-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LkNgvS9dw4CoUrBELOiX9NJj161DKAnJqoP7QF7UT/ftuy9U8HJSYhljJh0w/RxN 7+S72EmXtBVa2Nl7LPxwVQ== 0000017843-97-000017.txt : 19970927 0000017843-97-000017.hdr.sgml : 19970927 ACCESSION NUMBER: 0000017843-97-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970919 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARPENTER TECHNOLOGY CORP CENTRAL INDEX KEY: 0000017843 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 230458500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05828 FILM NUMBER: 97682718 BUSINESS ADDRESS: STREET 1: PO BOX 14662 CITY: READING STATE: PA ZIP: 19612-4662 BUSINESS PHONE: 2152082000 MAIL ADDRESS: STREET 1: P O BOX 14662 CITY: READING STATE: PA ZIP: 19612-4662 10-K 1 97 FORM 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 Commission file number 1-5828 CARPENTER TECHNOLOGY CORPORATION (Exact name of Registrant as specified in its Charter) Delaware 23-0458500 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 West Bern Street, Reading, Pennsylvania 19612-4662 (Address of principal executive offices) (Zip Code) 610-208-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: (Name of each exchange (Title of each class) on which registered) - --------------------- --------------------- Common stock, par value $5 per share......New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X . No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of August 29, 1997, 19,498,210 shares of Common Stock of Carpenter Technology Corporation were outstanding and the aggregate market value of such Common Stock held by nonaffiliates (based upon its closing transaction price on the Composite Tape on such date) was $873,763,536. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference certain information from the 1997 definitive Proxy Statement. The Exhibit Index appears on pages E-1 to E-6. PART I Item 1. Business (a) General Development of Business: Carpenter Technology Corporation, incorporated in 1904, is engaged in the manufacture, fabrication, and distribution of specialty metals and engineered products. There were no significant changes in the form of organization or mode of conducting business of Carpenter Technology Corporation (hereinafter called "the Company" or "Carpenter") during the year ended June 30, 1997, except for the transactions described below: On June 19, 1997, Carpenter acquired the net assets of Rathbone Precision Metals, Inc., for $9.6 million in cash, including acquisition costs. Rathbone is a manufacturer of custom, cold-drawn metal shapes. The acquisition of Rathbone enables Carpenter to bridge the specialty metal mill-form manufacturing business with the engineered products manufacturing business while providing additional value-added services to specialty metals customers. This investment was accounted for using the purchase method of accounting. On February 28, 1997, Carpenter purchased all of the common stock of Dynamet Incorporated in exchange for approximately 2.8 million shares of its treasury common stock with a fair market value of $99.5 million and $51.5 million of cash, including acquisition costs. In addition, Carpenter paid $10.3 million for consulting and non-compete agreements, a portion of which is payable over four years. Dynamet is a manufacturer of titanium bar, wire and powder products, predominantly used by the aerospace, medical and sports products industries. The Dynamet acquisition allows Carpenter to better satisfy the aerospace industry's needs for a range of technically advanced materials, and to help realize Carpenter's goal of profitable growth. This investment was accounted for using the purchase method of accounting. (b) Financial Information About Industry Segments: Carpenter is primarily engaged in one business segment - the manufacture, fabrication and distribution of specialty metals. Additionally, Carpenter manufactures certain engineered products. The engineered products operations do not qualify as a reportable segment and therefore are not presented as a separate business segment. (c) Narrative Description of Business: (1) Products: Carpenter primarily processes basic raw materials such as chromium, nickel, titanium, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire, narrow strip, special shapes, and hollow forms in many sizes and finishes and produces certain fabricated metal products. Sales of finished products include: STAINLESS STEELS - A broad range of corrosion resistant alloys including conventional stainless steels and many proprietary grades for special applications. SPECIAL ALLOYS - Other special purpose alloys used in critical components such as bearings and fasteners. Heat resistant alloys that range from slight modifica- tions of the stainless steels to complex nickel and cobalt base alloys. Alloys for electronic, magnetic and electrical applications with controlled thermal expansion characteristics, or high electrical resistivity or special magnetic characteristics. Fabrication of special stainless steels and zirconium base alloys into tubular products for the aircraft industry and nuclear reactors. TOOL AND OTHER STEEL - Tool and die steels which are extremely hard alloys used for tooling and other wear-resisting components in metalworking operations such as stamping, extrusion and machining. Other steel includes carbon steels purchased for distribution and other miscellaneous products. CERAMICS AND OTHER MATERIALS - Certain engineered products, including ceramic cores for casting ranging from small simple configurations to large complex shapes. Also, metal injected molded designs in a variety of materials, ultra-hard parts, and precision welded tubular products, as well as drawn solid tubular shapes. TITANIUM PRODUCTS - A corrosion resistant, highly specialized metal with a combination of high strength and low density. Most common uses are in aircraft, medical devices, sporting equipment and chemical and petroleum processing. Carpenter's products are sold primarily in the United States and principally through its own sales organization with service centers and sales offices located in many of the major cities of the country. Sales outside of the United States, including export sales, were $117.8 million, $96.5 million and $74.7 million in fiscal 1997, 1996 and 1995, respectively. (2) Classes of Products: The approximate percentage of Carpenter's consolidated net sales contributed by the major classes of products for the last three fiscal years are as follows: 1997 1996 1995 ---- ---- ---- Stainless steel 49% 58% 56% Special alloys 34% 32% 33% Tool and other steel 7% 7% 8% Ceramics and other materials 5% 3% 3% Titanium products 5% - - ---- ---- ---- 100% 100% 100% ==== ==== ==== (3) Raw Materials: Carpenter depends on continued delivery of critical raw materials for its day-to-day operations. These raw materials are nickel, ferrochrome, cobalt, molybdenum, titanium, manganese and scrap. Some of these raw materials sources are located in countries subject to potential interruptions of supply. These potential interruptions could cause material shortages and affect the availability and price. Carpenter is in a strong raw material position because of its long-term relationships with major suppliers. These suppliers provide availability of material and competitive prices for these key raw materials to help Carpenter maintain the appropriate levels of raw materials. (4) Patents and Licenses: Carpenter owns a number of United States and foreign patents and has granted licenses under some or all of them. Certain of the products produced by Carpenter are covered by patents of other companies from whom licenses have been obtained. Carpenter does not consider its business to be materially dependent upon any patent or patent rights. (5) Seasonality of Business: Carpenter's sales and earnings results are normally influenced by seasonal factors. The first fiscal quarter (three months ending September 30) is typically the lowest - chiefly because of annual plant vacation and maintenance shutdowns in this period by Carpenter as well as by many of its customers. The timing of major changes in the general economy can alter this pattern, but over the longer time frame, the historical patterns generally prevail. The chart below shows the percent of net sales by quarter for the past three fiscal years: Quarter Ended 1997 1996 1995 ------------- ---- ---- ---- September 30 21% 21% 20% December 31 22% 24% 23% March 31 27% 27% 28% June 30 30% 28% 29% ---- ---- ---- 100% 100% 100% ==== ==== ==== Fiscal 1997 includes the acquisition of Dynamet on February 28, 1997. (6) Customers: Carpenter is not dependent upon a single customer, or a very few customers, to the extent that the loss of any one or more would have a materially adverse effect. (7) Backlog: As of June 30, 1997, Carpenter had a backlog of orders, believed to be firm, of approximately $265 million, substantially all of which is expected to be shipped within the current fiscal year. The backlog as of June 30, 1996 was approximately $215 million. (8) Competition: Carpenter's business is highly competitive. It supplies materials to a wide variety of end-use market segments, none of which consumes more than about 25 percent of Carpenter's output, and competes with various companies depending on end-use segment, product or geography. There are approximately 20 domestic companies producing one or more similar specialty metal products that are considered to be major competitors to the specialty metals operations in one or more product segments. There are several dozen smaller producing companies and converting companies in the United States who are competitors. Carpenter also competes directly with several hundred independent distributors of products similar to those distributed by Carpenter's wholly owned distribution system. Additionally, numerous foreign producers import into the United States various specialty metal products similar to those produced by Carpenter. Furthermore, a number of different products may, in certain instances, be substituted for Carpenter's finished product. Imports of foreign specialty steels have long been a concern to the domestic steel industry because of the potential for unfair pricing by foreign producers. Such pricing practices have usually been supported by foreign governments through direct and indirect subsidies. Because of these unfair trade practices, Carpenter has been aggressive in filing trade actions against foreign producers who have dumped their specialty steel products into the United States. As a result of these actions, the U.S. Department of Commerce has issued antidumping orders for the collection of dumping duties on imports of stainless bar from Brazil, India, Japan and Spain at rates ranging up to about 61% of the value and on imports of stainless rod from Brazil, France and India at rates ranging up to about 49% of the value. These antidumping orders will continue in effect until the calendar year 2000, unless further extended. On July 30, 1997, Carpenter joined with three other domestic producers in filing new antidumping and countervailing duty trade actions against imports of stainless steel rod from seven countries - Germany, Italy, Japan, Korea, Spain, Sweden and Taiwan. These countries represent over 90% of current total imports of stainless steel rod. The industry group alleges that the foreign stainless steel rod is being dumped into this country at prices which should require antidumping margins ranging from about 10% up to about 47%. The U.S. Department of Commerce and the U.S. International Trade Commission are expected to complete their investigations of the unfair trade charges about the middle of calendar year 1998. Preliminary dumping determinations are expected in early 1998. In a related matter, negotiations are continuing between the U.S. government and the European Commission (EC) for a Multilateral Specialty Steel Agreement (MSSA). The objective of the MSSA would be to reduce unfair trade in specialty steel products by establishing international commitments and disciplines aimed at eliminating subsidies and other trade-distortive practices. The baseline for negotiations is an agreement on principles and provisions developed previously between the Specialty Steel Industry of North America and the European steel industry group known as Eurofer. The U.S. government would like to expand the scope of the current negotiations with the EC to include other countries as well. (9) Research, Product and Process Development: Carpenter's expenditures for company-sponsored research and development were approximately $13.0 million, $13.8 million and $12.3 million in fiscal 1997, 1996 and 1995, respectively. (10) Environmental Regulations: Carpenter is subject to various stringent federal, state, and local environmental laws and regulations. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. Liabilities are recognized for remedial activities, including remediation investigation and feasibility study costs, when the cleanup is probable and the cost can be reasonably estimated. Recoveries of expenditures are recognized as a receivable when they are estimable and probable. For further information on environmental remediation, see the Commitments and Contingencies section included in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 17 to the consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data". The costs of maintaining and operating environ- mental control equipment were about $7.9 million and $7.4 million for fiscal 1997 and 1996, respectively. The capital expenditures for environmental control equipment were $1.1 million and $.4 million for fiscal 1997 and 1996, respectively. Carpenter anticipates spending approximately $2.5 million on major domestic environmental capital projects over the next five fiscal years. Due to the possibility of unanticipated factual or regulatory developments, the amount of future capital expenditures may vary. (11) Employees: As of August 31, 1997, Carpenter and its affiliates had 5,081 employees. Item 2. Properties The primary locations of Carpenter's specialty metals manufacturing and fabrication plants are: Reading, Pennsylvania; Washington, Pennsylvania; Orangeburg, South Carolina; El Cajon, California; and Clearwater, Florida. The Reading, Washington and Orangeburg plants are owned in fee. The El Cajon and Clearwater plants are owned, but the land is leased. The primary locations of Carpenter's engineered products manufacturing operations are: Wood-Ridge, New Jersey; Carlstadt, New Jersey; Corby, England; Wilkes-Barre, Pennsylvania; Chicago, Illinois; and Petaluma, California. The Corby and Chicago plants are owned, while the rest of the locations are leased. The Reading plant has an annual practical melting capacity of approximately 226,000 ingot tons of its normal product mix. The annual tons shipped will be considerably less than the tons melted due to processing losses and finishing operations. During the years ended June 30, 1997 and 1996, the plant operated at approximately 90 percent and 93 percent, respectively, of its melting capacity. Carpenter also operates sales offices and distribution and service centers, most of which are owned, at 37 locations in 14 states and 8 foreign countries. The plants, service centers and offices of Carpenter have been acquired at various times over many years. There is an active maintenance program to keep facilities in good condition. In addition, Carpenter has had an active capital spending program to replace equipment as needed to keep it technologically competitive on a world-wide basis. Carpenter believes its facilities are in good condition and suitable for its business needs. Item 3. Legal Proceedings There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Carpenter or any of its subsidiaries is a party or to which any of their properties is subject. There are no material proceedings to which any Director, Officer, or affiliate of Carpenter, or any owner of more than five percent of any class of voting securities of Carpenter, or any associate of any Director, Officer, affiliate, or security holder of Carpenter, is a party adverse to Carpenter or has a material interest adverse to the interest of Carpenter or its subsidiaries. There is no administrative or judicial proceeding arising under any Federal, State or local provisions regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment that (1) is material to the business or financial condition of Carpenter (2) involves a claim for damages, potential monetary sanctions or capital expenditures exceeding ten percent of the current assets of Carpenter or (3) includes a governmental authority as a party and involves potential monetary sanctions in excess of $100,000. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of the Registrant Listed below are the names of corporate executive officers as of fiscal year end, including those required to be listed as executive officers for Securities and Exchange Commission purposes, each of whom assumes office after the annual meeting of the Board of Directors which immediately follows the Annual Meeting of Shareholders. All of the corporate officers listed below have held responsible positions with the registrant for more than five years except for Dennis M. Draeger. Mr. Draeger, who was a director of Carpenter since 1992, resigned as a member of the Board of Directors as of June 30, 1996. Mr. Draeger assumed his duties as Senior Vice President - Specialty Alloys Operations for Carpenter effective July 1, 1996. Prior to that he was President of Worldwide Floor Products Operations for Armstrong World Industries, Inc. since 1994 and he became Group Vice President for Armstrong in 1988. Assumed Present Name Age Positions Position - ---- --- --------- -------- Robert W. Cardy 61 Chairman, President & Chief Executive Officer July 1992 Director November 1990 G. Walton Cottrell 57 Senior Vice President - Finance & Chief Financial Officer January 1993 Dennis M. Draeger 56 Senior Vice President - Specialty Alloys Operations July 1996 Nicholas F. Fiore 57 Senior Vice President - Engineered Products Group January 1993 Robert W. Lodge 54 Vice President - Human Resources September 1991 John R. Welty 48 Vice President, General Counsel & Secretary January 1993 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Common stock of Carpenter is listed on the New York Stock Exchange. The ticker symbol is CRS. Here are the high and low market prices of Carpenter's stock for the past two fiscal years: Quarter Ended: 1997 1996 - --------------------------------------------------------------- High Low High Low September 30 $37-5/8 $31-1/4 $41-3/16 $33-7/8 December 31 $36-3/4 $32 $44 $37-5/8 March 31 $39-1/4 $34-3/4 $42 $35-5/8 June 30 $48-1/8 $37-1/4 $40-1/8 $32 - --------------------------------------------------------------- $48-1/8 $31-1/4 $44 $32 Carpenter has paid quarterly cash dividends on its common stock for 91 consecutive years. The quarterly dividend rate was $.33 per share for fiscal 1997 and 1996, and $.30 per share for fiscal 1995. Carpenter had 5,980 common shareholders of record as of August 29, 1997. The balance of the information required by this item is disclosed in Note 10 to the consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data". Item 6. Selected Financial Data Five-Year Financial Summary Dollar amounts in thousands, except per share data (years ended June 30) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------- Summary of Operations Net Sales $ 939,000 $865,324 $757,532 $628,795 $576,248 Income before extra- ordinary charge & cumulative effect of changes in accounting principles $ 59,993 $ 60,148 $ 47,492 $ 38,289 $ 26,534 Extraordinary charge, net of income taxes $ - $ - $ - $ (2,039) $ - Cumulative effect of changes in accounting principles, net of income taxes $ - $ - $ - $ - $(74,676) Net income (loss) $ 59,993 $ 60,148 $ 47,492 $ 36,250 $(48,142) Financial Position at Year-End Total assets $1,223,001 $911,971 $831,775 $729,911 $699,565 Long-term debt, net $ 244,726 $188,024 $194,762 $158,070 $189,895 Per Share Data Primary: Income before extra- ordinary charge & cumulative effect of changes in accounting principles $ 3.30 $ 3.51 $ 2.81 $ 2.28 $ 1.55 Net income (loss) $ 3.30 $ 3.51 $ 2.81 $ 2.15 $ (3.11) Fully Diluted: Income before extra- ordinary charge & cumulative effect of changes in accounting principles $ 3.16 $ 3.38 $ 2.70 $ 2.20 $ 1.51 Net income (loss) $ 3.16 $ 3.38 $ 2.70 $ 2.08 $ (2.88) Cash dividends-common $ 1.32 $ 1.32 $ 1.20 $ 1.20 $ 1.20 See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussion of factors that affect the comparability of the "Selected Financial Data". Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion of Operations Summary Net sales and earnings trends for the past three fiscal years are summarized below: (in millions - except per share) 1997 1996 1995 - -------------------------------- -------------------------- Net sales $939.0 $865.3 $757.5 Net income $ 60.0 $ 60.1 $ 47.5 Primary earnings per share $ 3.30 $ 3.51 $ 2.81 Net sales increased to a record level in fiscal 1997 primarily as a result of including the operations of Dynamet since its acquisition on February 28, 1997, and increased sales of ceramic products and of the Mexican steel distribution operations. Net income was unchanged in fiscal 1997 as the favorable effects from the inclusion of Dynamet, the improved ceramic sales and lower losses related to the reduced investment in Walsin-CarTech were offset by higher Specialty Alloys Operations environmental costs and extended maintenance shutdown costs at the beginning of fiscal 1997. Primary earnings per common share decreased from a year ago because of increased common shares outstanding. Net sales and earnings increased in fiscal 1996 as a result of a strong market for specialty metals, selling price increases, an improved product mix and cost reduction efforts. The chart below shows net sales by product line for the past three fiscal years: (in millions) 1997 1996 1995 - ------------- ---------------------------------- Sales % Sales % Sales % ---------------------------------- Stainless steel $461.5 49 $496.9 58 $424.7 56 Special alloys 317.9 34 273.4 32 249.0 33 Tool and other steel 69.4 7 62.8 7 59.5 8 Ceramics and other materials 45.8 5 29.3 3 22.6 3 Titanium products 44.4 5 2.9 - 1.7 - ---------------------------------- Total $939.0 100 $865.3 100 $757.5 100 ================================== Results of Operations - Fiscal 1997 Versus Fiscal 1996 Net sales were $939.0 million in fiscal 1997, a 9 percent increase from the $865.3 million level in fiscal 1996. A majority of the increase resulted from the inclusion of Dynamet's sales since acquisition. Increased sales of ceramic products, an improved mix of Specialty Alloys Operations products and increased sales of the Mexican steel distribution operations also added to the higher sales level in fiscal 1997. Unit volume of Specialty Alloys Operations products was unchanged from a year ago. Demand for specialty alloy products continued at a high level across most of the product spectrum, especially special alloys for aerospace and automotive applications. The product mix shifted toward more premium-melted products and away from certain commodity-priced products. Unit selling prices remained relatively constant during fiscal 1997. Cost of sales as a percentage of sales was 74 percent in both years. In fiscal 1997, lower Specialty Alloys Operations raw material costs were offset by higher labor, energy, maintenance shutdown and environmental costs. Specialty Alloys Operations raw material costs per unit purchased decreased by 12 percent during fiscal 1997 versus the year-earlier costs as a result of decreases in the cost of cobalt (26 percent), nickel (11 percent), and chromium (10 percent). Also, the purchase premium for semi-finished and finished products to supplement internal capacity was lower in fiscal 1997. Labor costs per hour for Specialty Alloys Operations production and maintenance employees were up by 2 percent principally as a result of a base wage increase in July 1996 which was partially offset by lower profit sharing costs. Specialty Alloys Operations natural gas and electric costs per unit consumed increased by 14 percent and 6 percent versus fiscal 1996 costs, respectively. Selling and administrative expenses were 13 percent of net sales in fiscal years 1997 and 1996. Costs were higher by $13.5 million primarily because of the inclusion of the costs for acquired companies and increased usage of outside services for revising computer systems to be year 2000 compliant. Interest expense increased by $1.0 million in fiscal 1997 versus fiscal 1996, as a result of a higher level of debt, primarily due to the Dynamet acquisition, offset by an increased level of capitalized interest on capital projects. Equity in losses of the Walsin-CarTech joint venture decreased by $5.8 million in fiscal 1997 due to the fiscal 1996 reduction of the investment in Walsin-CarTech and an improvement in its operating results (described in Note 4 to the consolidated financial statements). Income taxes as a percent of pre-tax income (effective tax rate) increased to 39 percent in fiscal 1997 from 37 percent a year earlier. The fiscal 1997 tax rate was negatively impacted by a federal income tax law change relating to company-owned life insurance programs, while the prior year's tax rate was favorably affected by a state income tax rate change. A reconciliation of the effective rate to the federal statutory rate is presented in Note 16 to the consolidated financial statements. Results of Operations - Fiscal 1996 Versus Fiscal 1995 Net sales were $865.3 million in fiscal 1996, a 14 percent increase from the $757.5 million level in fiscal 1995. The sales improvement was primarily due to higher unit prices and a shift toward higher alloyed products in the Specialty Alloys Operations. Unit volume of Specialty Alloys Operations products was slightly higher than in fiscal 1995. Demand for specialty steel products was at a high level, especially in automotive, aerospace, and chemical and petroleum processing related products. Unit selling prices for specialty steel shipments increased by an average of 8 percent to offset higher labor and other costs and to restore profit margins which had eroded in prior years. A raw material surcharge was established in fiscal 1995 to offset sharply rising raw material costs. The product mix shifted toward more premium-melted products and away from certain commodity-priced products. Approximately 12 percent of the increase in net sales was from the inclusion, in fiscal 1996, of Green Bay Supply Co., Inc., a specialty metals master distributor which was acquired in November 1995, and Parmatech Corporation, a metal injection molded parts business which was acquired in October 1995. Cost of sales as a percentage of sales was 74 percent in both years. Higher Specialty Alloys Operations raw material, labor and other costs were offset by increased selling prices. Raw material costs per unit purchased increased by 11 percent during fiscal 1996 versus the year-earlier costs as a result of increases in the cost of nickel (9 percent), chromium (22 percent) and cobalt (6 percent). Also, in both fiscal years, Carpenter purchased at a premium semi-finished and finished products to supplement internal capacity. Labor costs per hour for Specialty Alloys Operations production and maintenance employees were up by 4 percent, principally as a result of a base wage increase in July 1995 and higher profit sharing costs, partially offset by lower medical costs and higher pension credits. Specialty Alloys Operations natural gas costs per unit consumed decreased by 2 percent versus fiscal 1995 costs, and electricity costs per unit decreased by 3 percent. Selling and administrative expenses fell to 13 percent of net sales versus 14 percent in fiscal 1995, primarily because these costs tend to change less rapidly than sales. Costs were higher by $9.6 million primarily because of increased usage of outside services, additional travel costs and costs of acquired companies. Interest expense increased by $4.4 million in fiscal 