<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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:________________________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
[EATON COVER ARTWORK]
<PAGE> 3
NOTICE OF MEETING
The 1999 annual meeting of Eaton Corporation shareholders will be held
Wednesday, April 28, at 10:30 a.m. local time at The Forum Conference and
Education Center, One Cleveland Center, 1375 East Ninth Street, Cleveland, Ohio,
for the purpose of:
1. Electing directors;
2. Ratifying the appointment of independent auditors; and
3. Considering reports and such other business as may properly come before the
meeting.
These matters are more fully described in the following pages.
The record date for the meeting has been fixed by the Board of Directors as the
close of business on March 1, 1999. 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 19, 1999
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
Ratification of the Appointment of
Independent Auditors ......................... 20
Other Business ................................. 20
Ownership of Outstanding Voting Shares.......... 20
Future Shareholder Proposals ................... 23
</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, 1998 are scheduled to be sent to shareholders on or
about March 19, 1999.
PROXY SOLICITATION
Eaton's Board of Directors solicits your proxy, in the form enclosed, for use at
the 1999 annual meeting of shareholders and any adjournments thereof. The
individuals named in the enclosed form of proxy have advised the Board of their
intention to vote at the meeting in compliance with instructions on all forms of
proxy tendered by shareholders and, where no contrary instruction is indicated
on the proxy form, for the election of the individuals nominated to serve as
directors and for ratification of the appointment of Ernst & Young LLP as
independent auditors. These matters are described in the following sections of
this proxy statement.
Any shareholder giving a proxy may revoke it by giving Eaton 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., 445 Park 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 $7,000. Brokerage firms, nominees, custodians and fiduciaries
may be asked to forward proxy soliciting material to the beneficial
shareholders. All reasonable soliciting costs will be borne by Eaton.
VOTING AT THE MEETING
Each Eaton shareholder of record at the close of business on March 1, 1999 is
entitled to one vote for each share then held. On March 1st, 71,756,637 Eaton
common shares (par value, 50c each) were outstanding and entitled to vote.
At the 1999 annual meeting, the inspectors of election appointed by the Board of
Directors for the meeting will determine the presence of a quorum and tabulate
the results of shareholder voting. As provided by Ohio law and Eaton's Amended
Regulations, Eaton shareholders present in person or by proxy at the meeting
will constitute a quorum. The inspectors of election intend to treat properly
executed proxies marked "abstain" as "present" for these purposes. The
inspectors will also treat as "present" shares held in "street name" by brokers
that are voted on at least one proposal to come before the meeting.
Director nominees receiving the greatest
number of votes will be elected directors. Votes withheld in respect of the
election of directors will not be counted in determining the outcome of the
election. Adoption of all other proposals to come before the meeting will
require the affirmative vote of the holders of a majority of the outstanding
Eaton common shares, which requirement is consistent with the general vote
requirement in Eaton's Amended Articles of Incorporation. The practical effect
of this vote requirement will be that abstentions and shares held in "street
name" by brokers that are not voted in respect of those proposals will be
3
<PAGE> 6
treated the same as votes cast against those proposals.
As provided by Ohio law, each shareholder is entitled to cumulative voting
rights in the election of directors if any shareholder gives written notice to
the President or a Vice President or the Secretary of Eaton at least 48 hours
before the time fixed for the meeting, requesting cumulative voting, and if an
announcement of that notice is made at the beginning of the meeting by the
Chairman or Secretary, or by or on behalf of the shareholder who gave the
notice. If cumulative voting is in effect with respect to an election of
directors, each shareholder has the right to cumulate his or her voting power by
giving one nominee that number of votes which equals the number of directors to
be elected multiplied by the number of the shareholder's shares, or by
distributing his or her votes on the same principle among two or more nominees,
as he or she sees fit. If cumulative voting is in effect with respect to an
election of directors, the individuals named in the proxy will vote the shares
represented by the proxy cumulatively for those nominees that they may determine
in their discretion, except that no votes will be cast for any nominee as to
whom the shareholder giving the proxy has directed that his or her vote be
withheld.
1. ELECTION OF DIRECTORS
The Board of Directors is presently composed of twelve members. The terms of
four directors will expire in April, 1999, and those directors have been
nominated for re-election. Three of the nominees were elected at the 1996 annual
meeting and one was elected at the 1997 annual meeting. (See page 5.)
If any of the nominees become unable or decline to serve, the individuals named
in the enclosed proxy will have the authority to vote for substitutes. But
Eaton's management has no reason to believe that this will occur.
The Company's newest director, Michael J. Critelli, was elected by the Board
effective October 1, 1998. (See page 7.)
Neil A. Armstrong, a director since 1981, having attained the normal retirement
age, will resign as director at the conclusion of the annual meeting of
shareholders on April 28. Following the annual meeting, the Board of Directors
will be composed of eleven members.
Following is biographical information about each nominee and each director.
