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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
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:
[ ] 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 Section 240.14a-12
ILLINOIS TOOL WORKS INC.
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(Name of Registrant as Specified In Its Charter)
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(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)(1) 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):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] 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:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
[ILLINOIS TOOL WORKS, INC. LOGO]
ILLINOIS TOOL WORKS INC.
3600 WEST LAKE AVENUE
GLENVIEW, ILLINOIS 60025
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
- --------------------------------------------------------------------------------
FRIDAY, MAY 9, 2003
3:00 P.M.
THE NORTHERN TRUST COMPANY
50 SOUTH LASALLE STREET
CHICAGO, ILLINOIS
ITW is holding its 2003 Annual Meeting for the following purposes:
1. To elect ten directors for the upcoming year; and
2. To amend the Illinois Tool Works Inc. 1996 Stock Incentive Plan.
The Board of Directors recommends that you vote FOR each of the director
nominees and FOR the amendment of the 1996 Stock Incentive Plan.
Stockholders of record on March 11, 2003 are entitled to vote.
It is important that your shares are represented at the Annual Meeting
whether or not you plan to attend. To be certain that your shares are
represented, please sign, date and return the enclosed proxy card as soon as
possible or vote by telephone or the internet by following the instructions on
the proxy card. Whatever method you choose, please vote as soon as possible. You
may revoke your proxy at any time before it is voted at the Annual Meeting.
Our Annual Report for 2002 is enclosed.
By Order of the Board of Directors,
Stewart S. Hudnut
Secretary
March 21, 2003
ILLINOIS TOOL WORKS INC.
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PROXY STATEMENT
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TABLE OF CONTENTS
<Table>
<Caption>
Page
----
Questions and Answers....................................... 1
Election of Directors....................................... 4
Board of Directors and Its Committees....................... 7
Director Compensation....................................... 8
Ownership of ITW Stock...................................... 9
Section 16(a) Beneficial Ownership Reporting Compliance..... 12
Executive Compensation...................................... 12
Equity Compensation Plan Information........................ 16
Report of the Compensation Committee on Executive
Compensation............................................. 17
Company Performance......................................... 19
Report of the Audit Committee............................... 20
Independent Public Accountants.............................. 21
Amendment of the 1996 Stock Incentive Plan.................. 22
Annual Report on Form 10-K.................................. 27
</Table>
QUESTIONS AND ANSWERS
Following are questions often asked by stockholders of publicly held
companies. We hope that the answers will assist you in casting your vote.
WHAT AM I VOTING ON?
We are soliciting your vote on:
1. The election of ten directors for the upcoming year; and
2. The amendment of the Illinois Tool Works Inc. 1996 Stock Incentive
Plan.
WHO MAY VOTE?
Stockholders at the close of business on March 11, 2003, the record date,
may vote. On that date, there were 307,426,960 shares of ITW common stock
outstanding.
HOW MANY VOTES DO I HAVE?
Each share of ITW common stock that you own entitles you to one vote.
HOW DO I VOTE?
You may vote your shares in one of the following four ways:
<Table>
1. By mail: Complete the proxy card and sign, date and return
it in the enclosed envelope;
2. By telephone: Call the toll-free number on the proxy card,
enter the holder account number and the proxy
access number from the proxy card and follow the
recorded instructions;
3. By Internet: Go to the website listed on the proxy card, enter
the holder account number and the proxy access
number from the proxy card and follow the
instructions provided; or
4. In person: Attend the Annual Meeting, where ballots will be
provided.
</Table>
If you hold your shares through a bank or broker that does not offer telephone
or internet voting, please complete and return your proxy card by mail.
HOW DOES DISCRETIONARY VOTING AUTHORITY APPLY?
If you sign, date and return your proxy card, your vote will be cast as
you direct. If you do not indicate how you want to vote, you give authority to
Marvin D. Brailsford, Susan Crown and Harold B. Smith to vote for the election
of directors, for the amendment of the 1996 Stock Incentive Plan and on any
other matter that is properly raised at the Annual Meeting. In that event, your
proxy will be voted FOR the election of each director nominee,
FOR the amendment of the 1996 Stock Incentive Plan and FOR or AGAINST any other
properly raised matter at the discretion of Ms. Crown and Messrs. Brailsford and
Smith.
MAY I REVOKE MY PROXY?
You may revoke your proxy at any time before it is voted at the Annual
Meeting in one of four ways:
1. Notify ITW's Secretary in writing before the Annual Meeting that you
wish to revoke your proxy;
2. Submit another proxy with a later date;
3. Vote by telephone or internet after you have given your proxy; or
4. Vote in person at the Annual Meeting.
WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
Your shares are likely registered differently or are in more than one
account. You should sign and return all proxy cards to guarantee that all of
your shares are voted.
WHAT CONSTITUTES A QUORUM?
The presence, in person or by proxy, of the holders of a majority of ITW
shares entitled to vote at the Annual Meeting constitutes a quorum. Your shares
will be considered part of the quorum if you return a signed and dated proxy
card or if you vote by telephone or internet. Abstentions and broker non-votes
are counted as "shares present" at the meeting for purposes of determining if a
quorum exists. A broker non-vote occurs when a broker submits a proxy that does
not indicate a vote as to a proposal because he or she does not have voting
authority and has not received voting instructions from you.
WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?
ELECTION OF DIRECTORS: The ten nominees who receive the highest number of
votes will be elected. If you do not want to vote your shares for a particular
nominee, you may indicate that in the space provided on the proxy card or
withhold authority as prompted during telephone or internet voting. Broker
non-votes and votes to withhold authority for one or more nominees are not
considered shares voted and will not affect the outcome of the vote.
AMENDMENT OF THE 1996 STOCK INCENTIVE PLAN: Amendment of the 1996 Stock
Incentive Plan requires the affirmative vote of the holders of a majority of the
shares present or represented by proxy and having the power to vote at the
Annual Meeting. In the vote for amendment of the Plan, abstentions will have the
effect of a vote "against" the proposal. Broker non-votes are not considered
shares voted or having the power to vote and will not affect the outcome of the
vote.
HOW DO I SUBMIT A STOCKHOLDER PROPOSAL?
To be considered for inclusion in our proxy statement for the May 2004
Annual Meeting, a stockholder proposal must be received no later than November
22, 2003. Your
2
proposal must be in writing and must comply with the proxy rules of the
Securities and Exchange Commission (SEC). You may also submit a proposal that
you do not want included in the proxy statement, but that you want to raise at
the May 2004 Annual Meeting. If you submit that proposal after February 5, 2004,
then SEC rules permit the individuals named in the proxies solicited by ITW's
Board of Directors for that meeting to exercise discretionary voting power as to
that proposal. You should send your proposal to our Secretary at our address on
the cover of this proxy statement.
HOW DO I NOMINATE A DIRECTOR?
If you wish to nominate an individual for election as director at the May
2004 Annual Meeting, our Secretary must receive your written nomination by
December 31, 2003. Our by-laws require that your nomination include: (1) your
name and address; (2) the name, age and home and business addresses of the
nominee; (3) the principal occupation or employment of the nominee; (4) the
number of shares of ITW stock that the nominee beneficially owns; (5) a
statement that the nominee is willing to be nominated and serve as a director;
and (6) any other information regarding the nominee that would be required by
the SEC to be included in a proxy statement had ITW's Board of Directors
nominated that individual. Any nomination that you make must be approved by the
Corporate Governance and Nominating Committee as well as by the Board of
Directors.
WHO PAYS TO PREPARE, MAIL AND SOLICIT THE PROXIES?
ITW will pay all of the costs of preparing and mailing the proxy
statement and soliciting these proxies. We will ask brokers, dealers, banks,
voting trustees and other nominees and fiduciaries to forward the proxy
materials and our Annual Report to the beneficial owners of ITW common stock.
Upon request, we will reimburse them for their reasonable expenses. In addition
to mailing proxy materials, our officers, directors and employees may solicit
proxies in person, by telephone or otherwise.
3
ELECTION OF DIRECTORS
Stockholders will elect ten directors at the Annual Meeting. The
individuals listed below have been nominated by the Board of Directors as
recommended by the Corporate Governance and Nominating Committee. Each director
will serve until the May 2004 Annual Meeting, until a qualified successor
director has been elected, or until he or she resigns or is removed by the Board
of Directors. Phillip B. Rooney has opted not to stand for re-election in 2003.
We will vote your shares as you specify on the enclosed proxy card, by
telephone or by internet. If you do not specify how you want your shares voted,
we will vote them FOR the election of all the nominees listed below. If
unforeseen circumstances (such as death or disability) make it necessary for the
Board of Directors to substitute another person for any of the nominees, we will
vote your shares FOR that other person. The Board of Directors does not
anticipate that any nominee will be unable to serve. The nominees have provided
the following information about themselves:
<Table>
[W.F. ALDINGER PHOTO] WILLIAM F. ALDINGER, 55, has served as the Chairman and
Chief Executive Officer of Household International, Inc., a
consumer finance company, since 1996. He serves on the
boards of Household International, Inc., Household Finance
Company and MasterCard International. Mr. Aldinger has
served as a director of ITW since 1998.
[MICHAEL J. BIRCK MICHAEL J. BIRCK, 65, has served as the Chairman and Chief
PHOTO] Executive Officer of Tellabs, Inc. since 2002 and Chairman
from 2000 to 2002. Mr. Birck founded Tellabs and served as
President and Chief Executive Officer from 1975 to 2000.
Tellabs designs, manufactures, markets and services voice
and data equipment. He is a director of Molex, Inc. and
Tellabs, Inc. Mr. Birck has served as a director of ITW
since 1996.
</Table>
4
<Table>
[MARVIN D. BRAILSFORD MARVIN D. BRAILSFORD, 64, is a retired Vice President of
PHOTO] Kaiser-Hill Company LLC, a construction and environmental
services company. Prior to his employment with Kaiser-Hill,
he served with the United States Army for 33 years, retiring
with the rank of Lieutenant General. Mr. Brailsford has
served as a director of ITW since 1996.
[JAMES R. CANTALUPO JAMES R. CANTALUPO, 59, has been Chairman and Chief
PHOTO] Executive Officer of McDonald's Corporation, a restaurant
chain, since January 2003, previously serving as President
and Vice Chairman, Emeritus from 2002 to 2003, and President
and Vice Chairman from 1999 to 2002. He served as Vice
Chairman of McDonald's Corporation and Chairman and Chief
Executive Officer of McDonald's International from 1998 to
1999. He serves on the boards of McDonald's Corporation,
Sears Roebuck & Co. and Rohm and Haas. Mr. Cantalupo has
served as a director of ITW since 2001.
[SUSAN CROWN PHOTO] SUSAN CROWN, 44, has been Vice President of Henry Crown and
Company, a business with diversified investments, since
1984. She is a director of Baxter International Inc. and
Northern Trust Corporation and its subsidiary, The Northern
Trust Company. Ms. Crown has served as a director of ITW
since 1994.
[DON H. DAVIS PHOTO] DON H. DAVIS, JR., 63, has been Chairman of the Board of
Rockwell Automation, Inc. (formerly Rockwell International
Corporation), a manufacturer of aviation electronics and
automotive equipment, since 1998. He is a director of
Rockwell Automation, Inc., Apogent Technologies Inc. and
Ciena Corporation. Mr. Davis has served as a director of ITW
since 2000.