1996 versus fiscal 1995, principally as a result of lower capitalized interest and a higher level of debt. Equity in losses of the Walsin-CarTech joint venture increased to $7.0 million in fiscal 1996 versus a loss of $3.0 million in fiscal 1995. Lower sales volume, reduced selling prices and lower production levels were the primary reasons for the increased loss. The fiscal 1996 loss was partially offset by a pre-tax gain of $2.7 million on the sale of a portion of Carpenter's interest in the joint venture. The gain is included in other income on the consolidated statement of income (described in Note 4 to the consolidated financial statements). Income taxes as a percent of pre-tax income (effective tax rate) increased to 37 percent in fiscal 1996 from 36 percent a year earlier. A reconciliation of the effective tax rate to the federal statutory rate is presented in Note 16 to the consolidated financial statements. Management's Discussion of Cash Flow and Financial Condition Cash Flow Cash flow from operations was very strong over the past three fiscal years despite working capital needs to support growth in sales. Inventories, excluding amounts acquired through purchases of businesses, increased $17.3 million, $59.6 million and $29.5 million in fiscal 1997, 1996 and 1995, respectively, due to higher sales levels and a higher valued product mix of the Specialty Alloys Operations. Accounts receivable, excluding amounts relating to acquisitions, increased $3.1 million, $14.8 million and $21.8 million in fiscal 1997, 1996 and 1995, respectively, as a result of increased fourth quarter sales each year. The average days of sales outstanding at the end of fiscal 1997 was comparable to that of the past two fiscal years. Capital expenditures of $93.6 million, $48.6 million and $36.9 million in fiscal 1997, 1996 and 1995, respectively, were concentrated in the Specialty Alloys Operations' Reading, Pennsylvania, plant and were used for increased capacity, normal replacements and modernization. Fiscal 1997 and 1996 major projects included a 20-metric ton vacuum induction degassing and pouring furnace, two vacuum arc remelting furnaces, and annealing facilities. Work has begun on construction of a bar finishing cell and a major rebuild of the 3,000-ton press. During fiscal 1997, Carpenter acquired Rathbone Precision Metals, Inc., and Dynamet Incorporated. During fiscal 1996, the businesses of Green Bay Supply Co., Inc., and Parmatech Corporation were acquired and in fiscal 1995, Carpenter acquired Certech, Inc., and an affiliated company. Fiscal 1996 and 1995 also include other less significant acquisitions. The cost of all acquisitions totaled $86.6 million in cash and $107.2 million in common stock. Details of these transactions are included in Note 3 to the consolidated financial statements. During fiscal 1996, Carpenter sold a portion of its interest in Walsin-CarTech Specialty Steel Corporation, reducing its ownership interest from 19 percent to 5 percent. Carpenter received $32.7 million in cash from the sale which resulted in a $2.7 million pre-tax gain. Details of this transaction are included in Note 4 to the consolidated financial statements. During fiscal 1997, total debt increased by $106.4 million, excluding debt of acquired companies, primarily to finance acquisitions of businesses and the higher level of capital expenditures. During fiscal 1995, $80 million of medium-term notes were issued with a 7.4 percent average interest rate, and a portion of the proceeds were used to retire borrowings under credit arrangements. Details of debt and financing arrangements are provided in Note 8 to the consolidated financial statements. The dividend payout rate on common stock was $1.32 per share for both fiscal 1997 and fiscal 1996 versus $1.20 in fiscal 1995. The preferred stock dividend was maintained at $5,362.50 per share in each of the past three fiscal years. Total dividend payments were $24.4 million, $23.3 million and $21.0 million in fiscal 1997, 1996 and 1995, respectively. Financial Condition During the past three fiscal years, Carpenter maintained the ability to provide adequate cash to meet its needs through strong cash flow from operations, management of working capital and its flexibility to use outside sources of financing to supplement internally generated funds. Carpenter ended fiscal 1997 in a sound liquidity position, with current assets exceeding current liabilities by $144.2 million (a ratio of 1.6 to 1). This favorable ratio is conservatively stated because certain inventories are valued $138.9 million less than the current cost as a result of using the LIFO method. Total debt at June 30, 1997, was $330.6 million, or 36.9 percent of total capital, including deferred taxes, versus 35.3 percent of total capital, including deferred taxes, at June 30, 1996. Financing is available under a $200 million financing arrangement with a number of banks, providing for $150 million of revolving credit to February 2002 and lines of credit of $50 million. Borrowings under this agreement serve as back-up to Carpenter's commercial paper program. Carpenter limits the aggregate commercial paper and credit facility borrowings at any one time to a maximum of $200 million. As of June 30, 1997, $57.5 million was available under the credit facility and commercial paper program. At June 30, 1997, Carpenter had $20 million of medium-term debt securities available for issuance under a Shelf Registration on file with the Securities and Exchange Commission. In summary, Carpenter believes that its present financial resources, both from internal and external sources, are adequate to meet its foreseeable short-term and long-term liquidity needs. Commitments and Contingencies Environmental Carpenter has environmental liabilities at some of its owned operating facilities, and has been designated as a potentially responsible party ("PRP") with respect to certain superfund waste disposal sites. Additionally, Carpenter has been notified that it may be a PRP with respect to other superfund sites as to which no proceedings have been instituted against Carpenter. Neither the exact amount of cleanup costs nor the final method of their allocation among all designated PRPs at these superfund sites has been determined. The estimated range of the reasonably possible future costs of remediation at Carpenter-owned operating facilities and the superfund sites is between $11.2 million and $23.3 million. Carpenter has accrued amounts for environmental remediation costs, including remediation investigation and feasibility study costs, which represent management's best estimate of the probable and reasonably estimable remediation costs. Recoveries of expenditures are recognized as a receivable when they are estimable and probable. The estimated range of the anticipated recoveries for environmental costs is between $7.2 million and $7.5 million. Additional details are provided in Note 17 to the consolidated financial statements. Carpenter does not anticipate that its financial position will be materially affected by additional environmental remediation costs, although quarterly or annual operating results could be materially affected by future developments. Other Carpenter also is defending various claims and legal actions, and is subject to commitments and contingencies that are common to its operations. Carpenter provides for costs relating to these matters when a loss is probable and the amount is reasonably estimable. Additional details are provided in Note 17 to the consolidated financial statements. While it is not feasible to determine the outcome of these matters, in the opinion of management, any total ultimate liability will not have a material effect on Carpenter's financial position or results of operations and cash flows. Forward-Looking and Other Statements This Management Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report on Form 10-K contain various "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which represent Carpenter's expectations or beliefs concerning various future events, include, among other matters, statements concerning future revenues and continued growth in various market segments. These statements are based on current expectations that involve a number of risks and uncertainties which could cause actual results to differ from those of such forward-looking statements. These risks include the following: 1) the cyclical nature of the specialty materials business which are subject to changes in the general economic conditions; 2) the critical importance of certain raw materials used by Carpenter to produce specialty materials that can only be acquired from foreign sources, some of which are located in countries which may be subject to unstable political and economic conditions which may affect the prices of these materials; 3) the susceptibility of export sales to the effects of export controls, changes in legal and regulatory requirements, policy changes affecting the markets, changes in tax laws and tariffs, exchange rate fluctuations, political and economic instability, and accounts receivable collection; and 4) the effects on operations of changes in domestic and foreign governmental laws and public policy, including environmental regulations. Any of these factors could have an adverse and/or fluctuating effect on Carpenter's results of operations. Additional risk factors may be described from time to time with Carpenter's filings with the Securities and Exchange Commission. Carpenter undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements and Supplementary Data Page ---- Consolidated Financial Statements: Report of Independent Accountants 20 Consolidated Statement of Income for the Years Ended June 30, 1997, 1996 and 1995 21 Consolidated Statement of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995 22 Consolidated Balance Sheet as of June 30, 1997 and 1996 23 Consolidated Statement of Changes in Shareholders' Equity for the Years Ended June 30, 1997, 1996 and 1995 24-25 Notes to Consolidated Financial Statements 26-47 Supplementary Data: Quarterly Financial Data (Unaudited) 48 Report of Independent Accountants To the Board of Directors and Shareholders of Carpenter Technology Corporation: We have audited the accompanying consolidated balance sheet of Carpenter Technology Corporation and subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carpenter Technology Corporation and subsidiaries as of June 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. s/Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania July 28, 1997 Consolidated Statement of Income Carpenter Technology Corporation for the years ended June 30, 1997, 1996 and 1995 (in thousands, except per share data) 1997 1996 1995 - --------------------- ---------------------------- Net sales $939,000 $865,324 $757,532 ---------------------------- Costs and expenses: Cost of sales 697,892 636,783 564,169 Selling and administrative expenses 126,357 112,893 103,269 Interest expense 19,930 18,935 14,542 Equity in loss of joint venture 1,188 7,025 3,000 Other income, net (4,238) (5,482) (2,019) ---------------------------- 841,129 770,154 682,961 ---------------------------- Income before income taxes 97,871 95,170 74,571 Income taxes 37,878 35,022 27,079 ---------------------------- Net income $ 59,993 $ 60,148 $ 47,492 ============================ Earnings per common share: Primary $ 3.30 $ 3.51 $ 2.81 Fully diluted $ 3.16 $ 3.38 $ 2.70 Weighted average common shares outstanding: Primary 17,703 16,677 16,327 Fully diluted 18,760 17,604 17,309 See accompanying notes to consolidated financial statements. Consolidated Statement of Cash Flows Carpenter Technology Corporation for the years ended June 30, 1997, 1996 and 1995 (in thousands) 1997 1996 1995 - -------------- --------------------------------- OPERATIONS Net income $ 59,993 $ 60,148 $ 47,492 Adjustments to reconcile net income to net cash provided from operations: Depreciation and amortization 40,985 35,226 32,479 Deferred income taxes 7,144 4,527 3,314 Pension credits (11,064) (10,292) (7,933) Equity in loss of joint venture 1,188 7,025 3,000 Gain on sale of partial interest in joint venture - (2,650) - Changes in working capital and other, net of acquisitions: Receivables (3,097) (14,754) (21,819) Inventories (17,264) (59,619) (29,480) Accounts payable (4,192) 21,265 15,111 Accrued current liabilities 11,174 16,244 6,800 Other, net (10,799) (7,083) (5,177) -------------------------------- Net cash provided from operations 74,068 50,037 43,787 INVESTING ACTIVITIES -------------------------------- Purchases of plant and equipment (93,614) (48,621) (36,945) Disposals of plant and equipment 1,429 2,060 1,424 Acquisitions of businesses, net of cash received (60,233) (13,301) (13,032) Investment in joint venture - - (2,060) Proceeds from sale of partial interest in joint venture - 32,672 - -------------------------------- Net cash used for investing activities (152,418) (27,190) (50,613) -------------------------------- FINANCING ACTIVITIES Provided by (payments on) short-term debt 53,576 (1,884) 20,145 Proceeds from issuance of long-term debt 60,000 - 80,000 Payments on long-term debt (7,138) (9,023) (55,736) Dividends paid (24,383) (23,306) (21,045) Proceeds from issuance of common stock 1,863 4,590 1,745 Payments to acquire treasury stock - - (3,002) -------------------------------- Net cash provided from (used for) financing activities 83,918 (29,623) 22,107 -------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (107) (185) (565) -------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,461 (6,961) 14,716 Cash and cash equivalents at beginning of year 13,159 20,120 5,404 -------------------------------- Cash and cash equivalents at end of year $ 18,620 $ 13,159 $ 20,120 SUPPLEMENTAL DATA: ================================ Cash paid during the year for: Interest payments, net of amounts capitalized $ 18,705 $ 17,900 $ 15,441 Income tax payments, net of refunds $ 23,915 $ 20,942 $ 17,692 Non-cash investing activities: Treasury stock issued for business acquisitions $ 99,517 $ 4,500 $ 3,200 See accompanying notes to consolidated financial statements. Consolidated Balance Sheet Carpenter Technology Corporation June 30, 1997 and 1996 (in thousands, except share data) 1997 1996 - --------------------------------- ----------------------- ASSETS Current assets: Cash and cash equivalents $ 18,620 $ 13,159 Accounts receivable, net of allowance for doubtful accounts ($1,385 and $1,249) 159,863 137,103 Inventories 211,483 160,452 Deferred income taxes - 2,113 Other current assets 12,247 11,643 ----------------------- Total current assets 402,213 324,470 Property, plant and equipment, net 513,636 419,472 Prepaid pension cost 99,748 91,474 Goodwill, net 104,610 18,792 Other assets 102,794 57,763 ----------------------- Total assets $1,223,001 $911,971 ======================= LIABILITIES Current liabilities: Short-term debt $ 82,540 $ 18,964 Accounts payable 78,962 75,811 Accrued compensation 26,932 26,088 Accrued income taxes 19,263 13,656 Deferred income taxes 5,601 - Other accrued liabilities 41,375 30,446 Current portion of long-term debt 3,372 7,010 ----------------------- Total current liabilities 258,045 171,975 Long-term debt, net of current portion 244,726 188,024 Accrued postretirement benefits 135,903 137,738 Deferred income taxes 110,780 84,460 Other liabilities 24,240 20,697 SHAREHOLDERS' EQUITY Preferred stock - authorized 2,000,000 shares 28,224 28,581 Common stock - authorized 50,000,000 shares 98,215 97,729 Capital in excess of par value - common stock 54,338 13,498 Reinvested earnings 303,566 267,956 Common stock in treasury, at cost (3,539) (64,483) Deferred compensation (20,299) (22,830) Foreign currency translation adjustments (11,198) (11,374) ----------------------- Total shareholders' equity 449,307 309,077 ----------------------- Total liabilities and shareholders' equity $1,223,001 $911,971 ======================== See accompanying notes to consolidated financial statements. Consolidated Statement of Changes in Shareholders' Equity Carpenter Technology Corporation for the years ended June 30, 1997, 1996 and 1995
Common Stock Preferred ----------------------- Stock Capital in (in thousands, except Par Value Par Value Excess of Reinvested Treasury share and per share data) of $5 of $5 Par Value Earnings Stock - ---------------------------------------------------------------------------------------- Balances at June 30, 1994 $ 29,029 $ 48,061 $ 50,882 $204,667 $(66,150) Distributions to ESOP (204) 1 9 Stock options exercised, net of 133 shares exchanged 176 1,569 Restricted shares issued, net 107 1,238 (28) Shares purchased (3,002) Shares issued to acquire business 1,022 2,178 Net income 47,492 Cash dividends: Preferred, $5,362.50 per share, net of income taxes (1,599) Common, $2.40 per share (19,446) Reduction of ESOP note Accrued compensation Translation adjustments Other 426 Effects of 2-for-1 common stock split 48,345 (48,345) Balances at June 30, 1995 28,825 96,690 6,801 231,114 (67,002) Distributions to ESOP (244) 36 206 Stock options exercised, net of 41,010 shares exchanged 1,003 3,587 Restricted shares cancelled (138) Shares issued to acquire business 1,843 2,657 Net income 60,148 Cash dividends: Preferred, $5,362.50 per share, net of income taxes (1,572) Common, $1.32 per share (21,734) Reduction of ESOP note Accrued compensation Translation adjustments, net Other 1,061 Balances at June 30, 1996 28,581 97,729 13,498 267,956 (64,483) Distributions to ESOP (357) 52 285 Stock options exercised, net of 45,826 shares exchanged 434 1,429 Restricted shares cancelled (79) Shares issued to acquire business 38,494 61,023 Net income 59,993 Cash dividends: Preferred, $5,362.50 per share, net of income taxes (1,578) Common, $1.32 per share (22,805) Reduction of ESOP note Accrued compensation Translation adjustments Other 632 Balances at June 30, 1997 $ 28,224 $ 98,215 $ 54,338 $303,566 $ (3,539) See accompanying notes to consolidated financial statements.
Consolidated Statement of Changes in Shareholders' Equity Carpenter Technology Corporation for the years ended June 30, 1997, 1996 and 1995
Share Data -------------------------------------------- Foreign Total Common Shares Deferred Currency Share- Preferred----------------------------------- Compen- Translation holders' Shares Net sation Adjustments Equity Issued Issued Treasury Outstanding --------------------------------- -------------------------------------------- Balances at June 30, 1994 $(26,386) $ (959) $239,144 459.9 9,612,181 (1,522,604) 8,089,577 Distributions to ESOP (194) (3.2) 179 179 Stock options exercised, net of 133 shares exchanged 1,745 35,272 35,272 Restricted shares issued, net (1,317) - 21,350 (500) 20,850 Shares purchased (3,002) (53,124) (53,124) Shares issued to acquire business 3,200 53,124 53,124 Net income 47,492 Cash dividends: Preferred, $5,362.50 per share, net of income taxes (1,599) Common, $2.40 per share (19,446) Reduction of ESOP note 1,071 1,071 Accrued compensation 1,171 1,171 Translation adjustments (6,063) (6,063) Other 426 Effects of 2-for-1 common stock split - 9,668,982 (1,523,104) 8,145,878 Balances at June 30, 1995 (25,461) (7,022) 263,945 456.7 19,337,964 (3,046,208) 16,291,756 Distributions to ESOP (2) (3.6) 7,251 7,251 Stock options exercised, net of 41,010 shares exchanged 4,590 200,536 200,536 Restricted shares cancelled 138 - (4,652) (4,652) Shares issued to acquire business 4,500 120,786 120,786 Net income 60,148 Cash dividends: Preferred, $5,362.50 per share, net of income taxes (1,572) Common, $1.32 per share (21,734) Reduction of ESOP note 1,209 1,209 Accrued compensation 1,284 1,284 Translation adjustments, net (4,352) (4,352) Other 1,061 Balances at June 30, 1996 (22,830) (11,374) 309,077 453.1 19,545,751 (2,930,074) 16,615,677 Distributions to ESOP (20) (5.8) 10,400 10,400 Stock options exercised, net of 45,826 shares exchanged 1,863 86,769 86,769 Restricted shares cancelled 79 - (2,590) (2,590) Shares issued to acquire business 99,517 2,772,059 2,772,059 Net income 59,993 Cash dividends: Preferred, $5,362.50 per share, net of income taxes (1,578) Common, $1.32 per share (22,805) Reduction of ESOP note 1,355 1,355 Accrued compensation 1,097 1,097 Translation adjustments 176 176 Other 632 Balances at June 30, 1997 $(20,299) $(11,198) $449,307 447.3 19,642,920 (160,605) 19,482,315 See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements __________ 1. Summary of Significant Accounting Policies Description of Business - The Company is primarily engaged in one business segment - the manufacture, fabrication and distribution of specialty metals. Sales of finished products include stainless steels, special alloys, tool steels and titanium in the forms of bar, rod, wire and strip. Additionally, the Company manufactures certain engineered products including structural ceramics, metal injection molded products and ultra-hard wear parts. The engineered products do not qualify as a reportable segment and therefore are not presented as a separate business segment. The products of the Company are sold primarily in the United States and principally through its own sales organization, with service centers and sales offices located in many of the major cities of the country. Sales outside of the United States, including export sales, were $117.8 million, $96.5 million and $74.7 million in fiscal 1997, 1996 and 1995, respectively. Basis of Consolidation - The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated. The equity method of accounting is used when the Company has a 20%-50% interest in other entities and for investments in corporate joint ventures. Under the equity method, the original investment is recorded at cost and adjusted by the Company's share of undistributed earnings or losses of the entity. Cash Equivalents - Cash equivalents consist of highly liquid instruments with maturities at the time of acquisition of three months or less. Cash equivalents are stated at cost, which approximates market. Inventories - Inventories are valued at the lower of cost or market. Cost for inventories is principally determined by the Last-In, First-Out (LIFO) method. The Company also uses the First-In, First-Out (FIFO) and average cost methods. Depreciation and Amortization - Depreciation for financial reporting purposes is computed by the straight-line method. This method allocates depreciation equally over the estimated useful lives of the assets. Depreciation for income tax purposes is computed using accelerated methods. The costs of intangible assets other than goodwill, which are included in other assets on the consolidated balance sheet, are comprised principally of agreements not to compete, patents, trademarks and tradenames and are amortized on a straight-line basis over their respective estimated useful lives, ranging from 4 to 30 years. 1. Summary of Significant Accounting Policies (continued) Goodwill - Goodwill, representing the excess of the purchase price over the estimated fair value of the net assets of companies acquired to date, is being amortized on a straight-line basis over periods not to exceed 30 years, the estimated life of the goodwill. The Company's policy is to record an impairment loss against the goodwill in the period when it is determined that the carrying amount of the asset may not be recoverable. This determination includes evaluation of factors such as current market value, future asset utilization, business climate and future cash flows expected to result from the use of the net assets. Long-Lived Assets - Effective July 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 requires that long-lived assets, including related goodwill, be reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company evaluates long-lived assets for impairment by individual business unit. There was no cumulative effect resulting from the adoption of SFAS 121 in fiscal 1997. Environmental Expenditures - Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with the Company's capitalization policy. Expenditures that result from the remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed. Liabilities are recognized for remedial activities, including remediation investigation and feasibility study costs, when the cleanup is probable and the cost can be reasonably estimated. Recoveries of expenditures are recognized as receivables when they are estimable and probable. In October 1996, Statement of Position 96-1, "Environmental Remediation Liabilities," was issued and is effective for fiscal 1998. This statement provides guidance for recognizing, measuring and disclosing environmental remediation liabilities. The Company does not expect this statement to have a material effect on its financial position or results of operations. 1. Summary of Significant Accounting Policies (continued) Foreign Currency Translation and Remeasurement - Assets and liabilities of foreign operations, where the functional currency is the local currency, are translated into U.S. dollars at the fiscal year end exchange rate. The related translation adjustments are recorded as cumulative translation adjustments, a separate component of shareholders' equity. Revenues and expenses are translated using average exchange rates prevailing during the year. Foreign currency exchange gains and losses are included in net income. Realized and unrealized foreign currency exchange gains and losses for the years presented were not material. Non-monetary assets and liabilities of foreign operations, where the functional currency is the U.S. dollar or whose economic environment is highly inflationary as defined by SFAS 52, are translated at historical exchange rates. All other assets and liabilities are translated at year-end rates. Inventories charged to cost of sales and depreciation are translated at historical exchange rates. All other income and expense items are translated at average rates of exchange prevailing during the year. Gains and losses that result from translation are included in earnings. Effective January 1, 1997, the Company's operations in Mexico were considered to operate in a highly inflationary economy as defined by SFAS 52. Futures Contracts and Commodity Price Swaps - In connection with the anticipated purchase of raw materials for certain fixed-price sales arrangements, the Company enters into futures contracts and commodity price swaps to reduce the risk of cost increases. The contracts do not have leveraged features and generally are not entered into for speculative purposes. The significant characteristics and terms of the anticipated purchase of raw materials are identifiable, and the contracts are designated and effective as hedges, because of the high correlation between the contracts and the items being hedged. As such, they are accounted for as hedges and unrealized gains and losses are deferred and included in cost of sales in the periods when the related transactions are completed. Foreign Currency Forward Contracts - In connection with certain future payments between the Company and its various European subsidiaries, foreign currency forward contracts are used to reduce the risk of foreign currency exposures. The Company's primary foreign currency exposures are in France. The foreign currency forward contracts do not qualify as hedges for financial reporting purposes, as the 1. Summary of Significant Accounting Policies (continued) anticipated cash flows are not definitive. Therefore, the contracts are marked to market and any related gain or loss is included in income on a current basis. Gains and losses for the years presented were not material to the Company's results of operations or cash flows. Earnings per Common Share - Primary earnings per common share are computed by dividing net income (less preferred dividends, net of tax benefits) by the weighted average number of common shares and common share equivalents outstanding during the period. On a fully-diluted basis, both net earnings and shares outstanding are adjusted to assume the conversion of the convertible preferred stock. The Financial Accounting Standards Board (FASB) issued SFAS 128, "Earnings Per Share," which becomes effective for periods ending after December 15, 1997. The Company will adopt this statement effective with the quarter ending December 31, 1997. SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share. The adoption of SFAS 128 will not have a material effect on the Company's future presentation and disclosure requirements of earnings per share as compared to the current presentation and disclosure requirements. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Company-Owned Life Insurance Program - The Company has a company-owned life insurance program covering essentially all of the U.S.-based employees. The purpose of the program is to provide cash to fund employee benefit obligations and for other corporate purposes. At June 30, 1997 and 1996, the cash surrender values, $81.2 million and $81.4 million, and the insurance policy loans, $80.6 million and $80.7 million, respectively, were netted and included in other assets on the consolidated balance sheet. Reclassifications - Certain reclassifications of prior years' amounts have been made to conform with the current year's presentation. 1. Summary of Significant Accounting Policies (continued) Other Accounting Pronouncements - The FASB issued SFAS 130, "Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," which will be effective for the Company's fiscal year 1999. The impact of these new standards on the Company's future financial statements and disclosures has not been determined. 2. Two-for-One Common Stock Split On August 10, 1995, the Board of Directors of the Company declared a two-for-one common stock split which was distributed to shareholders of record on September 1, 1995. The par value of common shares remained at $5 per share. The effect of the stock split has been retroactively reflected as of June 30, 1995, in the statement of changes in shareholders' equity, but activity for fiscal 1995 was not restated in those statements. All references to the number of common shares and per share amounts elsewhere in the consolidated financial statements and related footnotes reflect the effect of the split for all periods presented. 3. Acquisitions of Businesses During the past three fiscal years, the Company acquired the entities described below, which were accounted for by the purchase method of accounting: Fiscal 1997 On June 19, 1997, the Company acquired the net assets of Rathbone Precision Metals, Inc., for $9.6 million in cash, including acquisition costs. Rathbone is a manu- facturer of custom, cold-drawn metal shapes. The pur- chase price included goodwill of $6.8 million, which is being amortized on a straight-line basis over 20 years. On February 28, 1997, the Company purchased all of the common stock of Dynamet Incorporated in exchange for approximately 2.8 million shares of its treasury common stock with a fair market value of $99.5 million and $51.5 million of cash, including acquisition costs. In addition, the Company entered into consulting and non-competition agreements for $10.3 million, a portion of which is payable over four years. Dynamet is a manufacturer of titanium bar, wire and powder products. Based upon a preliminary allocation, the excess of purchase price over the estimated fair values of the net assets acquired was $80.7 million and has been recorded as goodwill, which is being amortized on a straight-line basis over 30 years. 3. Acquisitions of Businesses (continued) Fiscal 1996 On November 9, 1995, the Company acquired the net assets of Green Bay Supply Co., Inc., for $10.8 million in cash, including acquisition costs. Green Bay is a master distributor which purchases specialty metal products globally and resells them to independent distributors in the United States. The purchase price approximated the fair value of the assets acquired. On October 26, 1995, the Company acquired all of the outstanding shares of Parmatech Corporation in exchange for 120,786 shares of treasury common stock with a fair value of $4.5 million and paid acquisition costs. Parmatech manufactures complex, net or near-net shape parts from a powder metal slurry using an injection molding process. The excess of purchase price over the fair values of the net assets acquired was $4.1 million and has been recorded as goodwill, which is being amortized on a straight-line basis over 20 years. Fiscal 1995 On July 22, 1994, the Company acquired all of the outstanding shares of Certech, Inc., and an affiliated company, for $16.7 million, including acquisition costs, comprised of $13.5 million in cash and 106,248 shares of treasury common stock. Certech manufactures a broad line of complex injection molded ceramics parts. The excess of purchase price over the fair values of the net assets acquired was $8.2 million and has been recorded as goodwill, which is being amortized on a straight-line basis over 20 years. Fiscal 1996 and 1995 also include other acquisitions which are immaterial. The purchase prices have been allocated to the assets purchased and the liabilities assumed based upon the fair values on the dates of acquisition, as follows: (in thousands) 1997 1996 1995 ---------------------------- Working Capital, other than cash $ 26,504 $ 9,457 $ 1,894 Property, plant and equipment 38,800 4,612 10,200 Other assets 27,264 2,158 1,740 Goodwill 87,499 4,094 8,154 Noncurrent liabilities (20,317) (2,520) (5,756) ---------------------------- Purchase price, net of cash received $159,750 $17,801 $16,232 ============================ 3. Acquisitions of Businesses (continued) Deferred tax liabilities included in the allocation totaled $27.0 million in fiscal 1997 and $1.3 million in fiscal 1996 and 1995. The operating results of these acquired businesses have been included in the consolidated statement of income from the dates of acquisition. On the basis of an unaudited pro forma consolidation of the results of operations as if the acquisitions in fiscal 1997 and 1996 had taken place at the beginning of fiscal 1996, consolidated net sales would have been $1,022.8 million for fiscal 1997 and $970.3 million for fiscal 1996. Unaudited consolidated pro forma net income and primary earnings per share would have been $66.7 million and $3.29 for the year ended June 30, 1997, and $66.4 million and $3.32 for the year ended June 30, 1996, respectively. Such pro forma amounts are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisitions had been effective at the beginning of fiscal 1996. As a result of the acquisition of Dynamet Incorporated, Mr. Peter C. Rossin became a director of the Company. He and his wife own of record or beneficially a total of 2,434,494 shares of the Company's common stock or approximately 12% of the shares outstanding as of June 30, 1997. These shares are subject to a Standstill Agreement which provides for certain limitations on either the increase or disposal of their interest in the Company's common stock, solicitation of proxies, involvement in tender offers, business combinations or restructuring of voting securities affecting the Company and on their ability to seek control of or influence the Company's Board of Directors or management. In addition, the Standstill Agreement provides that the Board will recommend the election, as a director of the Company, of Mr. Rossin or another person that he and the other former Dynamet shareholders designate, if, after consultation, the Board determines such person is reasonably acceptable. The Standstill Agreement expires in 2007, unless terminated earlier as a result of a change in control of the Company or a reduction of the voting power of the former Dynamet shareholders below 5% of the Company's outstanding shares. 4. Investment in Joint Venture The Company's investment in Walsin-CarTech Specialty Steel Corporation, a corporate joint venture in Taiwan with Walsin Lihwa Corporation, was $8.6 million at June 30, 1997, and $9.8 million at June 30, 1996, and is included in other assets on the consolidated balance sheet. This investment is being accounted for using the equity method of accounting. From inception on September 2, 1993, through March 19, 1996, the Company owned a 19 percent interest in the joint venture, which became operational in January 1995. On March 19, 1996, the Company sold a portion of its interest in the joint venture to Walsin Lihwa Corporation, reducing its ownership interest to 5 percent. The Company received $32.7 million in cash from the sale which resulted in a $2.7 million pre-tax gain, which is included in other income on the consolidated statement of income for fiscal 1996. Additionally, Walsin Lihwa may acquire the Company's remaining 5 percent interest for the original purchase cost, plus interest at any time prior to March 19, 1998, and holds the right of first refusal should the Company seek to sell its remaining interest in the joint venture. 5. Inventories June 30 (in thousands) 1997 1996 ------------------ Finished and purchased products $121,532 $129,184 Work in process 177,650 134,751 Raw materials and supplies 51,152 58,388 ------------------ Total at current cost 350,334 322,323 ------------------ Less excess of current cost over LIFO values 138,851 161,871 ------------------ $211,483 $160,452 ================== Current cost of LIFO-valued inventories was $317.6 million at June 30, 1997, and $295.4 million at June 30, 1996. The acquisition of Dynamet Incorporated in fiscal 1997 resulted in a new basis of accounting for Dynamet's LIFO inventories which are greater than those reportable for federal income tax purposes by $17.2 million at June 30, 1997. 6. Property, Plant and Equipment June 30 (in thousands) 1997 1996 ------------------ Land $ 8,871 $ 7,374 Buildings and building equipment 183,506 154,871 Machinery and equipment 707,051 620,153 Construction in progress 37,028 27,299 ------------------ Total at cost 936,456 809,697 ------------------ Less accumulated depreciation and amortization 422,820 390,225 ------------------ $513,636 $419,472 ================== 6. Property, Plant and Equipment (continued) The estimated useful lives are principally 45 years for buildings and 20 years for machinery and equipment. The ranges are as follows: Estimated Useful Lives Buildings and building equipment: Land improvements 20 years Buildings and equipment 20 to 45 years Machinery and equipment: Machinery and equipment 5 to 20 years Autos and trucks 3 to 6 years Office furniture and equipment 3 to 10 years For the years ended June 30, 1997, 1996 and 1995, depreciation expense was $36.8 million, $33.7 million and $31.2 million, respectively. 7. Other Accrued Liabilities June 30 (in thousands) 1997 1996 ----------------- Medical expenses $11,031 $10,690 Environmental costs 7,403 1,298 Interest 6,065 5,557 Other 16,876 12,901 ----------------- $41,375 $30,446 ================= 8. Debt Arrangements In February 1997, the Company renegotiated its existing financing arrangements with a number of banks to increase its credit facilities from $150 million to $200 million, lower the costs of the facilities and extend the term to February 2002. The arrangements provide for the availability of $150 million of revolving credit and lines of credit of $50 million and serve as back-up to the Company's commercial paper borrowings. The Company limits the aggregate commercial paper and credit facility borrowings at any one time to a maximum of $200 million. Interest is based on short-term market rates or competitive bids. This financing arrangement replaced the previous revolving credit and lines of credit arrangement. As of June 30, 1997, there were no borrowings outstanding under the revolving credit agreement, $13.5 million outstanding under the lines of credit and $129.0 million of commercial paper outstanding. At June 30, 1997, $60.0 million of short-term debt was classified as long-term debt because the Company has the ability and intent to refinance it on a long-term basis through existing credit facilities. There was $19.0 million of short-term debt outstanding under the previous financing arrangement as of June 30, 1996. 8. Debt Arrangements (continued) During fiscal 1995, the Company issued $80.0 million of medium-term debt securities with a 7.38% average interest rate under a Form S-3 registration statement ("Shelf Registration") on file with the Securities and Exchange Commission. The proceeds were used to retire borrowings under credit arrangements. At June 30, 1997, the Company has an additional $20.0 million of medium-term debt securities available for issuance under the Shelf Registration. For the years ended June 30, 1997, 1996 and 1995, interest cost totaled $22.3 million, $19.3 million and $17.8 million, of which $2.4 million, $.4 million and $3.3 million, respectively, were capitalized. The weighted average interest rates for short-term borrowings during fiscal 1997 and 1996 were 5.9% and 6.0%, respectively. Long-term debt outstanding at June 30, 1997 and 1996, consists of the following: (in thousands) 1997 1996 ------------------ 9% Sinking fund debentures due 2022; sinking fund requirements are $5.0 million annually from 2003 to 2021 $ 99,577 $ 99,559 Medium-term notes at 6.78% to 7.80% due from October 1998 to 2005 80,000 80,000 Short-term debt classified as long-term debt at 5.9% to 6.0% 60,000 - 10.45% Senior notes, series B, due in annual installments of $3.0 million through 1999 6,000 9,000 9.4% Notes - 3,571 Capitalized lease obligations at 7.6% to 10.1% due in installments through 2006 2,088 2,233 Other 433 671 ------------------ Total 248,098 195,034 ------------------ Less amounts due within one year 3,372 7,010 ------------------ $244,726 $188,024 ================== Aggregate maturities of long-term debt for the four years subsequent to June 30, 1998, are $13.2 million in fiscal 1999, $15.1 million in fiscal 2000, $10.1 million in fiscal 2001, and $85.2 million in fiscal 2002. 8. Debt Arrangements (continued) The Company's financing arrangements contain restrictions which, among other things, limit the aggregate amount of the Company's dividends. Reinvested earnings available for dividends at June 30, 1997, were approximately $208.2 million. 9. Financial Instruments The Company's financial instrument portfolio is comprised of cash and cash equivalents, company-owned life insurance, short-term and long-term debt instruments, raw material futures contracts and commodity price swaps and foreign currency forward contracts. The carrying amounts and estimated fair values of the Company's financial instruments were as follows: June 30 (in thousands) 1997 1996 ------------------ ------------------ Carrying Fair Carrying Fair Value Value Value Value ------------------ ------------------ Cash and cash equivalents $ 18,620 $ 18,620 $ 13,159 $ 13,159 Company-owned life insurance $ 88,327 $ 88,327 $ 85,611 $ 85,611 Short-term debt $ 82,540 $ 82,540 $ 18,964 $ 18,964 Long-term debt $248,098 $259,841 $195,034 $205,475 Futures contracts (buy) $ - $ - $ - $ - Foreign currency forward contracts (sell) $ 910 $ 910 $ 7 $ 7 The contract values and estimated fair value of contracts were as follows: June 30 (in thousands) 1997 1996 ------------------ ------------------ Fair Fair Contract Value of Contract Value of Value Contracts Value Contracts ------------------ ------------------ Futures contracts (buy) $21,671 $19,909 $21,610 $20,300 Foreign currency forward contracts (sell) $ 8,180 $ 7,270 $ 4,944 $ 4,937 The carrying amounts for cash, cash equivalents and short-term debt approximate their fair values due to the short maturities of these instruments. The carrying amount for company-owned life insurance is based on cash surrender values determined by the insurance carriers. The fair value of long-term debt as of June 30, 1997 and 1996, was determined by using current interest rates and market values of similar issues. 9. Financial Instruments (continued) The fair value of raw material futures contracts and commodity price swaps was based on quoted market prices for these instruments. These financial instruments have various maturity dates ranging from 1997 to 1999. The fair value of foreign currency forward contracts represents the amount to be exchanged if the existing contracts were settled at year end, based on market quotes. The foreign currency forward contracts have various maturity dates ranging from 1997 to 1998. The Company is exposed to credit risk related to its financial instruments in the event of non-performance by the counterparties. The Company does not generally require collateral or other security to support these financial instruments. However, the counterparties to these transactions are major institutions deemed credit worthy by the Company. The Company does not anticipate non-performance by the counterparties. 10. Common Stock Purchase Rights The Company has issued one common stock purchase right ("Right") for every outstanding share of common stock. Except as otherwise provided in the Rights Agreement, the Rights will become exercisable and separate Rights certifi- cates will be distributed to the shareholders: (1) 10 days following the acquisition of 20 percent or more of the Company's common stock, (2) 10 business days (or such later date as the Board may determine) following the commencement of a tender or exchange offer for 20 percent or more of the Company's common stock, or (3) 10 days after the Company's Board of Directors determines that a holder of 15 percent or more of the Company's shares has an interest adverse to those of the Company or its shareholders (an "adverse person"). Upon distribution, each Right would then entitle a holder to buy from the Company one newly issued share of its common stock for an exercise price of $145. After distribu- tion, upon: (1) any person acquiring 20 percent of the outstanding stock (other than pursuant to a fair offer as determined by the Board), (2) a 20 percent holder engaging in certain self-dealing transactions, (3) the determination of an adverse person, or (4) certain mergers or similar transactions between the Company and holder of 20 percent or more of the Company's common stock, each Right (other than those held by the acquiring party) entitles the holder to purchase shares of common stock of either the acquiring company or the Company (depending on the circumstances) having a market value equal to twice the exercise price of the Right. The Rights may be redeemed by the Company for $.025 per Right at any time before they become exercisable. The Rights Agreement expires on June 26, 2006. 11. Stock-Based Compensation Effective July 1, 1996, the Company adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in accordance with the provisions of SFAS 123, net income would have been reduced by $.9 million or $.05 per share in fiscal 1997. There would have been no effect on net income or earnings per share in fiscal 1996. These pro forma adjustments were calculated using the Black-Scholes option pricing model to value all stock options granted since July 1, 1995, using the following assumptions: 1997 1996 ----------------- Risk free interest rate 6.4% 5.8% Expected volatility 20.6% 20.6% Expected life of options 5 years 5 years Expected dividends 4.2% 4.2% The Company has three stock-based compensation plans for officers and key employees: a 1993 plan, a 1982 plan and a 1977 plan. 1993 Plan: The 1993 plan provides that the Board of Directors may grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and performance share awards, and determine the terms and conditions of each grant. As of June 30, 1997 and 1996, 1,358,455 and 1,545,965 shares, respectively, were reserved for options and share awards which may be granted under this plan. Stock option grants under this plan must be at no less than market value on the date of grant, are exercisable after one year of employment following the date of grant, and will expire no more than ten years after the date of grant. Restricted stock awards vest equally at the end of each year of employment for the five-year period from the date of grant. When the restricted shares are issued, deferred compensation is recorded in the shareholders' equity section of the consolidated balance sheet. The deferred compensation is charged to expense over the vesting period. During fiscal 1997, 1996 and 1995, $.6 million, $.6 million and $.3 million, respectively, were charged to expense for vested restricted shares. 11. Stock-Based Compensation (continued) Performance share awards are earned only if the Company achieves certain performance levels over a three-year period. The awards are payable in shares of common stock and expensed over the three-year performance period. In June 1997 and 1996, 25,700 and 18,400 performance share awards, respectively, were granted contingent on performance over the three fiscal years after grant. During fiscal 1997, $.3 million was charged to expense for earned performance shares. There was no charge to expense for these awards in fiscal 1996. 1982 and 1977 Plans: The 1982 plan expired in June 1992; however, all outstanding unexpired options granted prior to that date remain in effect. Under the 1982 and 1977 plans, options are granted at the market value on the date of grant, and are exercisable after one year of employment following the date of grant. Under the 1982 plan, options granted since August 9, 1990, expire ten years after grant, while options granted prior to that date have expired. Options granted under the 1977 plan expire ten years after grant. At June 30, 1997 and 1996, 48,520 and 164,620 shares, respectively, were reserved for options which may be granted under the 1977 plan. The Company also has a stock option plan which provides for the granting of stock options to non-employee Directors. Options are granted at the market value on the date of the grant and are exercisable after one year of Board service following the date of grant. Options expire ten years after the date of grant. At June 30, 1997 and 1996, 129,000 and 157,000 shares, respectively, were reserved for options which may be granted under this plan. A summary of the option activity under all plans for the past three years follows: Number of Option Price Shares per Share ---------------------------- Balance June 30, 1994 724,352 $19.00-$30.19 Granted 144,000 $28.32-$32.56 Exercised (70,810) $22.38-$30.19 Cancelled (3,390) $24.12-$30.19 ---------------------------- Balance June 30, 1995 794,152 $19.00-$32.56 Granted 270,500 $33.00-$39.12 Exercised (241,546) $19.00-$30.19 Cancelled (9,600) $28.32-$32.56 ---------------------------- Balance June 30, 1996 813,506 $19.00-$39.12 Granted 315,600 $31.63-$45.56 Exercised (132,595) $22.38-$33.00 Cancelled (7,100) $33.00-$39.12 ---------------------------- Balance June 30, 1997 989,411 $19.00-$45.56 ============================ 11. Stock-Based Compensation (continued) At June 30, 1997, 673,811 of the 989,411 options outstanding were exercisable. Of the options outstanding at June 30, 1997, 513,618 relate to the 1993 plan, 108,931 relate to the 1982 plan, 266,860 relate to the 1977 plan and 100,002 relate to the plan for non-employee Directors. 12. Pension Plans The Company has several noncontributory defined benefit pension plans, which cover a majority of its employees. The benefits are based primarily upon employees' years of service and average earnings prior to retirement. The Company's funding policy for the domestic plans is to contribute, at a minimum, amounts sufficient to meet ERISA requirements. Plan assets are held in trust, and consist primarily of publicly traded common stocks and fixed income instruments. Net pension credits included the following components: (in thousands) 1997 1996 1995 -------------------------------- Service cost of benefits earned $ 13,442 $ 11,439 $ 9,852 Interest cost on projected benefit obligation 32,696 28,852 27,255 Return on plan assets: Actual (150,206) (96,868) (83,917) Deferred gain 97,291 50,363 42,733 Net amortization and deferral (2,309) (2,240) (2,727) -------------------------------- Net pension credits $ (9,086) $ (8,454) $ (6,804) ================================ Principal actuarial assumptions: Discount rate 7.5% 7.5% 8.0% Long-term rate of compensation increase 4.5% 4.5% 4.5% Long-term rate of return on plan assets 9.0% 9.0% 9.0% The .5% discount rate change decreased the pension credit by $.8 million in fiscal 1996. 12. Pension Plans (continued) The funded status of these plans at June 30, 1997 and 1996 is summarized as follows: Overfunded Plans Underfunded Plans (in thousands) 1997 1996 1997 1996 --------------------------------------- Plan assets at fair value $718,638 $598,648 $ 2,380 $ 1,888 Actuarial present value of benefit obligations: Vested 391,068 310,648 11,181 9,006 Non-vested 203 60,433 382 397 --------------------------------------- Accumulated benefit obligation 391,271 371,081 11,563 9,403 Effect of future compensation increases 76,676 64,531 2,934 3,248 --------------------------------------- Projected benefit obligation 467,947 435,612 14,497 12,651 --------------------------------------- Plan assets in excess of (less than) projected benefit obligation 250,691 163,036 (12,117) (10,763) Unrecognized net (gain) loss- experience different from assumptions (171,082) (90,990) 3,436 3,527 Unrecognized transition (asset) obligation (11,595) (14,491) 370 417 Unrecognized prior service cost 31,734 33,919 272 294 --------------------------------------- Prepaid (accrued) pension cost $ 99,748 $ 91,474 $ (8,039) $ (6,525) ======================================= Principal actuarial assumptions: Discount rate 7.5% 7.5% 8.0% 8.1% Long-term rate of compensation increase 4.5% 4.5% 7.0% 6.8% During fiscal 1997 the Company established a separate account within a pension plan to fund certain postretirement medical benefits. As a result, all active employees became fully vested in their accrued pension benefits. The actuarial present value of the projected benefit obligation is computed assuming the continuing existence of the plans. The obligation to fund these plans would be substantially higher than the accumulated benefit obligation if the plans were terminated. 12. Pension Plans (continued) The underfunded plans include the pension plan of the Company's Mexican operations, Rathbone Precision Metals, Inc., and several supplemental retirement plans for certain key employees and outside directors. The Company has a company-owned life insurance program covering certain key employees and outside directors, the purpose of which is to provide for the Company's obligation under the supplemental retirement plans. As of June 30, 1997 and 1996, the cash surrender values of $7.2 million and $4.2 million, respectively, were included in other assets on the consolidated balance sheet. The Company also maintains defined contribution pension and savings plans for substantially all domestic employees. Company contributions were $5.3 million in fiscal 1997, $4.8 million in fiscal 1996 and $4.5 million in fiscal 1995. There were 1,357,110 common shares reserved for issuance under the savings plans at June 30, 1997. 13. Postretirement Medical and Life Insurance Benefits In addition to pension plan benefits, the Company provides health care and life insurance benefits for a majority of its retired employees and covered dependents. Eligible employees receive these benefits upon normal retirement. Expense of postretirement medical and life insurance benefits consisted of the following components: (in thousands) 1997 1996 1995 ----------------------------- Service cost of benefits earned $ 2,382 $ 2,317 $ 2,287 Interest cost on accumulated postretirement benefit obligation 10,590 9,767 10,317 Return on plan assets: Actual (9,217) (4,548) (6,023) Deferred gain 6,159 2,274 4,675 Net amortization and deferral (1,200) (1,575) (1,031) ----------------------------- Postretirement medical and life insurance benefits expense $ 8,714 $ 8,235 $10,225 ============================= Principal actuarial assumptions: Discount rate 7.5% 7.5% 8.0% Return on plan assets 9.0% 9.0% 9.0% Trend rate - beginning* 9.0% 10.0% 11.0% Trend rate - ultimate 6.0% 6.0% 6.0% * Declines 1% per year to the ultimate rate. The .5% discount rate change increased expense by $.7 million in fiscal 1996. 