<PAGE> 1
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SCHEDULE 14A
(RULE 14A)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
EATON CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------
(2) Aggregate number of securities to which transaction applies:
----------------
(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
--------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------
(5) Total fee paid:
------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------
(3) Filing Party:
---------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
PROXY
STATEMENT
&
NOTICE OF MEETING
1998 ANNUAL MEETING OF SHAREHOLDERS
- --------------------------------------------------------------------------------
[EATON LOGO]
<PAGE> 3
NOTICE OF MEETING
The 1998 annual meeting of Eaton Corporation shareholders will be held
Wednesday, April 22, at 11:00 a.m. local time at the Eaton Corporation
Innovation Center, 26201 Northwestern Highway, Southfield, Michigan, for the
purpose of:
1. Electing directors;
2. Approving the Company's 1998 Stock Plan;
3. Ratifying the appointment of independent auditors; and
4. Considering reports and such other business as may properly come before the
meeting.
These matters are more fully described in the following pages.
The record date for the meeting has been fixed by the Board of Directors as the
close of business on February 23, 1998. Shareholders of record at that time are
entitled to vote at the meeting.
By order of the Board of Directors
/S/EARL R. FRANKLIN
Earl R. Franklin
Secretary
March 13, 1998
Your Vote Is Important
To vote your shares, please indicate your choices, sign and date the enclosed
proxy card and return it in the accompanying postage-paid envelope. You will
save your Company the expense of a second mailing by returning your proxy card
promptly.
<PAGE> 4
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROXY STATEMENT ................................ 3
Proxy Solicitation ............................. 3
Voting at the Meeting .......................... 3
Election of Directors .......................... 4
Board Committees ............................... 8
Compensation of Directors ...................... 9
Executive Compensation ......................... 10
Approval of the 1998 Stock Plan................. 19
Ratification of the Appointment of
Independent Auditors ......................... 22
Other Business ................................. 22
Ownership of Outstanding Voting Shares.......... 22
Future Shareholder Proposals ................... 24
Exhibit A: 1998 Stock Plan...................... A-1
</TABLE>
<PAGE> 5
PROXY STATEMENT
EATON CORPORATION
Eaton Center
Cleveland, Ohio 44114-2584
(216) 523-5000
- ----------------------------------------------
This proxy statement, the accompanying proxy form and Eaton's annual report for
the year ended December 31, 1997 are scheduled to be sent to shareholders on or
about March 13, 1998.
PROXY SOLICITATION
Eaton's Board of Directors solicits your proxy, in the form enclosed, for use at
the 1998 annual meeting of shareholders and at any adjournments thereof. The
persons appointed by the enclosed form of proxy have advised the Board that it
is their intention to vote at the meeting in compliance with instructions on all
forms of proxy tendered by shareholders and, where no contrary instruction is
indicated on the proxy form, for the election of the persons nominated to serve
as directors, for approval of the 1998 Stock Plan and for ratification of the
appointment of Ernst & Young LLP as independent auditors. These matters are
described in the following sections of this proxy statement.
Any shareholder giving a proxy in the form enclosed has the power to revoke it
by giving Eaton written notice before the meeting or by revoking it at the
meeting. All properly executed proxies not revoked will be voted at the meeting.
In addition to soliciting proxies through the mail, certain employees may
solicit proxies in person or by telephone or facsimile. Eaton has retained
Morrow & Co., Inc., 909 Third Avenue, New York, New York 10022, to assist in the
solicitation of proxies, primarily from brokers, banks and other nominees, for a
fee estimated at $12,500. Brokerage firms, nominees, custodians and fiduciaries
may be requested to forward proxy soliciting material to the beneficial owners
of shares of record. All reasonable soliciting costs will be borne by Eaton.
VOTING AT THE MEETING
Each Eaton shareholder of record at the close of business on February 23, 1998
is entitled to one vote for each share then held. On February 23rd, 71,546,128
Eaton common shares (par value, 50c each) were outstanding and entitled to vote.
At the 1998 annual meeting, in accordance with Ohio law and Eaton's Amended
Regulations, the inspectors of election appointed by the Board of Directors for
the annual meeting will determine the presence of a quorum and will tabulate the
results of shareholder voting. As provided by Ohio law and Eaton's Amended
Regulations, Eaton shareholders present in person or by proxy at the 1998 annual
meeting will constitute a quorum for such meeting. The inspectors of election
intend to treat properly executed proxies marked "abstain" as "present" for
these purposes. The inspectors will also treat as "present" shares held in
"street name" by brokers that are voted on at least one proposal to come before
the 1998 annual meeting.
Director nominees receiving the greatest
number of votes will be elected directors. Votes withheld in respect of the
election of directors will not be counted in determining the outcome of the
election. Adoption of all other proposals to come before the 1998 annual meeting
will require the affirmative vote of the holders of a majority of the
outstanding Eaton common shares, which requirement is consistent with the
general vote requirement in Eaton's Amended
3
<PAGE> 6
Articles of Incorporation. The practical effect of this vote requirement will be
that abstentions and shares held in "street name" by brokers that are not voted
in respect of such proposals will be treated the same as votes cast against such
proposals.
As provided by Ohio law, each shareholder is entitled to cumulative voting
rights in the election of directors if any shareholder gives written notice to
the President or a Vice President or the Secretary of Eaton at least 48 hours
before the time fixed for the meeting, stating that cumulative voting is
desired, and if an announcement of such notice is made at the beginning of the
meeting by the Chairman or Secretary, or by or on behalf of the shareholder who
gave the notice. If cumulative voting is in effect with respect to an election
of directors, each shareholder has the right to cumulate his or her voting power
by giving one nominee that number of votes which equals the number of directors
to be elected multiplied by the number of the shareholder's votes, or by
distributing his or her votes on the same principle among two or more nominees,
as he or she sees fit. In the event that cumulative voting is in effect with
respect to an election of directors, the persons named in the proxy will vote
the shares represented by the proxy cumulatively for such of the nominees as
they may in their discretion determine, except that no votes with respect to any
proxy will be cumulated for any nominee for whom the shareholder executing the
proxy has directed that his or her vote be withheld.
1. ELECTION OF DIRECTORS
The Board of Directors is presently composed of eleven members. The terms of
three directors will expire in April, 1998, and those directors have been
nominated for re-election. Each of the nominees was elected at the 1995 annual
meeting. (See page 5.)
Should any of the nominees become unable or decline to serve, the persons named
in the enclosed proxy shall have discretionary authority to vote for
substitutes. Management, however, has no reason to believe that this will occur.
Following is biographical information about each nominee and each director
continuing in office.
4
<PAGE> 7
NOMINEES FOR ELECTION TO TERMS ENDING IN 2001 OR WHEN THEIR SUCCESSORS ARE
ELECTED AND HAVE QUALIFIED:
<TABLE>
<S> <C> <C>
NEIL A. ARMSTRONG PHOTO ERNIE GREEN PHOTO A. WILLIAM REYNOLDS PHOTO
NEIL A. ARMSTRONG, 67, is ERNIE GREEN, 59, is A. WILLIAM REYNOLDS, 64,
Chairman of the Board of founder, President and is Chief Executive of the
AIL Technologies, Inc., Chief Executive Officer Old Mill Group, a private
parent company of AIL of EGI, Inc., a investment firm. Mr.
Systems Inc., and a manufacturer of Reynolds is former
director of Cincinnati automotive components. He Chairman of GenCorp Inc.
Milacron, Inc., Cinergy is also President of He was Chairman of
Corp., RMI Titanium Co., Florida Production GenCorp from 1987 through
Thiokol Corporation and Engineering, Inc., March, 1995 and Chief
USX Corporation. subsidiary of EGI. He is Executive Officer from
DIRECTOR SINCE 1981 a director of DP&L Inc., August, 1985 to July,
Fluor Daniel GTI, Gradall 1994. Mr. Reynolds is a
Industries, Inc. and director of Boise Cascade
Pitney Bowes Inc. Corporation and Boise
DIRECTOR SINCE 1995 Cascade Office Products
Corp.
DIRECTOR SINCE 1987
</TABLE>
5
<PAGE> 8
DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL, 1999:
<TABLE>
<S> <C> <C> <C>
NED C. LAUTENBACH PHOTO JOHN R. MILLER PHOTO FURMAN C. MOSELEY PHOTO VICTOR A. PELSON PHOTO
NED C. LAUTENBACH, 54, is JOHN R. MILLER, 60, is FURMAN C. MOSELEY, 63, is VICTOR A. PELSON, 60, is a
Senior Vice President and President and Chief Chairman of Sasquatch Senior Advisor to SBC
Group Executive, Sales and Executive Officer of TBN Publishing Company. He is Warburg Dillon Read Inc.,
Distribution, of IBM Holdings Inc., a company former President of Simpson investment bankers. He was a
Corporation and a member of engaged in the resource Investment Company, holding Director and Senior Advisor
IBM's Corporate Executive recovery and recycling company for Simpson Paper of Dillon Read at its merger
Committee. IBM's primary business and is a director Company and Simpson Timber in 1997 with SBC Warburg.
business segments include of Waterlink, Inc. He was Company. He was Chairman of Before joining Dillon Read
information processors, President, Chief Operating Simpson Paper from 1969 to in April, 1996, Mr. Pelson
personal systems clients, Officer and a director of January, 1995 and retired as was associated with AT&T
OEM hardware, software and The Standard Oil Company President of Simpson from 1959 to March, 1996,
services. Mr. Lautenbach from August, 1980 through Investment in July, 1995. where he held a number of
began his career with IBM in March, 1986. Mr. Miller Mr. Moseley is a director of executive positions,
1968 and was elected Vice formerly served as Chairman Owens Corning. including Group Executive
President in 1987. He became of the Federal Reserve Bank DIRECTOR SINCE 1975 and President responsible
President of IBM Asia of Cleveland. for the Communications
Pacific in 1991, Senior Vice DIRECTOR SINCE 1985 Services Group, Executive
President of IBM in 1992 and Vice President and member of
Chairman of IBM World Trade the Management Executive
Corporation in 1993 and has Committee. At his retirement
been in his present position from AT&T, Mr. Pelson was
since 1995. He is a director Chairman of Global
of PPG Industries, Inc. Operations and a member of
DIRECTOR SINCE 1997 the Board of Directors. Mr.
Pelson is also a director of
United Parcel Service.