4
<PAGE> 7
NOMINEES FOR ELECTION TO TERMS ENDING IN 2002 OR WHEN THEIR SUCCESSORS ARE
ELECTED AND HAVE QUALIFIED:
<TABLE>
<S> <C> <C> <C>
NED C. LAUTENBACH PHOTO JOHN R. MILLER PHOTO FURMAN C. MOSELEY PHOTO VICTOR A. PELSON PHOTO
NED C. LAUTENBACH, 55, is a JOHN R. MILLER, 61, is FURMAN C. MOSELEY, 64, is VICTOR A. PELSON, 61, is a
partner of Clayton, Dubilier President and Chief Chairman of Sasquatch Senior Advisor to Warburg
& Rice, Inc., an investment Executive Officer of TBN Publishing Company. He is Dillon Read LLC, investment
firm specializing in Holdings Inc., a company former President of Simpson bankers. He was a Director
structuring leveraged engaged in the resource Investment Company, holding and Senior Advisor of Dillon
buyouts. Before joining recovery and recycling company for Simpson Paper Read when it merged with SBC
Clayton, Dubilier, Mr. business and is a director Company and Simpson Timber Warburg in 1997. Before
Lautenbach was associated of Cambrex Corporation and Company. He was Chairman of joining Dillon Read in
with IBM from 1968 until his Waterlink, Inc. He was Simpson Paper from 1969 to April, 1996, Mr. Pelson was
retirement in 1998. At IBM, President, Chief Operating January, 1995 and retired as associated with AT&T from
he held several executive Officer and a director of President of Simpson 1959 to March, 1996, where
positions, including Vice The Standard Oil Company Investment in July, 1995. he held a number of
President, President of IBM from August, 1980 through Mr. Moseley is a director of executive positions,
Asia Pacific, Senior Vice March, 1986. Mr. Miller Owens Corning. including Group Executive
President, Chairman of IBM formerly served as Chairman DIRECTOR SINCE 1975 and President responsible
World Trade Corporation, of the Federal Reserve Bank for the Communications
Senior Vice President and of Cleveland. Services Group, Executive
Group Executive, Sales and DIRECTOR SINCE 1985 Vice President and member of
Distribution, and was a the Management Executive
member of IBM's Corporate Committee. At the time of
Executive Committee. He is a his retirement from AT&T,
director of ChoicePoint, Mr. Pelson was Chairman of
Inc., Dynatech Corporation, Global Operations and a
and PPG Industries, Inc. member of the Board of
DIRECTOR SINCE 1997 Directors. Mr. Pelson is a
director of United Parcel
Service and Carrier 1
International, S.A.
DIRECTOR SINCE 1994
</TABLE>
5
<PAGE> 8
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, 47, is PHYLLIS B. DAVIS, 67, is STEPHEN R. HARDIS, 63, is GARY L. TOOKER, 59, 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., Marsh & McLennan Atlantic Richfield Company.
in September, 1995. Corporation and The TJX Companies, Nordson DIRECTOR SINCE 1992
DIRECTOR SINCE 1993 Companies, Inc., and a Corporation and Progressive
trustee of the Fidelity Corporation.
mutual funds. DIRECTOR SINCE 1983
DIRECTOR SINCE 1991
</TABLE>
6
<PAGE> 9
DIRECTORS WHOSE PRESENT TERMS CONTINUE UNTIL APRIL 2001:
<TABLE>
<S> <C> <C> <C>
NEIL A. ARMSTRONG PHOTO MICHAEL J. CRITELLI PHOTO ERNIE GREEN PHOTO A. WILLIAM REYNOLDS PHOTO
NEIL A. ARMSTRONG, 68, is MICHAEL J. CRITELLI, 50, is ERNIE GREEN, 60, is founder, A. WILLIAM REYNOLDS, 65, is
Chairman of the Board of AIL Chairman and Chief Executive President and Chief Chief Executive of the Old
Technologies, Inc., and a Officer of Pitney Bowes Executive Officer of EGI, Mill Group, a private
director of Cinergy Corp., Inc., a provider of Inc., a manufacturer of investment firm. Mr.
Cordant Technologies Inc., messaging and advanced automotive components. He is Reynolds is former Chairman
Milacron Inc., RTI business communications also President of Florida of GenCorp Inc. He was
International Metals Inc., solutions. He was elected Production Engineering, Chairman of GenCorp from
and USX Corporation. Vice Chairman in 1994. He Inc., subsidiary of EGI. He 1987 through March, 1995 and
DIRECTOR SINCE 1981 was promoted to Vice is a director of DP&L Inc., Chief Executive Officer from
Chairman and Chief Executive Gradall Industries, Inc. and August, 1985 to July, 1994.
Officer of the corporation Pitney Bowes Inc. Mr. Reynolds is a director
in 1996, and Chairman and DIRECTOR SINCE 1995 of Boise Cascade Corporation
Chief Executive Officer in and Boise Cascade Office
1997. Mr. Critelli is a Products Corp.
director of Catalyst, Inc., DIRECTOR SINCE 1987
and a trustee of the
National Urban League.
DIRECTOR SINCE 1998
</TABLE>
7
<PAGE> 10
BOARD COMMITTEES -- The Board of Directors has the following standing
committees: Audit, Compensation and Organization, Corporate Responsibility and
Public Policy, Executive and Finance.
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 of the audit, 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 1998. Present members are
Messrs. Armstrong, Critelli, 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 1998. Present members are Mrs.
Davis and Messrs. Lautenbach, Miller, Pelson and Tooker.
The Compensation and Organization Committee will consider individuals for
nomination to stand for election as directors who are recommended to it in
writing by any Eaton shareholder. Any shareholder wishing to recommend an
individual as a nominee for election at the annual meeting of shareholders to be
held in 2000 should send a signed letter of recommendation, to be received
before November 5, 1999, to the following address: Eaton Corporation, Eaton
Center, Cleveland, Ohio 44114-2584, attention Corporate Secretary.
