04 shall be paid
to the Participant or his Beneficiary, as the case may be,
in accordance with the schedule for payment determined
under Section 6.05 and, with each Periodic Installment,
there shall be paid all Treasury Bill Interest Equivalents
credited to the Participant and then unpaid.
C. Provisions Regarding Type B Retirement Compensation.
Section 6.08. A Participant may defer as Type B
Retirement Compensation all or any portion of his future
Incentive Compensation which is earned during a period of
four (4) consecutive Incentive Years or for the period to
his Normal Retirement Date, if earlier; provided, however,
that with respect to any Incentive Year, the amount of
Incentive Compensation a Participant may defer as Type B
Retirement Compensation must be at least $5,000 and no
greater than the maximum amount for such Incentive Year
specified in such Participant's Deferred Incentive
Compensation Agreement; provided, further, that any
Incentive Compensation in excess of such annual maximum
limitation may be deferred as either Periodic Compensation
or Type A Retirement Compensation.
<PAGE>
Page 12
Section 6.09. Notwithstanding anything herein to the
contrary, Eaton shall be entitled to deny Participants the
opportunity to elect to defer future Incentive
Compensation as Type B Retirement Compensation for any
reason if such Incentive Compensation is not then subject
to an effective deferral election; provided, however, that
any such denial by Eaton of the opportunity to elect
deferrals shall apply to all Participants equally.
Section 6.10.
(a) Following Retirement, all Type B Retirement
Compensation then credited to a Participant's
Account, together with Fixed Rate Interest
Equivalents earned during the period of deferral,
shall be paid to the Participant or his Beneficiary
in fifteen (15) equal annual installments commencing
on the first day of February following the year in
which the Participant attains age 65; provided,
however, that after consideration of the wishes and
needs of the Participant or his Beneficiary, the
Committee may determine in its sole discretion (i) to
commence payment of the installments to any
Participant at an earlier date following Retirement;
(ii) to pay to any Participant the Type B Retirement
Compensation in a lump sum within one year following
Retirement; or (iii) to pay Type B Retirement
Compensation in a lump sum upon any Termination of
Employment by reason of divestiture or closing of a
business unit, subsidiary, plant or facility or to
provide that such Type B Retirement Compensation
shall be paid commencing on a date which is
subsequent to such Termination of Employment but not
later than the Participant's Normal Retirement Date.
For purposes of the payments under the foregoing
clauses (ii) and (iii), the amount of such lump sum
shall be equal to the then present value of the
fifteen (15) annual payments which otherwise would
have been made as calculated using an interest rate
equal to "Moody's Corporate Bond Yield Average -
Monthly (Average Corporates)" most recently published
by Moody's Investor Services, Inc. (or any successor
thereto) at the time of the calculation.
(b) The rate of each Participant's Fixed Rate Interest
Equivalent, as set forth in his Deferred Incentive
Compensation Agreement, is based on the assumption
that the Participant will defer a specified amount of
Incentive Compensation for four (4) consecutive years
or to his Retirement, if earlier. Notwithstanding
any provisions hereof to the contrary, upon a
Participant's Termination of Employment, other than
for Retirement and except as provided in
Section 6.10(c), all Type B Retirement Compensation
then credited to his or her Account shall be credited
only with Treasury Bill Interest Equivalents,
compounded quarterly, for the actual period of
deferral until paid in lieu of the Fixed Rate
Interest Equivalents otherwise credited to Type B
Retirement Compensation; provided, however, that the
Committee may determine in its sole discretion that
all Type B Retirement Compensation credited to a
Participant's Account shall continue to be credited
<PAGE>
Page 13
with Fixed Rate Interest Equivalents until paid.
Upon such Termination of Employment, payment of the
amounts credited to a Participant's Account shall be
made as determined by the Committee (i) in Periodic
Installments commencing within one year following
such Termination of Employment or at such other date
not later than first February following the
Participant's Normal Retirement Date as determined by
the Committee, or (ii) in a lump sum within one year
following such Termination of Employment or at such
other date not later than the first February
following the Participant's Normal Retirement Date as
determined by the Committee.
(c) Notwithstanding anything in Section 6.10(b) to the
contrary, (i) if a Participant's Termination of
Employment occurs within five (5) years after a
Change in Control of Eaton and such Termination of
Employment is by Eaton without Cause or by the
Participant for Good Reason or for Retirement, all
Type B Retirement Compensation then credited to the
Participant's Account shall be credited with the
Fixed Rate Interest Equivalents and held under the
Plan as elected by the Participant in his Deferred
Incentive Compensation Agreement; (ii) if within
five (5) years after a Change in Control of Eaton a
Participant is not permitted to complete the deferral
of Incentive Compensation until the Participant's
Retirement because of any amendment or termination of
the Plan, all Type B Retirement Compensation then
credited to the Participant's Account shall be
credited with the Fixed Rate Interest Equivalents and
held under the Plan as elected by the Participant in
his Deferred Incentive Compensation Agreement; or
(iii) if a Participant's Termination of Employment is
caused by any divestiture or closing of a business
unit, subsidiary, plant or facility, the Compensation
Committee of the Board may determine in its sole
discretion that all Type B Retirement Compensation
then credited to the Participant's Account shall be
credited with the Fixed Rate Interest Equivalents
until paid as provided under Section 6.10(a).
VII. AMENDMENT AND TERMINATION
Section 7.01. Eaton fully expects to continue the Plan
but it reserves the right, except as otherwise provided
herein, at any time or from time to time, by action of the
Compensation Committee of the Board, to modify or amend
the Plan, in whole or in part, or to terminate the Plan,
in whole or in part, at any time and for any reason,
including, but not limited to, adverse changes in the
federal tax laws; provided howver, that no amendment may
be made to the provisions of the Plan which comply with
Rule l6b-3(c)(2)(ii)(A) of the Securities Efxchange Act of
1934, as amended, more than once every six months, other
than to comport with changes in the Internal Revenue Code,
the Employee Retirement Income Security Act, or the rules
thereunder.
<PAGE>
Page 14
Section 7.02. In the event of any termination of the Plan
which results in the Participants being unable to have any
future Incentive Compensation allocated as Type B
Retirement Compensation, the amount of all Type B
Retirement Compensation credited to a Participant's
Account at the date of such Plan termination shall be
converted to Type A Retirement Compensation, effective
retroactively to the date such Retirement Compensation was
allocated pursuant to Section 6.01, and either shall be
paid to the Participant or continue to be held under the
Plan as elected by the Participant in his Deferred
Incentive Compensation Agreement, except for 1985
Incentive Compensation, if any, deferred as Type B
Retirement Compensation which shall continue to be held
under the Plan. Notwithstanding the foregoing, in the
event of a termination of the Plan within five (5) years
after a Change in Control of Eaton, all Type B Retirement
Compensation then credited to a Participant's Account
together with Fixed Rate Interest Equivalents earned
during the period of deferral shall not be converted to
Type A Retirement Compensation but shall be held under the
Plan as elected by the Participant in his Deferred
Incentive Compensation Agreement. No amendment to, or
termination of, the Plan after a Change in Control of
Eaton shall modify this provision or any provision hereof
relating to a Change in Control of Eaton or the rights of
a Participant in effect under the Plan immediately prior
to such Change in Control of Eaton. Notwithstanding
anything herein to the contrary, no amendment,
modification or termination of the Plan shall, without the
consent of the Participant, alter or impair this provision
or any of the Participant's rights under the Plan with
respect to benefits accrued prior to such amendment,
modification or termination.
VIII. ADMINISTRATION
Section 8.01. The Plan shall be administered by the
Committee in accordance with rules of general application
for the administration of the Plan as the Committee may,
from time to time, adopt. The Committee shall interpret
the provisions of the Plan where necessary and may adopt
procedures for the administration of the Plan which are
consistent with the provisions of the Plan and the rules
adopted by the Committee.
Section 8.02. Each Participant or Beneficiary must claim
any benefit to which he may be entitled under the Plan by
a written notification to the Committee. If a claim is
denied, it must be denied within a reasonable period of
time in a written notice stating the specific reasons for
the denial.
The claimant may have a review of the denial by the
Committee by filing a written notice with the Committee
within sixty (60) days after the notice of the denial of
his claim.
The written decision by the Committee with respect to the
review must be given within one hundred and twenty (120)
days after receipt of the written request.
<PAGE>
Page 15
IX. PAYMENTS TO PARTICIPANTS
Section 9.01.
Notwithstanding anything herein to the contrary, upon the
occurrence of a Termination and Change in Control, the
Participants shall be entitled to receive from the Company
the payments as provided in Section 9.03 .
Section 9.02.
Notwithstanding anything herein to the contrary, upon the
occurrence of a Failure to Pay, each Participant covered
by the situation described in clause (i) of the definition
of Failure to Pay, or each of the Participants in the
event of a situation described in clause (ii) of that
definition, as the case may be, shall be entitled to
receive from the Company the payments as provided in
Section 9.03.
Section 9.03.
No later than the first to occur of (i) one year following
the date hereof for any current Participant, (ii) a
Termination and Change in Control or a Failure to Pay for
any current Participant or (iii) the date upon which any
person who is not a current Participant upon the date
hereof becomes a Participant, each Participant shall
select one of the payment alternatives set forth below
with respect to that portion of the Participant's Plan
Account equal to the full amount of the Account minus the
Funded Amount, and with respect to that portion of the
Account equal to the Funded Amount. The payment
alternatives selected with respect to the two portions of
the Account need not be the same. The payment
alternatives are as follows:
(a) a lump sum payment within 30 days following the
Termination and Change in Control or Failure to Pay,
as the case may be;
(b) payment in monthly, quarterly, semiannual or annual
payments, over a period not to exceed fifteen years,
as selected by the Participant at the time provided
in the first paragraph of this Section 9.03,
commencing within 30 days following the Termination
and Change in Control or Failure to Pay, as the case
may be, which are substantially equal in amount or in
the number of share units being valued and paid,
except that earnings attributable to periods
following Termination and Change in Control or
Failure to Pay shall be included with each payment.
Payment shall be made to each such Participant in
accordance with his or her selected alternative as
provided in Sections 9.01 and 9.02.
X. MISCELLANEOUS
Section 10.01. Each Participant shall have the right, by
written instruction to the Committee, on a form supplied
by the Committee, to designate one or more primary and
contingent beneficiaries (and the proportion to be paid to
<PAGE>
Page 16
each, if more than one is designated) to receive his
Deferred Incentive Compensation upon his death. Any such
designation shall be revocable by the Participant.
Section 10.02. The Committee may, in its sole discretion,
change the amount of the Periodic Installments or the
number of years over which the Periodic Installments are
to be paid or permit the payment of any Deferred Incentive
Compensation at any date or dates which may be earlier
than the payment date or dates provided under the Plan.
The Committee may consider the needs and desires of the
participant or beneficiary in making this decision. The
determination of the Committee shall be final and
conclusive upon Eaton, the Participant and the
Beneficiary. Any Type B Retirement Compensation paid
pursuant to this Section 10.02 to a Participant who would
then be eligible to terminate his employment for
Retirement shall be credited with the Fixed Rate Interest
Equivalent on the amount so paid. Any Type B Retirement
Compensation paid to a Participant who is not then
eligible to terminate his employment for Retirement shall
be credited only with the Treasury Bill Interest
Equivalent.
Section 10.03. All payments under the Plan shall be
subject to such taxes (federal, state or local) as may be
due thereon and the determination by the Committee as to
withholding with respect thereto shall be binding upon the
Participant and his Beneficiary.
Section 10.04. If any Participant under the Plan is a
member of the Committee, he shall not participate as a
member of the Committee in any determination under the
Plan relating to his Deferred Incentive Compensation.
Section 10.05. All action of the Committee hereunder may
be taken with or without a meeting. If taken without a
meeting, the action shall be in writing and signed by a
majority of the members of the Committee and if taken with
a meeting, a majority of the Committee shall constitute a
quorum for any such action.
Section 10.06. Subject to any federal statute to the
contrary, no right or benefit under the Plan shall be
subject to anticipation, alienation, sale, assignment,
pledge, encumbrance, or charge, and any attempt to
anticipate, alienate, sell, assign, pledge, encumber, or
charge any right or benefit under the Plan shall be void.
No right or benefit hereunder shall in any manner be
liable for or subject to the debts, contracts,
liabilities, or torts of the person entitled to such
benefits. If the Participant or Beneficiary shall become
bankrupt, or attempt to anticipate, alienate, sell,
assign, pledge, encumber, or charge any right hereunder,
then such right or benefit shall, in the discretion of the
Company, cease and terminate, and in such event, the
Company may hold or apply the same or any part thereof for
the benefit of the Participant or his spouse, children, or
other dependents, or any of them, in such manner and in
such amounts and proportions as the Company may deem
proper.
<PAGE>
Page 17
Section 10.07. The obligations of Eaton to make payments
hereunder shall constitute a liability of Eaton to the
Participant. Eaton may, but shall not be required to,
establish or maintain any special or separate fund, or
purchase or acquire life insurance on a Participant's
life, or otherwise to segregate assets to assure that such
payments shall be made.
Section 10.08. The Plan shall not be deemed to constitute
a contract of employment between Eaton and a Participant.
Neither shall the execution of this Plan nor any action
taken by Eaton pursuant to this Plan be held or construed
to confer on a Participant any legal right to be continued
as an employee of Eaton, in an executive position or in
any other capacity with Eaton whatsoever.
Section 10.09. Obligations incurred by Eaton pursuant to
this Plan shall be binding upon and inure to the benefit
of Eaton, its successors and assigns, and the Participant
or his Beneficiary.
Section 10.10. This Plan shall be construed and governed
in accordance with the law of the State of Ohio.
Section 10.11. The masculine gender, where appearing in
the Plan, shall be deemed to include the feminine gender,
and the singular may include the plural, unless the
context clearly indicates to the contrary.
Section 10.12. All headings used in the Plan are for
convenience of reference only and are not part of the
substance of the Plan.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (b)
Executive Strategic Incentive Plan
(amended and restated as of June 21, 1994 and July 25, 1995)
1. PURPOSE
The purpose of the Executive Strategic Incentive Plan (the
"Plan") is to promote the growth and profitability of Eaton
Corporation (the "Company") through the granting of
incentives intended to motivate executive officers of the
Company to achieve demanding long-term corporate objectives
and to attract and retain executive officers of outstanding
ability.
2. ADMINISTRATION
Except as otherwise expressly provided herein, the Plan
shall be administered by the Compensation Committee (the
"Committee") of the Company's Board of Directors which shall
consist of at least three directors of the Company selected
by the Board.
Except as otherwise expressly provided herein, the Committee
shall have complete authority to: (i) interpret all
provisions of the Plan consistent with law; (ii) designate
the executives to participate under the Plan; (iii)
determine the incentive targets and performance objectives
applicable to participants; (iv) adopt, amend and rescind
general and special rules and regulations for the Plan's
administration; and (v) make all other determinations
necessary or advisable for the administration of the Plan.
3. ELlGlBlLITY
All officers of the Company shall be eligible to participate
in the Plan. The Committee shall have sole discretion in
determining the other executives who shall participate under
the Plan for any Award Period.
4. INCENTIVE TARGETS
(A) Establishment of Incentive Amounts
Individual Incentive Amounts for each participant with
respect to each Plan Award Period (as defined below)
shall be determined by multiplying the Incentive
Percentages adopted by the Committee which are
applicable to such participant, and which may not
exceed 120%, by the amount of such participant's
average year-end salary range midpoint for the Award
Period. Notwithstanding the foregoing, the Committee
may, in its sole discretion, use a different method
for establishing incentive targets for participants
under the Plan.
<PAGE>
Page 2
(B) Award Periods
Each Award Period shall be the four-calendar year
period commencing as of the first day of the calendar
year in which the performance objectives are
established for the Award Period as described in
Section 4(C). A new Award Period shall commence as of
the first day of each calendar year, unless otherwise
specified by the Committee.
(C) Establishment of Company Performance Objectives
As soon as practicable at the beginning of each Award
Period, threshold, target, and maximum Company
performance objectives for such Award Period shall be
established by the Committee. The performance
objectives shall be based upon cash flow return on
gross capital. Within sixty (60) days after the
performance objectives have been established by the
Committee, each participant will be provided with
written notice of his or her established objectives.
In its sole discretion, the Committee may modify
previously established performance objectives as a
result of any change in conditions, the occurrence of
any events or other factors which make such objectives
unsuitable. Notwithstanding the foregoing, after a
Change in Control (as hereinafter defined), neither
the Committee nor the Board shall have the authority
to modify performance objectives in any manner which
could prove detrimental to the interests of the Plan's
participants.
(D) Determination of Payments
As promptly as practicable after the end of each Award
Period, the Committee shall fix the level of
attainment of the Company's performance for the Award
Period and approve award payments under the Plan which
shall not exceed: (i) 50% of the participant's
Incentive Amount upon attainment of the threshold
performance objective; (ii) 100% of the participant's
Incentive Amounts upon attainment of the target
performance objective; and (iii) 200% of the
participant's Incentive Amount upon attainment of the
maximum performance objective; provided, however, that
if the Company's performance does not place it within
the top 25%, using equivalent measurements of
performance, of a group of peer companies selected by
the Committee in its sole discretion, an award payment
equal to 150% of the participant's Incentive Amount
shall instead be paid upon the attainment of maximum
performance. Payments ranging from 50% to 2000% of
the Incentive Amounts will be determined by the
Committee in respect of an Award Period for the
attainment of performance objectives between either
threshold and target or target and maximum. Such
amounts, if any, shall be paid to the participant in
cash within ninety (90) days after the end of each
Award Period, unless the participant made an
irrevocable election to defer all or part of the
amount of his or her award payment pursuant to any
long term incentive compensation deferral plan adopted
by the Company and made available for amounts earned
hereunder.
<PAGE> Page 3
5. PRORATA PAYMENTS
A participant must be employed by the Company or one of its
subsidiaries at the end of an Award Period in order to be
entitled to a payment in respect to such Award Period;
provided, however, that a payment, prorated for the
participant's length of service during the Award Period, may
be authorized by the Committee, in its sole discretion, in
the event the employment of a participant terminates before
the end of an Award Period due to death, permanent
disability, normal or early retirement, closure or
divestiture of an Eaton facility or any other reason.
Notwithstanding the foregoing, upon any termination of the
Plan by the Committee during the term of any Award Period,
payments to all participants will be made, prorated for each
participant's length of service during the Award Period
prior to the date of Plan termination.
6. OTHER PROVISIONS
(A) Adjustments upon Certain Changes
In the event of changes to the structure or corporate
organization of the Company's businesses which affect
the participants and/or the performance prospects of
the Company, the Committee may make appropriate
adjustments to individual participant Incentive
Targets or to the established performance objectives
for incomplete Award Periods. Adjustments under this
Section 6 shall be made by the Committee, whose
determination as to what adjustments shall be made,
and the extent thereof, shall be final, binding and
conclusive. Notwithstanding the foregoing, after a
Change in Control, neither the Committee nor the Board
shall have the authority to change established
Performance Objectives in any manner which could prove
detrimental to the interests of the participant.
(B) Change in Control Defined
For purposes of the Plan, a Change in Control shall be
deemed to have occurred if:
(i) a tender offer shall be made and consummated for
the ownership of 25% or more of the outstanding
voting securities of the Company,
(ii) the Company shall be merged or consolidated with
another Corporation and as a result of such
merger or consolidation less than 75% of the
outstanding voting securities of the surviving
or resulting corporation shall be owned in the
aggregate by the former shareholders of the
Company as the same shall have existed
immediately prior to such merger or
consolidation,
(iii) the Company shall sell substantially all of its
assets to another corporation which is not a
wholly-owned subsidiary of the Company,
<PAGE>
Page 4
(iv) a "person" within the meaning of Section 3(a)(9)
or of Section 13(d)(3) of the Securities
Exchange Act of 1934 (as in effect on the
effective date of the Plan) shall acquire 25% or
more of the outstanding voting securities of the
Company (whether directly, indirectly,
beneficially or of record). For purposes of the
Plan, ownership of voting securities shall take
into account and shall include ownership as
determined by applying the provisions of Rule
13d-3(d)(1)(I) under the Securities Exchange Act
of 1934 (as in effect on the effective date of
the Plan), or
(v) during any period of two consecutive years,
individuals who at the beginning of such period
constitute the Board cease for any reason to
constitute at least a majority thereof unless
the election, or nomination for election by
Eaton's shareholders, of each new director was
approved by a vote of at least two-thirds of the
directors then still in office who were directors
at the beginning of the period.
(C) Non-Transferability
No right to payment under the Plan shall be subject to
debts, contract liabilities, engagements or torts of
the participant, nor to transfer, anticipation,
alienation, sale, assignment, pledge or encumbrance by
the participant except by will or the law of descent
and distribution or pursuant to a qualified domestic
relations order.
(D) Compliance with Law and Approval of Regulatory Bodies
No payment shall be made under the Plan except in
compliance with all applicable federal and state laws
and regulations including, without limitation,
compliance with tax requirements.
(E) No Right to Employment
Neither the adoption of the Plan nor its operation,
nor any document describing or referring to the Plan,
or any part thereof, shall confer upon any participant
under the Plan any right to continue in the employ of
the Company or any subsidiary, or shall in any way
affect the right and power of the Company or any
subsidiary to terminate the employment of any
participant under the Plan at any time with or without
assigning a reason therefore, to the same extent as
the Company might have done if the Plan had not been
adopted.
(F) Interpretation of the Plan
Headings are given to the sections of the Plan solely
as a convenience to facilitate reference; such
headings, numbering and paragraphing shall not in any
case be deemed in any way material or relevant to the
<PAGE>
Page 5
construction of the Plan or any provisions thereof.
The use of the masculine gender shall also include
within its meaning the feminine. The use of the
singular shall also include within its meaning the
plural and vice versa.
(G) Amendment and Termination
The Committee may at any time suspend, amend or
terminate the Plan. Notwithstanding the foregoing,
upon the occurrence of a Change in Control, no
amendment, suspension or termination of the Plan
shall, without the consent of the participant, alter
or impair any rights or obligations under the Plan
with respect to such participant.
(H) Effective Date of the Plan
The Plan was adopted by the Board on April 24, 1991
but the effective date of the Plan shall be January 1,
1991. The Plan was amended and restated as of June
21, 1994 and July 25, 1995.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (f)
Incentive Compensation Deferral Plan
(amended and restated as of September 24, 1996)
I. Purpose
The Incentive Compensation Deferral Plan (the "Plan") enables
employees who contribute significantly to the success of Eaton
Corporation (the "Company") to defer receipt of awards earned
under incentive compensation plans. The purpose of the Plan is
to help attract and retain highly qualified individuals, to pro-
vide an incentive to those individuals to improve the profit-
ability, competitiveness and growth of the Company, and to help
align their interests with those of the shareholders.
II. Eligibility
All elected officers of the Company are eligible to participate
in the Plan with respect to amounts earned under the Executive
Strategic Incentive Plan or any other Eaton incentive plan made
available for deferral hereunder by the Committee. Such other
executives as determined by the Committee shall also be eligible
to participate in the Plan with respect to any amounts earned
under any Eaton incentive compensation plan made available for
deferral hereunder by the Committee, including the Senior
Operations Managers Plan.
III. Definitions
The terms used herein shall have the following meanings:
Account - A bookkeeping account established by Eaton for a
Participant to which may be credited Deferred Incentive
Compensation and earnings or losses thereon.
Agreement - A written agreement between Eaton and a Participant
deferring the receipt of Incentive Compensation and indicating
the term of the deferral.
Beneficiary - The person or entity designated in writing by the
Participant and delivered to the Committee. If that person or
entity is not living or in existence at the time any unpaid
balance of Deferred Incentive Compensation becomes due after the
death of a Participant, the term "Beneficiary" shall mean the
Participant's estate or legal representative or any person, trust
or organization designated in such Participant's will.
Board - The Board of Directors of Eaton Corporation.
Change in Control of Eaton - Shall be deemed to occur if (i) a
tender offer shall be consummated for 25% or more of the com-
bined voting power of Eaton's then outstanding voting securities,
(ii) Eaton shall be merged or consolidated with another corpora-
tion and as a result less than 75% of the outstanding voting
securities of the resulting corporation shall be owned by the
former shareholders of Eaton, other than affiliates (within the
meaning of the Securities Exchange Act of 1934 (the "Exchange
Act")) of any party to such merger or consolidation, as the same
shall have existed immediately prior to such merger or consoli-
dation, (iii) Eaton shall sell substantially all of its assets
<PAGE>
Page 2
to another corporation which is not a wholly owned subsidiary of
Eaton, (iv) any "person" (as such term is used in Sections
3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, of 25% or more of the
combined voting power of Eaton's then outstanding securities; or
(v) during any period of two consecutive years, individuals who
at the beginning of that period constitute the Board cease to
constitute at least a majority thereof unless the election, or
the nomination for election by Eaton's shareholders, of each new
director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the begin-
ning of the period. For purposes of this Plan, ownership of
voting securities shall take into account and include ownership
as determined by applying the provisions of Rule 13d-3(d)(1)(i)
of the Exchange Act (as then in effect).
Committee - The Compensation Committee of the Board.
Common Share Retirement Compensation - Retirement Compensation
which is converted into share units in accordance with Article
VII.
Deferral Plans - Shall mean the Deferred Incentive Compensation
Plan, the Strategic Incentive and Option Plan and this Plan.
Deferred Incentive Compensation - That portion of Incentive
Compensation deferred pursuant to the Plan.
Eaton - Eaton Corporation, an Ohio corporation, and its
subsidiaries and successors and assigns.
Eaton Common Shares - The common shares of Eaton Corporation with
a par value of fifty cents each.
Failure to Pay - Shall mean that the circumstances described in
either (i) or (ii) have occurred:
(i) Any Participant shall have notified the Company in
writing that the Company shall have failed to pay to
the Participant, when due, either directly or by
direction to the trustee of any trust holding assets
for the payment of benefits pursuant to the Plan, at
least 75% of any and all amounts which the Participant
was entitled to receive at any time in accordance with
the terms of the Plan, and that such amounts remain
unpaid. Such notice must set forth the amount, if
any, which was paid to the Participant by the Company,
and the amount which the Participant believes he or
she was entitled to receive under the Plan. Subject
to Section __, the failure to make such payment shall
have continued for a period of 30 days after receipt
of such notice by the Company, and during such 30-day
period the Company shall have failed to prove, by
clear and convincing evidence as determined by the
Trustee in its sole and absolute discretion, that such
amount was in fact paid or was not due and payable; or
(ii) More than two Plan Participants shall have notified
the Company in writing that they have not been paid,
when due, either directly or by direction to the
Trustee, amounts to which they are entitled under the
Plan, and that such amounts remain unpaid. Each such
notice must set forth the amount, if any, which was
<PAGE>
Page 3
paid to the Participant by the Company, and the amount
which the Participant believes he or she was entitled
to receive under the Plan. Within 15 days after re-
ceipt of each such notice, the Trustee shall determine,
on a preliminary basis, whether any failure to pay such
Participants has resulted in a failure to pay when due
at least 75% of the aggregate amount due to all Parti-
cipants under all the Deferral Plans in any two-year
period, and that such amounts remain unpaid. If the
Trustee determines that such a failure has occurred,
then it shall so notify the Company and the Partici-
pants in writing within the same 15 day period.
Within a period of 20 days after receipt of such notice
from the Trustee, the Company shall have failed to
prove by clear and convincing evidence, in the sole
and absolute discretion of the Trustee, that
such amounts were paid or were not due and
payable.
Funded Amount - Shall mean with respect to the Account of any
Participant, the value of any assets which have been placed in a
grantor trust established by the Company to pay benefits with
respect to that Plan Account, as determined at the time initial
payments are to be made pursuant to the selections made by the
Participants in accordance with Section 10.03.
Incentive Compensation - Any payment awarded to a Participant
under any Incentive Compensation Plan.
Incentive Compensation Plan - Any incentive compensation plan
approved by either the Board or its Compensation Committee.
Interest Rate Retirement Compensation - Retirement Compensation
which is credited with Treasury Note Based Interest in accordance
with Article VII.
Participant - An employee of Eaton who elects to defer receiving
benefits under an Incentive Compensation Plan designated by the
Committee as eligible for deferral hereunder.
Periodic Installments - Monthly, quarterly, semiannual or annual
payments, over a period not to exceed fifteen years, as determined
by the Committee in its sole discretion, which are substantially
equal in amount, or, in the case of Common Share Retirement
Compensation, substantially equal in the number of share units
being valued and paid or the number of Eaton Common Shares being
distributed, except that earnings attributable to periods
following Retirement or Termination of Employment shall be
included with each payment.
Plan - This Incentive Compensation Deferral Plan pursuant to
which Incentive Compensation may be deferred for later payment.
Retirement - The Termination of Employment of a Participant who
is age fifty-five or older and who has at least ten years of
service with Eaton, who is age sixty-five or older or who is
eligible to receive pension payments under a pension plan
sponsored by Eaton commencing within sixty days of the date of
such Termination of Employment, or who is approved by the Com-
mittee to qualify as a retirement.
<PAGE>
Page 4
Retirement Compensation - That portion of Incentive Compensation
deferred for payment at Retirement, at one year following
Retirement, or in Periodic Installments commencing after
Retirement.
Short-Term Compensation - That portion of Incentive Compensation
deferred for payment as determined by the Committee in accordance
with Article V.
Termination and Change in Control - Shall mean the termination of
the employment of a Participant for any reason whatsoever prior
to a Change in Control if there is a subsequent Change in Control
or termination of the employment of a Participant for any reason
whatsoever during the three-year period immediately following a
Change in Control.
Termination of Employment - The time when a Participant shall no
longer be employed by Eaton, whether by reason of retirement,
death, voluntary resignation, divestiture, discharge (with or
without cause), or such disability that, under the then current
employment practices of Eaton, the employment of the Participant
is deemed to have been terminated.
Treasury Bill Interest Equivalent - A rate of interest equal to
the quarterly average yield of 13-week U.S. Government Treasury
Bills.
Treasury Note Based Interest - A rate of interest equal to the
average yield of 10-year U.S. Government Treasury Notes plus 300
basis points.
Trustee - Shall mean the trustee of any trust which holds assets
for the payment of the benefits provided by the Plan.
Variable-Term Compensation - That portion of Incentive Compensa-
tion deferred for payment to a Participant until such time as it
is determined by the Committee in its sole discretion that such
compensation can be paid in whole or in part without exceeding
the deduction limit imposed by Section 162(m) of the Internal
Revenue Code or without being subject to that section.
IV. Election to Defer
Section 4.01 Deferral Options
With respect to any plan eligible for the deferral of Incentive
Compensation hereunder, for each award period ending during or
after 1994 (an "Award Period"), the Participant may elect to
defer the receipt of all or part of his or her Incentive Compen-
sation as Short-Term Compensation, Variable-Term Compensation or
Retirement Compensation. Once a Participant has made an effec-
tive election, he or she may not thereafter change that election
or change any allocation between Short-Term Compensation,
Variable-Term Compensation or Retirement Compensation.
Section 4.02 Amount Deferred
Not less than 10% of Incentive Compensation awarded for any Award
Period may be deferred under the Plan, except that Variable-Term
Compensation may be less than 10% of the Incentive Compensation
awarded for any Award Period. If a Participant elects to allo-
<PAGE>
Page 5
cate a portion of Incentive Compensation to both Short-Term
Compensation and Retirement Compensation, the amount allocated to
each shall be not less than 10% of the Incentive Compensation
awarded for any Award Period.
Section 4.03 Election Deadline
To be in effect for an Award Period, a Participant's election
must be completed, signed and filed with the Committee on or
before such date as is necessary to defer an award for Federal
income tax purposes.
V. Short-Term Compensation
If elected by a Participant, payment of the amount of Incentive
Compensation allocated to Short-Term Compensation will be
deferred. Treasury Bill Interest Equivalents shall be credited
quarterly to the Participant's Short-Term Compensation Account
until such compensation is paid to the Participant. Short-Term
Compensation, together with credited Treasury Bill Interest
Equivalents, shall be paid to the Participant in a lump sum or in
not more than five annual installments as determined by the
Committee.
VI. Variable-Term Compensation
Section 6.01 Amount and Duration
Variable-Term Compensation is a response to amendments to the
Internal Revenue Code which limit the deductibility of individual
annual compensation in excess of $1 million. Only those
Participants whose total taxable compensation is likely to exceed
that amount will be offered the opportunity to select Variable-
Term Compensation.
If elected by a Participant, the amount of Incentive Compensation
allocated to Variable-Term Compensation will be the amount (if
any) determined by the Committee in its sole discretion which,
when added to other compensation of the Participant, exceeds the
deductible compensation limit imposed by Internal Revenue Code
Section 162(m). Amounts allocated as Variable-Term Compensation
shall be credited to the Account of the Participant on the date
such amounts would have been paid if there had been no valid
deferral election. Variable-Term Compensation will be deferred
until such time as the Committee, in its sole discretion, shall
determine that it, together with the earnings thereon, can be
paid in whole or in part without exceeding the limit imposed by
Section 162(m).
Section 6.02 Earnings
The Variable-Term Compensation Account shall be credited with
Treasury Note Based Interest, compounded quarterly until paid.
VII. Retirement Compensation
Section 7.01 Duration
If elected by a Participant, payment of the amount of Incentive
Compensation allocated to Retirement Compensation will be de-
ferred to Retirement or to one year after Retirement, but subject
to Committee discretion as to date of payment as provided herein.
Retirement Compensation shall be credited to the Participant on
<PAGE>
Page 6
the date such amount would have been distributed to him or her if
there had been no valid deferral election by establishing an
Account in the Participant's name.
Section 7.01 Common Share Retirement Compensation
Between fifty percent and one hundred percent, as elected by the
Participant, of the amount allocated to Retirement Compensation
shall be credited to Common Share Retirement Compensation, and
the balance shall be credited to Interest Rate Retirement
Compensation.
Common Share Retirement Compensation shall be converted into a
number of share units based upon the average of the mean prices
for Eaton Common Shares for the twenty trading days of the New
York Stock Exchange during which Eaton Common Shares were traded
immediately following the end of the incentive period in which
the Incentive Compensation to be deferred was earned. On each
Eaton Common Share dividend payment date, dividend equivalents
equal to the actual Eaton Common Share dividends paid shall be
credited to the share units in the Participant's Account, and
shall in turn be converted into share units utilizing the mean
Eaton Common Share price on the dividend payment date.
The maximum, cumulative number of share units that may be
allocated to all Participants is 2 million.
Allocations to Common Share Retirement Compensation are subject
to approval of the Plan by the Company's shareholders and to the
share unit limitation provided above. If that approval is not
obtained, or if that limitation would be exceeded, then those
allocations shall instead be made to Interest Retirement
Compensation.
Upon payment of Common Share Retirement Compensation in Eaton
Common Shares, the share units standing to the Participant's
credit shall be converted to the same number of Eaton Common
Shares for distribution to the Participant.
Upon payment of Common Share Retirement Compensation in cash,
including any installment thereof in the case of Periodic
Installments, the share units required to make the cash payment
shall be converted to an amount equal to the greater of: (a) the
product of the average of the mean prices for an Eaton Common
Share for the last twenty trading days of the New York Stock
Exchange during which Eaton Common Shares were traded in the
month immediately preceding the month in which the date of pay-
ment occurs, multiplied by the number of share units then
credited to the Participant's Account, or (b) if a Change in
Control of Eaton shall have occurred at any time within thirty-
six months immediately preceding the payment, the product of the
number of share units credited to the Participant's Account at
the time of payment multiplied by the highest of (i) the highest
price paid for an Eaton Common Share in any tender offer in
connection with the Change in Control of Eaton; (ii) the price
received for an Eaton Common Share in any merger, consolidation
or similar event in connection with the Change in Control of
Eaton; or (iii) the highest price paid for an Eaton Common Share
as reported in any Schedule 13D within the sixty-day period
immediately preceding the Change in Control of Eaton.