DIRECTOR SINCE 1994
</TABLE>
6
<PAGE> 9
DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL, 2000:
<TABLE>
<S> <C> <C> <C>
ALEXANDER M. CUTLER PHOTO PHYLLIS B. DAVIS PHOTO STEPHEN R. HARDIS PHOTO GARY L. TOOKER PHOTO
ALEXANDER M. CUTLER, 46, is PHYLLIS B. DAVIS, 66, is STEPHEN R. HARDIS, 62, is GARY L. TOOKER, 58, is
President and Chief former Senior Vice President Chairman and Chief Executive Chairman of the Board of
Operating Officer of Eaton of Avon Products, Inc., a Officer of Eaton Motorola, Inc., a
Corporation. Mr. Cutler manufacturer and marketer of Corporation. Mr. Hardis manufacturer of electronics
joined Cutler-Hammer, Inc. cosmetics, toiletries and joined Eaton in 1979 as equipment. Mr. Tooker joined
in 1975, which was jewelry. Mrs. Davis joined Executive Vice Motorola in 1962 and
subsequently acquired by Avon in 1968 as Product President - Finance and advanced to the position of
Eaton, and became President Manager, advanced to Group Administration. He was Senior Executive Vice
of Eaton's Industrial Group Vice President (U.S.) in elected Vice Chairman in President and Chief
in 1986 and President of the 1977 and led Sales and 1986 and designated Chief Corporate Staff Officer in
Controls Group in 1989. He Distribution from 1985 to Financial and Administrative 1986. He became Chief
advanced to Executive Vice 1988. In 1989, she became Officer. He became Chief Operating Officer in 1988,
President - Operations in Corporate Senior Vice Executive Officer in President in 1990, Vice
1991, was elected Executive President for Business September, 1995 and Chairman Chairman and Chief Executive
Vice President and Chief Development and Corporate in January, 1996. Mr. Hardis Officer in December, 1993
Operating Officer - Controls Affairs until her retirement is a director of KeyCorp, and Chairman in 1997. Mr.
in September, 1993 and in late 1991. Mrs. Davis is Lexmark International Group, Tooker is a director of the
assumed his present position a director of BellSouth Inc., Nordson Corporation Atlantic Richfield Company.
in September, 1995. Corporation and The TJX and Progressive Corporation. DIRECTOR SINCE 1992
DIRECTOR SINCE 1993 Companies, Inc., and a DIRECTOR SINCE 1983
trustee of the Fidelity
mutual funds.
DIRECTOR SINCE 1991
</TABLE>
7
<PAGE> 10
BOARD COMMITTEES -- Eaton's Board of Directors has standing Audit, Compensation
and Organization, Corporate Responsibility and Public Policy, Executive, and
Finance Committees.
Audit Committee. The functions of the Audit Committee include aiding directors
in fulfilling the Board's responsibility for the quality of financial reporting,
meeting with the Company's director of internal audits to review the annual
internal audit plan and, subsequently, the results thereof, receiving and
considering management recommendations regarding the appointment of independent
auditors and recommending to the Board a firm to serve as independent auditors,
meeting with the independent auditors and management to review the scope of and
the plan for the annual audit and, subsequently, to review the results of the
audit, reviewing any significant changes in accounting policies, reviewing the
annual financial statements, reviewing significant non-audit professional
services provided by the independent auditors and fees for those services and
serving as the auditors' access to the Board (for both internal and independent
auditors). The Audit Committee held three meetings in 1997. Present members are
Messrs. Armstrong, Green, Moseley and Reynolds.
Compensation and Organization Committee. The functions of the Compensation and
Organization Committee include recommending and attracting qualified candidates
as director nominees, recommending the number of directors to serve for each
ensuing year, reviewing and recommending changes in the functions and
responsibilities of each of the Board's committees, reviewing proposed
organization or responsibility changes at the officer level, evaluating the
performance of the Chief Executive Officer and reviewing the performance
evaluations of the other elected officers, reviewing succession planning for key
officer positions and recommending the individual to assume the position of
Chief Executive Officer if that position becomes vacant due to unforeseen
circumstances. The committee is also responsible for recommending to the Board
of Directors the salary of each elected officer and the retainer and attendance
fees and other compensation to non-employee directors, reviewing awards to
elected officers under the Executive Incentive Compensation Plan and the
aggregate amount of awards under the Plan, adjusting that amount as appropriate
within the terms of the Plan, establishing and subsequently determining the
attainment of performance objectives under the Company's long-term incentive
compensation plans, administering stock option plans and reviewing compensation
and benefit plans as they relate to key employees to confirm that those plans
remain equitable and competitive, as well as maintaining a program to analyze
and recommend such plans for the long range, and preparing an annual report for
the Company's proxy statement regarding executive compensation. The Compensation
and Organization Committee held six meetings in 1997. Present members are Mrs.
Davis and Messrs. Lautenbach, Miller, Pelson and Tooker.
The Compensation and Organization Committee will consider persons for nomination
to stand for election as directors who are recommended to it in writing by any
Eaton shareholder. Any shareholder wishing to submit a recommendation to the
committee for consideration as a nominee for election at the annual meeting of
shareholders to be held in 1999 should send a signed letter of recommendation,
to be received before November 6, 1998, to the following address: Eaton
Corporation, Eaton Center, Cleveland, Ohio 44114-2584, attention Corporate
Secretary. Recommendation letters must state the reasons for the recommendation
and contain the full name and address of each proposed nominee as well as a
brief biographical history setting forth past and present directorships,
employments, occupations and civic activities.
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<PAGE> 11
Any such recommendation should be accompanied by a written statement from the
proposed nominee consenting to be named as a candidate and, if nominated and
elected, to serve as a director.
Corporate Responsibility and Public Policy Committee. The function of the
Corporate Responsibility and Public Policy Committee is to provide oversight
regarding significant public issues of concern with respect to the Company's
relationships with shareholders, employees, customers, competitors, suppliers
and the communities in which the Company operates, including such areas as
ethics compliance, environmental, health and safety issues, diversity and equal
employment opportunity, community relations, government relations, charitable
contributions, shareholder and investor relations and the Eaton Philosophy of
Excellence through People. The Corporate Responsibility and Public Policy
Committee held two meetings in 1997. Present members are Mrs. Davis and Messrs.
Armstrong, Green, Miller and Tooker.
Executive Committee. The functions of the Executive Committee include all of the
functions of the Board of Directors other than the filling of vacancies in the
Board of Directors or in any of its committees. The Executive Committee acts
upon matters requiring Board action during the intervals between Board meetings.
It did not meet in 1997. Mr. Hardis is a member for the full twelve-month term;
each of the non-employee directors serves a four-month term.
Finance Committee. The functions of the Finance Committee include the periodic
review of the Company's financial condition and the recommendation of financial
policies, analyzing Company policy regarding its debt-equity relationship,
reviewing and making recommendations regarding the Company's dividend policy,
reviewing the Company's cash flow, proposals for long- and short-term debt
financing and the risk management program, meeting with and reviewing the
performance of management pension committees and any other fiduciaries appointed
by the Board for pension and profit-sharing retirement plans and reviewing those
plans and recommending modifications to them. The Finance Committee held two
meetings in 1997. Present members are Messrs. Armstrong, Green, Lautenbach,
Moseley, Pelson and Reynolds.
The Board of Directors held ten meetings in 1997. All of the directors attended
at least 75% of the meetings of the Board and its committees except for Mr.
Lautenbach, who attended 70% of such meetings. Attendance at meetings of the
Board and its committees as a whole averaged 96%.
COMPENSATION OF DIRECTORS -- Employee directors are not compensated for their
services as directors. Non-employee directors receive an annual retainer of
$30,000, a fee of $1,000 for each Board meeting and each Board committee meeting
attended and a fee of $1,000 for each special presentation attended on non-Board
meeting days. Non-employee directors receive an additional annual retainer of
$3,000 for each Board committee on which they serve or $5,000 for each committee
which they chair, except that no such retainers are paid for membership or
chairmanship of the Executive Committee or any ad hoc committee of the Board.
Non-employee directors first elected before 1996 may defer payment of their
annual fees not to exceed $30,000 at a rate of return specified in their
deferred compensation agreements. The rate of interest is based upon the number
of years until a director's retirement date and, in general, is higher than
prevailing market rates. Such directors also may defer their annual fees at the
prime bank rate. All non-employee directors may defer their fees at a rate of
return which varies, depending on whether the director defers the fees as
retirement compensation or as short-term compensation. At least 50% of
retirement
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<PAGE> 12
compensation, or any greater portion which the director elects, is converted to
share units and earns share price appreciation and dividend equivalents. The
balance of retirement compensation earns 10-year Treasury note returns plus 300
basis points. Short-term compensation earns 13-week Treasury bill returns. These
arrangements provide for accelerated lump sum or installment payments upon a
failure by the Company to pay or termination of service in the context of a
change in control of the Company.
Pursuant to the Company's 1995 Stock Plan, as approved by the shareholders, each
person serving as a non-employee director on January 24, 1995 and who continued
serving in that capacity after the annual meeting of shareholders on April 26,
1995 was granted an option for 5,000 shares. Each person becoming a non-employee
director thereafter is granted an option for 5,000 shares on the date of his or
her first election to the Board. Beginning in the year following the initial
grant, each non-employee director receives an option for 1,000 shares annually
during his or her service on the Board.
In 1988, the Company's defense electronics business was transferred to a new
subsidiary in anticipation of the divestiture of that business. At that time, in
order to provide leadership to the subsidiary's management and employees during
the divestiture process, Neil A. Armstrong was requested by the Company to serve
as Chairman of the Board of Directors of the subsidiary. Subsequently, the
defense industry underwent extensive consolidation in the context of drastically
declining defense spending. In the opinion of the Compensation and Organization
Committee, the efforts and dedication of Mr. Armstrong as Chairman of the
subsidiary during that period were instrumental in preserving that business,
which was sold to its officers, managers and an employee stock ownership plan in
1997. Accordingly, the Committee, based on the recommendation of the Company's
management, approved a one-time cash award to Mr. Armstrong in 1997 in the
amount of $300,000. Also in 1997, Mr. Armstrong received from the subsidiary
standard board attendance and annual retainer fees through October in the amount
of $22,750 and a regular annual grant of 10,000 "phantom" stock options. The
phantom options provided for cash payments upon exercise equal to any increases
in the book value per common share of the former subsidiary.
Upon leaving the Board, non-employee directors who were first elected prior to
1996 are eligible to receive an annual benefit, as described below. Directors
who are first elected in 1996 or thereafter are not eligible to receive the
annual benefit. For Board service of at least five years, eligible directors
receive an annual benefit equal to the annual retainer in effect at the time the
directors leave the Board. Eligible directors having fewer than five years but
more than one year of Board service at the time of their Board retirement
receive a proportionately reduced annual benefit. The annual benefit is paid for
the lesser of ten years or life. The present value of payments under this plan
will be paid in a lump sum upon a "proposed change in control" of the Company,
unless otherwise determined by a committee of the Board.