Recommendation letters must state the reasons for the recommendation and contain
the full name and address of each proposed nominee as well as a brief
biographical history setting forth past and present directorships, employments,
occupations and civic activities. Any such
8
<PAGE> 11
recommendation should be accompanied by a written statement from the proposed
nominee consenting to be named as a candidate and, if nominated and elected,
consenting to serve as a director.
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, environmental, health and safety issues, diversity and equal employment
opportunity, community relations, government relations, charitable
contributions, shareholder and investor relations and the Eaton Philosophy --
Excellence through People. The Corporate Responsibility and Public Policy
Committee held two meetings in 1998. Present members are Mrs. Davis and Messrs.
Armstrong, Critelli, 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 1998. 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 1998. Present members are Messrs. Armstrong, Green, Lautenbach,
Moseley, Pelson and Reynolds.
The Board of Directors held nine meetings in 1998. All of the directors attended
at least 75% of the meetings of the Board and its committees. Attendance at
meetings of the Board and its committees as a whole averaged 98%.
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 interest specified in their
deferred compensation agreements. The rate of interest is based upon the number
of years until a director's normal retirement date and, in general, is higher
than prevailing market rates. All non-employee directors may defer their fees at
a rate of return which varies, depending on whether the director defers the fees
as retirement compensation or as short-term compensation. At least 50% of
retirement compensation, or any greater portion which the director elects, is
converted to share units and earns share price appreciation and
9
<PAGE> 12
dividend equivalents. The balance of retirement compensation earns 10-year
Treasury note returns plus 300 basis points. Short-term compensation earns
13-week Treasury bill returns. These arrangements provide for accelerated lump
sum or installment payments upon a failure by the Company to pay or termination
of service in the context of a change in control of the Company.
Under the Company's 1998 Stock Plan, as approved by the shareholders, each
person who on April 22, 1998 or thereafter becomes a non-employee director
automatically is granted an option for 5,000 shares upon the date of his or her
election. So long as each non-employee director continues to serve in that
capacity, beginning in the year after that director receives his or her initial
grant, he or she is automatically granted an option for a number of shares equal
to the quotient resulting from dividing (i) four times the annual retainer for
each non-employee director in effect on the granting date, by (ii) the closing
price of an Eaton common share on the New York Stock Exchange Composite
Transactions on the last business day immediately preceding the granting date.
The granting date is the Tuesday immediately before the fourth Wednesday of each
January.
Upon leaving the Board, non-employee directors who were first elected prior to
1996 are eligible to receive an annual benefit, as described below. Directors
who are first elected in 1996 or later 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 of Eaton and the four other most highly
compensated executive officers for fiscal year 1998. The table also summarizes
compensation of the named executive officers for fiscal years 1997 and 1996.
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 1998 $866,680 $1,053,531 $ 0 60,000 $1,130,481 $449,931
Chairman and Chief 1997 790,000 1,534,680 0 250,000 973,409 748,410
Executive Officer 1996 721,680 1,023,925 0 48,000 654,240 298,732
A. M. Cutler 1998 $640,040 $ 715,479 $ 0 36,000 $ 793,221 $ 26,034
President and Chief Operating 1997 586,680 990,031 0 175,000 709,458 22,733
Officer 1996 540,000 672,290 0 32,000 496,520 14,125
G. L. Gherlein 1998 $375,000 $ 286,819 $ 0 12,500 $ 375,458 $161,973
Executive Vice President 1997 356,040 362,229 0 60,000 376,512 216,484
and General Counsel 1996 339,340 269,193 0 15,500 282,029 92,915
R. J. McCloskey 1998 $354,020 $ 346,783 $ 0 15,000 $ 348,331 $ 49,962
Senior Vice President and 1997 330,700 437,046 0 90,000 310,938 21,887
Group Executive -- Automotive 1996 311,040 329,046 0 18,000 109,062 25,116
T.W. O'Boyle 1998 $366,000 $ 394,072 $ 0 15,000 $ 348,331 $ 25,443
Senior Vice President and 1997 338,680 494,052 0 90,000 310,938 29,604
Group Executive -- 1996 320,340 239,306 0 18,000 109,062 22,897
Truck Components
- ----------------------------------------------------------------------------------------------------
</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 1998
for each of the named executive officers was as follows: S. R. Hardis,
$10,500; A. M. Cutler, $9,600; G. L. Gherlein, $9,646; R. J. McCloskey,
$9,623; and T. W. O'Boyle $9,218. The Company maintains plans pursuant to
which incentive compensation may be deferred. Earnings on these deferrals
which exceed rates established by the Internal Revenue Service are disclosed
in this table. Those earnings during 1998 for each of the named executive
officers were as follows: S. R. Hardis, $411,352; A. M. Cutler, $1,387; G.
L. Gherlein, $115,527; R. J. McCloskey, $4,169; and T. W. O'Boyle, $0. Under
a Company program, each executive officer may acquire an automobile. Under
this program for 1998, the approximate cost to the Company for each of the
named executive officers was as follows: S. R. Hardis, $11,390; A. M.
Cutler, $10,698; G. L. Gherlein, $30,755; R. J. McCloskey, $31,815; and T.
W. O'Boyle, $12,472. 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 1998
for each of the named executive officers were as follows: S. R. Hardis,
$16,689; A. M. Cutler, $4,349; G. L. Gherlein, $6,045; R. J. McCloskey,
$4,355; and T. W. O'Boyle, $3,753. Each executive officer is responsible for
paying individual income taxes due with respect to the Company's automobile
and insurance programs.