<PAGE>
Page 7
Section 7.03 Interest Rate Retirement Compensation
Retirement Compensation not credited to Common Share Retirement
Compensation shall be credited to Interest Rate Retirement
Compensation. Interest Rate Retirement Compensation shall be
credited to the Interest Rate Retirement Compensation Account,
which shall earn Treasury Note Based Interest, compounded
quarterly, until paid.
Section 7.04 Periodic Installments
Upon the death of a Participant who has commenced receiving
Periodic Installments, the entire remaining amount of his or her
Retirement Compensation shall be distributed to the Participant's
Beneficiary. Such distributions may be made either in a lump sum
or in installments in such amounts and over such periods, not
exceeding the remaining number of annual installments form the
date of death of the Participant, as the Committee may direct in
its sole discretion.
Section 7.05 Termination of Employment
The Retirement Compensation Account of a Participant whose
employment terminates for reasons other than Retirement shall be
distributed in a lump sum or in Periodic Installments, as the
Committee may determine in its sole discretion. The lump sum
payment shall be made, or the Periodic Installments shall
commence, as the Committee may determine in its sole discretion,
no later than the February 1 of the calendar year immediately
after the calendar year that includes the earliest of: (i) the
Participant's death, (ii) the Participant's attainment of age 55
if he or she was credited with at least 10 years of service for
Eaton (or an affiliate of Eaton), (iii) the Participant's attain-
ment of age 65, or (iv) the fifth anniversary of the Partici-
pant's termination of employment.
Earnings shall be credited on undistributed Retirement
Compensation Accounts, and annual installment payments shall be
adjusted to reflect such additional earnings, based on the
remaining number of installment payments to be distributed and
based on Treasury Note Based Interest, computed quarterly.
VIII. Amendment and Termination
Eaton fully expects to continue the Plan but it reserves the
right, except as otherwise provided herein, at any time by action
of the Committee, to modify, amend or terminate the Plan for any
reason, including adverse changes in the federal tax laws.
Notwithstanding the foregoing, (a) no amendment or modification of
the provisions of the Plan permitting officers to receive awards
or setting the formula that determines the amount, price and
timing of awards, shall be made more than once every six months
(or at more frequent intervals if permitted by applicable
governmental regulations); and (b) no amendment, modification or
termination of the Plan shall, without the consent of the
Participant, alter or impair any of the Participant's rights
under the Plan with respect to benefits accrued prior to such
amendment, modification or termination.
<PAGE>
Page 8
IX. Administration
The Plan shall be administered by the Committee. The Committee
shall interpret the provisions of the Plan where necessary and
may adopt procedures for the administration of the Plan which are
consistent with the provisions of the Plan and any rules adopted
by the Committee.
After Retirement or other Termination of Employment, the Com-
mittee shall determine in its sole discretion (i) whether Retire-
ment Compensation shall be paid in a lump sum or in Periodic
Installments, (ii) the date on which a lump sum payment will be
made or Periodic Installments will commence, which in the case of
Retirement shall be not later than one year following the date to
which the deferral was made, and in the case of Termination of
Employment for reasons other than Retirement shall be in
accordance with Section 7.05, (iii) whether to change the
Periodic Installments or the number of years over which they are
to be paid, and (iv) whether Common Share Retirement Compensa-
tion will be paid in cash or in Eaton Common Shares. In making
these determinations, the Committee may consider the wishes and
needs of the Participant or his or her Beneficiary.
Each Participant or Beneficiary must claim any benefit to which
such Beneficiary may be entitled under the Plan by a written
notification to the Committee. If a claim is denied, it must be
denied within a reasonable period of time in a written notice
stating the specific reasons for the denial. The claimant may
have a review of the denial by the Committee by filing a written
notice with the Committee within sixty days after the notice of
the denial of his or her claim. The written decision by the
Committee with respect to the review must be given within one
hundred twenty days after receipt of the written request.
The determinations of the Committee shall be final and con-
clusive.
X. Change in Control
Section 10.01 Termination and Change in Control
Notwithstanding anything herein to the contrary, upon the
occurrence of a Termination and Change in Control, the
Participants shall be entitled to receive from the Company the
payments as provided in Section 10.03.
Section 10.02 Failure to Pay
Notwithstanding anything herein to the contrary, upon the
occurrence of a Failure to Pay, each Participant covered by the
situation described in clause (i) of the definition of Failure to
Pay, or each of the Participants in the event of a situation
described in clause (ii) of that definition, as the case may be,
shall be entitled to receive from the Company the payments as
provided in Section 10.03.
<PAGE>
Page 9
Section 10.03 Payment
No later than the first to occur of (i) one year following the
date hereof for any person who is a current Participant, (ii) a
Termination and Change in Control or a Failure to Pay for any
person who is a current Participant or (iii) the date upon which
any person who is not a current Participant becomes a Partici-
pant, each Participant shall select one of the payment altern-
atives set forth below with respect to that portion of the Parti-
cipant's Plan Account equal to the full amount of the Account
minus the Funded Amount, and with respect to that portion of the
Account equal to the Funded Amount. The payment alternatives
selected with respect to the two portions of the Account need
not be the same. The payment alternatives are as follows:
(a) a lump sum payment within 30 days following the
Termination and Change in Control or Failure to Pay,
as the case may be;
(b) payment in monthly, quarterly, semiannual or annual
payments, over a period not to exceed fifteen years,
as selected by the Participant at the time provided in
the first paragraph of this Section 10.03, commencing
within 30 days following the Termination and Change in
Control or Failure to Pay, as the case may be, which
are substantially equal in amount or in the number of
share units being valued and paid or in the number of
Eaton Common Shares being distributed, except that
earnings attributable to periods following Termination
and Change in Control or Failure to Pay shall be
included with each payment.
Payment of such amounts shall be made to each such Participant in
accordance with his or her selected payment alternatives as
provided in Section 10.01 and 10.02.
XI. Miscellaneous
Section 11.01 Adjustments
In the event of a reorganization, merger, consolidation,
reclassification, recapitalization, combination or exchange of
shares, stock split, stock dividend, rights offering or similar
event affecting shares of the Company, the Committee shall
equitably adjust the limitation on the number and class of share
units which may be allocated to Participants as Common Share
Retirement Compensation, and the number of share units previously
allocated to their Accounts.
Section 11.01 Designation of Beneficiaries
Each Participant shall have the right, by written instruction to
the Committee, on a form supplied by the Committee, to designate
one or more primary and contingent Beneficiaries (and the
proportion to be paid to each, if more than one is designated) to
receive his or her Account balance upon his or her death. Any
such designation shall be revocable by the Participant.
<PAGE>
Page 10
Section 11.03 Committee Actions
All actions of the Committee hereunder may be taken with or
without a meeting. If taken without a meeting, the action shall
be in writing and signed by a majority of the members of the
Committee and if taken with a meeting, a majority of the Com-
mittee shall constitute a quorum for any such action. The deter-
mination by the Committee as to the withholding of taxes shall
be binding upon the Participants and their Beneficiaries.
Section 11.04 Assignment
No benefit under the Plan shall be subject to anticipation,
alienation, sale, transfer or encumbrance, and any attempt to do
so shall be void. No benefit hereunder shall in any manner be
liable for the debts, contracts, or liabilities of the person
entitled to such benefits. If the Participant or Beneficiary
shall become bankrupt, or attempt to anticipate, alienate, sell,
transfer or encumber any benefit hereunder, then such benefit
shall, in the discretion of the Committee, cease and terminate,
and the Committee may hold or apply the same for the benefit of
the Participant or his or her spouse, children, or other depen-
dents, or any of them, in such manner and in such amounts and
proportions as the Committee may deem proper. During a Partic-
ipant's lifetime, rights hereunder are exercisable only by the
Participant or that person's guardian or legal representative.
Notwithstanding the foregoing, nothing in this Section shall
prohibit the transfer of any benefit by will or by the laws of
descent and distribution or (if permitted by applicable
regulations under Section 16(b) of the Securities Exchange Act)
pursuant to a qualified domestic relations order, as defined
under the Internal Revenue Code and the Employee Retirement
Income Security Act.
Section 11.05 No Employment Contract
The Plan shall not be deemed to constitute a contract of employ-
ment between Eaton and a Participant. Neither shall the execu-
tion of the Plan nor any action taken by Eaton or the Committee
pursuant to the Plan confer on a Participant any legal right to
be continued in any other capacity with Eaton whatsoever.
Section 11.06 Governing Law
The Plan shall be construed and governed in accordance with the
law of the State of Ohio to the extent not covered by Federal
law.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (g)
Strategic Incentive and Option Plan
(amended and restated as of September 24, 1996)
1. Purpose
The purpose of the Plan is to promote the growth and
profitability of Eaton Corporation (the "Company") through
the granting of incentives intended to motivate senior
executives of the Company to achieve demanding long-term
corporate objectives, to attract and retain senior
executives of outstanding competence and to provide such
senior executives with an opportunity to acquire an equity
interest in the Company. This purpose will be achieved
through the award of Contingent Performance Units ("Units")
and the grant of Stock Options ("Options") to purchase
common shares of the Company and tandem Stock Appreciation
Rights ("Rights").
2. Administration
The Plan shall be administered by the Compensation Committee
(the "Committee") of the Company's Board of Directors (the
"Board") which shall consist of at least three Directors
selected by the Board. The Board may also select one or
more Directors as alternate members of the Committee, who
may take the place of any absent member or members at any
meeting of the Committee. Members of the Committee shall be
"disinterested persons" within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934. Moreover, no
member of the Committee while serving as such shall be
eligible to participate in the Plan.
The Committee shall have complete authority to: (i)
interpret all provisions of the Plan consistent with law;
(ii) designate the senior executives to receive awards of
Units and grants of Options and Rights; (iii) determine the
number of Units, Options and Rights to be issued, optioned
or granted to each such senior executive; (iv) specify the
number of shares subject to each Option; (v) prescribe the
form of instruments evidencing any Units, Options or Rights
awarded or granted under the Plan; (vi) make special awards
when appropriate; (vii) adopt, amend and rescind general and
special rules and regulations for the Plan's administration;
and (viii) make all other determinations necessary or
advisable for the administration of the Plan.
3. Eligibility
Participation in the Plan shall be determined solely by the
Committee and shall be limited to those senior executives of
the Company who have the greatest impact on the Company's
long-term financial performance. As a condition of
accepting an award or grant under the Plan, a participant
must agree not to accept any future grants of stock options
or stock appreciation rights under any other plan maintained
by the Company as long as he remains eligible to receive
grants under this Plan. Stock options and stock
appreciation rights granted prior to an award or grant under
the Plan shall not be affected by this requirement.
Directors of the Company who are not also senior executives
of the Company are not eligible to participate in the Plan.
<PAGE> Page 2
4. Shares Subject to Plan
Subject to adjustments as provided in Section 8(A) hereof,
the shares to be offered under this Plan, whether upon
exercise of Options or Rights, shall be the Common Shares of
the Company, with a par value of $.50 each ("shares"),
either authorized but unissued shares, treasury shares, or
any combination thereof. The aggregate number of shares
which may be delivered under the Plan shall not exceed
500,000. This number may be adjusted to reflect any change
in the capitalization of the Company resulting from a stock
dividend or a stock split or other adjustment contemplated
by Section 8(A) of the Plan and occurring after the
effective date of the Plan. The Committee will maintain
records showing the cumulative total of all shares subject
to Options outstanding under the Plan.
If an Option shall expire or terminate for any reason
without having been fully exercised, the unpurchased shares
subject thereto shall again be available for future issuance
under the Plan. If a Right is exercised in whole or in
part, all or an applicable portion of the related Option, as
the case may be, shall automatically terminate. The shares
subject to such Option, less the number of shares actually
issued upon exercise of the Right, shall be available for
future issuance under the Plan.
5. Stock Options
(A) Allotment of Shares
(1) Subject to the limitations specified in Section
5(A)(2), the Committee may grant to
participants, from time to time on or after
January 1, 1981, Options to purchase shares in
such amounts as the Committee may determine in
its sole discretion. Options granted under the
Plan may be: (i) Options which are intended to
qualify as incentive stock options under Section
422A of the Internal Revenue Code ("Incentive
Stock Options"); (ii) Options which are not
intended to qualify as Incentive Stock Options;
or (iii) both of the foregoing if not granted to
a participant in tandem where the exercise of
one type of Option would reduce the shares
available under the other type of Option.
(2) With respect to Options granted after December
31, 1986, the aggregate fair market value
(determined at the time the option is granted)
of the shares with respect to which Incentive
Stock Options are exercisable for the first time
by any participant during any calendar year
(under all plans of the Company and its
subsidiaries) shall not exceed $100,000.
(3) Options which are not Incentive Stock Options
may be granted to any participant without regard
to the limitation stated in Section 5(A)(2).
<PAGE>
Page 3
(B) Option Price
The price per share for shares purchased by the
exercise of any Option granted under the Plan will be
the fair market value per share on January 5, 1981 for
Options granted in 1981 and 100% of the fair market
value per share on the date the Option is granted for
Options granted after such year. Fair market value
per share is the mean of the highest and lowest
selling prices quoted on the New York Stock Exchange
("NYSE") list of composite transactions on the date
the value is to be determined or if the NYSE is not
open for trading or the shares are not traded on that
date, then the Option price shall be the mean of the
highest and lowest selling prices of the shares on the
NYSE list of composite transactions on the day
immediately preceding such date on which the shares
were traded.
(C) Option Period
Each Option shall expire on such date as the Committee
shall determine, but not later than the tenth
anniversary of the date on which the Option is granted
plus one (1) day.
(D) Exercise of Options
(1) By a Participant During Continuous Employment
Unless otherwise determined by the Committee, an
Option will be exercisable in full six months
after the date the Option is granted; provided
that no Option shall be exercisable prior to the
approval of the Plan by the shareholders of the
Company.
During the lifetime of a participant to whom an
Option is granted, the Option may be exercised
only by the participant, his attorney-in-fact or
his guardian as hereinafter provided.
A participant may not exercise any part of an
Option granted under this Plan unless, at the
time of such exercise, he has been in the
continuous employment of the Company since the
date the Option was granted. The Committee may
decide in each case to what extent leaves of
absence for government or military service,
illness, temporary disability or other reasons
shall not for this purpose be deemed
interruptions of continuous employment.
(2) By a Former Employee
No person may exercise an Option after he ceases
to be an employee of the Company or any
subsidiary unless he ceases to be an employee of
the Company as a result of normal retirement,
early retirement, or disability retirement,
either physical or mental, or on account of
physical or mental disability. In these
<PAGE>
Page 4
instances, the Option may be exercised by him,
his attorney-in-fact or his guardian, as
appropriate, at any time after the date on which
he ceased to be an employee (but no later than
the end of the fixed term of the Option) for the
number of shares for which the Option could have
been exercised at the time he ceased to be an
employee, or for such greater number of shares
subject to the Option for which the Committee
may authorize an acceleration of time of
exercise under the Option; provided that,
Incentive Stock Options may be exercised after a
termination of employment described in this
Section 5(D)(2) (other than due to permanent and
total disability) for a period of no more than
three months following such termination and may
be exercised for a period of no more than one
year following termination due to such
disability.
(3) In Case of Death
If a participant or former participant who was
granted an Option dies, and at the time of death
was entitled to exercise any Option, the Option
may be exercised within twelve months after the
death of such person (but no later than the end
of the fixed term of the Option) by his estate
or by a person who acquired the right to
exercise the Option by bequest or inheritance.
The Option may be exercised only for the number
of shares for which it could have been exercised
at the time the participant or former
participant died, or for such greater number of
shares subject to the Option for which the
Committee may authorize an acceleration of time
of exercise under the Option.
(4) Termination of Options
An Option granted under this Plan shall be
considered terminated in whole or in part to the
extent that, in accordance with the provisions
of the Plan, it can no longer be exercised for
shares originally subject to the Option.
(E) Method of Exercise
Each Option granted under the Plan shall be deemed
exercised when the holder shall indicate the decision
to do so in writing delivered to the Company and shall
at the same time tender to the Company payment in full
in cash for the shares for which the Option is
exercised and shall comply with such other reasonable
requirements as the Committee may establish pursuant
to Section 8(E) of the Plan, but this provision shall
not preclude exercise of, or payment for an Option, by
any other proper legal method specifically approved by
the Committee.
<PAGE>
Page 5
An Option granted under the Plan may be exercised for
any lesser number of shares than the full amount for
which it could be exercised. Such a partial exercise
of an Option shall not affect the right to exercise
the Option from time-to-time in accordance with the
Plan for the remaining shares subject to the Option.
6. Stock Appreciation Rights
(A) Grant
The Committee may grant Rights only in connection with
all or part of any Option granted under the Plan,
either concurrently with the grant of such Option, or
at any time thereafter during the term of the Option.
(B) Term
Rights shall be exercisable for up to six months from
the date that a participant ceases to be an employee
of the Company, unless the Committee determines
otherwise. Rights shall automatically terminate if
and to the extent the related Option is exercised.
(C) Limitations on Exercise
Rights shall be exercisable at such time or time as
and to the extent, but only to the extent, that the
Option to which they relate shall be exercisable.
Rights shall in no event be exercisable unless and
until the holder of the Rights has completed at least
six months of continuous service with the Company
immediately following the date upon which the Rights
were granted.
Rights shall be subject to any other terms and
conditions not inconsistent with the Plan as may from
time-to-time be approved by the Committee.
(D) Exercise
Rights entitle the holder of an Option in connection
with which such Rights are granted, upon exercise of
the Rights, to surrender the Option, or any applicable
portion thereof, to the extent unexercised, and to
receive a number of shares or shares and cash as set
forth below.
Upon exercise of Rights, the holder shall be entitled
to receive a number of shares equal in aggregate fair
market value to the amount by which the fair market
value per share on the date of such exercise shall
exceed the Option price per share of the related
Option, multiplied by the number of shares in respect
of which the Rights have been exercised. As the
Committee shall determine in its sole discretion, up
to one-half of the Company's obligation arising from
the exercise of Rights may be settled by the payment
of cash; provided, however, that notwithstanding the
foregoing, with respect to exercises of Rights which
occur subsequent to a Change of Control, 100% of the
<PAGE>
Page 6
Company's obligation arising from such exercises shall
be settled by the payment of cash. The exercise of
Rights which results in the receipt of cash by the
participant may be made only during a period provided
by Rule 16b-3 under the Securities Exchange Act of
1934. Rule 16b-3 defines such an exercise period as
beginning on the third business day following the date
of release for publication of any annual or quarterly
summary statement of the Company's revenues and
earnings and ending on the twelfth business day
following that date. The Committee shall determine
the fair market value of the shares for each such
exercise period, which shall not be higher than the
highest sale price of the Company's shares during the
period, as reported on the NYSE list of composite
transactions. The fair market value as determined by
the Committee shall be applicable to all Rights
exercised by participant during the exercise period,
whether or not such exercise results in the receipt of
cash by the participant. Notwithstanding the
foregoing, Rights may also be exercised at any time
during the thirty (30) day period commencing upon any
Change of Control.
(E) Method of Exercise
Each Right granted under the Plan shall be deemed
exercised when the holder shall indicate the decision
to do so in writing delivered to the Company and shall
comply with such other reasonable requirements as the
Committee may establish pursuant to Section 8(E) of
the Plan, but this provision shall not preclude
exercise of, or payment for, a Right by any other
proper legal method specifically approved by the
Committee.
A Right granted under the Plan may be exercised for
any lesser number of shares than the full amount for
which it could be exercised. Such a partial exercise
of a Right shall not affect the right to exercise the
Right from time-to-time in accordance with the Plan
for the remaining shares subject to the Right.
7. Performance Units
(A) Grant
Subject to the provisions of the Plan and such other
terms and conditions as the Committee may prescribe
which are not inconsistent with the provisions of the
Plan, the Committee may grant Units to participants
under the Plan. Units may or may not be granted in
conjunction with an Option granted under the Plan, as
determined by the Committee in its sole discretion.
(B) Number of Units
The number of Units to be granted shall be determined
by the Committee; provided, however, that during any
calendar year in no event shall more than three Units
be granted for each share subject to an Option granted
or to be granted under the Plan during the same
calendar year.
<PAGE>
Page 7
(C) Award Period
Unless otherwise determined by the Committee, the
Award Period shall be a four-calendar year period
commencing as of the first day of the calendar year in
which the Unit is granted. A new Award Period shall
commence as of the first day of each calendar year,
unless otherwise specified by the Committee.
(D) Performance Objectives
During the first four months of each Award Period,
threshold, target and maximum Performance Objectives
for such Award Period shall be established by the
Board, after consideration of the recommendations of
the Committee, based upon such measurements as the
Board deems appropriate for such Award Period in its
sole discretion; notwithstanding the foregoing, the
authority to establish Performance Objectives which
are based upon the performance of the various product
groups of the Company, and to modify such Performance
Objectives pursuant to this Section 7(D), shall be
vested in the Committee.
In no event shall the total value of Units for any
Award Period determined at the end of the Award Period
exceed an amount equal to 125% of the participant's
annual base salary as in effect on the last day of
such Award Period.
Within sixty (60) days after Performance Objectives
have been established by the Board for a specific
Award Period, each participant to whom Units are
awarded will be provided with written notice of the
established Objectives.
Subject to the last sentence of this Section 7(D), if
the Committee and the Board determine that an
unforeseen change during an Award Period in the
Company's business, operations, corporate structure,
capital structure or manner in which it conducts
business is extraordinary and material and that the
established threshold, target and maximum Performance
Objectives for the Award Period are no longer
suitable, the Board, after consideration of the
recommendations of the Committee, may modify the
threshold, target and maximum Performance Objectives
as it deems appropriate and equitable in its sole
discretion. Notwithstanding the foregoing sentence,
after a Change of Control, neither the Board nor the
Committee shall have the authority to modify
Performance Objectives.
(E) Value of Units
The Committee shall, on the date of grant, fix a par
value for each Unit. The par value of a Unit shall be
equal to the fair market value of one share on the
date of grant, unless otherwise specified by the
Committee.
<PAGE>
Page 8
The value of a Unit at the end of an Award Period
shall not exceed: (i) 50% of its par value upon the
attainment of the threshold Performance Objective;
(ii) 100% of its par value upon the attainment of the
target Performance Objective; and (iii) 200% of its
par value for Units granted prior to 1985 and 150% for
Units granted in 1985 and all subsequent years upon
the attainment of the maximum Performance Objective.
Failure to achieve the threshold Performance Objective
in respect of an Award Period shall result in a zero
valuation for the Unit. Unit values between 50% and
200% or 150%, as the case may be, of par value will be
determined by the Committee in respect of an Award
Period for the attainment of Performance Objectives
between either threshold and target or target and
maximum.
(F) Payment
As promptly as practicable after the end of each Award
Period, the Committee shall, pursuant to Section 7(E)
of the Plan, determine the value, if any, of the Units
awarded in respect to such Period. The aggregate
value, if any, of such Units shall be paid in cash,
unless the participant made an irrevocable election to
defer all or part of the amount of his award. Such an
election must be made in writing to the Committee, or
to any person the Committee may designate, during the
year prior to the final year of the Award Period.
A participant who makes the deferral election will
have the option of deferring all or part of his award
to: (i) a specific date approved by the Committee;
(ii) retirement; or (iii) one year after retirement.
The amount of any deferred award will be paid from the
general assets of the Company, unless transferred to
any trust established by the Company for such purpose.
Appreciation, as measured by the Company's annual
after-tax return on shareholders' equity, will be
credited annually to deferred awards and to unpaid
annual installments of deferred awards; provided,
however, that such appreciation will not be credited
to deferred awards at any time more than five (5)
years after the year within which occurs the
participant's date of retirement and such awards
instead will be credited with a market rate of
interest as determined by the Committee.
Except as otherwise provided herein, payment of
deferred awards shall be made in a lump sum or in
equal annual installments as the Committee may direct
after consideration of the wishes and needs of the
participant; provided, however, that annual
installments of deferred awards may not exceed a
maximum of fifteen (15) installments. Upon the death
of a participant, the entire amount of his deferred
awards, if any, or the remaining portion thereof, if
installment distributions have been made, shall be
distributed to such beneficiary as the participant may
have designated in writing to the Company as the
person, firm or trust to receive any such post-death
distribution under the Plan, or, in the absence of
<PAGE>
Page 9
such written designation, to such participant's legal
representative or any person, firm, trust or
organization designated in such participant's last
will to receive such distributions. Distribution of
deferred awards, subsequent to the death of a
participant or former participant, may be made either
in a lump sum or in installments in such amounts and
over such period not exceeding ten (10) years from the
date of death of the participant or former participant
as the Committee may direct.
Lump Sum Payment means the payment of the entire
amount of all deferred awards plus appreciation or
earnings thereon.
(G) Termination of Employment
A Participant must be employed by the Company at the
end of the Award Period in order to be entitled to a
payment in respect to a Unit awarded for such Award
Period; provided, however, that in the event the
employment of a participant shall be terminated for
any reason before the end of the Award Period, the
Committee, in its sole discretion, may authorize a
proportionate payment to the participant or the
participant's estate or legal representative, as the
case may be. Notwithstanding the foregoing, upon any
termination of the Plan by the Committee with the
approval of the Board during the term of any Award
Period, a proportionate payment, as determined by the
Committee in its sole discretion, will be made.
8. Other Provisions
(A) Adjustments upon Changes in Capitalization
In the event of changes to the outstanding shares of
the Company through reorganization, merger,
consolidation, recapitalization, reclassification,
stock split-up, stock dividend, stock consolidation or
otherwise, an appropriate and proportionate adjustment
shall be made in the number and kind of shares as to
which Options or Rights may be granted and in the
number and par value of Units covered by each award
thereof. A corresponding adjustment changing the
number or kind of shares and the exercise price per
share allocated to unexercised Options and Rights or
portions thereof or in the number and kind of
outstanding Units, which shall have been granted prior
to any such change, shall likewise be made.
Adjustments under this Section shall be made by the
Committee, whose determination as to what adjustments
shall be made, and the extent thereof, shall be final,
binding and conclusive.
Notwithstanding the foregoing provisions of this
Section 8(A), upon the occurrence of any corporate
reorganization which results in the substitution of
stock of another company for shares covered under the
Plan, such stock shall be substituted for such shares
under all Options or Rights theretofore granted under
<PAGE>
Page 10
this Plan, with such substitutions being based on the
same terms as those that were involved in the
transaction resulting in such corporate
reorganization.
(B) Change of Control Defined
For purposes of the Plan (except with respect to
Section 7(F)), a Change of Control shall be deemed to
have occurred if: (i) a tender offer shall be made
and consummated for the ownership of 25% or more of
the outstanding voting securities of the Company; (ii)
the Company shall be merged or consolidated with
another corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting
securities of the surviving or resulting corporation
shall be owned in the aggregate by the former
shareholders of the Company as the same shall have
existed immediately prior to such merger or
consolidation; (iii) the Company shall sell
substantially all of its assets to another corporation
which is not a wholly-owned subsidiary of the Company;
or (iv) a "person" within the meaning of Section
3(a)(9) or of Section l3(d)(3) of the Securities
Exchange Act of l934 (as in effect on the effective
date of the Plan) shall acquire 25% or more of the
outstanding voting securities of the Company (whether
directly, indirectly, beneficially or of record). For
purposes of the Plan, ownership of voting securities
shall take into account and shall include ownership as
determined by applying the provisions of Rule
13d-3(d)(1)(i) under the Securities Exchange Act of
1934 (as in effect on the effective date of the Plan).
(C) Non-Transferability
No Option, Right or Unit granted to a participant
under the Plan shall be subject to transfer,
anticipation, alienation, sale, assignment, pledge or
encumbrance by the participant nor to debts, contract
liabilities, engagements or torts of the participant.
(D) Cancellation and Replacement of Options and Rights
The Committee may at any time and from time-to-time
permit the voluntary surrender by the holder of any
outstanding Options and any Rights under the Plan
where such surrender is conditioned upon granting such
holder new Options and Rights for such number of
shares as the Committee shall determine, or may
require such a voluntary surrender as a condition
precedent to the grant of new Options and Rights to
such holder.
The Committee shall determine the terms and conditions
of new Options and Rights, including the prices at and
periods during which they may be exercised, all or any
of which may differ from the terms and conditions of
the Options and Rights surrendered. Any such new
Options or Rights shall be subject to all the relevant
provisions of the Plan.
<PAGE>
Page 11
The shares subject to any Option or Right so
surrendered shall no longer be charged against the
limitation provided in Section 4 of the Plan and may
again become shares subject to Options granted under
the Plan.
The granting of new Options and Rights in connection
with the surrender of outstanding Options and Rights
under the Plan shall be considered for the purposes of
the Plan as the grant of new Options and Rights and
not an alteration, amendment or modification of the
Plan or of the Options and Rights being surrendered.
(E) Compliance with Law and Approval of Regulatory Bodies
No Option, Right or Unit shall be exercisable and no
shares will be delivered under the Plan except in
compliance with all applicable federal and state laws
and regulations including, without limitation,
compliance with withholding tax requirements and with
the rules of all domestic stock exchanges on which the
Company's shares may be listed. Any share certificate
issued to evidence shares for which an Option is
exercised may bear legends and statements the
Committee shall deem advisable to assure compliance
with federal and state laws and regulations. No
Option, Right or Unit shall be exercisable and no
shares will be delivered under the Plan, until the
Company has obtained consent or approval from
regulatory bodies, federal or state, having
jurisdiction over such matters as the Committee may
deem advisable.
In the case of the exercise of an Option or Right by a
person or estate acquiring the right to exercise the
Option or Right by bequest or inheritance, the
Committee may require reasonable evidence as to the
ownership of the Option and may require consents and
releases of taxing authorities that it may deem
advisable.
(F) No Right to Employment
Neither the adoption of the Plan nor its operation,
nor any document describing or referring to the Plan,
or any part thereof, shall confer upon any participant
under the Plan any right to continue in the employ of
the Company or any subsidiary, or shall in any way
affect the right and power of the Company or any
subsidiary to terminate the employment of any
participant under the Plan at any time with or without
assigning a reason therefore, to the same extent as
the Company might have done if the Plan had not been
adopted.
(G) Rights as Shareholder
No person, estate or other entity shall have any of
the rights of a shareholder with reference to shares
subject to an Option or Right until a certificate for
the shares has been delivered to such person, estate
or other entity.
<PAGE>
Page 12
(H) Interpretation of the Plan
Headings are given to the sections of the Plan solely
as a convenience to facilitate reference; such
headings, numbering and paragraphing shall not in any
case be deemed in any way material or relevant to the
construction of the Plan or any provisions thereof.
The use of the masculine gender shall also include
within its meaning the feminine. The use of the
singular shall also include within its meaning the
plural and vice versa.
(I) Amendment and Termination
The Committee, with the approval of the Board, may at
any time suspend, amend or terminate the Plan. The
Committee may make such modifications of the terms and
conditions of a holder's Option, Right or Unit as it
shall deem advisable if not contrary to the provisions
of the Plan. No Option, Right or Unit may be granted
during any suspension of the Plan or after such
termination. Notwithstanding the foregoing provisions
of this Section 8(I), no amendment, suspension or
termination shall, without the consent of the holder
of an Option, Right or Unit, alter or impair any
rights or obligations under any Option, Right, Unit or
deferral theretofore granted or allowed under the
Plan.
In addition to Committee and Board approval of an
amendment, if the amendment would: (i) materially
increase the benefits accruing to participants; (ii)
materially increase the number of securities issuable
under the Plan; or (iii) materially modify the
requirements for eligibility, then such amendment
shall be approved by the holders of a majority of the
Company's voting power.
(J) Effective Date and Duration of the Plan
The effective date of the Plan shall be January 1,
1981. Unless previously terminated by the Committee,
with Board approval, the Plan shall terminate at the
close of business on December 31, 1990, and no Option,
Right or Unit shall be granted under the Plan
thereafter, but such termination shall not affect any
Option, Right or Unit theretofore granted.
9. Other Payment Provisions
(A) Termination and Change in Control
Notwithstanding anything herein to the contrary, upon the
occurrence of a Termination and Change in Control, the
Participants shall be entitled to receive from the Company
the payments as provided in Section 9(C) .
<PAGE>
Page 13
(B) Failure to Pay
Notwithstanding anything herein to the contrary, upon the
occurrence of a Failure to Pay, each Participant covered by
the situation described in clause (i) of the definition of
Failure to Pay, or each of the Participants in the event of
a situation described in clause (ii) of that definition, as
the case may be, shall be entitled to receive from the
Company the payments as provided in Section 9(C).
(C) Payment
No later than the first to occur of (i) one year following
the date hereof for any current Participant, (ii) a
Termination and Change in Control or a Failure to Pay for
any current Participant or (iii) the date upon which any
person who is not a current Participant becomes a
Participant, each Participant shall select one of the
payment alternatives set forth below with respect to that
portion of the Participant's deferred awards equal to the
full amount of those awards minus the Funded Amount, and
with respect to that portion of those awards equal to the
Funded Amount. The payment alternatives selected with
respect to the two portions of the deferred awards need not
be the same. The payment alternatives are as follows:
(i) a lump sum payment within 30 days following the
Termination and Change in Control or Failure to Pay,
as the case may be;
(ii) payment in monthly, quarterly, semiannual or annual
payments, over a period not to exceed fifteen years,
as selected by the Participant at the time provided in
the first paragraph of this Section 9(C), commencing
within 30 days following the Termination and Change in
Control or Failure to Pay, as the case may be, which
are substantially equal in amount, except that
earnings attributable to periods following Termination
and Change in Control or Failure to Pay shall be
included with each payment.
Payment shall be made to each such Participant in accordance
with his or her selected alternative as provided in Sections
9(A) and 9(B).
(D) Definitions
"Deferral Plans" - shall mean the Eaton Incentive
Compensation Deferral Plan, the Eaton Corporation Deferred
Incentive Compensation Plan and this Plan.
"Failure to Pay" - shall mean that the circumstances
described in either (i) or (ii) have occurred:
(i) Any Participant shall have notified the Company and
the Trustee in writing that the Company shall have
failed to pay to the Participant, when due, either
directly or by direction to the Trustee, at least
75% of any and all amounts which the Participant was
entitled to receive at any time in accordance with
the terms of the Plan, and that such amounts remain
unpaid. Such notice must set forth the amount, if
<PAGE>
Page 14
any, which was paid to the Participant, and the
amount which the Participant believes he or she was
entitled to receive under the Plan. The failure to
make such payment shall have continued for a period
of 30 days after receipt of such notice by the
Company, and during such 30-day period the Company
shall have failed to prove, by clear and convincing
evidence as determined by the Trustee in its sole
and absolute discretion, that such amount was in
fact paid or was not due and payable; or
(ii) More than two Plan Participants shall have notified
the Company and the Trustee in writing that they
have not been paid when due, either directly or by
direction to the Trustee, amounts to which they are
entitled under the Plan, and that such amounts
remain unpaid. Each such notice must set forth the
amount, if any, which was paid to the Participant,
and the amount which the Participant believes he or
she was entitled to receive under the Plan. Within
15 days after receipt of each such notice, the
Trustee shall determine, on a preliminary basis,
whether any failure to pay such Participants has
resulted in a failure to pay when due, directly or
by direction, at least 75% of the aggregate amount
due to all Participants under all the Deferral Plans
in any two-year period, and that such amounts remain
unpaid. If the Trustee determines that such a
failure has occurred, then it shall so notify the
Company and the Participants in writing within the
same 15 day period. Within a period of 20 days
after receipt of such notice from the Trustee, the
Company shall have failed to prove by clear and
convincing evidence, in the sole and absolute
discretion of the Trustee, that such amount was paid
or was not due and payable.