</Table>
5
<Table>
[W. JAMES FARRELL W. JAMES FARRELL, 60, has been Chairman of ITW since 1996,
PHOTO] Chief Executive Officer since 1995 and has 37 years of
service with ITW. He is a director of Allstate Insurance
Company, Sears Roebuck & Co., Kraft Foods, Inc. and UAL
Corp. Mr. Farrell has served as a director of ITW since
1995.
[ROBERT C. MCCORMACK ROBERT C. MCCORMACK, 63, has been a Partner of Trident
PHOTO] Capital LP, a venture capital firm, since 1993. From 1987 to
1993, Mr. McCormack served successively as Deputy Under
Secretary of Defense and Assistant Secretary of the Navy. He
is a director of DeVry, Inc., Mead Westvaco Corp. and the
Northern Trust Corporation and its subsidiary, The Northern
Trust Company. Mr. McCormack has served as a director of ITW
since 1993, and previously served as a director of ITW from
1978 through 1987.
[ROBERT S. MORRISON ROBERT S. MORRISON, 60, is a retired Vice Chairman of
PHOTO] PepsiCo, Inc., a beverage and food products company, serving
from 2001 to 2003. From 1997 to 2001, prior to its merger
with PepsiCo, he was Chairman, President and Chief Executive
Officer of The Quaker Oats Company. Mr. Morrison is a
director of 3M, The Tribune Company and Aon Corporation. Mr.
Morrison is a director nominee.
[HAROLD B. SMITH HAROLD B. SMITH, 69, is a retired officer of ITW and is a
PHOTO] director of W.W. Grainger Inc. and Northern Trust
Corporation and its subsidiary, The Northern Trust Company.
He is a trustee of The Northwestern Mutual Life Insurance
Company. Mr. Smith has served as a director of ITW since
1968.
</Table>
6
BOARD OF DIRECTORS AND ITS COMMITTEES
ITW's Board of Directors met five times during 2002. In addition to
meetings of the full Board, directors attended meetings of Board committees. The
Board of Directors has standing audit, compensation, corporate governance and
nominating, and finance committees. All of the directors attended 100% of the
meetings of the Board and its committees, except for Mr. Aldinger, who attended
67% of the meetings.
AUDIT COMMITTEE
<Table>
Meetings in 2002: 7
Members: Susan Crown (Chairman)
William F. Aldinger
Michael J. Birck
Marvin D. Brailsford
James R. Cantalupo
Don H. Davis, Jr.
Function: Responsible for the engagement of independent public
accountants, ITW's internal audit systems and other matters
significantly affecting ITW's financial status. Additional
information on the committee and its activities is set forth
in the "Report of the Audit Committee" on page 20.
</Table>
COMPENSATION COMMITTEE
<Table>
Meetings in 2002: 2
Members: William F. Aldinger (Chairman)
Michael J. Birck
James R. Cantalupo
Robert C. McCormack
Phillip B. Rooney
Function: Administers ITW's compensation plans for key employees and
approves compensation levels for executive officers.
Additional information on the committee and its activities
is set forth in the "Report of the Compensation Committee on
Executive Compensation" on page 17.
</Table>
7
CORPORATE GOVERNANCE AND NOMINATING COMMITTEE
<Table>
Meetings in 2002: 1
Members: Marvin D. Brailsford (Chairman)
James R. Cantalupo
Susan Crown
Don H. Davis, Jr.
Harold B. Smith
Function: Receives suggestions, evaluates and recommends director
candidates to the Board. Recommends and monitors corporate
governance policies and procedures. Makes recommendations as
to Board committees and Board size.
</Table>
FINANCE COMMITTEE
<Table>
Meetings in 2002: 1
Members: Robert C. McCormack (Chairman)
William F. Aldinger
Don H. Davis, Jr.
Phillip B. Rooney
Harold B. Smith
Function: Reviews, evaluates and recommends to the Board management's
proposals relating to ITW's financing, investment portfolio
and real estate investments.
</Table>
DIRECTOR COMPENSATION
ANNUAL RETAINER AND ATTENDANCE FEES
The annual retainer for outside directors is $35,000, the fee for each
Board or committee meeting attended is $1,500, and the fee for chairmen is an
additional $900 per meeting chaired. Outside directors can defer receipt of all
or a portion of their annual retainer and meeting fees until retirement or
resignation. Deferred fee amounts are credited with interest at current rates.
NON-OFFICER DIRECTORS' FEE CONVERSION PLAN
In order to link director compensation with stockholder interests,
outside directors have been given the opportunity to elect annually to receive
all or a portion of their annual retainer and meeting fees in an equivalent
value of ITW common stock pursuant to the Non-Officer Directors' Fee Conversion
Plan. The number of ITW shares to be issued to a director is determined by
dividing the dollar amount of the fee subject to the election by the closing
price of ITW common stock on the date the fee otherwise would have been paid in
cash. A director can also elect to defer receipt of the shares, in which case
the deferred shares are credited as stock units to an account in the director's
name. The account receives additional credits for cash dividends and is adjusted
for stock dividends, splits, combinations or other
8
changes in ITW common stock. The stock units in a director's account are
distributed as shares of ITW common stock upon retirement, resignation or a
corporate change (as defined in the 1996 Stock Incentive Plan), with any
fractional shares paid in cash.
RESTRICTED ITW COMMON STOCK
In 1995, the stockholders approved a plan whereby a portion of each
outside director's compensation includes the periodic grant of restricted ITW
common stock, thereby directly linking another element of director compensation
with stockholder interests. In January 2001, each outside director of ITW
received an award of 900 restricted shares. Each new outside director who joins
the Board after January 2001 will be granted an award of 300 shares for each
full year of service remaining until January 2004. Restricted shares vest
equally over the years remaining from the grant date until January 2004 and
fully vest upon death or retirement. A director cannot sell the shares until the
earliest of retirement, death or January 2004. A director who terminates service
on the Board other than for death or retirement prior to January 2004 will
forfeit any unvested restricted shares.
PHANTOM ITW STOCK
To tie a further portion of their compensation to stockholder interests,
outside directors of ITW are granted 1,000 units of phantom stock upon first
becoming a director. The value of each unit equals the market value of one share
of ITW common stock. Additional units are credited to a director's phantom stock
account in an amount equivalent to cash dividends paid on ITW stock. Accounts
are adjusted for stock dividends, stock splits, combinations or similar changes.
A director is eligible for a cash distribution from his or her account at
retirement or upon approved resignation. When phantom stock is granted,
directors elect to receive the distribution in either a lump sum or in up to ten
annual installments, an election that directors may change at any time until two
years preceding the distribution. Directors receive the value of their phantom
stock account immediately upon a change of control.
OWNERSHIP OF ITW STOCK
DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS
The following table shows how much ITW common stock the directors,
nominees, the named executive officers, and all directors, nominees and
executive officers as a group beneficially owned as of December 31, 2002. The
named executive officers are the Chief Executive Officer and the four next most
highly compensated executive officers based on compensation earned during 2002.
Beneficial ownership is a technical term broadly defined by the SEC to
mean more than ownership in the usual sense. In general, beneficial ownership
includes any shares a director or executive officer can vote or transfer and
stock options that are exercisable currently or that become exercisable within
60 days. Except as otherwise noted, the stockholders named in this table have
sole voting and investment power for all shares shown as beneficially owned by
them.
9
The number of shares beneficially owned by each incumbent outside
director includes 900 shares (600 shares in the case of Mr. Cantalupo) of ITW
common stock that were granted under the Directors' Restricted Stock Plan and
that will fully vest in 2004. The number of the director's phantom stock units
disclosed in the table represents an equivalent number of shares of ITW common
stock. Phantom stock units are not transferable and have no voting rights. The
units are not included in the "percent of class" calculation.
<Table>
<Caption>
SHARES OF COMMON STOCK PHANTOM PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED STOCK UNITS OF CLASS
- ------------------------ ---------------------- ----------- --------
Directors and Nominees (other than Executive
Officers)
William F. Aldinger............................. 6,767(1) 1,050 *
Michael J. Birck................................ 13,703 2,143 *
Marvin D. Brailsford............................ 5,111 2,138 *
James R. Cantalupo.............................. 2,851 1,018 *
Susan Crown..................................... 11,900(2) 2,161 *
H. Richard Crowther............................. 333,408(3) 1,858 *
Don H. Davis, Jr. .............................. 4,372 1,034 *
Robert C. McCormack............................. 14,194,944(4) 2,161 4.6%
Robert S. Morrison.............................. 0 0 *
Phillip B. Rooney............................... 58,630(5) 2,161 *
Harold B. Smith................................. 37,882,867(6) -- 12.4%
Executive Officers
W. James Farrell................................ 1,070,278(7) -- *
James M. Ringler................................ 597,158(8) -- *
Frank S. Ptak................................... 540,483(9) -- *
David B. Speer.................................. 161,062(10) -- *
Russell M. Flaum................................ 208,982(11) -- *
Directors, Nominees and Executive Officers as a
Group (25 Persons).............................. 41,882,223(12) 15,724 13.7%
</Table>
- ------------
* Less than 1%
(1) Includes 100 shares owned by Mr. Aldinger's spouse, as to which he
disclaims beneficial ownership.
(2) Includes (a) 2,000 shares owned by Ms. Crown's spouse as to which she
disclaims beneficial ownership; and (b) 2,000 shares held in trusts of
which Ms. Crown's children are beneficiaries as to which she disclaims
beneficial ownership.
(3) Includes (a) 259,941 shares held in a revocable living trust as to which
Mr. Crowther shares voting and investment power; (b) 35,360 shares owned by
his spouse as to which Mr. Crowther disclaims beneficial ownership; and (c)
8,000 shares owned by a charitable foundation of which Mr. Crowther is an
officer.
(4) Includes (a) 400 shares owned in a trust as to which Mr. McCormack shares
voting and investment power with The Northern Trust Company; and (b)
14,186,380 shares owned in twelve trusts as to which Messrs. McCormack, H.
B. Smith and The Northern Trust Company are trustees and share voting and
investment power.
(5) Includes 2,021 shares owned by Mr. Rooney's spouse, as to which he
disclaims beneficial ownership.
(6) Includes (a) 20,978,764 shares owned in twelve trusts as to which Mr. Smith
shares voting and investment power with The Northern Trust Company and
others; (b) 2,128,080 shares owned in ten trusts as to which he shares
voting and investment power; (c) 14,186,380 shares owned in twelve trusts
as to which Messrs. McCormack, H. B. Smith and The Northern Trust Company
are trustees and share voting and investment power; and (d) 51,017 shares
owned by a charitable foundation of which Mr. Smith is a director. Mr.
Smith's address is c/o Secretary, Illinois Tool Works Inc., 3600 West Lake
Avenue, Glenview, Illinois 60025.
10
(7) Includes (a) 164 shares owned by Mr. Farrell's son as to which he disclaims
beneficial ownership; (b)16,462 shares owned in a partnership as to which
Mr. Farrell shares voting and investment power; (c) 17,890 shares owned in
a revocable trust as to which Mr. Farrell has sole voting and investment
power; (d) 3,301 shares owned by a charitable foundation of which Mr.
Farrell is an officer; (e) 6,855 shares allocated to Mr. Farrell's account
in the ITW Savings and Investment Plan; and (f) 1,025,606 shares covered by
options exercisable within 60 days.
(8) Includes (a) 14,051 shares allocated to Mr. Ringler's account in the ITW
Savings and Investment Plan; and (b) 494,138 shares covered by options
exercisable within 60 days.