13. Postretirement Medical and Life Insurance Benefits (continued) The funded status of the postretirement medical and life insurance benefit plans at June 30, 1997 and 1996, is summarized as follows: (in thousands) 1997 1996 -------------------- Accumulated postretirement benefit obligation (APBO): Retirees $ 86,904 $ 90,669 Fully eligible active plan participants 24,534 24,751 Other active plan participants 29,339 28,968 -------------------- Total APBO 140,777 144,388 Plan assets at fair value 45,588 33,624 -------------------- APBO in excess of plan assets 95,189 110,764 Unrecognized net gain 48,796 35,074 Unrecognized prior service cost (1,948) (2,111) -------------------- Accrued postretirement benefits $142,037 $143,727 ==================== Principal actuarial assumptions: Discount rate 7.5% 7.5% Trend rate - beginning* 8.0% 9.0% Trend rate - ultimate 6.0% 6.0% *Declines 1% per year to the ultimate rate. The Company has been voluntarily contributing amounts into a Voluntary Employee Trust Fund (VEBA) since fiscal 1992. Plan assets are invested in trust-owned life insurance. The health-care cost trend rate assumption has a significant effect on the amounts reported. If the assumed health-care cost trend rate was increased by 1 percent, the APBO at June 30, 1997 would increase by $17.1 million and the postretirement benefit expense for fiscal 1997 would have increased by $1.6 million. 14. Employee Stock Ownership Plan The Company has a leveraged employee stock ownership plan ("ESOP") to assist a majority of its employees with their future retiree medical obligations. The Company issued 461.5 shares of convertible preferred stock at $65,000 per share to the ESOP in exchange for a $30.0 million 15-year 9.345% note which is included in the shareholders' equity section of the consolidated balance sheet as deferred compensation. The preferred stock is recorded net of related issuance costs. 14. Employee Stock Ownership Plan (continued) Principal and interest obligations on the note are satisfied by the ESOP as the Company makes contributions to the ESOP and dividends are paid on the preferred stock. As payments are made on the note, shares of preferred stock are allocated to participating employees' accounts within the ESOP. The Company contributed $1.3 million in fiscal 1997 and 1996, and $1.1 million in fiscal 1995 to the ESOP. Compensation expense related to the plan was $1.9 million in fiscal 1997 and $2.0 million in fiscal 1996 and 1995. As of June 30, 1997, the ESOP held 447.3 shares of the convertible preferred stock, consisting of 140.3 allocated shares and 307.0 unallocated shares. Each preferred share is convertible into 2,000 shares of common stock. There are 894,558 common shares reserved for issuance under the ESOP at June 30, 1997. The shares of preferred stock pay a cumulative annual dividend of $5,362.50 per share, are entitled to vote together with the common stock as a single class and have 2,600 votes per share. The stock is redeemable at the Company's option at $67,600 per share, declining to $65,000 per share by 2001. 15. Supplemental Data (in thousands) 1997 1996 1995 --------------------------- Research and development $12,986 $13,825 $12,302 Repairs and maintenance $58,295 $53,369 $49,305 16. Income Taxes Provisions for income taxes consisted of the following: (in thousands) 1997 1996 1995 ---------------------------- Current: Federal $25,886 $28,057 $20,117 State 2,407 2,018 2,488 Foreign 2,441 420 1,160 Deferred: Federal 4,888 3,589 4,332 State 1,844 (211) (1,437) Foreign 412 1,149 419 --------------------------- $37,878 $35,022 $27,079 =========================== 16. Income Taxes (continued) The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate: (% of pre-tax income) 1997 1996 1995 ---------------------------- Federal tax rate 35.0% 35.0% 35.0% Increase (decrease) in taxes resulting from: State income taxes, net of federal tax benefit 2.8 2.0 4.1 Goodwill amortization 0.7 0.4 0.4 Federal and state tax rate changes 0.3 (0.5) (2.0) Other, net (0.1) (0.1) (1.2) ---------------------------- Effective tax rate 38.7% 36.8% 36.3% ============================ Deferred taxes are recorded based upon temporary differences between financial statement and tax bases of assets and liabilities. The following deferred tax liabilities and assets were recorded as of June 30, 1997 and 1996: (in thousands) 1997 1996 ------------------ Deferred tax liabilities: Depreciation and amortization $124,396 $109,846 Prepaid pensions 34,144 30,659 Intangible assets 11,515 1,060 Inventories 10,206 4,660 Other 11,269 9,954 ------------------ Total deferred tax liabilities 191,530 156,179 ------------------ Deferred tax assets: Postretirement provisions 53,809 54,557 Other reserve provisions 22,278 20,576 Valuation allowance (938) (1,301) ------------------ Total deferred tax assets 75,149 73,832 ------------------ Net deferred tax liability $116,381 $ 82,347 ================== The change in the valuation allowances relate to pre-acquisition net operating loss carryforwards of an acquired company. 17. Commitments and Contingencies Environmental The Company is subject to various stringent federal, state and local environmental laws and regulations. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. The Company accrues amounts for environmental remediation costs which represent 17. Commitments and Contingencies (continued) management's best estimate of the probable and reasonably estimable costs relating to environmental remediation. For the years ended June 30, 1997 and 1995, $5.9 million and $1.0 million, respectively, were charged to operations for environmental remediation costs (no expense was recognized in fiscal 1996). The liability recorded for environmental cleanup costs, including remediation investigation and feasibility study costs, remaining at June 30, 1997 and 1996, was $11.2 million and $5.6 million, respectively. During fiscal years 1997 and 1996, the Company entered into partial settlements of litigation relating to insurance coverages for certain superfund sites and recognized income of $3.0 million and $4.1 million, respectively. The discounted amounts receivable for recoveries from these settlements and from potentially responsible parties ("PRPs") at June 30, 1997 and 1996, were $7.2 million and $4.2 million, respectively. Estimates of the amount and timing of future costs of environmental remediation requirements are necessarily imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology and the identification of presently unknown remediation sites and the allocation of costs among the PRPs. Based upon information presently available, such future costs are not expected to have a material effect on the Company's competitive or financial position. However, such costs could be material to results of operations in a particular future quarter or year. 17. Commitments and Contingencies (continued) Other The Company is also defending various claims and legal actions, and is subject to commitments and contingencies which are common to its operations. The Company provides for costs relating to these matters when a loss is probable and the amount is reasonably estimable. The effect of the outcome of these matters on the Company's future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, in the opinion of management, any total ultimate liability will not have a material effect on the Company's financial position or results of operations and cash flows. SUPPLEMENTARY DATA Quarterly Financial Data (Unaudited) Quarterly sales and earnings results are usually influenced by seasonal factors. The first fiscal quarter (three months ending September 30) is typically the lowest because of annual plant vacation and maintenance shutdowns in this period by Carpenter and by many of its customers. This seasonal pattern can be disrupted by major economic cycles or special accounting adjustments. (dollars in thousands - First Second Third Fourth except per share amounts) Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------- Results of Operations Fiscal 1997 Net sales $194,746 $208,670 $250,869 $284,715 Gross profits $ 46,428 $ 56,601 $ 61,916 $ 76,163 Net income $ 8,075 $ 13,647 $ 15,494 $ 22,777 - -------------------------------------------------------------------------- Fiscal 1996 Net sales $184,469 $210,126 $233,274 $237,455 Gross profits $ 48,264 $ 52,897 $ 58,699 $ 68,681 Net income $ 11,906 $ 12,293 $ 14,726 $ 21,223 - -------------------------------------------------------------------------- Per Common Share Fiscal 1997 Primary earnings $ .46 $ .79 $ .86 $ 1.14 Fully diluted earnings $ .45 $ .75 $ .84 $ 1.10 - -------------------------------------------------------------------------- Fiscal 1996 Primary earnings $ .70 $ .71 $ .86 $ 1.24 Fully diluted earnings $ .67 $ .69 $ .83 $ 1.19 - -------------------------------------------------------------------------- Item 9. Disagreements on Accounting and Financial Disclosure Not Applicable PART III Item 10. Directors and Executive Officers of the Registrant The information required as to directors is incorporated herein by reference to the "Election of Directors" section of the 1997 definitive Proxy Statement. Information concerning Carpenter's executive officers appears in Part I of this Annual Report on Form 10-K. Item 11. Executive Compensation The information required by this item is incorporated herein by reference from the 1997 definitive Proxy Statement under the "Election of Directors" section. Item 12. Security Ownership of Certain Beneficial Owners and Management The security ownership of directors and officers as a group is described in the 1997 definitive Proxy Statement under "Security Ownership of Directors and Officers" section. Such information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference from the 1997 definitive Proxy Statement under the "Election of Directors" section. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents Filed as Part of this Report: (1) The following consolidated financial statement schedule should be read in conjunction with the consolidated financial statements (see Item 8. Financial Statements): Report of Independent Accountants Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is contained in the consolidated financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CARPENTER TECHNOLOGY CORPORATION Our report on the consolidated financial statements of Carpenter Technology Corporation and subsidiaries is included on page 20 of the 1997 Annual Report on Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. s/Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania July 28, 1997 (2) The following documents are filed as exhibits: 2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession 3. Articles of Incorporation and By-Laws of the Company 4. Instruments Defining the Rights of Security Holders, Including Indentures 10. Material Contracts 11. Statement re Computation of Per Share Earnings 12. Statement re Computation of Ratios 23. Consent of Experts and Counsel 24. Powers of Attorney 27. Financial Data Schedule 99. Additional Exhibits (b) Reports on Form 8-K: On May 13, 1997, Carpenter filed Form 8-K/A, Amendment to Current Report as an amendment to Carpenter's Current Report on Form 8-K dated February 28, 1997 and filed March 27, 1997, with respect to preparation of pro forma financial statements of Dynamet Incorporated related to Carpenter's acquisition of that company. Such Form 8-K/A is incorporated by reference herein. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CARPENTER TECHNOLOGY CORPORATION By s/G. Walton Cottrell ----------------------------- G. Walton Cottrell Sr. Vice President - Finance & Chief Financial Officer Date: September 19, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. s/Robert W. Cardy Chairman, President & September 19, 1997 - --------------------- Robert W. Cardy Chief Executive Officer and Director (Principal Executive Officer) s/G. Walton Cottrell Sr. Vice President - September 19, 1997 - --------------------- G. Walton Cottrell Finance & Chief Financial Officer s/Edward B. Bruno Controller (Principal September 19, 1997 - --------------------- Edward B. Bruno Accounting Officer) * Director September 19, 1997 - --------------------- Marcus C. Bennett * Director September 19, 1997 - --------------------- William S. Dietrich II * Director September 19, 1997 - --------------------- C. McCollister Evarts, M.D. * Director September 19, 1997 - --------------------- J. Michael Fitzpatrick * Director September 19, 1997 - --------------------- Carl R. Garr * Director September 19, 1997 - --------------------- William J. Hudson, Jr. * Director September 19, 1997 - --------------------- Arthur E. Humphrey * Director September 19, 1997 - --------------------- Edward W. Kay * Director September 19, 1997 - --------------------- Frederick C. Langenberg * Director September 19, 1997 - --------------------- Robert J. Lawless * Director September 19, 1997 - --------------------- Marlin Miller, Jr. * Director September 19, 1997 - --------------------- Paul R. Roedel * Director September 19, 1997 - --------------------- Peter C. Rossin * Director September 19, 1997 - --------------------- Kathryn C. Turner * Director September 19, 1997 - --------------------- Kenneth L. Wolfe Original Powers of Attorney authorizing John R. Welty to sign this Report on behalf of: Marcus C. Bennett, William S. Dietrich II, C. McCollister Evarts, M.D., J. Michael Fitzpatrick, Carl R. Garr, William J. Hudson, Jr., Arthur E. Humphrey, Edward W. Kay, Frederick C. Langenberg, Robert J. Lawless, Marlin Miller, Jr., Paul R. Roedel, Peter C. Rossin, Kathryn C. Turner, Kenneth L. Wolfe, are being filed with the Securities and Exchange Commission. *By s/John R. Welty -------------------------------- John R. Welty Attorney-in-fact CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS (in thousands) Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions Balance ------------------ at Beg- Charged Charged Balance inning to to at End of Costs & Other Deduc- of Description Period Expenses Accounts(1) tions(2) Period - ----------- ------ -------- -------- ----- ------ Year ended June 30, 1997: Allowance for doubtful accounts receivable $1,249 $ 276 $ 441 $ (581) $1,385 ====== ======= ======= ======= ====== Year ended June 30, 1996: Allowance for doubtful accounts receivable $1,034 $ 440 $ 472 $ (697) $1,249 ====== ======= ======= ======= ====== Year ended June 30, 1995: Allowance for doubtful accounts receivable $ 619 $ 578 $ 338 $ (501) $1,034 ====== ======= ======= ======= ====== (1) Includes beginning balances of acquired businesses and recoveries of accounts previously written off, net of collection expenses. (2) Doubtful accounts written off. F-1 EX-99 2 EXHIBIT INDEX EXHIBIT INDEX ------------- Exhibit No. Title Page - ----------- ----- ---- 2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession A. Agreement and Plan of Merger dated January 6, 1997, by and among Dynamet Incorporated, Shareholders of Dynamet Incorporated and Carpenter is incorporated herein by reference to Exhibit 1 to Carpenter's Current Report on Form 8-K filed on March 27, 1997. 3. Articles of Incorporation and By-Laws A. Restated Certificate of Incorporation is incorporated herein by reference to Exhibit 3A of Carpenter's 1987 Annual Report on Form 10-K. B. By-Laws, amended as of December 5, 1996, are incorporated herein by reference to Exhibit 3B of Carpenter's 1996 Annual Report on Form 10-K and to Exhibit 3 of Carpenter's Form 10-Q Quarterly Report for the quarter ended December 31, 1996. 4. Instruments Defining Rights of Security Holders, Including Indentures A. Restated Certificate of Incorporation and By-Laws set forth in Exhibit Nos. 3A and 3B, above. B. Rights Agreement relating to Rights distributed to holders of Carpenter's Stock, amended as of April 23, 1996, is incorporated by reference to Carpenter's Current Report on Form 8-K filed May 3, 1996. C. Section 5.8 of the Note Agreement dated E-7 August 1, 1988 with respect to the issuance of $9,000,000 9.89% Senior Notes, Series A due August 23, 1994 and $21,000,000 10.45% Senior Notes, Series B due May 15, 1999 by and among Carpenter and certain financial institu- tions identified therein which impose certain restrictions on dividend payments by Carpenter, the relevant portions of which are attached hereto. D. Certificate of Designation, Preferences and Rights of the Series A Convertible Preferred Stock is incorporated herein by reference to Exhibit No. 3.1 to Carpenter's Form 8-K Current Report dated September 6, 1991. E. Indenture related to Carpenter's $100,000,000 of 9.0% Sinking Fund Debentures due 2022 is incorporated herein by reference to Exhibit No. 4A to Carpenter's Form 10-Q Quarterly Report for the quarter ended March 31, 1992. F. Carpenter's Registration Statement No. 33-51613, as filed on Form S-3 on January 6, 1994, with respect to its Medium Term Note Program for issuance of unsecured debt up to $100,000,000 and the Prospectus and Prospectus Supplement, both dated and filed June 14, 1994, with respect thereto are incorporated by reference. G. Indenture dated January 12, 1994, between Carpenter and Morgan Guaranty Trust Company of New York, as Trustee, related to Carpenter's $100,000,000 of unsecured medium term notes registered under Registration No. 33-51613 is incorporated by reference to Carpenter's Report on Form 10-Q for the quarterly period ended December 31, 1993. H. Carpenter's Registration Statement No. 33-54045 as filed on Form S-8 on June 8, 1994, with respect to its Stock-Based Incentive Compensation Plan is incorporated by reference. I. Pricing Supplements Nos. 1 and 2, dated August 8, 1994, as filed on August 9, 1994, to Registration No. 33-51613 with respect to issuance of $15,000,000 of debt under Carpenter's $100,000,000 Medium Term Note Program is incorporated by reference. J. Pricing Supplements Nos. 3 and 4, dated September 12, 1994, as filed on September 13, 1994 to Registration No. 33-51613 with respect to issuance of $15,000,000 of debt under Carpenter's $100,000,000 Medium Term Note Program is incorporated by reference. K. Pricing Supplement No. 5 dated September 21, 1994 as filed on September 22, 1994 to Registration No. 33-51613 with respect to the issuance of $10,000,000 of debt under Carpenter's $100,000,000 Medium Term Note Program is incorporated by reference. L. Pricing Supplement No. 6 dated October 5, 1994 as filed on October 6, 1994 to Registration No. 33-51613 with respect to issuance of $10,000,000 of debt under Carpenter's $100,000,000 Medium Term Note Program is incorporated by reference. M. Pricing Supplements Nos. 7 and 8 dated June 15, 1995 as filed on June 19, 1995 to Registration No. 33-51613 with respect to issuance of $30,000,000 of debt under Carpenter's $100,000,000 Medium Term Note Program is incorporated by reference. 10. Material Contracts A. Supplemental Retirement Plan for Executive Officers, amended as of April 23, 1996, is incorporated herein by reference to Exhibit No. 10A to Carpenter's 1996 Annual Report on Form 10-K. B. Management and Officers Capital Appre- ciation Plan, an Incentive Stock Option Plan, amended as of August 9, 1990, is incorporated herein by reference to Exhibit No. 10B to Carpenter's 1990 Annual Report on Form 10-K. C. Incentive Stock Option Plan for Officers and Key Employees, amended as of August 9, 1990, is incorporated herein by reference to Exhibit No. 10C to the Company's 1990 Annual Report on Form 10-K. D. Directors Retirement Plan is incorporated herein by reference to Exhibit No. 10E to Carpenter's 1983 Annual Report on Form 10-K. E. Deferred Compensation Plan for Nonmanagement Directors of Carpenter Technology Corporation, amended as of December 7, 1995, is incorporated herein by reference to Exhibit No. 10E to Carpenter's 1996 Annual Report on Form 10-K. F. Deferred Compensation Plan for Corporate E-9 and Division Officers of Carpenter Technology Corporation, amended as of April 1, 1997, in the form attached hereto. G. Executive Annual Compensation Plan, E-20 amended as of July 1, 1997, in the form attached hereto. H. Non-Qualified Stock Option Plan For Non-Employee Directors, as amended, is incorporated herein by reference to Appendix A of Carpenter's 1997 Proxy Statement. I. Officers' Supplemental Retirement Plan of Carpenter Technology Corporation is incorporated herein by reference to Exhibit 10I to Carpenter's 1990 Annual Report on Form 10-K. J. Trust Agreement between Carpenter and E-28 the Chase Manhattan Bank, N.A., dated September 11, 1990 as amended and restated on May 1, 1997, in the form attached hereto, relating in part to the Supplemental Retirement Plan for Executive Officers, Deferred Compensation Plan for Corporate and Division Officers and the Officers' Supplemental Retirement Plan of Carpenter Technology Corporation set forth in Exhibits 10A, 10F and 10I above. K. Carpenter Technology Corporation Employee Stock Ownership Plan, effective as of September 6, 1991, is incorporated herein by reference to Exhibit No. 10.1 to Carpenter's Form 8-K Current Report dated September 6, 1991. L. Carpenter Technology Corporation Employee Stock Ownership Plan Trust Agreement dated September 6, 1991, between Carpenter and State Street Bank and Trust Company, not in its individual capacity, but solely in its capacity as the Trustee, is incorporated herein by reference to Exhibit No. 10.2 to Carpenter's Form 8-K Current Report dated September 6, 1991. M. Stock Purchase Agreement dated September 6, 1991, between Carpenter and State Street Bank and Trust Company, not in its individual capacity, but solely in its capacity as the Trustee, is incorporated herein by reference to Exhibit No. 10.3 to Carpenter's Form 8-K Current Report dated September 6, 1991. N. Stock Subscription and Investment E-55 Agreement as amended and restated effective January 1, 1997, by and among Walsin Lihwa Corporation and Carpenter in the form attached hereto. O. Indemnification Agreements, entered into between Carpenter and each of the directors and the following executive officers: Robert W. Cardy, Dennis M. Draeger, G. Walton Cottrell, Nicholas F. Fiore, Robert W. Lodge and John R. Welty are incorporated by reference to the form attached to Carpenter's 1993 Form 10-K. P. Stock-Based Incentive Compensation Plan for Officers and Key Employees, amended as of June 27, 1996, is incorporated herein by reference to Appendix A to the 1996 Proxy Statement. Q. Stock Purchase Agreement dated July 28, 1993, between Carpenter Technology Corporation, Carpenter Investments, Inc. and the shareholders of Aceros Fortuna, S.A. de C.V. and Movilidad Moderna, S.A. de C.V. with respect to the purchase of all the capital stock of Aceros Fortuna and Movilidad Moderna is incorporated by reference to Exhibit 1 to Carpenter's Form 8-K Current Report dated July 28, 1993. R. Distribution Agreement dated January 12, 1994 among Carpenter, CS First Boston Corporation and J.P. Morgan Securities Inc. is incorporated by reference to Exhibit 1 to Carpenter's Registration Statement No. 33-51613. S. Special Severance Agreements entered into between Carpenter and each of the following executive officers: Robert W. Cardy, Dennis M. Draeger, G. Walton Cottrell, Nicholas F. Fiore, Robert W. Lodge, and John R. Welty are incorporated herein by reference to the form attached to Carpenter's 1995 Form 10-K. T. Trust Agreement between Carpenter E-83 and the Chase Manhattan Bank, N.A., dated December 7, 1990 as amended and restated on May 1, 1997, in the form attached hereto, relating in part to the Directors' Retirement Plan and the Deferred Compensation Plan for Nonmanagement Directors set forth in Exhibits 10D and 10E above. 11. Statement re Computation of Per Share E-108 Earnings 12. Statement re Computations of Ratios E-110 23. Consent of Experts and Counsel E-111 Consent of Independent Accountants 24. Powers of Attorney E-112 Powers of Attorney in favor of G. Walton Cottrell or John R. Welty. 27. Financial Data Schedule E-127 99. Additional Exhibits 1997 Proxy Statement, submitted to the SEC via Edgar EX-4 3 NOTE AGREEMENT Excerpt From Note Agreement Relating To $9,000,000 9.89% Senior Notes Series A, Due August 23, 1994 And $21,000,000 10.45% Senior Notes Series B, Due May 15, 1999 Section 5.8. Dividends, Stock Purchases. The Company will not except as hereinafter provided: (a) declare or pay any dividends, either in cash or property, on any shares of its capital stock of any class (except dividends or other distributions payable solely in shares of capital stock of the Company); or (b) directly or indirectly, or through any Subsidiary, purchase, redeem or retire any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock (other than in exchange for or out of the net proceeds to the Company from the substantially concurrent issue or sale of other shares of capital stock of the Company or warrants, rights or options to purchase or acquire any shares of its capital stock); or (c) make any other payment or distribution, either directly or indirectly or through any Subsidiary, in respect of its capital stock; (such declarations or payments of dividends, purchases, redemptions or retirements of capital stock and warrants, rights or options, and all such other distributions being herein collectively called "Restricted Payments"), if (a) any Default or Event of Default shall have occurred and be continuing or (b) after giving effect thereto the aggregate amount of Restricted Payments made during the period from and after December 31, 1987 to and including the date of the making of the Restricted Payment in question, would exceed the sum of (i) $50,000,000, plus (ii) the net proceeds to the Company from the issue or sale of any shares of capital stock of the Company during the period from and after December 31, 1987, plus (iii) the aggregate principal amount of any Adjusted Long-Term Debt of the Company converted into or exchanged for capital stock of the Company after December 31, 1987, plus (iv) 100% of Consolidated Net Income for such period, computed on a cumulative basis for said entire period (or if such Consolidated Net Income is a deficit figure, then minus 100% of such deficit), minus the aggregate amount of payments made by the Company pursuant to (a) and (b) of the next succeeding paragraph. The provisions of this Section 5.8 to the contrary notwithstanding, the Company may (a) make any required redemption of not exceeding 2,000,000 shares of its preferred stock, (b) pay dividends on its capital stock within 90 days of the date of declaration of such dividends, provided that, at the time of declaration, such dividends were permitted by provisions of this Section 5.8, and (c) redeem rights to purchase capital stock of the Company issued pursuant to that certain Rights Agreement dated as of June 26, 1986 between the Company and Morgan Guaranty Trust Company, as Rights Agent, or any similar or successor plans providing for the issuance of capital stock of the Company, or securities convertible into capital stock of the Company, provided that the payments to effect such redemptions shall not exceed $3,000,000 in the aggregate. The Company will not declare any dividend which constitutes a Restricted Payment payable more than 90 days after the date of declaration thereof. For the purposes of this Section 5.8 the amount of any Restricted Payment declared, paid or distributed in property of the Company shall be deemed to be the fair market value (as determined in good faith by an Executive Officer of the Company) of such property at the time of the making of the Restricted Payment in question. EX-10 4 DEFERRED COMP DEFERRED COMPENSATION PLAN FOR OFFICERS AND KEY EMPLOYEES OF CARPENTER TECHNOLOGY CORPORATION -------------------------------- As amended April 1, 1997 This is the Deferred Compensation Plan for Officers and Key Employees of Carpenter Technology Corporation, effective January 1, 1995, established by Carpenter Technology Corporation and its subsidiaries expressly included herein to provide its senior executives with an additional method of planning for their retirement. The Plan is intended to be an "unfunded" plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974. ARTICLE I - DEFINITIONS ----------------------- The following words and phrases as used herein have the following meanings unless the context plainly requires a different meaning: 1.1 Account means the total amount credited to the ------- bookkeeping accounts in which a Participant's Contributions are maintained, including earnings thereon. The Accounts will consist of subaccounts for each type of Contribution made under Article IV, as the Plan Administrator deems necessary. 