"Funded Amount" - shall mean, with respect to the deferred
awards of any Participant, the value of any assets which
have been placed in a grantor trust established by the
Company to pay benefits with respect to those awards or
that account, as determined at the time initial payments
are to be made pursuant to the selections made by the
Participants in accordance with Section 9.(C).
"Termination and Change in Control" - shall mean (a) the
termination of the employment of a Participant for any
reason whatsoever prior to a Change in Control, but only
upon the occurrence of a subsequent Change in Control, or
(b) the termination of the employment of a Participant
for any reason whatsoever during the three-year period
immediately following a Change in Control.
"Trustee" - shall mean the trustee of any grantor trust
which holds assets for the payment of the benefits
provided by the Plan.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (h)
Change in Control Agreement
AGREEMENT by and between Eaton Corporation, an Ohio
corporation (the "Company") and _____________ (the "Executive"),
dated as of the 1st day of November, 1996.
The Board of Directors of the Company (the "Board"),
has determined that it is in the best interests of the Company
and its shareholders to assure that the Company will have the
continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as
defined below) of the Company. The Board believes it is
imperative to diminish the inevitable distraction of the Execu-
tive by virtue of the personal uncertainties and risks created
by a pending or threatened Change of Control and to encourage
the Executive's full attention and dedication to the Company
currently and in the event of any threatened or pending Change
of Control, and to provide the Executive with compensation and
benefits arrangements upon a Change of Control which ensure that
the compensation and benefits expectations of the Executive will
be satisfied and which are competitive with those of other corp-
orations. Therefore, in order to accomplish these objectives,
the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date"
shall mean the first date during the Change of Control Period (as
defined in Section 1(b)) on which a Change of Control (as defined
in Section 2) occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to
the date on which the Change of Control occurs, and if it is
reasonably demonstrated by the Executive that such termination of
employment (i) was at the request of a third party who has taken
steps reasonably calculated to effect a Change of Control or (ii)
otherwise arose in connection with or anticipation of a Change of
Control, then for all purposes of this Agreement the "Effective
Date" shall mean the date immediately prior to the date of such
termination of employment.
(b) The "Change of Control Period" shall mean the
period commencing on the date hereof and ending on the third an-
niversary of the date hereof; provided, however, that commencing
on the date one year after the date hereof, and on each annual
anniversary of such date (such date and each annual anniversary
thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall
be automatically extended so as to terminate three years from
such Renewal Date, unless at least 60 days prior to the Renewal
Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this
Agreement, a "Change of Control" shall mean:
(a) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Ex-
<PAGE>
Page 2
change Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 25% or more of either (i) the then outstanding shares of
common stock of the Company (the "Outstanding Company Common
Stock") or (ii) the combined voting power of the then out-
standing voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Com-
pany Voting Securities"); provided, however, that for pur-
poses of this subsection (a), the following acquisitions
shall not constitute a Change of Control: (i) any acquisi-
tion directly from the Company, (ii) any acquisition by the
Company, or (iii) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company; or
(b) Individuals who, as of the date hereof, consti-
tute the Board (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent
to the date hereof whose election, or nomination for election
by the Company's shareholders, was approved by a vote of at
least two-thirds of the directors then comprising the Incum-
bent Board shall be considered as though such individual were
a member of the Incumbent Board, but excluding, for this pur-
pose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election con-
test with respect to the election or removal of directors or
other actual or threatened solicitation of proxies or con-
sents by or on behalf of a Person other than the Board; or
(c) Consummation by the Company of a reorganization,
merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company or the
acquisition of assets of another corporation (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such Business Combina-
tion beneficially own, directly or indirectly, more than 75%
of, respectively, the then outstanding shares of common stock
and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of di-
rectors, as the case may be, of the corporation resulting
from such Business Combination (including, without limita-
tion, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Out-
standing Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any
employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 25% or more of,
respectively, the then outstanding shares of common stock of
the corporation resulting from such Business Combination or
the combined voting power of the then outstanding voting se-
curities of such corporation except to the extent that such
ownership existed prior to the Business Combination and (iii)
at least a majority of the members of the board of directors
of the corporation resulting from such Business Combination
<PAGE>
Page 3
were members of the Incumbent Board at the time of the execu-
tion of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be
deemed to have occurred as a result of any transaction or series
of transactions which the Executive, or any entity in which the
Executive is a partner, officer or more than 50% owner initiates,
if immediately following the transaction or series of transac-
tions that would otherwise constitute a Change in Control, the
Executive, either alone or together with other individuals who
are executive officers of the Company immediately prior thereto,
beneficially owns, directly or indirectly, more than 10% of the
then outstanding shares of common stock of the Company or the
corporation resulting from the transaction or series of
transactions, as applicable, or of the combined voting power of
the then outstanding voting securities of the Company or such
resulting corporation.
3. Employment Period. The Company hereby agrees to
continue the Executive in its employ, and the Executive hereby
agrees to remain in the employ of the Company subject to the
terms and conditions of this Agreement, for the period commen-
cing on the Effective Date and ending on the third anniversary
of such date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least commen-
surate in all material respects with the most significant of
those held, exercised and assigned to the Executive at any time
during the 120-day period immediately preceding the Effective
Date and (B) the Executive's services shall be performed at the
location where the Executive was employed immediately preceding
the Effective Date or any office or location less than 35 miles
from such location.
(ii) During the Employment Period, and excluding
any periods of vacation and sick leave to which the Executive is
entitled, the Executive agrees to devote reasonable attention and
time during normal business hours to the business and affairs of
the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive hereunder, to use the
Executive's reasonable best efforts to perform faithfully and
efficiently such responsibilities. During the Employment Period
it shall not be a violation of this Agreement for the Executive
to (A) serve on corporate, civic or charitable boards or commit-
tees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal invest-
ments, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement. It
is expressly understood and agreed that to the extent that any
such activities have been conducted by the Executive prior to the
Effective Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto) subse-
quent to the Effective Date shall not thereafter be deemed to
interfere with the performance of the Executive's responsibili-
ties to the Company. <PAGE>
Page 4
(b) Compensation. (i) Base Salary. During the
Employment Period, the Executive shall receive an annual base
salary ("Annual Base Salary"), which shall be paid at a monthly
rate, at least equal to twelve times the highest monthly base
salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its
affiliated companies in respect of the twelve-month period
immediately preceding the month in which the Effective Date
occurs. During the Employment Period, the Annual Base Salary
shall be increased no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date,
and thereafter at least annually, in each case by a percentage
not less than the average annual percentage merit increase in the
Executive's base salary during the five (5) full calendar years
immediately preceding the Effective Date. Any increase in Annual
Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term
Annual Base Salary as utilized in this Agreement shall refer to
Annual Base Salary as so increased. As used in this Agreement,
the term "affiliated companies" shall include any company con-
trolled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base
Salary, the Executive shall be awarded, for each fiscal year
ending during the Employment Period, an annual bonus (the "Annual
Bonus") in cash in an amount (the "Annual Bonus Amount") at least
equal to the Executive's Incentive Potential (as defined in the
Eaton Incentive Compensation Plan) for the most recent year for
which an Incentive Potential was established before the Effective
Date under the Eaton Incentive Compensation Plan, adjusted by the
average of the Executive's individual performance rating for each
of the three most recent years ended before the Effective Date,
but eliminating any Corporate Performance Factor (as defined in
the Eaton Incentive Compensation Plan). Each such Annual Bonus
shall be paid no later than the end of the third month of the
fiscal year next following the fiscal year for which the Annual
Bonus is awarded, unless the Executive shall elect to defer the
receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans.
During the Employment Period, the Executive shall be entitled to
participate in all incentive, savings and retirement plans,
practices, policies and programs applicable generally to other
peer executives of the Company and its affiliated companies
(including without limitation the Company's Deferred Incentive
Compensation Plan, Limited Eaton Service Supplemental Retirement
Income Plan, long-term Executive Strategic Incentive Plan and
Supplemental and/or Excess Benefits Plans, as and to the extent
those plans are in effect from time to time), but in no event
shall such plans, practices, policies and programs provide the
Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent,
if any, that such distinction is applicable), savings
opportunities and retirement benefit opportunities, in each case,
less favorable, in the aggregate, than the most favorable of
those provided by the Company and its affiliated companies for
the Executive under such plans, practices, policies and programs
as in effect at any time during the 120-day period immediately
preceding the Effective Date or if more favorable to the Execu-
tive, those provided generally at any time after the Effective
Date to other peer executives of the Company and its affiliated
companies.
<PAGE>
Page 5
(iv) Welfare Benefit Plans. During the Employ-
ment Period, the Executive and/or the Executive's family, as the
case may be, shall be eligible for participation in and shall
receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription,
dental, disability, salary continuance, employee life, group
life, accidental death and travel accident insurance plans and
programs) to the extent applicable generally to other peer execu-
tives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide
the Executive with benefits which are less favorable, in the
aggregate, than the most favorable of such plans, practices,
policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective
Date or, if more favorable to the Executive, those provided gen-
erally at any time after the Effective Date to other peer execu-
tives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the
Executive shall be entitled to receive prompt reimbursement for
all reasonable expenses incurred by the Executive in accordance
with the most favorable policies, practices and procedures of the
Company and its affiliated companies in effect for the Executive
at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment
Period, the Executive shall be entitled to fringe benefits,
including, without limitation, tax and financial planning
services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with
the most favorable plans, practices, programs and policies of
the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately pre-
ceding the Effective Date or, if more favorable to the Execu-
tive, as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated
companies.
(vii) Office and Support Staff. During the Employ-
ment Period, the Executive shall be entitled to an office or
offices of a size and with furnishings and other appointments,
and to exclusive personal secretarial and other assistance, at
least equal to the most favorable of the foregoing provided to
the Executive by the Company and its affiliated companies at any
time during the 120-day period immediately preceding the Effec-
tive Date or, if more favorable to the Executive, as provided
generally at any time thereafter with respect to other peer exec-
utives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period,
the Executive shall be entitled to paid vacation in accordance
with the most favorable plans, policies, programs and practices
of the Company and its affiliated companies as in effect for the
Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with
respect to other peer executives of the Company and its affil-
iated companies.
<PAGE>
Page 6
5. Termination of Employment. (a) Death or Disability.
The Executive's employment shall terminate automatically upon the
Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the
Executive has occurred during the Employment Period (pursuant to
the definition of Disability set forth below), it may give to the
Executive written notice in accordance with Section 12(b) of this
Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the
Company shall terminate effective on the 30th day after receipt
of such notice by the Executive (the "Disability Effective
Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the
Executive's duties. For purposes of this Agreement, "Disability"
shall mean the absence of the Executive from the Executive's
duties with the Company on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical
illness which is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable
to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's
employment during the Employment Period for Cause. For purposes
of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Ex-
ecutive to perform substantially the Executive's duties with
the Company or one of its affiliates (other than any such
failure resulting from incapacity due to physical or mental
illness), after a written demand for substantial performance
is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically
identifies the manner in which the Board or Chief Executive
Officer believes that the Executive has not substantially
performed the Executive's duties, or
(ii) the willful engaging by the Executive in il-
legal conduct or gross misconduct which is materially and
demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the
part of the Executive, shall be considered "willful" unless it is
done, or omitted to be done, by the Executive in bad faith or
without reasonable belief that the Executive's action or omission
was in the best interests of the Company. Any act, or failure to
act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief
Executive Officer or a senior officer of the Company or based up-
on the advice of counsel for the Company shall be conclusively
presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company. The
cessation of employment of the Executive shall not be deemed to
be for Cause unless and until there shall have been delivered to
the Executive a copy of a resolution duly adopted by the affirm-
ative vote of not less than three-quarters of the entire member-
ship of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Execu-
tive and the Executive is given an opportunity, together with
counsel, to be heard before the Board), finding that, in the good
faith opinion of the Board, the Executive is guilty of the con-
duct described in subparagraph (i) or (ii) above, and specifying
the particulars thereof in detail.
<PAGE>
Page 7
(c) Good Reason. The Executive's employment may be
terminated by the Executive for Good Reason. For purposes of
this Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any
duties inconsistent in any respect with the Executive's
position (including status, offices, titles and reporting
requirements), authority, duties or responsibilities as
contemplated by Section 4(a) of this Agreement, or any other
action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any
of the provisions of Section 4(b) of this Agreement, other
than an isolated, insubstantial and inadvertent failure not
occurring in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be
based at any office or location other than as provided in
Section 4(a)(i)(B) hereof or the Company's requiring the
Executive to travel on Company business to a substantially
greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of
the Executive's employment otherwise than as expressly
permitted by this Agreement; or
(v) any failure by the Company to comply with
and satisfy Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination
of "Good Reason" made by the Executive shall be conclusive.
(d) Notice of Termination. Any termination by the
Company for Cause, or by the Executive for Good Reason, shall be
communicated by Notice of Termination to the other party hereto
given in accordance with Section 12(b) of this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a
written notice which (i) indicates the specific termination
provision in this Agreement relied upon, (ii) to the extent
applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated and (iii)
if the Date of Termination (as defined below) is other than the
date of receipt of such notice, specifies the termination date
(which date shall be not more than thirty days after the giving
of such notice). The failure by the Executive or the Company to
set forth in the Notice of Termination any fact or circumstance
which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company, respectively,
hereunder or preclude the Executive or the Company, respectively,
from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
<PAGE>
Page 8
(e) Date of Termination. "Date of Termination" means
(i) if the Executive's employment is terminated by the Company
for Cause, or by the Executive for Good Reason, the date of re-
ceipt of the Notice of Termination or any later date specified
therein, as the case may be, (ii) if the Executive's employment
is terminated by the Company other than for Cause or Disability,
the date on which the Company notifies the Executive of such
termination and (iii) if the Executive's employment is termi-
nated by reason of death or Disability, the date of death of the
Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a)
Good Reason; Other Than for Cause, Death or Disability. If,
during the Employment Period, the Company shall terminate the
Executive's employment other than for Cause or Disability or the
Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a
lump sum in cash within 30 days after the Date of Termination
the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual
Base Salary through the Date of Termination, to the
extent not theretofore paid to the Executive, (2) the
amount, if any, which has been earned by the Executive
with respect to any completed Incentive Year under the
Eaton Incentive Compensation Plan or any successor
thereto, and any completed Award Period under the Eaton
Executive Strategic Incentive Plan or any successor
thereto, in each case to the extent not theretofore
paid to the Executive, and (3) with respect to each
Award Period under the Eaton Executive Strategic
Incentive Plan or any successor thereto which begins
before and ends after the Date of Termination, an
amount equal to (x) 100% of the Executive's Individual
Incentive Target (as defined in such plan) for such
Award Period times (y) a fraction, the numerator of
which is the number of days in such Award Period before
the Date of Termination, and the denominator of which
is the total number of days in such Award Period (the
sum of the amounts described in clauses (1), (2) and
(3) shall be hereinafter referred to as the "Accrued
Obligations"); and
B. the product of (1) the Multiple (as
defined below) and (2) the sum of (x) the Executive's
Annual Base Salary and (y) the Annual Bonus Amount;
(ii) for a number of years after the Executive's
Date of Termination equal to the lesser of two and the
Multiple, or such longer period as may be provided by the
terms of the appropriate plan, program, practice or policy,
the Company shall continue benefits to the Executive and/or
the Executive's family at least equal to those which would
have been provided to them in accordance with the plans,
programs, practices and policies described in Section
4(b)(iv) of this Agreement if the Executive's employment had
not been terminated or, if more favorable to the Executive,
as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated
companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is
eligible to receive medical or other welfare benefits under
another employer-provided plan, the medical and other welfare
<PAGE> Page 9
benefits described herein shall be secondary to those
provided under such other plan during such applicable period
of eligibility, and for purposes of determining eligibility
(but not the time of commencement of benefits) of the
Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be
considered to have remained employed for a number of years
after the Date of Termination equal to the lesser of two and
the Multiple and to have retired on the last day of such
period;
(iii) to the extent not theretofore paid or pro-
vided, the Company shall timely pay or provide to the
Executive any other amounts or benefits required to be paid
or provided or which the Executive is eligible to receive
under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such
other amounts and benefits shall be hereinafter referred to
as the "Other Benefits").
The "Multiple" means the lesser of (i) three and (ii) the number
of years and portions thereof (expressed as a decimal fraction)
from the Date of Termination until the Executive's 65th birthday.
(b) Death. If the Executive's employment is termi-
nated by reason of the Executive's death during the Employment
Period, this Agreement shall terminate without further obliga-
tions to the Executive's legal representatives under this Agree-
ment, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obliga-
tions shall be paid to the Executive's estate or beneficiary,
as applicable, in a lump sum in cash within 30 days of the Date
of Termination. With respect to the provision of Other Benefits,
the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or
beneficiaries shall be entitled to receive, benefits at least
equal to the most favorable benefits provided by the Company and
affiliated companies to the estates and beneficiaries of peer
executives of the Company and such affiliated companies under
such plans, programs, practices and policies relating to death
benefits, if any, as in effect with respect to other peer execu-
tives and their beneficiaries at any time during the 120-day
period immediately preceding the Effective Date or, if more
favorable to the Executive's estate and/or the Executive's bene-
ficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its
affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is term-
inated by reason of the Executive's Disability during the Employ-
ment Period, this Agreement shall terminate without further ob-
ligations to the Executive, other than for payment of Accrued Ob-
ligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination. With respect
to the provision of Other Benefits, the term Other Benefits as
utilized in this Section 6(c) shall include, and the Executive
shall be entitled after the Disability Effective Date to receive,
disability and other benefits at least equal to the most favor-
able of those generally provided by the Company and its affili-
ated companies to disabled executives and/or their families in
accordance with such plans, programs, practices and policies re-
lating to disability, if any, as in effect generally with respect
to other peer executives and their families at any time during
<PAGE> Page 10
the 120-day period immediately preceding the Effective Date or,
if more favorable to the Executive and/or the Executive's family,
as in effect at any time thereafter generally with respect to
other peer executives of the Company and its affiliated com-
panies and their families.
(d) Cause; Other than for Good Reason. If the
Executive's employment shall be terminated for Cause during the
Employment Period, this Agreement shall terminate without further
obligations to the Executive other than the obligation to pay to
the Executive (x) the Annual Base Salary through the Date of
Termination and (y) Other Benefits, in each case to the extent
theretofore unpaid. If the Executive voluntarily terminates
employment during the Employment Period, excluding a termination
for Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such
case, all Accrued Obligations shall be paid to the Executive in a
lump sum in cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this
Agreement shall prevent or limit the Executive's continuing or
future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies and
for which the Executive may qualify, nor, subject to the last
sentence of this Section 7 and to Section 13(f), shall anything
herein limit or otherwise affect such rights as the Executive may
have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any
plan, policy, practice or program of or any contract or agreement
with the Company or any of its affiliated companies at or subse-
quent to the Date of Termination shall be payable in accordance
with such plan, policy, practice or program or contract or agree-
ment except as explicitly modified by this Agreement. Notwith-
standing the foregoing, if the Executive becomes entitled to re-
ceive severance benefits under Section 6(a) hereof, such sever-
ance benefits shall be in lieu of any benefits under any sever-
ance or separation plan, program or policy of the Company or
any of its affiliated companies to which the Executive would
otherwise have been entitled.
8. Full Settlement; Legal Fees. The Company's ob-
ligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be af-
fected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Ex-
ecutive or others. In no event shall the Executive be obligated
to seek other employment or take any other action by way of
mitigation of the amounts payable to the Executive under any of
the provisions of this Agreement and except as specifically
provided in Section 6(a)(ii), such amounts shall not be reduced
whether or not the Executive obtains other employment. The Com-
pany agrees to pay as incurred, to the full extent permitted by
law, all legal fees and expenses which the Executive may
reasonably incur as a result of any contest (regardless of the
outcome thereof) by the Company, the Executive or others of the
validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof
(whether such contest is between the Company and the Executive
or between either of them and any third party, and including as
a result of any contest by the Executive about the amount of any
payment pursuant to this Agreement), plus in each case interest
<PAGE>
Page 11
on any delayed payment at the applicable Federal rate provided
for in Section 7872(f)(2)(A) of the Internal Revenue Code of
1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwith-
standing, in the event it shall be determined that any payment
or distribution by the Company to or for the benefit of the Exe-
cutive (whether paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required un-
der this Section 9) (a "Payment") would be subject to the excise
tax imposed by Section 4999 of the Code or any interest or penal-
ties are incurred by the Executive with respect to such excise
tax (such excise tax, together with any such interest and penal-
ties, are hereinafter collectively referred to as the "Excise
Tax"), then the Executive shall be entitled to receive an addi-
tional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes (including any in-
terest or penalties imposed with respect to such taxes), in-
cluding, without limitation, any income taxes (and any interest
and penalties imposed with respect thereto) and Excise Tax im-
posed upon the Gross-Up Payment, the Executive retains an amount
of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments.
(b) Subject to the provisions of Section 9(c), all de-
terminations required to be made under this Section 9, including
whether and when a Gross-Up Payment is required and the amount of
such Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, shall be made by Ernst & Young or
such other certified public accounting firm as may be designated
by the Executive (the "Accounting Firm"), which shall provide
detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from
the Executive that there has been a Payment, or such earlier time
as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change of Control, the Executive
shall appoint another nationally recognized accounting firm to
make the determinations required hereunder (which accounting firm
shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by
the Company. Any Gross-Up Payment, as determined pursuant to
this Section 9, shall be paid by the Company to the Executive
within five days of the receipt of the Accounting Firm's deter-
mination. Any determination by the Accounting Firm shall be
binding upon the Company and the Executive. As a result of the
uncertainty in the application of Section 4999 of the Code at
the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpay-
ment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies
pursuant to Section 9(c) and the Executive thereafter is re-
quired to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company
to or for the benefit of the Executive.
<PAGE>
Page 12
(c) The Executive shall notify the Company in writing
of any claim by the Internal Revenue Service that, if successful,
would require the payment by the Company of the Gross-Up Payment.
Such notification shall be given as soon as practicable but no
later than ten business days after the Executive is informed in
writing of such claim and shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which he
gives such notice to the Company (or such shorter period ending
on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior
to the expiration of such period that it desires to contest such
claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim,
(ii) take such action in connection with con-
testing such claim as the Company shall reasonably
request in writing from time to time, including,
without limitation, accepting legal representation with
respect to such claim by an attorney reasonably
selected by the Company,
(iii) cooperate with the Company in good faith in
order effectively to contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly
all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall in-
demnify and hold the Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including interest and penal-
ties with respect thereto) imposed as a result of such represent-
ation and payment of costs and expenses. Without limitation on
the foregoing provisions of this Section 9(c), the Company shall
control all proceedings taken in connection with such contest
and, at its sole option, may pursue or forgo any and all admini-
strative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole
option, either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible manner,
and the Executive agrees to prosecute such contest to a determin-
ation before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company directs
the Executive to pay such claim and sue for a refund, the Company
shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect thereto) im-
posed with respect to such advance or with respect to any im-
puted income with respect to such advance; and further provided
that any extension of the statute of limitations relating to pay-
ment of taxes for the taxable year of the Executive with respect
to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's con-
trol of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Exe-
<PAGE>
Page 13
cutive shall be entitled to settle or contest, as the case may
be, any other issue raised by the Internal Revenue Service or
any other taxing authority.
(d) If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 9(c), the
Executive becomes entitled to receive any refund with respect to
such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to
the Company the amount of such refund (together with any interest
paid or credited thereon after taxes applicable thereto). If,
after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writ-
ing of its intent to contest such denial of refund prior to the
expiration of 30 days after such determination, then such advance
shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the
amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall
hold in a fiduciary capacity for the benefit of the Company all
secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their
respective businesses, which shall have been obtained by the
Executive during the Executive's employment by the Company or any
of its affiliated companies and which shall not be or become
public knowledge (other than by acts by the Executive or
representatives of the Executive in violation of this Agreement).
After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it. In no
event shall an asserted violation of the provisions of this
Section 10 constitute a basis for deferring or withholding any
amounts otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the
Executive and without the prior written consent of the Company
shall not be assignable by the Executive otherwise than by will
or the laws of descent and distribution. This Agreement shall
inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and
be binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or
assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had
taken place. As used in this Agreement, "Company" shall mean the
Company as hereinbefore defined and any successor to its busi-
ness and/or assets as aforesaid which assumes and agrees to per-
form this Agreement by operation of law, or otherwise.
<PAGE>
Page 14
12. Trust Deposit. (a) Upon the occurrence of a Pro-
posed Change of Control (as defined below) during the Change of
Control Period, the Company shall deposit in trust or escrow with
a third party cash in an amount sufficient to provide all of the
benefits and other payments to which the Executive would be
entitled hereunder if a Change of Control occurred on the date of
the Proposed Change of Control and the Executive's employment
were terminated by the Executive for Good Reason immediately
thereafter. Upon such deposit, references hereunder to any
payment by the Company shall be deemed to refer to a payment from
such trust or escrow; provided, however, that nothing contained
herein shall relieve the Company of its obligation to make the
payments required of it hereunder in the event any such payment
is not made from the trust or escrow.
(b) "Proposed Change of Control" means:
(i) the commencement of a tender or exchange
offer by any third person (other than a tender or exchange
offer which, if consummated, would not result in a Change of
Control) for 25% or more of the Outstanding Company Common
Stock or combined voting power of the Outstanding Company
Voting Securities;
(ii) the execution of an agreement by the Com-
pany, the consummation of which would result in the occur-
rence of a Change of Control;
(iii) the public announcement by any person (in-
cluding the Company) of an intention to take or to consider
taking actions which if consummated would constitute a Change
of Control other than through a contested election for
directors of the Company; or
(iv) the adoption by the Board, as a result of
other circumstances, including circumstances similar or re-
lated to the foregoing, of a resolution to the effect that,
for purposes of this Agreement, a Proposed Change of Control
has occurred.
13. Miscellaneous. (a) This Agreement shall be gov-
erned by and construed in accordance with the laws of the State
of Ohio, without reference to principles of conflict of laws.
The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement
executed by the parties hereto or their respective successors
and legal representatives.
(b) All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to the
other party or by registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive:
_______________________
_______________________
<PAGE>
Page 15
If to the Company:
Eaton Corporation
Eaton Center
Cleveland, Ohio 44114-2584
Attention: General Counsel
or to such other address as either party shall have furnished to
the other in writing in accordance herewith. Notice and
communications shall be effective when actually received by the
addressee.
(c) The invalidity or unenforceability of any pro-
vision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable
under this Agreement such Federal, state, local or foreign taxes
as shall be required to be withheld pursuant to any applicable
law or regulation.
(e) The Executive's or the Company's failure to insist
upon strict compliance with any provision hereof or any other
provision of this Agreement or the failure to assert any right
the Executive or the Company may have hereunder, including, with-
out limitation, the right of the Executive to terminate employ-
ment for Good Reason pursuant to Section 5(c)(i)-(v) of this
Agreement, shall not be deemed to be a waiver of such provision
or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that,
except as may otherwise be provided under any other written
agreement between the Executive and the Company, the employment
of the Executive by the Company is "at will" and, prior to the
Effective Date, the Executive's employment may be terminated by
either the Executive or the Company at any time prior to the
Effective Date, in which case the Executive shall have no further
rights under this Agreement. From and after the Effective Date
this Agreement shall supersede any other agreement between the
parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the
Executive's hand and, pursuant to the authorization from its Board
of Directors, the Company has caused this Agreement to be executed
in its name on its behalf, all as of the day and year first above
written.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (j)
Executive Incentive Compensation Plan
This plan description is to be applicable to Executive Incentive
Compensation Plan years beginning with 1995.
I. Purpose
The purpose of the Plan is to provide an annual incentive
compensation opportunity for eligible employees in
executive, administrative, professional, technical, or
advisory positions whose actions are considered to have a
significant impact on corporate performance.
II. Administration
The Plan is adopted by the Board of Directors of Eaton
Corporation and may be amended, modified or discontinued as
the Board, in its sole discretion, may deem necessary. Any
changes to the Plan that may be adverse to the interests of
the participants will be effective only for years commencing
after the year in which the change is adopted.
The Plan is administered by the Management Compensation
Committee (the "Committee), which shall consist of the Chief
Executive Officer and up to four officers designated by the
Chief Executive Officer. The Committee shall have complete
authority to interpret all provisions of the Plan consistent
with the law.
III. Concept
The plan is founded on the concept that the base salaries of
the participants are similar to those paid to people
performing like jobs in industries in which Eaton competes.
IV. Eligibility
Any salaried employee of the Corporation or any of its
subsidiaries (including any subsidiary acquired after
adoption of this plan) who in the judgment of the Committee
meets the criteria described in Article I may be selected
for participation in the Plan. The Committee will have
final authority for designating participants in the Plan,
but may delegate this authority as it deems advisable.
Employees will be notified in writing when they first become
participants in the Plan. An employee may be designated as
a participant on the first of any month following the
approval of the Committee or its designee.
V. Calculation of Incentive Compensation Payments
Plan participants will be placed into one of three (3)
Incentive Compensation Programs. These three programs are:
Operations Program - which will include participants
who are assigned to operating units.
Corporate Staff Program - which will include parti-
cipants who are members of corporate staff functional
departments.
<PAGE> Page 2
Executive Management Program - which will include
senior elected officers.
A Corporate Incentive pool will be created by multiplying
participants' salary grade midpoints by Percentage Incentive
Factors appropriate for their respective levels of
responsibility. The aggregate pool amount will then be
multiplied by the Corporate Performance Factor to determine
the Adjusted Corporate Incentive Pool.
The Corporate Performance Factor raises or lowers the
initial Corporate Pool based on Eaton's performance as
measured by Cash Flow Return on Gross Capital (CFR). A
philosophical cornerstone of the plan is the belief that
consistently high CFR performance will result in increases
in shareholder value. The Compensation Committee of the
Board will establish the Corporate Performance Schedule.
This schedule will define the threshold, target, and maximum
CFR goals and pool adjustment levels for the designated
year. This process determines the maximum amount of the
adjusted corporate incentive pool but is not linked to the
incentive distribution process.
The process of allocating the incentive funds is based upon
performance ratings. In the Operations Program, each
appropriate operating unit will be given a rating on a scale
from zero (0) to 150. Participants in the Executive
Management Program and the Corporate Staff Program will be
given individual ratings based on the same scale. These
ratings will be established by a senior officer, subject to
final review and approval by the Chairman, and will be based
primarily upon the success of the unit and/or individual in
meeting preestablished objectives. It is intended that the
ratings process should allow maximum flexibility for the
recognition of unanticipated challenges and opportunities
which may not have been contemplated at the time the
original objectives were established.
While it is not necessary that the entire Adjusted Corporate
Incentive Pool be allocated to participants, the total of
all awards made to participants throughout the Corporation
cannot be greater than the sum of the pools of all three
programs. Excepted from this provision are the awards made
to designated employees by the Board of Directors, which
shall be calculated in a manner consistent with the Plan,
but which shall be paid from the Corporation's General Funds
rather than the incentive fund. At the sole discretion of
the Chief Executive Officer, money not distributed from one
program may be reallocated to another program.
VI. Other Provisions
The Compensation Committee of the Board, in its sole
discretion, may adjust the corporate pool by as much as plus
or minus ten percent (10%).
The Plan also provides for a Special Award Fund which will
allow the Compensation Committee of the Board of Directors,
on an exception basis, to award special payments to
individual participants who, in the Committee's judgment,
have made extraordinary contributions to the Corporation in
a year when there would normally be no incentive due to
below threshold corporate performance. The maximum amount
of such awards is defined in Article X of this booklet.
<PAGE> Page 3
VII. Payment
Incentive compensation will be paid in the year subsequent
to the year in which it is earned at the earliest feasible
date following the determination of final corporate
performance and the calculation of individual incentive
payments.
VIII.Service for Part of Year
A participant must be employed by the Company or one of its
subsidiaries at the end of an Award Period in order to be
entitled to a payment in respect to such Award Period;
provided, however, that a payment, prorated for the
participant's length of service during the Award Period, may
be authorized by the Committee, in its sole discretion, in
the event the employment of a participant terminates before
the end of an Award Period due to death, permanent
disability, normal or early retirement, closure or
divestiture of an Eaton facility or any other reason.
Notwithstanding the foregoing, upon any termination of the
Plan by the Committee during the term of any Award Period,
payments to all participants will be made, prorated for each
participant's length of service during the Award Period
prior to the date of Plan termination.
IV. Accounting Provisions
Awards paid out under the provisions of the Plan to
participants in the Operations Program will be accrued for,
and charged to, the appropriate units. Awards to
participants in the Executive Management and Corporate Staff
Programs will be accrued for and charged as a corporate
administrative expense.
X. Definitions of Special Terms
Incentive Potential - The amount derived from multiplying a
participant's midpoint by the percentage incentive factor
appropriate for the position's level of responsibility.
This calculation is made prior to any adjustment for
individual, group, or corporate results.
Adjusted Corporate Incentive Pool - The sum of the Incentive
Potential for all participants in each of the three programs
multiplied by the Corporate Performance Factor.
Corporate Performance Factor - Adjustment percentages which
raise or lower the Corporate Incentive Pool based on Eaton's
performance. The following schedule will be applied to
incentive years beginning in 1994 and will remain in effect
until adjusted by action of the Compensation Committee of
the Board of Directors.
Corporate
Performance
CFR Factor
----- ------
13.0% Threshold 40%
16.0% Target 100%
18.5% Maximum 200%
<PAGE>
Page 4
Cash Flow Return on Gross Capital - Net income plus
depreciation, goodwill amortization and after-tax net
interest divided by capital plus accumulated depreciation
minus goodwill and short-term investments.
Special Award Fund - An amount not greater than ten percent
(10%) of the sum of the Corporate Incentive Pool. The
Compensation Committee of the Board of Directors will have
sole authority to grant up to the maximum of this Fund to
recognize extraordinary contributions to the Corporation in
a year when the CFR threshold was not met and the Plan did
not generate payments for participants.
Midpoint - The midpoint of the base salary range for each
participant's level of responsibility as effective on July
1st of each new incentive year.
Percentage Incentive Factor Schedule - A schedule outlining
the percentage to be applied against the midpoint of the
base salary range of each level of participant in order to
determine their Incentive Potential. The incentive factor
will vary according to level of responsibility and may be
changed from time to time to reflect the competitive
practices for companies comparable to Eaton. The schedule
will be established by the Compensation Department subject
to review and approval of the Compensation Committee of the
Board of Directors.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (k)
Plan for the Deferred Payment of Directors' Fees
(amended and restated as of September 24, 1996)
ARTICLE I
ESTABLISHMENT OF PLAN
1.01 "Establishment of Plan and Effective Date": Eaton
Corporation (the "Company") has established this Plan
for the Deferred Payment of Directors' Fees (the "Plan")
effective as of October 23, 1985. This Amendment and
Restatement of the Plan shall be effective as of
September 24, 1996.
1.02 "Statement of Purpose": It is the purpose of the Plan
to attract and retain qualified persons to serve as
Directors of the Company by enabling such Directors to
defer some or all fees which may be payable to them for
future services as a member of the Board of Directors of
the Company or as chairman or a member of any committee
of the Board.
ARTICLE II
DEFINITIONS
When used herein the following terms shall have the
meanings indicated unless a different meaning is clearly
required by the context:
2.01 "Board": The Board of Directors of Eaton Corporation.