11
<PAGE> 14
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES -- The following table
contains information concerning the exercise of stock options during fiscal year
1998 and the value of unexercised stock options at the end of fiscal year 1998
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 7,680 $ 471,954 298,614 185,000 $4,588,843 $0
A. M. Cutler 0 0 244,066 123,500 4,216,514 0
G. L. Gherlein 6,000 379,960 123,400 42,500 2,596,309 0
R. J. McCloskey 0 0 85,000 60,000 800,305 0
T. W. O'Boyle 2,700 144,811 96,520 60,000 1,240,076 0
- --------------------------------------------------------------------------------------------------------
</TABLE>
OPTION GRANTS -- The following table gives information concerning grants of
stock options made during fiscal year 1998 to each of
the named executive officers. No stock
appreciation rights were granted during fiscal
year 1998.
<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 60,000 5.19 $88.41 1/27/08 $0 $ 3,341,898 $ 8,434,314
A. M. Cutler 36,000 3.12 88.41 1/27/08 0 2,005,139 5,060,588
G. L. Gherlein 12,500 1.08 88.41 1/27/08 0 696,229 1,757,149
R. J. McCloskey 15,000 1.30 88.41 1/27/08 0 835,475 2,108,579
T. W. O'Boyle 15,000 1.30 88.41 1/27/08 0 835,475 2,108,579
- -------------------
All Shareholders(2) N/A N/A N/A N/A 0 3,994,958,507 10,082,514,326
</TABLE>
(1) Based on a total of 1,155,528 options granted to all employees. All options
granted to the named executive officers were granted on January 27, 1998. As
granted, 50% of the options become exercisable if Eaton earns $8.80 per
share for any year prior to the end of year 2001, and 50% become exercisable
if Eaton achieves a market price per share of at least $110 by the end of
1999, $115 by the end of 2000, $120 by the end of 2001, $125 by the end of
2002 or $133 by the end of 2003. Whether or not the goals are attained, the
options will become fully exercisable ten days prior to the expiration of
the ten-year term.
(2) At the assumed annual rates of stock price appreciation of 0%, 5% and 10%,
the value of all 71,724,963 shares outstanding on January 31, 1999 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 1998 to each
of the named executive officers.
<TABLE>
<CAPTION>
PERFORMANCE
OR OTHER
NUMBER OF PERIOD ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
SHARES, 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 7,900 4 years 1,975 7,900 23,700
A. M. Cutler 5,500 4 years 1,375 5,500 16,500
G. L. Gherlein 2,600 4 years 650 2,600 7,800
R. J. McCloskey 2,850 4 years 713 2,850 8,550
T. W. O'Boyle 2,850 4 years 713 2,850 8,550
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) These units were awarded during 1998 under the Company's long term incentive
plan at a target price per unit of $89.42. The actual, final value of the
units will be determined after the completion of the four-year award period
based upon the achievement of corporate and individual performance goals.
The corporate goals relate to cash flow return on gross capital and growth
in earnings per Company common share. Any future pay outs will be made in
Company common shares, unless the executive has elected to defer receipt of
the payment under the Company's long term deferral plan or to the extent
necessary to satisfy tax withholding requirements.
COMPENSATION AND ORGANIZATION COMMITTEE REPORT -- The Committee, consisting of
five non-employee directors, met six times in 1998. 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 of Company and industry practices
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. Sixty-nine percent of the 1998 aggregate cash
compensation of the executive officers named in the compensation table was based
directly on specific financial performance objectives. For 1998, 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. Stock option grants made in 1998 were set at the
median level. A portion of the grants made to virtually all executives were
performance-based options, premised on the belief that putting a greater portion
of executives' compensation at risk will encourage an aggressive and
entrepreneurial management style which will help the Company to achieve its
growth objectives. Vesting of these
13
<PAGE> 16
performance-based options is tied to specific share prices and is directly
related to the Company's publicly stated growth objectives. Performance grants
become fully exercisable ten 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. In judging performance, the Committee considers performance against
annual plans, accomplishment of other objectives and the results of similar
companies. The Company 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 1998 salary adjustments were based upon these
considerations and accepted by the Board of Directors.
Short-Term Incentives -- Annual performance awards, including those paid in
1998, are based on percentages of salary range midpoints and depend upon whether
the Company has achieved predetermined levels of cash flow return on gross
capital employed in the business ("CRC"), individual performance ratings,
business unit performance (for operating managers) 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 the predetermined CRC levels, as it did in 1998.
Individual performance ratings take into account factors such as unanticipated
challenges and opportunities, actual performance against profit plan, personal
objectives, general economic conditions and the performance of other large
industrial corporations. Individual ratings emphasize pay for performance, and
may result in payments ranging from zero to 150% of the amount otherwise
payable. The Committee may adjust the total amount available for payment under
the plan up or down by 20%. Payments for 1998 were made at levels generated by
the plan metrics and were not affected by the exercise of this discretion.
Executives may defer payment of their bonuses. Amounts deferred until retirement
earn the greater of share price appreciation and dividend equivalents or 13-
week Treasury bill returns. Amounts deferred for shorter periods earn Treasury
bill returns.