EXECUTIVE COMPENSATION -- The following table summarizes the total compensation
of the Chief Executive Officer and the four other most highly compensated
executive officers of Eaton for fiscal years 1997, 1996 and 1995.
10
<PAGE> 13
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
AWARDS PAYOUTS
-------- ---------
LONG-
ANNUAL COMPENSATION OTHER STOCK TERM ALL OTHER
---------------------------- ANNUAL OPTIONS INCENTIVE COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (SHARES) PAYOUTS (1)
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
S. R. Hardis 1997 $790,000 $1,534,680 $ 0 250,000 $973,409 $748,410
Chairman and Chief 1996 721,680 1,023,925 0 48,000 654,240 298,732
Executive Officer 1995 580,020 867,720 0 26,300 470,912 499,251
A. M. Cutler 1997 $586,680 $ 990,031 $ 0 175,000 $709,458 $ 22,733
President and Chief Operating 1996 540,000 672,290 0 32,000 496,520 14,125
Officer 1995 470,170 626,980 0 26,300 385,259 20,554
B. R. Bachman(2) 1997 $332,040 $ 418,044 $ 0 90,000 $225,000 $ 18,844
Senior Vice President -- 1996 310,020 344,033 7,365 18,000 0 19,380
Semiconductor and Specialty
Systems
R. J. McCloskey 1997 $330,700 $ 437,046 $ 0 90,000 $310,938 $ 21,887
Senior Vice President -- 1996 311,040 329,046 0 18,000 159,658 25,116
Controls and Hydraulics 1995 252,040 271,606 0 8,000 128,446 26,169
T.W. O'Boyle 1997 $338,680 $ 494,052 $ 0 90,000 $310,938 $ 29,604
Senior Vice President -- 1996 320,340 239,306 0 18,000 151,399 22,897
Truck Components 1995 272,600 305,361 0 7,300 137,288 20,776
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All Other Compensation contains several components. The Eaton Corporation
Share Purchase and Investment Plan permits an employee to contribute from 1%
to 6% of his or her salary to the matching portion of the plan. Eaton makes
a matching contribution which, except in special circumstances, ranges
between $.25 and $1.00 for each dollar contributed by the participating
employee, as determined under a formula designed to reflect Eaton's
quarterly earnings per share. The amount the Company contributed during 1997
for the named executive officers was as follows: S. R. Hardis, $4,070; A. M.
Cutler, $2,991; B. R. Bachman, $3,418; R. J. McCloskey, $3,537; and T. W.
O'Boyle, $2,977. The Company maintains plans pursuant to which incentive
compensation may be deferred. Earnings on such deferrals which are above
rates established by the Internal Revenue Service must be disclosed in this
table. Those earnings during 1997 for each of the named executive officers
were as follows: S. R. Hardis, $718,093; A. M. Cutler, $5,201; B. R.
Bachman, $0; R. J. McCloskey, $3,626; and T. W. O'Boyle, $432. Under a
Company program, each executive officer may acquire an automobile at an
approximate cost to the Company for each of the named executive officers for
1997 as follows: S. R. Hardis, $10,954; A. M. Cutler, $10,698; B. R.
Bachman, $12,043; R. J. McCloskey, $10,917; and T. W. O'Boyle, $22,783. The
Company provides certain executives, including the named executive officers,
with the opportunity to acquire individual whole-life insurance. The annual
premiums paid by the Company during 1997 for each of the named executive
officers were as follows: S. R. Hardis, $15,293; A. M. Cutler, $3,843; B. R.
Bachman, $3,383; R. J. McCloskey, $3,807; and T. W. O'Boyle, $3,412. Each
executive officer is responsible for paying individual income taxes due with
respect to the Company's automobile and insurance programs.
(2) Mr. Bachman became an executive officer of the Company in January, 1996. In
connection with the employment of Mr. Bachman, the Company agreed to provide
a replacement loan for an interest-free loan in the amount of $160,000 which
Mr. Bachman had with his previous employer. The new loan is payable by Mr.
Bachman over a four-year period. The Company also has agreed to reimburse
Mr. Bachman for the expense of income taxes imposed with respect to the
loan. The amount of such reimbursement for 1997 is shown under "Other Annual
Compensation."
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<PAGE> 14
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES -- The following table
contains information concerning the exercise of stock options during fiscal year
1997 and the value of unexercised stock options at the end of fiscal year 1997
with respect to the named executive officers.
<TABLE>
<CAPTION>
TOTAL VALUE OF
TOTAL NUMBER OF UNEXERCISED,
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES HELD AT HELD AT
ACQUIRED ON FISCAL YEAR END FISCAL YEAR END
EXERCISE VALUE --------------------------- ---------------------------
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
S. R. Hardis 1,471 $100,524 306,294 125,000 $10,415,159 $2,180,000
A. M. Cutler 5,723 357,768 244,066 87,500 8,648,769 1,526,000
B. R. Bachman 600 23,888 64,400 45,000 1,488,050 784,800
R. J. McCloskey 0 0 85,000 45,000 2,327,605 784,800
T. W. O'Boyle 1,000 87,856 99,220 45,000 3,147,374 784,800
- -------------------------------------------------------------------------------------------------------
</TABLE>
OPTION GRANTS -- The following table gives information concerning grants of
stock options made during fiscal year 1997 to each of the named executive
officers. No stock appreciation rights were granted during fiscal year 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL OR BASE EXPIRATION ----------------------------------------
NAME GRANTED (#) YEAR(1) PRICE DATE 0% 5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
S. R. Hardis 250,000 9.03% $71.81 1/21/2007 $0 $ 11,290,231 $ 28,611,662
A. M. Cutler 175,000 6.32% 71.81 1/21/2007 0 7,903,162 20,028,163
B. R. Bachman 90,000 3.25% 71.81 1/21/2007 0 4,064,483 10,336,198
R. J. McCloskey 90,000 3.25% 71.81 1/21/2007 0 4,064,483 10,336,198
T. W. O'Boyle 90,000 3.25% 71.81 1/21/2007 0 4,064,483 10,336,198
- -------------------
All Shareholders(2) N/A N/A N/A N/A 0 3,260,850,417 8,263,635,184
</TABLE>
(1) Based on a total of 2,789,115 options granted to all employees. All options
granted to the named executive officers were granted on January 21, 1997. As
granted, 50% of the options become exercisable if Eaton earns $8.00 per
share for any year prior to the year 2001, and 50% become exercisable if
Eaton achieves a market price per share of $85.00 by the end of 1998, $92.50
by the end of 1999, or $100.00 by the end of 2000. If such goals are not met
by 2000, the unmet goal will be increased by 10% per year thereafter.
Whether or not the goals are attained, the options will become fully
exercisable ten days prior to the expiration of the ten-year term. The
market price goal was attained during 1997, and 50% of the options became
exercisable.
(2) At the assumed annual rates of stock price appreciation of 0%, 5% and 10%,
the value of all 72,205,132 shares outstanding on January 31, 1998 would
increase by the amounts shown. There can be no assurance that the market
price of Eaton shares will increase in the future.
- --------------------------------------------------------------------------------
12
<PAGE> 15
LONG-TERM INCENTIVE PLAN AWARDS -- The following table gives information
regarding Long-Term Incentive Plan awards made during fiscal year 1997 to each
of the named executive officers.
<TABLE>
<CAPTION>
PERFORMANCE
NUMBER OF OR OTHER ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
SHARES, PERIOD UNTIL PRICE BASED PLANS
UNITS OR MATURATION ------------------------------------------
NAME OTHER RIGHTS(1) OR PAYOUT THRESHOLD TARGET MAXIMUM
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
S. R. Hardis N/A 4 years $315,000 $630,000 $1,260,000
A. M. Cutler N/A 4 years 218,757 437,514 875,028
B. R. Bachman N/A 4 years 114,012 228,024 456,048
R. J. McCloskey N/A 4 years 114,012 228,024 456,048
T. W. O'Boyle N/A 4 years 114,012 228,024 456,048
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) The awards made during 1997 were not based on units or shares. Rather, the
estimated future payouts are predicated upon the achievement of corporate
performance goals, specifically, cash flow return on gross capital, measured
at the end of the four-year award period. The achievement of approximately
76% of the goal will result in payment of the threshold amount, while
attaining approximately 118% of the goal will result in payment of the
maximum amount. All future payouts, if any, will be made in cash.
COMPENSATION AND ORGANIZATION COMMITTEE REPORT -- The Committee, consisting of
five non-employee directors, met six times in 1997. The Committee has adopted
several fundamental compensation policies which have been endorsed by the Board
of Directors. It is Committee policy that executive compensation must to a large
extent be at risk, in the sense of being dependent on achieving rigorous
corporation and individual performance objectives which are designed to enhance
shareholder value. It is also Committee policy that executive compensation must
be competitive in the employment marketplace in order to allow the Company to
attract, motivate and retain highly qualified executives, and that it must
fairly reflect, in the judgment of the Committee, accomplishments and
responsibilities within the Company.
The administration of the Company's executive compensation is consistent with
these policies. This is confirmed by studies conducted for the Committee at
least every two years with the assistance of a nationally recognized consulting
firm, the results of which are summarized for the Board of Directors.
Seventy-three percent of the 1997 aggregate cash compensation of the executive
officers named in the compensation table was based directly on specific
financial performance objectives. For 1997, the Committee again established base
salary and short-term incentive award opportunities for executive officers at
approximately the median range and long-term cash incentives at approximately
the 75th percentile of compensation paid by similar companies included in the
survey data bases of several nationally recognized compensation consulting
firms. For stock option grants, target levels traditionally have been set at the
median. However, in January, 1997, the Committee approved special
performance-based stock option grants to executive officers and key operating
managers in lieu of more standard grants. Vesting and exercisability of these
performance-based options are tied to specific share prices and are directly
related to the Company's publicly stated objective of achieving sustained 10%
growth in earnings per
13
<PAGE> 16
share through the economic cycle. Option grants to this group of executives in
the four years following the special grant are expected to be at the median
range of the applicable survey data bases referenced above. The Committee has
extended performance-based conditions to a portion of the 1998 grants made to
virtually all eligible executives, based on the belief that putting a greater
portion of executives' compensation at risk will help the Company achieve its
aggressive growth objectives. Performance grants become fully exercisable 10
days before the expiration of their ten-year terms in order to avoid earnings
charges related to price appreciation of the option shares after the date of
grant.