2.02 "Change in Control of the Company": For purposes of the
Plan, a "Change in Control of the Company" shall be
deemed to have occurred if (i) a tender offer shall be
made and consummated for the ownership of securities of
the Company representing 25% or more of the combined
voting power of the Company's then outstanding voting
securities, (ii) the Company shall be merged or
consolidated with another corporation and as a result of
such merger or consolidation less than 75% of the
outstanding voting securities of the surviving or
resulting corporation shall be owned in the aggregate by
the former shareholders of the Company, other than
affiliates (within the meaning of the Securities
Exchange Act of 1934 (the "Exchange Act")) of any party
to such merger or consolidation, as the same shall have
existed immediately prior to such merger or
consolidation, (iii) the Company shall sell
substantially all of its assets to another corporation
which is not a wholly-owned subsidiary of the Company,
(iv) any "person" (as such term is used in Sections
3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes
the beneficial owner, directly or indirectly, of
securities of the Company representing 25% or more of
the combined voting power of the Company's then
outstanding securities, or (v) during any period of two
consecutive years, individuals who at the beginning of
such period constitute the Board cease for any reason to
constitute at least a majority thereof unless the
<PAGE>
Page 2
election, or the nomination for election by the
Company's shareholders, of each new Director was
approved by a vote of at least two-thirds of the
Directors then still in office who were Directors at the
beginning of the period. For purposes of the Plan,
ownership of voting securities shall take into account
and include ownership as determined by applying the
provisions of Rule 13d-3(d)(1)(i) of the Exchange Act
(as then in effect).
2.03 "Committee": The Corporate Compensation Committee of
the Company which shall have full power and authority to
administer and interpret, in its sole discretion, the
provisions of the Plan.
2.04 "Company": Eaton Corporation and its corporate
successors.
2.05 "Compensation": The total annual fees paid to a
Participant for services as a Director of the Company
including the annual retainer fee, Board meeting
attendance fees, additional annual retainer fees paid to
Board Committee chairmen and any other fees paid by the
Company for services as a Director of the Company.
2.06. "Deferral Plans": The Company's plan of the same name as
this Plan and this Plan.
2.07 "Deferred Account Balance": At any particular date, the
total of all Compensation deferred under the Plan and
earnings credited thereto less the amount of any
deferred Compensation previously paid to the
Participant.
2.08 "Deferred Compensation Agreement": The written
agreement between the Company and a Participant
substantially in the form attached hereto as Exhibit A
and made a part hereof.
2.09 "Designated Beneficiary": One or more beneficiaries, as
designated by a Participant in a written form filed with
the Vice President and Secretary of the Company and
approved by the Committee, to whom payments otherwise
due to or for the benefit of the Participant hereunder
shall be made in the event of his death prior to the
commencement of benefit payments hereunder or the
complete payment of such benefit. In the event no such
written designation is made by a Participant or if such
Designated Beneficiary shall not be in existence at the
time of the Participant's death or if such Designated
Beneficiary predeceases the Participant, the Participant
shall be deemed to have designated his estate as the
Designated Beneficiary.
2.10 "Failure to Pay": The circumstances described in either
(i) or (ii) have occurred:
(i) Any Participant shall have notified the Company and
the Trustee in writing that the Company shall have
failed to pay to the Participant, when due, either
directly or by direction to the trustee of any
trust holding assets for the payment of benefits
pursuant to the Plan, at least 75% of any and all
amounts which the Participant was entitled to
<PAGE> Page 3
receive at any time in accordance with the terms of
the Plan, and that such amounts remain unpaid.
Such notice must set forth the amount, if any,
which was paid to the Participant, and the amount
which the Participant believes he or she was
entitled to receive under the Plan. The failure to
make such payment shall have continued for a period
of 30 days after receipt of such notice by the
Company, and during such 30-day period the Company
shall have failed to prove, by clear and convincing
evidence as determined by the Trustee in its sole
and absolute discretion, that such amount was in
fact paid or was not due and payable; or
(ii) More than two Participants shall have notified the
Company and the Trustee in writing that they have
not been paid when due, either directly or by
direction to the Trustee, amounts to which they are
entitled under the Plan and that such amounts
remain unpaid. Each such notice must set forth the
amount, if any, which was paid to the Participant,
and the amount which the Participant believes he or
she was entitled to receive under the Plan. Within
15 days after receipt of each such notice, the
Trustee shall determine, on a preliminary basis,
whether any failure to pay such Participants has
resulted in a failure to pay when due, directly or
by direction, at least 75% of the aggregate amount
due to all Participants under all the Deferral
Plans in any two-year period, and that such amounts
remain unpaid. If the Trustee determines that such
a failure has occurred, then it shall so notify the
Company and the Participants in writing within the
same 15 day period. Within a period of 20 days
after receipt of such notice from the Trustee, the
Company shall have failed to prove by clear and
convincing evidence, in the sole and absolute
discretion of the Trustee, that such amount was
paid or was not due and payable.
2.11 "Funded Amount": With respect to the account of any
Participant, the value of any assets which have been
placed in a grantor trust established by the Company to
pay benefits with respect to that account, as determined
at the time initial payments are to be made pursuant to
the selections made by the Participants in accordance
with Section 6.03 .
2.12 "Lump Sum Payment": The lump sum amount which is equal to
the then present value of the payment, in fifteen annual
payments commencing on the date of the lump sum payment,
of the Participant's Deferred Account Balance plus a rate
of return thereon equal to the rate or rates of interest
specified in the Participant's Deferred Compensation
Agreement throughout that fifteen year period,
discounted with a rate of interest equal to "Moody's
Corporate Bond Yield Average - Monthly (Average
Corporates)" most recently published by Moody's Investor
Services, Inc., or any successor thereto, at the time of
the calculation.
2.13 "Normal Retirement": Retirement as a Director of the
Company at the Normal Retirement Date.
<PAGE>
Page 4
2.14 "Normal Retirement Date": The date a Participant
retires from the Board of Directors after attaining the
age of sixty-eight (68).
2.15 "Participant": A Director who is or hereafter becomes
eligible to participate in the Plan and does participate
by electing, in the manner specified herein, to defer
Compensation pursuant to the Plan.
2.16 "Plan": This Plan for the Deferred Payment of
Directors' Fees as contained herein which was originally
effective as of October 23, 1985, and which has been
amended from time to time thereafter.
2.17 "Regular Annuity Starting Date": The April 1st
immediately following a Participant's Normal Retirement
Date.
2.18 "Termination and Change in Control": The termination of
the service as a Director of a Participant for any
reason whatsoever prior to a Change in Control, upon a
Change in Control or during the three-year period
immediately following a Change in Control.
2.19 "Trustee": Shall mean the trustee of any trust which
holds assets for the payment of the benefits provided by
the Plan.
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.01 "Eligibility": Any Director of the Company who is
separately compensated for his services on the Board and
who is first elected to the Board prior to 1996 shall be
eligible to participate under the Plan. Directors who
serve as either an officer or an employee of the
Company, or who are first elected after 1995, shall not
be eligible to participate under the Plan.
3.02 "Manner of Election":
(a) Any person wishing to commence participation in
the Plan must file a signed copy of the Deferred
Compensation Agreement in the form attached as
Exhibit A with the Vice President and Secretary
of the Company at Eaton Center, Cleveland, Ohio
44114. If the Company accepts the Election, an
eligible Director shall become a Participant in
the Plan as of December 1, 1985 for an Election
filed in 1985 and as of the January 1st
immediately following the date an Election is
filed in any year after 1985 if such Election is
filed prior to December 1 of such year. Upon
the request of a Participant, the Committee may
in its sole discretion approve the termination
of future deferrals by such Participant.
(b) The Board shall be vested with the authority to
deny Participants the opportunity to defer
future Compensation pursuant to the Plan for any
reason if such denial is applied equitably to
all Participants; provided, however, that the
foregoing authority does not apply to any
<PAGE> Page 5
Participant's right to continue to defer the
amount constituting his then existing Deferred
Account Balance and any past and future earnings
thereon, which amounts shall continue to be
deferred and/or paid in accordance with the
other terms and conditions of this Plan.
3.03 "Limits on Deferred Compensation":
(a) Subject to required minimum and maximum annual
limitations on the amount of Compensation which
may be deferred equal to $5,000 and $30,000,
respectively, a Participant may defer all or any
portion of his future Compensation which is
earned during a period of at least four (4)
years (16 full calendar quarters) or for the
period to his Normal Retirement Date, if
earlier, or for any period of time longer than
four years which ends prior to his Normal
Retirement Date. Future Compensation in excess
of the $30,000 annual limitation may be deferred
pursuant to the Company's Plan for Deferred
Payment of Directors' Fees adopted as of June 1,
1980 (the "1980 Plan"), which plan continues to
be effective.
(b) Notwithstanding the annual limitations imposed
under Section 3.03(a), an eligible Participant
under the Plan may elect, in the manner
specified in Section 3.02, prior to December 1,
1985, to have all or part of his Compensation
which was deferred under the 1980 Plan to be
held and distributed in accordance with the
terms and conditions of the Plan.
ARTICLE IV
RETIREMENT BENEFITS
4.01 "Normal Retirement Benefit":
(a) The Normal Retirement Benefit is a level fifteen
(15) year annuity payable to a Participant who
has attained Normal Retirement in fifteen (15)
equal annual installments commencing on the
Participant's Regular Annuity Starting Date and
continuing on the anniversary of that date each
year thereafter until fifteen (15) annual
payments have been made;
(b) The Normal Retirement Benefit shall be
calculated by reference to the Participant's
total Compensation deferred under the Plan and
the rate or rates of interest specified in his
Deferred Compensation Agreement; provided,
however, that the Committee may determine, in
its sole discretion, to pay the Normal
Retirement Benefit in a Lump Sum Payment.
4.02 "Early Termination Benefit": The Normal Retirement
Benefit provided under the Plan is based on the
assumption that each Participant will defer a specified
amount of Compensation for a specified period of time of
not less than (4) years or to his Normal Retirement
<PAGE> Page 6
Date, if earlier. In the event a Participant has not
deferred Compensation in accordance with the terms and
conditions of the Plan for at least four (4) years,
resigns as a Director of the Company on a date which is
before i) the end of the deferral period he elected or
ii) his Normal Retirement Date, and iii) any Proposed
Change in Control of the Company, then in lieu of the
Normal Retirement Benefit described in Section 4.01(a)
hereof, the Participant shall be entitled to receive an
Early Termination Benefit either at age 68 or at the
date of his termination as a Director, as determined by
the Committee in its sole discretion. The Early
Termination Benefit shall be equal to his Deferred
Account Balance at the time of his termination as
Director and shall be payable in a lump sum or in up to
fifteen (15) equal annual installments, as determined by
the Committee in its sole discretion. To the Early
Termination Benefit payable to a Participant under this
Section 4.02 shall be added interest at the rate
specified in his Deferred Compensation Agreement,
compounded annually, and credited on the unpaid deferred
Compensation from the date of termination until the date
paid by the Company.
4.03 "Entitlement to Normal Retirement Benefit After a Change
in Control of the Company": Notwithstanding anything to
the contrary herein, if within three years after a
Change in Control of the Company any Participant who,
before his Normal Retirement Date, is removed as a
Director of the Company by a vote of the shareholders,
resigns as a Director of the Company, completes his term
of office as a Director of the Company and is not
re-elected for the next successive term or is otherwise
unable to defer additional Compensation for a full (4)
years or until his Normal Retirement Date, whichever is
earlier, because of any amendment, suspension or
termination of the Plan, shall be entitled to receive
the Normal Retirement Benefit payable as provided in
Section 4.01(a) based upon his then existing Deferred
Account Balance.
ARTICLE V
SURVIVOR BENEFIT
5.01 "Survivor Benefit": Upon the occurrence of any of the
following events, the Company shall pay to a
Participant's Designated Beneficiary a benefit as
defined in this ARTICLE V (herein referred to as a
"Survivor Benefit"):
(a) The death of a Participant while serving as a
Director of the Company; or
(b) The death of a Participant after becoming
entitled to a Normal Retirement Benefit or an
Early Termination Benefit but prior to
commencement of payment of either such benefit.
5.02 "Amount of Survivor Benefit": The Survivor Benefit
shall be an amount equal to the Participant's Deferred
Account Balance at the date of his death together with
<PAGE>
Page 7
interest thereon, compounded annually, from the date
Compensation was deferred until the date it is
completely paid by the Company (a "Deferral Period") at
a rate equal to the prime rate announced by AmeriTrust
Company National Association in Cleveland, Ohio (or any
successor thereto) (hereinafter referred to as the
"Prime Rate") from time to time during the Deferral
Period. The Survivor Benefit shall be paid either in a
lump sum or in up to fifteen (15) annual installments,
as determined by the Committee in its sole discretion.
5.03 "Survivor Benefit After Commencement of Benefit Payments
to the Participant": In the event a Participant who
has begun to receive benefit installment payments under
the Plan dies prior to full payment of his Normal
Retirement Benefit or Early Termination Benefit, all
remaining payments due hereunder shall be made to such
Participant's Designated Beneficiary in the same amount
as was being received by the Participant.
ARTICLE VI
CERTAIN PAYMENTS TO PARTICIPANTS
6.01 "Termination and Change in Control": Notwithstanding
anything herein to the contrary, upon the occurrence of
a Termination and Change in Control, the Participants
shall be entitled to receive from the Company the
payments as provided in Section 6.03.
6.02 "Failure to Pay": Notwithstanding anything herein to the
contrary, upon the occurrence of a Failure to Pay, each
Participant covered by the situation described in clause
(i) of the definition of Failure to Pay, or each of the
Participants in the event of a situation described in
clause (ii) of that definition, as the case may be,
shall be entitled to receive from the Company the
payments as provided in Section 6.03.
6.03 "Payment Requirement": No later than the first to occur
of (i) six months following the date hereof for any
current Participant, (ii) a Termination and Change in
Control or a Failure to Pay for any current Participant
or (iii) the date upon which any person who is not a
current Participant upon the date hereof becomes a
Participant, each Participant shall select one of the
payment alternatives set forth below with respect to
that portion of the Participant's account equal to the
full amount of the account minus the Funded Amount, and
with respect to that portion of the account equal to the
Funded Amount. The payment alternatives selected with
respect to the two portions of the account need not be
the same. The payment alternatives are as follows:
(a) a Lump Sum Payment within 30 days following the
Termination and Change in Control or Failure to
Pay, as the case may be;
(b) payment in monthly, quarterly, semiannual or
annual payments, over a period not to exceed
fifteen years, as selected by the Participant at
the time provided in the first paragraph of this
Section 6.03, commencing within 30 days
following the Termination and Change in Control
<PAGE> Page 8
or Failure to Pay, as the case may be, which are
substantially equal in amount, except that
earnings attributable to periods following
Termination and Change in Control or Failure to
Pay at the rate or rates of interest specified
in the Participant's Deferred Compensation
Agreement shall be included with each payment.
Payment shall be made to each such Participant in
accordance with his or her selected alternative as
provided in Sections 6.01 and 6.02.
ARTICLE VII
AMENDMENT AND TERMINATION
7.01 "Right to Amend and Terminate the Plan": The Company
fully expects to continue the Plan but it reserves the
right, at any time or from time to time, by action of
the Board, to modify or amend the Plan, in whole or in
part. In addition, the Company reserves the right by
action of the Board to terminate the Plan, in whole or
in part, at any time and for any reason, including, but
not limited to, adverse changes in the federal tax laws.
Notwithstanding anything herein to the contrary, no
amendment, modification or termination of the Plan
shall, without the consent of the Participant, alter
this provision or impair any of the Participant's rights
under the Plan with respect to benefits accrued prior to
such amendment, modification or termination.
7.02 "Plan Termination Benefit":
(a) In the event of the complete termination of the
Plan, each Participant shall be entitled to
receive an amount equal to his then Deferred
Account Balance (other than amounts initially
deferred under the l980 Plan which will continue
to be held in accordance with the terms of the
Plan) together with interest thereon at the
Prime Rate in effect from time to time during
such Deferral Period, compounded annually, and
credited from the date of deferral until the
date paid by the Company (hereinafter referred
to as a "Plan Termination Benefit"). As
determined by the Committee in its sole
discretion, the Plan Termination Benefit shall
be payable either in a lump sum or in up to
fifteen (15) annual installments commencing at
the time elected by the Participant in his
Deferred Compensation Agreement prior to the
Deferral Period.
(b) In the event of a Participant's death prior to
the complete payment of the benefits provided
under this Section 8.02, all remaining payments
due hereunder shall be made to the Participant's
Designated Beneficiary in the same amount as was
being received by the Participant.
7.03 "Right to Amend or Terminate the Plan After a Change in
Control of the Company": Notwithstanding anything to
the contrary herein, no amendment shall be made to the
Plan after a Change in Control of the Company which
<PAGE> Page 9
would alter or impair this Section 7.03 or any rights or
obligations under the Plan in relation to any
Participant without the prior written consent of the
Participant; and in the event of complete termination of
the Plan after a Change in Control of the Company, each
Participant shall be entitled to receive his Normal
Retirement Benefit, if greater than the Plan Termination
Benefit, payable as provided in Section 4.01(a) based
upon his then existing Deferred Account Balance.
ARTICLE VIII
MISCELLANEOUS
8.01 "Non-Alienation of Benefits": Subject to any federal
statute to the contrary, no right or benefit under the
Plan shall be subject to anticipation, alienation, sale,
assignment, pledge, encumbrance, or charge, and any
attempt to anticipate, alienate, sell, assign, pledge,
encumber, or charge any right or benefit under the Plan
shall be void. No right or benefit hereunder shall in
any manner be liable for or subject to the debts,
contracts, liabilities, or torts of the person entitled
to such benefits. If a Participant or his Designated
Beneficiary (if entitled to benefits under the Plan)
shall become bankrupt, or attempt to anticipate,
alienate, sell, assign, pledge, encumber, or charge any
right hereunder, then such right or benefit shall, in
the discretion of the Committee, cease and terminate,
and in such event, the Company may hold or apply the
same or any part thereof for the benefit of the
Participant or his spouse, children, or other
dependents, or any of them, in such manner and in such
amounts and proportions as the Committee may deem
proper.
8.02 "No Trust Created": The obligations of the Company to
make payments hereunder shall constitute a liability of
the Company to the Participant. Such payments shall be
made from the general funds of the Company, and the
Company shall not be required to establish or maintain
any special or separate fund, or purchase or acquire
life insurance on a Participant's life, or otherwise to
segregate assets to assure that such payments shall be
made, and neither a Participant nor Designated
Beneficiary shall have any interest in any particular
asset of the Company by reason of its obligations
hereunder. Nothing contained in the Plan shall create
or be construed as creating a trust of any kind or any
other fiduciary relationship between the Company and a
Participant or any other person.
8.03 "No Employment Agreement": The Plan shall not be deemed
to constitute a contract of employment between the
Company and a Participant. Neither shall the execution
of the Plan nor any action taken by the Company pursuant
to the Plan be held or construed to confer on a
Participant any legal right to be continued as Director
of the Company, in an executive position or in any other
capacity with the Company whatsoever; nor shall any
provision herein restrict the right of any Participant
to resign as a Director.
<PAGE>
Page 10
8.04 "Binding Effect": Obligations incurred by the Company
pursuant to the Plan shall be binding upon and inure to
the benefit of the Company, its successors and assigns,
and the Participant or his Designated Beneficiary.
8.05 "Claims for Benefits": Each Participant or Designated
Beneficiary must claim any benefit to which he may be
entitled under this Plan by filing a written
notification with the Vice President and Secretary of
the Company. The Committee shall make all
determinations with respect to such claims for benefits.
If a claim is denied by the Committee, it must be denied
within a reasonable period of time in a written notice
stating the following:
(a) The specific reason for the denial.
(b) The specific reference to the Plan
provision on which the denial is based.
(c) A description of additional information
necessary for the claimant to present his
claim, if any, and an explanation of why
such information is necessary.
(d) An explanation of the Plan's claims review
procedure.
The claimant may have a review of the denial by the
Committee by filing a written notice with the Vice
President and Secretary of the Company within sixty (60)
days after the notice of the denial of his claim.
The written decision by the Committee with respect to
the review must be given within one hundred and twenty
(120) days after receipt of the written request.
8.06 "Entire Plan": This document and any amendments hereto
contain all the terms and provisions of the Plan and
shall constitute the entire Plan, any other alleged
terms or provisions being of no effect.
ARTICLE IX
CONSTRUCTION
9.01 "Governing Law": The Plan shall be construed and
governed in accordance with the law of the State of
Ohio.
9.02 "Gender": The masculine gender, where appearing in the
Plan, shall be deemed to include the feminine gender,
and the singular may include the plural, unless the
context clearly indicates to the contrary.
9.03 "Headings, etc.": The cover page of the Plan, the Table
of Contents and all headings used in this Plan are for
convenience of reference only and are not part of the
substance of the Plan.
<PAGE>
Page 11
Exhibit A
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT is made this day of , 199_ ,
between EATON CORPORATION (hereinafter the "Company"), an Ohio
corporation, and , a non-employee
Director of the Company (hereinafter called "Participant").
WHEREAS, the Board of Directors of the Company has
approved a Plan for the Deferred Payment of Directors' Fees (the
"Plan") for the purpose of attracting and retaining qualified
persons to serve as Directors of the Company;
WHEREAS, the Plan provides that a Director becomes a
participant under the Plan upon the execution and delivery by
him of a Deferred Compensation Agreement, in the form of this
Agreement, to the Administrative Committee under the Plan, and
the acceptance of such agreement by the Company;
NOW, THEREFORE, in consideration of the mutual
agreements herein contained, the Company and the Participant
hereby agree as follows:
1. Participation. This Agreement is made to evidence
the Participant's participation in the Plan, to set
forth the amount of the Participant's Compensation to be
deferred thereunder and to establish the interest rates
to be used to calculate the Participant's Normal
Retirement Benefit and his Early Termination Benefit
under the Plan.
2. The Plan Controls. The Plan (and all its
provisions), as it now exists and as it may be amended
hereafter, is incorporated herein and made a part of
this Agreement, and the provisions of the Plan, as it
may be amended from time to time, shall control the
terms and conditions of this Agreement and anything
contained herein which is inconsistent with the Plan, as
so amended, shall be of no force or effect.
3. Definitions. When used herein, the terms which are
defined in the Plan shall have the meanings given them
in the Plan.
4. No Interest Created. Neither the Participant nor
his Designated Beneficiary shall have any interest in
any specific asset of the Company, including policies of
insurance. The Participant and his Designated
Beneficiary shall have only the right to receive the
benefits provided under the Plan.
5. Deferrals. Pursuant to ARTICLE III of the Plan, the
Participant hereby elects to defer the receipt of, and
the Company hereby elects to defer the payment of,
future Compensation in the amount of Dollars
($ ) for each calendar year during the
period of to .
6. Normal Retirement Benefit Interest Rate. The
Participant's Normal Retirement Benefit shall be
determined by crediting interest to the Participant's
total Compensation deferred under the Plan (including
amounts transferred from the Company's Plan for the
<PAGE> Page 12
Deferred Payment of Directors' Fees established as of
June 1, 1980) at the rate of % compounded annually
from the date of deferral until paid by the Company.
7. Early Termination Benefit Interest Rate. In
accordance with ARTICLE IV of the Plan, interest shall
be credited to the Early Termination Benefit at a rate
equal to %, compounded annually.
8. Disposition In the Event of Plan Termination. In
the event the Company determines to terminate the Plan,
the Participant hereby elects to have his Plan
Termination Benefit (other than amounts transferred from
the 1980 Plan) distributed as indicated by the
Participant below: (The Participant should check only
one of the boxes below and sign his initials in the
opposite blank).
I hereby elect to have payment of
-------- the Plan Termination Benefit
initials commence within a reasonable period
of time after the Plan termination
date; or
I hereby elect to have the Plan
-------- Termination Benefit be retained by the
initials Company, credited with interest during
the Deferral Period, compounded
annually, at the Prime Rate and paid
commencing upon the earlier to occur
of my Normal Retirement or my resigna-
tion from the Board of Directors of
the Company.
The Company shall determine in its sole discretion
whether the Plan Termination Benefit shall be paid in a
lump sum or in up to fifteen (15) annual installments.
9. Entire Agreement. This Agreement contains the
entire agreement and understanding by and between the
Company and the Participant, and no representations,
promises, agreements, or understandings, written or
oral, not contained herein shall be of any force or
effect.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (l)
Plan for the Deferred Payment of Directors' Fees
(originally adopted in 1980 and
amended and effective February 25, 1997)
1. Purpose of Plan. It is the purpose of this Plan for
Deferred Payment of Directors' Fees (the "Plan") to enable
each Director of Eaton Corporation (the "Company") to defer
some or all fees which may be payable to the Director for
future services to be performed by him as a member of the
Board of Directors of the Company, or as a member of any
committee thereof.
2. Eligibility. Any Director of the Company who is separately
compensated for his services on the Company's Board of
Directors, or on any committee of such Board, and who is
first elected to the Board prior to 1996, shall be eligible
to participate in the Plan. Directors who are first elected
to the Board after 1995 shall not be eligible to participate
in the Plan.
3. Manner of Election. Any person wishing to participate in
the Plan must file with the Secretary of the Company at
Eaton Center, 1111 Superior Avenue, Cleveland, Ohio
44114-2584, a written notice, on the Notice of Election form
attached as Exhibit A, electing to defer payment of all or a
portion of his compensation as a Director (an "Election").
An Election shall become effective upon the effective date
of the Plan if filed within thirty (30) days following such
date. Thereafter, a person for whom an Election is not in
effect may elect to participate in the Plan as follows: (a)
with respect to Directors' fees payable for any calendar
year by filing an Election, in accordance with the procedure
described above, on or before December 31 of the preceding
calendar year; and (b) with respect to Directors' fees
payable for any portion of a calendar year which remains at
the time of such person's initial election to the Office of
Director of the Company, or any subsequent re-election if
immediately prior thereto he was not serving as a Director,
by filing an Election, in accordance with the procedure
described above, within thirty (30) days subsequent to such
election or re-election. An effective Election may not be
revoked or modified with respect to Directors' fees payable
for the calendar year or portion of a calendar year for
which such Election is effective and such Election, unless
terminated or modified as described below, shall apply to
Directors' fees payable with respect to each subsequent
calendar year. An effective Election may be terminated or
modified for any subsequent calendar year by the filing, as
described above, of either a new Election, in regard to
modifications, or a Notice of Termination, on the form
attached as Exhibit B, in regard to terminations, on or
before December 31 immediately preceding the calendar year
for which such modification or termination is to be
effective. An effective Election shall also terminate on
the date a person ceases to be a Director. A person for
whom an effective Election is terminated may thereafter file
a new Election for future calendar years for which he is
eligible to participate in the Plan.
<PAGE>
Page 2
Notwithstanding anything herein to the contrary, a Director
may elect to have held and distributed in accordance with
the terms and conditions of the 1996 Non-Employee Director
Fee Deferral Plan all or part of his or her compensation
which was deferred under the Plan.
4. Compensation Account. The amount of any Director's fees
deferred in accordance with an Election shall be credited to
a deferred compensation account maintained by the Company in
the name of the Director ("Deferred Compensation Account").
5. Adjustment of Deferred Compensation Account. As of each
Accounting Date (as defined below), the Deferred
Compensation Account for each Director shall be adjusted for
the period elapsed since the last preceding Accounting Date
as follows:
(a) First, the account shall be charged with any
distribution made during the period in accordance with
Paragraph 7, below.
(b) Then, the account shall be credited with the Interest
Factor for that period, as defined in Paragraph 6,
below.
(c) Finally, the account shall be credited with the
amount, if any, of any Director's fees deferred during
that period in accordance with an effective Election
under Paragraph 3, above.
For purposes of this Plan, the term "Accounting Date" means
each March 31, June 30, September 30 and December 31.
6. Interest Factor. As at any Accounting Date, the term
"Interest Factor" means an amount, if any, determined by
multiplying (i) an amount equal to the balance of the
Director's Deferred Compensation Account as of the close of
business on the next preceding Accounting Date by (ii) a
percentage determined by multiplying (A) the average of the
prime rates of interest in effect at KeyBank (or any
successor thereto), Cleveland, Ohio on the Accounting Date
and the next preceding Accounting Date by (B) 1/4.
7. Manner of Payment. A Director's deferred fees will be paid
to him or, in the event of his death, to his designated
beneficiary, in accordance with his Election. If a Director
elects to receive payment of his deferred fees in
installments rather than in a lump-sum, the payment period
shall not exceed ten years following the Payment
Commencement Date, as defined in Paragraph 8 below. The
amount of any installment payment shall be determined by
multiplying (i) the balance in the Director's Deferred
Compensation Account on the date of such installment by (ii)
a fraction, the numerator of which is one and the
denominator of which is the number of remaining unpaid
installments. The balance of the account shall be
appropriately reduced in accordance with Paragraph 5, above,
to reflect the installment payments made hereunder. Amounts
held pending distribution pursuant to this Paragraph 7 shall
continue to be credited with the Interest Factor described
in Paragraph 6 above.
<PAGE>
Page 3
8. Payment Commencement Date. Payments of amounts deferred
pursuant to an election under the Plan shall commence on
March 30 of the first year of deferred payment selected by a
Director in his Election. If a Director dies prior to the
first year of deferred payment selected by him, payments
shall commence on March 30 of the calendar year immediately
following the year of his death.
9. Beneficiary Designation. A Director may designate, in the
Beneficiary Designation form attached as Exhibit C, any
person to whom payments are to be made if the Director dies
before receiving payment of all amounts due hereunder. A
beneficiary designation will be effective only after the
signed Beneficiary Designation form is filed with the
Secretary of the Company while the Director is alive and
will cancel all beneficiary designations signed and filed
earlier. If the Director fails to designate a beneficiary
as provided above, or if all designated beneficiaries of the
Director die before the Director or before complete payment
of all amounts due hereunder, remaining unpaid amounts shall
be paid in one lump sum to the estate of the last to die of
the Director or the Director's designated beneficiaries, if
any.
10. Certain Payments to Directors.
(a) Notwithstanding anything herein to the contrary, upon
the occurrence of a Termination and Change in Control,
the Directors shall be entitled to receive from the
Company the payments as provided in Section 10(c) .
(b) Notwithstanding anything herein to the contrary, upon
the occurrence of a Failure to Pay, each Director
covered by the situation described in clause (i) of
the definition of Failure to Pay, or each of the
Directors in the event of a situation described in
clause (ii) of that definition, as the case may be,
shall be entitled to receive from the Company the
payments as provided in Section 10(c).
(c) No later than the first to occur of (i) six months
following the date hereof for any current Director,
(ii) a Termination and Change in Control or a Failure
to Pay for any current Director or (iii) thirty days
after the date upon which any person who is not a
current Director upon the date hereof becomes a
Director, each Director shall select one of the
payment alternatives set forth below with respect to
that portion of the Director's Deferred Compensation
Account equal to the full amount of the account minus
the Funded Amount, and with respect to that portion of
the account equal to the Funded Amount. The payment
alternatives selected with respect to the two portions
of the account need not be the same. The payment
alternatives are as follows:
(I) a lump sum payment within 30 days following the
Termination and Change in Control or Failure to
Pay, as the case may be;
(II) payment in monthly, quarterly, semiannual or
annual payments, over a period not to exceed
fifteen years, as selected by the Director at
the time provided in the first paragraph of this
<PAGE> Page 4
Section 10(c), commencing within 30 days
following the Termination and Change in Control
or Failure to Pay, as the case may be, which are
substantially equal in amount, except that
earnings attributable to periods following
Termination and Change in Control or Failure to
Pay shall be included with each payment.
Payment shall be made to each such Director in accordance
with his or her selected alternative as provided in Sections
10(a) and 10(b).
11. Non-Alienability of Benefits. Neither the Director nor any
beneficiary designated by him shall have any right to,
directly or indirectly, alienate, assign or encumber any
amount that is or may be payable hereunder.
12. Administration of Plan. Full power and authority to
construe, interpret and administer the Plan shall be vested
in the Company's Board of Directors. Decisions of the Board
shall be final, conclusive and binding upon all parties.
Notwithstanding the terms of an Election made by a
participant hereunder, the Board of Directors of the Company
may, in its sole discretion, change the terms of such
Election upon the request of a participant or his
representative, or a participant's beneficiary or such
beneficiary's representative, after considering the needs of
the Company and of the participant or the participant's
beneficiary.
13. Certain Definitions.
"Deferral Plans": The Company's plan of the same name as
this Plan and this Plan.
"Failure to Pay": The circumstances described in either (i)
or (ii) have occurred:
(i) Any Director shall have notified the Company and the
Trustee in writing that the Company shall have
failed to pay to the Director, when due, either
directly or by direction to the trustee of any trust
holding assets for the payment of benefits pursuant
to the Plan, at least 75% of any and all amounts
which the Director was entitled to receive at any
time in accordance with the terms of the Plan, and
that such amounts remain unpaid. Such notice must
set forth the amount, if any, which was paid to the
Director, and the amount which the Director believes
he or she was entitled to receive under the Plan.
The failure to make such payment shall have
continued for a period of 30 days after receipt of
such notice by the Company, and during such 30-day
period the Company shall have failed to prove, by
clear and convincing evidence as determined by the
Trustee in its sole and absolute discretion, that
such amount was in fact paid or was not due and
payable; or
<PAGE>
Page 5
(ii) More than two Directors shall have notified the
Company and the Trustee in writing that they have
not been paid when due, either directly or by
direction to the Trustee, amounts to which they are
entitled under the Plan and that such amounts remain
unpaid. Each such notice must set forth the amount,
if any, which was paid to the Director, and the
amount which the Director believes he or she was
entitled to receive under the Plan. Within 15 days
after receipt of each such notice, the Trustee shall
determine, on a preliminary basis, whether any
failure to pay such Directors has resulted in a
failure to pay when due, directly or by direction,
at least 75% of the aggregate amount due to all
Directors under all the Deferral Plans in any two-year
period, and that such amounts remain unpaid. If the
Trustee determines that such a failure has occurred,
then it shall so notify the Company and the Directors
in writing within the same 15 day period. Within a
period of 20 days after receipt of such notice from
the Trustee, the Company shall have failed to prove
by clear and convincing evidence, in the sole and
absolute discretion of the Trustee, that such amount
was paid or was not due and payable.
"Funded Amount": With respect to the Deferred
Compensation Account of any Director, the value of any
assets which have been placed in a grantor trust
established by the Company to pay benefits with respect
to that account, as determined at the time initial
payments are to be made pursuant to the selections made
by the Participants in accordance with Section 10(c).
"Termination and Change in Control": The termination of
the service as a Director of a Director for any reason
whatsoever prior to a Change in Control, upon a Change in
Control or during the three-year period immediately
following a Change in Control.
"Trustee": The trustee of any trust which holds assets for
the payment of the benefits provided by the Plan.
14. Governing Law. The provisions of the Plan shall be
interpreted and construed in accordance with the laws of
the State of Ohio.
15. Effective Date and Amendment. This amendment and
restatement of the Plan shall become effective on
September 24, 1996. The Committee may amend or terminate
the Plan at any time; provided that no such amendment or
termination shall adversely affect the amounts in any
then-existing Deferred Compensation Account or the
payment thereof in accordance with each Director's
Election.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (m)
1996 Non-Employee Director Fee Deferral Plan
(amended effective February 25, 1997)
I. Purpose
The 1996 Non-Employee Director Fee Deferral Plan (the
"Plan") enables each Director of Eaton Corporation ("Eaton" or
the "Company") who is not employed by the Company to defer re-
ceipt of fees that may be payable to him or her for future
services as a member of the Board of Directors of the Company
(the "Board") or as chairman or as a member of any committee of
the Board. The purpose of the Plan is to help attract and re-
tain highly qualified individuals to serve as members of the Com-
pany's Board of Directors and as members of committees thereof.