(9) Includes 470,000 shares covered by options exercisable by Mr. Ptak within
60 days.
(10) Includes (a) 847 shares allocated to Mr. Speer's account in the ITW Savings
and Investment Plan; and (b) 155,000 shares covered by options exercisable
within 60 days.
(11) Includes (a) 1,761 shares allocated to Mr. Flaum's account in the ITW
Savings and Investment Plan; and (b) 182,500 shares covered by options
exercisable within 60 days.
(12) Includes 3,239,544 shares covered by options exercisable within 60 days.
OTHER PRINCIPAL STOCKHOLDERS
This table shows, as of December 31, 2002, the only stockholder other
than a director that we know to be a beneficial owner of more than 5% of ITW
common stock. We maintain a commercial banking relationship with The Northern
Trust Company and its wholly owned subsidiaries. The Northern Trust Company is a
wholly owned subsidiary of Northern Trust Corporation. Susan Crown, Robert C.
McCormack and Harold B. Smith, directors of ITW, are also directors of Northern
Trust Corporation and The Northern Trust Company. The commercial banking
relationship may involve, but is not strictly limited to the following services:
creating and maintaining deposit accounts, credit services, investment banking
services, payment and collection services, trade services, credit enhancement or
payment guaranty, acting as agent or fiduciary, consulting services, risk
management services, and broker dealer services. In addition, The Northern Trust
Company serves as the trustee under ITW's principal pension plans. The banking
and trustee relationships with The Northern Trust Company are conducted in the
ordinary course of business on an arms-length basis. Banking and trustee fees
paid to The Northern Trust Company were approximately $1.73 million in 2002.
<Table>
<Caption>
NAME AND ADDRESS AMOUNT OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
The Northern Trust Company.................................. 43,437,846(1) 14.1%
50 South LaSalle Street
Chicago, Illinois 60675
</Table>
- ------------
(1) The Northern Trust Company and its affiliates act as sole fiduciary or
co-fiduciary of trusts and other fiduciary accounts that own an aggregate of
43,437,846 shares. They have sole voting power with respect to 5,419,105
shares and share voting power with respect to 36,739,955 shares. They have
sole investment power with respect to 3,675,792 shares and share investment
power with respect to 37,074,131 shares. In addition, The Northern Trust
Company holds in other accounts, but does not beneficially own, 17,861,538
shares, resulting in aggregate holdings by The Northern Trust Company of
61,299,384 shares, or 20.01%.
11
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires that ITW's
executive officers, directors and greater than 10% stockholders file reports of
ownership and changes of ownership of ITW common stock with the SEC and the New
York Stock Exchange. Based on a review of copies of these reports provided to us
during fiscal 2002 and written represent-ations from executive officers and
directors, we believe that all filing requirements were met during 2002.
EXECUTIVE COMPENSATION
This table summarizes the compensation of the Chief Executive Officer and
the other four most highly compensated executive officers of ITW.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
------------
AWARDS
------
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND ------------------------ UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY(1) BONUS(1)(2) OPTIONS (3)(4)
------------------ ---- ---------- ----------- ------------ ------------
W. James Farrell....................... 2002 $1,047,010 $1,869,000 -- $100,199(5)
Chairman and Chief Executive Officer 2001 969,240 1,071,630 400,000 111,994
2000 899,990 1,309,500 450,000 65,280
James M. Ringler....................... 2002 $ 750,022 $1,297,500 -- $107,382
Vice Chairman 2001 750,022 826,875 75,000 113,097
2000 750,022 1,091,250 75,000 26,339
Frank S. Ptak.......................... 2002 $ 488,612 $ 872,200 -- $ 50,288
Vice Chairman 2001 452,704 500,535 200,000 54,358
2000 420,004 611,100 230,000 30,738
David B. Speer......................... 2002 $ 320,073 $ 577,800 -- $ 32,449
Executive Vice President 2001 292,768 364,568 60,000 32,579
2000 270,770 398,063 75,000 16,180
Russell M. Flaum....................... 2002 $ 305,573 $ 486,700 -- $ 27,874
Executive Vice President 2001 282,953 278,490 60,000 29,754
2000 262,159 379,050 75,000 13,616
</Table>
- ------------
(1) Actual salary or bonus earned. Includes amounts deferred by the executive
under the Executive Contributory Retirement Income Plan or the Savings and
Investment Plan.
(2) Amounts awarded under the Executive Incentive Plan are based on the
executive's base salary as of December 31 for that year and paid in the
following year.
(3) Includes company matching contributions in 2002 to the Executive
Contributory Retirement Income Plan or the Savings and Investment Plan as
follows: Mr. Farrell, $74,153; Mr. Ringler, $55,192; Mr. Ptak, $34,620; Mr.
Speer, $23,963; and Mr. Flaum, $20,443.
(4) Includes interest credited in 2002 on deferred compensation under the
Executive Contributory Retirement Income Plan in excess of 120% of the
applicable federal long-term rate as follows: Mr. Farrell, $23,049; Mr.
Ringler $52,190; Mr. Ptak, $15,668; Mr. Speer, $8,486; and Mr. Flaum,
$7,431.
12
(5) Includes $2,997 representing imputed income on Mr. Farrell's outstanding
home loan made by ITW in 1995. The maximum amount of the loan outstanding
during 2002 was $95,000, which was paid in full in December 2002. The
imputed rate of interest on the loan was 7.34% per annum and the loan was
repayable in annual installments through the year 2003.
On January 2, 2003, the Compensation Committee granted restricted stock
to certain key domestic employees. The shares will vest in three equal
installments on December 16 in the years 2003, 2004 and 2005. An employee's
shares will vest only if he or she is actively employed with ITW on the vesting
date, and unvested shares will be forfeited upon retirement, death or
disability. Each employee may exercise full voting rights as to the restricted
stock and is entitled to receive all dividends and other distributions paid on
the restricted stock from the date of the grant until the stock is forfeited or
sold. The Chief Executive Officer and the other four most highly compensated
executive officers of ITW each received the following restricted shares: Mr.
Farrell, 140,000 shares having a value of $9,287,600 on the grant date; Mr.
Ringler, 25,000 shares having a value of $1,658,500 on the grant date; Mr. Ptak,
70,000 shares having a value of $4,643,800 on the grant date; Mr. Speer, 20,000
shares having a value of $1,326,800 on the grant date; and Mr. Flaum, 20,000
shares having a value of $1,326,800 on the grant date. These shares are not
included in the share ownership table on page 10.
In the event of a corporate change (as defined in the 1996 Stock
Incentive Plan), each executive officer's unvested restricted stock and stock
options previously granted under the 1996 Stock Incentive Plan fully vest. In
addition, executives receive a cash payment under the Executive Incentive Plan
immediately upon a corporate change. The amount paid under the Executive
Incentive Plan equals a portion of the maximum awards payable under the Plan for
that year based on the number of days in the year that have elapsed as of the
date of corporate change. Executives may also request a distribution of 90% of
their Executive Contributory Retirement Income Plan account within 18 months of
a corporate change, forfeiting the remaining 10% of the account.
13
OPTION EXERCISES IN 2002 AND
YEAR-END 2002 OPTION VALUES
This table provides information regarding the exercise of options during
2002 and options outstanding at the end of the year for the Chief Executive
Officer and the other four most highly compensated executive officers of ITW.
The "value realized" is calculated using the difference between the option
exercise price and the price of ITW common stock on the date of exercise
multiplied by the number of shares acquired upon exercise. The "value of
unexercised in-the-money options at fiscal year-end 2002" is calculated using
the difference between the option exercise price and $64.86 (the closing price
of ITW stock on December 31, 2002, the last trading day of the year) multiplied
by the number of shares underlying the option. An option is in-the-money if the
market value of ITW common stock is greater than the option's exercise price.
<Table>
<Caption>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES YEAR-END 2002 FISCAL YEAR-END 2002
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
W. James Farrell..... 230,000 $10,995,290 1,025,606 575,000 $14,909,719 $2,772,625
James M. Ringler..... -- -- 494,138 93,750 14,004,270 483,750
Frank S. Ptak........ -- -- 470,000 290,000 6,908,825 1,408,775
David B. Speer....... 7,000 297,826 155,000 90,000 1,561,888 449,588
Russell M. Flaum..... 12,500 660,156 182,500 90,000 2,726,006 449,588
</Table>
14
RETIREMENT PLANS
ITW's principal defined benefit pension plan covers approximately 23,000
domestic business unit employees, including executive officers. Upon retirement,
participants receive benefits based on years of plan participation and average
compensation for the five highest years out of the last ten years of employment.
Compensation includes salary and bonus shown in the Summary Compensation Table.
As of January 1, 2001, the plan was amended to provide a defined lump-sum amount
at retirement that is convertible to an annuity. Persons who were age 50 or
older on January 1, 2001, and had at least five years of service, will receive a
benefit that is no less valuable than that provided under the prior plan
formula, including early retirement subsidy. Because the Internal Revenue Code
imposes limits on those plan benefits, the Board has established a supplemental
plan that provides for payments to certain executives equal to benefits that
would be paid but for these limitations. The table below shows the estimated
annual benefits to be paid under the pension plan and supplemental plan to an
individual who was 56 on December 31, 2002 (the median age of all of the
executive officers) and who continues to participate in the plans through the
plans' normal retirement age of 65, assuming the plan provisions in effect on
December 31, 2002 continue until that date. For years of service prior to 2001,
benefits have been computed based on the pension plan formula then in effect and
the transition provisions in the amended plan.
<Table>
<Caption>
ESTIMATED ANNUAL NORMAL RETIREMENT BENEFITS(1)
------------------------------------------------------------------------------------------
YEARS OF SERVICE AT NORMAL RETIREMENT(2)
COMPENSATION 10 15 20 25 30 35 40
- ------------ -------- -------- ---------- ---------- ---------- ---------- ----------
$ 600,000........... $100,824 $119,352 $ 177,309 $ 221,636 $ 265,964 $ 286,798 $ 307,633
850,000........... 143,908 170,515 253,702 317,128 380,554 410,069 439,585
1,100,000........... 186,993 221,678 330,096 412,620 495,143 533,340 571,537
1,350,000........... 230,078 272,841 406,489 508,111 609,733 656,611 703,489
1,600,000........... 273,163 324,003 482,882 603,603 724,323 779,882 835,441
2,000,000........... 342,099 405,864 605,111 756,389 907,667 977,116 1,046,564
2,500,000........... 428,269 508,189 757,898 947,372 1,136,847 1,223,657 1,310,468
3,000,000........... 514,439 610,515 910,684 1,138,356 1,366,027 1,470,199 1,574,372
3,500,000........... 600,608 712,840 1,063,471 1,329,339 1,595,207 1,716,741 1,838,276
4,000,000........... 686,778 815,166 1,216,258 1,520,322 1,824,386 1,963,283 2,102,180
</Table>
- ------------
(1) Calculations of benefits in terms of 2002 dollars are based on 4% annual pay
increases before and after 2001, 4% annual increases in Social Security
Covered Compensation from 2002 and a 30-year Treasury rate average (used to
convert defined lump sum benefits into an annuity) of 4.92% (monthly average
for December 2002).
(2) Actual years of participation as of December 31, 2002 for the Chief
Executive Officer and the other four most highly compensated executive
officers were as follows: Mr. Farrell, 37.5 years; Mr. Ringler, 13.0 years
(10.0 of which were granted as consideration for his employment by ITW); Mr.