1.2 Beneficiary means the person that the Participant ----------- designates to receive any unpaid portion of the Participant's Account should the Participant's death occur before the Participant receives the entire balance to the credit of such Participant's Account. If the Participant does not designate a beneficiary, his Beneficiary shall be his spouse if he is married at the time of his death, or his estate if he is unmarried at the time of his death. 1.3 Board of Directors means the board of directors of ------------------ Carpenter Technology Corporation or the Human Resources Committee thereof (including any successor committee performing similar duties), whenever said Board delegates responsibilities under this Plan to such Committee. 1.4 Code means the Internal Revenue Code of 1986, as ---- amended. 1.5 Company means Carpenter Technology Corporation or any ------- successor by merger, purchase or otherwise. 1.6 Compensation means all amounts that are treated as ------------ wages for Federal income tax withholding under Section 3401(a) of the Code for the Plan Year plus amounts that would be paid to the Employee during the year but for the Employee's election under a cash or deferred arrangement described in Section 401(k) of the Code or a cafeteria plan described in Section 125 of the Code. Notwithstanding the preceding sentence, Compensation shall not include: 1.6.1 bonuses or other amounts payable under the Annual Extra Compensation Plan, the Executive Annual Compensation Plan, and the Quarterly Profit Sharing Program; 1.6.2 contributions by the Employer to this or any other plan or plans for the benefit of its employees, except as otherwise expressly provided in this Section 1.6; or 1.6.3 amounts identified by the Employer as expense allowances or reimbursements regardless of whether such amounts are treated as wages under the Code. 1.7 Contribution means an amount deferred under the Plan ------------ pursuant to a Participant's election or an Employer Addition under Article IV, and credited to a Participant's Account. No money or other assets will actually be contributed to such Accounts. 1.8 Effective Date means January 1, 1995. -------------- 1.9 Employee means an individual who is employed by an -------- Employer. 1.10 Employer means the Company and any subsidiary that (1) -------- the Board of Directors designates as an Employer and (2) the Board of such subsidiary approves participation in the Plan. A list of the subsidiaries currently designated as an Employer is attached hereto as Appendix A. 1.11 Employer Addition means contributions made on behalf of ----------------- a Participant by an Employer. 1.12 Executive Annual Compensation Plan means the Carpenter ---------------------------------- Technology Corporation Executive Annual Compensation Plan, as may be amended from time to time. 1.13 Five-Year Medium Term Note Borrowing Rate means the ----------------------------------------- Company's Five-Year Medium Term Note Borrowing Rate, as provided by one of the Company's investment bankers for any such medium term note that would have been issued on November 15 (or the next business day thereafter if November 15 is not a business day) of each Plan Year. 1.14 Participant means a Senior Executive who elects to ----------- participate or is otherwise granted participation in the Plan pursuant to Section 2.2. 1.15 Pension Board means the Pension Board appointed ------------- pursuant to the General Retirement Plan for Employees of Carpenter Technology Corporation, as constituted from time to time. 1.16 Plan means the Deferred Compensation Plan for Officers ---- and Key Employees of Carpenter Technology Corporation, as may be amended from time to time. 1.17 Plan Administrator means the Pension Board. ------------------ 1.18 Plan Year means the 12-month period beginning January 1 --------- and ending December 31. 1.19 Quarterly Profit Sharing Program means the Profit -------------------------------- Sharing Plan of Carpenter Technology Corporation, as may be amended from time to time. 1.20 Senior Executive means an Employee who is classified as ---------------- "exempt" under the Fair Labor Standards Act of 1938, as amended, and whose salary grade is at least 19, or any other Employee who the Board of Directors expressly designates as a Senior Executive. 1.21 Carpenter Special Products Corporation Extra -------------------------------------------- Compensation Plans means the Profit Sharing Plan for Carpenter - ------------------ Special Products Corporation Employees (formerly the Profit Sharing Plan for Special Products Division Employees), as may be amended from time to time; the Management Bonus Plan for Carpenter Special Products Corporation Employees (formerly the Management Bonus Plan for Special Products Division Employees), as may be amended from time to time; and, prior to July 1, 1995, the Carpenter Technology Corporation Annual Extra Compensation Plan for Special Products Division Management Employees. ARTICLE II - PARTICIPATION -------------------------- 2.1 Eligibility to Participate. All Senior Executives are -------------------------- eligible to participate in the Plan. 2.2 Participation. Any Senior Executive who elects to ------------- participate in the Plan shall become a Participant in the Plan immediately upon enrolling as a Participant by the method required by the Plan Administrator. Any Senior Executive receiving Employer Additions shall become a Participant on the date of the initial Employer Addition, if the Participant has not enrolled under the preceding sentence. An individual shall remain a Participant under the Plan until all amounts credited to the Participant's Account have been distributed to the Participant or the Participant's Beneficiary. ARTICLE III - VESTING --------------------- Participants are always fully vested in all amounts credited to their Accounts. ARTICLE IV - CONTRIBUTIONS -------------------------- 4.1 Eligibility to Receive Contributions. Subject to ------------------------------------ Section 5.5.2, a Participant may receive Contributions in each Plan Year that the Participant is a Senior Executive. 4.2 Elective Participant Contributions. ---------------------------------- 4.2.1 Salary Deferral Contributions. A Participant ----------------------------- may elect to defer up to 25% of the Participant's Compensation and to have the Employer make a Contribution of that amount to the Participant's Account under the Plan. 4.2.2 Profit Sharing Deferral Contributions. A ------------------------------------- Participant may elect to defer up to 100% of the amount the Participant is eligible to receive under the Quarterly Profit Sharing Program in any Plan Year and to have the Employer make a Contribution of that amount to the Participant's Account under the Plan. 4.2.3 Annual Executive Compensation Deferral -------------------------------------- Contributions. A Participant may elect to defer up to 100% of - ------------- the amounts the Participant is eligible to receive under the Executive Annual Compensation Plan or the Carpenter Special Products Corporation Extra Compensation Plans in any Plan Year and to have the Employer make a Contribution of that amount to the Participant's Account under the Plan. 4.2.4 Other Deferral Contributions. A Participant ---------------------------- may elect to defer up to 100% of the amount the Participant is eligible to receive under any compensation plan that the Board designates a compensation plan for purposes of this Section 4.2.4, and to have the Employer make a Contribution of that amount to the Participant's Account under the Plan. 4.3 Employer Additions. The Participant's Employer will ------------------ contribute to a separate subaccount on behalf of a Senior Executive whose Company Basic Contributions [as defined in the Savings Plan of Carpenter Technology Corporation ("Savings Plan")] are limited by Code section 401(a)(17). The amount of the Employer Addition will equal the amount that would have been contributed to the Savings Plan as Company Basic Contributions except for such limitation. 4.4 Elections. --------- 4.4.1 Frequency and Timing of Elections. Elections --------------------------------- may be made once each Plan Year and they may not be modified during the Plan Year. For Salary Deferral Contributions, Profit Sharing Deferral Contributions, Other Deferral Contributions and Employer Additions, described in Sections 4.2.1, 4.2.2, 4.2.4, and 4.3 respectively, the Participant must make an election by December 15 of a Plan Year for it to take effect for the next Plan Year. For Annual Executive Compensation Deferral Contributions described in Section 4.2.3, the Participant must make an election by March 31 of the fiscal year for which the award is based. 4.4.2 Duration of Elections. Elections to receive --------------------- Contributions under this Article IV expire at the end of the Plan Year for which the election was made. 4.4.3 Restriction on Elections. Elections to ------------------------ receive Contributions may be in the form of a whole percentage or in $1 increments. 4.5 Earnings. All amounts credited to a Participant's -------- Account shall be credited with earnings at a rate equal to the Five-Year Medium Term Note Borrowing Rate, established as of November 15 (or the next business day thereafter if November 15 is not a business day) of the prior Plan Year. For the first Plan Year, the rate is 8.25%. The Pension Board shall communicate to all Senior Executives the Five-Year Medium Term Note Borrowing Rate for the next Plan Year no later than November 30 of the current Plan Year. Earnings on Contributions shall begin to accrue on the date that such Contributions would have been paid to the Participant but for an election to defer under this Article IV. Earnings shall be compounded semi-annually on each January 1 and July 1. In addition, any distribution not made on either January 1 or July 1 shall have earnings compounded as of the date of distribution. ARTICLE V - DISTRIBUTIONS ------------------------- 5.1 Payment of Distributions. All distributions shall, at ------------------------ the Employer's discretion, be made directly out of the Employer's general assets or from the Carpenter Technology Corporation Non- Qualified Employee Benefits Trust. 5.2 Form of Distributions. A Participant may receive --------------------- distributions in one of the following manners, which the Participant shall elect on the initial enrollment forms. A Participant may elect to receive distributions from each subaccount in different manners and at different times. 5.2.1 A lump sum distribution of the Participant's entire Account; 5.2.2 Ten annual installments, with the distribution each year equal to the product resulting from multiplying the then current Account balance by a fraction. The numerator of the fraction is always one, and the denominator of the fraction is ten for the first distribution and is reduced by one for each subsequent distribution; or 5.2.3 Fifteen annual installments, with the distribution each year equal to the product resulting from multiplying the then current Account balance by a fraction. The numerator of the fraction is always one, and the denominator of the fraction is fifteen for the first distribution and is reduced by one for each subsequent distribution. 5.3 Timing of Distributions. Participants shall elect on ----------------------- their initial enrollment forms when distributions of their Accounts will begin, which shall either be a specific date or event. At any point prior to a year in which a distribution of any or all of a Participant's Account is scheduled for distribution pursuant to this Article V, the Participant shall have the option to further defer all or part of the scheduled distribution to a later year. A scheduled distribution or portion thereof may, however, be further deferred only once. 5.4 Distributions of Employer Additions. In the case of a ----------------------------------- Participant who receives an Employer Addition pursuant to Section 4.3, the distribution of such Employer Addition will be governed by the Participant's election required by December 15 of the immediately preceding Plan Year, pursuant to Section 4.4.1. If the Participant did not make such election during the preceding Plan Year, the Participant will be deemed to have made an initial election for such Employer's Addition to be paid as a lump sum in the month following his Termination of Employment. 5.5 Accelerated Distributions. Subject to the following ------------------------- forfeiture and suspension provisions, a Participant may elect to receive a distribution of all or a portion of his Account prior to the date or dates originally elected under Section 5.3, as long as such distribution is at least $5,000. 5.5.1 Forfeiture of Earnings. A Participant shall ---------------------- forfeit any earnings attributable to the amount distributed pursuant to Section 5.5 that accrued during the six-month period ending on the date of the distribution. The amount of forfeited earnings shall be calculated using the highest interest rate that was in effect during the six-month period. If, however, the actual earnings credited to a Participant's Account are less than the amount determined in the immediately preceding sentence, no amount beyond the actual earnings shall be forfeited. Any amounts forfeited under this Section shall not be distributed or allocated to any other Account in the Plan and shall be forfeited to the Employer. 5.5.2 Suspension of Participation. If a --------------------------- Participant elects to accelerate a distribution under Section 5.5, he will not be entitled to receive any Contributions under Article IV of the Plan for the Plan Year immediately following the Plan Year in which the Participant elected to accelerate a distribution. Any election made to receive Elective Participant Contributions for a Plan Year in which participation is suspended shall be disregarded. 5.6 Termination of Employment. Upon termination of ------------------------- employment, a Participant, or the Beneficiary if the termination is caused by the Participant's death, shall have the following options with respect to the distribution of the Participant's Account: 5.6.1 Reaffirm Current Election. The Participant ------------------------- or Beneficiary may elect to reaffirm the Participant's election under Section 5.3 that was in effect at the time of the Participant's termination; or 5.6.2 Request a New Election. The Participant or ---------------------- Beneficiary may elect new distribution option available under Section 5.2, subject to the Employer's consent. ARTICLE VI - PLAN ADMINISTRATION -------------------------------- 6.1 General. The Plan shall be administered by the Pension ------- Board, which is the Plan Administrator. 6.2 Responsibilities and Reports. The Plan Administrator ---------------------------- may, pursuant to a written resolution, allocate, among one or more of its members, specific responsibilities under the Plan, and the Plan Administrator may name other persons to carry out such responsibilities. The Plan Administrator shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports that are furnished by any actuary, accountant, controller, counsel, investment banker or other person who is employed or engaged for such purposes. 6.3 Governing Law. This Plan shall be governed by and ------------- construed in accordance with the laws of the Commonwealth of Pennsylvania, to the extent not preempted by federal law. ARTICLE VII - CLAIMS PROCEDURE ------------------------------ 7.1 Plan Interpretation. The Human Resources Committee of ------------------- the Board of Directors shall have the authority and responsibility to interpret and construe the Plan and to decide all questions arising thereunder, including, without limitation, questions of eligibility for participation, eligibility for Contributions, the amount of Account balances, and the timing of the distribution thereof, and shall have the authority to deviate from the literal terms of the Plan to the extent it shall determine to be necessary or appropriate to operate the Plan in compliance with the provisions of applicable law. Notwithstanding the above, a member of the Human Resources Committee shall not take any part in decisions regarding his participation in the Plan. 7.2 Denial of Claim for Benefits. Any denial by the Human ---------------------------- Resources Committee of any claim for benefits under the Plan by a Participant or Beneficiary shall be stated in writing by the Human Resources Committee and delivered or mailed to the Participant or Beneficiary. The Human Resources Committee shall furnish the claimant with notice of the decision not later than 90 days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90 day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Human Resources Committee expects to render the final decision. The notice of the Human Resources Committee's decision shall be written in a manner calculated to be understood by the claimant and shall include (i) the specific reasons for the denial, including, where appropriate, references to the Plan, (ii) any additional information necessary to perfect the claim with an explanation of why the information is necessary, and (iii) an explanation of the procedure for perfecting the claim. 7.3 Appeal of Denial. The claimant shall have 60 days ---------------- after receipt of written notification of denial of his or her claim in which to file a written appeal with the Human Resources Committee. As a part of any such appeal, the claimant may submit issues and comments in writing and shall, on request, be afforded an opportunity to review any documents pertinent to the perfection of his or her claim. The Human Resources Committee shall render a written decision on the claimant's appeal ordinarily within 60 days of receipt of notice thereof but, in no case, later than 120 days. ARTICLE VIII - FUNDING ---------------------- 8.1 Funding. The Employer shall not segregate or hold ------- separately from its general assets any amounts credited to the Accounts, and shall be under no obligation whatsoever to fund in advance any amounts under the Plan, including Contributions and earnings thereon. 8.2 Insolvency. In the event that the Employer becomes ---------- insolvent, all Participants and Beneficiaries shall be treated as general, unsecured creditors of the Employer with respect to any amounts credited to the Accounts under the Plan. ARTICLE IX - AMENDMENT AND TERMINATION -------------------------------------- 9.1 Reservation of Rights. The Employer reserves the right --------------------- to amend or terminate the Plan at any time by action of the Board of Directors. Notwithstanding the foregoing, no such amendment or termination shall reduce the balance of any Participant's Account as of the date of such amendment or termination. 9.2 Funding upon Termination. Upon a complete termination ------------------------ of the Plan, the Employer shall contribute to the Carpenter Technology Corporation Non-Qualified Employee Benefits Trust an amount equal to the aggregate of all amounts credited to Participants' Accounts as of the date of such termination. If the Carpenter Technology Corporation Non-Qualified Employee Benefits Trust does not exist at the time the Plan is terminated, the Employer shall create an irrevocable grantor trust to which it will contribute such amounts. This newly created trust shall be designed to ensure that Participants will not be subject to taxation on amounts contributed to and held under the trust on their behalf before the amounts are distributed. 9.3 Survival of Accounts and Elections. Notwithstanding ---------------------------------- any termination of the Plan, the trustee of the trust to which amounts are contributed under Section 9.2 shall maintain the Accounts for Participants in the same manner as under this Plan and all elections for distributions under Article V of the Plan shall survive the termination and remain in effect. ARTICLE X - MISCELLANEOUS ------------------------- 10.1 Limited Purpose of Plan. The establishment or ----------------------- existence of the Plan shall not confer upon any individual the right to be continued as an Employee. The Employer expressly reserves the right to discharge any Employee whenever in its judgment its best interests so require. 10.2 Non-alienation. No amounts payable under the Plan -------------- shall be subject in any manner to anticipation, assignment, or voluntary or involuntary alienation. 10.3 Facility of Payment. If the Plan Administrator, in its ------------------- sole discretion, deems a Participant or Beneficiary who is eligible to receive any payment hereunder to be incompetent to receive the same by reason of age, illness or any infirmity or incapacity of any kind, the Plan Administrator may direct the Employer to apply such payment directly for the benefit of such person, or to make payment to any person selected by the Plan Administrator to disburse the same for the benefit of the Participant or Beneficiary. Payments made pursuant to this Section 10.3 shall operate as a discharge, to the extent thereof, of all liabilities of all Employers and the Plan Administrator to the person for whose benefit the payments are made. DEFERRED COMPENSATION PLAN FOR OFFICERS AND KEY EMPLOYEES OF CARPENTER TECHNOLOGY CORPORATION -------------------------------- APPENDIX A PARTICIPATING SUBSIDIARIES -------------------------- Carpenter Special Products Corporation Dynamet, Inc. As of April 1, 1997 EX-10 5 EXEC ANNUAL COMP EXECUTIVE ANNUAL COMPENSATION PLAN OF CARPENTER TECHNOLOGY CORPORATION EFFECTIVE JULY 1, 1989 Restated July 1, 1997 I. Statement and Purpose of Plan The Executive Annual Compensation Plan provides short-term additional compensation for selected executives based on Company profitability and individual performance. The Plan is separate from the Profit Sharing Plan of Carpenter Technology Corporation which was effective July 1, 1987. The combination of Base Pay and Executive Annual Compensation is intended to provide competitive cash compensation to Participants. II. Definitions A. Base Pay -------- A Participant's Base Pay is the salary paid during the Plan Year before salary reduction for flexible benefits or savings. Covered hours paid include: hours worked, paid time off for vacation, holidays, sickness, military leave, miscellaneous paid absences (moving day, family sickness, poll watching), jury duty and funeral leave, and sick leave covered by salary continuance. Excluded from Base Pay is pay for: Sickness and Accident, Long-Term Disability Insurance, Workers' Compensation, Moving Allowance, Mortgage Interest Differential Allowance, imputed income, severance pay, profit sharing payments, Employee Stock Ownership Plan contributions, and any other cash payments made not otherwise expressly included. B. Company ------- Carpenter Technology Corporation or any successor by merger, purchase or otherwise. C. Employee -------- A person employed by the Company who receives compensation from the Company other than a pension, severance pay, retainer, fee under contract, workers' compensation, unemployment compensation or similar payments. D. Executive Annual Compensation ----------------------------- The dollar payment to Participants under the Plan. E. Net Income ---------- Net Income shall mean the amount shown under that caption in the Company's audited Statement of Income for the Plan Year. F. Participant ----------- Any Employee who on or after July 1, 1989 is in a salaried exempt position classified in salary grade 19 or above unless expressly excluded in writing by the Chief Executive Officer. All Participants in the Plan are eligible for 100% participation from the first day worked in an eligible position. G. Performance Objective - --------------------- A Performance Objective, as listed in Appendix "A", is an objective standard used to determine a Participant's Executive Annual Compensation as a result of Company financial performance that has been established by the Human Resources Committee, or any successor committee performing similar duties (the "Committee"), and approved by the Company's Board of Directors. H. Plan ---- The Executive Annual Compensation Plan of Carpenter Technology Corporation, as defined in this document and as the same may be amended or restated from time-to-time. I. Plan Year --------- The Company's fiscal year. J. Salary Grade Target Percentages ------------------------------- The percentages (as set forth below) of Base Pay paid to a Participant, depending on salary grade, for Company financial and personal performance, respectively, upon 100% attainment of the Target Percent Performance Objective: Target Target Salary Financial Personal Combined Grade Percentage Percentage Percentages ----- ---------- ---------- ----------- 33 48% 12% 60% 32 44% 11% 55% 31 44% 11% 55% ------------------------------------------------------- 30 44% 11% 55% 29 44% 11% 55% 28 44% 11% 55% ------------------------------------------------------- 27 36% 9% 45% 26 36% 9% 45% 25 36% 9% 45% ------------------------------------------------------- 24 32% 8% 40% Target Target Salary Financial Personal Combined Grade Percentage Percentage Percentages ----- ---------- ---------- ----------- 23 32% 8% 40% ------------------------------------------------------- 22 28% 7% 35% 21 28% 7% 35% 20 24% 6% 30% ------------------------------------------------------- 19 20% 5% 25% K. Termination of Employment ------------------------- A Participant's separation from employment with the Company, whether voluntary or involuntary. III. Administration, Operation, and Executive Annual Compensation Payments Executive Annual Compensation shall be comprised of Company Financial and Personal Performance Payments calculated on Base Pay times the percentages determined as follows: A. Company Financial Percentage ---------------------------- Performance Objectives are developed for each Plan Year by the Committee. The Company Financial payout is a range based on the individual Participant's Performance Objective and is calculated and paid in the following manner: 1. Threshold payout at 80% attainment of the Participant's Performance Objective generates 50% of the financial Salary Grade Target Percentage. 2. Target payout at 100% attainment of the Participant's Performance Objective generates 100% of the financial Salary Grade Target Percentage. 