II. Eligibility
All members of the Board who are not employed by the
Company are eligible to participate in the Plan with respect to
amounts earned as fees for services as a member of the Board or
as chairman or a member of any committee of the Board.
III. Definitions
The terms used herein shall have the following meanings:
Account - A bookkeeping account established by Eaton for
a Participant to which may be credited Deferred Fees and earn-
ings or losses thereon.
Agreement - A written agreement between Eaton and a
Participant deferring the receipt of Fees and indicating the term
of the deferral.
Beneficiary - The person or entity designated in writing,
executed and delivered by the Participant to the Committee. If
that person or entity is not living or in existence at the time
any unpaid balance of Deferred Fees becomes due after the death
of a Participant, the term "Beneficiary" shall mean the Partici-
pant's estate or legal representative or any person, trust or
organization designated in such Participant's will.
Board - The Board of Directors of Eaton Corporation.
Change in Control of Eaton - Shall be deemed to occur if
(i) a tender offer shall be consummated for 25% or more of the
combined voting power of Eaton's then outstanding voting
securities, (ii) Eaton shall be merged or consolidated with
another corporation and as a result less than 75% of the
outstanding voting securities of the resulting corporation shall
be owned by the former shareholders of Eaton, other than
affiliates (within the meaning of the Securities Exchange Act of
1934 (the "Exchange Act")) of any party to such merger or con-
solidation, as the same shall have existed immediately prior to
such merger or consolidation, (iii) Eaton shall sell substan-
tially all of its assets to another corporation that is not a
wholly owned subsidiary of Eaton, (iv) any "person" (as such
term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange
Act) is or becomes the beneficial owner, directly or indirectly,
of 25% or more of the combined voting power of Eaton's then out-
standing securities; or (v) during any period of two consecutive
<PAGE> Page 2
years, individuals who at the beginning of that period constitute
the Board cease to constitute at least a majority thereof unless
the election, or the nomination for election by Eaton's share-
holders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were direc-
tors at the beginning of the period. For purposes of this Plan,
ownership of voting securities shall take into account and in-
clude ownership as determined by applying the provisions of Rule
13d-3(d)(l)(i) of the Exchange Act (as then in effect).
Committee - The Compensation and Organization Committee
of the Board or such other committee as the Board may from time
to time designate for purposes of administration of the Plan.
Common Share Retirement Deferred Fees - Retirement
Deferred Fees that are converted into share units in accordance
with Article VI.
Deferral Plans - This Plan and any other prior plan
sponsored by the Company pursuant to which Fees may be deferred.
Deferred Fees - That portion of Fees deferred pursuant to
the Plan.
Eaton - Eaton Corporation, an Ohio corporation, and its
subsidiaries and successors and assigns.
Eaton Common Shares - The common shares of Eaton
Corporation with a par value of fifty cents each.
Failure to Pay - The circumstances described in either
(i) or (ii) have occurred:
(i) Any Participant shall have notified the
Company and the Trustee in writing that the Company shall
have failed to pay to the Participant, when due, either
directly or by direction to the trustee of any trust
holding assets for the payment of benefits pursuant to
the Plan, at least 75% of any and all amounts which the
Participant was entitled to receive at any time in
accordance with the terms of the Plan, and that such
amounts remain unpaid. Such notice must set forth the
amount, if any, which was paid to the Participant by the
Company, and the amount which the Participant believes he
or she was entitled to receive under the Plan. The
failure to make such payment shall have continued for a
period of 30 days after receipt of such notice by the
Company, and during such 30-day period the Company shall
have failed to prove, by clear and convincing evidence as
determined by the Trustee in its sole and absolute
discretion, that such amount was in fact paid or was not
due and payable; or
(ii) More than two Participants shall have
notified the Company and the Trustee in writing that they
have not been paid when due, either directly or by
direction to the Trustee, amounts to which they are
entitled under the Plan and that such amounts remain
unpaid. Each such notice must set forth the amount, if
any, which was paid to the Participant, and the amount
which the Participant believes he or she was entitled to
receive under the Plan. Within 15 days after receipt of
each such notice, the Trustee shall determine, on a
preliminary basis, whether any failure to pay such
<PAGE> Page 3
Participants has resulted in a failure to pay when due,
directly or by direction, at least 75% of the aggregate
amount due to all Participants under all the Deferral
Plans in any two-year period, and that such amounts re-
main unpaid. If the Trustee determines that such a
failure has occurred, then it shall so notify the Company
and the Participants in writing within the same 15 day
period. Within a period of 20 days after receipt of such
notice from the Trustee, the Company shall have failed
to prove by clear and convincing evidence, in the sole
and absolute discretion of the Trustee, that such amounts
were paid or were not due and payable.
Fees - Any amount payable to a Participant for services
as a member of the Board or as chairman or a member of any com-
mittee of the Board.
Funded Amount - With respect to the Account of any
Participant, the value of any assets which have been placed in a
grantor trust established by the Company to pay benefits with
respect to that Account, as determined at the time initial
payments are to be made pursuant to the selections made by the
Participants in accordance with Section 10.03.
Interest Rate Retirement Deferred Fees - Retirement
Deferred Fees that are credited with Treasury Note Based Interest
in accordance with Article VII.
Participant - A member of the Board who is not an em-
ployee of Eaton and who elects to defer receipt of Fees.
Periodic Installments - Monthly, quarterly, semiannual or
annual payments, over a period not to exceed fifteen years, as
determined by the Committee in its sole discretion, which are
substantially equal in amount, or, in the case of Common Share
Retirement Deferred Fees, substantially equal in the number of
share units being valued and paid or the number of Eaton Common
Shares being distributed, except that earnings attributable to
periods following Retirement or Termination of Service as a
Director shall be included with each payment.
Plan - This 1996 Non-Employee Director Fee Deferral Plan
pursuant to which Fees may be deferred for later payment.
Retirement - The Termination of Service as a Director of
a Participant who is age 55 or older and who has at least ten
years of service as a member of the Board, who is age 68 or
older, or who is approved by the Committee to qualify as a re-
tirement.
Retirement Deferred Fees - That portion of Fees deferred
for payment at Retirement, at one year following Retirement, or
in Periodic Installments commencing after Retirement.
Short-Term Deferred Fees - That portion of Fees deferred
for payment as determined by the Committee in accordance with
Article V.
Termination and Change in Control - The Termination of
Service as a Director of a Participant for any reason whatsoever
prior to a Change in Control if there is a subsequent Change in
Control or the Termination of Service as a Director of a Partici-
pant for any reason whatsoever during the three-year period
immediately following a Change in Control.
<PAGE> Page 4
Termination of Service as a Director - The time when a
Participant shall no longer be a member of the Board, whether by
reason of retirement, death, voluntary resignation, divestiture,
removal (with or without cause), or disability.
Treasury Bill Interest Equivalent - A rate of interest
equal to the quarterly average yield of 13-week U.S. Government
Treasury Bills.
Treasury Note Based Interest - A rate of interest equal
to the average yield of 10-year U.S. Government Treasury Notes
plus 300 basis points.
Trustee - The trustee of any trust which holds assets for
the payment of the benefits provided by the Plan.
IV. Election to Defer
Section 4.01 Deferral Options. For each calendar year
commencing with 1997, a Participant may elect to defer the re-
ceipt of all or part of his or her Fees as Short-Term Deferred
Fees or Retirement Deferred Fees. Once a Participant has made an
effective election, he or she may not thereafter change that
election or change any allocation between Short-Term Deferred
Fees or Retirement Deferred Fees.
Section 4.02 Amount Deferred. Not less than 10% of Fees
payable for any calendar year may be deferred under the Plan. If
a Participant elects to allocate a portion of Fees to both Short-
Term Deferred Fees and Retirement Deferred Fees, the amount
allocated to each shall be not less than 10% of the Fees payable
for any calendar year.
Section 4.03 Election Deadline. To be in effect, a
Participant's election must be completed, signed and filed with
the Committee on or before such date as is necessary to defer
inclusion of the Fees in the Director's gross income for Federal
income tax purposes.
Section 4.04 Transfers. Notwithstanding anything herein
to the contrary, a Participant may elect to have held and
distributed in accordance with the terms and conditions of the
Plan all or part of his or her compensation which was deferred
under the 1980 Plan for Deferred Payment of Directors' Fees, and
any such election with respect to amounts to be held and
distributed as Retirement Deferred Fees for any Participant in
payment status upon the effective date of such election may be
held only as Interest Rate Deferred Fees if to do otherwise would
be administratively impractical.
V. Short-Term Deferred Fees
If elected by a Participant, payment of the amount of
Fees allocated to Short-Term Deferred Fees will be deferred.
Short-Term Deferred Fees shall be credited to the Participant on
the date such amount would have been distributed to him or her if
there had been no valid deferral election by establishing an
Account in the Participant's name. Treasury Bill Interest
Equivalents shall be credited quarterly to the Participant's
Short-Term Deferred Fees Account until such compensation is paid
to the Participant. Short-Term Deferred Fees, together with
credited Treasury Bill Interest Equivalents, shall be paid to the
Participant in a lump sum or in not more than five annual
installments as determined by the Committee.
<PAGE> Page 5
VI. Retirement Deferred Fees
Section 6.01 Duration. If elected by a Participant,
payment of the amount of Fees allocated to Retirement Deferred
Fees will be deferred to Retirement or to one year after
Retirement, but subject to Committee discretion as to date of
payment as provided herein. Retirement Deferred Fees shall be
credited to the Participant on the date such amount would have
been distributed to him or her if there had been no valid de-
ferral election by establishing an Account in the Participant's
name.
Section 6.02 Common Share Retirement Deferred Fees. Be-
tween 50% and 100%, as elected by the Participant, of the amount
allocated to Retirement Deferred Fees shall be credited to Common
Share Retirement Deferred Fees, and the balance shall be credited
to Interest Rate Retirement Deferred Fees.
Common Share Retirement Deferred Fees shall be converted
into a number of share units based upon the average of the mean
prices for Eaton Common Shares for the twenty trading days of the
New York Stock Exchange during which Eaton Common Shares were
traded immediately following the end of the calendar year in
which the Fees to be deferred were earned. On each Eaton Common
Share dividend payment date, dividend equivalents equal to the
actual Eaton Common Share dividends paid shall be credited to
the share units in the Participant's Account, and shall in turn
be converted into share units utilizing the mean Eaton Common
Share price on the New York Stock Exchange on the dividend pay-
ment date.
Upon payment of Common Share Retirement Deferred Fees in
Eaton Common Shares, the share units standing to the Partici-
pant's credit shall be converted to the same number of Eaton
Common Shares for distribution to the Participant.
Upon payment of Common Share Retirement Deferred Fees in
cash, including any installment thereof in the case of Periodic
Installments, the share units required to make the cash payment
shall be converted to an amount equal to the greater of: (a) the
product of the average of the mean prices for an Eaton Common
Share for the last twenty trading days of the New York Stock Ex-
change during which Eaton Common Shares were traded in the month
immediately preceding the month in which the date of payment
occurs, multiplied by the number of share units then credited to
the Participant's Account, or (b) if a Change in Control of Eaton
shall have occurred at any time within thirty-six months
immediately preceding the payment, the product of the number of
share units credited to the Participant's Account at the time of
payment multiplied by the highest of (i) the highest price paid
for an Eaton Common Share in any tender offer in connection with
the Change in Control of Eaton; (ii) the price received for an
Eaton Common Share in any merger, consolidation or similar event
in connection with the Change in Control of Eaton; or (iii) the
highest price paid for an Eaton Common Share as reported in any
Schedule 13D within the sixty-day period immediately preceding
the Change in Control of Eaton.
Section 6.03 Interest Rate Retirement Deferred Fees.
Retirement Deferred Fees not credited to Common Share Retirement
Deferred Fees shall be credited to Interest Rate Retirement
Deferred Fees. Interest Rate Retirement Deferred Fees shall be
credited to the Interest Rate Retirement Deferred Fees Account,
<PAGE>
Page 6
which shall earn Treasury Note Based Interest, compounded
quarterly, until paid.
Section 6.04 Periodic Installments. Upon the death of a
Participant who has commenced receiving Periodic Installments,
the entire remaining amount of his or her Retirement Deferred
Fees shall be distributed to the Participant's Beneficiary. Such
distributions may be made either in a lump sum or in installments
in such amounts and over such periods, not exceeding the remain-
ing number of annual installments from the date of death of the
Participant, as the Committee may direct in its sole discretion.
Section 6.05 Termination of Service as a Director. The
Retirement Deferred Fees Account of a Participant whose Termina-
tion of Service as a Director occurs for reasons other than Re-
tirement shall be distributed in a lump sum or in Periodic In-
stallments, as the Committee may determine in its sole discre-
tion. The lump sum payment shall be made, or the Periodic In-
stallments shall commence, when the Committee may determine in
its sole discretion, no later than February 1 of the calendar
year immediately after the calendar year that includes the earl-
iest of: (i) the Participant's death, (ii) the Participant's
attainment of age 55 if he or she was credited with at least 10
years of service for Eaton (or an affiliate of Eaton), (iii) the
Participant's attainment of age 68, or (iv) the fifth anniversary
of the Participant's Termination of Service as a Director.
Earnings shall be credited on undistributed Retirement
Deferred Fees Accounts, and annual installment payments shall be
adjusted to reflect such additional earnings, based on the
remaining number of installment payments to be distributed and
based on Treasury Note Based Interest, computed quarterly.
VII. Amendment and Termination
Eaton fully expects to continue the Plan but it reserves
the right, except as otherwise provided herein, at any time by
action of the Board, to modify, amend or terminate the Plan for
any reason, including adverse changes in the federal tax laws.
Notwithstanding the foregoing, upon the occurrence of a Change in
Control of Eaton, no amendment, modification or termination of
the Plan shall, without the consent of any particular Partici-
pant, alter or impair any rights or obligations under the Plan
with respect to that Participant.
VIII. Administration
The Plan shall be administered by the Committee. The
Committee shall interpret the provisions of the Plan where
necessary and may adopt procedures for the administration of the
Plan which are consistent with the provisions of the Plan and any
rules adopted by the Committee.
After Retirement or other Termination of Service as a
Director, the Committee shall determine in its sole discretion
(i) whether Retirement Deferred Fees shall be paid in a lump sum
or in Periodic Installments, (ii) the date on which a lump sum
payment will be made or Periodic Installments will commence,
which in the case of Retirement shall be not later than one year
following the date to which the deferral was made, and in the
case of Termination of Service as a Director for reasons other
than Retirement shall be in accordance with Section 6.05, (iii)
whether to change the Periodic Installments or the number of
years over which they are to be paid, and (iv) whether Common
<PAGE> Page 7
Share Retirement Deferred Fees will be paid in cash or in Eaton
Common Shares. In making these determinations, the Committee may
consider the wishes and needs of the Participant or his or her
Beneficiary.
Each Participant or Beneficiary must claim any benefit to
which such Beneficiary may be entitled under the Plan by a writ-
ten notification to the Committee. If a claim is denied, it must
be denied within a reasonable period of time in a written notice
stating the specific reasons for the denial. The claimant may
have a review of the denial by the Committee by filing a written
notice with the Committee within sixty days after the notice of
the denial of his or her claim. The written decision by the Com-
mittee with respect to the review must be given within 120 days
after receipt of the written request.
The determinations of the Committee shall be final and
conclusive.
IX. Termination and Change in Control - Failure to Pay
Section 9.01 Termination and Change in Control.
Notwithstanding anything herein to the contrary, upon the
occurrence of a Termination and Change in Control, the
Participants shall be entitled to receive from the Company the
payments as provided in Section 9.03.
Section 9.02 Failure to Pay. Notwithstanding anything
herein to the contrary, upon the occurrence of a Failure to Pay,
each Participant covered by the situation described in clause (i)
of the definition of Failure to Pay, or each of the Participants
in the event of a situation described in clause (ii) of that
definition, as the case may be, shall be entitled to receive from
the Company the payments as provided in Section 9.03.
Section 9.03 Payment Requirement. No later than (i) the
first to occur of six months following the date hereof, a
Termination and Change in Control or a Failure to Pay for any
person who is a Participant upon such event or (ii) the date upon
which any person who is not subject to clause (i) becomes a
Participant, each Participant shall select one of the payment
alternatives set forth below with respect to that portion of the
Participant's Account equal to the full amount of the Account
minus the Funded Amount, and with respect to that portion of the
Account equal to the Funded Amount. The payment alternatives
selected with respect to the two portions of the Account need not
be the same. The payment alternatives are as follows:
(a) a Lump Sum Payment within 30 days following
the Termination and Change in Control or Failure to Pay, as
the case may be;
(b) payment in monthly, quarterly, semiannual
or annual payments, over a period not to exceed fifteen
years, as selected by the Participant at the time provided
in the first paragraph of this Section 9.03, commencing
within 30 days following the Termination and Change in
Control or Failure to Pay, as the case may be, which are
substantially equal in amount or in the number of share
units being valued and paid or in the number of Eaton
Common Shares being distributed, except that earnings
attributable to periods following Termination and Change
in Control or Failure to Pay shall be included with each
payment.
<PAGE> Page 8
Payment of such amounts shall be made to each such Participant in
accordance with his or her selected alternative as provided in
Section 9.01 and 9.02.
X. Miscellaneous
Section 10.01 Adjustments. In the event of a
reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split,
stock dividend, rights offering or similar event affecting shares
of the Company, the Committee shall equitably adjust the number
of share units previously allocated to the Accounts of Partici-
pants as Common Share Retirement Deferred Fees.
Section 10.02 Designation of Beneficiaries. Each
Participant shall have the right, by written instruction to the
Committee, on a form supplied by the Committee, to designate one
or more primary and contingent Beneficiaries (and the proportion
to be paid to each, if more than one is designated) to receive
his or her Account balance upon his or her death. Any such
designation shall be revocable by the Participant.
Section 10.03 Committee Actions. All actions of the
Committee hereunder may be taken with or without a meeting. If
taken without a meeting, the action shall be in writing and
signed by a majority of the members of the Committee and if taken
with a meeting, a majority of the Committee shall constitute a
quorum for any such action.
Section 10.04 Assignment. No benefit under the Plan shall
be subject to anticipation, alienation, sale, transfer or
encumbrance, and any attempt to do so shall be void. No benefit
hereunder shall in any manner be liable for the debts, contracts,
or liabilities of the person entitled to such benefits. If a
Participant or Beneficiary shall become bankrupt, or attempt to
anticipate, alienate, sell, transfer or encumber any benefit
hereunder, then such benefit shall, in the discretion of the
Committee, cease and terminate, and the Committee may hold or
apply the same for the benefit of the Participant or his or her
spouse, children, or other dependents, or any of them, in such
manner and in such amounts and proportions as the Committee may
deem proper. During a Participant's lifetime, rights hereunder
are exercisable only by the Participant or the Participant's
guardian or legal representative. Notwithstanding the foregoing,
nothing in this Section shall prohibit the transfer of any bene-
fit by will or by the laws of descent and distribution or (if
permitted by applicable regulations under Section 16(b) of the
Securities Exchange Act) pursuant to a qualified domestic
relations order, as defined under the Internal Revenue Code and
the Employee Retirement Income Security Act.
Section 10.05 No Funding Required. The obligations of
Eaton to make payments shall be a liability of Eaton to the
Participant. Eaton shall not be required to maintain any sepa-
rate fund or reserve, or purchase or acquire life insurance on a
Participant's life, or otherwise segregate assets to assure that
any particular asset of Eaton is available to make such payments
by reason of Eaton's obligations hereunder. Nothing contained in
the Plan shall be construed as creating a trust or other fiduci-
ary relationship between Eaton and a Participant or any other
person.
<PAGE>
Page 9
Section 10.06 No Contract for Services. The Plan shall
not be deemed to constitute a contract for services between Eaton
and a Participant. Neither the execution of the Plan nor any
action taken by Eaton or the Committee pursuant to the Plan shall
confer on a Participant any legal right to be continued as a
member of the Board or in any other capacity with Eaton whatso-
ever.
Section 10.07 Governing Law. The Plan shall be construed
and governed in accordance with the law of the State of Ohio to
the extent not covered by Federal law.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (n)
Eaton Corporation Trust Agreement - Outside Directors
This Trust Agreement (the "Trust Agreement") is made this
6th day of December, 1996, by and between Eaton Corporation (the
"Company"), an Ohio corporation with its principal offices at
Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114 and
Wachovia Bank of North Carolina, N.A. (the "Trustee") with its
principal office in Winston-Salem, North Carolina.
Recitals
(a) WHEREAS, the Company has adopted the nonqualified deferred
compensation plans, programs and agreements as listed in
Attachment A (individually a "Plan" and collectively the
"Plans");
(b) WHEREAS, the Company has incurred or expects to incur
liability under the terms of the Plans with respect to the
Participants;
(c) WHEREAS, the Company has previously established a trust
agreement (the "Prior Trust") between Eaton Corporation and
National City Bank, as trustee (the "Prior Trustee") dated
April 22, 1987;
(d) WHEREAS, the Prior Trust is revocable by the Company at any
time prior to a change of control and the Company has
determined to revoke such Prior Trust and to remove the
Prior Trustee as Trustee;
(e) WHEREAS, the Board of Directors of the Company has
authorized the establishment of a grantor trust to be used
to fund certain deferred compensation obligations under the
Plans;
(f) WHEREAS, the Company intends to contribute assets to the
Trust that shall be held subject to the claims of the Com-
pany's creditors in the event of the Company's Insolvency,
as herein defined, until paid to Participants in such manner
and at such times as specified in the Plans and in this
Trust Agreement;
(g) WHEREAS, it is the intention of the Company to make
contributions to the Trust to provide itself with a source
of funds to assist it in satisfying its liabilities under
the Plans;
(h) WHEREAS, it is the intention of the parties that the Trust
shall constitute an unfunded arrangement and shall not
affect the status of the Plans as unfunded plans maintained
for the purpose of providing deferred compensation for a
select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income
Security Act of 1974.
NOW, THEREFORE, the parties do hereby establish the Trust
and agree that the Trust shall be comprised, held and disposed of
as follows:
Section 1 Establishment of the Trust
<PAGE>
Page 2
1.01 Appointment of Trustee. The Company hereby appoints
Wachovia Bank of North Carolina, N.A., a national banking
association with trust powers, to serve as Trustee for the
Trust under the terms of this Trust Agreement, and the
Trustee hereby accepts its appointment. The Trust shall be
called the Eaton Corporation Grantor Trust Agreement
dated____________, 1996, and shall be effective on the same
date.
1.02 Grantor Trust. The Trust is intended to be a grantor trust,
of which the Company is the grantor, within the meaning of
subpart E, part I, subchapter J, chapter 1, subtitle A of
the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
1.03 Revocability. The Trust shall be irrevocable by the Company
at any time after the first to occur of one year from the
date hereof, a Change of Control or such other date as shall
be mutually agreeable to the Company and the Trustee. Prior
to that date, the Trust shall be unilaterally revocable by
the Company.
1.04 Deposit of Trust Assets. The Company hereby deposits $1,000
with the Trustee, in trust, which shall become the initial
principal of the Trust, and the Company may at any time make
additional deposits with the Trustee of cash or other
property in accordance with the Trust Agreement. All such
deposits shall be held, administered and disposed of by the
Trustee as provided in the Trust Agreement.
1.05 Use of Trust Assets. The principal of the Trust, and any
earnings thereon, shall be held separate and apart from
other funds of the Company and, except as otherwise
expressly provided herein, shall be used exclusively for the
uses and purposes of Participants, general creditors of the
Company and Trust expenses, in each case as herein set
forth. Plan participants and their beneficiaries shall have
no preferred claim on, or any beneficial ownership interest
in, any assets of the Trust. All rights created under the
Plans and Trust shall be unsecured rights of Participants
against the Company. Any assets held by the Trust will be
subject to the claims of the Company's general creditors
under federal and state law in the event of Insolvency, as
defined herein.
1.06 Agent. At the effective date of this Trust or at such time
as may be determined by the Company, the Company may
designate an agent (the "Agent") for administering the
Plans. The Agent may be the Trustee or a third party
professional administrator familiar with deferred
compensation Plans, and shall perform record keeping and
administrative duties. If the Company fails to appoint an
Agent, then the Company shall perform those duties.
Following a Change of Control or a Failure to Pay, the
Trustee shall appoint the Agent (who may have been the Agent
prior to the Change of Control), and the Company may no
longer perform the record keeping and administrative duties.
The Trustee may be protected from acting upon advice or
direction of the Agent within its area of responsibility to
the same extent that it could rely upon advice or direction
from the Company.
Section 2 Benefit Schedule and Plans
<PAGE>
Page 3
2.01 Plans. Within 30 days after the effective date of this
Trust, the Company shall provide the Trustee with complete,
current copies of the Plans. The Company shall provide the
Trustee with all changes to these Plans within 30 days after
such changes are effective. The Company shall also furnish
the Trustee, upon the Trustee's request, such information as
the Trustee shall deem necessary for its determination under
Section 2.06. The Trustee is authorized to rely on the
latest copy of the Plans provided to it by the Company,
provided that any Plan amendments submitted to the Trustee
may not be inconsistent with the plan amendment provisions
of those Plans.
2.02 Benefit Schedule - Contents. The Company shall provide a
schedule (the "Benefit Schedule") to the Trustee and to each
Participant as it relates to that Participant, indicating
(i) the amounts payable to or in respect of each Participant
under each Plan, or providing formulae or instructions
acceptable to the Trustee, utilizing readily determinable
and objective information, for determining such amounts,
(ii) the form in which such amounts are to be paid (as
provided for or available under the Plans) or the method of
determining such form of payment, and (iii) the timing of
such payments or the method of determining such timing, (iv)
Beneficiary designations for each Participant, and (v) any
other information within the possession or control of the
Company reasonably necessary for the Trustee to use to
determine benefits under the Trust.
2.03 Benefit Schedule - When Furnished. A copy of the Benefit
Schedule is attached hereto as Attachment B and is hereby
made a part of this Trust Agreement. The Company shall
provide a current version of the Benefit Schedule (i) not
later than 45 days after the end of each calendar year, (ii)
following a Proposed Change of Control and before a Change
of Control, as of the date of the Proposed Change of
Control, (iii) within 45 days after a Change of Control or a
Failure to Pay, as of the date of such event and (iv) at
such other times as may in the judgment of the Company be
appropriate in view of any change in circumstances.
2.04 Amendments to Attachment A. Not later than 45 days after
the end of each calendar year and at such other times as may
in the judgment of the Company be appropriate, the Company
shall furnish to the Trustee and to each affected
Participant (as it pertains to such Participant) any
amendment to Attachment A and any corresponding amendment to
the Benefit Schedule required as a result of such amendment
to Attachment A.
2.05 Agreement Between Company and Participant. If the Company
and each Participant do not agree upon the Benefit Schedule,
as it may be updated from time to time as provided in
Sections 2.03 and 2.04, and any amendment to Attachment A,
as the same pertains to the Participant's benefits, then the
provisions of Section 2.06 shall control.
2.06 Trustee Resolves Disagreement. Upon written notification to
the Trustee by the Company or any Participant of the failure
of the Company and such Participant to agree as provided in
Section 2.05, the Trustee shall, to the extent necessary in
the sole judgment of the Trustee, (i) recompute the amount
payable hereunder to any Participant, as set forth in the
<PAGE>
Page 4
Benefit Schedule, and (ii) notify the Company and the
Participant in writing of its computations. Thereafter,
this Trust Agreement and the Benefit Schedule shall be
amended to the extent of such Trustee determinations without
further action; provided, however, that the failure of the
Company to furnish any amendment, restatement or successor
to the Plans, or compensation or other information shall in
no way diminish the rights of any Participant hereunder or
thereunder. If the Trustee has not completed its
recomputation within 30 days after receipt of written
notification of the failure of the Company and the
Participant to agree, as provided above, the Trustee shall
make any payments to the Participant from his or her account
hereunder, in accordance with the terms hereof, based upon
the Benefit Schedule which is in effect at that time.
Following the recomputation, any overpayments by reason of
the foregoing shall be repaid to the Trust without interest.
The Trustee, however, shall have no obligation to enforce
repayment of any such overpayments, nor shall it incur any
liability to any party whatsoever, including without
limitation any liability to the Company or to any other
Participant, for having made any such overpayment. The
obligation to enforce repayment of any such overpayment
shall rest solely with the Company.
Section 3 Contributions to the Trust
3.01 No Company Obligation. The Company may make contributions
to the Trust to provide assets for payment of benefits under
the Plans at such times as it shall determine in its sole
discretion as grantor. The Company shall have no obligation
to make contributions to the Trust, except as otherwise
expressly provided in Section 3.03.
3.02 Allocation of Contributions. At the time it makes
contributions to the Trust, the Company shall identify the
Plans, or the Participant Plan accounts and the Plans, for
which such contributions are made and the amount contributed
for each such Participant Plan account or Plan. The amounts
contributed for a Plan (as contrasted with the amounts
contributed for Participant Plan accounts) shall be
allocated among the accounts for the Participants in the
Plan in proportion to the benefits accrued thereunder prior
to 1996, and in proportion to those accrued thereunder in
1996 or thereafter, as may be specified by the Company. If
it is determined by the Trustee that the balance of a
Participant's account for any Plan reflects Trust assets
that will clearly never be required to pay benefits to the
Participant, such excess assets shall be reallocated first
in proportion to the balances of the separate accounts of
the remaining Participants in that Plan, and after such Plan
is fully funded, then in proportion to the balances of the
separate accounts of the Participants in the other Plans.
3.03 Change of Control or Failure to Pay. Upon a Change of
Control or a Failure to Pay as defined in clause (ii) of the
definition of that term, the Company shall make a
contribution to the Trust in an amount that is sufficient to
fund 100% of the amount necessary to pay each Participant
the benefits to which the Participant would be entitled
pursuant to the terms of the Plans as of the date of the
Change of Control or such Failure to Pay.
<PAGE>
Page 5
3.04 Assets Contributed. Assets contributed by the Company to
the Trust must be, in the sole and absolute discretion of
the Trustee, easily liquidated. Equity securities must be
traded on a national securities exchange or on the NASDAQ
National Market System. Debt securities must be at least
"investment grade" as that term is commonly used by the debt
rating agencies. Subject to the foregoing, prior to a
Change of Control or a Failure to Pay, the Company may
contribute equity (but not debt) securities of the Company
or any affiliate. Thereafter, the Company may not
contribute such securities.
3.05 Expense Account. The Company may, in its sole and absolute
discretion, deliver to the Trustee from time to time assets
to be allocated to an account to be used to pay Trustee
administrative and other expenses not included with the
Trustee's fees as contemplated by Section 11.02 ("Expense
Account"). All amounts in the Expense Account, including
contributions and earnings thereon, may be used only for
these purposes. Notwithstanding the foregoing, upon a
Change of Control or a Failure to Pay, the Company shall
deliver an amount to the Trustee to be allocated to the
Expense Account such that the amount in that account will
then be $250,000.
Section 4 Payments to Participants
4.01 Prior to a Termination and Change of Control or a Failure to
Pay.
Prior to a Termination and Change of Control or a Failure to
Pay:
(a) Distributions from the Trust shall be made by the Trustee to
Participants only at the direction of the Company. The
Company shall provide such directions annually for each
Plan, and such directions (when considered together with
payments to Participants by the Company from sources other
than Trust assets) must provide for payments to Participants
which are in accordance with the Benefit Schedule and the
Plans. Such directions may not provide for distributions
from a Participant's Plan account which bear a greater
proportion to the total payment then being made to the
Participant, than the amount in the Participant's Plan
account under the Trust bears to the Plan Participant's
accrued benefit under the Plan ("Prorata Payment"). If no
directions are given or if the directions provide for a
distribution from the Trust to a Participant which is less
than a Prorata Payment, then in either case an amount
necessary to achieve a Prorata Payment will be removed from
the Participant's Plan account by the Trustee and
reallocated amongst the accounts of all the Participants in
the Plan in proportion to the balances in their respective
accounts, including the Participant from whom the Trustee
removed an amount in accordance with this sentence.
(b) The Company may make benefit payments pursuant to the Plans
(other than distributions from the Trust) directly to
Participants as the payments become due, or it may remit the
amount needed for such payments to the Trustee, in which
case the Trustee will make such payments. The Company shall
notify the Trustee of its decision prior to the time amounts
are payable to the Participant. The Company shall be
responsible for all tax withholdings and reportings for
<PAGE> Page 6
payments it makes. The Trustee shall make all tax
withholdings or payments from the Trust assets. Such
withholdings shall be remitted to the tax authorities, or to
the Company for remission to the tax authorities, as the
Trustee and the Company may agree.
4.02 After a Termination and Change of Control or a Failure to
Pay.
(a) Notwithstanding anything herein to the contrary, upon the
occurrence of a Termination and Change in Control, the
Participants shall be entitled to receive from the Trust the
payments provided in Section 4.02(c).
(b) Notwithstanding anything herein to the contrary, upon the
occurrence of a Failure to Pay, each Participant covered by
the situation described in clause (i) of the definition of
Failure to Pay, or each of the Participants in the event of
a situation described in clause (ii) of that definition, as
the case may be, shall be entitled to receive from the Trust
the payments as provided in Section 4.02(c).
(c) No later than the first to occur of (i) six months following
the date hereof for any person who is a Participant prior to
the first of the events described in clause (i) or (ii),
(ii) a Termination and Change in Control or a Failure to Pay
for any person who is a Participant prior to the first of
the events described in clause (i) or (ii), or (iii) the
date upon which any person who is not a Participant prior to
the first to occur of the events described in (i) or (ii)
becomes a Participant, each Participant shall select one of
the following payment alternatives with respect to each
Plan, and payment shall be made to each such Participant in
accordance with his or her selected alternative as provided
in Sections 4.02(a) and 4.02(b):
A lump sum payment of the full amount in the
Participant's Plan account within 30 days following
the Termination and Change in Control or Failure to
Pay, as the case may be;
Payment of the full amount in the Participant's Plan
account in monthly, quarterly, semiannual or annual
payments, over a period not to exceed fifteen years,
as selected by the Participant at the time provided in
the first paragraph of this Section 4.02(c),
commencing within 30 days following the Termination
and Change in Control or Failure to Pay, as the case
may be, which are substantially equal in amount or in
the number of share units being valued and paid or in
the number of Eaton shares being distributed, except
that earnings attributable to periods following
Termination and Change in Control or Failure to Pay
shall be included with each payment.
4.03 Tax Payments.
(a) Either before or after Termination and Change of Control or
a Failure to Pay, if any Participant is determined to be
subject to federal income tax on any amount to the credit of
his or her account under any Plan prior to the time of
actual payment hereunder, whether or not due to the
establishment of or contributions to this Trust, a portion
of such taxable amount equal to the taxes, including
<PAGE> Page 7
interest and penalties, owed on such taxable amount, shall
be distributed by the Trustee from the Participant's Plan
account to such Participant within thirty days after receipt
of notice from the Participant, with a copy to the Company,
setting forth the amount of such tax, interest and penalties
and a certification by the Participant that such tax,
interest and penalties have not otherwise been paid by the
Company.
(b) For purposes of this Section 4.03, a Participant shall be
deemed to pay state and local taxes at the highest marginal
rate of taxation in the state in which the Participant
resides or is employed (or both) where a tax is imposed, and
federal income taxes at the highest marginal rate of
taxation, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state
and local taxes.