Ptak, 27.1 years; Mr. Speer, 24.5 years; and Mr. Flaum, 16.0 years. Mr.
Ringler's benefit for 9.9 years of participation in the Premark pension
plans (in which the formula produced a lesser benefit than the ITW plans
had) was added to his benefits under the ITW plans as of December 31, 2000
and will be adjusted in the future for increases in average pay since 2000.
In addition, under ITW's 1982 Executive Contributory Retirement Income
Plan, Mr. Farrell is eligible to receive an annual benefit of $113,529 for 15
years beginning at the normal retirement age of 65.
15
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2002 about
ITW's existing equity compensation plans.
<Table>
<Caption>
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
TO BE ISSUED UPON EXERCISE PRICE OF EQUITY COMPENSATION
EXERCISE OF OUTSTANDING OUTSTANDING OPTIONS, PLANS (EXCLUDING
OPTIONS, WARRANTS WARRANTS AND SECURITIES REFLECTED
PLAN CATEGORY AND RIGHTS(A) RIGHTS(B) IN COLUMN(A))(C)
- ------------- ----------------------- --------------------- -----------------------
Equity compensation plans
approved by security
holders....................... 10,778,356 $55.17 5,361,314(2)
Equity compensation plans not
approved by security
holders....................... 16,470(1) -- 2,841,922(3)
---------- ------ ---------
Total........................... 10,794,826 $55.17 8,203,236
========== ====== =========
</Table>
- ------------
(1) Represents shares credited to directors' accounts for annual retainer and
meeting fees deferred pursuant to the Non-Officer Directors' Fee Conversion
Plan. A description of the Plan can be found on page 8. Not included in this
figure are 1,292,671 shares subject to outstanding options under the Premark
International, Inc. 1994 Incentive Plan and 35,892 shares subject to
outstanding options under the Premark International, Inc. Director Stock
Plan having an aggregate weighted-average exercise price of $33.05.
(2) These shares remain available for issuance under the 1996 Stock Incentive
Plan. This amount excludes 7,000 shares of unvested restricted stock that
were granted pursuant to the 1996 Stock Incentive Plan and 4,800 shares of
unvested restricted stock granted pursuant to the Directors' Restricted
Stock Plan. Effective January 2, 2003, this amount was reduced by 792,158
shares representing the 2003 grant of restricted shares under the 1996 Stock
Incentive Plan.
(3) This amount includes 2,499,279 shares available for issuance under the
Premark International, Inc. 1994 Stock Incentive Plan, 309,113 shares
available for issuance under the Premark International, Inc. Director Stock
Plan and 33,530 shares available for issuance under the Non-Officer
Directors' Fee Conversion Plan.
PREMARK INTERNATIONAL, INC. DIRECTOR STOCK PLAN AND 1994 INCENTIVE PLAN
Pursuant to the terms of our merger with Premark International, Inc. in
1999, we assumed Premark's Director Stock Plan and 1994 Incentive Plan. The
Premark International, Inc. Plans were approved by Premark's stockholders. While
ITW has the ability to do so, it has not granted, and does not intend to grant,
additional awards under these plans. Shares remaining available for issuance
pursuant to these plans are included in the table above under the caption
"Equity compensation plans not approved by security holders."
The Director Plan permitted a Premark director to elect annually to
receive his or her retainer fees in the form of an option rather than in cash.
Under the plan, these options had a ten-year term and vested upon consummation
of our acquisition of Premark. The options were granted at a discount to the
fair market value of Premark stock on the grant date, with the amount of the
discount based on the percentage of fees deferred.
The 1994 Incentive Plan provides for the issuance of stock options, stock
appreciation rights, restricted stock and performance awards. Under the plan,
the exercise price of options and the grant price of stock appreciation rights
granted under the plan had to equal at least
16
the fair market value of Premark stock on the grant date. Options and stock
appreciation rights expire ten years after the grant date. The committee
administering the plan determines the terms of performance awards. All awards
outstanding under the Incentive Plan vested upon consummation of our merger with
Premark.
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
During 2002, the Compensation Committee of the Board of Directors was
composed of five independent directors. The Committee administers ITW's
compensation plans for key employees, including the Executive Incentive Plan and
the 1996 Stock Incentive Plan. The Committee also approves compensation levels
for executive officers. In making its decisions, the Committee considers
management's contribution to ITW's long-term growth. One long-term performance
factor that the Committee considers is ITW's total stockholder return, which is
measured by capital appreciation and reinvested dividends. For the five and ten
year periods ending December 31, 2002, the compound annual stockholder rate of
return was 3% and 15%, respectively. For the same periods, the rate of return on
the Standard & Poor's 500 Index was -1% and 9%, respectively and the rate of
return on the Standard & Poor's Industrial Machinery Index was 2% and 9%,
respectively.
Compensation for executive officers is composed of base salary, a cash
bonus based on performance and stock incentives. The Committee believes that the
stock incentive and cash bonus components align the executive officers'
performance with stockholder interests. The Committee's philosophy is to provide
executives with total compensation above the median for executives of comparable
industrial companies.
BASE SALARY. In establishing base salaries for the Chief Executive
Officer and other executive officers, the Committee considers compensation
information of a peer group of comparable industrial companies. This peer group
includes some of the same companies as the S&P Industrial Machinery and the S&P
Industrial Conglomerates Indices used for the Company Performance graphs on
pages 19 and 20. In determining base salary, the Committee considers the
executive officer's past performance and potential future performance as well as
ITW's net income and the operating income of the business units that the officer
oversees. The Committee's objective is to target base salaries of the Chief
Executive Officer and the other executive officers at the 50th percentile of the
peer group.
BONUS. Executive officers receive annual cash bonuses under the Executive
Incentive Plan based on predetermined financial and non-financial objectives.
Executive officers may elect to take up to half of their annual cash bonus in
ITW common stock. For 2002 and all subsequent years, the maximum bonus
opportunities were increased by the Committee from 50%-100% to 70%-200%. These
adjustments reflect a more competitive position with the peer group of
comparable industrial companies and increase the percentage of executive total
compensation that is at risk. The Chief Executive Officer, Vice Chairmen and
certain executive officers can earn half of the maximum bonus opportunity if
ITW's net income is at least 120% of targeted plan. The other half of the
maximum bonus opportunity relates to the individual's performance measured
against predetermined management goals, for example,
17
succession planning, cost reduction targets, market penetration, acquisition
planning and a variety of other objectives specifically related to the
individual unit's performance. For the Executive Vice Presidents, one-eighth of
the maximum bonus opportunity is based on ITW's net income, three-eighths is
based on the operating income of the operating units for which the individual is
responsible, and the remaining one-half is based on the individual's performance
measured against evaluation factors similar to the Chief Executive Officer's.
For 2002, the average bonus received by executive officers was approximately 86%
of the maximum award.
STOCK INCENTIVES. The Chief Executive Officer, executive officers and
certain other key employees participate in the 1996 Stock Incentive Plan,
principally through the grant of stock options and restricted stock. The
magnitude of a stock incentive award is based on the executive officer's
performance and the officer's ability to influence ITW's long-term growth and
profitability. Options are priced at fair market value on the date of grant.
The Committee grants stock awards under the 1996 Stock Incentive Plan and
believes it is an effective incentive for executive officers to create value for
stockholders. The Committee did not grant stock option awards to any domestic
employees in 2002. On January 2, 2003, the Committee granted restricted stock
awards to the Chief Executive Officer, executive officers and certain other key
domestic employees. A description of the amounts and terms of the grants awarded
to the Chief Executive Officer and the four next most highly compensated
executive officers can be found on page 13.
Internal Revenue Code Section 162(m) limits the deductibility of
compensation in excess of $1,000,000 paid to each of the Chief Executive Officer
and the other four most highly compensated executive officers. Certain
performance based and deferred compensation is not included in compensation
counted for purposes of the limit. The Committee has attempted to structure
ITW's compensation programs to preserve deductibility and will continue to
assess the impact of Section 162(m) on its compensation practices.
William F. Aldinger, Chairman
Michael J. Birck
James R. Cantalupo
Robert C. McCormack
Phillip B. Rooney
18
COMPANY PERFORMANCE
Shown below are two graphs covering a five year comparison and a ten year
comparison of cumulative total returns for ITW, the Standard & Poor's (S&P) 500
Composite Index, the S&P Industrial Conglomerates Index and the S&P Industrial
Machinery Index. In 2002, the S&P replaced the S&P Diversified Manufacturing
Index with the S&P Industrial Conglomerates and S&P Industrial Machinery
Indices. Both graphs assume an investment of $100, on December 31, 1997 for the
five year period and December 31, 1992 for the ten year period, including
reinvestment of dividends. Total returns are based on market capitalization.
[PERFORMANCE GRAPH]
<Table>
<Caption>
12/97 12/98 12/99 12/00 12/01 12/02
----------- ----------- ----------- ----------- ----------- -----------
- ------------------------------------------------------------------------------------------------------------
Illinois Tool Works Inc. $100.00 $ 97.33 $114.46 $102.26 $117.91 $114.48
S&P 500 $100.00 $128.58 $155.64 $141.46 $124.65 $ 97.10
S&P Industrial
Conglomerates $100.00 $137.24 $197.79 $198.97 $178.72 $106.30
S&P Industrial Machinery $100.00 $ 95.05 $108.43 $103.22 $109.26 $108.31
- ------------------------------------------------------------------------------------------------------------
</Table>
19
[PERFORMANCE GRAPH]
<Table>
<Caption>
12/92 12/93 12/94 12/95 12/96 12/97 12/98 12/99 12/00
------ ------ ------ ------ ------ ------ ------ ------ ------
---------------------------------------------------------------------------------------------------------
Illinois Tool Works Inc. $100.00 $121.19 $138.22 $188.64 $257.96 $391.90 $381.42 $448.55 $400.74
S&P 500 $100.00 $110.08 $111.53 $153.45 $188.68 $251.63 $323.53 $391.62 $355.96
S&P Industrial
Conglomerates $100.00 $100.00 $100.00 $138.66 $192.96 $277.06 $380.24 $548.00 $551.28
S&P Industrial Machinery $100.00 $100.00 $100.00 $130.59 $163.59 $223.03 $211.99 $241.84 $230.22
---------------------------------------------------------------------------------------------------------
<Caption>
12/01 12/02
------ ------
----------------------------------------------------------
Illinois Tool Works Inc. $462.10 $448.64
S&P 500 $313.65 $244.34
S&P Industrial
Conglomerates $495.17 $294.53
S&P Industrial Machinery $243.68 $241.57
---------------------------------------------------------------
</Table>
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the ITW Board of Directors is composed of six
independent directors, as defined in the listing standards of the New York Stock
Exchange. The Committee is responsible for the oversight of ITW's financial
statements, including reviewing: (1) ITW's accounting policies and procedures;
(2) the adequacy and effectiveness of ITW's financial and accounting controls;
(3) the performance of ITW's independent public accountants; (4) major changes
to ITW's auditing and accounting principles and practices; (5) the internal
audit plan; (6) significant findings from completed internal audits; (7)
consolidated financial statements; and (8) the effectiveness of the ethical and
legal compliance system. The Committee also is responsible for providing
oversight to ITW's financial reporting process through periodic meetings with
ITW's independent public accountants, internal auditors and management to review
accounting, auditing, internal controls and financial reporting matters. ITW's
management is responsible for the preparation and integrity of the financial
reporting information and related systems of internal controls. The Committee,
in carrying out its role, relies on ITW's senior management, including senior
financial management, and its independent public accountants.