Long-Term Incentives -- Long-term incentives are granted annually. Their value
depends on whether the Company achieves aggressive performance objectives during
the four years following a grant. For award periods beginning before 1998, these
objectives were expressed in terms of CRC. For award periods beginning in 1998,
the Committee significantly raised the performance hurdle, which is now
expressed in terms of CRC, earnings per share and a discretionary assessment of
individual performance. The performance objectives are established by the
Committee based upon a review with management of the Company's past performance
in comparison to that of its peer group companies and the Company's strategic
plans. For the 1995-1998 award period, the Company substantially exceeded the
target objectives established for that period. Payments are made in cash for
award periods beginning before 1998, and for later award periods payments will
be made in Eaton shares except to the extent necessary to satisfy tax-
withholding obligations. Executive officers may
14
<PAGE> 17
defer payment of their awards. At least 50% of any deferrals that will be paid
after retirement are converted to share units and earn share price appreciation
and dividend equivalents. The balance earns 10-year Treasury note returns plus
300 basis points. Short-term deferrals earn 13-week Treasury bill returns.
Tax Deduction -- Any non-deferred annual compensation of more than $1 million
for the Company's Chief Executive Officer and each of its four other most
highly-compensated officers is not tax deductible unless paid pursuant to
formula-driven, performance-based arrangements 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 salary 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 1998 compensation of S.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 1998 adjustment to Mr. Hardis' base salary to reflect his overall performance
in this key strategic leadership role, to position this component of his
compensation competitively in the marketplace, and to reflect his time in this
position. Mr. Hardis' 1998 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 1998. Consistent with the plan's design, this formula-driven
payout was further adjusted to reflect the Committee's evaluation of Mr. Hardis'
performance. In addition to the Company's financial performance, this evaluation
took into account his continued focus on the Company's long-term strategy,
foregoing the pressures to cut growth and developmental programs for short-term
earning gains. The Committee's evaluation also took into account his continued
success in focusing the Company's leadership team on the need to facilitate a
major change in the Company's culture to increase its speed and agility, his
management of succession issues and his effectiveness as the Company's principal
spokesman. Mr. Hardis also earned a 1995-1998 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 stock option awarded to Mr. Hardis in 1998 has vesting tied to the
Company's achieving specific share price and earnings per share targets. That
award is targeted to provide him the opportunity for superior rewards if the
Company achieves strong financial performance and its long-term objective of
creating sustained growth for Eaton in a demanding global marketplace.
Consistent with the Company's changing culture and increased emphasis on
pay-for-performance, in 1998 the Committee approved several changes to incentive
plans to focus rewards on higher performance hurdles, all of which will apply to
Mr. Hardis and other executive officers. Under the long-term incentive
15
<PAGE> 18
plan, the Committee added cumulative earnings per share growth as a second
performance metric for new awards. It also made awards dependent upon an
assessment of individual performance and payable mostly in Company shares
instead of in cash. Under the short-term incentive plan, the Committee increased
the CRC performance goals for 1999, increased from 10% to 20% the amount by
which the Committee may adjust the total amount available for payments in order
to reflect corporate performance and decided to apply a qualitative assessment
of overall corporate performance in determining final awards.
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
16
<PAGE> 19
COMPANY STOCK PERFORMANCE -- The following graph compares the cumulative total
return for Eaton common shares with the S&P 500 Index, with a group of 20 peer
companies (new peers), and with a group of 20 companies which were considered
peers last year (old peers). The new peer group consists of: Aeroquip-Vickers,
Inc., Applied Materials, Inc., Borg-Warner Automotive, Inc., Cooper Industries,
Inc., Cummins Engine Company, Inc., Dana Corporation, Detroit Diesel
Corporation, Emerson Electric Co., Honeywell Inc., Hubbell Incorporated, Johnson
Controls, Inc., Meritor Automotive, Inc., Navistar International Corporation,
PACCAR Inc., Parker-Hannifin Corporation, Rockwell International Corporation,
SPX Corporation, TRW Inc., Thomas & Betts Corporation and Varian Associates,
Inc. The old peer group consists of: Aeroquip-Vickers, Inc. (formerly named
TRINOVA Corporation), Allied-Signal Inc., Arvin Industries, Inc., CBS
Corporation (formerly named Westinghouse Electric Corporation), 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, TRW Inc. and United Technologies Corporation.
This year the Company revised the list of companies making up the peer group in
order to provide more similarity between their businesses and those of the
Company.
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG EATON, S&P 500 INDEX, OLD PEER GROUP AND NEW PEER GROUP
[PERFORMANCE GRAPH]
OLD PEERS NEW PEERS EATON S&P 500
--------- --------- ----- -------
<S> <C> <C> <C> <C>
1993 100 100 100 100
1994 100 96 100 101
1995 130 126 110 139
1996 154 151 146 171
1997 176 181 190 229
1998 201 185 153 294
</TABLE>
Assumes $100 invested on December 31, 1993 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.