Salary -- In setting executive salaries, the Committee uses input from outside
sources as noted above and management recommendations for individual
adjustments. The Committee considers performance against annual plans,
accomplishment of other objectives and the results of similar companies in
judging performance. The Committee also normally considers factors such as
initiative and leadership, as well as time in position, experience, knowledge
and level of competitive compensation in the marketplace. Consistently effective
individual performance is a threshold requirement for any salary increase. The
Committee considers these same factors when preparing its recommendations for
base salary adjustments for the Company's Chairman and Chief Executive Officer.
The Committee's recommendations for 1997 salary adjustments were based upon
these considerations and accepted by the Board of Directors.
Short-Term Incentives -- Annual performance bonuses, including those paid in
1997, are based on percentages of salary range midpoints and depend upon whether
the Company has achieved predetermined levels of cash flow return on the gross
capital employed in the business ("CRC"), individual performance ratings and
Committee discretion. CRC correlates well with corporate performance and is a
measure which is easily understood by incentive compensation plan participants.
The Committee also believes that, over time, consistently high CRC provides a
good statistical correlation with sustained high stock market valuation. No
payments are made unless the Company achieves, as it did in 1997, the
predetermined CRC levels. Individual performance ratings take into account
factors such as unanticipated challenges and opportunities, actual performance
against profit plan and personal objectives, general economic conditions and the
performance of other large industrial corporations. Individual ratings may
result in bonus payments ranging from zero to 150% of the bonus otherwise
payable. The Committee may adjust the total amount available for bonuses by up
to 10%. Actual bonus payments for 1997 were not affected by the exercise of this
discretion. Executive officers may defer payment of their bonuses. Amounts
deferred until retirement earn the greater of share price appreciation and
dividend equivalents or 13-week Treasury bill returns. Amounts deferred for
shorter periods earn Treasury bill returns.
Long-Term Cash Incentives -- Long-term cash incentives are granted annually.
Their value depends on whether the Company achieves aggressive performance
objectives during the four years following a grant. For the 1994-1997 award
period, the Company not only met but substantially exceeded the objectives
established for that period. These objectives are expressed in terms of CRC.
They are established by the Committee based upon a review with management of the
Company's past performance in comparison to that of its peer group companies and
the Company's strategic plans. Executive officers may defer payment of their
awards. At least 50% of any deferrals which will be paid out after retirement
are converted to share units and earn share price
14
<PAGE> 17
appreciation and dividend equivalents. The balance earns 10-year Treasury note
returns plus 300 basis points. Short-term deferrals earn 13-week Treasury bill
returns.
Tax Deduction -- Any non-deferred annual compensation of more than $1 million
for the Company's Chief Executive Officer and each of its four other most
highly-compensated officers is not tax deductible unless paid pursuant to
formula-driven, performance-based arrangements which preclude Committee
discretion to adjust compensation after the beginning of the period in which the
compensation is earned. The Committee preserves deductibility by requiring
deferrals of otherwise non-deductible payments.
Stock Options -- Stock options align the interests of the Company's officers and
other executives with those of its shareholders by having a significant
component of their compensation tied directly to increases in shareholder value.
All officers of the Company are expected to hold a multiple of from two to five
times their base compensation in Company shares depending on their level in the
organization. Options typically have been granted annually, have an exercise
price equal to the fair market value of the shares on the date of grant and, to
encourage a long-term perspective, have an exercise period of ten years. The
Company does not "reprice" stock options after they have been granted and does
not grant stock appreciation rights.
Chief Executive Officer Compensation -- The 1997 compensation of Stephen R.
Hardis, the Company's Chief Executive Officer, was earned pursuant to the
arrangements described above. The Committee recommended, and the Board of
Directors approved, a 1997 adjustment to Mr. Hardis' base salary to position
this component of his compensation competitively in the marketplace and
appropriately to reflect his time in this position and his overall performance
in this key strategic leadership role. Mr. Hardis' 1997 annual incentive payout
reflected the award formula of the Company's incentive compensation plan, which
was based primarily on the Company's financial performance, as measured by CRC
compared to targets set by the Committee for 1997. Consistent with the plan's
design, this formula-driven payout was further adjusted to reflect the
Committee's evaluation of Mr. Hardis' performance. This evaluation took into
account that the Company's 1997 profit plans, before special items, were
exceeded substantially, and that the Company achieved record earnings per share
and record net income, all of which was achieved without compromising spending
on major developmental programs. The Committee's evaluation also took into
account Mr. Hardis' attainment of the Company's demanding profit plan
objectives, his effective leadership of the Company in pursuing its publicly
stated long-term growth strategy and his success in focusing the Company's
leadership team on the need to facilitate a major change in the Company's
culture to increase the organization's speed and agility. Mr. Hardis also earned
a 1994-1997 payout from the Executive Strategic Incentive Plan which was based
on the Company's four-year CRC performance against stretch objectives
established by the Committee for this period. The award on this long-term plan
is formula-driven and is not subject to individual performance adjustments. As
noted above, in 1997, the Committee approved special stock option grants for
executive officers and key operating managers, including Mr. Hardis. This grant
(shown on the Option Grant Table), and the smaller annual stock option grant
awarded to Mr. Hardis in January, 1998, have vesting tied to the Company's
achieving specific share price and earnings per share targets. The special 1997
stock option grant to Mr. Hardis, along with median option grants in future
years, are targeted to provide him the opportunity for superior rewards if he
successfully contributes to the Company's continued strong financial
15
<PAGE> 18
performance and attainment of its long-term objective of creating sustained
growth for Eaton in a demanding global marketplace.
Respectfully submitted to the Company's shareholders by the Compensation and
Organization Committee of the Board of Directors.
John R. Miller, Chairman
Phyllis B. Davis
Ned C. Lautenbach
Victor A. Pelson
Gary L. Tooker
COMPANY STOCK PERFORMANCE -- The following graph compares the cumulative total
return for Eaton common shares with the S&P 500 Index and a group of 20 peer
companies: Allied-Signal Inc., Arvin Industries, Inc., Cummins Engine Company,
Inc., Dana Corporation, Emerson Electric Co., General Signal Corporation, GTE
Corporation, Honeywell Inc., Johnson Controls, Inc., Motorola, Inc., Navistar
International Corporation, PACCAR Inc., Parker-Hannifin Corporation, Rockwell
International Corporation, SPX Corporation, Sundstrand Corporation, TRINOVA
Corporation, TRW Inc., United Technologies Corporation and CBS Corporation
(formerly named Westinghouse Electric Corporation).
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG EATON, S&P 500 INDEX AND PEER COMPANIES
Assumes $100 invested on December 31, 1992 in Eaton common shares, the S&P 500
Index and stock of the peer companies. Total return assumes that all dividends
are reinvested when received. The returns of each company in the group of peer
companies are weighted based on the relative stock market capitalization of
those companies.
16
<PAGE> 19
RETIREMENT PLANS -- The following table shows the annual normal retirement
benefits payable to officers and other employees of the Company pursuant to the
Company's retirement plans upon retirement at age 65 at the compensation levels
and years of service specified. The table assumes retirement under the standard
post-retirement single life annuity option. Under the standard post-retirement
surviving spouse option, the participant receives a reduced pension, and a
pension equal to 50% of his or her reduced pension is payable to his or
her surviving spouse. The benefit for an employee electing that option whose
spouse is three years younger would be approximately 11% less than the amounts
shown in the table.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ANNUAL NORMAL RETIREMENT BENEFITS PURSUANT TO STANDARD
AVERAGE FINAL SINGLE LIFE ANNUITY OPTION FOR YEARS OF CREDITED SERVICE INDICATED
ANNUAL -----------------------------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS 40 YEARS
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
$ 200,000 $ 42,932 $ 57,242 $ 71,553 $ 85,864 $100,174 $ 114,485
300,000 65,432 87,242 109,053 130,864 152,674 174,485
400,000 87,932 117,242 146,553 175,864 205,174 234,485
500,000 110,432 147,242 184,053 220,864 257,674 294,485
600,000 132,932 177,242 221,553 265,864 310,174 354,485
700,000 155,432 207,242 259,053 310,864 362,674 414,485
800,000 177,932 237,242 296,553 355,864 415,174 474,485
900,000 200,432 267,242 334,053 400,864 467,674 534,485
1,000,000 222,932 297,242 371,553 445,864 520,174 594,485
1,100,000 245,432 327,242 409,053 490,864 572,674 654,485
1,200,000 267,932 357,242 446,553 535,864 625,174 714,485
1,300,000 290,432 387,242 484,053 580,864 677,674 774,485
1,400,000 312,932 417,242 521,553 625,864 730,174 834,485
1,500,000 335,432 447,242 559,053 670,864 782,674 894,485
1,600,000 357,932 477,242 596,553 715,864 835,174 954,485
1,700,000 380,432 507,242 634,053 760,864 887,674 1,014,485
</TABLE>
The information contained in the preceding table is based on the assumption that
the retirement plans will be continued in their present form.
Annual normal retirement benefits are computed at the rate of 1% of average
final annual compensation up to the applicable Social Security integration level
($27,576 for 1997 retirements) plus 1 1/2% of average final annual compensation
in excess of the Social Security integration level, multiplied by the employee's
years of credited service.
An employee's average final annual compensation is the average annual amount of
his or her total compensation (which includes salary and bonus as so identified
in the Summary Compensation Table on page 11) for service during the five
consecutive years within the last ten years of employment for which the
employee's total compensation was greatest. Years of credited service is the
number of years of employment between age 21 and retirement, with a maximum of
44 years. As of January 31, 1998, the number of years of credited service for
each of the individuals named in the Summary Compensation Table on page 11 was
as follows: B. R. Bachman, 2.2; A. M. Cutler, 22.4; S. R. Hardis, 18.4; R. J.
McCloskey, 28.8; and T. W. O'Boyle, 31.3.
---------------
Certain provisions of the Internal Revenue Code, as amended, limit the annual
benefits which may be paid from a tax-qualified retirement plan. As permitted
under the Code, the Board of
17
<PAGE> 20
Directors has authorized the payment from Eaton's general funds of any benefits
calculated under the provisions of the applicable retirement plan which may
exceed those limits. The present value of these benefits will be paid in a
single installment upon a proposed change in control of the Company unless
otherwise determined by the Board of Directors.
---------------
The Board of Directors has adopted a plan which provides supplemental annual
retirement income to certain executives who do not have the opportunity to
accumulate significant credited service with Eaton, provided that they retire at
age 55 or older and have at least five years of service with Eaton. The amount
of the annual supplement is generally equal to the amount by which a percentage
(described below) of the executive's average final annual compensation exceeds
his or her earned retirement income (which includes amounts receivable pursuant
to the retirement plans described above as well as retirement plans maintained
by the executive's previous employers). The percentage of average final
annual compensation used for this purpose depends upon an executive's age and
years of service at retirement. The percentage ranges from 20% (for retirements
at age 55 with less than 15 years of service) to 45% (for retirements at age 65
with 15 years or more of service). Under the plan, the present value of payments
will be paid in a single installment upon a proposed change in control of the
Company unless otherwise determined by the Board of Directors. Five executive
officers currently are participating in the plan, of whom two, S. R. Hardis and
B. R. Bachman, are named in the Summary Compensation Table on page 11. The
estimated annual benefits payable under this plan are $198,158 to Mr. Hardis and
$141,269 to Mr. Bachman, based on the assumptions that Mr. Hardis and Mr.