We have reviewed and discussed with senior management the audited
financial statements included in the 2002 Annual Report to Stockholders.
Management has confirmed to the Committee that the financial statements have
been prepared in conformity with generally accepted accounting principles.
20
We have reviewed and discussed with Deloitte & Touche LLP, ITW's
independent public accountants, the matters required to be discussed by the
Statement on Auditing Standards No. 61 (Communications with Audit Committee),
under which Deloitte & Touche must provide us with additional information
regarding the scope and results of its audit of ITW's financial statements. This
information includes (1) Deloitte & Touche's responsibility under generally
accepted auditing standards, (2) significant accounting policies, (3) management
judgments and estimates, (4) any significant audit adjustments, (5) any
disagreements with management, and (6) any difficulties encountered in
performing the audit.
We have received from Deloitte & Touche a letter providing the
disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees) with respect to any
relationships between Deloitte & Touche and ITW that in its professional
judgment may reasonably be thought to bear on independence. Deloitte & Touche
has discussed its independence with us, and has confirmed in the letter that, in
its professional judgment, it is independent of ITW within the meaning of the
federal securities laws.
Based on the review and discussions described above, we have recommended
to the Board of Directors that the audited financial statements included in
ITW's 2002 Annual Report to Stockholders be included in ITW's Annual Report on
Form 10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission.
Susan Crown, Chairman
William F. Aldinger
Michael J. Birck
Marvin D. Brailsford
James R. Cantalupo
Don H. Davis, Jr.
INDEPENDENT PUBLIC ACCOUNTANTS
On May 10, 2002, the Board of Directors, upon recommendation of the Audit
Committee, decided to dismiss ITW's independent auditors, Arthur Andersen LLP,
and to engage the services of Deloitte & Touche LLP as its new independent
auditors. The audit reports of Arthur Andersen on ITW's consolidated financial
statements as of and for the fiscal years ended December 31, 2001 and 2000 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During fiscal years ended December 31, 2001 and 2000, and the subsequent interim
period through May 10, 2002, there were no disagreements between ITW and Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to Arthur Andersen's satisfaction, would have caused Arthur Andersen to
make reference to the subject matter of the disagreement in connection with its
reports. None of the reportable events described under Item 304 (a)(1)(v) of
Regulation S-K promulgated under the
21
Securities Exchange Act of 1934 occurred within the fiscal years ended December
31, 2001 and 2000 or within the interim period through May 10, 2002.
During 2002, the Board authorized Deloitte & Touche to (1) examine and
report on ITW's financial statements, (2) review ITW's unaudited quarterly
financial statements, and (3) review financial reports required by the SEC and
related matters. The Committee plans to engage Deloitte & Touche LLP to act in
similar capacities in 2003. Representatives of Deloitte & Touche will be present
at the Annual Meeting and will have the opportunity to make a statement and
respond to questions.
AUDIT FEES
Deloitte & Touche will bill us approximately $3,390,000 for professional
services in connection with the audit of the annual financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2002,
and for the reviews of the quarterly financial statements included in our
Quarterly Reports on Form 10-Q for the quarters ended June 30 and September 30,
2002.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
In fiscal year 2002, Deloitte & Touche did not perform any professional
services in connection with operating or supervising the operation of our
information system or managing our local area network. In addition, there were
no fees for professional services in connection with designing or implementing a
hardware or software system that aggregates source data underlying the financial
statements or generates information that is significant to our financial
statements taken as a whole.
ALL OTHER FEES
For fiscal year 2002, the aggregate fees for all other services of
Deloitte & Touche were approximately $6,377,000, including audit-related fees of
$615,000, tax fees of $5,604,000 and other fees of $158,000. Audit-related fees
include disposition audit fees, acquisition due diligence and technical
accounting assistance. Tax fees paid to other public accounting and consulting
firms were approximately $5,000,000.
The Audit Committee has reviewed the fees paid to Deloitte & Touche and
determined that the non-audit services of Deloitte & Touche during fiscal year
2002 are compatible with maintaining Deloitte & Touche's independence.
AMENDMENT OF THE 1996 STOCK INCENTIVE PLAN
The Board of Directors has approved, subject to stockholder approval,
amendments to the 1996 Stock Incentive Plan to increase the number of shares of
ITW common stock authorized for issuance under the 1996 Stock Incentive Plan and
to merge the Premark International, Inc. 1994 Incentive Plan into the 1996 Stock
Incentive Plan. As a result of these amendments, the number of shares authorized
under the 1996 Stock Incentive Plan will be increased from 20,000,000 shares to
30,930,193 shares, and the number of shares available for future grants and
awards will be increased from 4,571,950 shares to 10,071,229 shares.
22
The Board believes that without stockholder approval of the proposed amendments
there will be insufficient shares authorized for effective future use of the
1996 Stock Incentive Plan.
The purpose of the 1996 Stock Incentive Plan is to encourage management
and other key employees to have a greater financial investment in ITW through
ownership of our common stock. The Board believes that the 1996 Stock Incentive
Plan is an important tool in ensuring the highest level of performance from
ITW's key employees by providing them with an opportunity to acquire an
ownership interest.
DESCRIPTION OF THE 1996 STOCK INCENTIVE PLAN
General. The 1996 Stock Incentive Plan authorizes the grant of incentives
to key employees in the form of stock options, stock awards, performance units
and stock appreciation rights. The Compensation Committee administers the 1996
Stock Incentive Plan, approves key employees for participation, and determines
the timing and amount of awards. The number of key employees who will
participate in the future, and the amounts of any awards, cannot now be
determined. In 2002, 146 key international employees received stock option
grants under the 1996 Stock Incentive Plan, and on January 2, 2003, 362 key
domestic employees received grants of restricted shares under the 1996 Stock
Incentive Plan.
Stock Options. Options granted under the 1996 Stock Incentive Plan, which
may include incentive stock options satisfying Internal Revenue Code
requirements, must have an exercise price of not less than the fair market value
of ITW common stock (the average of the high and low trading prices) on the date
of grant and typically expire ten years from grant. On March 11, 2003, the fair
market value of ITW common stock was $55.97 per share. In addition, an optionee
may be required to complete a specified period of employment following the grant
date before the option may be exercised. Options for more than 500,000 shares of
common stock may not be granted in any calendar year to any employee. The
exercise price of an option may be paid in cash, through the surrender or
withholding of shares of common stock having a fair market value equal to the
exercise price, or through a combination of the foregoing. If the exercise price
is paid by the surrender of previously acquired shares of ITW common stock, the
optionee will automatically be granted a restorative option to purchase
additional shares of common stock equal to the number of shares surrendered. The
exercise price of the restorative option will be 100% of the fair market value
of ITW common stock on the date of grant of the restorative option and all other
terms will be identical to those of the exercised option.
Stock Awards. Awards of ITW common stock may be made on terms and
conditions fixed by the Committee, including restrictions as to vesting or
transferability of the award. If the Committee intends a restricted share award
to qualify as performance-based compensation under Internal Revenue Code Section
162(m), such restricted shares will vest on the attainment of performance goals
as described under "Performance Units" below. Stock awards for more than 500,000
shares of common stock may not be granted in any calendar year to any employee.
Performance Units. The Committee may grant performance units that are
earned to the extent performance goals are attained. The Committee will
establish in writing the target cash value or number of shares of ITW common
stock for each performance unit grant, the
23
duration of the performance period and the specific performance goals. If the
Committee intends for performance units to qualify as performance-based
compensation under Code Section 162(m), the key employee's performance goals are
based on objective criteria such as increases in earnings per share, revenues,
cash flow or stock price. Following the performance period, the Committee will
determine the extent to which performance goals have been met and compute the
payment to be received by each key employee. For performance unit awards
intended to qualify as performance-based compensation under Code Section 162(m),
the maximum amount payable in cash to an employee in any calendar year is
$5,000,000, and the maximum number of shares of common stock that may be issued
to an employee in any calendar year is 500,000.
Stock Appreciation Rights. Stock appreciation rights may be granted in
connection with an option or may be granted independently. Stock appreciation
rights for more than 500,000 shares of common stock may not be granted in any
calendar year to any employee. The holder of a stock appreciation right receives
upon exercise or, if applicable, on the date the related option is surrendered,
cash or shares of common stock equal in value to the lesser of the fair market
value of the common stock on the grant date or the excess of the fair market
value on the exercise date over the fair market value on the grant date,
multiplied by the number of shares covered by the right.
Termination of Employment. With certain exceptions, upon termination of
employment due to retirement, disability or death, all unvested options, stock
appreciation rights and stock awards will fully vest, and a prorated portion of
any performance unit awards will be distributed. If employment terminates other
than by reason of retirement, disability or death, any unvested options, stock
appreciation rights and, with certain exceptions stock awards as well as any
unpaid performance units will be forfeited. Upon retirement or disability, any
options and stock appreciation rights remain exercisable for the shorter of five
years or the remaining term of the options or rights. In the event of death
while employed or following retirement or disability, any options or stock
appreciation rights remain exercisable for the shorter of two years or the
remaining term of the options or rights. For other terminations of employment,
vested options and rights remain exercisable for the shorter of three months (or
two years after death during such three-month period) or the remaining term of
the options or rights.
Corporate Change. In the event of a "corporate change", all awards will
immediately vest, and a prorated portion of the maximum value of all performance
units will be immediately paid out in cash. A "corporate change" may be (i) a
dissolution, (ii) a merger, consolidation or reorganization after which the
stockholders immediately prior to the effective date thereof hold less than 70%
of the outstanding common stock of the surviving entity, (iii) a sale of all or
substantially all of ITW's assets, (iv) certain persons or entities acquire more
than 30% of the outstanding common stock, or (v) there is more than 50% turnover
in the membership of the Board of Directors under circumstances not approved by
the then current Board.
Plan Benefits. In 2002, no options or other stock incentives were granted
under the 1996 Stock Incentive Plan to current executive officers and 355,200
options were granted to key international employees at an exercise price of
$65.685 per share. On January 2, 2003,
24
792,158 restricted shares were granted to 362 key domestic employees; this
amount includes 275,000 restricted shares granted to the Chief Executive Officer
and the other four most highly compensated executive officers of ITW as
described on page 13.
As of March 11, 2003, information relating to options granted under the
1996 Stock Incentive Plan since its inception in 1979 (adjusted for all stock
splits) follows:
<Table>
<Caption>
NAME NUMBER OF SHARES
- ---- ----------------
W. James Farrell, Chairman and Chief Executive Officer...... 2,221,794
James M. Ringler, Vice Chairman............................. 150,000
Frank S. Ptak, Vice Chairman................................ 942,000
David B. Speer, Executive Vice President.................... 353,000
Russell M. Flaum, Executive Vice President.................. 343,000
All current executive officers.............................. 5,761,274
All plan participants (other than current executive
officers)................................................. 6,345,645
</Table>
Outside directors are not eligible to participate in the 1996 Stock Incentive
Plan.