3. Maximum payout at 120% attainment of the Participant's Performance Objective generates 200% of the financial Salary Grade Target Percentage. B. Personal Performance Payment Percentage --------------------------------------- In the event of a Company Financial Payment, an additional Personal Performance Payment may be made. A Participant's Personal Performance payment is determined by the individual's performance as measured against predetermined standards of performance. The expected payment for achieving these standards of performance is the Target Personal Percentage. However, a significant deviation in performance against these standards, as determined by the Chief Executive Officer, may result in a payment that can range from 0 to 50% of the EACP Financial Percentage. The Chief Executive Officers' achievement of standards is determined by the Board of Directors. C. Ad Hoc Performance Percentage ----------------------------- Notwithstanding the foregoing section to the contrary, a Personal Performance Payment may be granted by the CEO under this Plan if the Plan's financial threshold is not achieved. The Ad Hoc Performance Percentage shall be determined by the CEO, but in no event shall be greater than the Target Personal Percentage for the Participant's salary grade. Such awards are subject to Board approval prior to payment. IV. Frequency of Calculation Executive Annual Compensation will be calculated at the end of each Plan Year. V. Method of Payment Executive Annual Compensation will be paid as soon as possible following the reporting of Plan Year earnings. VI. New Participants New Participants in the Plan subsequent to the beginning of a Plan Year will have their initial Executive Annual Compensation calculated on their Base Pay paid during the period of the Plan Year in which such Employee was a Participant. VII. Participation Change Participants, whose salary grade change results in a change in the Salary Grade Target Percentage during the Plan Year, will have their Executive Annual Compensation calculated as the sum of the results of multiplying the applicable partial Base Pay by the Salary Grade Target Percentage for each portion of the Plan Year the Participant was in a different salary grade. The individual performance targets will be separately established for each salary grade change and added thereto. VIII. Termination of Participation in the Plan Executive Annual Compensation for Participants after Termination of Employment or termination of eligibility for the Plan, will be based on their Base Pay paid as a Participant during the Plan Year. IX. Vesting Except for payments made by mistake and as otherwise provided in the Plan, all Executive Annual Compensation due pursuant to this Plan shall at all times be 100% vested in the Participant and nonforfeitable. X. Other Benefit Calculations Specific employee benefit plans will include these payments to the extent permitted by the provisions of such employee benefit plan. XI. Plan Amendment and Termination Unless prohibited by law or contract, the Company may amend, terminate or partially terminate the Plan at any time provided, however, that no amendment, partial termination or termination shall prevent the Participant from receiving Executive Annual Compensation as calculated under the terms of this Plan for any partial or full Plan Year participation prior to such amendment, partial termination or termination. Notwithstanding the foregoing to the contrary, extraordinary or unusual items may be given special consideration by the Board of Directors who may amend calculation of the Annual Executive Compensation accordingly. XII. No Guaranty of Employment The adoption and maintenance of the Plan shall not be deemed to be a contract of employment between the Company and any Employee. Nothing herein contained shall be deemed to give any Employee the right to be retained in the employ of the Company or to interfere with the right of the Company to discharge any Employee, at any time, nor shall it be deemed to give the Company the right to require any Employee to remain in its employ, nor shall it interfere with the Employee's right to terminate employment at any time. XIII. Administration The general administration of the Plan and the responsibility for carrying out the provisions thereof with regard to all Participants shall be placed in the Company. Any expenses incurred in administering the Plan shall be paid by the Company. Interpretation of any disputed provisions of this Plan shall be by the non-management members of the Board of Directors and such interpretations shall be final. APPENDIX "A" ----------- The following Performance Objectives have been approved by the Committee: 1. Earnings Before Interest and Income Taxes (EBIT) - The entry ------------------------------------------------ labeled "Income Before Interest and Taxes" as calculated and reported by the Company's Financial Department on the Company's monthly internal financial statements related to the Plan Year used for determination of Base Pay. 2. Return on Assets - Return on Assets shall be computed by ---------------- dividing EBIT by the sum of the Plan Year averages for total inventories (before LIFO), accounts receivable and fixed assets. 3. Return on Equity - Return on Equity shall be computed by ---------------- dividing Net Income by the average shareholders' equity for the Plan Year. Average shareholders' equity shall be computed by adding the amount of consolidated shareholders' equity at the end of the previous Plan Year and at the end of each month during the Plan Year and dividing that sum by 13. EX-10 6 TRUST AGREEMENT EMP TRUST AGREEMENT --------------- Carpenter Technology Corporation Non-Qualified Employee Benefits Trust TRUST AGREEMENT effective as of the 1st day of May, 1997, by and between Carpenter Technology Corporation, a corporation organized under the laws of the State of Delaware (hereinafter referred to as the "Company"), and THE CHASE MANHATTAN BANK, a banking corporation organized under the laws of the State of New York (hereinafter referred to as the "Trustee"). BACKGROUND ---------- The Company and its Affiliates maintain the benefit plans listed on Exhibit A hereto (the "Plans") for the benefit of various of its executives, officers and other selected employees. The Company and its Affiliates intend to create a trust, to which it will contribute cash, or other property acceptable to the Trustee, to help the Company and its Affiliates meet its obligations under the Plans, and to assure that, subject to the sufficiency of the Trust Fund, payments provided for by the Plans are not improperly withheld in the event of a Change in Control of the Company and its Affiliates. The establishment of this Trust shall not affect the Company's and its Affiliates' continuing obligation to make payments under the Plans, except that the liability shall be reduced to the extent payments are made by the Trustee hereunder. The assets of the Trust Fund shall be, and shall remain, subject to the claims of the Company's and its Affiliates' general creditors in the event of the Company's or its Affiliates' insolvency. Otherwise, the Trust shall be irrevocable until all liabilities under all Plans have been satisfied, at which time the Trust shall terminate, and all remaining assets of the Trust Fund shall be returned to the Company. The Trust is intended to be a "grantor trust" with the result that the corpus and income of the Trust are treated as assets and income of the Company and its Affiliates pursuant to sections 671 through 679 of the "Code". The Company and its Affiliates intend that the Plans not be deemed funded (within the meaning of Title I of ERISA) despite the existence of this Trust. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company, its Affiliates, and the Trustee covenant and agree as follows: ARTICLE I DEFINITIONS; ESTABLISHMENT OF TRUST ----------------------------------- Section 1.01 Definitions. Whenever used in this ----------- Trust Agreement, unless otherwise provided or the context otherwise requires: (a) "Account" shall mean an account maintained in ------- respect of a Participant pursuant to Section 4.02. (b) "Affiliate" or "Affiliates" shall mean any --------- ---------- corporation or unincorporated business, controlling, controlled by, or under common control with, the Company within the meaning of sections 414(b) and (c) of the Code, and any organization (whether or not incorporated) which is a member of an affiliated service group [as defined in section 414(m) of the Code] that has adopted participation in the Plans and this Trust with the approval of the Company. A list of participating Affiliates is contained in Exhibit B. (c) "Benefits" shall mean, with respect to each -------- Participant, the benefits payable to or in respect of that Participant pursuant to the applicable Plan listed on Exhibit A. (d) "Change in Control" is defined in Article III. ----------------- (e) "Code" shall mean the Internal Revenue Code of ---- 1986, as amended from time to time. (f) "Committee" shall mean the Company's Pension Board --------- appointed under the Company's General Retirement Plan for Employees of Carpenter Technology Corporation. (g) "Company" shall mean Carpenter Technology ------- Corporation or any successor company by merger, acquisition or otherwise. (h) "ERISA" means the Employee Retirement Income ----- Security Act of 1974, as amended from time to time. (i) "Investment Manager" shall mean any person or ------------------ entity that qualifies as an Investment Manager under section 3(38) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and is appointed by the Pension Board or a duly authorized officer of the Company to manage Trust assets that are not invested in life insurance policies. (j) "Participant" shall mean each person entitled to ----------- benefits under any Plan, including the beneficiaries pursuant to any Plan. (k) "Pension Board" shall mean the Pension Board as ------------- defined in the General Retirement Plan for Employees of Carpenter Technology Corporation. (l) "Plan" shall mean any plan listed on Exhibit A ---- hereto, as in effect from time to time. "Plans" shall mean all such plans. (m) "Trust" shall mean the trust established under ----- this Trust Agreement. (n) "Trust Agreement" shall mean this trust agreement, --------------- as from time to time amended. (o) "Trust Fund" shall mean the trust fund held from ---------- time to time by the Trustee hereunder consisting of all contributions received by the Trustee together with the investments and reinvestment made therewith and all net profits and earnings thereon less all payments and charges therefrom. (p) "Trustee" shall mean The Chase Manhattan Bank, or ------- its successor, or an officer, director or employee of such a Trustee exercising any fiduciary powers under this Trust Agreement; provided, however, that in no event may any subsidiary or affiliate of the Company or any Participant be such a successor Trustee. Section 1.02 Establishment and Title of the Trust. ------------------------------------ The Company hereby establishes with the Trustee a trust to be known as the "Carpenter Technology Corporation Non-Qualified Employee Benefits Trust," consisting of such sums of money and other property acceptable to the Trustee as from time to time may be paid or delivered to the Trustee pursuant to this Trust Agreement. The Trust Fund shall be held by the Trustee in trust and shall be dealt with in accordance with the provisions of this Trust Agreement. Section 1.03 Acceptance by the Trustee. The Trustee ------------------------- accepts the Trust established hereunder on the terms and conditions set forth herein and agrees to perform the duties imposed on it by this Trust Agreement. ARTICLE II INVESTMENT AND ADMINISTRATION OF THE TRUST FUND ----------------------------------------------- Section 2.01 Investment of the Trust Fund. Except as ---------------------------- directed by any Investment Manager, the Pension Board or a duly authorized officer of the Company, the Trustee shall have the exclusive responsibility and authority to hold, invest, reinvest and administer the assets of the Trust, hereinafter referred to as the "Fund", in accordance with the terms of this Trust Agreement. The Trustee shall be under no liability for any loss of any kind that may result when it follows proper written directions of the Pension Board or a duly authorized officer of the Company which are in accordance with the terms of the Trust Agreement and not contrary to law. (a) If an Investment Manager is so appointed by the Pension Board or a duly authorized officer of the Company to manage any portion of the Trust Fund, the Trustee's only responsibility with respect to such portion shall be: (1) except as otherwise directed by the Pension Board or a duly authorized officer of the Company, to retain custody of the assets of such portion of the Trust Fund; and (2) to follow the written directions of the Investment Manager with respect to such portion of the Trust Fund. (b) The Trustee shall incur no liability with respect to the investment of any portion of the Trust Fund if an Investment Manager has been appointed to manage that portion of the Trust Fund, by the Pension Board or a duly authorized officer of the Company for either: (1) following the written directions of the Investment Manager; or (2) failing to act in the absence of written directions from the Investment Manager. Notwithstanding anything to the contrary herein contained, the Pension Board or a duly authorized officer of the Company may direct the transfer of such part or all of the Fund as it shall deem advisable to The Chase Manhattan Bank as trustee of any trust ("Collective Trust") maintained by it as a common trust fund as defined under section 584 of the Code, now or hereinafter maintained by it as a medium for the collective investment of assets of trusts and which it may elect to make available to non-qualified benefit trusts, and the Pension Board or a duly authorized officer of the Company may direct the withdrawal of any part or all of the Fund so transferred. To the extent of the interest of the Trust in any Collective Trust, the terms of the agreement or declaration of trust establishing such Collective Trust shall be a part of this Trust as if set forth in full herein, and any assets transferred to any Collective Trust shall be held, invested and administered in accordance with such agreement or declaration of trust, which shall be controlling notwithstanding any contrary provision of this Agreement. Section 2.02 Plan Insurance. The Company may apply -------------- for and maintain such contracts of insurance with one or more insurance companies and on such rating or risk terms as the Company may determine to be appropriate for the provision of benefits under the Plans. The Trust shall be the policyholder and owner of such contracts. The Trustee, only as directed by the Pension Board or a duly authorized officer of the Company, shall pay premiums or other charges with respect to such contracts from assets of the Trust Fund. Section 2.03 Investments of Insurance. The Pension ------------------------ Board or a duly authorized officer of the Company may direct the Trustee to apply for and maintain contracts of insurance with one or more companies for investment purposes pursuant to Section 2.05(m), using the proceeds of such insurance to fund the Trust. The Trustee shall be the policyholder and owner of such contracts. The Trustee, only as directed by the Pension Board or a duly authorized officer of the Company, shall exercise any and all investment options, decisions or rights that the Trustee has as policyholder and owner of such insurance policies held for investment purposes. (a) If the Trustee is directed by the Pension Board or a duly authorized officer of the Company to purchase an insurance policy for investment purposes, the Trustee's only responsibility with respect to such policy shall be: (1) except as otherwise directed by the Pension Board or a duly authorized officer of the Company, to retain custody of such policy; and (2) to follow the written directions of the Pension Board or a duly authorized officer of the Company with respect to such policy. (b) The Trustee shall incur no liability with respect to the purchase of an insurance policy purchased for investment purposes if directed by the Pension Board or a duly authorized officer of the Company for either: (1) following the written directions of the Pension Board or a duly authorized officer of the Company with respect to such policy; or (2) failing to act in the absence of written directions from the Pension Board or a duly authorized officer of the Company with respect to such policy. Section 2.04 Funding Policy. From time to time the -------------- Pension Board or a duly authorized officer of the Company may communicate to the Trustee in writing the current funding policy and method that have been established to carry out the objectives of the Trust. The Trustee's discretion in investing and reinvesting the principal and income of the Fund shall be subject to the funding policy, and the Trustee shall have the duty to act strictly in accordance with and may rely upon, such funding policy, and any changes therein, as so communicated to the Trustee from time to time in writing. Section 2.05 Investment Powers of Trustee. Subject ---------------------------- to the direction of an Investment Manager, the Pension Board or a duly authorized officer of the Company, or with respect to assets subject to the Trustee's investment, management and control, the Trustee shall have, with respect to any securities or other property at any time held by it and constituting part of the Fund, power: (a) to purchase, receive or subscribe for any securities or other property and to retain in trust such securities or other property; (b) to sell, exchange, redeem or otherwise dispose of any securities or other property at public or private sale for cash, on credit, or for other securities or property, and to grant options for the purchase or exchange thereof without liability on the purchasers to see to the application of the purchase money; (c) to participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to any securities or other property held in the Fund, and to consent to or oppose any such plan or any action thereunder, or any contract, lease, mortgage, purchase, sale or other action by any person or corporation; (d) to deposit any securities or other property with any protective, reorganization or similar committee; and to pay and agree to pay part of the expenses and compensation of any such committee and any assessment levied with respect to any securities or other property so deposited; (e) to exercise conversion and subscription rights pertaining to any securities or other property held in the Fund; (f) to extend the time of payment of any obligation held in the Fund; (g) to enter into stand-by agreements for future investment, either with or without a stand-by fee; (h) to hold any moneys received by the Trustee in a common trust fund as defined under Section 584 of the Code, now or hereinafter maintained by it as a medium for the collective investment of assets of trusts, or any other comparable fund the Trustee deems advisable; (i) to exercise all voting rights with respect to any investment and to grant proxies, discretionary or otherwise; (j) to collect and receive any and all money, securities or other property due to the Fund and to give full discharge therefor; (k) with the consent of the Company, to settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust; with the consent of Carpenter, to commence or defend suits or legal proceedings to protect any interest of the Trust; and, with the consent of Carpenter, to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal (subsequent to a Change in Control the consent of Carpenter is not required to pursue the powers granted in this Section); (l) for the purposes of the Trust and if so instructed by the Investment Manager, the Pension Board or a duly authorized officer of the Company, to borrow money from others, to issue its promissory note or notes therefore, and to secure the repayment thereof by pledging any securities or other property in its possession; provided, however, that no such loan or advance shall be made by the Trustee hereunder other than as temporary advances to the Fund, on a cash or overdraft basis, on which no interest is payable and provided further that no insurance contract shall be pledged except to secure a loan to pay premiums thereon; (m) to purchase insurance contracts, and pay premiums with respect thereto; (n) to organize under the laws of any state a corporation or trust for the purpose of acquiring and holding title to any securities or other property which it is authorized to acquire under this Trust Agreement and to exercise with respect thereto any or all of the powers set forth in this Trust Agreement. Section 2.06 Discretionary Powers of Trustee. The -------------------------------- Trustee shall have the following powers and authority with respect to the fund: (a) to employ suitable agents and counsel and to pay their reasonable and proper expenses and compensation; (b) to register any securities held by it hereunder in its own name or in the name of a nominee with or without the addition of words indicating that such securities are held in a fiduciary capacity and to hold any securities in bearer form and to deposit any securities or other property in a depository or a clearing corporation; (c) to make, execute and deliver, as Trustee, any and all deed, leases, mortgages, conveyances, waivers, releases or other instruments in writing necessary or desirable for the accomplishment of any of the powers listed in Section 2.05; and (d) generally, to do all acts, whether or not expressly authorized, which the Trustee may deem necessary or desirable for the protection of the Fund. Section 2.07 Securities or Other Property. The words ---------------------------- "securities or other property" as used in this Trust Agreement shall be deemed to refer to any property, real or personal, or part interest therein, wherever situate, including, but not limited, to governmental, corporate or personal obligations, trust and participation certificates, leaseholds, fee titles, mortgages and other interests in realty, preferred and common stocks, certificates of deposit, put and call options and other option contracts of any type, foreign or domestic, whether or not traded on any exchange, tangible personal property, contracts for future or immediate receipt or delivery of property, evidences of indebtedness or ownership in foreign corporation or other enterprises, indebtedness of foreign governments, limited partnerships, insurance contracts, and any other evidences of indebtedness or ownership including securities or other property of the Company, without being limited to the classes of property in which trustees are authorized to invest trust funds by any law or any rule of court of any State. Section 2.08 Trustee's Authority. Persons dealing ------------------- with the Trustee shall be under no obligation to see the proper application of any money paid or property delivered to the Trustee or to inquire into the Trustee's authority as to any transaction. Section 2.09 Protection Clause. Neither the Company ----------------- nor its Affiliates nor the Trustee shall be responsible for any insurance company's failure to make payments provided by such contract, or for the action of any person which may delay payment or render a contract null and void or unenforceable in whole or in part. Section 2.10 Following a Change In Control - ----------------------------- Following the occurrence of a Change in Control as defined in Section 3.01, the Trustee shall follow the last funding policy communicated in writing by the Pension Board or a duly authorized officer of the Company prior to such Change in Control. Notwithstanding instructions to the contrary, the maturity of investment instruments shall at all times be selected to permit the timely payment of benefits under the Plans. ARTICLE III CHANGE IN CONTROL ----------------- Section 3.01 Definition of Change in Control. For ------------------------------- purposes of this Trust, a "Change in Control" of the Company shall be deemed to have occurred if: (a) a "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Section 3.01(a), 3.01(c) or 3.01(d) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. Section 3.02 Definition of a Potential Change in ----------------------------------- Control. For purposes of this Trust, a "Potential Change in - ------- Control" of the Company shall be deemed to have occurred if: (a) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (b) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; (c) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities, increases his beneficial ownership of such securities by 5% or more of the combined voting power of the Company's then outstanding securities on the effective date of this Agreement; or (d) the Board of Directors of the Company adopts a resolution to the effect that, for purposes of this Trust, a "potential change in control" has occurred. Such a resolution will be provided to the Trustee in certified form. Section 3.03 Requirement of Notice. Notwithstanding --------------------- the definitions in Sections 3.01 and 3.02, no Change in Control or Potential Change in Control shall be deemed to have occurred for purposes of this Trust Agreement unless and until the Trustee has actual written notice from the Company or from any person who was an officer of the Company prior to the alleged Change in Control or the alleged Potential Change in Control that such Change in Control or Potential Change in Control has occurred. ARTICLE IV CONTRIBUTIONS ------------- Section 4.01 Contributions by the Company. ---------------------------- (a) The Company will deliver contributions hereunder to the Trustee at such times, and in such amounts, as the Company may determine to be appropriate to enable the Trust to accumulate assets sufficient to pay all, or any part, as determined by the Company, of the benefits payable under the Plans. At the time of that delivery, the Company will notify the Trustee of the amount of each contribution attributable to the Company and to each Affiliate. (b) Upon the occurrence of a Potential Change in Control, the Company, if it so chooses, will deliver to the Trustee cash and/or marketable securities having a fair market value in an amount equal to the sum of the amounts, determined by an actuary selected by the Company, which will be sufficient to fund fully the Company's and its Affiliates' obligations to pay to the Participants the full amount of all Benefits to which they may become entitled pursuant to the Plans. The actuarial basis employed by such actuary shall include the following assumptions: no interest will be earned on plan assets; salaries will increase at the rate of 10% per annum; there will be no changes in any of the plans; any dollar limitations imposed on the underlying qualified plans will remain constant; and, an employee will be assumed to terminate employment at such time as to maximize his benefits under the Plans but not later than age 65. Any such contribution shall be identified to the Trustee, by the Company, as a Section 4.01(b) contribution. (c) In addition to contributions made to the Trust pursuant to Sections 4.01(a) and 4.01(b), the Company shall deliver to the Trustee any amounts which the Trustee is required to pay pursuant to Section 6.02. (d) The Trustee shall be responsible only for contributions actually received by it hereunder. The Trustee shall have no duty or authority to ascertain whether any contributions should be made to it or to bring any action or proceeding to enforce any obligation to make any such contribution. (e) In the event that the Trust is overfunded; any amount of such assets constituting the overfunding shall: (1) first, be transferred to the Carpenter Technology Corporation Non-Qualified Benefits Trust for Directors ("the Directors' Trust") until the Directors' Trust becomes overfunded; and (2) second, returned to the Company. (f) For the purposes of Section 4.01(e), above, the Trust is "overfunded" when the amount of assets held in the Trust Fund exceed 110% of the present value of all the unpaid accrued benefits under the Plans. The value of the accrued benefits shall be calculated using the projected benefit obligation method ("PBO"), as described in Statement No. 87 of the Financial Accounting Standards Board, using the actuarial methods and assumptions used for valuing accrued benefits for funding purposes under the General Retirement Plan for Employees of Carpenter Technology Corporation. In calculating the PBO under the Plans, it will be assumed that all participants in the Plans will continue to earn credited service until attaining age 65 and that projected service will also be taken into account. The determination of whether the Trust is overfunded shall be made by a qualified actuary selected by the Human Resources Committee. Section 4.02 Accounts. -------- (a) Before a Change In Control. The Committee shall -------------------------- create a separate Account for each Participant, and cause records to be maintained by the Company, or a separate recordkeeper as the Company's agent, reflecting the amount, if any, credited