(c) An amount to the credit of a Participant's account shall be
determined to be subject to federal income tax for purposes
of this Section 4.03 upon the earliest of: (i) a final
determination by the United States Internal Revenue Service
addressed to the Participant which is not appealed to the
courts; (ii) a final determination by the United States Tax
Court or any other federal court affirming any such
determination by the Internal Revenue Service; or (iii) an
opinion by the Company's tax counsel, addressed to the
Company and the Trustee, to the effect that by reason of
Treasury Regulations, amendments to the Internal Revenue
Code, published Internal Revenue Service rulings, court
decisions or other substantial precedent, amounts to the
credit of Participants hereunder are subject to federal
income tax prior to payment.
(d) The Company shall undertake at its sole expense to defend
any tax claims described herein which are asserted by the
Internal Revenue Service against any Participant, including
attorney fees and cost of appeal, and shall have the sole
authority to determine whether or not to appeal any
determination made by the Service or by a lower court. The
Company will reimburse any Participant for any interest or
penalties in respect of tax claims hereunder upon receipt of
documentation of same. In consideration of such
undertaking, the Participant shall notify the Company and
the Trustee promptly upon receipt by such Participant of any
notification or communication, whether written or oral, from
any taxing authority, or any representative or agent
thereof, asserting that any amounts to the credit of such
Participant are subject to tax prior to payment.
(e) Any distributions from the Trust to a Participant under this
Section shall be applied in accordance with the provisions
of the Plans to reduce the Company's liabilities to such
Participant and/or Beneficiary under the Plan and the
Benefit Schedule. Such reductions shall be made on a pro-
rata basis over the term of benefit payments under the Plan
and Benefit Schedule. Any such reduction shall be
determined by the Company prior to a Change of Control or a
Failure to Pay, and by the Trustee following such events.
4.04 Distribution Limit - Benefit Schedule Pursuant to Plan.
Under no circumstances shall a Participant receive a
distribution which is greater than the amount then credited
to the Participant's Plan account under the Trust. Payments
<PAGE> Page 8
made in accordance with the Benefit Schedule shall be deemed
to be pursuant to the Plans for purposes of the Trust.
4.05 Company Obligation Continues. Notwithstanding any
distribution made to a Participant in accordance with this
Section 4, the Company shall remain obligated to pay any
amounts due the Participant under the Plans which have not
been paid from the assets of the Trust.
Section 5 Payments to the Company
Except as otherwise expressly provided in this Trust Agreement
(including without limitation as provided in Section 1.03), the
Company shall have no right or power to direct the Trustee to
return to the Company or to divert to others any of the Trust
assets before all benefit payments have been made to Participants
pursuant to the terms of the Plans and the Benefit Schedule. If
the Trustee determines, in its sole and absolute discretion, that
certain assets will clearly never be required to pay benefits to
the Participants, or to pay Trust expenses, then such assets will
be returned to the Company.
Section 6 Creditors and Insolvency
6.01 No Liens Created. Notwithstanding anything herein to the
contrary, nothing in this Trust Agreement shall constitute a
mortgage, lien, pledge, charge or security interest of any
kind, or any other type of preferential arrangement that has
the practical effect of creating a security interest
("Liens") with respect to any indebtedness of the Company
the terms of which restrict the Company's ability to incur
Liens.
6.02 Insolvency. The Trustee shall cease payment of benefits to
Participants if the Company is Insolvent. The Company shall
be considered "Insolvent" for purposes of this Trust
Agreement if (i) the Company is unable to pay its debts as
they become due, or (ii) the Company is subject to a pending
proceeding as a debtor under the United States Bankruptcy
Code.
6.03 Claims of Creditors. At all times during the continuance of
this Trust, the principal and income of the Trust shall be
subject to claims of general creditors of the Company under
federal and state law as set forth below.
(a) The Board of Directors or the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing
that the Company is Insolvent. If a person claiming to be a
creditor of the Company alleges in writing to the Trustee
that the Company has become Insolvent, the Trustee shall
determine whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of
benefits to Participants.
(b) Unless the Trustee has actual knowledge that the Company is
Insolvent, or has received notice from the Company or a
person claiming to be a creditor alleging that the Company
is Insolvent, the Trustee shall have no duty to inquire
whether the Company is Insolvent. The Trustee may in all
events rely on such evidence concerning the Company's
solvency as may be furnished to the Trustee and that
provides the Trustee with a reasonable basis for making a
determination concerning the Company's Insolvency.
<PAGE> Page 9
(c) If at any time the Trustee has determined that the Company
is Insolvent, the Trustee shall discontinue payments to
Participants and shall hold the assets of the Trust for the
benefit of the Company's general creditors as a court of
competent jurisdiction may direct. Nothing in this Trust
Agreement shall in any way diminish any rights of
Participants or their Beneficiaries to pursue their rights
as general creditors of the Company with respect to benefits
due under the Plans or otherwise.
(d) The Trustee shall resume the payment of benefits to
Participants in accordance with Section 2 of this Trust
Agreement only after the Trustee has determined that the
Company is not Insolvent (or is no longer Insolvent).
6.04 Resumption of Payments. If the Trustee discontinues the
payment of benefits from the Trust pursuant to Section 6.02
and subsequently resumes such payments, the first payment
following such discontinuance shall include the aggregate
amount of all payments due to Participants under the terms
of the Plans for the period of such discontinuance, less the
aggregate amount of any payments made to Participants by the
Company in lieu of the payments provided for hereunder
during any such period of discontinuance.
Section 7 Investment Authority
7.01 General Authority and Investment Guidelines. In no event
shall any rights associated with assets of the Trust be
exercisable by or rest with Participants. Except as
otherwise expressly provided herein, all rights associated
with assets of the Trust shall be exercised by the Trustee
or the person designated by the Trustee. The Trustee shall
invest and reinvest the principal and income of the Trust,
without distinction between principal and income, in
accordance with the investment guidelines as may be
furnished by the Company from time to time prior to
Termination and Change of Control or a Failure to Pay. Each
Plan may have investment guidelines which are different from
those of other Plans. The Company may amend, from time to
time and in its sole and absolute discretion, the investment
guidelines of each Plan prior to a Change of Control or a
Failure to Pay. Following a Termination and Change of
Control or a Failure to Pay, the Trustee is authorized, in
its sole and absolute discretion, but subject to the
fiduciary standards set forth below, to disregard the
investment guidelines furnished to the Trustee by the
Company.
7.02 Company May Appoint Investment Manager. Prior to a
Termination and Change of Control or a Failure to Pay, the
Company shall have the right to direct the Trustee in
accordance with this Section.
(a) The Company may from time to time direct the Trustee to
segregate all or any portion of the Trust assets in a
separate investment account or accounts and may appoint one
or more investment managers and/or an investment committee
established by the Company to direct the investment and
reinvestment of each such investment account or accounts.
In such event, the Company shall notify the Trustee of the
appointment of each such investment manager and/or
investment committee. Members of the investment committee
may be employees of the Company, but may not be
<PAGE> Page 10
Participants. In exercising its responsibilities hereunder,
any such investment managers or investment committee shall
have the same duties of loyalty and care as the Trustee
would have in connection with investment of Trust assets.
(b) After the appointment of an investment manager in accordance
with Section 7.02(a), the Trustee shall make every sale or
investment with respect to such investment account as
directed in writing by the investment manager or investment
committee, unless the Trustee determines that such
directions, if implemented, would not be in accordance with
the requirements of this Trust Agreement or with the
standard of conduct for a fiduciary imposed by the Employee
Retirement Income Security Act of 1974, as amended.
(c) Notwithstanding the foregoing, the Trustee, without
obtaining prior approval or direction from an investment
manager or investment committee, shall invest cash balances
held by it from time to time in U.S. Treasury Bills,
commercial paper (including such forms of commercial paper
as may be available through the Trustee) which are rated ___
or higher by _____________, certificates of deposit
(including certificates issued by the Trustee in its
separate corporate capacity) issued by a commercial bank
organized and existing under the laws of the United States
or any state thereof having a combined capital of at least
[$1 billion], and similar types of securities, with a
maturity not to exceed one year. The Trustee shall sell
such short term investments as may be necessary to carry out
the instructions of an investment manager or investment
committee regarding more permanent type investments and
directed distributions.
(d) The Company may from time to time direct the Trustee with
respect to the voting of any trust assets.
7.03 Trustee Duties and Delegation. Following a Change of
Control or a Failure to Pay:
(a) In exercising its discretion to manage the investment of the
Trust assets, the Trustee shall consider the needs of the
Plans, the need for matching of the Trust assets with the
liabilities of the Plans and the duty of the Trustee to act
solely in the best interests of the Participants.
(b) The Trustee shall have the right, in its sole and absolute
discretion, to delegate its investment responsibility to an
investment manager who may be an affiliate of the Trustee.
In the event the Trustee shall exercise this right, the
Trustee shall remain, at all times responsible for the acts
of an investment manager. The Trustee shall have the right,
in its sole and absolute discretion to remove any such
investment manager.
7.04 Company may Substitute Assets. The Company shall have the
right at any time, and from time to time and in its sole and
absolute discretion, to substitute assets of equal fair
market value for any asset held by the Trust, provided that
such assets satisfy the requirements of Section 3.04. This
right is exercisable by the Company in a nonfiduciary
capacity without the approval or consent of any person in a
fiduciary capacity.
<PAGE>
Page 11
7.05 Commingling. Subject to the investment guidelines for each
Plan, the Trustee is hereby authorized to commingle any or
all of the assets of the Plans for investment purposes. The
Trustee, however, shall maintain the investment results
separately by Plan, and the investment experience of each
Plan shall be maintained and allocated to each Plan
separately as earnings. The investment experience of a Plan
shall not be shared with other Plans for purposes of this
Trust.
7.06 Asset Rights. All rights associated with assets of the
Trust shall be exercised only as expressly provided herein.
Section 8 Permissible Investments and Additional Authority
Subject to the investment guidelines while in effect in accord-
ance with the terms of this Agreement and to the fiduciary
duties of the Trustee as provided herein, the Trustee shall have
the power in connection with the Trust in its sole and absolute
discretion:
(a) To invest and reinvest in any readily marketable common and
preferred stocks, bonds, notes, debentures and convertible
stocks and securities (including any such equity securities
of the Company, but not including any debt securities of the
Company or any stock or security of the Trustee other than a
de minimis amount held in a collective or mutual fund),
certificates of deposit or demand or time deposits
(including any such deposits with the Trustee) and shares of
investment companies and mutual funds (including mutual
funds maintained by the Trustee), without being limited to
the classes or property in which the Trustee is authorized
to invest by any law or any rule of court of any state and
without regard to the proportion any such property may bear
to the entire amount of the Trust Assets;
(b) To enter into interest rate, equity and currency exchange or
swap transactions, cap transactions, commodity swaps, collar
transactions, interest rate options, forward foreign
exchange transactions, floor transactions or any other
similar transaction; provided, however, that none of such
transactions may involve leveraged financial instruments,
instruments bought or sold solely for the purpose of earning
a profit due to changes in the market price of the
instruments, or counter parties which are not major
international financial institutions;
(c) To invest and reinvest all or any portion of the Trust
assets collectively through the medium of any common,
collective or commingled trust fund that may be established
and maintained by the Trustee, subject to the instrument or
instruments establishing such trust fund or funds and with
the terms of such instrument or instruments, as from time to
time amended, being incorporated into this Trust Agreement
to the extent of the equitable share of the Trust in any
such common collectively or commingled trust fund;
(d) To retain any property at any time received by the Trustee;
(e) To sell or exchange any property held by it at public or
private sale, for cash or on credit, to grant and exercise
options for the purchase or exchange thereof, to exercise
all conversion or subscription rights pertaining to any such
<PAGE>
Page 12
property and to enter into any covenant or agreement to
purchase any property in the future;
(f) To participate in any plan of reorganization, consolidation,
merger, combination, liquidation or other similar plan
relating to property held by it and to consent to or oppose
any such plan or any action thereunder or any contract,
lease, mortgage, purchase, sale or other action by an
person;
(g) To deposit any property held by it with any protective,
reorganization or similar committee, to delegate
discretionary power thereto, and to pay part of the expenses
and compensation thereof and any assessments levied with
respect to any such property so deposited;
(h) To extend the time of payment of any obligation held by it;
(i) To hold uninvested any moneys received by it, without
liability for interest thereon, but only in anticipation of
payments due for investments, reinvestments, expenses or
disbursements;
(j) To exercise the right to vote any securities or other
property held by it, except as otherwise provided in Section
7.02(d);
(k) Solely for the benefit of Participants and subject to the
provisions of any agreements relating to indebtedness of the
Company existing prior to a Change of Control or a Failure
to Pay, to borrow money from others, including the Company,
in such amounts and for such terms as are advisable, to
issue its promissory note or notes therefor, and to secure
the repayment thereof by pledging any property held by it;
(l) To employ suitable contractors and counsel, who may be
counsel to the Company or to the Trustee, and to pay their
reasonable expenses and compensation from the Trust assets
to the extent not paid by the Company;
(m) To register investments in its own name or in the name of a
nominee; to hold any investment in bearer form; and to
combine certificates representing securities with
certificates of the same issue held by it in other fiduciary
capacities or to deposit or to arrange for the deposit of
such securities with any depository, even though, when so
deposited, such securities may be held in the name of the
nominees of such depository with other securities deposited
therewith by other persons, or to deposit or to arrange for
the deposit of any securities issued or guaranteed by the
United States government, or any agency or instrumentality
thereof, including securities evidenced by book entries
rather than by certificates, with the United States
Department of the Treasury or a Federal Reserve Bank, even
though, when so deposited, such securities may not be held
separate from securities deposited therein by other persons;
provided, however, that no securities held in the Trust
shall be deposited with the United States Department of the
Treasury or a Federal Reserve Bank or other depository in
the same account as any individual property of the Trustee,
and provided, further, that the books and records of the
Trustee shall at all times show that all such securities are
part of the Trust assets;
<PAGE>
Page 13
(n) To settle, compromise or submit to arbitration any claims,
debts or damages due or owing to or from the Trust, to
commence or defend suits or legal proceedings to protect any
interest of the Trust, and to represent the Trust in all
suits or legal proceedings in any court or before any other
body or tribunal; provided, however, that the Trustee shall
not be required to take any such action unless it shall
have been indemnified by the Company to its reasonable
satisfaction against liability or expenses it might
incur therefrom;
(o) To acquire, hold, retain and be the owner of any individual
or group policies of life insurance, annuity contracts, and
other property of any kind which policies are contributed to
the Trust by the Company or are purchased by the Trustee as
directed by the Company. To the extent that the Trustee is
directed by the Company prior to a Change of Control or a
Failure to Pay to invest part or all of the Trust assets in
insurance contracts, the type and amount thereof shall be
specified by the Company. The Trustee shall be under no
duty to make inquiry as to the propriety of the type or
amount so specified. Each insurance contract issued shall
provide that the Trustee shall be the owner thereof with the
power to exercise all rights, privileges, options and
elections granted by or permitted under such contract or
under the rules of the insurer. The exercise by the Trustee
of any incidents of ownership under any contract shall,
prior to a Change of Control or a Failure to Pay, be subject
to the direction of the Company. The Trustee shall have all
such rights, except that the Trustee shall have no power to
name a beneficiary of the policy other than the Trust, to
assign the policy (as distinct from conversion of the policy
to a different form) other than to a successor Trustees, or
to loan to any person the proceeds of any borrowing against
an insurance policy held in the Trust. No insurer shall be
deemed to be a party to the Trust and an insurer's
obligations shall be measured and determined solely by the
terms of contracts and other agreements executed by the
insurer.
(p) To hold any other class of assets contributed by the Company
that is deemed prudent by the Trustee, unless expressly
prohibited herein;
(q) To form corporations or partnerships and to create trusts to
hold title to any property, upon such terms and conditions
as may be advisable;
(r) To hold all or part of the Trust uninvested;
(s) To sell, exchange or transfer any equity securities of the
Company held by the Trust, provided that if the Trustee
elects to sell, exchange or transfer any such equity
securities, the Company must be offered the right of first
refusal to engage in a transaction on terms at least equal
to those offered the Trust in an open market transaction;
(t) Generally, to do all acts, whether or not expressly
authorized, that the Trustee may deem necessary or desirable
for the protection of the Trust assets or the administration
of the Trust, including communicating with Participants.
Notwithstanding any powers granted to Trustee pursuant to this
Trust Agreement or pursuant to applicable law, Trustee shall not
<PAGE> Page 14
have any power that could give this Trust the objective of
carrying on a business and dividing the gains therefrom, within
the meaning of Section 301.7701-2 of the Procedure and Admini-
strative Regulations promulgated pursuant to the Internal Revenue
Code.
Section 9 Accounting by the Trustee
9.01 Accounting Records and Reports. The Trustee shall keep
accurate and detailed records of all investments, receipts,
disbursements and all other Trust transactions. All such
records shall be open to reasonable inspection and audit by
the Company and by any Participant. The Trustee shall
deliver written reports of its administration of the Trust
setting forth for each Participant, for each Plan and for
the Trust in the aggregate:
(a) For the period covered by the report, all contributions,
investments, receipts, disbursements and other transactions
effected by it, including a description of all securities
and investments purchased and sold and the cost or net
proceeds of such purchases or sales (accrued interest paid
or receivable being shown separately);
(b) All cash, securities and other property held at the
beginning and at the end of the period covered by the
report.
The Trustee shall provide such reports as follows:
(c) To the Company, covering each of the first three quarters of
each calendar year, beginning with the first calendar
quarter ending after the effective date of this Trust
Agreement, and provided within 60 days following the close
of each such quarter;
(d) To the Company and to each Participant, covering each
calendar year, and provided within 60 days following the end
of such year;
(e) To the Company and to each Participant, covering the period
from the close of the last preceding year to the date of any
resignation or removal of the Trustee, and provided within
60 days after such resignation or removal.
In the absence of the Company's filing with the Trustee of
objections to any such account within 180 days after its
receipt, the Company shall be deemed to have so approved
such account. In such case, or upon the written approval by
the Company of any such account, the Trustee shall, to the
extent permitted by law, be discharged from all liability to
the Company for its acts or failures to act described by
such account. The foregoing, however, shall not preclude
the Trustee from having its accounting settled by a court of
competent jurisdiction.
9.02 Separate Participant Accounts. The Trustee shall maintain a
separate account for each Participant under each Plan. The
Trustee shall credit or debit each Participant's account or
accounts as appropriate to reflect his or her allocable
portion of the Trust assets, as such Trust assets may be
adjusted from time to time pursuant to the terms of this
Trust Agreement, to reflect contributions, investment
earnings and losses, and distributions. All contributions
<PAGE> Page 15
to the Trust shall be allocated in accordance with the terms
of this Trust Agreement. Investment earnings and losses for
each Plan shall be allocated to Participants' accounts under
that Plan based on the proportion which each Participant
account for that Plan bears to the total of all Participant
accounts for that Plan. During the period that the Trust is
revocable, the Trustee and the Company shall mutually agree
upon procedures to assure the proper allocation of account
balances in accordance with the requirements of this Section
9.02.
Section 10 Trustee Rights, Duties and Indemnification
10.01 Duties of Loyalty and Care. Following a Change of Control
or a Failure to Pay, the Trustee shall act solely in the
interest of and for the benefit of the Participants under
the terms of the Plans and this Trust. At all times,
whether before or after a Change of Control or a Failure to
Pay, the Trustee shall act with the care, skill, prudence
and diligence under the circumstances then prevailing that
a prudent person acting in like capacity and familiar with
such matters would use in the conduct of an enterprise of a
like character and with like aims. The Trustee shall incur
no liability to any person for any action taken pursuant to
a direction, request or approval given by the Company which
is contemplated by, and in conformity with, the terms of
the Plans, the Benefit Schedule or this Trust Agreement,
and is given in writing by the Company.
10.02 Participant Payment Determinations. In making any
determination required or permitted to be made by the
Trustee concerning any distribution to Participants, the
Trustee shall, in each such case, reach its own independent
determination, in its absolute and sole discretion, as to
the Participant's entitlement to the payment under the
Plans, the Benefit Schedule and this Trust Agreement. The
Company waives any right to contest any amount distributed
by the Trustee hereunder pursuant to a good faith determin-
ation made by the Trustee, notwithstanding any claim
by or on behalf of the Company (absent a manifest abuse of
discretion by the Trustee) that such payments should not be
made. The Trustee shall, to the maximum extent permitted
by applicable law, be fully protected and held harmless in
making such payments.
10.03 No Legal Action by Trustee. Following a Change of Control
or a Failure to Pay, the Trustee agrees that it will not
itself institute any action at law or at equity, whether in
the nature of an accounting, interpleading action, request
for a declaratory judgment or otherwise, requesting a court
or administrative or quasi-judicial body to make any
determination required to be made by the Trustee hereunder
in the place and stead of the Trustee.
10.04 Indemnification. Unless the Trustee has been negligent or
engaged in misconduct, the Company hereby indemnifies the
Trustee against losses, liabilities, claims, costs and
expenses (other than costs and expenses included in the
standard fee schedule) incurred in connection with the
administration of the Trust, including (a) liability to
which the Trustee may be subjected by carrying out any
directions of an investment manager (except for an
affiliated investment manager appointed pursuant to Section
7.03(b)) or investment committee issued pursuant hereto,
<PAGE> Page 16
(b) liability for failure to act in the absence of direc-
tions of the investment manager (except for an affiliated
investment manager appointed pursuant to Section 7.03(b))
or investment committee and (c) liability for all expenses
reasonably incurred by the Trustee if it undertakes or
defends any litigation arising in connection with this
Trust or to protect a Participant's rights under the Plans.
10.05 Counsel. Prior to a Change of Control or Failure to Pay,
the Trustee may consult with legal counsel (who may also be
counsel for the Company generally) with respect to any of
its duties or obligations hereunder. Following a Change of
Control or Failure to Pay, the Trustee shall select
independent legal counsel and may consult with counsel or
other persons with respect to its duties and with respect
to the rights of Participants under the Plans.
10.06 Agents. The Trustee may hire agents, accountants,
actuaries, investment advisors, financial consultants or
other professionals to assist it in performing any of its
duties or obligations hereunder and, provided the Trustee
has not breached its duties in selecting or retaining such
persons, may rely on any determinations made by such agents
to the same extent as if such determinations had been made
by the Trustee. The use of such persons shall not entitle
the Trustee to any additional compensation to the extent
that the services of such agents are included in the
Trustee's standard fee schedule.
10.07 Powers. The Trustee shall have, without exclusion, all
powers conferred on the Trustee by applicable law, unless
expressly provided otherwise herein, except that the
Trustee shall not have any power that could give this
Trust the objective of carrying on a business and dividing
the gains therefrom, within the meaning of Section
301.7701-2 of the Procedure and Administrative Regulation
promulgated pursuant to the Internal Revenue Code.
Section 11 Compensation and Expenses of the Trustee
11.01 Taxes. With respect to any taxes levied or assessed upon
the Trust, the Trustee at the Company's expense or the
Company, whichever may be elected by the Company, may
contest the validity of such taxes in any manner deemed
appropriate by the Company. The Company shall pay any
taxes of any and all kinds whatsoever, which at any time
are levied or assessed upon or become payable with respect
of the Trust, the income or any property forming a part
thereof, or any security transaction pertaining thereto.
To the extent that any taxes levied or assessed upon the
Trust are not paid by the Company when due, the Trustee
shall pay such taxes out of the Trust assets. The Trustee
shall notify each Participant in writing of the failure of
the Company to pay taxes.
11.02 Fees and Expenses. The Trustee shall be paid compensation
by the Company in accordance with the Trustee's regular
schedule of fees for trust services, as in effect from time
to time, unless otherwise agreed by the Company and
Trustee. The Trustee shall be reimbursed for its reason-
able expenses related to management and administration of
the Trust, including reasonable expenses incurred in
connection with the appointment of a successor trustee,
and reasonable compensation of counsel and any actuary or
<PAGE> Page 17
other agent engaged by the Trustee to assist it in such
management and administration, to the extent not included
in the regular schedule of fees for trust services.
11.03 Failure to Pay Fees and Expenses - Expense Account. If the
Company does not pay the Trustee's fees and expenses as
provided herein, then the Trustee may withdraw from the
Expense Account the amounts required for payment of those
fees and expenses (including taxes) to the extent there is
a balance in the Expense Account. If there is an inade-
quate balance in the Expense Account, the Trustee may
satisfy such obligation from the Trust assets and shall
charge such to the appropriate Plan, or if there is no
appropriate Plan, then it shall charge all Plans in propor-
tion to the aggregate of the account balances or accrued
benefits under the Plans. The Trustee shall notify all
Participants or Beneficiaries of any failure by the Company
to reimburse the Trust for fees and expenses payable here-
under.
Section 12 Resignation and Removal of the Trustee
12.01 Resignation. Prior to a Change of Control or a Failure to
Pay, the Trustee may resign at any time by written notice
to the Company, which shall be effective 90 days after re-
ceipt of such notice by the Company unless the Company and
the Trustee agree otherwise. Following a Change of Control
or a Failure to Pay, the Trustee may resign only after at
least 90 days notice to the Company and the Participants
and the effective appointment of a successor Trustee.
12.02 Removal. Prior to a Change of Control or a Failure to Pay,
the Trustee may be removed by the Company with or without
cause on 90 days notice or upon shorter notice acceptable
to the Trustee. Subsequent to a Change of Control or a
Failure to Pay, the Trustee may only be removed by the
Company if both of the following conditions are satisfied:
(a) The Company shall give notice to the Trustee of its removal,
the appointment of a successor Trustee and the acceptance by
the successor of its appointment in writing.
(b) The Company shall then notify each Participant of the
removal and designation of the successor Trustee, each
Participant shall then vote for or against such action, and
a majority of the Participants vote for such action.
12.03 Successor Trustee. The appointment of a successor trustee
shall become effective upon agreement by it to assume the
Agreement as Trustee, except that following a Change of
Control or a Failure to Pay, the appointment of a successor
trustee shall become effective only after the successor
trustee has also been approved by a vote of the majority of
all Participants.
12.04 Transfer of Assets. Upon resignation or removal of the
Trustee and appointment of a successor Trustee, all assets
shall subsequently be transferred to the successor Trustee.
The transfer shall be completed within 90 days after the
effective date of the resignation or removal, unless the
Company extends the time limit.
<PAGE>
Page 18
Section 13 Successor Trustee
13.01 Qualifications of Successor Trustee. Any successor Trustee
must be a bank or national banking association with a mar-
ket capitalization exceeding $1 billion. The successor
Trustee shall have all of the rights and powers of the
former Trustee. The former Trustee shall execute any
instrument necessary or reasonably requested by the Company
or the successor Trustee to evidence the appointment of the
successor Trustee and the transfer of Trust assets to it.
13.02 Responsibilities. The successor Trustee need not examine
the records and acts of any prior Trustee. The successor
Trustee shall not be responsible for and the Company shall
indemnify and defend the successor Trustee from any claim
or liability resulting from any action or inaction of any
prior Trustee or from any other past event, or any condi-
tion existing at the time it becomes successor Trustee.
Section 14 Amendment and Termination
14.01 Amendment. During the period that this Trust Agreement is
revocable, it may be amended in any respect by the Company
and the Trustee. Thereafter, this Trust Agreement may be
amended only if such amendment does not have an adverse
effect upon the Participants and their rights hereunder or
if the amendment is approved in writing by 90% of all
Participants. Any permitted amendment to this Trust
Agreement shall be evidenced by a written instrument
executed by the Trustee and the Company. Notwithstanding
the foregoing, no amendment shall conflict with the terms
of the Plans or shall make the Trust revocable after it has
become irrevocable in accordance with its terms.
14.02 Termination. The Trust shall not terminate until the first
to occur of (a) the date on which Participants have re-
ceived all of the benefits due to them under the terms and
conditions of the Plans, or (b) 90% of all Participants
give their written approval to the termination of the
Trust. Upon termination and the payment of all expenses,
any assets remaining in the Trust shall be returned to the
Company.
Section 15 Definitions.
For purposes of this Trust, the following terms shall be defined
as set forth below:
"Agent" shall have the meaning set forth in Section 1.06.
"Benefit Schedule" shall have the meaning set forth in Section
2.02.
"Change of Control" shall mean:
(a) a tender offer shall be made and consummated for the
ownership of securities of the Company representing
25% or more of the combined voting power of the
Company's then outstanding voting securities,
(b) the Company shall be merged or consolidated with
another corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting
securities of the surviving or resulting corporation
<PAGE> Page 19
shall be owned in the aggregate by the former
shareholders of the Company, other than affiliates
(within the meaning of the Securities Exchange Act of
1934 (the "Exchange Act")) of any party to such merger
or consolidation, as the same shall have existed
immediately prior to such merger of consolidation;
(c) the Company shall sell substantially all of its assets
to another corporation which is not a wholly owned
subsidiary of the Company;
(d) any "person" (as such term is used in Sections 3(a)(9)
and 13(d)(3) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, of
securities of the Company representing 25% or more of
the combined voting power of the Company's then
outstanding securities; or
(e) during the period of two consecutive years,
individuals who at the beginning of such period
constitute the Board of Directors of the Company (the
"Board") cease for any reason to constitute at least a
majority thereof unless the election, or the
nomination for election by the Company's shareholders,
of each new director was approved by a vote of at
least two-thirds of the directors then still in office
who were directors at the beginning of the period.
For purposes of this definition, ownership of voting
securities shall take into account and include ownership as
determined by applying the provisions of Rule 13d-3(d)(1)(i)
of the Exchange Act (as then in effect).
The Company shall advise the Trustee whether or not a Change
of Control has occurred. The Trustee shall be entitled to
rely upon such advice, but if the Trustee receives notice of
a Change of Control from another source, then the Trustee
shall make its own independent determination.
"Expense Account" shall have the meaning set forth in Section
3.05.
"Failure to Pay" shall mean that the circumstances described in
either (i) or (ii) have occurred:
(i) Any Plan Participant shall have notified the Trustee
and the Company in writing that the Company shall have
failed to pay to the Participant, when due, either
directly or by direction to the Trustee in accordance
with the terms hereof, at least 75% of any and all
amounts which the Participant was entitled to receive
at any time in accordance with the terms of any Plan,
the Benefit Schedule or this Trust Agreement, and that
such amount remains unpaid. Such notice must set
forth the amount, if any, which was paid to the
Participant, and the amount which the Participant
believes he or she was entitled to receive under the
Plans, the Benefit Schedule and this Trust Agreement.
Subject to Section 2.06, the failure to make such
payment shall have continued for a period of 30 days
after receipt of such notice by the Trustee and by the
Company, and during such 30-day period the Company
shall have failed to prove, by clear and convincing
evidence as determined by the Trustee in its sole and
<PAGE> Page 20
absolute discretion, that such amount was in fact paid
or was not due and payable; or
(ii) More than two Plan Participants shall have notified
the Trustee and the Company in writing, either
individually or jointly, that they have not been paid,
when due, amounts to which they are entitled under the
Plans, the Benefit Schedule or this Trust Agreement,
and that such amount remains unpaid. Each such notice
must set forth the amount, if any, which was paid to
the Participant, and the amount which the Participant
believes he or she was entitled to receive under the
Plans, the Benefit Schedule and this Trust Agreement.
Within 15 days after receipt of each such notice, the
Trustee shall determine, on a preliminary basis,
whether any failure to pay such Participants has
resulted in a failure to pay when due, directly or by
direction, at least 75% of the aggregate amount due to
all Participants under all the Plans, the Benefit
Schedule and this Trust Agreement in any two-year
period, and that such amount remains unpaid. Subject
to Section 2.06, if the Trustee determines that such a
failure has occurred, then it shall so notify the
Company and the Participants in writing within the
same 15 day period. Within a period of 20 days after
receipt of such notice from the Trustee, the Company
shall have failed to prove by clear and convincing
evidence, in the sole and absolute discretion of the
Trustee, that such amount was paid or was not due and
payable.
"Insolvency" shall have the meaning set forth in Section 6.02.
"Liens" shall have the meaning set forth in Section 6.01
"Participant" shall mean the participants in the Plans, and any
beneficiaries of any participants who are no longer then
surviving.
"Plan" shall have the meaning set forth in the first WHEREAS
recital.
"Proposed Change of Control" shall mean:
(a) 20 days after the commencement of a tender offer shall
be made for the ownership of securities of the Company
representing 25% or more of the combined voting power
of the Company's then outstanding voting securities
(unless such tender offer shall have been withdrawn);
(b) 20 days after the commencement of solicitation of
proxies or consents for a merger or consolidation with
another corporation and as a result of such merger or
consolidation, less than 75% of the outstanding voting
securities of the surviving or resulting corporation
would be owned in the aggregate by the former
shareholder of the Company, other than the party and
affiliates (within the meaning of the Exchange Act) of
any party to such merger or consolidation, as the same
shall have existed immediately prior to such merger or
consolidation;
<PAGE>
Page 21
(c) upon the date that the Company shall have entered into
an agreement to sell substantially all of its assets
to another corporation which is not a wholly owned
subsidiary of the Company;
(d) within 20 days after any "person" (as such term is
used in Sections 3(a)(9) and 13(d)(3) of the Exchange
Act) becomes the beneficial owner, directly or
indirectly, of securities of the Company representing
15% or more of the combined voting power of the
Company's then outstanding securities, except for any
employee benefit plan of the Company; or
(e) upon the date that individuals who, at the beginning
of any period of two consecutive years, constitute the
Board of Directors of the Company, cease for any
reason to constitute at least 76% thereof, unless the
election, or the nomination for election by the
Company's shareholders, of each new director was
approved by a vote of at least two-thirds of the
directors then still in office who were directors at
the beginning of the period.
For purposes of this definition, ownership of voting
securities shall take into account and include
ownership as determined by applying the provisions of
Rule 13d-3(d)(1)(i) of the Exchange Act (as then in
effect).
"Prorata Payment" shall have the meaning set forth in Section
4.01(a).
"Termination and Change in Control" shall mean the termination of
the employment of a Participant for any reason whatsoever, either
at the initiative of the Company or the Participant, prior to a
Change in Control if there is a subsequent Change in Control, or
the termination of employment of a Participant for any reason
whatsoever, either at the initiative of the Company or the
Participant, during the three-year period following a Change in
Control.
Section 16 Miscellaneous
16.01 Company Obligation Continues. Notwithstanding any distri-
bution made to a Participant in accordance with this Trust
Agreement, the Company shall remain obligated to pay any
amounts due the Participant under the Plans which have not
been paid from the assets of the Trust.
16.02 Trustee Expenses. In discharging its responsibilities
hereunder, the Trustee may consult with and make such
inquiries of such persons, including Participants or
Beneficiaries, the Company, the Agent, legal counsel,
actuaries, third party administrators or any other person
the Trustee may reasonably deem necessary. Any reasonable
expenses incurred by the Trustee in fulfilling its
responsibilities shall be reimbursed by the Company and, to
the extent not paid by the Company within a reasonable
time, shall be charged to the Trust. If charged to the
Trust, the expenses shall first be charged to the Expense
Account and if the assets of the Expense Account are insuf-
ficient shall be prorated to Participants and Benefi-
ciaries.
<PAGE>
Page 22
16.03 Company Waiver or Right to Contest. If the Company
breaches any of its obligations hereunder to provide funds,
Plans, the Benefit Schedule or information to the Trustee,
the Trustee shall enforce such obligations by legal action
if necessary, the Company hereby waives its right to con-
test any such action by the Trustee and consents to the
remedy of specific performance.
16.04 Severability. Any provision of this Trust Agreement
prohibited by law shall be ineffective to the extent of any
such prohibition, without invalidating the remaining
provisions hereof.
16.05 ERISA Compliance. The Company hereby represents and
warrants that all of the Plans have been established,
maintained and administered in accordance with all
applicable laws, including without limitation, ERISA.