17
<PAGE> 20
RETIREMENT PLANS -- The following table shows the annual normal retirement
benefits payable to officers and other employees of the Company under the
Company's retirement plans upon retirement at age 65 at the compensation levels
and years of service specified. The table assumes retirement under the standard
post-retirement single life annuity option. Under the standard post-retirement
surviving spouse option, the participant receives a reduced pension, and a
pension equal to 50% of 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 $ 42,802 $ 57,070 $ 71,337 $ 85,604 $ 99,872 $ 114,139
300,000 65,302 87,070 108,837 130,604 152,372 174,139
400,000 87,802 117,070 146,337 175,604 204,872 234,139
500,000 110,302 147,070 183,837 220,604 257,372 294,139
600,000 132,802 177,070 221,337 265,604 309,872 354,139
700,000 155,302 207,070 258,837 310,604 362,372 414,139
800,000 177,802 237,070 296,337 355,604 414,872 474,139
900,000 200,302 267,070 333,837 400,604 467,372 534,139
1,000,000 222,802 297,070 371,337 445,604 519,872 594,139
1,100,000 245,302 327,070 408,837 490,604 572,372 654,139
1,200,000 267,802 357,070 446,337 535,604 624,872 714,139
1,300,000 290,302 387,070 483,837 580,604 677,372 774,139
1,400,000 312,802 417,070 521,337 625,604 729,872 834,139
1,500,000 335,302 447,070 558,837 670,604 782,372 894,139
1,600,000 357,802 477,070 596,337 715,604 834,872 954,139
1,700,000 380,302 507,070 633,837 760,604 887,372 1,014,139
1,800,000 402,802 537,070 671,337 805,604 939,872 1,074,139
1,900,000 425,302 567,070 708,837 850,604 992,372 1,134,139
</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
($29,304 for 1998 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 means the
number of years of employment between age 21 and retirement, with a maximum of
44 years. As of January 31, 1999, the number of years of credited service for
each of the individuals named in the Summary Compensation Table on page 11 was
as follows: A. M. Cutler, 23.4; G. L. Gherlein, 32.6; S. R. Hardis, 19.4; R. J.
McCloskey, 29.8; and T. W. O'Boyle, 32.3.
---------------
18
<PAGE> 21
Certain provisions of the Internal Revenue Code, as amended, limit the annual
benefits that may be paid from a tax-qualified retirement plan. As permitted
under the Code, the Board of Directors has authorized the payment from Eaton's
general funds of any benefits calculated under the provisions of the applicable
retirement plan which may exceed those limits. The present value of these
benefits will be paid in a single installment upon a proposed change in control
of the Company unless otherwise determined by the Board of Directors.
---------------
The Board of Directors has adopted a plan which provides supplemental annual
retirement income to certain executives who do not have the opportunity to
accumulate significant credited service with Eaton, provided that they 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. Four executive officers
currently are participating in the plan, including S. R. Hardis, who is named in
the Summary Compensation Table on page 11. The estimated annual benefit payable
to Mr. Hardis under this plan is $209,104, based on the assumptions that Mr.
Hardis retires at age 65 and that his base salary and target incentive
compensation increases 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 because of changed
circumstances, then the officer would be entitled to receive certain amounts and
benefits under these agreements. These amounts and benefits would include (i)
long-term incentive compensation reflective of the portion of the award periods
completed prior to termination, (ii) salary and bonus multiplied by three (or
any lesser number of years and portions thereof until age 65), and (iii)
continuation of medical, life insurance and other welfare benefits for two years
(or any lesser number of years and portions thereof until age 65), subject to
reduction for comparable benefits received in any subsequent employment. The
officer would be entitled to receive an additional payment, net of taxes, to
compensate for the excise tax imposed on these and other payments if they are
determined to be "excess parachute payments" under the Internal Revenue Code.
The agreements provide that, upon the occurrence of a proposed change of
control, the
19
<PAGE> 22
Company would deposit in trust a cash amount sufficient to provide the benefits
and payments to which the officers would be entitled under the agreements upon a
change of control and termination of employment. The agreements also provide
that the Company would reimburse the officers for any costs incurred to enforce
the agreements.
---------------
Certain grantor trusts established by the Company hold approximately $40 million
of marketable securities and 485,000 Company shares in order to provide for a
portion of the Company's deferred compensation obligations. The trust assets,
which are subject to the claims of the Company's creditors, will be used to pay
those obligations in proportion to trust funding. The trusts provide for full
funding upon a change in control of the Company and for accelerated lump sum or
installment payments upon a failure by the Company to pay amounts due under the
plans or upon a termination of employment in the context of a change in control.
2. 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 1999. 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 a
majority of the outstanding shares, 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
answer any questions concerning the independent auditors' areas of
responsibility.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF
ERNST & YOUNG LLP.
3. OTHER BUSINESS
Management does not know of any other matters requiring shareholder action that
may come before the meeting; but, if any are properly presented, the individuals
named in the enclosed form of proxy will vote on those matters according to
their best judgment.
OWNERSHIP OF OUTSTANDING VOTING SHARES -- Set forth below is certain information
concerning persons who are known by Eaton to have reported owning beneficially
more than 5% of the common shares of the Company's voting shares as of the most
recent practicable date.
20
<PAGE> 23
<TABLE>
<CAPTION>
Title of Class: Common Shares
- ------------------------------------------------------
Name and Address of Number Percent
Beneficial Owner of Shares of Class
- ------------------------------------------------------
<S> <C> <C>
Capital Research and Management
Company 4,950,000(1) 6.9%
333 South Hope Street
Los Angeles, CA 90071
Harris Associates Inc. 4,509,550(2,4) 6.32%
Two North LaSalle Street,
Suite 500
Chicago, Illinois 60602-3790
Harris Associates Investment
Trust series designated
The Oakmark Fund 4,065,800(3,4) 5.69%
Two North LaSalle Street,
Suite 500
Chicago, IL 60602-3790
Sanford C. Bernstein & Co.,
Inc. 3,790,072(5) 5.3%
767 Fifth Avenue
New York, NY 10153
</TABLE>
- ---------------
(1) Capital Research and Management Company has filed with the Securities and
Exchange Commission a Schedule 13G dated February 8, 1999, which reports the
beneficial ownership of 4,950,000 common shares. As reported in the Schedule
13G, Capital Research and Management Company has sole dispositive power with
respect to 4,950,000 shares (as investment adviser managing The American
Funds Group of mutual funds), and has no voting power with respect to these
shares.