Amendment or Discontinuance. The 1996 Stock Incentive Plan may be amended
or discontinued by the Board, provided that stockholder approval is required for
any amendment that would (i) increase the number of shares of common stock that
may be issued under the 1996 Stock Incentive Plan, (ii) amend the "corporate
change" provision, (iii) allow a non-key employee to be granted an award, (iv)
permit shares to be valued at, or the exercise price of options to be, less than
fair market value, (v) change the method of establishing the amount paid upon
exercise of a stock appreciation right, (vi) change the terms of the 1996 Stock
Incentive Plan applicable to performance unit grants, or (vii) change the
maximum number of shares that may be awarded to any employee in any year
pursuant to options, stock awards or stock appreciation rights.
Federal Income Tax Consequences. Under present law, upon exercise of an
option the holder recognizes ordinary income, and ITW is entitled to a
deduction, equal to the amount by which the fair market value of the shares
acquired upon exercise exceeds the exercise price. Upon the exercise of an
incentive stock option, the holder does not recognize ordinary income if, at all
times during the period beginning on the grant date and ending on the day three
months before the exercise date, the holder was an ITW employee and certain
other requirements are satisfied. However, the amount by which the value of ITW
common stock at the time of exercise of the incentive stock option exceeds the
exercise price is included in determining the alternative minimum tax, which the
holder must pay if it exceeds his or her regular tax.
Stock awards are taxable as ordinary income to the holder and deductible
by ITW in the year paid in an amount equal to the fair market value of the
shares received. If the shares are subject to restrictions involving both
vesting and nontransferability, the recipient's taxable income and ITW's
deduction may be deferred and measured by the fair market value of the shares at
the time that the first of the two restrictions lapse. Performance units and
stock appreciation rights result in ordinary income to the holder and a tax
deduction for ITW at the time of payment of the performance units or exercise of
the stock appreciation rights. The amount of such income and deduction equals
the value of any cash or shares of ITW common stock received.
25
AMENDMENT TO INCREASE THE NUMBER OF SHARES
The amendment to the 1996 Stock Incentive Plan would increase the number
of shares of common stock authorized for issuance under the 1996 Stock Incentive
Plan by 3,000,000 plus the amount available as a result of the merger of the
Premark International, Inc. 1994 Incentive Plan into the 1996 Stock Incentive
Plan. The 1996 Stock Incentive Plan, as approved by stockholders at the May 3,
1996 annual meeting, authorized the issuance of 10,000,000 shares of common
stock, which increased to 20,000,000 as the result of a stock split in 1997. As
of March 11, 2003, 4,571,950 shares remain available for future grants of
options and other stock incentives under the 1996 Stock Incentive Plan.
Under the Premark Plan, which has been maintained by ITW following the
1999 merger with Premark International, Inc., 2,499,279 shares of ITW common
stock remain available for future issuance of options and other stock
incentives. After the merger of the Premark Plan into the 1996 Stock Incentive
Plan, these shares would automatically be available for issuance under the 1996
Stock Incentive Plan. Combining the proposed increase of 3,000,000 authorized
shares under the 1996 Stock Incentive Plan with the 2,499,279 shares added by
the merger of the Premark Plan into the 1996 Stock Incentive Plan would result
in an aggregate increase in shares authorized for issuance under the 1996 Stock
Incentive Plan of 5,499,279 shares. Therefore, the number of shares available
for future grants and awards under the 1996 Stock Incentive Plan would be
increased from 4,571,950 shares to 10,071,229 shares.
If any outstanding awards granted under the 1996 Stock Incentive Plan
terminate or lapse, the shares reserved for those awards will be available for
subsequent grants. In the event of any change in the outstanding shares of ITW
common stock by reason of a stock dividend or split, recapitalization, merger or
similar corporate event, the number of shares reserved for issuance, the
aggregate number of shares of common stock subject to each outstanding award,
and the fair market value applicable to each award, shall be appropriately
adjusted by the Committee. Any common stock surrendered or withheld in payment
of the exercise price of an option, or in satisfaction of any tax liabilities
resulting from an award, will be added to the aggregate shares of common stock
available for issuance.
AMENDMENT TO MERGE THE PREMARK INTERNATIONAL, INC. 1994 INCENTIVE PLAN INTO THE
1996 STOCK INCENTIVE PLAN
The principal change resulting from the amendment to merge the Premark
Plan into the 1996 Stock Incentive Plan is the addition of 2,499,279 shares
available for issuance as described under "Amendment to Increase the Number of
Shares" above. In addition, the options outstanding under the Premark Plan,
which became fully vested upon ITW's merger with Premark in 1999, will be
assumed by the 1996 Stock Incentive Plan but will continue to be subject to the
terms of the applicable option agreements. The Premark Plan and the 1996 Stock
Incentive Plan contain substantially similar terms with respect to eligibility
to participate, types of awards and plan administration. As a result, the merger
of the Premark Plan would require minor technical modifications to the terms of
the 1996 Stock Incentive Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO AMEND THE
1996 STOCK INCENTIVE PLAN.
26
ANNUAL REPORT ON FORM 10-K
YOU MAY REVIEW AND DOWNLOAD A COPY OF ITW'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002, INCLUDING SCHEDULES, THAT WE FILED WITH
THE SEC BY ACCESSING OUR WEBSITE, WWW.ITW.COM, OR BY WRITING TO: STEWART S.
HUDNUT, SECRETARY, ILLINOIS TOOL WORKS INC., 3600 WEST LAKE AVENUE, GLENVIEW,
ILLINOIS 60025.
27
[ITW LOGO]
ILLINOIS TOOL WORKS INC. 000000 0000000000 0 0000
000000000.000 ext
000000000.000 ext
000000000.000 ext
000000000.000 ext
MR A SAMPLE
DESIGNATION (IF ANY) 000000000.000 ext
ADD 1 000000000.000 ext
ADD 2 000000000.000 ext
ADD 3
ADD 4 HOLDER ACCOUNT NUMBER
ADD 5
ADD 6 C 1234567890 J N T
[ ] Mark this box with an X
if you have made changes
to your name or address
details above.
- -----------------------------------------------------------------------------------------------------------------------------------
ANNUAL MEETING PROXY CARD
- -----------------------------------------------------------------------------------------------------------------------------------
A ELECTION OF DIRECTORS PLEASE REFER TO THE REVERSE SIDE FOR INTERNET AND TELEPHONE VOTING INSTRUCTIONS.
1. The Board of Director Recommends a Vote FOR the listed nominees.
FOR WITHHOLD FOR WITHHOLD FOR WITHHOLD
01 - William F. Aldinger [ ] [ ] 05 - Susan crown [ ] [ ] 09 - Robert S. Morrison [ ] [ ]
02 - Michael J. Birck [ ] [ ] 06 - Don H. Davis, Jr. [ ] [ ] 10 - Harold B. Smith [ ] [ ]
03 - Marvin D. Brailsford [ ] [ ] 07 - W. James Farrell [ ] [ ]
04 - James R. Cantalupo [ ] [ ] 08 - Robert C. McCormack [ ] [ ]
B ISSUE
The Board of Directors Recommends a Vote FOR the following proposal.
FOR AGAINST ABSTAIN I CONSENT
2. Amendment to the 1996 [ ] [ ] [ ] Until contrary notice to [ ]
Stock Incentive Plan. the Corporation, I consent
to access all future notices
of annual meetings, proxy
statements, and annual reports
issued by the Corporation over
the Internet. SEE REVERSE FOR
DETAILS.
C AUTHORIZED SIGNATURES - SIGN HERE - THIS SECTION MUST BE COMPLETED FOR YOUR INSTRUCTIONS TO BE EXECUTED.
NOTE: Please sign your name(s) EXACTLY as your name(s) appear(s) on this proxy. All joint holders must sign. When
signing as attorney, trustee, executor, administrator, guardian or corporate officer, please provide your FULL title.
Signature 1 - Please keep signature within the box Signature 2 - Please keep signature within the box Date (mm/dd/yyyy)
-------------------------------------------------- -------------------------------------------------- --------------------
/ /
-------------------------------------------------- -------------------------------------------------- --------------------
IUPX H H H P P P P 0 0 1 7 9 3 2
001CD40001 009H5B
- --------------------------------------------------------------------------------
PROXY - ILLINOIS TOOL WORKS INC.
- --------------------------------------------------------------------------------
3600 WEST LAKE AVENUE, GLENVIEW, ILLINOIS 60025
ANNUAL MEETING OF STOCKHOLDERS MAY 9, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned stockholder of Illinois Tool Works Inc. hereby appoints
Marvin D. Brailsford, Susan Crown and Harold S. Smith, or any of them, with
full power of substitution, to act as proxies at the Annual Meeting of
Stockholders of ITW to be held in Chicago, Illinois on May 9, 2003 with
authority to vote as directed by this Proxy at the meeting, and any
adjournments of the meeting, all shares of common stock of ITW registered in
the name of the undersigned.
IMPORTANT - THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE.
ILLINOIS TOOL WORKS INC.
ANNUAL MEETING OF STOCKHOLDERS
FRIDAY, MAY 9, 2003
THE NORTHERN TRUST COMPANY (6TH FLOOR)
50 SOUTH LASALLE STREET
CHICAGO, ILLINOIS
ELECTRONIC ACCESS TO FUTURE DOCUMENTS NOW AVAILABLE
Illinois Tool Works Inc. ("ITW") provides its annual reports and proxy
solicitation materials, including notices to shareholders of annual meetings
and proxy statements, over the internet. If you give your consent to access
these documents over the internet, ITW will advise you when these documents
become available on the internet. Providing these documents over the internet
will reduce ITW's printing and postage costs. Once you give your consent,
it will remain in effect until you notify ITW that you wish to resume mail
delivery of its annual reports and proxy statements. Even though you give
your consent, you still have the right at any time to request copies of these
documents.
To give your consent, mark the appropriate box located on the reverse of this
Proxy Card.
INSTRUCTIONS FOR VOTING BY THE INTERNET, TELEPHONE OR MAIL
Illinois Tool Works Inc. encourages you to take advantage of new and convenient
ways to vote your shares for proposals to be covered at the Annual Meeting of
Stockholders. Please take this opportunity to use one of the three voting
methods detailed below to vote your shares. Voting is easier than ever.
PROXIES SUBMITTED BY TELEPHONE OR THE INTERNET MUST BE RECEIVED BY 12:00
MIDNIGHT, PACIFIC STANDARD TIME, ON MAY 8, 2003.
TO VOTE USING THE TELEPHONE TO VOTE USING THE INTERNET TO VOTE BY MAIL
(within U.S. and Canada)
- - Call toll free 1-866-668-0870 - Go lo the following web site: - Mark, sign and date the proxy card.
in the United States or Canada WWW.COMPUTERSHARE.COM/US/PROXY
any time on a touch tone - Return the proxy card in the
telephone. There is NO CHARGE - Enter the information requested postage-paid envelope provided.
to you for the call. on your computer screen and follow
the simple instructions.
- - Enter the HOLDER ACCOUNT NUMBER
(EXCLUDING THE LETTER "C") and
PROXY ACCESS NUMBER both located
below.
- - Follow the simple recorded
instructions.
Option 1: To vote as the Board of
Directors recommends on
ALL proposals:
Press 1.
When asked, please confirm
your vote by pressing 1.
Option 2: If you choose to vote on
EACH proposal separately,
press 0 and follow the simple
recorded instructions.
HOLDER ACCOUNT NUMBER C0123456789 PROXY ACCESS NUMBER 12345
If you vote by telephone or the Internet, please DO NOT mail
back this proxy card.
THANK YOU FOR VOTING
009H6D
ILLINOIS TOOL WORKS INC.