16.06 Alienation. Benefits payable to Participants and their
Beneficiaries under this Trust Agreement may not be
anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable
process.
16.07 Counterparts. This Trust Agreement may be executed in
multiple copies, each of which shall for all purposes
constitute an agreement, binding on the parties, and
each party hereby covenants and agrees to execute all
duplicates or replacement counterparts of this Trust
Agreement as may be required.
16.08 Successors and Assigns. This Trust Agreement shall be
binding upon and shall inure to the benefit of the parties,
their respective successors and permitted assigns, and each
party agrees, on behalf of itself, and its successors and
permitted assigns, to execute any instruments which may be
necessary or appropriate to carry out the purpose and in-
tention of this Trust Agreement, and hereby authorizes and
directs its successors and permitted assigns to execute any
and all such instruments.
16.09 Notices. Notices required hereunder shall be deemed to
have been given hereunder if delivered personally, by
telecopy or sent by certified mail, postage prepaid, as
follows:
If to the Company: Secretary
Eaton Corporation
Eaton Center
1111 Superior Avenue
Cleveland, Ohio 44114
If to the Trustee: Mr. Joe Long
Senior Vice President
Wachovia Bank of North Carolina
100 N. Main Street
Winston-Salem, NC 27150
If to the Participants: To their addresses as they may
appear on the records of the Company or the Trustee.
<PAGE>
Page 23
16.10 Governing Law. This Trust Agreement shall be governed by
and construed in accordance with the laws of North
Carolina.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 10 (o)
Eaton Corporation Trust Agreement - Officers and Employees
This Trust Agreement (the "Trust Agreement") is made this
6th day of December, 1996, by and between Eaton Corporation (the
"Company"), an Ohio corporation with its principal offices at
Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114 and
Wachovia Bank of North Carolina, N.A. (the "Trustee") with its
principal office in Winston-Salem, North Carolina.
Recitals
(a) WHEREAS, the Company has adopted the nonqualified deferred
compensation plans, programs and agreements as listed in
Attachment A (individually a "Plan" and collectively the
"Plans");
(b) WHEREAS, the Company has incurred or expects to incur
liability under the terms of the Plans with respect to the
Participants;
(c) WHEREAS, the Company has previously established a trust
agreement (the "Prior Trust") between Eaton Corporation and
National City Bank, as trustee (the "Prior Trustee") dated
April 22, 1987;
(d) WHEREAS, the Prior Trust is revocable by the Company at any
time prior to a change of control and the Company has
determined to revoke such Prior Trust and to remove the
Prior Trustee as Trustee;
(e) WHEREAS, the Board of Directors of the Company has
authorized the establishment of a grantor trust to be used
to fund certain deferred compensation obligations under the
Plans;
(f) WHEREAS, the Company intends to contribute assets to the
Trust that shall be held subject to the claims of the Com-
pany's creditors in the event of the Company's Insolvency,
as herein defined, until paid to Participants in such manner
and at such times as specified in the Plans and in this
Trust Agreement;
(g) WHEREAS, it is the intention of the Company to make
contributions to the Trust to provide itself with a source
of funds to assist it in satisfying its liabilities under
the Plans;
(h) WHEREAS, it is the intention of the parties that the Trust
shall constitute an unfunded arrangement and shall not
affect the status of the Plans as unfunded plans maintained
for the purpose of providing deferred compensation for a
select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income
Security Act of 1974.
NOW, THEREFORE, the parties do hereby establish the Trust
and agree that the Trust shall be comprised, held and disposed of
as follows:
<PAGE>
Page 2
Section 1 Establishment of the Trust
1.01 Appointment of Trustee. The Company hereby appoints
Wachovia Bank of North Carolina, N.A., a national banking
association with trust powers, to serve as Trustee for the
Trust under the terms of this Trust Agreement, and the
Trustee hereby accepts its appointment. The Trust shall be
called the Eaton Corporation Grantor Trust Agreement
dated____________, 1996, and shall be effective on the same
date.
1.02 Grantor Trust. The Trust is intended to be a grantor trust,
of which the Company is the grantor, within the meaning of
subpart E, part I, subchapter J, chapter 1, subtitle A of
the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
1.03 Revocability. The Trust shall be irrevocable by the Company
at any time after the first to occur of one year from the
date hereof, a Change of Control or such other date as shall
be mutually agreeable to the Company and the Trustee. Prior
to that date, the Trust shall be unilaterally revocable by
the Company.
1.04 Deposit of Trust Assets. The Company hereby deposits $1,000
with the Trustee, in trust, which shall become the initial
principal of the Trust, and the Company may at any time make
additional deposits with the Trustee of cash or other
property in accordance with the Trust Agreement. All such
deposits shall be held, administered and disposed of by the
Trustee as provided in the Trust Agreement.
1.05 Use of Trust Assets. The principal of the Trust, and any
earnings thereon, shall be held separate and apart from
other funds of the Company and, except as otherwise
expressly provided herein, shall be used exclusively for the
uses and purposes of Participants, general creditors of the
Company and Trust expenses, in each case as herein set
forth. Plan participants and their beneficiaries shall have
no preferred claim on, or any beneficial ownership interest
in, any assets of the Trust. All rights created under the
Plans and Trust shall be unsecured rights of Participants
against the Company. Any assets held by the Trust will be
subject to the claims of the Company's general creditors
under federal and state law in the event of Insolvency, as
defined herein.
1.06 Agent. At the effective date of this Trust or at such time
as may be determined by the Company, the Company may
designate an agent (the "Agent") for administering the
Plans. The Agent may be the Trustee or a third party
professional administrator familiar with deferred
compensation Plans, and shall perform record keeping and
administrative duties. If the Company fails to appoint an
Agent, then the Company shall perform those duties.
Following a Change of Control or a Failure to Pay, the
Trustee shall appoint the Agent (who may have been the Agent
prior to the Change of Control), and the Company may no
longer perform the record keeping and administrative duties.
The Trustee may be protected from acting upon advice or
direction of the Agent within its area of responsibility to
the same extent that it could rely upon advice or direction
from the Company.
<PAGE>
Page 3
Section 2 Benefit Schedule and Plans
2.01 Plans. Within 30 days after the effective date of this
Trust, the Company shall provide the Trustee with complete,
current copies of the Plans. The Company shall provide the
Trustee with all changes to these Plans within 30 days after
such changes are effective. The Company shall also furnish
the Trustee, upon the Trustee's request, such information as
the Trustee shall deem necessary for its determination under
Section 2.06. The Trustee is authorized to rely on the
latest copy of the Plans provided to it by the Company,
provided that any Plan amendments submitted to the Trustee
may not be inconsistent with the plan amendment provisions
of those Plans.
2.02 Benefit Schedule - Contents. The Company shall provide a
schedule (the "Benefit Schedule") to the Trustee and to each
Participant as it relates to that Participant, indicating
(i) the amounts payable to or in respect of each Participant
under each Plan, or providing formulae or instructions
acceptable to the Trustee, utilizing readily determinable
and objective information, for determining such amounts,
(ii) the form in which such amounts are to be paid (as
provided for or available under the Plans) or the method of
determining such form of payment, and (iii) the timing of
such payments or the method of determining such timing, (iv)
Beneficiary designations for each Participant, and (v) any
other information within the possession or control of the
Company reasonably necessary for the Trustee to use to
determine benefits under the Trust.
2.03 Benefit Schedule - When Furnished. A copy of the Benefit
Schedule is attached hereto as Attachment B and is hereby
made a part of this Trust Agreement. The Company shall
provide a current version of the Benefit Schedule (i) not
later than 45 days after the end of each calendar year, (ii)
following a Proposed Change of Control and before a Change
of Control, as of the date of the Proposed Change of
Control, (iii) within 45 days after a Change of Control or a
Failure to Pay, as of the date of such event and (iv) at
such other times as may in the judgment of the Company be
appropriate in view of any change in circumstances.
2.04 Amendments to Attachment A. Not later than 45 days after
the end of each calendar year and at such other times as may
in the judgment of the Company be appropriate, the Company
shall furnish to the Trustee and to each affected
Participant (as it pertains to such Participant) any
amendment to Attachment A and any corresponding amendment to
the Benefit Schedule required as a result of such amendment
to Attachment A.
2.05 Agreement Between Company and Participant. If the Company
and each Participant do not agree upon the Benefit Schedule,
as it may be updated from time to time as provided in
Sections 2.03 and 2.04, and any amendment to Attachment A,
as the same pertains to the Participant's benefits, then the
provisions of Section 2.06 shall control.
2.06 Trustee Resolves Disagreement. Upon written notification to
the Trustee by the Company or any Participant of the failure
of the Company and such Participant to agree as provided in
Section 2.05, the Trustee shall, to the extent necessary in
the sole judgment of the Trustee, (i) recompute the amount
<PAGE> Page 4
payable hereunder to any Participant, as set forth in the
Benefit Schedule, and (ii) notify the Company and the
Participant in writing of its computations. Thereafter,
this Trust Agreement and the Benefit Schedule shall be
amended to the extent of such Trustee determinations without
further action; provided, however, that the failure of the
Company to furnish any amendment, restatement or successor
to the Plans, or compensation or other information shall in
no way diminish the rights of any Participant hereunder or
thereunder. If the Trustee has not completed its
recomputation within 30 days after receipt of written
notification of the failure of the Company and the
Participant to agree, as provided above, the Trustee shall
make any payments to the Participant from his or her account
hereunder, in accordance with the terms hereof, based upon
the Benefit Schedule which is in effect at that time.
Following the recomputation, any overpayments by reason of
the foregoing shall be repaid to the Trust without interest.
The Trustee, however, shall have no obligation to enforce
repayment of any such overpayments, nor shall it incur any
liability to any party whatsoever, including without
limitation any liability to the Company or to any other
Participant, for having made any such overpayment. The
obligation to enforce repayment of any such overpayment
shall rest solely with the Company.
Section 3 Contributions to the Trust
3.01 No Company Obligation. The Company may make contributions
to the Trust to provide assets for payment of benefits under
the Plans at such times as it shall determine in its sole
discretion as grantor. The Company shall have no obligation
to make contributions to the Trust, except as otherwise
expressly provided in Section 3.03.
3.02 Allocation of Contributions. At the time it makes
contributions to the Trust, the Company shall identify the
Plans, or the Participant Plan accounts and the Plans, for
which such contributions are made and the amount contributed
for each such Participant Plan account or Plan. The amounts
contributed for a Plan (as contrasted with the amounts
contributed for Participant Plan accounts) shall be
allocated among the accounts for the Participants in the
Plan in proportion to the benefits accrued thereunder prior
to 1996, and in proportion to those accrued thereunder in
1996 or thereafter, as may be specified by the Company. If
it is determined by the Trustee that the balance of a
Participant's account for any Plan reflects Trust assets
that will clearly never be required to pay benefits to the
Participant, such excess assets shall be reallocated first
in proportion to the balances of the separate accounts of
the remaining Participants in that Plan, and after such Plan
is fully funded, then in proportion to the balances of the
separate accounts of the Participants in the other Plans.
3.03 Change of Control or Failure to Pay. Upon a Change of
Control or a Failure to Pay as defined in clause (ii) of the
definition of that term, the Company shall make a
contribution to the Trust in an amount that is sufficient to
fund 100% of the amount necessary to pay each Participant
the benefits to which the Participant would be entitled
pursuant to the terms of the Plans as of the date of the
Change of Control or such Failure to Pay.
<PAGE>
Page 5
3.04 Assets Contributed. Assets contributed by the Company to
the Trust must be, in the sole and absolute discretion of
the Trustee, easily liquidated. Equity securities must be
traded on a national securities exchange or on the NASDAQ
National Market System. Debt securities must be at least
"investment grade" as that term is commonly used by the debt
rating agencies. Subject to the foregoing, prior to a
Change of Control or a Failure to Pay, the Company may
contribute equity (but not debt) securities of the Company
or any affiliate. Thereafter, the Company may not
contribute such securities.
3.05 Expense Account. The Company may, in its sole and absolute
discretion, deliver to the Trustee from time to time assets
to be allocated to an account to be used to pay Trustee
administrative and other expenses not included with the
Trustee's fees as contemplated by Section 11.02 ("Expense
Account"). All amounts in the Expense Account, including
contributions and earnings thereon, may be used only for
these purposes. Notwithstanding the foregoing, upon a
Change of Control or a Failure to Pay, the Company shall
deliver an amount to the Trustee to be allocated to the
Expense Account such that the amount in that account will
then be $250,000.
Section 4 Payments to Participants
4.01 Prior to a Termination and Change of Control or a Failure to
Pay.
Prior to a Termination and Change of Control or a Failure to
Pay:
(a) Distributions from the Trust shall be made by the Trustee to
Participants only at the direction of the Company. The
Company shall provide such directions annually for each
Plan, and such directions (when considered together with
payments to Participants by the Company from sources other
than Trust assets) must provide for payments to Participants
which are in accordance with the Benefit Schedule and the
Plans. Such directions may not provide for distributions
from a Participant's Plan account which bear a greater
proportion to the total payment then being made to the
Participant, than the amount in the Participant's Plan
account under the Trust bears to the Plan Participant's
accrued benefit under the Plan ("Prorata Payment"). If no
directions are given or if the directions provide for a
distribution from the Trust to a Participant which is less
than a Prorata Payment, then in either case an amount
necessary to achieve a Prorata Payment will be removed from
the Participant's Plan account by the Trustee and
reallocated amongst the accounts of all the Participants in
the Plan in proportion to the balances in their respective
accounts, including the Participant from whom the Trustee
removed an amount in accordance with this sentence.
(b) The Company may make benefit payments pursuant to the Plans
(other than distributions from the Trust) directly to
Participants as the payments become due, or it may remit the
amount needed for such payments to the Trustee, in which
case the Trustee will make such payments. The Company shall
notify the Trustee of its decision prior to the time amounts
are payable to the Participant. The Company shall be
responsible for all tax withholdings and reportings for
<PAGE> Page 6
payments it makes. The Trustee shall make all tax
withholdings or payments from the Trust assets. Such
withholdings shall be remitted to the tax authorities, or to
the Company for remission to the tax authorities, as the
Trustee and the Company may agree.
4.02 After a Termination and Change of Control or a Failure to
Pay.
(a) Notwithstanding anything herein to the contrary, upon the
occurrence of a Termination and Change in Control, the
Participants shall be entitled to receive from the Trust the
payments provided in Section 4.02(c).
(b) Notwithstanding anything herein to the contrary, upon the
occurrence of a Failure to Pay, each Participant covered by
the situation described in clause (i) of the definition of
Failure to Pay, or each of the Participants in the event of
a situation described in clause (ii) of that definition, as
the case may be, shall be entitled to receive from the Trust
the payments as provided in Section 4.02(c).
(c) No later than the first to occur of (i) six months following
the date hereof for any person who is a Participant prior to
the first of the events described in clause (i) or (ii),
(ii) a Termination and Change in Control or a Failure to Pay
for any person who is a Participant prior to the first of
the events described in clause (i) or (ii), or (iii) the
date upon which any person who is not a Participant prior to
the first to occur of the events described in (i) or (ii)
becomes a Participant, each Participant shall select one of
the following payment alternatives with respect to each
Plan, and payment shall be made to each such Participant in
accordance with his or her selected alternative as provided
in Sections 4.02(a) and 4.02(b):
A lump sum payment of the full amount in the
Participant's Plan account within 30 days following
the Termination and Change in Control or Failure to
Pay, as the case may be;
Payment of the full amount in the Participant's Plan
account in monthly, quarterly, semiannual or annual
payments, over a period not to exceed fifteen years,
as selected by the Participant at the time provided in
the first paragraph of this Section 4.02(c),
commencing within 30 days following the Termination
and Change in Control or Failure to Pay, as the case
may be, which are substantially equal in amount or in
the number of share units being valued and paid or in
the number of Eaton shares being distributed, except
that earnings attributable to periods following
Termination and Change in Control or Failure to Pay
shall be included with each payment.
4.03 Tax Payments.
(a) Either before or after Termination and Change of Control or
a Failure to Pay, if any Participant is determined to be
subject to federal income tax on any amount to the credit of
his or her account under any Plan prior to the time of
actual payment hereunder, whether or not due to the
establishment of or contributions to this Trust, a portion
of such taxable amount equal to the taxes, including
<PAGE> Page 7
interest and penalties, owed on such taxable amount, shall
be distributed by the Trustee from the Participant's Plan
account to such Participant within thirty days after receipt
of notice from the Participant, with a copy to the Company,
setting forth the amount of such tax, interest and penalties
and a certification by the Participant that such tax,
interest and penalties have not otherwise been paid by the
Company.
(b) For purposes of this Section 4.03, a Participant shall be
deemed to pay state and local taxes at the highest marginal
rate of taxation in the state in which the Participant
resides or is employed (or both) where a tax is imposed, and
federal income taxes at the highest marginal rate of
taxation, net of the maximum reduction in federal income
taxes which could be obtained from deduction of such state
and local taxes.
(c) An amount to the credit of a Participant's account shall be
determined to be subject to federal income tax for purposes
of this Section 4.03 upon the earliest of: (i) a final
determination by the United States Internal Revenue Service
addressed to the Participant which is not appealed to the
courts; (ii) a final determination by the United States Tax
Court or any other federal court affirming any such
determination by the Internal Revenue Service; or (iii) an
opinion by the Company's tax counsel, addressed to the
Company and the Trustee, to the effect that by reason of
Treasury Regulations, amendments to the Internal Revenue
Code, published Internal Revenue Service rulings, court
decisions or other substantial precedent, amounts to the
credit of Participants hereunder are subject to federal
income tax prior to payment.
(d) The Company shall undertake at its sole expense to defend
any tax claims described herein which are asserted by the
Internal Revenue Service against any Participant, including
attorney fees and cost of appeal, and shall have the sole
authority to determine whether or not to appeal any
determination made by the Service or by a lower court. The
Company will reimburse any Participant for any interest or
penalties in respect of tax claims hereunder upon receipt of
documentation of same. In consideration of such
undertaking, the Participant shall notify the Company and
the Trustee promptly upon receipt by such Participant of any
notification or communication, whether written or oral, from
any taxing authority, or any representative or agent
thereof, asserting that any amounts to the credit of such
Participant are subject to tax prior to payment.
(e) Any distributions from the Trust to a Participant under this
Section shall be applied in accordance with the provisions
of the Plans to reduce the Company's liabilities to such
Participant and/or Beneficiary under the Plan and the
Benefit Schedule. Such reductions shall be made on a pro-
rata basis over the term of benefit payments under the Plan
and Benefit Schedule. Any such reduction shall be
determined by the Company prior to a Change of Control or a
Failure to Pay, and by the Trustee following such events.
<PAGE>
Page 8
4.04 Distribution Limit - Benefit Schedule Pursuant to Plan.
Under no circumstances shall a Participant receive a
distribution which is greater than the amount then credited
to the Participant's Plan account under the Trust. Payments
made in accordance with the Benefit Schedule shall be deemed
to be pursuant to the Plans for purposes of the Trust.
4.05 Company Obligation Continues. Notwithstanding any
distribution made to a Participant in accordance with this
Section 4, the Company shall remain obligated to pay any
amounts due the Participant under the Plans which have not
been paid from the assets of the Trust.
Section 5 Payments to the Company
Except as otherwise expressly provided in this Trust Agreement
(including without limitation as provided in Section 1.03), the
Company shall have no right or power to direct the Trustee to
return to the Company or to divert to others any of the Trust
assets before all benefit payments have been made to Participants
pursuant to the terms of the Plans and the Benefit Schedule. If
the Trustee determines, in its sole and absolute discretion, that
certain assets will clearly never be required to pay benefits to
the Participants, or to pay Trust expenses, then such assets will
be returned to the Company.
Section 6 Creditors and Insolvency
6.01 No Liens Created. Notwithstanding anything herein to the
contrary, nothing in this Trust Agreement shall constitute a
mortgage, lien, pledge, charge or security interest of any
kind, or any other type of preferential arrangement that has
the practical effect of creating a security interest
("Liens") with respect to any indebtedness of the Company
the terms of which restrict the Company's ability to incur
Liens.
6.02 Insolvency. The Trustee shall cease payment of benefits to
Participants if the Company is Insolvent. The Company shall
be considered "Insolvent" for purposes of this Trust
Agreement if (i) the Company is unable to pay its debts as
they become due, or (ii) the Company is subject to a pending
proceeding as a debtor under the United States Bankruptcy
Code.
6.03 Claims of Creditors. At all times during the continuance of
this Trust, the principal and income of the Trust shall be
subject to claims of general creditors of the Company under
federal and state law as set forth below.
(a) The Board of Directors or the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing
that the Company is Insolvent. If a person claiming to be a
creditor of the Company alleges in writing to the Trustee
that the Company has become Insolvent, the Trustee shall
determine whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of
benefits to Participants.
(b) Unless the Trustee has actual knowledge that the Company is
Insolvent, or has received notice from the Company or a
person claiming to be a creditor alleging that the Company
is Insolvent, the Trustee shall have no duty to inquire
whether the Company is Insolvent. The Trustee may in all
<PAGE> Page 9
events rely on such evidence concerning the Company's
solvency as may be furnished to the Trustee and that
provides the Trustee with a reasonable basis for making a
determination concerning the Company's Insolvency.
(c) If at any time the Trustee has determined that the Company
is Insolvent, the Trustee shall discontinue payments to
Participants and shall hold the assets of the Trust for the
benefit of the Company's general creditors as a court of
competent jurisdiction may direct. Nothing in this Trust
Agreement shall in any way diminish any rights of
Participants or their Beneficiaries to pursue their rights
as general creditors of the Company with respect to benefits
due under the Plans or otherwise.
(d) The Trustee shall resume the payment of benefits to
Participants in accordance with Section 2 of this Trust
Agreement only after the Trustee has determined that the
Company is not Insolvent (or is no longer Insolvent).
6.04 Resumption of Payments. If the Trustee discontinues the
payment of benefits from the Trust pursuant to Section 6.02
and subsequently resumes such payments, the first payment
following such discontinuance shall include the aggregate
amount of all payments due to Participants under the terms
of the Plans for the period of such discontinuance, less the
aggregate amount of any payments made to Participants by the
Company in lieu of the payments provided for hereunder
during any such period of discontinuance.
Section 7 Investment Authority
7.01 General Authority and Investment Guidelines. In no event
shall any rights associated with assets of the Trust be
exercisable by or rest with Participants. Except as
otherwise expressly provided herein, all rights associated
with assets of the Trust shall be exercised by the Trustee
or the person designated by the Trustee. The Trustee shall
invest and reinvest the principal and income of the Trust,
without distinction between principal and income, in
accordance with the investment guidelines as may be
furnished by the Company from time to time prior to
Termination and Change of Control or a Failure to Pay. Each
Plan may have investment guidelines which are different from
those of other Plans. The Company may amend, from time to
time and in its sole and absolute discretion, the investment
guidelines of each Plan prior to a Change of Control or a
Failure to Pay. Following a Termination and Change of
Control or a Failure to Pay, the Trustee is authorized, in
its sole and absolute discretion, but subject to the
fiduciary standards set forth below, to disregard the
investment guidelines furnished to the Trustee by the
Company.
7.02 Company May Appoint Investment Manager. Prior to a
Termination and Change of Control or a Failure to Pay, the
Company shall have the right to direct the Trustee in
accordance with this Section.
<PAGE>
Page 10
(a) The Company may from time to time direct the Trustee to
segregate all or any portion of the Trust assets in a
separate investment account or accounts and may appoint one
or more investment managers and/or an investment committee
established by the Company to direct the investment and
reinvestment of each such investment account or accounts.
In such event, the Company shall notify the Trustee of the
appointment of each such investment manager and/or
investment committee. Members of the investment committee
may be employees of the Company, but may not be
Participants. In exercising its responsibilities hereunder,
any such investment managers or investment committee shall
have the same duties of loyalty and care as the Trustee
would have in connection with investment of Trust assets.
(b) After the appointment of an investment manager in accordance
with Section 7.02(a), the Trustee shall make every sale or
investment with respect to such investment account as
directed in writing by the investment manager or investment
committee, unless the Trustee determines that such
directions, if implemented, would not be in accordance with
the requirements of this Trust Agreement or with the
standard of conduct for a fiduciary imposed by the Employee
Retirement Income Security Act of 1974, as amended.
(c) Notwithstanding the foregoing, the Trustee, without
obtaining prior approval or direction from an investment
manager or investment committee, shall invest cash balances
held by it from time to time in U.S. Treasury Bills,
commercial paper (including such forms of commercial paper
as may be available through the Trustee) which are rated ___
or higher by _____________, certificates of deposit
(including certificates issued by the Trustee in its
separate corporate capacity) issued by a commercial bank
organized and existing under the laws of the United States
or any state thereof having a combined capital of at least
[$1 billion], and similar types of securities, with a
maturity not to exceed one year. The Trustee shall sell
such short term investments as may be necessary to carry out
the instructions of an investment manager or investment
committee regarding more permanent type investments and
directed distributions.
(d) The Company may from time to time direct the Trustee with
respect to the voting of any trust assets.
7.03 Trustee Duties and Delegation. Following a Change of
Control or a Failure to Pay:
(a) In exercising its discretion to manage the investment of the
Trust assets, the Trustee shall consider the needs of the
Plans, the need for matching of the Trust assets with the
liabilities of the Plans and the duty of the Trustee to act
solely in the best interests of the Participants.
(b) The Trustee shall have the right, in its sole and absolute
discretion, to delegate its investment responsibility to an
investment manager who may be an affiliate of the Trustee.
In the event the Trustee shall exercise this right, the
Trustee shall remain, at all times responsible for the acts
of an investment manager. The Trustee shall have the right,
in its sole and absolute discretion to remove any such
investment manager.
<PAGE>
Page 11
7.04 Company may Substitute Assets. The Company shall have the
right at any time, and from time to time and in its sole and
absolute discretion, to substitute assets of equal fair
market value for any asset held by the Trust, provided that
such assets satisfy the requirements of Section 3.04. This
right is exercisable by the Company in a nonfiduciary
capacity without the approval or consent of any person in a
fiduciary capacity.
7.05 Commingling. Subject to the investment guidelines for each
Plan, the Trustee is hereby authorized to commingle any or
all of the assets of the Plans for investment purposes. The
Trustee, however, shall maintain the investment results
separately by Plan, and the investment experience of each
Plan shall be maintained and allocated to each Plan
separately as earnings. The investment experience of a Plan
shall not be shared with other Plans for purposes of this
Trust.
7.06 Asset Rights. All rights associated with assets of the
Trust shall be exercised only as expressly provided herein.
Section 8 Permissible Investments and Additional Authority
Subject to the investment guidelines while in effect in accord-
ance with the terms of this Agreement and to the fiduciary duties
of the Trustee as provided herein, the Trustee shall have the
power in connection with the Trust in its sole and absolute dis-
cretion:
(a) To invest and reinvest in any readily marketable common and
preferred stocks, bonds, notes, debentures and convertible
stocks and securities (including any such equity securities
of the Company, but not including any debt securities of the
Company or any stock or security of the Trustee other than a
de minimis amount held in a collective or mutual fund),
certificates of deposit or demand or time deposits
(including any such deposits with the Trustee) and shares of
investment companies and mutual funds (including mutual
funds maintained by the Trustee), without being limited to
the classes or property in which the Trustee is authorized
to invest by any law or any rule of court of any state and
without regard to the proportion any such property may bear
to the entire amount of the Trust Assets;
(b) To enter into interest rate, equity and currency exchange or
swap transactions, cap transactions, commodity swaps, collar
transactions, interest rate options, forward foreign
exchange transactions, floor transactions or any other
similar transaction; provided, however, that none of such
transactions may involve leveraged financial instruments,
instruments bought or sold solely for the purpose of earning
a profit due to changes in the market price of the
instruments, or counter parties which are not major
international financial institutions;
(c) To invest and reinvest all or any portion of the Trust
assets collectively through the medium of any common,
collective or commingled trust fund that may be established
and maintained by the Trustee, subject to the instrument or
instruments establishing such trust fund or funds and with
the terms of such instrument or instruments, as from time to
time amended, being incorporated into this Trust Agreement
<PAGE>
Page 12
to the extent of the equitable share of the Trust in any
such common collectively or commingled trust fund;
(d) To retain any property at any time received by the Trustee;
(e) To sell or exchange any property held by it at public or
private sale, for cash or on credit, to grant and exercise
options for the purchase or exchange thereof, to exercise
all conversion or subscription rights pertaining to any such
property and to enter into any covenant or agreement to
purchase any property in the future;
(f) To participate in any plan of reorganization, consolidation,
merger, combination, liquidation or other similar plan
relating to property held by it and to consent to or
oppose any such plan or any action thereunder or any
contract, lease, mortgage, purchase, sale or other action by
an person;
(g) To deposit any property held by it with any protective,
reorganization or similar committee, to delegate
discretionary power thereto, and to pay part of the expenses
and compensation thereof and any assessments levied with
respect to any such property so deposited;
(h) To extend the time of payment of any obligation held by it;
(i) To hold uninvested any moneys received by it, without
liability for interest thereon, but only in anticipation of
payments due for investments, reinvestments, expenses or
disbursements;
(j) To exercise the right to vote any securities or other
property held by it, except as otherwise provided in Section
7.02(d);
(k) Solely for the benefit of Participants and subject to the
provisions of any agreements relating to indebtedness of the
Company existing prior to a Change of Control or a Failure
to Pay, to borrow money from others, including the Company,
in such amounts and for such terms as are advisable, to
issue its promissory note or notes therefor, and to secure
the repayment thereof by pledging any property held by it;
(l) To employ suitable contractors and counsel, who may be
counsel to the Company or to the Trustee, and to pay their
reasonable expenses and compensation from the Trust assets
to the extent not paid by the Company;
(m) To register investments in its own name or in the name of a
nominee; to hold any investment in bearer form; and to
combine certificates representing securities with
certificates of the same issue held by it in other fiduciary
capacities or to deposit or to arrange for the deposit of
such securities with any depository, even though, when so
deposited, such securities may be held in the name of the
nominees of such depository with other securities deposited
therewith by other persons, or to deposit or to arrange for
the deposit of any securities issued or guaranteed by the
United States government, or any agency or instrumentality
thereof, including securities evidenced by book entries
rather than by certificates, with the United States
Department of the Treasury or a Federal Reserve Bank, even
though, when so deposited, such securities may not be held
<PAGE> Page 13
separate from securities deposited therein by other persons;
provided, however, that no securities held in the Trust
shall be deposited with the United States Department of the
Treasury or a Federal Reserve Bank or other depository in
the same account as any individual property of the Trustee,
and provided, further, that the books and records of the
Trustee shall at all times show that all such securities are
part of the Trust assets;
(n) To settle, compromise or submit to arbitration any claims,
debts or damages due or owing to or from the Trust, to
commence or defend suits or legal proceedings to protect any
interest of the Trust, and to represent the Trust in all
suits or legal proceedings in any court or before any other
body or tribunal; provided, however, that the Trustee shall
not be required to take any such action unless it shall
have been indemnified by the Company to its reasonable
satisfaction against liability or expenses it might
incur therefrom;
(o) To acquire, hold, retain and be the owner of any individual
or group policies of life insurance, annuity contracts, and
other property of any kind which policies are contributed to
the Trust by the Company or are purchased by the Trustee as
directed by the Company. To the extent that the Trustee is
directed by the Company prior to a Change of Control or a
Failure to Pay to invest part or all of the Trust assets in
insurance contracts, the type and amount thereof shall be
specified by the Company. The Trustee shall be under no
duty to make inquiry as to the propriety of the type or
amount so specified. Each insurance contract issued shall
provide that the Trustee shall be the owner thereof with the
power to exercise all rights, privileges, options and
elections granted by or permitted under such contract or
under the rules of the insurer. The exercise by the Trustee
of any incidents of ownership under any contract shall,
prior to a Change of Control or a Failure to Pay, be subject
to the direction of the Company. The Trustee shall have all
such rights, except that the Trustee shall have no power to
name a beneficiary of the policy other than the Trust, to
assign the policy (as distinct from conversion of the policy
to a different form) other than to a successor Trustees, or
to loan to any person the proceeds of any borrowing against
an insurance policy held in the Trust. No insurer shall be
deemed to be a party to the Trust and an insurer's
obligations shall be measured and determined solely by the
terms of contracts and other agreements executed by the
insurer.
(p) To hold any other class of assets contributed by the Company
that is deemed prudent by the Trustee, unless expressly
prohibited herein;
(q) To form corporations or partnerships and to create trusts to
hold title to any property, upon such terms and conditions
as may be advisable;
(r) To hold all or part of the Trust uninvested;
<PAGE>
Page 14
(s) To sell, exchange or transfer any equity securities of the
Company held by the Trust, provided that if the Trustee
elects to sell, exchange or transfer any such equity
securities, the Company must be offered the right of first
refusal to engage in a transaction on terms at least equal
to those offered the Trust in an open market transaction;
(t) Generally, to do all acts, whether or not expressly
authorized, that the Trustee may deem necessary or desirable
for the protection of the Trust assets or the administration
of the Trust, including communicating with Participants.
Notwithstanding any powers granted to Trustee pursuant to this
Trust Agreement or pursuant to applicable law, Trustee shall not
have any power that could give this Trust the objective of
carrying on a business and dividing the gains therefrom, within
the meaning of Section 301.7701-2 of the Procedure and Admini-
strative Regulations promulgated pursuant to the Internal
Revenue Code.
Section 9 Accounting by the Trustee
9.01 Accounting Records and Reports. The Trustee shall keep
accurate and detailed records of all investments, receipts,
disbursements and all other Trust transactions. All such
records shall be open to reasonable inspection and audit by
the Company and by any Participant. The Trustee shall
deliver written reports of its administration of the Trust
setting forth for each Participant, for each Plan and for
the Trust in the aggregate:
(a) For the period covered by the report, all contributions,
investments, receipts, disbursements and other transactions
effected by it, including a description of all securities
and investments purchased and sold and the cost or net
proceeds of such purchases or sales (accrued interest paid
or receivable being shown separately);
(b) All cash, securities and other property held at the
beginning and at the end of the period covered by the
report.
The Trustee shall provide such reports as follows:
(c) To the Company, covering each of the first three quarters of
each calendar year, beginning with the first calendar
quarter ending after the effective date of this Trust
Agreement, and provided within 60 days following the close
of each such quarter;
(d) To the Company and to each Participant, covering each
calendar year, and provided within 60 days following the end
of such year;
(e) To the Company and to each Participant, covering the period
from the close of the last preceding year to the date of any
resignation or removal of the Trustee, and provided within
60 days after such resignation or removal.
In the absence of the Company's filing with the Trustee of
objections to any such account within 180 days after its
receipt, the Company shall be deemed to have so approved
such account. In such case, or upon the written approval by
the Company of any such account, the Trustee shall, to the
<PAGE> Page 15
extent permitted by law, be discharged from all liability to
the Company for its acts or failures to act described by
such account. The foregoing, however, shall not preclude
the Trustee from having its accounting settled by a court of
competent jurisdiction.
9.02 Separate Participant Accounts. The Trustee shall maintain a
separate account for each Participant under each Plan. The
Trustee shall credit or debit each Participant's account or
accounts as appropriate to reflect his or her allocable
portion of the Trust assets, as such Trust assets may be
adjusted from time to time pursuant to the terms of this
Trust Agreement, to reflect contributions, investment
earnings and losses, and distributions. All contributions
to the Trust shall be allocated in accordance with the terms
of this Trust Agreement. Investment earnings and losses for
each Plan shall be allocated to Participants' accounts under
that Plan based on the proportion which each Participant
account for that Plan bears to the total of all Participant
accounts for that Plan. During the period that the Trust is
revocable, the Trustee and the Company shall mutually agree
upon procedures to assure the proper allocation of account
balances in accordance with the requirements of this Section
9.02.