Bachman retire at age 65 and that their base salary and target incentive
compensation increase at 4% per annum.
---------------
The Company has entered into agreements with its executive officers, including
those named in the Summary Compensation Table on page 11, which provide for
payments and benefits in the event of a termination of employment in the context
of a change of control of the Company. The purpose of these agreements is to
assure continued dedication, and to diminish the inevitable distraction caused
by personal uncertainties and risks, in the event of a corporate change of
control.
The agreements provide that each officer, for three years following a change of
control, will have duties, salary, bonus, fringe benefits and opportunities for
savings, incentive earnings and retirement compensation, no less favorable than
was previously the case. If the Company were to terminate an officer's
employment during this three-year period for reasons other than cause or
disability, or if the officer were to terminate employment for reasons relating
to changed circumstances, then the amounts and benefits that the officer would
be entitled to receive include (i) long-term incentive compensation reflective
of the portion of the award periods completed prior to termination, (ii) salary
and bonus multiplied by three (or any lesser number of years and portions
thereof until age 65), and (iii) continuation of medical, life insurance and
other welfare benefits for two years (or any lesser number of years and portions
thereof until age 65), subject to reduction for comparable benefits received in
any subsequent employment. The officer would be entitled to receive an
additional payment, net of taxes, to compensate for the excise tax imposed on
these and other payments if they are determined to be excess parachute payments
under the Internal Revenue Code.
The agreements provide that, upon the occurrence of a proposed change of
control, the Company would deposit in trust a cash amount sufficient to provide
the benefits and payments to which the officers would be entitled under the
18
<PAGE> 21
agreements upon a change of control and termination of employment. The
agreements also provide that the Company would reimburse the officers for any
enforcement costs.
---------------
Certain grantor trusts established by the Company hold approximately $38 million
of marketable securities and 307,000 Company shares in order to provide for a
portion of its deferred compensation obligations. The trust assets, which are
subject to the claims of the Company's creditors, will be used to pay those
obligations in proportion to trust funding. The trusts provide for full funding
upon a change in control of the Company and for accelerated lump sum or
installment payments upon a failure by the Company to pay amounts due under the
plans or upon a termination of employment in the context of a change in control.
2. APPROVAL OF 1998 STOCK PLAN
The Board believes that share-based incentives are important factors in
attracting and retaining highly qualified individuals, and that they help to
align the interests of those individuals with the interests of the Company's
shareholders. It believes that the shareholder-approved 1995 Stock Plan has been
instrumental in producing the strong financial performance of the Company since
1995. As of January 31, 1998, however, only 571,570 common shares remained
available for additional awards under that plan. The Board is therefore
submitting to the Company's shareholders for their approval a new share-based
plan, called the 1998 Stock Plan (the "Plan"). The Plan, which is similar to the
1995 Stock Plan, will authorize the granting of stock options to non-employee
directors, and the granting of stock options and other share-based awards to
salaried employees selected by the Board's Compensation and Organization
Committee (the "Committee"). The purpose of the Plan is to continue to provide
long-term incentives for outstanding service to the Company and its shareholders
and to assist in recruiting and retaining highly qualified individuals. A copy
of the Plan is included as Exhibit A to this proxy statement, and the following
summary is qualified in its entirety by the provisions of the Plan.
Administration -- The Committee, which is comprised of non-employee directors,
will administer employee awards. The Non-employee Director Options Committee,
which is comprised of the members of the Board who are employees of the Company,
will administer non-employee director options.
Shares Available -- Subject to adjustments for stock splits, stock dividends and
other events affecting the shares, the total number of the Company's common
shares with a par value of 50c each ("shares") that may be delivered under the
Plan will not exceed 4,000,000, and the total number of shares or share units
underlying options or related to other awards that may be granted to any
employee during any three consecutive calendar year period will not exceed
500,000. Shares related to awards that are forfeited, terminated or unexercised
upon expiration shall immediately become available for other awards.
To avoid dilution resulting from the exercise of stock options, under a share
repurchase program previously authorized by the Board, which has been partially
completed, the Company has remaining authority to purchase up to 2,000,000
shares. The actual number of shares to be purchased will depend upon market
conditions.
Stock Options --
Employee Stock Options. Each option will be exercisable at such times and for
such number of shares as determined by the Committee as of the date of grant.
Grants to officers will not be exercisable for at least six months after those
options are granted. Although the Plan does not impose any similar time
requirement on grants to non-officer employees, such grants historically have
become exercisable as follows: after one year as to 33% of the shares covered
19
<PAGE> 22
by the grant, after the second year as to another 33%, and after the third year
as to the remaining 34%. The Committee may accelerate the times when an option
may be exercised, and the Corporate Compensation Committee (comprised of Company
officers) may do likewise for employees who are not officers. The Committee may
grant employee options which are intended to qualify as incentive stock options
("Incentive Stock Options") under the Internal Revenue Code.
Non-employee Director Stock Options. Each person who becomes a non-employee
director at the 1998 annual shareholders meeting or thereafter automatically
will be granted an option for 5,000 shares upon the date of his or her election.
On each granting date thereafter that each non-employee director continues to
serve in that capacity, he or she will automatically be granted options for a
number of shares equal to the quotient resulting from dividing (i) four times
the annual retainer for each non-employee director in effect on the granting
date by (ii) the closing price of a share on the last business day immediately
preceding the granting date. The granting date is the Tuesday immediately before
the fourth Wednesday of each January. A non-employee director option shall be
fully exercisable six months following the date of grant.
Term. The term of each option will be ten years from the date of grant.
Price. The option price will be the fair market value of the shares subject to
the option on the date of grant. The fair market value shall be the mean between
the high and low prices as quoted on the New York Stock Exchange Composite
Transactions. The fair market value of a share as of March 2, 1998 was $95.25.
Payment. The exercise price will be payable in cash or, if permitted by the
applicable committee, by other consideration, including shares valued at fair
market value on the date of exercise. Delivery of the shares by the Company to
the option holder upon exercise of an option may be deferred, as authorized by
the applicable committee.
Performance Shares -- The Committee may grant performance shares for no cash
consideration, if permitted by applicable law, or for such consideration as may
be determined by the Committee. The Committee will establish award periods and
the number of performance shares to be earned if Company performance objectives
are met during the award periods. The performance objectives will be stated in
terms of cash flow return on gross capital employed in the Company's business
("CRC"). CRC equals the total of net income plus depreciation, goodwill
amortization and after-tax net interest divided by the total of capital employed
in the business plus accumulated depreciation minus goodwill and short-term
investments. After performance shares have been awarded and performance
objectives have been established, the Committee may not increase the number of
performance shares that may be earned by any employee upon attainment of any
performance objective. The actual levels of CRC to be achieved and other terms
and conditions of the performance shares will be determined by the Committee. If
performance shares are not earned, they will be available for future grants.
Other Awards -- The Company has not granted stock appreciation rights for many
years, primarily because of their adverse accounting consequences. However, in
some countries stock appreciation rights are more advantageous to the recipients
than conventional stock options. Therefore, the Plan permits their use at the
discretion of the Committee. Stock appreciation rights entitle the holder to
receive a number of shares or cash equal to the increase in the fair market
value of the designated number of shares from the date of grant to the date of
exercise. Stock appreciation rights may be exercised as determined by the
Committee.
20
<PAGE> 23
The Committee may grant other share-based awards, including restricted shares,
for no cash consideration, if permitted by applicable law, or for such
consideration as may be determined by the Committee. The Committee will
determine the criteria or periods for payment and the extent to which those
criteria or periods have been met. Any such grants shall have such other terms
and conditions as determined by the Committee.
Other Matters -- The Plan will become effective if and when approved by the
shareholders at the 1998 annual meeting of shareholders, and no awards may be
granted after December 31, 2007.
Shares available for awards may consist, in whole or in part, of authorized and
unissued shares or treasury shares.
The Plan may be terminated or amended by the Board of Directors without
shareholder approval, except that the Plan may not be amended without
shareholder approval to (i) materially increase the aggregate number of shares
which may be issued under the Plan, (ii) increase the maximum number of shares
which may be granted to any employee, (iii) grant options or stock appreciation
rights at a purchase price below fair market value on the date of grant or (iv)
materially modify the requirements as to eligibility for participation in the
Plan.
The Board of Directors is presently comprised of nine non-employee directors and
two employee directors. The number of employees to whom employee stock options
are typically granted is approximately 320.
The benefits that will be received by employees under the Plan or which would
have been received under the Plan if it had been in effect in 1997 are not
currently determinable, because awards will be made at the discretion of the
Committee.
Federal Income Tax Implications --
General. The Plan has been designed to meet the requirements in Section 162(m)
of the Internal Revenue Code for stock options, stock appreciation rights and
performance shares, but has not been designed to meet those requirements for
other awards.
Stock Options. Employees may be granted Incentive Stock Options or nonqualified
options. Under present federal income tax law and regulations, no tax is imposed
as a result of the grant or exercise of an Incentive Stock Option. The amount by
which the fair market value of the shares received upon exercise exceeds the
option price is an item of tax preference and may be subject to the alternative
minimum tax. If the shares received upon the exercise of an Incentive Stock
Option are not disposed of within two years from the date the option was granted
and within one year after the date the shares are transferred to the holder,
upon the sale of the shares, the difference between the amount realized on the
sale and the option price will be taxed as long-term capital gain or loss. Eaton
will not be entitled to a tax deduction with respect to the grant or exercise of
the Incentive Stock Option or upon the sale of the shares issued upon exercise.
If these holding period rules are not met, the holder will realize ordinary
income upon disposition equal to the amount by which the fair market value of
the shares at the time of exercise (or, if lower, the proceeds of sale) exceeds
the option price. Eaton will be entitled to a tax deduction equal to the
ordinary income realized by the holder. Any gain in excess of the amount taxed
as ordinary income will be taxed as short-term or long-term capital gain.
A person granted a non-qualified stock option will not be taxed upon the grant
of the option, and Eaton will not be entitled to a tax deduction by reason of
the grant. The option holder will realize taxable income upon exercise of the
option in the amount by which the fair market value of the shares received
exceeds the option price. Eaton will be entitled to a tax deduction equal to the
ordinary income to the employee.