(2) Harris Associates Inc. has filed with the Securities and Exchange Commission
a Schedule 13G dated January 25, 1999, which reports the beneficial
ownership of 4,509,550 common shares. As reported in the Schedule 13G,
Harris Associates Inc. has shared voting power (with Harris Associates
Investment Trust) with respect to 4,509,550 shares, shared dispositive power
with respect to 4,072,900 shares, and sole dispositive power with respect to
436,650 shares.
(3) Harris Associates Investment Trust has filed with the Securities and
Exchange Commission a Schedule 13G dated January 25, 1999, which reports the
beneficial ownership of 4,065,800 common shares. As reported in the Schedule
13G, Harris Associates Investment Trust has shared voting power (with Harris
Associates Inc.) with respect to 4,065,800 shares and shared dispositive
power with respect to 4,065,800 shares.
(4) The 4,065,800 shares which Harris Associates Investment Trust reports owning
beneficially are included within the number of shares as to which Harris
Associates Inc. reports shared voting and shared dispositive power. The
total number of Eaton shares owned beneficially by both entities is
4,509,550.
(5) Sanford C. Bernstein & Co., Inc. has filed with the Securities and Exchange
Commission a Schedule 13G dated February 5, 1999, which reports the
beneficial ownership of 3,790,072 common shares. As reported in the Schedule
13G, Sanford C. Bernstein & Co., Inc. has sole voting power with respect to
2,126,480 shares, shared voting power with respect to 327,497 shares, and
sole dispositive power with respect to 3,790,072 shares.
21
<PAGE> 24
The following table shows the beneficial ownership, reported to the Company as
of January 31, 1999, of Company common shares by each director and nominee, each
executive officer named in the Summary Compensation Table on page 11 and all of
those individuals 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 9,800 -- 672 10,472
M. J. Critelli 400 -- 0 400
A. M. Cutler 266,052(5,6) -- 30,733 296,785
P. B. Davis 9,293 -- 355 9,648
G. L. Gherlein 176,660(5,6) -- 28,879 205,539
E. Green 8,500 -- 557 9,057
S. R. Hardis 354,268(5) -- 156,146 510,410
N. C. Lautenbach 8,000 -- 1,113 9,113
R. J. McCloskey 92,263(5) -- 5,348 97,611
J. R. Miller 12,500 -- 0 12,500
F. C. Moseley 22,000(6) -- 578 22,578
T. W. O'Boyle 105,448(5) -- 1,918 107,416
V. A. Pelson 10,000(6) -- 1,551 11,551
A. W. Reynolds 14,000 -- 617 14,617
G. L. Tooker 11,000(6) -- 896 11,896
Directors, Nominees and
Executive Officers as a group
of 29 1,942,387 2.7% 281,317 2,223,704
- ------------------------------------------------------------------------------------------------
</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, 1999 upon the exercise of outstanding stock options as
follows: G. L. Gherlein, 123,400; A. M. Cutler, 244,066; S. R. Hardis,
298,614; R. J. McCloskey, 85,000; T. W. O'Boyle, 96,520; and all directors,
nominees and executive officers as a group, 1,583,294 shares.
(3) Each of the individuals listed holds less than 1% of outstanding common
shares.
(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, 1999. 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 the unallocated 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.
22
<PAGE> 25
Employee benefit plans of the Company and its subsidiaries on January 31, 1999
held 8,201,135 common shares for the benefit of participating employees, or
11.4% of common shares outstanding.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE -- Section 16(a) of the
Securities Exchange Act of 1934 requires the Company's directors and officers to
file reports of holdings and transactions in the Company's equity securities
with the Securities and Exchange Commission and the New York Stock Exchange. The
Company believes that there was compliance with all such filing requirements
with respect to 1998.
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 2000 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, 1999.
By order of the Board of Directors
/s/ EARL R. FRANKLIN
Earl R. Franklin
Secretary
March 19, 1999
23
<PAGE> 26
Admission to the Annual Meeting
Shareholders who plan to attend the 1999 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> 27
<TABLE>
<CAPTION>
954
<S> <C> <C> <C> <C> <C> <C>
/X/ PLEASE MARK YOUR
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" ITEM #2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1 AND #2.
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify appointment / / / / / /
Directors of Independent Auditors
(see reverse)
For, except vote withheld from the following nominee(s):
---------------------------------------------------------------
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SIGNATURE(S) DATE
- ------------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
EATON CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, APRIL 28, 1999, 10:30 A.M.
THE FORUM CONFERENCE AND EDUCATION CENTER
ONE CLEVELAND CENTER
1375 EAST NINTH STREET
CLEVELAND, OHIO
</TABLE>
<PAGE> 28
EATON CORPORATION
EATON CENTER
CLEVELAND, OHIO 44114-2584
P
-------------------------------------------------------------------
R (LOGO)
O The undersigned hereby appoints S. R. Hardis, G. L. Gherlein and E.
R. Franklin as proxies, each with the power to appoint his
X substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side of this card, all of the Eaton
Y common shares, including reinvestment shares, if any, held by the
undersigned on March 1, 1999, at the annual meeting of shareholders
to be held at The Forum Conference and Education Center, One
Cleveland Center, 1375 East Ninth Street, Cleveland, Ohio, on April
28, 1999, at 10:30 a.m. local time and at any adjournments thereof.