1996 STOCK INCENTIVE PLAN
Approved by the Board of Directors on February 16, 1996
and by the Stockholders on May 3, 1996
Amended by the Board of Directors on
December 12, 1997, October 29, 1999,
January 3, 2003 and March 18, 2003
TABLE OF CONTENTS
Section 1. Purpose....................................................................................2
Section 2. Definitions................................................................................2
Section 3. Administration.............................................................................4
Section 4. Common Stock Subject to Plan...............................................................4
Section 5. Options....................................................................................5
Section 6. Stock Awards...............................................................................5
Section 7. Performance Units..........................................................................6
Section 8. Stock Appreciation Rights..................................................................6
Section 9. Termination of Employment..................................................................7
Section 10. Adjustment Provisions......................................................................8
Section 11. Term.......................................................................................8
Section 12. Corporate Change...........................................................................8
Section 13. General Provisions.........................................................................8
Section 14. Amendment or Discontinuance of the Plan...................................................10
Section 15. Options Granted Under the Premark Plan....................................................10
ILLINOIS TOOL WORKS INC.
1996 STOCK INCENTIVE PLAN
Section 1. PURPOSE.
The purpose of the Plan is to encourage Key Employees to have a greater
financial investment in the Company through ownership of its Common Stock. The
Plan is an amendment and restatement of the 1979 Stock Incentive Plan (the "1979
Plan"). The terms of the Plan will apply to all outstanding Incentives granted
under the 1979 Plan, including those pertaining to a Corporate Change and
termination of employment as described below. No additional Incentives will be
granted under the 1979 Plan.
Effective May 9, 2003, the Premark International, Inc. 1994 Incentive
Plan (the "Premark Plan") is merged into the 1996 Stock Incentive Plan. Section
15 of the 1996 Stock Incentive Plan sets forth the terms applicable to the
merged Premark Plan and the Options granted thereunder.
Section 2. DEFINITIONS.
Board: The Board of Directors of the Company.
Code: The Internal Revenue Code of 1986, as amended.
Committee: The Compensation Committee of the Board or such other
committee as shall be appointed by the Board to administer the Plan pursuant to
Section 3.
Common Stock: The Common Stock, without par value, of the Company or
such other class of shares or other securities as may be applicable pursuant to
the provisions of Section 10.
Company: Illinois Tool Works Inc., a Delaware corporation, and any
successor thereto.
Corporate Change: Any of the following: (i) the dissolution of the
Company; (ii) the merger, consolidation, or reorganization of the Company with
any other corporation after which the holders of Common Stock immediately prior
to the effective date thereof hold less than 70% of the outstanding common stock
of the surviving or resulting entity; (iii) the sale of all or substantially all
of the assets of the Company to any person or entity other than a wholly owned
subsidiary; (iv) any person or group of persons acting in concert, other than
descendants of Byron L. Smith and trusts for the benefit of such descendants, or
entity becomes the beneficial owner, directly or indirectly, of more than 30% of
the outstanding Common Stock; or (v) the individuals who, as of the close of the
most recent annual meeting of the Company's stockholders, are members of the
Board (the "Existing Directors") cease for any reason to constitute more than
50% of the Board; provided, however, that if the election, or nomination for
election, by the Company's stockholders of any new director was approved by a
vote of at least 50% of the Existing Directors, such new director shall be
considered an Existing Director;
-2-
provided further, however, that no individual shall be considered an Existing
Director if such individual initially assumed office as a result of either an
actual or threatened "Election Contest" (as described in Rule 14a-11 under the
Securities Exchange Act of 1934) or other actual or threatened solicitation of
proxies by or on behalf of anyone other than the Board (a "Proxy Contest"),
including by reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest.
Covered Employee: A Key Employee who is or is expected to be a "covered
employee" within the meaning of Code Section 162(m) and the related regulations
for the year in which an Incentive is taxable to such employee and for whom the
Committee intends that such Incentive qualify as performance-based compensation
under Code Section 162(m).
Disability: Eligible for Social Security disability benefits or
disability benefits under the Company's long-term disability plan, based upon a
determination by the Committee that the condition arose prior to termination of
employment.
Fair Market Value: The average of the highest and lowest price at which
Common Stock was traded on the relevant date, as reported in the "NYSE-Composite
Transactions" section of the Midwest Edition of The Wall Street Journal, or, if
no sales of Common Stock were reported for that date, on the most recent
preceding date on which Common Stock was traded.
Incentive Stock Option: As defined in Code Section 422.
Incentives: Options (including Incentive Stock Options), Stock Awards,
Performance Units and Stock Appreciation Rights.
Key Employee: An employee of the Company approved by the Committee for
participation in the Plan on the basis of his or her ability to contribute
significantly to the growth and profitability of the Company.
Option: An option to purchase shares of Common Stock granted to a Key
Employee pursuant to Section 5.
Performance Unit: A unit representing a cash sum or one or more shares
of Common Stock that is granted to a Key Employee pursuant to Section 7.
Plan: The Illinois Tool Works Inc. 1996 Stock Incentive Plan, as
amended from time to time.
Restricted Shares: Shares of Common Stock issued subject to
restrictions pursuant to Section 6(b).
Retirement: Termination of employment while eligible for retirement as
defined by the Company's tax-qualified defined benefit retirement plan.
-3-
Stock Appreciation Right or Right: An award granted to a Key Employee
pursuant to Section 8.
Stock Award: An award of Common Stock granted to a Key Employee
pursuant to Section 6.
Stock Ownership Guidelines: The stock ownership guidelines adopted by
the Board, as amended from time to time.
Section 3. ADMINISTRATION.
(a) Committee. The Plan shall be administered by the Committee. To the
extent required to comply with Rule 16b-3 under the Securities Exchange Act of
1934, each member of the Committee shall qualify as a "non-employee director" as
defined therein. To the extent required to comply with Code Section 162(m) and
the related regulations, each member of the Committee shall qualify as an
"outside director" as defined therein.
(b) Authority of the Committee. The Committee shall have the authority
to approve Key Employees for participation; to construe and interpret the Plan;
to establish, amend or waive rules and regulations for its administration; and
to accelerate the exercisability of any Incentive or the termination of any
restriction under any Incentive. Incentives may be subject to such provisions as
the Committee shall deem advisable, and may be amended by the Committee from
time to time; provided that no such amendment may adversely affect the rights of
the holder of an Incentive without such holder's consent, and no amendment, as
it applies to any Covered Employee, shall be made that would cause an Incentive
granted to such Covered Employee to fail to satisfy the performance-based
compensation exemption under Code Section 162(m) and the related regulations.
Section 4. COMMON STOCK SUBJECT TO PLAN.
Subject to Section 10, the aggregate shares of Common Stock that may be
issued under the Plan, including Common Stock authorized but not issued or
reserved for issuance under the 1979 Plan, shall not exceed 10,000,000. In the
event of a lapse, expiration, termination, forfeiture or cancellation of any
Incentive granted under the Plan or the 1979 Plan without the issuance of shares
or payment of cash, the Common Stock subject to or reserved for such Incentive
may be used again for a new Incentive hereunder; provided that in no event may
the number of shares of Common Stock issued hereunder exceed the total number of
shares reserved for issuance. Any shares of Common Stock withheld or surrendered
to pay withholding taxes pursuant to Section 13(e) or surrendered in full or
partial payment of the exercise price of an Option pursuant to Section 5(e)
shall be added to the aggregate of shares of Common Stock available for
issuance.
The 10,000,000 shares of Common Stock authorized for issuance pursuant
to the 1996 Stock Incentive Plan increased to 20,000,000 shares pursuant to the
stock split in 1997. Effective May 9, 2003, the number of shares of Common Stock
authorized for issuance shall be
-4-
30,930,193 shares, which number reflects the merger of the Premark Plan into the
1996 Stock Incentive Plan and an additional 3,000,000 shares.
Section 5. OPTIONS.
(a) Price. The exercise price per share of an Option shall be not less
than the Fair Market Value on the grant date.
(b) Limitations. The exercise price of Incentive Stock Options
exercisable for the first time by a Key Employee during any calendar year shall
not exceed $100,000. Options for more than 500,000 shares of Common Stock may
not be granted in any calendar year to any Key Employee. No Incentive Stock
Options may be granted after April 30, 2006.
(c) Required Period of Employment. The Committee may condition the
exercisability of any Option on the completion of a minimum period of
employment.
(d) Duration. Each Option shall expire at such time as the Committee
may determine at the time of grant, provided that Incentive Stock Options must
expire not later than ten years from the grant date.
(e) Payment. The exercise price of an Option shall be paid in full at
the time of exercise in cash, or by the surrender of Common Stock previously
acquired from the Company that has been held by the Incentive holder for a
period of at least six months and that has a value equal to the exercise price,
or by a combination of the foregoing.
(f) Grant of Restorative Options. The Committee shall grant to any Key
Employee a restorative Option to purchase additional shares of Common Stock
equal to the number of shares delivered by the Key Employee in payment of the
exercise price of an Option. The terms of a restorative Option shall be
identical to the terms of the exercised Option, except that the exercise price
shall be not less than the Fair Market Value on the grant date of the
restorative Option.
Section 6. STOCK AWARDS.
(a) Grant of Stock Awards. Stock Awards may be made on terms and
conditions fixed by the Committee. Stock Awards may be in the form of Restricted
Shares authorized pursuant to Section 6(b). Officers who are covered by the
Stock Ownership Guidelines may elect to receive up to 50% of their Executive
Incentive Plan awards in shares of Common Stock. The recipient of Common Stock
pursuant to a Stock Award shall be a stockholder of the Company with respect
thereto, fully entitled to receive dividends, vote and exercise all other rights
of a stockholder except to the extent otherwise provided in the Stock Award.
Stock Awards (including Restricted Share awards) for more than 500,000 shares of
Common Stock may not be granted in any calendar year to any Key Employee.
(b) Restricted Shares. Restricted Shares may not be sold by the holder,
or subject to execution, attachment or similar process, until the lapse of the
applicable restriction period or
-5-
satisfaction of other conditions specified by the Committee. If the Committee
intends the Restricted Shares granted to any Covered Employee to satisfy the
performance-based compensation exemption under Code Section 162(m) ("Qualifying
Restricted Shares"), the extent to which the Qualifying Restricted Shares will
vest shall be based on the attainment of performance goals established in
writing prior to commencement of the performance period by the Committee from
the list in Section 7(a). The level of attainment of such performance goals and
the corresponding number of vested Qualifying Restricted Shares shall be
certified by the Committee in writing pursuant to Code Section 162(m) and the
related regulations.
Section 7. PERFORMANCE UNITS.
(a) Value of Performance Units. Prior to the commencement of the
performance period, the Committee shall establish in writing an initial target
value or number of shares of Common Stock for the Performance Units to be
granted to a Key Employee, the duration of the performance period, and the
specific performance goals to be attained, including performance levels at which
various percentages of Performance Units will be earned and, for Covered
Employees, the minimum level of attainment to be met to earn any portion of the
Performance Units. If the Committee intends the Performance Units granted to any
Covered Employee to satisfy the performance-based compensation exemption under
Code Section 162(m) ("Qualifying Performance Units"), the performance goals
shall be based on one or more of the following objective criteria: generation of
free cash, earnings per share, revenues, market share, stock price, cash flow,
retained earnings, results of customer satisfaction surveys, aggregate product
price and other product price measures, safety record, acquisition activity,
management succession planning, improved asset management, improved gross
margins, increased inventory turns, product development and liability, research
and development integration, proprietary protections, legal effectiveness,
handling SEC or environmental issues, manufacturing efficiencies, system review
and improvement, service reliability and cost management, operating expense
ratios, total stockholder return, return on sales, return on equity, return on
capital, return on assets, return on investment, net income, operating income,
and the attainment of one or more performance goals relative to the performance
of other corporations.