21
<PAGE> 24
Performance Shares. Performance shares will not result in taxable income to the
recipient or a tax deduction for Eaton during any period that the recipient's
rights to shares under the award are contingent on Eaton's attainment of
performance goals. At the time the Committee certifies that the Company's
performance goal has been met, the recipient will realize taxable ordinary
income equal to the fair market value of the shares at the time of
certification. Eaton will be entitled to a tax deduction in the same amount.
Other Awards. Restricted shares will not be taxable to the recipient, or
deductible by Eaton, when awarded or during the period the shares are
restricted. At the time the restriction lapses, the recipient will realize
taxable ordinary income equal to the fair market value of the shares at the time
of lapse, less the amount (if any) paid by the recipient for those shares.
Subject to the provisions of Section 162(m) of the Internal Revenue Code, Eaton
will at that time be entitled to a tax deduction in the same amount.
Accounting Practice -- There is currently no accounting charge to the income of
the Company in connection with the grant or exercise of a stock option. The
Company's income will be charged to the extent of any appreciation in the fair
value of stock appreciation rights which are outstanding and expected to be
exercised in the future. The Company's income will be charged for the expected
fair value of shares awarded in the future as performance shares.
VOTE REQUIRED -- The Board's adoption of the Plan is conditioned upon the Plan's
receiving the approval of holders of the majority of the outstanding Eaton
common shares.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE 1998 STOCK
PLAN.
3. RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
Upon the recommendation of its Audit Committee, the Board of Directors has
appointed the accounting firm of Ernst & Young LLP as independent auditors to
conduct the annual audit of Eaton's books and records for 1998. The submittal of
this matter to the shareholders at the annual meeting is not required by law or
by Eaton's Amended Regulations. The Board of Directors is nevertheless
submitting it to the shareholders to ascertain their views. If this proposal is
not approved at the annual meeting by the affirmative vote of holders of the
majority of the outstanding common shares of the Company entitled to vote at the
meeting, the Board intends to reconsider its appointment of Ernst & Young LLP as
independent auditors.
A representative of Ernst & Young LLP will be present at the annual meeting to
make a statement, should he or she desire to do
so, and to answer any questions concerning the independent auditors' areas of
responsibility.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF
ERNST & YOUNG LLP.
4. OTHER BUSINESS
Management does not know of any other matters requiring shareholder action that
may come before the meeting; but, if any are properly presented, the individuals
named in the enclosed form of proxy have discretionary authority to act on such
matters and will vote thereon according to their best judgment.
OWNERSHIP OF OUTSTANDING VOTING SHARES -- Set forth below is certain information
concerning persons who are known by Eaton to have reported owning beneficially
more than 5% of the common shares of the Company's voting shares as of the most
recent practicable date.
22
<PAGE> 25
<TABLE>
<CAPTION>
Title of Class: Common Shares
- ------------------------------------------------------
Name and Address of Number Percent
Beneficial Owner of Shares of Class
- ------------------------------------------------------
<S> <C> <C>
FMR Corp. 5,968,950(1) 7.74%
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
- ---------------
(1) FMR Corp. has filed with the Securities and Exchange Commission a Schedule
13G dated February 14, 1998, which reports the beneficial ownership of
5,968,950 common shares by it and certain affiliated entities and
individuals. As reported in the Schedule 13G, FMR Corp. and such entities
and individuals have the sole power to vote or to direct the vote of
1,487,750 shares and sole power to dispose or to direct the disposition of
5,968,950 shares.
The following table shows the beneficial ownership, reported to the Company as
of January 31, 1998, of Company common shares by each director and nominee, each
executive officer named in the Summary Compensation Table on page 11 and all
such persons and all other executive officers as a group and also sets forth the
number of share units held under various deferred compensation plans.
TITLE OF CLASS: COMMON SHARES
<TABLE>
<CAPTION>
NAME OF NUMBER PERCENT TOTAL NUMBER OF
BENEFICIAL OF SHARES OF DEFERRED SHARES AND
OWNER OWNED(1,2) CLASS(3) SHARE UNITS(4) DEFERRED SHARE UNITS
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
N. A. Armstrong 8,800 -- 295 9,095
B. R. Bachman 65,360(5) -- 3,561 68,921
A. M. Cutler 266,758(5,6) -- 20,494 287,252
P. B. Davis 8,264 -- 152 8,416
E. Green 7,500 -- 348 7,848
S. R. Hardis 361,360(5) -- 130,010 491,370
N. C. Lautenbach 7,000 -- 404 7,404
R. J. McCloskey 91,875(5) -- 2,097 93,971
J. R. Miller 11,500 -- 0 11,500
F. C. Moseley 21,000(6) -- 250 21,250
T. W. O'Boyle 105,278(5) -- 1,148 106,426
V. A. Pelson 9,000(6) -- 1,125 10,125
A. W. Reynolds 13,000 -- 272 13,272
G. L. Tooker 10,000(6) -- 696 10,696
Directors, Nominees and
Executive Officers as a group
of 28 1,861,726(5,6) 2.5% 216,815 2,078,541
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Each person has sole voting and investment power with respect to the shares
listed, unless otherwise indicated.
(2) Includes shares which the person has the right to acquire within 60 days
after January 31, 1998 upon the exercise of outstanding stock options as
follows: B. R. Bachman, 64,400; A. M. Cutler, 244,066; S. R. Hardis,
306,294; R. J. McCloskey, 85,000; T. W. O'Boyle, 99,220; and all directors,
nominees and executive officers as a group, 1,521,949 shares.
(3) Less than 1% unless otherwise indicated.
(4) For descriptions of these units, see pages 9-10 and 14-15.
(5) Includes shares held under the Eaton Corporation Share Purchase and
Investment Plan as of January 31, 1998. Participants in the plan are
entitled to direct the plan trustee's voting of shares which are not
allocated to any participant's account. None of those shares are included
among the shares beneficially owned by the executive officers.
(6) Includes shares held jointly or in other capacities, such as by trust.
23
<PAGE> 26
Employee benefit plans of the Company and its subsidiaries on January 31, 1998
held 8,838,516 common shares for the benefit of participating employees, or
12.2% of common shares outstanding.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE -- Section 16(a) of the
Securities Exchange Act of 1934 requires the Company's directors and officers to
file reports of holdings and transactions in the Company's equity securities
with the Securities and Exchange Commission and the New York Stock Exchange.
Based on Company records, the Company believes that there was compliance with
all such filing requirements with respect to 1997.
FUTURE SHAREHOLDER PROPOSALS -- Shareholders who wish to submit proposals for
inclusion in the proxy statement and for consideration at the annual meeting
must do so on a timely basis. In order to be included in the proxy statement for
the 1999 annual meeting, proposals must relate to proper subjects and must be
received by the Corporate Secretary, Eaton Corporation, Eaton Center, Cleveland,
Ohio 44114-2584, before November 13, 1998.
By order of the Board of Directors
/s/E. R. FRANKLIN
Earl R. Franklin
Secretary
March 13, 1998
24
<PAGE> 27
EXHIBIT A
1998 STOCK PLAN
1. PURPOSE
The Plan enables non-employee directors and professional and management
employees who contribute significantly to the success of Eaton Corporation (the
"Company") to participate in its future prosperity and growth and to identify
their interests with those of the shareholders. The purpose of the Plan is to
provide long-term incentive through outstanding service to the Company and its
shareholders and to assist in recruiting and retaining people of outstanding
ability and initiative in non-employee director, professional and management
positions.
2. ADMINISTRATION
(A) Employee Awards
With respect to employee awards, the Plan shall be administered by the
Compensation and Organization Committee of the Board of Directors (the
"Committee"), which shall consist of at least three non-employee directors.
(B) Non-employee Director Options
With respect to non-employee director options, the Plan shall be administered by
the Non-employee Director Options Committee, which shall be comprised of the
members of the Board who are employees of the Company.
(C) Authority of Committees
With respect only to those awards for which it has administrative
responsibility, the Committee and the Non-employee Director Options Committee
shall each have complete authority (except as otherwise expressly provided
herein) to interpret all provisions of the Plan consistent with law, to
determine the type and terms of instruments evidencing awards, to adopt, amend
and rescind general and special rules and regulations for its administration,
and to make all other determinations necessary or advisable for its
administration of the Plan. The determinations of each committee shall be final
and conclusive. The committees may act by resolution or in any other manner
permitted by law. The Committee may delegate authority to grant awards to
employees who are not officers or directors of the Company.
3. SHARES AVAILABLE
The aggregate of (a) the number of Eaton common shares delivered by the Company
in payment and upon exercise of awards to employees and non-employee directors
and (b) the number of shares subject to outstanding awards to employees and non-
employee directors shall not exceed 4,000,000 at any one time, subject to
adjustments as authorized herein. Shares related to awards that are forfeited,
terminated, unexercised upon expiration, settled in cash in lieu of shares or in
such manner that all or some of the shares covered by an award are not issued,
or exchanged for awards that do not involve shares, shall immediately become
available for other awards. Shares available for awards may consist, in whole or
in part, of authorized and unissued shares or treasury shares.
The maximum aggregate number of shares or share units underlying options or
related to other awards that may be granted to any employee during any three
consecutive calendar year period is 500,000.
Awards may be made under the Plan at any time after approval of the Plan by
shareholders at the 1998 annual meeting.
4. ELIGIBILITY FOR EMPLOYEE AWARDS
Any salaried employee (including officers) of the Company or any of its
subsidiaries occupying a professional or management position may be granted an
award. The Committee (a) will designate employees to whom grants are to be made,
(b) will specify the number of options, performance shares, restricted shares or
other stock-based awards
A-1
<PAGE> 28
subject to each grant, and (c) subject to Section 5(C), will specify the price
of the award.
Non-employee directors are eligible to receive stock options as provided below.
5. STOCK OPTIONS
(A) Employee Stock Options
Grants. The Committee may grant to eligible employees (i) options which are
intended to qualify as incentive stock options ("Incentive Stock Options") under
the Internal Revenue Code, or (ii) options which are not intended to qualify as
Incentive Stock Options. Each option will give the employee the right to
purchase a designated number of the Company's common shares with a par value of
$.50 each ("shares"). The aggregate fair market value (at the time of grant) of
shares for Incentive Stock Options under all plans of the Company which become
initially exercisable by an employee during any calendar year shall not exceed
$100,000 (or such other amount as may be provided by the Internal Revenue Code
or regulations thereunder).