to that Participant in accordance with the terms of the Deferred Compensation Plan for Corporate and Division Officers of Carpenter Technology Corporation (the "Deferred Compensation Plan"). When a contribution is made, the Committee shall notify the Trustee of the amount of such contribution allocable to each Participant's Account and/or specific plans. The Trustee shall not be required to maintain any separate account records, but shall rely solely upon the information maintained by the Committee and the notice to the Trustee as herein provided. The remainder, (or all thereof if no allocation is indicated) of such contribution shall not be specifically allocated to any Plan or any Participant, but shall be available to discharge the Company's and its Affiliates' obligations to make benefit payments under any of the Plans in accordance with the applicable provisions of Article V. The Company shall, however, provide to the Trustee, with respect to each Plan, at such intervals as the Committee shall determine, but in no event less frequently than annually, a schedule listing each Participant, each Plan under which that Participant has accrued a benefit and the amount of such benefit. The Trustee shall have no responsibility with respect to the determination or accuracy of any such allocations and/or the accrued benefits due any participant or plan as herein provided, but shall rely solely upon such information provided to it by the Company. (b) Following a Change In Control. Upon notice to the ----------------------------- Trustee that a Change in Control has occurred, or that a Potential Change in Control has occurred and that the Company has invoked the allocation procedures of this Section 4.02(b), the Trustee, based upon the schedule of such benefits most recently provided to the Trustee by the Committee, shall allocate all of the Trust Fund's assets as follows: assets shall first be allocated to the Deferred Compensation Plan portion of each Participant's Account in an amount equal to each Participant's accrued benefit therein not previously allocated thereto. In the event that the Trust Fund's assets are insufficient to fully fund each Participant's accrued benefit under the Deferred Compensation Plan, the assets shall be allocated ratably to the Participants' Accounts in the ratio that the accrued benefits in respect of each such Participant under said Deferred Compensation Plan bear to the total accrued benefits of all such Participants under said plan. The balance of the assets shall be allocated to each participant's account in an amount equal to each participant's accrued benefit under all of the Plans other than the Deferred Compensation Plans. If the assets of the Trust Fund, after making provision for the Deferred Compensation Plan, are insufficient to fully fund all of the accrued benefits of all Participants under all of the other Plans, those assets shall be allocated ratably to the Participants' Accounts in the ratio that the accrued benefits in respect of each such Participant under all of such other Plans bear to the total accrued benefits of all such Participants under all such other Plans. Section 4.03 Delivery to the Company. Any Section ----------------------- 4.01(b) contribution delivered to the Trustee shall be returned to the Company without interest on the 181st day following (and exclusive of the date of) its receipt by the Trustee, unless within 180 days following such receipt by the Trustee, a notice of the "Change in Control" shall have been received by the Trustee pursuant to Section 3.03. Such 180-day period shall be extended for an additional 180-day period for any "Potential Change in Control" which occurs or continues during any initial or extended 180-day period. The Committee will provide the Trustee with written notice of any extension. Section 4.04 Trustee's Agent. The Trustee shall be --------------- entitled to retain such actuarial, accounting, legal and other services as it may deem necessary to accomplish and/or maintain such allocations, payments and/or Participant Account records as are provided for under Articles IV and V hereof or to conduct its investment responsibilities under Section 2.06, and to pay for such services as an expense of the Trust Fund out of the assets of the Trust Fund, unless promptly paid by the Company. ARTICLE V PAYMENT OF BENEFITS ------------------- Section 5.01 Payments by Trustee. ------------------- (a) Prior to a Change In Control. Until such time as ---------------------------- Section 5.01(b) applies, all payments to Participants in any of the Plans shall be made by the Company and its Affiliates, as agents for the Trustee, in accordance with the applicable provisions of the Plans. Each month, upon receipt of written instructions to the Trustee from the Committee of the amount needed to pay such benefits the Trustee shall promptly disburse such funds to the Company and, upon that disbursement shall have no further responsibility with respect to such funds or their application. (b) Following a Change In Control. Following notice ----------------------------- to the Trustee that a Change in Control has occurred, and subject to the limitation of Section 5.01(c), the Trustee shall make payments to Participants and their beneficiaries from the Trust Fund in accordance with the payment schedule most recently provided by the Committee to the Trustee prior to the occurrence of the Change in Control; provided, however, that if the Company and a Participant agree to the substitution of a new payment schedule with respect to such Participant following the occurrence of a Change in Control, the Trustee shall instead make payments in accordance with such substitute payment schedule. In the event that the Company and a Participant (or in the event of his death, his Beneficiary) disagree as to the amount, form or duration of benefit payments under a Plan, the Trustee shall continue to make benefit payments pursuant to the payment schedule most recently provided by the Committee prior to a Change in Control until authorized to make payments under a substitute schedule by both the Participant (or Beneficiary) and the Company or until the Trustee receives a final non-appealable order from a court of competent jurisdiction to alter such benefit payment schedule. (c) Any amount paid under this Section 5.01 shall be charged by the Committee or the Trustee, as the case may be, against the Account of the applicable Participant and no payment with respect to an Account shall be made in excess of the amount credited to such Account. (d) The Trustee shall not make any payments to Participants or beneficiaries from the Trust Fund except as provided in this Section 5.01 even though it may be informed from another source that payments are due under a Plan. The Trustee shall be fully protected in making payments or omitting to make payments in accordance with Section 5.01(b). Section 5.02 Determinations by Committee. --------------------------- (a) If at any time the Committee or, if Section 5.01(b) applies, the Trustee, determines that any amount held in the Trust Fund is includible in the gross income of a Participant or his beneficiary for federal income tax purposes prior to payment of such amount from the Trust Fund, the Trustee, upon notice from the Committee or, if Section 5.01(b) applies, upon notice by a Participant or Beneficiary, in the format provided in Exhibit B, that based on a (i) change in the tax or revenue laws of the United States of America, (ii) a published ruling or similar announcement issued by the Internal Revenue Service, (iii) a regulation issued by the Secretary of the Treasury or his delegate, (iv) a decision by a court of competent jurisdiction involving the Participant or Beneficiary, or (v) a closing agreement made under Code Section 7121 that is approved by the Internal Revenue Service and involves the Participant or Beneficiary, that Participant or Beneficiary has recognized or will recognize income for federal income tax purposes with respect to amounts that are or will be payable to him under the Plans before they are paid to him, shall pay such amount to such person in the manner directed by the Committee or by such notice to the Trustee and the Participant's Account shall be charged, or his accrued benefit reduced, accordingly. (b) If at any time the Committee prior to a Change in Control determines that the amount allocated to the Account of any Participant exceeds the amount reasonably expected to be necessary to provide the Benefits payable in respect of such Participant from such Account, such excess may be reallocated to the Accounts of other Participants or held as part of the unallocated Fund, as determined by the Committee. If at any time prior to a Change in Control the Committee determines that the Benefits in respect of all Participants have been paid in full, the Committee shall so notify the Trustee in writing. Section 5.03 Withholding, Returns and Reports. -------------------------------- (a) Prior to a Change in Control. Prior to a Change ---------------------------- in Control, the Company and its Affiliates shall withhold all required federal, state and local taxes from benefit payments under any of the Plans, and remit those withholdings to the appropriate taxing authorities. The Company and its Affiliates shall also be responsible for the preparation of all information reports, returns, receipts and other communications required by Chapter 61 of the Code to be filed with, or distributed to, any person or governmental entity. (b) Following a Change in Control. Following a Change ----------------------------- in Control, the Trustee shall assume the Company's and its Affiliates' responsibilities under Section 5.03(a) with respect to benefit payments under any of the Plans, and shall reduce such benefit payments by the amount of any such required withholding. The Trustee shall remit the net benefit payments to the Participants and shall pay the required tax withheld to the Company and its Affiliates, which shall continue to be responsible for the preparation and filing of all items required by Chapter 61 of the Code, as enumerated in Section 5.03(a). (c) The Company, its Affiliates and the Trustee shall cooperate with each other in providing any information reasonably necessary to enable the other to carry out any of its responsibilities under this Section 5.03. Section 5.04 Company's Continuing Obligations. -------------------------------- Notwithstanding any provisions of this Trust Agreement to the contrary, the Company and its Affiliates shall remain obligated to pay the Benefits under the Plan. To the extent the amount in the Trust Fund is not sufficient to pay any Benefits when due, the Company and its Affiliates shall pay such deficiency directly to the person entitled thereto. Nothing in this Trust Agreement shall relieve the Company and its Affiliates of its liabilities to pay the Benefits except to the extent such liabilities are met by the application of Trust Fund assets. Section 5.05 Company's Income. The Company agrees ---------------- that all income, deductions and credits of the Trust Fund belong to it as owner for income tax purposes and will be included on the Company's income tax returns to the extent required by applicable law. ARTICLE VI CONCERNING THE TRUSTEE ---------------------- Section 6.01 Notices to the Trustee. Except as ---------------------- provided in Section 5.02, the Trustee may rely on the authenticity, truth and accuracy of: (a) any notice, direction, certification, approval or other writing of the Company, if evidenced by an instrument signed in the name of the Company by its Chairman, President, any Vice President, Secretary, Assistant Secretary or Treasurer, and believed in good faith by it to be genuine; (b) any notice, direction, certification, approval or other written, oral or other transmitted form of instruction received by the Trustee and believed by it in good faith to be genuine and to be sent by or on behalf of the Committee; or (c) any copy of a resolution of the Board of Directors of the Company, if certified by the Secretary or an Assistant Secretary of the Company under its corporate seal. (d) The Company shall furnish the Trustee from time to time with a list of the names and signatures of the officers or other persons authorized to act under this Section 6.01(a) and (b), or in any other manner authorized to notify or instruct the Trustee pursuant to the provisions of this Agreement. Any such list shall be certified by the Secretary or an Assistant Secretary of the Company, and may be relied upon by the Trustee until it receives a revised list. Section 6.02 Expenses of the Trust Fund. The Trustee -------------------------- shall pay out of the Trust Fund: (a) all brokerage fees and transfer tax expenses and other expenses incurred in connection with the sale or purchase of investments; (b) all real and personal property taxes, income taxes and other taxes of any kind at any time levied or assessed under any present or future law upon, or with respect to, the Trust Fund or any property included in the Trust Fund; (c) the Trustee's compensation and expenses as provided in Section 6.03, unless promptly paid by the Company; and (d) unless promptly paid by the Company, all other reasonable expenses of administering the Trust. Notwithstanding the foregoing, the Trustee shall, at Company expense and direction, contest the validity of any taxes in any manner deemed appropriate by the Company or its counsel, but only if it has received an indemnity bond or other security satisfactory to it to pay any expenses of such contest; provided, however, that the Trustee shall have no obligation to contest if it receives an opinion of counsel of its choice to the effect that there is no basis in law or fact for such contest. Alternatively, the Company may itself contest the validity of any such taxes. Section 6.03 Compensation of the Trustee. The --------------------------- Company will pay to the Trustee compensation for its services from time to time in accordance with its schedule of fees then in - ---- effect for trusts of similar nature, and will reimburse the Trustee for all reasonable expenses (including attorneys' fees) incurred by the Trustee in the administration of the Trust. Section 6.04 Protection of the Trustee. ------------------------- (a) The Company and its Affiliates agree to indemnify and hold harmless the Trustee from and against any and all damages, losses, claims or expenses as incurred (including expenses of investigation and fees and disbursements of counsel to the Trustee and any taxes imposed on the Trust Fund or income of the Trust) arising out of or in connection with the performance by the Trustee of its duties hereunder, except to the extent that any such damages, losses, claims or expenses result from the negligence or willful misconduct of the Trustee, its officers, employees or agents. (b) The Trustee shall incur no liability to any person in discharging its duties hereunder for any action taken or omitted in good faith in conformity with the terms of this Trust Agreement. Each direction, notice, request or approval provided (whether or not certified to the Trustee in writing) by the Company, or the Pension Board/Committee, shall constitute a certification by the Company to the Trustee that such direction is in conformity with the terms of the Plan and applicable law. Under no circumstances shall the Trustee incur liability to any person for any indirect, consequential or special damages (including, without limitation, lost profits) of any form, whether or not foreseeable and regardless of the form of the action in which such a claim may be brought, with respect to the Trust or its role as Trustee, except as otherwise required by ERISA or New York State Law. Section 6.05 Duties of the Trustee. The Trustee will --------------------- be under no obligation to perform any duties whatsoever, except such duties as are specifically set forth as such in this Trust Agreement, and no implied covenant or obligation will be read into this Trust Agreement against the Trustee. The Trustee will not be compelled to take any action toward the execution or enforcement of the Trust or to prosecute or defend any suit in respect thereof, unless indemnified to its satisfaction against loss, costs, liability and expense or there are sufficient assets in the Trust Fund to provide such indemnity; and the Trustee will be under no liability or obligation to anyone with respect to any failure on the part of the Company to perform any of its obligations under the Plans. Nothing in this Trust Agreement should be construed as requiring the Trustee to make any payment in excess of amounts held in the Trust Fund at the time of such payment. Section 6.06 Settlement of Accounts of the Trustee. ------------------------------------- The Trustee shall keep or cause to be kept accurate and detailed records of all investments, receipts, disbursements and other transactions hereunder. Such records shall be open to inspection and audit at all reasonable times during normal business hours by any person designated by the Company. At least annually, or upon such more frequent intervals, but not more frequent than monthly, as the Company may direct, the Trustee shall file with the Company a written statement, listing the investments of the Trust Fund and any uninvested cash balance thereof, and setting forth all receipts, disbursements, payments and other transactions respecting the Trust Fund not included in any such previous statement. Any statement, when approved by the Company, will be binding and conclusive on the Company and its Affiliates; and the Trustee will thereby be released and discharged from any liability or accountability to the Company and its Affiliates with respect to all matters set forth therein. Omission by the Company or its Affiliates to object in writing to any specific items in any such statement, which shall be deemed an account stated, within ninety (90) days after its delivery will constitute approval of the account by the Company and its Affiliates. No other accounts or reports shall be required to be given to the Company, except as stated herein or except as otherwise agreed to in writing by the Trustee. Except as provided above, the Trustee shall not be required to file an accounting, judicial or otherwise. Section 6.07 Right to Judicial Settlement. Nothing ---------------------------- contained in this Trust Agreement shall be construed as depriving the Trustee of the right to have a judicial settlement of its accounts, and upon any proceeding for a judicial settlement of the Trustee's accounts or for instructions the only necessary party thereto in addition to the Trustee shall be the Company. Section 6.08 Resignation or Removal of the Trustee. ------------------------------------- The Trustee may at any time resign upon sixty (60) days notice in writing to the Company (which sixty (60) days notice requirement may be waived by agreement in writing of the Company). Prior to a Change in Control, or a Potential Change in Control, the Trustee may be removed by the Company upon sixty (60) days notice in writing to the Trustee (which sixty (60) days notice requirement may be waived by agreement in writing of the Trustee). Section 6.09 Appointment of Successor Trustee. In -------------------------------- the event of the resignation or removal of the Trustee, or in any other event in which the Trustee ceases to act, a successor trustee may be appointed by the Company by instrument in writing delivered to and accepted by the successor trustee. Notice of such appointment will be given by the Company to the retiring trustee, and the successor trustee will deliver to the retiring trustee an instrument in writing accepting such appointment. If no appointment of a successor trustee is made within a reasonable time after such a resignation, removal or other event, any court of competent jurisdiction may appoint a successor trustee. In the event of such resignation, removal or other event, the retiring trustee or its successors and assigns shall file with the Company a final statement to which the provisions of Section 6.06 shall apply. In the event of the appointment of a successor trustee, such successor trustee will succeed to all the right, title and estate of, and will be, the Trustee; and the retiring trustee will after the settlement of its final account as provided for in Section 6.06, and the receipt of any compensation or expenses due it, deliver the Trust Fund to the successor trustee together with all such instruments of transfer, conveyance, assignment and further assurance as the successor trustee may reasonably require. The retiring trustee will retain a first lien upon the Trust Fund to secure all amounts due the retiring trustee pursuant to the provisions of this Trust Agreement. The Company will provide the Trustee with a ratification and release upon such resignation, removal or other event. Section 6.10 Merger or Consolidation of the Trustee. ------------------------------------- Any corporation continuing as the result of any merger or resulting from any consolidation to which merger or consolidation the Trustee is a party, or any corporation to which substantially all the business and assets of the Trustee may be transferred, will be deemed automatically to be continuing as the Trustee. ARTICLE VII ENFORCEMENT ----------- Section 7.01 Enforcement of Trust Agreement and Legal ---------------------------------------- Proceedings. The Company shall have the right to enforce any - ----------- provision of this Trust Agreement in its own name. In any action or proceeding affecting the Trust, the only necessary parties shall be the Company and the Trustee and, except as otherwise required by applicable law, no other person shall be entitled to any notice or service of process. Any judgment entered in such an action or proceeding shall, to the maximum extent permitted by applicable law, be binding and conclusive on all persons having or claiming to have any interest in the Trust. ARTICLE VIII AMENDMENT, REVOCATION AND TERMINATION ------------------------------------- Section 8.01 Amendment. The Company may from time to --------- time prior to the occurrence of a Change in Control or a Potential Change in Control with respect to which the allocation procedures of Section 4.02(b) are invoked, with the Trustee's consent, amend in writing, in whole or in part, any or all of the provisions of this Trust Agreement without the consent of any Participant or any other person; provided, however, that no such amendment shall increase the duties or obligations or change the compensation of the Trustee without the Trustee's written consent. This Trust Agreement may not be amended following a Change in Control nor may it be amended following a Potential Change in Control with respect to which the allocation procedures of Section 4.02(b) are invoked unless the resulting allocations are revoked pursuant to Section 4.03. Section 8.02 Irrevocability. Subject to section -------------- 10.08, the Trust shall be irrevocable and, except as otherwise provided in Section 8.03 and Article IX, shall be held for the exclusive purpose of providing the Benefits to Participants and their beneficiaries and defraying expenses of the Trust in accordance with the provisions of this Trust Agreement. Section 8.03 Termination. The Trust shall terminate ----------- if the Committee provides the Trustee with a written statement to the effect that the Benefits in respect of all Participants have been paid in full. As soon as practicable following such event, and subject to the Trustee's independent verification of the accuracy of that notice pursuant to Section 5.02, if applicable, the Trustee shall settle its final accounts in accordance with Section 6.06 and, after receipt of any unpaid fees and expenses, shall distribute the balance of the Trust Fund to the Company. ARTICLE IX CLAIMS OF COMPANY'S CREDITORS ----------------------------- Section 9.01 Insolvency. As used in this Article IX, ---------- the Company or its Affiliates (collectively the "Business Entities" and individually each a "Business Entity") shall be deemed to be "Insolvent" if (i) any Business Entity is unable to pay its debts generally as they become due, or (ii) any Business Entity is subject to a proceeding as a debtor under the federal Bankruptcy Code (or any successor federal statute). If any Business Entity is deemed Insolvent, the assets of the Trust attributable to that Business Entity shall be subject to claims of creditors of the Insolvent Business Entity (hereinafter the "Bankruptcy Creditors"). Section 9.02 Discontinuance of Benefits. If at any -------------------------- time (i) any Business Entity, or a person claiming to be a creditor of any Business Entity alleges in writing to the Trustee that any Business Entity has become Insolvent, or (ii) the Trustee is served with any order, process or paper from a court of competent jurisdiction to the effect that a Business Entity is Insolvent, the Trustee shall give notice thereof to the Company and, if applicable, the allegedly Insolvent Business Entity, and shall discontinue Benefit payments under this Trust Agreement on account of services performed for the deemed Insolvent Business Entity, shall hold the Trust assets attributable to the deemed Insolvent Business Entity for the benefit of the Insolvent Business Entity's Bankruptcy Creditors, and shall resume payment of Benefits to a Participant on account of services performed for the allegedly Insolvent Business Entity under this Trust Agreement in accordance with Article V only upon: (a) in the case of clause (ii) above, the receipt of an order of a court of competent jurisdiction authorizing or requiring such payment, and (b) in the case of clause (i) above, receipt of written notice from the Company that the deemed Insolvent Business Entity is not Insolvent. The Board of Directors of a Business Entity, and the Company's Treasurer shall be obligated to give the Trustee prompt written notice if the Business Entity becomes Insolvent, with the same consequences as provided in the preceding sentence. If payment of Benefits has been discontinued pursuant to clause (i) of the second preceding sentence, the Board of Directors of the deemed Insolvent Business Entity, and the Company's Treasurer, shall be obligated to give the Trustee prompt written notice in the event the deemed Insolvent Business Entity is not Insolvent, and such notice shall be treated as notice from the Company for purposes of the second preceding sentence. The Trustee shall not be liable to anyone in the event Benefit payments are discontinued pursuant to this Section 9.02. If the Trustee discontinues payment of Benefits pursuant to this Section 9.02 and subsequently resumes such payment, to the extent the Trust Fund is sufficient for such purpose, the first payment to a Participant following such discontinuance shall include an aggregate amount equal to the payments which would have been made to such Participant under this Trust Agreement but for this Section 9.02, as shall be determined by the Committee or if Section 5.01(b) applies, by the Trustee. No interest shall be due or payable with respect to any such payments in arrears. ARTICLE X MISCELLANEOUS PROVISIONS ------------------------ Section 10.01 Successors. This Trust Agreement shall ---------- be binding upon and inure to the benefit of the Company, its Affiliates and the Trustee and their respective successors and assigns. Section 10.02 Nonalienation. Except insofar as ------------- applicable law may otherwise require: (a) no amount payable to or in respect of any Participant at any time under the Trust shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind, and any attempt to so alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber any such amount, whether presently or thereafter payable, shall be void; and (b) the Trust Fund shall in no manner be liable for or subject to the debts or liabilities of any Participant. Section 10.03 Communications. -------------- (a) Communications to the Company shall be addressed to the Company