<TABLE>
<S> <C>
Election of Directors: N. C. Lautenbach, J. R. Miller, F. C. Moseley, V. A. Pelson
</TABLE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
WHEN PROPERLY EXECUTED, IT WILL BE VOTED FOR ITEMS #1 AND #2
UNLESS CONTRARY INSTRUCTIONS ARE INDICATED ON THE REVERSE SIDE.
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
SEE REVERSE
SIDE
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 29
<TABLE>
<CAPTION>
2826
<S> <C> <C> <C> <C> <C> <C>
/X/ PLEASE MARK YOUR
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" ITEM #2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1 AND #2.
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify appointment / / / / / /
Directors of Independent Auditors
(see reverse)
For, except vote withheld from the following nominee(s):
---------------------------------------------------------------
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
Please sign, date and return promptly in the enclosed envelope to protect
confidentiality.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SIGNATURE DATE
- ------------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
EATON CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, APRIL 28, 1999, 10:30 A.M.
THE FORUM CONFERENCE AND EDUCATION CENTER
ONE CLEVELAND CENTER
1375 EAST NINTH STREET
CLEVELAND, OHIO
</TABLE>
<PAGE> 30
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 Forum Conference and Education
Center, One Cleveland Center, 1375 East Ninth Street, Cleveland,
Ohio, on April 28, 1999, at 10:30 a.m. local time and at any
adjournments thereof. The Trustee is hereby instructed to vote FOR
Items #1 and #2 unless 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.)
<TABLE>
<S> <C>
Election of Directors: N. C. Lautenbach, J. R. Miller, F. C. Moseley, V. A. Pelson
</TABLE>
SEE REVERSE
SIDE
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 31
<TABLE>
<CAPTION>
2840
<S> <C> <C> <C> <C> <C> <C>
/X/ PLEASE MARK YOUR
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" ITEM #2.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS #1 AND #2.
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of / / / / 2. Ratify appointment / / / / / /
Directors of Independent Auditors
(see reverse)
For, except vote withheld from the following nominee(s):
---------------------------------------------------------------
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
Please sign, date and return promptly in the enclosed envelope to protect
confidentiality.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SIGNATURE DATE
- ------------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
EATON CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
WEDNESDAY, APRIL 28, 1999, 10:30 A.M.
THE FORUM CONFERENCE AND EDUCATION CENTER
ONE CLEVELAND CENTER
1375 EAST NINTH STREET
CLEVELAND, OHIO
</TABLE>
<PAGE> 32
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"), and/or (g) Cutler-Hammer de
Puerto Rico, Inc. Retirement Savings Plan (the "Cutler-Hammer Group
Participants") hereby directs the Trustee to vote in person or by
proxy all common shares of Eaton Corporation credited to the
undersigned's account under the Plans on the record date (the
"Credited Eaton Shares") for the annual meeting of shareholders of
Eaton Corporation to be held at The Forum Conference and Education
Center, One Cleveland Center, 1375 East Ninth Street, Cleveland,
Ohio, on April 28, 1999, at 10:30 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 and #2 unless contrary voting
instructions are indicated on the reverse side of this card.
<TABLE>
<S> <C>
Election of Directors: N. C. Lautenbach, J. R. Miller, F. C. Moseley, V. A. Pelson
</TABLE>
SEE REVERSE
SIDE
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 33
CUTLER-HAMMER
SUPPLEMENTAL VOTING DIRECTIONS STATEMENT
FOR CUTLER-HAMMER DE PUERTO RICO, INC.
RETIREMENT SAVINGS PLAN (THE "PLAN")
This Supplemental Voting Directions Statement is being sent to participants and
former participants in the above-described Plan who hold shares of Eaton
Corporation in their Plan accounts.
Under the Plan, if the Trustee does not receive a signed voting instruction card
telling the Trustee how to vote the Eaton shares in your account, the Trustee
will vote those shares in the same proportion, on each issue, as it votes other
Eaton shares according to instructions from the other Plan participants.
<PAGE> 34
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 sent to participants and
former participants in the above-described Plans who hold shares of Eaton
Corporation in their Plan accounts and who sign and return the Confidential
Voting Instructions Card in connection with the annual meeting of shareholders
of Eaton Corporation to be held on April 28, 1999.
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
instruct the Trustee how to vote a proportionate share of the common shares not
allocated to any account and shares for which the Trustee does not receive
timely directions from the other participants in the Plans (the "Unvoted
Shares"). Unless a participant instructs the Trustee otherwise, the Trustee will
follow the instructions given by participants who submit a signed Confidential
Voting Instructions Card. As a result, by executing and returning a Confidential
Voting Instructions Card, you will also be issuing an instruction to vote the
proportionate shares of the Unvoted Shares. (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, telephone
216-689-3728.)
<PAGE> 35
CONSOLIDATED CONTROLS
EATON CORPORATION CONSOLIDATED CONTROLS
PROFIT SHARING PLAN TRUST
Dear Participant:
As a participant in the Eaton Corporation Consolidated Controls Profit Sharing
Plan, you have the right to direct Fidelity Management Trust Company 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 22, 1999, Fidelity will vote the shares
in your account as instructed.
If First Chicago does not receive your proxy card by that date, Fidelity will
vote the shares in your account in the same proportion on each issue as it votes
those shares for which it has received voting directions from the other
participants.