Exercise. Each option shall be exercisable on such date or dates, during such
period and for such number of shares, as shall be determined by the Committee as
of the date of grant, although grants to employees subject to Section 16(b) of
the Securities Exchange Act of 1934 ("16b") shall not be exercisable for at
least six months after those options are granted. The Committee may, in its sole
discretion, accelerate the times when an option may be exercised and the
Management Compensation Committee (comprised of Company officers) may do
likewise for employees who are not subject to 16b.
(B) Non-employee Director Stock Options
Grants. Subject to approval by shareholders at the 1998 annual meeting, each
person who at that meeting or thereafter becomes a non-employee director
automatically shall be granted an option for 5,000 shares upon the date of his
or her election. On each granting date that each non-employee director continues
to serve in that capacity, beginning in the year after that director receives
his or her initial grant, he or she shall automatically be granted an option for
a number of shares equal to the quotient resulting from dividing (i) four times
the annual retainer for each non-employee director in effect on the granting
date, by (ii) the closing price of an Eaton common share on the New York Stock
Exchange Composite Transactions on the last business day immediately preceding
the granting date. The granting date is the Tuesday immediately before the
fourth Wednesday of each January. Notwithstanding anything to the contrary
herein, no non-employee director shall be allowed to receive an initial grant or
a continuing grant for a particular year hereunder if that director receives
such a grant under the 1995 Stock Plan.
Term. The term of each option shall be ten years from the date of grant.
Exercise. An option shall become fully exercisable six months following the date
of grant.
(C) Price
Each employee and non-employee director option shall state the number of shares
to which it pertains and the option price. The option price shall be the fair
market value of the shares subject to the option on the date of grant. The fair
market value shall be the mean between the high and low prices as quoted on the
New York Stock Exchange Composite Transactions.
(D) Payment
The price at which shares may be purchased upon exercise of an employee or
non-employee director option shall be paid in full at the time of exercise in
cash, or, if permitted by the applicable committee, by means of tendering shares
or other consideration valued at fair market value on the date of exercise, or
any
A-2
<PAGE> 29
combination thereof. The applicable committee shall determine acceptable methods
of tendering shares or other consideration. Delivery of shares by the Company to
the optionholder upon exercise of an option may be deferred, as authorized by
the appropriate committee.
6. PERFORMANCE SHARES
The Committee may grant performance shares to any eligible employee for no cash
consideration, if permitted by applicable law, or for such consideration as may
be determined by the Committee and specified in the grant. The Committee shall
establish award periods and shall establish the number of performance shares to
be earned if Company performance objectives are met. The performance objectives
shall be stated in terms of cash flow return on gross capital employed in the
Company's business ("CRC"). CRC equals the total of net income plus
depreciation, goodwill amortization and after-tax net interest divided by the
total of capital plus accumulated depreciation minus goodwill and short-term
investments. After performance shares have been awarded and performance
objectives have been established, the Committee may not increase the number of
performance shares that may be earned by any employee upon attainment of those
performance objectives within a performance period. The actual levels of CRC to
be achieved, and the length of the performance period and other terms and
conditions of the performance shares, shall be determined by the Committee.
To the extent performance shares are forfeited or the grant of performance
shares has expired or is surrendered, canceled or terminated, the shares subject
to the grant shall be available for future grants if within other Plan
limitations.
7. OTHER AWARDS
In limited circumstances where the Committee determines that the use of stock
options is inadvisable for tax or other regulatory reasons, it may grant stock
appreciation rights to eligible employees. Stock appreciation rights entitle the
holder, upon exercise, to receive a number of shares or cash, as the Committee
may determine, equal to the increase in fair market value of a number of shares
designated by such rights from the date of grant to the date of exercise. The
number of shares subject to a stock appreciation right shall be counted against
the individual limit on the maximum number of shares that may be awarded to any
employee during any three consecutive calendar year period, and against the
maximum number of shares which may be delivered under the Plan.
The Committee may grant other share-based awards to any eligible employee for no
cash consideration, if permitted by applicable law, or for such consideration as
may be determined by the Committee and specified in the grant. Such grants may
include restricted shares. The Committee may specify such criteria or periods
for payment as it shall determine and the extent to which such criteria or
periods have been met shall be conclusively determined by the Committee. Other
share-based grants may be paid in shares or other consideration related to
shares, as specified by the grant, and shall have such terms and conditions as
shall be determined by the Committee.
8. TRANSFERS
Except as otherwise provided by the appropriate committee, awards under the Plan
are not transferable other than by will or the laws of descent and distribution.
A transferred award may be exercised by the transferee only to the extent that
the grantee would have been entitled had the award not been transferred.
Notwithstanding anything herein to the contrary, the transfer of Incentive Stock
Options shall be limited as required by the Internal Revenue Code and applicable
regulations.
9. ADJUSTMENTS
In the event of a reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split,
A-3
<PAGE> 30
stock dividend, rights offering or similar event affecting shares of the
Company, the appropriate committee shall equitably adjust (a) the number and
class of shares (i) reserved under the Plan, (ii) for which awards may be
granted to an individual, and (iii) covered by outstanding awards denominated in
shares or share units, (b) the prices relating to outstanding awards, and (c)
the appropriate fair market value and other price determinations for such
awards.
10. GENERAL PROVISIONS
The Company shall have the right to deduct from any payment made under the Plan
any taxes required by law to be withheld. It shall be a condition to the
obligation of the Company to deliver shares that the participant pay the Company
such amount as it may request for the purpose of satisfying any such tax
liability. Any award under the Plan may provide that the participant may elect,
in accordance with any applicable committee regulations, to pay the amount of
such withholding taxes in shares.
No person, estate or other entity shall have any of the rights of a shareholder
with reference to shares subject to an award until a certificate or certificates
for the shares have been delivered to that person, estate or other entity. The
Plan shall not confer upon any non-employee director or employee any right to
continue in that capacity. The Plan and all determinations made and actions
taken pursuant hereto, to the extent not governed by the laws of the United
States, shall be governed by the laws of Ohio.
11. AMENDMENT
The Board of Directors of the Company may alter, amend or terminate the Plan
from time to time, except that the Plan may not be amended without shareholder
approval to (i) materially increase the aggregate number of shares which may be
issued, (ii) increase the maximum number of shares which may be granted to any
employee, (iii) grant options or stock appreciation rights at a purchase price
below fair market value on date of grant, or (iv) materially modify the
requirements as to eligibility for participation in the Plan. The provisions of
the Plan pertaining to the awards to non-employee directors may not be amended
more than once every six months, other than to comport with changes in the
Internal Revenue Code, the Employee Retirement Income Security Act, or the rules
thereunder.
12. EFFECTIVE AND TERMINATION DATES
The Plan will become effective if and when approved by shareholders holding a
majority of the Company's outstanding common shares entitled to vote at the 1998
annual meeting of shareholders.
No awards shall be granted under the Plan after December 31, 2007. Awards
granted before that date shall remain valid thereafter in accordance with their
terms.
A-4
<PAGE> 31
Admission to the Annual Meeting
Shareholders who plan to attend the 1998 annual meeting of shareholders may
apply for admission tickets at the Registration Desk immediately prior to the
meeting. Shareholders whose shares are registered in the name of a broker or
bank name should obtain certification of ownership to bring to the meeting.
Eaton Corporation
Eaton Center
Cleveland, Ohio 44114-2584
- --------------------------------------------------------------------------------
[EATON LOGO]
<PAGE> 32
EATON CORPORATION
EATON CENTER
CLEVELAND, OHIO 44114-2584
-------------------------------------------------------------------
(LOGO)
P
R The undersigned hereby appoints S. R. Hardis, G. L. Gherlein and E.
O R. Franklin as proxies, each with the power to appoint his
X substitute, and hereby authorizes them to represent and to vote, as
Y designated on the reverse side of this card, all of the Eaton
common shares, including reinvestment shares, if any, held by the
undersigned on February 23, 1998, at the annual meeting of
shareholders to be held at the Eaton Corporation Innovation Center,
26201 Northwestern Highway, Southfield, Michigan, on April 22,
1998, at 11:00 a.m. local time and at any adjournments thereof.
Election of Directors: N. A. Armstrong, E. Green, A. W. Reynolds
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
WHEN PROPERLY EXECUTED, IT WILL BE VOTED FOR ITEMS #1, #2 AND
#3 UNLESS CONTRARY INSTRUCTIONS ARE INDICATED ON THE REVERSE
SIDE.
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
SEE REVERSE
SIDE
-- FOLD AND DETACH HERE --
<PAGE> 33
<TABLE>
<CAPTION>
[ X ] PLEASE MARK YOUR [ [ 954
VOTES AS IN THIS
EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL OF THE BOARD OF DIRECTORS' NOMINEES AND "FOR" ITEMS
#2 AND #3.
-------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1, #2 AND #3.
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of [ ] [ ] 2. Approve 1998 [ ] [ ] [ ]
Directors Stock Plan
(see reverse)
FOR AGAINST ABSTAIN
For, except vote withheld from the 3. Ratify appointment [ ] [ ] [ ]
following nominee(s): of Independent
__________________________________________ Auditors
4. In their discretion, the proxies are authorized to
vote upon such other business as may properly
come before the meeting.
Please sign exactly as name appears hereon. Joint
owners should each sign. When signing as attorney,
executor, administrator, trustee or guardian,
please give full title as such.
____________________________________________________
____________________________________________________
SIGNATURE(S) DATE
</TABLE>
- --------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
EATON CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, APRIL 22, 1998, 11:00 A.M.
EATON CORPORATION INNOVATION CENTER
26201 NORTHWESTERN HIGHWAY
SOUTHFIELD, MICHIGAN
<PAGE> 34
CONFIDENTIAL VOTING INSTRUCTIONS
To Key Trust Company of Ohio, N.A., Trustee for the Eaton
Corporation Share Purchase and Investment Plan ("Plan"):
The undersigned, as a participant in the above Plan, hereby directs
the Trustee to vote in person or by proxy in connection with (a)
all common shares of Eaton Corporation credited to the
undersigned's account under the Plan on the record date ("allocated
shares") and (b) the proportionate number of common shares of Eaton
Corporation which are not allocated to the account of any
participant ("unallocated shares") as to which the undersigned is
entitled to direct the voting in accordance with the Plan
provisions, in each case at the annual meeting of shareholders of
Eaton Corporation to be held at the Eaton Corporation Innovation
Center, 26201 Northwestern Highway, Southfield, Michigan, on April
22, 1998, at 11:00 a.m. local time and at any adjournments thereof.