(b) Payment of Performance Units. After the end of a performance
period, the Committee shall certify in writing the extent to which performance
goals have been met and shall compute the payout to be received by each Key
Employee. With respect to Qualifying Performance Units, for any calendar year,
the maximum amount payable in cash to any Covered Employee shall be $5,000,000,
and the aggregate shares of Common Stock that may be issued to any Covered
Employee is 500,000. The Committee may not adjust upward the amount payable to
any Covered Employee with respect to Qualifying Performance Units.
Section 8. STOCK APPRECIATION RIGHTS.
(a) Grant of Stock Appreciation Rights. Stock Appreciation Rights may
be granted in connection with an Option (at the time of the grant or at any time
thereafter) or may be granted independently. Stock Appreciation Rights for more
than 500,000 shares of Common Stock may not be granted to any Key Employee in
any calendar year.
-6-
(b) Value of Stock Appreciation Rights. The holder of a Stock
Appreciation Right granted in connection with an Option, upon surrender of that
Option, will receive cash or shares of Common Stock equal in value to the lesser
of (i) the excess of the Fair Market Value on the exercise date over the
Option's exercise price or (ii) the exercise price of the Option that is
surrendered, multiplied by the number of shares covered by such Option. The
holder of a Stock Appreciation Right granted independently of an Option, upon
exercise of that Right, will receive cash or shares of Common Stock equal in
value to the lesser of (i) the excess of the Fair Market Value on the exercise
date over the Fair Market Value on the grant date or (ii) the Fair Market Value
on the grant date, multiplied by the number of shares covered by such Right.
Section 9. TERMINATION OF EMPLOYMENT.
(a) Forfeiture of Incentives Upon Termination of Employment. Except as
may be determined otherwise by the Committee, all unvested Options, Rights and
Stock Awards and all unpaid Performance Units shall be forfeited upon
termination of employment for reasons other than Retirement, Disability or
death.
(b) Vesting Upon Retirement, Disability or Death. Subject to Section
13(g), upon termination of employment by reason of Retirement, Disability or
death, all unvested Options, Rights and Stock Awards shall become fully vested
and any Performance Units shall become payable to the extent provided in Section
9(c)(ii).
Notwithstanding anything contained in this Section 9(b) to the
contrary, any unvested Restricted Shares granted effective January 2, 2003 shall
not become fully vested upon termination of employment by reason of Retirement,
Disability or Death.
(c) Treatment of Incentives Following Termination.
(i) Options and Stock Appreciation Rights.
(A) Termination Due to Retirement, Disability or Death. Upon
termination of employment by reason of Retirement or
Disability, Options shall be exercisable not later than the
earlier of five years after the termination date or the
expiration of the term of the Options. Options held by a Key
Employee who dies while employed by the Company or after
terminating by reason of Retirement or Disability shall be
exercisable by the Key Employee's beneficiary not later than
the earliest of two years after the date of death, five years
after the date of termination due to Retirement or Disability,
or the expiration of the term of the Options.
(B) Termination for Other Reasons. Upon termination of
employment for any reason other than Retirement, Disability or
death, all unvested Options shall be forfeited as provided in
Section 9(a) and any Options vested prior to such termination
may be exercised by a Key Employee during the three-month
period
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commencing on the date of termination, but not later than the
expiration of the term of the Options. If a Key Employee dies
during such post-employment period, such Key Employee's
beneficiary may exercise the Options (to the extent such
Options were vested and exercisable at the date of termination
of employment), but not later than the earlier of two years
after the date of death or the expiration of the term of the
Options.
(C) Stock Appreciation Rights. Sections 9(c)(i)(A) and (B)
shall apply in the same manner to Stock Appreciation Rights.
(ii) Performance Units. If a Key Employee terminates
employment by reason of Retirement, Disability or death, the
Key Employee or such Key Employee's beneficiary in the event
of death shall receive a prorated payment of the Key
Employee's Performance Units based on the number of full
months of service completed by the Key Employee during the
applicable performance period, adjusted based on the
achievement of performance goals during the performance
period. Payment shall be made at the time payments would have
been made had the Key Employee not terminated by reason of
Retirement, Disability or death.
Section 10. ADJUSTMENT PROVISIONS.
In the event of a stock split, stock dividend, recapitalization,
reclassification or combination of shares, merger, sale of assets or similar
event, the Committee shall adjust equitably (a) the number and class of shares
or other securities that are reserved for issuance under the Plan, (b) the
number and class of shares or other securities that have not been issued under
outstanding Incentives, and (c) the appropriate Fair Market Value and other
price determinations applicable to Incentives.
Section 11. TERM.
The Plan shall be deemed adopted and shall become effective on the date
it is approved by the stockholders of the Company and shall continue until
terminated by the Board or no Common Stock remains available for issuance under
Section 4, whichever occurs first.
Section 12. CORPORATE CHANGE.
In the event of a Corporate Change, all Incentives shall vest in each
Key Employee, and the maximum value of each Key Employee's Performance Units,
prorated for the number of full months of service completed by the Key Employee
during the applicable performance period, shall immediately be paid in cash to
the Key Employee.
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Section 13. GENERAL PROVISIONS.
(a) Employment. Nothing in the Plan or in any related instrument shall
confer upon any employee any right to continue in the employ of the Company or
shall affect the right of the Company to terminate the employment of any
employee with or without cause.
(b) Legality of Issuance of Shares. No Common Stock shall be issued
pursuant to an Incentive unless and until all legal requirements applicable to
such issuance have been satisfied.
(c) Ownership of Common Stock Allocated to Plan. No employee
(individually or as a member of a group), and no beneficiary or other person
claiming under or through such employee, shall have any right, title or interest
in or to any Common Stock allocated or reserved for purposes of the Plan or
subject to any Incentive except as to shares of Common Stock, if any, as shall
have been issued to such employee.
(d) Governing Law. The Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Illinois.
(e) Withholding of Taxes. The Company may withhold, or allow an
Incentive holder to remit to the Company, any Federal, state or local taxes
applicable to any grant, exercise, vesting, distribution or other event giving
rise to income tax liability with respect to an Incentive. In order to satisfy
all or a portion of the income tax liability that arises with respect to any
Incentive, the holder of the Incentive may elect to surrender previously
acquired Common Stock or to have the Company withhold Common Stock that would
otherwise have been issued pursuant to the exercise of an Option or in
connection with any other Incentive; provided that any withheld Common Stock, or
any surrendered Common Stock previously acquired from the Company and held by
the Incentive holder for less than six months, may only be used to satisfy the
minimum tax withholding required by law.
(f) Non-transferability; Exceptions. Except as provided in this Section
13(f), no Incentive may be assigned or subjected to any encumbrance, pledge or
charge of any nature. Under such rules and procedures as the Committee may
establish, the holder of an Incentive may transfer such Incentive to members of
the holder's immediate family (i.e., children, grandchildren and spouse) or to
one or more trusts for the benefit of such family members or to partnerships in
which such family members are the only partners, provided that (i) the
agreement, if any, with respect to such Incentives, expressly so permits or is
amended to so permit, (ii) the holder does not receive any consideration for
such transfer, and (iii) the holder provides such documentation or information
concerning any such transfer or transferee as the Committee may reasonably
request. Any Incentives held by any transferees shall be subject to the same
terms and conditions that applied immediately prior to their transfer. The
Committee may also amend the agreements applicable to any outstanding Incentives
to permit such transfers. Any Incentive not granted pursuant to any agreement
expressly permitting its transfer or amended expressly to permit its transfer
shall not be transferable. Such transfer rights shall in no event apply to any
Incentive Stock Option.
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(g) Forfeiture of Incentives. Except for an Incentive that becomes
vested pursuant to Section 12, the Committee may immediately forfeit an
Incentive, whether vested or unvested, if the holder competes with the Company
or engages in conduct that, in the opinion of the Committee, adversely affects
the Company.
(h) Beneficiary Designation. Under such rules and procedures as the
Committee may establish, each Key Employee may designate a beneficiary or
beneficiaries to succeed to any rights which the Key Employee may have with
respect to Options, Stock Appreciation Rights, Stock Awards or Performance Units
at the time of his or her death. The designation may be changed or revoked by
the Key Employee at any time. No such designation, revocation or change shall be
effective unless made in writing on a form provided by the Company and delivered
to the Company prior to the Key Employee's death. If a Key Employee does not
designate a beneficiary or no designated beneficiary survives the Key Employee,
then his or her beneficiary shall be the Key Employee's estate.
Section 14. AMENDMENT OR DISCONTINUANCE OF THE PLAN.
(a) Amendment or Discontinuance. The Plan may be amended or
discontinued by the Board from time to time, provided that without the approval
of stockholders, no amendment shall be made which (i) amends Section 4 to
increase the aggregate Common Stock that may be issued pursuant to Incentives,
(ii) amends the provisions of Section 12, (iii) permits any person who is not a
Key Employee to be granted an Incentive, (iv) permits Common Stock to be valued
at, or permits the exercise price of Options at the grant date, to be less than
Fair Market Value, (v) amends the provisions of Section 8 to change the method
of establishing the amount the Company shall distribute upon exercise of a Stock
Appreciation Right, (vi) amends the provisions of Section 7(b) to increase the
value which may be specified for Performance Units or amends any other provision
of the Plan, the amendment of which would require stockholder approval in order
to continue to satisfy the performance-based compensation exemption under Code
Section 162(m) and the related regulations with respect to any Incentive awarded
to any Covered Employee, (vii) changes the maximum number of shares of Common
Stock that may be awarded to any employee in any year pursuant to Options, Stock
Awards or Stock Appreciation Rights, or (viii) amends this Section 14.
(b) Effect of Amendment or Discontinuance on Incentives. No amendment
or discontinuance of the Plan by the Board or the stockholders of the Company
shall adversely affect any Incentive theretofore granted without the consent of
the holder.
Section 15. OPTIONS GRANTED UNDER THE PREMARK PLAN.
Pursuant to the merger of the Premark Plan into the 1996 Stock
Incentive Plan effective May 9, 2003, each Option granted under the Premark Plan
prior to such date shall be assumed by the 1996 Stock Incentive Plan and shall
be subject to the requirements set forth below.
(a) Administration by the Committee. The Committee shall have the full
power, discretion and authority to interpret and administer the Options
previously granted
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under the Premark Plan in a manner which is consistent with the provisions of
the 1996 Stock Incentive Plan, the terms of the applicable Option agreements,
and the requirements of applicable law.
(b) Option Grants. Any grants of Options to individuals who had
previously been eligible for grants under the Premark Plan prior to the
Company's merger with Premark International, Inc. have been made under the 1996
Stock Incentive Plan subsequent to the merger and will continue to be granted
pursuant to the terms of the 1996 Stock Incentive Plan.
(c) Option Agreements. Each Option granted under the Premark Plan is
evidenced by an Option agreement, the terms of which shall continue in effect.
d) Premark Plan Provisions. Except as set forth in this Section 15 or
in any outstanding Option agreement, the provisions of the Premark Plan shall
terminate and have no effect as of May 9, 2003.
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