Section 10 Trustee Rights, Duties and Indemnification
10.01 Duties of Loyalty and Care. Following a Change of Control
or a Failure to Pay, the Trustee shall act solely in the
interest of and for the benefit of the Participants under
the terms of the Plans and this Trust. At all times,
whether before or after a Change of Control or a Failure to
Pay, the Trustee shall act with the care, skill, prudence
and diligence under the circumstances then prevailing that
a prudent person acting in like capacity and familiar with
such matters would use in the conduct of an enterprise of a
like character and with like aims. The Trustee shall incur
no liability to any person for any action taken pursuant to
a direction, request or approval given by the Company which
is contemplated by, and in conformity with, the terms of
the Plans, the Benefit Schedule or this Trust Agreement,
and is given in writing by the Company.
10.02 Participant Payment Determinations. In making any
determination required or permitted to be made by the
Trustee concerning any distribution to Participants, the
Trustee shall, in each such case, reach its own independent
determination, in its absolute and sole discretion, as to
the Participant's entitlement to the payment under the
Plans, the Benefit Schedule and this Trust Agreement. The
Company waives any right to contest any amount distributed
by the Trustee hereunder pursuant to a good faith deter-
mination made by the Trustee, notwithstanding any claim
by or on behalf of the Company (absent a manifest abuse of
discretion by the Trustee) that such payments should not be
made. The Trustee shall, to the maximum extent permitted
by applicable law, be fully protected and held harmless in
making such payments.
10.03 No Legal Action by Trustee. Following a Change of Control
or a Failure to Pay, the Trustee agrees that it will not
itself institute any action at law or at equity, whether in
the nature of an accounting, interpleading action, request
for a declaratory judgment or otherwise, requesting a court
<PAGE> Page 16
or administrative or quasi-judicial body to make any
determination required to be made by the Trustee hereunder
in the place and stead of the Trustee.
10.04 Indemnification. Unless the Trustee has been negligent or
engaged in misconduct, the Company hereby indemnifies the
Trustee against losses, liabilities, claims, costs and
expenses (other than costs and expenses included in the
standard fee schedule) incurred in connection with the
administration of the Trust, including (a) liability to
which the Trustee may be subjected by carrying out any
directions of an investment manager (except for an
affiliated investment manager appointed pursuant to Section
7.03(b)) or investment committee issued pursuant hereto,
(b) liability for failure to act in the absence of direc-
tions of the investment manager (except for an affiliated
investment manager appointed pursuant to Section 7.03(b))
or investment committee and (c) liability for all expenses
reasonably incurred by the Trustee if it undertakes or de-
fends any litigation arising in connection with this Trust
or to protect a Participant's rights under the Plans.
10.05 Counsel. Prior to a Change of Control or Failure to Pay,
the Trustee may consult with legal counsel (who may also be
counsel for the Company generally) with respect to any of
its duties or obligations hereunder. Following a Change of
Control or Failure to Pay, the Trustee shall select
independent legal counsel and may consult with counsel or
other persons with respect to its duties and with respect
to the rights of Participants under the Plans.
10.06 Agents. The Trustee may hire agents, accountants,
actuaries, investment advisors, financial consultants or
other professionals to assist it in performing any of its
duties or obligations hereunder and, provided the Trustee
has not breached its duties in selecting or retaining such
persons, may rely on any determinations made by such agents
to the same extent as if such determinations had been made
by the Trustee. The use of such persons shall not entitle
the Trustee to any additional compensation to the extent
that the services of such agents are included in the
Trustee's standard fee schedule.
10.07 Powers. The Trustee shall have, without exclusion, all
powers conferred on the Trustee by applicable law, unless
expressly provided otherwise herein, except that the
Trustee shall not have any power that could give this Trust
the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2
of the Procedure and Administrative Regulation promulgated
pursuant to the Internal Revenue Code.
Section 11 Compensation and Expenses of the Trustee
11.01 Taxes. With respect to any taxes levied or assessed upon
the Trust, the Trustee at the Company's expense or the
Company, whichever may be elected by the Company, may
contest the validity of such taxes in any manner deemed
appropriate by the Company. The Company shall pay any
taxes of any and all kinds whatsoever, which at any time
are levied or assessed upon or become payable with respect
of the Trust, the income or any property forming a part
thereof, or any security transaction pertaining thereto.
<PAGE>
Page 17
To the extent that any taxes levied or assessed upon the
Trust are not paid by the Company when due, the Trustee
shall pay such taxes out of the Trust assets. The Trustee
shall notify each Participant in writing of the failure of
the Company to pay taxes.
11.02 Fees and Expenses. The Trustee shall be paid compensation
by the Company in accordance with the Trustee's regular
schedule of fees for trust services, as in effect from time
to time, unless otherwise agreed by the Company and
Trustee. The Trustee shall be reimbursed for its reason-
able expenses related to management and administration of
the Trust, including reasonable expenses incurred in con-
nection with the appointment of a successor trustee, and
reasonable compensation of counsel and any actuary or other
agent engaged by the Trustee to assist it in such manage-
ment and administration, to the extent not included in the
regular schedule of fees for trust services.
11.03 Failure to Pay Fees and Expenses - Expense Account. If the
Company does not pay the Trustee's fees and expenses as
provided herein, then the Trustee may withdraw from the
Expense Account the amounts required for payment of those
fees and expenses (including taxes) to the extent there is
a balance in the Expense Account. If there is an inade-
quate balance in the Expense Account, the Trustee may
satisfy such obligation from the Trust assets and shall
charge such to the appropriate Plan, or if there is no
appropriate Plan, then it shall charge all Plans in propor-
tion to the aggregate of the account balances or accrued
benefits under the Plans. The Trustee shall notify all
Participants or Beneficiaries of any failure by the Company
to reimburse the Trust for fees and expenses payable here-
under.
Section 12 Resignation and Removal of the Trustee
12.01 Resignation. Prior to a Change of Control or a Failure to
Pay, the Trustee may resign at any time by written notice
to the Company, which shall be effective 90 days after re-
ceipt of such notice by the Company unless the Company and
the Trustee agree otherwise. Following a Change of Control
or a Failure to Pay, the Trustee may resign only after at
least 90 days notice to the Company and the Participants
and the effective appointment of a successor Trustee.
12.02 Removal. Prior to a Change of Control or a Failure to Pay,
the Trustee may be removed by the Company with or without
cause on 90 days notice or upon shorter notice acceptable
to the Trustee. Subsequent to a Change of Control or a
Failure to Pay, the Trustee may only be removed by the Com-
pany if both of the following conditions are satisfied:
(a) The Company shall give notice to the Trustee of its removal,
the appointment of a successor Trustee and the acceptance by
the successor of its appointment in writing.
(b) The Company shall then notify each Participant of the
removal and designation of the successor Trustee, each
Participant shall then vote for or against such action, and
a majority of the Participants vote for such action.
<PAGE>
Page 18
12.03 Successor Trustee. The appointment of a successor trustee
shall become effective upon agreement by it to assume the
Agreement as Trustee, except that following a Change of
Control or a Failure to Pay, the appointment of a successor
trustee shall become effective only after the successor
trustee has also been approved by a vote of the majority of
all Participants.
12.04 Transfer of Assets. Upon resignation or removal of the
Trustee and appointment of a successor Trustee, all assets
shall subsequently be transferred to the successor Trustee.
The transfer shall be completed within 90 days after the
effective date of the resignation or removal, unless the
Company extends the time limit.
Section 13 Successor Trustee
13.01 Qualifications of Successor Trustee. Any successor Trustee
must be a bank or national banking association with a mar-
ket capitalization exceeding $1 billion. The successor
Trustee shall have all of the rights and powers of the
former Trustee. The former Trustee shall execute any in-
strument necessary or reasonably requested by the Company
or the successor Trustee to evidence the appointment of the
successor Trustee and the transfer of Trust assets to it.
13.02 Responsibilities. The successor Trustee need not examine
the records and acts of any prior Trustee. The successor
Trustee shall not be responsible for and the Company shall
indemnify and defend the successor Trustee from any claim
or liability resulting from any action or inaction of any
prior Trustee or from any other past event, or any condi-
tion existing at the time it becomes successor Trustee.
Section 14 Amendment and Termination
14.01 Amendment. During the period that this Trust Agreement is
revocable, it may be amended in any respect by the Company
and the Trustee. Thereafter, this Trust Agreement may be
amended only if such amendment does not have an adverse
effect upon the Participants and their rights hereunder or
if the amendment is approved in writing by 90% of all
Participants. Any permitted amendment to this Trust
Agreement shall be evidenced by a written instrument
executed by the Trustee and the Company. Notwithstanding
the foregoing, no amendment shall conflict with the terms
of the Plans or shall make the Trust revocable after it
has become irrevocable in accordance with its terms.
14.02 Termination. The Trust shall not terminate until the first
to occur of (a) the date on which Participants have re-
ceived all of the benefits due to them under the terms and
conditions of the Plans, or (b) 90% of all Participants
give their written approval to the termination of the
Trust. Upon termination and the payment of all expenses,
any assets remaining in the Trust shall be returned to the
Company.
Section 15 Definitions.
For purposes of this Trust, the following terms shall be defined
as set forth below:
"Agent" shall have the meaning set forth in Section 1.06.
<PAGE> Page 19
"Benefit Schedule" shall have the meaning set forth in Section
2.02.
"Change of Control" shall mean:
(a) a tender offer shall be made and consummated for the
ownership of securities of the Company representing
25% or more of the combined voting power of the
Company's then outstanding voting securities,
(b) the Company shall be merged or consolidated with
another corporation and as a result of such merger or
consolidation less than 75% of the outstanding voting
securities of the surviving or resulting corporation
shall be owned in the aggregate by the former
shareholders of the Company, other than affiliates
(within the meaning of the Securities Exchange Act of
1934 (the "Exchange Act")) of any party to such merger
or consolidation, as the same shall have existed
immediately prior to such merger of consolidation;
(c) the Company shall sell substantially all of its assets
to another corporation which is not a wholly owned
subsidiary of the Company;
(d) any "person" (as such term is used in Sections 3(a)(9)
and 13(d)(3) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, of
securities of the Company representing 25% or more of
the combined voting power of the Company's then
outstanding securities; or
(e) during the period of two consecutive years,
individuals who at the beginning of such period
constitute the Board of Directors of the Company (the
"Board") cease for any reason to constitute at least a
majority thereof unless the election, or the
nomination for election by the Company's shareholders,
of each new director was approved by a vote of at
least two-thirds of the directors then still in office
who were directors at the beginning of the period.
For purposes of this definition, ownership of voting
securities shall take into account and include ownership as
determined by applying the provisions of Rule 13d-3(d)(1)(i)
of the Exchange Act (as then in effect).
The Company shall advise the Trustee whether or not a Change
of Control has occurred. The Trustee shall be entitled to
rely upon such advice, but if the Trustee receives notice of
a Change of Control from another source, then the Trustee
shall make its own independent determination.
"Expense Account" shall have the meaning set forth in Section
3.05.
"Failure to Pay" shall mean that the circumstances described in
either (i) or (ii) have occurred:
(i) Any Plan Participant shall have notified the Trustee
and the Company in writing that the Company shall have
failed to pay to the Participant, when due, either
directly or by direction to the Trustee in accordance
with the terms hereof, at least 75% of any and all
<PAGE> Page 20
amounts which the Participant was entitled to receive
at any time in accordance with the terms of any Plan,
the Benefit Schedule or this Trust Agreement, and that
such amount remains unpaid. Such notice must set
forth the amount, if any, which was paid to the
Participant, and the amount which the Participant
believes he or she was entitled to receive under the
Plans, the Benefit Schedule and this Trust Agreement.
Subject to Section 2.06, the failure to make such
payment shall have continued for a period of 30 days
after receipt of such notice by the Trustee and by the
Company, and during such 30-day period the Company
shall have failed to prove, by clear and convincing
evidence as determined by the Trustee in its sole and
absolute discretion, that such amount was in fact paid
or was not due and payable; or
(ii) More than two Plan Participants shall have notified
the Trustee and the Company in writing, either
individually or jointly, that they have not been paid,
when due, amounts to which they are entitled under the
Plans, the Benefit Schedule or this Trust Agreement,
and that such amount remains unpaid. Each such notice
must set forth the amount, if any, which was paid to
the Participant, and the amount which the Participant
believes he or she was entitled to receive under the
Plans, the Benefit Schedule and this Trust Agreement.
Within 15 days after receipt of each such notice, the
Trustee shall determine, on a preliminary basis,
whether any failure to pay such Participants has
resulted in a failure to pay when due, directly or by
direction, at least 75% of the aggregate amount due to
all Participants under all the Plans, the Benefit
Schedule and this Trust Agreement in any two-year
period, and that such amount remains unpaid. Subject
to Section 2.06, if the Trustee determines that such a
failure has occurred, then it shall so notify the
Company and the Participants in writing within the
same 15 day period. Within a period of 20 days after
receipt of such notice from the Trustee, the Company
shall have failed to prove by clear and convincing
evidence, in the sole and absolute discretion of the
Trustee, that such amount was paid or was not due and
payable.
"Insolvency" shall have the meaning set forth in Section 6.02.
"Liens" shall have the meaning set forth in Section 6.01
"Participant" shall mean the participants in the Plans, and any
beneficiaries of any participants who are no longer then
surviving.
"Plan" shall have the meaning set forth in the first WHEREAS
recital.
"Proposed Change of Control" shall mean:
(a) 20 days after the commencement of a tender offer shall
be made for the ownership of securities of the Company
representing 25% or more of the combined voting power
of the Company's then outstanding voting securities
(unless such tender offer shall have been withdrawn);
<PAGE>
Page 21
(b) 20 days after the commencement of solicitation of
proxies or consents for a merger or consolidation with
another corporation and as a result of such merger or
consolidation, less than 75% of the outstanding voting
securities of the surviving or resulting corporation
would be owned in the aggregate by the former
shareholder of the Company, other than the party and
affiliates (within the meaning of the Exchange Act) of
any party to such merger or consolidation, as the same
shall have existed immediately prior to such merger or
consolidation;
(c) upon the date that the Company shall have entered into
an agreement to sell substantially all of its assets
to another corporation which is not a wholly owned
subsidiary of the Company;
(d) within 20 days after any "person" (as such term is
used in Sections 3(a)(9) and 13(d)(3) of the Exchange
Act) becomes the beneficial owner, directly or
indirectly, of securities of the Company representing
15% or more of the combined voting power of the
Company's then outstanding securities, except for any
employee benefit plan of the Company; or
(e) upon the date that individuals who, at the beginning
of any period of two consecutive years, constitute the
Board of Directors of the Company, cease for any
reason to constitute at least 76% thereof, unless the
election, or the nomination for election by the
Company's shareholders, of each new director was
approved by a vote of at least two-thirds of the
directors then still in office who were directors at
the beginning of the period.
For purposes of this definition, ownership of voting
securities shall take into account and include
ownership as determined by applying the provisions of
Rule 13d-3(d)(1)(i) of the Exchange Act (as then in
effect).
"Prorata Payment" shall have the meaning set forth in Section
4.01(a).
"Termination and Change in Control" shall mean the termination of
the employment of a Participant for any reason whatsoever, either
at the initiative of the Company or the Participant, prior to a
Change in Control if there is a subsequent Change in Control, or
the termination of employment of a Participant for any reason
whatsoever, either at the initiative of the Company or the
Participant, during the three-year period following a Change in
Control.
Section 16 Miscellaneous
16.01 Company Obligation Continues. Notwithstanding any
distribution made to a Participant in accordance with this
Trust Agreement, the Company shall remain obligated to pay
any amounts due the Participant under the Plans which have
not been paid from the assets of the Trust.
<PAGE>
Page 22
16.02 Trustee Expenses. In discharging its responsibilities
hereunder, the Trustee may consult with and make such
inquiries of such persons, including Participants or
Beneficiaries, the Company, the Agent, legal counsel,
actuaries, third party administrators or any other person
the Trustee may reasonably deem necessary. Any reasonable
expenses incurred by the Trustee in fulfilling its
responsibilities shall be reimbursed by the Company and, to
the extent not paid by the Company within a reasonable
time, shall be charged to the Trust. If charged to the
Trust, the expenses shall first be charged to the Expense
Account and if the assets of the Expense Account are
insufficient shall be prorated to Participants and
Beneficiaries.
16.03 Company Waiver or Right to Contest. If the Company
breaches any of its obligations hereunder to provide funds,
Plans, the Benefit Schedule or information to the Trustee,
the Trustee shall enforce such obligations by legal action
if necessary, the Company hereby waives its right to con-
test any such action by the Trustee and consents to the
remedy of specific performance.
16.04 Severability. Any provision of this Trust Agreement
prohibited by law shall be ineffective to the extent of any
such prohibition, without invalidating the remaining
provisions hereof.
16.05 ERISA Compliance. The Company hereby represents and
warrants that all of the Plans have been established,
maintained and administered in accordance with all
applicable laws, including without limitation, ERISA.
16.06 Alienation. Benefits payable to Participants and their
Beneficiaries under this Trust Agreement may not be
anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable
process.
16.07 Counterparts. This Trust Agreement may be executed in
multiple copies, each of which shall for all purposes
constitute an agreement, binding on the parties, and
each party hereby covenants and agrees to execute all
duplicates or replacement counterparts of this Trust
Agreement as may be required.
16.08 Successors and Assigns. This Trust Agreement shall be
binding upon and shall inure to the benefit of the parties,
their respective successors and permitted assigns, and each
party agrees, on behalf of itself, and its successors and
permitted assigns, to execute any instruments which may be
necessary or appropriate to carry out the purpose and in-
tention of this Trust Agreement, and hereby authorizes and
directs its successors and permitted assigns to execute any
and all such instruments.
16.09 Notices. Notices required hereunder shall be deemed to
have been given hereunder if delivered personally, by tele-
copy or sent by certified mail, postage prepaid, as
follows:
<PAGE>
Page 23
If to the Company: Secretary
Eaton Corporation
Eaton Center
1111 Superior Avenue
Cleveland, Ohio 44114
If to the Trustee: Mr. Joe Long
Senior Vice President
Wachovia Bank of North Carolina
100 N. Main Street
Winston-Salem, NC 27150
If to the Participants: To their addresses as they may
appear on the records of the Company or the Trustee.
16.10 Governing Law. This Trust Agreement shall be governed by
and construed in accordance with the laws of North
Carolina.
IN WITNESS WHEREOF, this Trust Agreement has been executed on
behalf of the parties hereto on the day and year first above
written.
EATON CORPORATION WACHOVIA BANK OF NORTH
CAROLINA, N.A., TRUSTEE
By:_________________________ By:_________________________
Its:________________________ Its:________________________
ATTEST: ATTEST:
By:_________________________ By:_________________________
Its:________________________ Its:________________________
<PAGE>
Page 1
<TABLE>
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14(c)
Exhibit 11
Computations of Net Income per Common Share
<CAPTION>
Year ended December 31
------------------------
(Millions except for per share amounts) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average number of Common Shares outstanding 77.4 77.8 75.6
Net income $ 349 $ 399 $ 333
Per share amount 4.50 5.13 4.40
</TABLE>
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 21
Subsidiaries of Eaton Corporation
<TABLE>
Eaton is publicly held and has no parent corporation. Eaton's
subsidiaries, the state or country in which each was organized,
and the percentage of voting securities owned by Eaton or
another Eaton subsidiary as of December 31, 1996 are as follows:
<CAPTION>
Percentage of voting
securities owned (by
Where Eaton unless otherwise
Consolidated subsidiaries (A) organized indicated)
- - ------------------------------- ----------- ------------------------------
<S> <C> <C> <C>
American Nucleonics Corporation California 100% AIL Systems Inc.
Vorad Safety Systems, Inc. California 100% IVHS Technologies,
Inc.
AIL Systems Inc. Delaware 95.404% AIL Systems
Holding Company
BAC Investments Ltd. Delaware 100%
CEEC Holdings Incorporated Delaware 100% CEEC Investments
Incorporated
CEEC Incorporated Delaware 100% Cutler-Hammer Inc.
CEEC Investments Incorporated Delaware 100% CEEC Incorporated
Challenger Electrical Equipment
Corp. Delaware 100% CEEC Holdings
Incorporated
Cutler-Hammer de Puerto Rico Inc. Delaware 100% Cutler-Hammer Inc.
Cutler-Hammer Inc. Delaware 100%
Eaton Administration Corporation Delaware 100%
Eaton ESC Holding Company Delaware 100%
Eaton Holding Corporation Delaware 100% Eaton International
Corporation
Eaton International Corporation Delaware 100%
Eaton Semiconductor Equipment Inc Delaware 100%
Eaton Truck Systems, Inc. Delaware 100%
Eaton USEV Holding Company Delaware 100%
Eaton VORAD Technologies, L.L.C. Delaware 50% Eaton Truck Systems,
Inc.
50% Vorad Safety
Systems, Inc.
ERC Corporation Delaware 100% Eaton Leasing
Corporation
ERC II Corporation Delaware 100% Eaton Leasing
Corporation
</TABLE>
<PAGE>
<TABLE>
Page 2
<CAPTION>
<S> <C> <C> <C>
High Temperature Engineering
Corporation Delaware 100% Eaton
Semiconductor
Equipment Inc.
IVHS Technologies, Inc. Delaware 70%
Lectron Products, Inc. (Indiana) Indiana 100% Lectron Products,
Inc. (Michigan)
CAPCO Automotive Products
Corporation Michigan 100%
IKU USA Inc. Michigan 100% SPIVICO Inc.
Lectron Products, Inc. (Michigan) Michigan 100%
SPIVICO Inc. Michigan 100% Eaton Holding
Corporation
AIL Systems Holding Company Nevada 100%
Cutler-Hammer de Puerto Rico
Company (Partnership) Ohio 99% Cutler-Hammer de
Puerto Rico Inc.
1% Cutler-Hammer Inc.
Cutler-Hammer IDT, Inc. Ohio 100%
Eaton Consulting Services
Corporation Ohio 100%
Eaton Leasing Corporation Ohio 100%
Eaton Properties Corporation Ohio 100% Eaton Leasing
Corporation
Eaton Utah Corporation Ohio 100% Eaton Leasing
Corporation
Eaton Westlake Corporation Ohio 100% Eaton Leasing
Corporation
U.S. Engine Valve (Partnership) Ohio 5.607%
70% Eaton USEV
Holding Company
Eaton I.C.S.A. Argentina 100%
Eaton Controls Pty. Ltd. Australia 99.99996% Eaton
International
Corporation
.00004% Eaton Pty. Ltd.
Eaton Pty. Ltd. Australia 100%
Eaton Specialty Controls Pty.
Ltd. Australia 99.99996%
.00004% Eaton
International
Corporation
Eaton Holding G.m.b.H. Austria 100% Eaton
International
Corporation
Eaton Foreign Sales Corporation Barbados 100%
Eaton Holding Limited Barbados 100% Eaton Yale Ltd.
Eaton Services Limited Barbados 100% Eaton Holding
Limited
</TABLE>
<PAGE>
<TABLE>
Page 3
<CAPTION>
<S> <C> <C> <C>
Saturn Insurance Company Ltd. Bermuda
Islands 100%
Eaton Controles Ltda. Brazil 51%
49% Eaton
International
Corporation
Eaton Ltda. Brazil 70.67% Eaton Services
Limited
28.73% Eaton
International
Corporation
.60% Cutler-Hammer Inc.
Eaton Technologies Ltda. Brazil 99.99%
.01% Eaton
International
Corporation
Eaton Truck Components Ltda. Brazil 21.135%
78.865% CAPCO
Automotive
Products
Corporation
Eaton ETN Offshore Ltd. Canada 100% Common Shares
- Eaton
Corporation
100% Preferred Shares -
Eaton
International
Corporation
Eaton Yale Ltd. Canada 100% Eaton ETN
Offshore Ltd.
Eaton Holding I Limited Cayman Islands 100% Eaton Holding
III Limited
Eaton Holding II Limited Cayman Islands 100% Eaton Holding
III Limited
Eaton Holding III Limited Cayman Islands 100% Eaton Holding G.m.b.H.
Jining Eaton Hydraulics
Company Ltd. China 60%
Suzhou Cutler-Hammer Electric
Co., Ltd. China 75%
Eaton Controles Industriales S.A. Costa Rica 97.53% Eaton
International
Corporation
Eaton Controls d.o.o. Croatia 80% Eaton
Controls S.A.
20% Eaton
Technologies S.A.
Cutler-Hammer, S.A. Dominican
Republic 100% Cutler-Hammer Inc.
Coupatan Immobiliere S.A. France 100% Eaton Controls S.A.
</TABLE>
<PAGE>
<TABLE>
Page 4
<CAPTION>
<S> <C> <C> <C>
Eaton Controls S.A. France 100% Eaton
Technologies S.A.
Eaton Engineering Controls Srl France 100% Eaton Controls S.A.
Eaton S.A. France 100%
Eaton Technologies S.A. France 55%
45% Eaton
International
Corporation
Eaton Automotive G.m.b.H. Germany 100% Eaton G.m.b.H.
Eaton Controls G.m.b.H. & Co.
K.G. (Partnership) Germany 99.5% Eaton Yale Ltd.
.5% Eaton G.m.b.H.
Eaton G.m.b.H. Germany 100%
Eaton Technologies Limited Hong Kong 100% Eaton
International
Corporation
Eaton Automotive S.p.A. Italy 33%
67% Eaton S.p.A.
Eaton Controls S.p.A. Italy 99.998% Eaton S.p.A.
.002% Eaton Automotive
S.p.A.
Eaton Finance S.p.A. Italy 50% Eaton Automotive
S.p.A.
50% Eaton Controls
S.p.A.
Eaton S.p.A. Italy 99.9053%
.0947% Eaton B.V.
Eaton Japan Co., Ltd. Japan 100%
Eaton International Inc. Liberia 100%
Cutler-Hammer Controls Sdn. Bhd. Malaysia 100% Eaton
International
Corporation
Condura S.A. de C.V. Mexico 100% Eaton
International
Corporation
Cutler-Hammer Mexicana S.A. Mexico 100% Eaton
International
Corporation
Controles Latinamericanos,
S.A. de C.V. Mexico 100% Eaton
International
Corporation
Eaton Manufacturera S.A.
de C.V. Mexico 90.603%
Eaton Molded Products S.A.
de C.V. Mexico .1%
99.9% Eaton
International
Corporation
</TABLE>
<PAGE>
<TABLE>
Page 5
<CAPTION>
<S> <C> <C> <C>
Operaciones de Maquila de
Juarez S.A. de C.V. Mexico 99.99999% Eaton
International
Corporation
.00001% Cutler-Hammer Inc.
Eaton s.a.m. Monaco 100%
Eaton B.V. Netherlands 100%
Eaton C.V. (Partnership) Netherlands 99.9% Eaton Holding
III Limited
.1% Eaton
International
Corporation
Eaton Holding B.V. Netherlands 100% Eaton Holding
Corporation
IKU B.V. Netherlands 100% IKU Holding
Montfoort B.V.
IKU Holding Montfoort B.V. Netherlands 100% Eaton Holding B.V.
Eaton Finance N.V. Netherlands
Antilles 45%
55% Eaton International
Inc.
Cutler-Hammer Asia Corporation Philippines 100% Eaton
International
Corporation
Eaton Controls Spolka z o.o. Poland 100% Eaton Holding B.V.
Eaton Automotive Spolka z o.o. Poland 100% Eaton Automotive
S.p.A.
Cutler-Hammer Pte. Ltd. Singapore 100% Eaton
International
Corporation
Eaton Services Pte. Ltd. Singapore 100% Eaton
Semiconductor
Equipment Inc.
Eaton Truck Components (Pty)
Limited South Africa 100% Eaton Limited (U.K.)
Eaton Limited South Korea 100%
Eaton Semiconductor Limited South Korea 100% Eaton
Semiconductor
Equipment Inc.
Eaton Ros S.A. Spain 100% Eaton S.A.
Eaton S.A. Spain 49.86%
50.14% Eaton B.V.
Productos Eaton Livia S.A. Spain 52% Eaton B.V.
48% Eaton S.A. (Spain)
Eaton Limited Taiwan 19.42%
80.58% Eaton
International
Corporation
</TABLE>
<PAGE>
<TABLE>
Page 6
<CAPTION>
<S> <C> <C> <C>
Eaton Technologies Limited Thailand 100%
Rubberon Technology Corporation
Limited Thailand 100%
Eaton Financial Services Limited United
Kingdom 100% Eaton Limited (U.K.)
Eaton Limited United
Kingdom 100%
Cutler-Hammer de Venezuela S.A. Venezuela 100% Eaton
International
Corporation
Cutler-Hammer Electro
Metalurgica C.A. Venezuela 100% Cutler-Hammer de
Venezuela S.A.
Luz-a-Tec S.A. Venezuela 99.99% Cutler-Hammer
Electro Metalurgica
C.A.
.01% Cutler-Hammer Inc.
</TABLE>
(A) Other Eaton subsidiaries, most of which are inactive, are
not listed above. If considered in the aggregate, they would
not be material.
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 23
Consent of Independent Auditors
<TABLE>
We consent to the incorporation by reference in the following Registration
Statements and related Prospectuses of our report dated January 20, 1997,
with respect to the consolidated financial statements of Eaton Corporation
included in this Form 10-K for the year ended December 31, 1996:
<CAPTION>
Registration
number Description Filing date
- - ------------ ----------------------------------------- -----------------
<S> <C> <C>
333-23539 Eaton Non-Employee Director Fee Deferral
Plan - Form S-8 Registration Statement March 18, 1997
333-22597 Eaton Incentive Compensation Deferral
Plan - Form S-8 Registration Statement February 28, 1997
333-13873 Eaton Corporation Investment Plan for
Hourly Employees of the Hydraulics
Division - Hutchinson Plant - Form S-8
Registration Statement October 10, 1996
333-13869 Lincoln Plant Share Purchase and
Investment Plan and Trust - Form S-8
Registration Statement October 10, 1996
333-13861 Eaton Corporation 401(k) Savings Plan for
the Hourly Rate Employees at Airflex
Division - Form S-8 Registration
Statement October 10, 1996
333-13857 Eaton Wauwatosa Union Plan and Trust -
Form S-8 Registration Statement October 10, 1996
333-13855 Eaton Winamac Hourly Investment Plan and
Trust - Form S-8 Registration Statement October 10, 1996
333-03599 Eaton Corporation Share Purchase and
Investment Plan - Form S-8 Registration
Statement May 13, 1996
333-01365 Eaton Corporation Incentive Compensation
Deferral Plan - Form S-3 Registration
Statement March 1, 1996
33-64201 Eaton Corporation $120,837,500 of Debt
Securities and Debt Warrants - Form S-3
Registration Statement November 14, 1995
33-63357 Lectron Products, Inc. Retirement Savings
Plan - Form S-8 Registration Statement October 12, 1995
33-60907 Eaton 1995 Stock Plan - Form S-8
Registration Statement July 7, 1995
</TABLE>
<PAGE>
<TABLE>
Page 2
<CAPTION>
<S> <C> <C>
33-59459 Eaton Corporation 2,072,400 of Common
Shares - Form S-3 Registration Statement May 19, 1995
33-53521 Cutler-Hammer Inc. Savings Plan for
Certain Hourly Employees - Form S-8
Registration Statement May 6, 1994
33-52333 Eaton Corporation $600,000,000 of Debt
Securities, Debt Warrants, Common Shares
and Preferred Shares - Form S-3
Registration Statement February 18, 1994
33-49779 Eaton Limited U.K. Savings-Related Share
Option Scheme (1191) - Form S-8
Registration Statement July 16, 1993
33-49777 Eaton Corporation Share Purchase and
Investment Plan - Form S-8
Registration Statement July 15, 1993
33-49393, Eaton Corporation Stock Option Plans -
33-12842, Form S-8 Registration Statement March 9, 1993
2-76349 &
2-58718
33-15582 Eaton Limited U.K. Savings-Related Share
Option Scheme - Form S-8 Registration
Statement July 7, 1987
33-2688 Eaton Corporation Shareholder Dividend
Reinvestment Plan (Including Post
Effective Amendment No. 1 filed
February 19, 1986) January 15, 1986
2-77090 Eaton Corporation Strategic Incentive and
Option Plan - Form S-8 Registration
Statement May 10, 1982
</TABLE>
Ernst & Young LLP
Cleveland, Ohio
March 20, 1997
<PAGE>
Page 1
Eaton Corporation
1996 Annual Report on Form 10-K
Item 14 (c)
Exhibit 24
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS: That each person whose name is signed
below has made, constituted and appointed, and by this instrument does
make, constitute and appoint, Adrian T. Dillon, Ronald L. Leach or
William J. Nowak his or her true and lawful attorney, for him or her and
in his or her name, place and stead to subscribe, as attorney-in-fact,
his or her signature as Director or Officer or both, as the case may be,
of Eaton Corporation, an Ohio corporation (the "Corporation"), to the
Annual Report on Form 10-K for the year ended December 31, 1996 pursuant
to the Securities Exchange Act of 1934, and to any and all amendments to
that Annual Report on Form 10-K, giving and granting unto each such
attorney-in-fact full power and authority to do and perform every act and
thing whatsoever necessary to be done in the premises, as fully as he or
she might or could do if personally present, hereby ratifying and
confirming all that each such attorney-in-fact shall lawfully do or cause
to be done by virtue hereof.
This Power of Attorney shall not apply to any Annual Report on Form 10-K
or amendment thereto filed after December 31, 1997.
IN WITNESS WHEREOF, this Power of Attorney has been signed this 26th day
of February, 1997.
/s/ Stephen R. Hardis /s/ Charles E. Hugel
- - ----------------------------- ------------------------------
Stephen R. Hardis Charles E. Hugel
Chairman and Chief Executive Director
Officer; Principal
Executive Officer; Director
/s/ Alexander M. Cutler /s/ John R. Miller
- - ------------------------------ -----------------------------
Alexander M. Cutler John R. Miller
President and Chief Operating Director
Officer; Director
/s/ Ronald L. Leach
- - ----------------------------- -----------------------------
Ronald L. Leach Furman C. Moseley
Vice President - Accounting; Director
Principal Accounting Officer
/s/ Neil A. Armstrong /s/ Victor A. Pelson
- - ----------------------------- -----------------------------
Neil A. Armstrong Victor A. Pelson
Director Director
/s/ Phyllis B. Davis /s/ A. William Reynolds
- - ----------------------------- -----------------------------
Phyllis B. Davis A. William Reynolds
Director Director
<PAGE>
Page 2
/s/ Ernie Green /s/ Gary L. Tooker
- - ------------------------------ -----------------------------
Ernie Green Gary L. Tooker
Director Director
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and the Statements of Consolidated Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 22
<SECURITIES> 38
<RECEIVABLES> 1,000
<ALLOWANCES> 15
<INVENTORY> 729
<CURRENT-ASSETS> 2,017
<PP&E> 3,496
<DEPRECIATION> 1,704
<TOTAL-ASSETS> 5,307
<CURRENT-LIABILITIES> 1,230
<BONDS> 1,062
0
0
<COMMON> 39
<OTHER-SE> 2,121
<TOTAL-LIABILITY-AND-EQUITY> 5,307
<SALES> 6,961
<TOTAL-REVENUES> 6,961
<CGS> 5,165
<TOTAL-COSTS> 6,427
<OTHER-EXPENSES> (36)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> 485
<INCOME-TAX> 136
<INCOME-CONTINUING> 349
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 349
<EPS-PRIMARY> 4.50
<EPS-DILUTED> 4.41
</TABLE>