The Trustee is hereby instructed to vote FOR Items #1, #2 and #3
unless contrary voting instructions are indicated on the reverse
side of this card. Under the Plan, allocated shares for which the
Trustee does not receive directions in the form of a signed voting
instruction card are voted by the Trustee in accordance with and in
the same proportion as the allocated shares for which it receives
voting instructions. Unallocated shares are voted by the Trustee as
directed by the participants, acting as a Named Fiduciary, who
return signed voting instruction cards. (Any participant wishing to
vote the unallocated shares differently from the allocated shares
may do so by requesting a separate voting instruction card from Key
Trust Company of Ohio, N.A. at 127 Public Square, Mail Code:
OH-01-27-1402, Cleveland, Ohio 44114-1306, (216) 689-3728.)
Election of Directors: N. A. Armstrong, E. Green, A. W. Reynolds
SEE REVERSE
SIDE
-- FOLD AND DETACH HERE --
<PAGE> 35
<TABLE>
<CAPTION>
[ X ] PLEASE MARK YOUR [ [ 2826
VOTES AS IN THIS
EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL OF THE BOARD OF DIRECTORS' NOMINEES AND "FOR" ITEMS
#2 AND #3.
-------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1, #2 AND #3.
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of [ ] [ ] 2. Approve 1998 [ ] [ ] [ ]
Directors Stock Plan
(see reverse)
FOR AGAINST ABSTAIN
For, except vote withheld from the 3. Ratify appointment [ ] [ ] [ ]
following nominee(s): of Independent
__________________________________________ Auditors
<CAPTION>
4. In their discretion, the proxies are authorized to
vote upon such other business as may properly
come before the meeting.
Please sign date and return promptly in the
enclosed envelope to protect confidentiality.
_______________________________________________________
SIGNATURE DATE
</TABLE>
- --------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
EATON CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, APRIL 22, 1998, 11:00 A.M.
EATON CORPORATION INNOVATION CENTER
26201 NORTHWESTERN HIGHWAY
SOUTHFIELD, MICHIGAN
<PAGE> 36
CONFIDENTIAL VOTING INSTRUCTIONS
To Key Trust Company of Ohio, N.A., Trustee for the Plans listed
below ("Plans"):
The undersigned, as a participant in the (a) Eaton Corporation
401(k) Savings Plan for Hourly Employees of the Airflex Division,
(b) Eaton Corporation Investment Plan for Hourly Employees of the
Hydraulics Division Hutchinson Plant, (c) Eaton Corporation Lincoln
Plant Share Purchase and Investment Plan and Trust, (d) Eaton
Corporation Wauwatosa Union Plan and Trust, (e) Eaton Corporation
Winamac Plant Hourly and Investment Plan and Trust, and/or the (f)
Eaton Corporation 401(k) Savings Plan and Trust, ((a) through (f)
being the "Group A Participants"), (g) Eaton Corporation
Cutler-Hammer Represented Employees and/or (h) Cutler-Hammer de
Puerto Rico, Inc. Retirement Savings Plan, ((g) and (h) being the
"Cutler-Hammer Group Participants") hereby directs the Trustee to
vote in person or by proxy all common shares of the Eaton
Corporation credited to the undersigned's account under the Plan
("Plans") on the record date (the "Credited Eaton Shares") for the
annual meeting of shareholders of Eaton Corporation to be held at
the Eaton Corporation Innovation Center, 26201 Northwestern
Highway, Southfield, Michigan, on April 22, 1998, at 11:00 a.m.
local time and at any adjournments thereof. The Group A
Participants and the Cutler-Hammer Group Participants, by issuing
their instructions on this card, confirm that they have received a
copy of the Supplemental Voting Directions Statement which
accompanies this card, that they are acting as a Named Fiduciary
and that their vote is amended to incorporate the additional shares
described on the Supplemental Voting Directions Statement. The
Trustee is hereby instructed to vote FOR items #1, #2 and #3 unless
contrary voting instructions are indicated on the reverse side of
this card.
Election of Directors: N. A. Armstrong, E. Green, A. W. Reynolds
SEE REVERSE
SIDE
-- FOLD AND DETACH HERE --
<PAGE> 37
<TABLE>
<CAPTION>
[ X ] PLEASE MARK YOUR [ [ 2840
VOTES AS IN THIS
EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL OF THE BOARD OF DIRECTORS' NOMINEES AND "FOR" ITEMS
#2 AND #3.
-------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1, #2 AND #3.
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of [ ] [ ] 2. Approve 1998 [ ] [ ] [ ]
Directors Stock Plan
(see reverse)
FOR AGAINST ABSTAIN
For, except vote withheld from the 3. Ratify appointment [ ] [ ] [ ]
following nominee(s): of Independent
__________________________________________ Auditors
<CAPTION>
4. In their discretion, the proxies are authorized to
vote upon such other business as may properly
come before the meeting.
Please sign date and return promptly in the
enclosed envelope to protect confidentiality.
_______________________________________________________
SIGNATURE DATE
</TABLE>
- --------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
EATON CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, APRIL 22, 1998, 11:00 A.M.
EATON CORPORATION INNOVATION CENTER
26201 NORTHWESTERN HIGHWAY
SOUTHFIELD, MICHIGAN
<PAGE> 38
EATON CORPORATION
EATON CENTER
CLEVELAND, OHIO 44114-2584
P -----------------------------------------------------------------------
R The undersigned hereby appoints S. R. Hardis, G. L. Gherlein and E.
O R. Franklin as proxies, each with the power to appoint his
X substitute, and hereby authorizes them to represent and to vote, as
Y designated on the reverse side of this card, all of the Eaton
common shares, including reinvestment shares, if any, held by the
undersigned on February 23, 1998, at the annual meeting of
shareholders to be held at the Eaton Corporation Innovation Center,
26201 Northwestern Highway, Southfield, Michigan, on April 22,
1998, at 11:00 a.m. local time and at any adjournments thereof.
Election of Directors: N. A. Armstrong, E. Green, A. W. Reynolds
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS. WHEN PROPERLY EXECUTED, IT WILL BE
VOTED FOR ITEMS #1, #2 AND #3 UNLESS CONTRARY
INSTRUCTIONS ARE INDICATED ON THE REVERSE SIDE.
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY IN
THE ENCLOSED ENVELOPE.
SEE REVERSE
SIDE
<PAGE> 39
<TABLE>
<CAPTION>
[ X ] PLEASE MARK YOUR [ [ 954
VOTES AS IN THIS
EXAMPLE.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO DIRECTION
IS MADE, THIS PROXY WILL BE VOTED "FOR" ALL OF THE BOARD OF DIRECTORS' NOMINEES AND "FOR" ITEMS
#2 AND #3.
-------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1, #2 AND #3.
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of [ ] [ ] 2. Approve 1998 [ ] [ ] [ ]
Directors Stock Plan
(see reverse)
FOR AGAINST ABSTAIN
For, except vote withheld from the 3. Ratify appointment [ ] [ ] [ ]
following nominee(s): of Independent
__________________________________________ Auditors
<CAPTION>
4. In their discretion, the proxies are authorized to
vote upon such other business as may properly
come before the meeting.
Please sign exactly as name appears hereon. Joint
owners should each sign. When signing as attorney,
executor, administrator, trustee or guardian,
please give full title as such.
____________________________________________________
____________________________________________________
SIGNATURE(S) DATE
</TABLE>
<PAGE> 40
CUTLER-HAMMER
SUPPLEMENTAL VOTING DIRECTIONS STATEMENT
FOR
EATON CORPORATION CUTLER-HAMMER REPRESENTED EMPLOYEES
CUTLER-HAMMER DE PUERTO RICO, INC. RETIREMENT SAVINGS PLAN
(THE "PLANS")
This Supplemental Voting Directions Statement is being furnished to participants
and former participants in the above-described Plans who held shares of the
Eaton Corporation as part of their account in those Plans.
Under the Plans, Eaton shares for which the Trustee does not receive directions
in the form of a signed voting instruction card are voted by the Trustee in
accordance with and in the same proportion as the shares for which it receives
voting instructions.
<PAGE> 41
PRISM
SUPPLEMENTAL VOTING DIRECTIONS STATEMENT
FOR
EATON CORPORATION 401(k) SAVINGS PLAN FOR HOURLY EMPLOYEES OF THE AIRFLEX
DIVISION
EATON CORPORATION INVESTMENT PLAN FOR HOURLY EMPLOYEES OF THE
HYDRAULICS DIVISION HUTCHINSON PLANT
EATON CORPORATION LINCOLN PLANT SHARE PURCHASE AND INVESTMENT PLAN AND TRUST
EATON CORPORATION WAUWATOSA UNION PLAN AND TRUST
EATON CORPORATION WINAMAC PLANT HOURLY AND INVESTMENT PLAN AND TRUST
EATON CORPORATION 401(k) SAVINGS PLAN AND TRUST
(THE "PLANS")
This Supplemental Voting Directions Statement is being furnished to participants
and former participants in the above-described Plans who held shares of the
Eaton Corporation as part of their account in any of the Plans, and who execute
and return the Confidential Voting Instructions Card in connection with the
annual meeting of shareholders of Eaton Corporation to be held on April 22,
1998.
Under the Plans, in addition to voting the Credited Eaton Shares as defined on
the Confidential Voting Instructions Card, each Participant has the right to
issue instructions relating to a proportionate share of the common shares not
allocated to any account and shares for which the Trustee does not receive
timely directions (the "Unvoted Shares"). Unless a participant shall issue
different instructions, the Trustee shall follow the instructions given by
participants who submit a signed Confidential Voting Instructions Card. (Any
participant wishing to vote the Unvoted Shares differently from the voted shares
may do so by requesting a separate voting instructions card from Key Trust
Company of Ohio, N.A. at 127 Public Square, Mail Code: OH-01-27-1402, Cleveland,
Ohio 44114-1306, (216)689-3728). As a result, by executing and returning a
Confidential Voting Instructions Card, you will also be issuing an instruction
to vote the proportionate share of the Unvoted Shares.
<PAGE> 42
CONSOLIDATED CONTROLS
EATON CORPORATION CONSOLIDATED CONTROLS
PROFIT SHARING PLAN TRUST
Dear Participant:
As a participant in the Eaton Corporation Consolidated Controls Profit Sharing
Plan (the "Plan"), you have the right to direct Fidelity Management Trust
Company ("Fidelity") as trustee of the Plan on how to vote the Eaton Corporation
common shares credited to your account under the Plan.
The enclosed proxy card will also serve as a trustee instruction card that you
may use to give voting instructions to Fidelity. Your directions to Fidelity
will be kept confidential.
If First Chicago Trust Company of New York, which is acting as the tabulating
agent, receives your proxy card by April 16, 1998, Fidelity will vote all shares
credited to your account under the Plan as instructed.
If First Chicago Trust Company of New York does not receive your instruction
card by April 16, 1998, Fidelity will vote the common shares credited to your
account in the same proportion on each issue as it votes those shares for which
it has received voting directions from participants.