at P.O. Box 14662, Reading, PA 19612-4662, Attn. Treasurer, Carpenter Technology Corporation, provided, however, that upon the Company's written request, such communications shall be sent to such other address as the Company may specify. (b) Communications to the Trustee shall be addressed to its Global Investor Services Division, 4-Chase Metrotech Center, 18th Floor, Brooklyn, New York 11245; provided, however, that upon the Trustee's written request, such communications shall be sent to such other address as the Trustee may specify. (c) No communication shall be binding on the Trustee until it is received by the Trustee, and no communication shall be binding on the Company or any Affiliates until it is received by the Company. Section 10.04 Headings. Titles to the Sections of --------- this Trust Agreement are included for convenience only and shall not control the meaning or interpretation of any provision of this Trust Agreement. Section 10.05 Third Parties. A third party dealing ------------- with the Trustee shall not be required to make inquiry as to the authority of the Trustee to take any action nor be under any obligation to follow the proper application by the Trustee of the proceeds of sale of any property sold by the Trustee or to inquire into the validity or propriety of any act of the Trustee. Section 10.06 Governing Law. This Trust Agreement and ------------- the Trust established hereunder shall be governed by and construed, enforced, and administered in accordance with the laws of the State of New York. The United States District Court for the Southern District of New York shall have the sole and exclusive jurisdiction over any lawsuit or other judicial proceeding relating to or arising from this Agreement. If that court lacks federal subject matter jurisdiction, the Supreme Court of the State of New York, New York County shall have sole and exclusive jurisdiction. Either of these courts shall have proper venue for any such lawsuit or judicial proceeding, and the parties waive any objection to venue or their convenience as a forum. The parties agree to submit to the jurisdiction of any of the courts specified and to accept service of process to vest personal jurisdiction over them in any of these courts. The parties further hereby knowingly, voluntarily and intentionally waive, to the fullest extent permitted by law, any right to a trial by jury with respect to any such lawsuit or judicial proceeding arising or relating to this Agreement or the transactions contemplated hereby. Section 10.07 Counterparts. This Trust Agreement may ------------ be executed in any number of counterparts, each of which shall be deemed to be the original although the others shall not be produced. Section 10.8 IRS Ruling - Funded Status. The Company -------------------------- intends to apply to the Internal Revenue Service for a ruling to the effect that this Trust is a grantor trust within the meaning of section 671, et. seq. of the Code and that contributions hereunder will not be treated as taxable income to Plan Participants until distributed to those Participants. If the Company is unable to obtain a satisfactory ruling to that effect, or if any Plan is finally determined to be funded within the meaning of Title I of ERISA because of the existence of this Trust and if a Change in Control has not then occurred, the Company shall have the right, notwithstanding the provisions of Article VIII, to further amend or revoke the Trust. If the Trust is revoked, its assets, after deducting any unpaid fees or expenses due the Trustee, shall be returned to the Company. IN WITNESS WHEREOF, this Trust Agreement has been duly executed by the parties hereto as of the day and year first above written. Attest: CARPENTER TECHNOLOGY CORPORATION John R. Welty Secretary By: John A. Schuler -------------------------- Treasurer Attest: THE CHASE MANHATTAN BANK Robert Signorino By: Vito Milillo ------------------------- STATE OF Pennsylvania ) ) COUNTY OF Berks ) Personally appeared John A. Schuler, Treasurer, of Carpenter Technology Corporation, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed as such Treasurer and the free act and deed of said company, before me May 1, 1997. Anita M. Keltz ----------------------- Notary Public STATE OF New York ) ) ss.: COUNTY OF Kings ) Personally appeared Vito Milillo, Vice President, of the Chase Manhattan Bank, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed as such Vice President and the free act and deed of said company, before me May 20, 1997. Julia R. Scalia ----------------------- Notary Public EXHIBIT "A" ----------- 1. Deferred Compensation Plan for Officers and Key Employees of Carpenter Technology effective January 1, 1995, subject to any approved amendments. 2. Supplemental Retirement Plan For Executives of Carpenter Technology Corporation effective December 13, 1979, subject to any approved amendments. 3. Officers' Supplemental Retirement Plan of Carpenter Technology Corporation effective January 1, 1983, subject to any approved amendments. 4. Benefit Equalization Plan of Carpenter Technology corporation effective January 1, 1983, subject to any approved amendments. 5. Earnings Adjustment Plan of Carpenter Technology Corporation effective January 1, 1989, subject to any approved amendments. EXHIBIT "B" ----------- 1. Carpenter Special Products Corporation of El Cajon, CA EXHIBIT "C" ----------- FORM OF NOTICE CONCERNING EARLY TAXATION ---------------------------------------- I, the undersigned Participant (Beneficiary) under the Carpenter Technology Corporation Non-Qualified Employee Benefits Trust Agreement hereby notify The Chase Manhattan Bank, as Trustee, that pursuant to Section 5.02(a) thereof, the undersigned will recognize income for federal income tax purposes due to funds held in said Trust and request payment of all funds held in my account. I do hereby certify the above to be a true statement and I hereby furnish the following independent verification of the reasons why I will recognize income for federal income tax purposes: [List below the type of independent verification and enclose a copy of such verification.] EX-10 7 STOCK SUB WALSIN ================================================================ STOCK SUBSCRIPTION AND INVESTMENT AGREEMENT BETWEEN WALSIN LIHWA CORPORATION AND CARPENTER TECHNOLOGY CORPORATION As Amended and Restated Effective January 1, 1997 ================================================================= STOCK SUBSCRIPTION AND INVESTMENT AGREEMENT AGREEMENT dated April 8, 1993, as amended and restated effective January 1, 1997, by and between WALSIN LIHWA CORPORATION, a corporation organized and existing under the laws of the Republic of China, with its principal office at 12th Floor, 117 Ming Sheng East Road, Section 3, Taipei, Taiwan ("W-L") and CARPENTER TECHNOLOGY CORPORATION, a corporation organized and existing under the laws of the State of Delaware, United States of America, with its principal place of business at 101 West Bern Street, Reading, Pennsylvania 19603 ("CTC"). BACKGROUND ---------- W-L and CTC entered into a Stock Subscription and Investment Agreement dated April 8, 1993 ("Investment Agreement") with respect to establishing the Venture as defined in the Investment Agreement. The Venture operates a specialty steel manufacturing facility in Yenshui, Taiwan (the "Facility") which is designed to manufacture hot finished specialty alloy long product. The Venture is a party hereto to the extent set forth in Section 1.7. The parties have determined that it is in their interests to amend and restate the Investment Agreement as provided herein. In consideration of the covenants and conditions herein contained and intending to be legally bound, the parties hereto agree as follows: ARTICLE 1 FORMATION OF THE VENTURE ------------------------ 1.1 Incorporation; Initial Capitalization. W-L and CTC ------------------------------------- caused the Venture to be incorporated and organized under the laws of the Republic of China. The initial authorized and paid- in capital of the Venture was New Taiwan Dollars Six Billion Three Hundred and Seventy Five Million (NT $6,375,000,000) divided into 637,500,000 shares of Venture Stock (as hereinafter defined). The share certificates representing the paid-up capital shares of the Venture Stock were duly issued to the parties as provided in the Investment Agreement. 1.2 Articles of Incorporation. The Articles of ------------------------- Incorporation of the Venture shall be substantially in the form attached hereto as Exhibit A. 1.3 Board of Directors. Immediately after the Time of ------------------ Stock Subscription Closing (as hereinafter defined), the Venture shall have a Board of Directors consisting of an odd number of persons, initially nine, of whom six shall be nominees of W-L and three shall be nominees of CTC. In the event of changes in the original CTC ownership percentages after March 18, 1996, composition in the Board of Directors will be determined as provided in Section 9.7 hereof. 1.4 Executive Team. -------------- (a) Effective as of January 10, 1996, CTC appointed an executive team ("the Executive Team"), consisting of three (3) persons, each of whom was well versed in steel operations, to serve on-site at the Facility until January 10, 1997. CTC was responsible for the direct labor costs of the Executive Team, including salary and incentives, if any. The Venture was responsible for the travel and living expenses of the Executive Team. Further, the Venture was responsible for obtaining any required work permits for the Executive Team. (b) At the discretion of the Venture, one member of the Executive Team could be appointed as Executive Vice-President of the Venture through, but not after, January 10, 1997. In the event of such appointment, the Venture shall fully indemnify the Executive Vice-President against any and all liability (including, but not limited to, legal fees) which may arise out of the scope of his activities with the Venture. 1.5 Supervisors. The representation of any shareholder by ----------- a supervisor shall be as provided by the Company Law. 1.6 Officers. Immediately after the Time of Stock Subscription -------- Closing, the principal executive officers of the Venture shall be: Chairman of the Board : Yu Lon Chiao President : I-Lin Cheng 1.7 Joinder in Agreement by the Venture. The Venture ----------------------------------- hereby accepts its rights, responsibilities and obligations under Sections 2.5, 9.8, 10.1, 10.3, 10.4, 10.7, 10.8, and 10.11 hereof and only to such extent becomes a party hereto. ARTICLE 2 INITIAL ISSUANCE OF VENTURE STOCK; PURCHASE OF ASSETS ----------------------------------------------------- 2.1 Issuance to W-L of Shares of Venture Stock. At the ------------------------------------------ Stock Subscription Closing contemplated by Section 2.3, the Venture shall issue to W-L 516,370,000 shares of Venture Stock, constituting 81% of the initial paid-in capital shares (the "W-L Subscribed Shares") against payment of the aggregate subscription price therefor of NT$5,163.7 million (the "W-L Share Subscription Price"), as provided in Section 2.3. 2.2 Issuance to CTC of Shares of Venture Stock. At the ------------------------------------------ Stock Subscription Closing, the Venture shall issue to CTC 121,130,000 shares of Venture Stock, constituting 19% of the initial paid-in capital shares (the "CTC Subscribed Shares") against payment of the aggregate subscription price therefor of $NT1,211.3 million (the "CTC Share Subscription Price") as provided in Section 2.3. 2.3 Stock Subscription Closing. -------------------------- (a) Time and Place. The closing of the transactions -------------- contemplated by Sections 2.1 and 2.2 (the "Stock Subscription Closing") will take place at 10:00 a.m., local time, on the later to occur of September 1, 1993 or the third business day after the parties have determined that all conditions to the Stock Subscription Closing contemplated by Article 6 hereof not theretofore waived have been or can be satisfied, at the offices of W-L, 12th Floor, 117 Ming Sheng East Road, Section 3, Taipei, Taiwan, or at such other time, date or place as the parties may mutually agree. The date on which and the time at which the Stock Subscription Closing occurs are sometimes referred to herein respectively as the "Stock Subscription Closing Date" and the "Time of Stock Subscription Closing." (b) Deliveries and Proceedings at Closing. At the ------------------------------------- Stock Subscription Closing: (i) Deliveries by W-L and CTC. W-L and CTC will ------------------------- each deliver to the Venture by wire transfer of immediately available funds to an account designated by the Venture the respective amounts of the W-L and CTC Share Subscription Prices; (ii) Deliveries by the Venture. The Venture will ------------------------- deliver to W-L and CTC appropriate evidence of (A) receipt of the respective amounts of the W-L and CTC Share Subscription Prices and (B) the resulting issuance to each of them of their respective shares of Venture Stock to be held pending issuance of stock certificates therefor; and (iii) Other Deliveries. The closing certificates ---------------- and other documents required to be delivered pursuant to this Agreement will be exchanged. 2.4 Purchase of Assets by Venture. At the Assets Purchase ----------------------------- Closing contemplated by Section 2.5, the Venture shall purchase from W-L, and W-L shall sell and transfer to the Venture, the Assets, against payment of the purchase price therefor (the "Assets Purchase Price"), all pursuant to and as more specifically provided in an assets purchase agreement between the Venture and W-L in substantially the form attached hereto as Exhibit B (the "Assets Purchase Agreement"), and as otherwise provided in Section 2.5. The Assets Purchase Agreement shall be executed and delivered by W-L and the Venture promptly following completion of the incorporation and organization formalities in respect of the Venture. 2.5 Assets Purchase Closing. ----------------------- (a) Time and Place. The Closing of the assets -------------- purchase transaction contemplated by Section 2.4 (the "Assets Purchase Closing") will take place at 10:00 a.m., local time, on the earlier to occur of September 30, 1993 or the third business day after the parties have determined that all conditions to the Assets Purchase Closing contemplated by Article 9 of the Assets Purchase Agreement not theretofore waived have been or can be satisfied, at the offices of W-L, 12th Floor, 117 Ming Sheng East Road, Section 3, Taipei, Taiwan, or at such other time, date or place as the parties may mutually agree. The date on which and the time at which the Assets Purchase Closing occurs are sometimes referred to herein respectively as the "Assets Purchase Closing Date" and the "Time of Assets Purchase Closing"> (b) Deliveries and Proceedings at Closing. At the ------------------------------------- Assets Purchase Closing: (i) Deliveries by Venture to W-L. The Venture ---------------------------- will deliver to W-L by wire transfer of immediately, available funds to an account designated by W-L the amount of the Assets Purchase Price; (ii) Deliveries by W-L to the Venture. W-L will -------------------------------- deliver to the Venture such instruments and documents as shall be appropriate to transfer title to, or otherwise confirm assignment of legal ownership of, the Assets, as described or otherwise referred to in the Assets Purchase Agreement; (iii) Execution of Agreement. The KHT Licensing and Transfer Agreement, the CEA Distributor Agreement and the Western Hemisphere Distributor Agreement will be executed and delivered (or released from escrow) by the respective parties thereto; (iv) Transfer of Licensed KHT Payment. The -------------------------------- Venture will deliver to CTC by wire transfer of immediately available funds to an account designated therefor the payment contemplated by the KHT Licensing and Transfer Agreement; and (v) Other Deliveries. The closing certificates ---------------- and other documents required to be delivered pursuant to the Assets Purchase Agreement will be exchanged. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF W-L ------------------------------------- As an inducement to CTC to enter into this Agreement and to consummate the transactions contemplated herein, W-L hereby represents and warrants to CTC as follows: 3.1 Organization. W-L is a company limited by shares duly ------------ organized, validly existing and, if required under applicable law or regulation, in good standing under the laws of the Republic of China, and has full corporate power and authority to own or lease its properties and to carry on its business as now conducted. 3.2 Corporate Authority. The execution, delivery and ------------------- performance of this Agreement by W-L has been duly authorized and approved by its Board of Directors and will have been duly approved by its shareholders by the Time of Stock Subscription Closing. The Agreement has been duly executed and delivered by W-L and constitutes the legal, valid and binding obligation of W-L enforceable in accordance with its terms, and neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby, nor compliance with or fulfillment of the terms and provisions hereof, will (i) conflict with or result in a breach of the terms, conditions or provisions of or constitute a default under the Articles of Incorporation of W-L, any material agreement or judgment to which it is a party of by which it is bound or any material statutory or regulatory provisions affecting it, (ii) give any party to or with rights under any such agreement or judgment the right to terminate, modify or otherwise change the material rights or obligations of W-L under such agreement or judgment, or (iii) require the approval, consent or authorization of any court, governmental authority or regulatory body, other than approvals of the Securities and Exchange Commission, Investment Commission of the Ministry of Economic Affairs and industrial authorities-in-charge of the Republic of China (such approvals being herein referred to collectively as the "W-L Governmental Approvals"), and such approvals, consents or authorizations the failure of which to be obtained would not have a material adverse effect on the financial position or results of operations of W-L. W-L will have at the Time of Stock Subscription Closing and at the Time of Assets Purchase Closing, full corporate power and authority to do and perform all acts and things required to be done by it under this Agreement. 3.3 No Shareholder with Adverse Competitive Interests. To ------------------------------------------------- the best of W-L's knowledge, no person or entity holding in excess of 5% of the outstanding shares of capital stock of W-L or any Affiliate thereof has a competitive interest or is in a competitive position which will be materially adverse to the Venture or CTC at the Time of Stock Subscription Closing. 3.4 Brokers. W-L has not made any agreement or taken any ------- other action which might cause CTC or any of its Affiliates to pay or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. 3.5 Completeness and Accuracy of Information. None of ---------------------------------------- W-L's representations, warranties or statements contained in this Agreement, or in the Exhibits or schedules hereto, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make any of such representations, warranties or statements not misleading in light of the circumstances under which they were made. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF CTC ------------------------------------- As an inducement to W-L to enter into this Agreement and to consummate the transactions contemplated herein, CTC represents and warrants to W-L as follows: 4.1 Organization. CTC is a corporation duly organized, ------------ validly existing and in good standing under the laws of the State of Delaware, and has full corporate power and authority to own or lease its properties and to carry on its business as now conducted. 4.2 Corporate Authority. The execution, delivery and performance ------------------- of this Agreement have been duly authorized and approved by the Board of Directors of CTC (subject to final ratification following execution and delivery hereof) and, if required by applicable law or regulation, will have been duly approved by its stockholders by the Time of Stock Subscription Closing, the Agreement has been duly executed and delivered by CTC and constitutes the legal, valid and binding obligation of CTC enforceable in accordance with its terms, and neither the execution and delivery of this Agreement nor the consummation of the trans-actions contemplated hereby, nor compliance with or fulfillment of the terms and provisions hereof, will (i) conflict with a result in a breach of the terms, conditions or provisions of or constitute a default under the Certificate of Incorporation or Bylaws of CTC, any material agreement or judgment to which it is a party or by which it is bound or any material statutory or regulatory provisions affecting it, (ii) give any party to or with rights under any such agreement or judgment the right to terminate, modify or otherwise change the material rights or obligations of CTC under such agreement or judgment, or (iii) require the approval, consent or authorization of any federal, state or local court, governmental authority or regulatory body, other than the CTC Investment, TA and Foreign Exchange Approvals and such approvals, consents or authorizations the failure of which to be obtained would not have a material adverse effect on the financial position or results of operations of CTC. CTC will have at the Time of Closing, full corporate power and authority to do and perform all acts and things required to be done by it under this Agreement. 4.3 Brokers. CTC has not made any agreement or taken any ------- other action which might cause W-L or any of its Affiliates to pay or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. 4.4 Completeness and Accuracy of Information. None of ---------------------------------------- CTC's representations, warranties or statements contained in this Agreement, or in the Exhibits and schedules hereto, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make any of such representations, warranties or statements not misleading in light of the circumstances under which they were made. ARTICLE 5 ACTIONS PRIOR TO TIME OF STOCK PURCHASE CLOSING ----------------------------------------------- The parties will take or permit to be taken the following actions between the date hereof and the Time of Stock Purchasing Closing: 5.1 Governmental Applications and Approvals. Promptly --------------------------------------- following the date of this Agreement, CTC shall submit to the Investment Commission of the Ministry of Economic Affairs of the Republic of China the foreign investment and technical cooperation applications and supporting documentation necessary to obtain approvals for (i) the purchase of the CTC Subscribed Shares and (ii) the right to receive payments under the KHT Licensing and Technology Agreement, and shall in due course, submit to the Central Bank of China the application necessary to obtain approval with respect to foreign currency exchange for the payment to the Venture of the CTC Share Subscription Price (such approvals being herein referred to collectively as the "CTC Investment, TA and Foreign Exchange Approvals"). CTC shall use its reasonable best efforts promptly to furnish or cause to be furnished such additional information as may be requested by the governmental authorities in connection with such applications and to take such additional action as may be necessary or required in order to obtain the CTC Investment, TA and Foreign Exchange Approvals. 5.2 Investigation of the Venture and the Facility. Until --------------------------------------------- the earlier to occur of the Time of Stock Subscription Closing or such time as this Agreement is terminated pursuant to Section 6.3(a) hereof, W-L shall afford to the officers, employees and authorized representatives (including, without limitation, accounting and legal personnel) of CTC such access to the offices, properties, business and financial records of W-L relating to the Facility and the Assets and business to be transferred to the Venture as CTC shall deem necessary or desirable, and shall furnish to CTC or its authorized representatives such additional financial and operating data as shall be reasonably requested, subject at all times to the provisions of the Confidentiality Agreement dated November 16, 1992 between W-L and CTC (the "Confidentiality Agreement"). No investigation made by either party or its representatives hereunder shall affect the representations and warranties of the other party hereunder. 5.3 Preserve Accuracy of Representations and Warranties. --------------------------------------------------- Each of the parties shall refrain from taking any action which would render any of its respective representations and warranties contained in Articles 3 and 4 of this Agreement inaccurate or incomplete as of the Time of Stock Subscription Closing. W-L promptly will notify CTC of any claims, proceedings or investigations that may be threatened, brought, asserted or commenced against W-L or any of its officers or directors (i) involving in any manner the transactions contemplated hereby or (ii) which might have a material adverse effect on the Facility or the Venture. CTC promptly will notify W-L of any claims, proceedings or investigations that may be threatened, brought, asserted or commenced against CTC or its officers or directors involving in any manner the transactions contemplated hereby. 5.4 Efforts towards Completion of the Facility. W-L will ------------------------------------------ use its reasonable best efforts to work towards completion of the Facility with the objective of bringing it to fully-operational status in or before July 31, 1994, and to maintain satisfactory relationships with contractors, design professionals, suppliers, customers and others who will have business relationships with the Venture. ARTICLE 6 CONDITIONS TO CLOSING; TERMINATION ---------------------------------- 6.1 Conditions Precedent to the Obligations of CTC. The ---------------------------------------------- obligation of CTC to proceed with the Stock Subscription Closing under this Agreement is subjection to the fulfillment, prior to or at the Time of Stock Subscription Closing, of the following conditions (any one or more of which may be waived in whole or in part by CTC at CTC's option): (a) Representations and Warranties of W-L. The ------------------------------------- representations and warranties of W-L contained in Article 3 of this Agreement shall be true, complete and correct on and as of the Stock Subscription Closing Date with the same force and effect as though such representations and warranties had been made on, as of and with reference to the Stock Subscription Closing Date, and CTC shall have received a certificate to such effect signed by the Chairman of the Board or President of W-L. (b) Performance and Compliance. W-L shall have -------------------------- reasonably performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with at or before the Time of Stock Subscription Closing, and CTC shall have received a certificate to such effect signed by the Chairman of the Board or President of W-L. (c) Satisfactory Instruments. All instruments and ------------------------ documents required to be delivered on the part of W-L to effectuate and consummate the transactions contemplated hereby shall be delivered respectively to CTC or to the Venture and shall be in the form and substance satisfactory to CTC and its counsel. (d) Required Approvals and Consents. The shareholders ------------------------------- of W-L (and of CTC, if required by applicable law or regulation) shall have approved this Agreement and the transactions contemplated hereby, all consents and approvals of all governmental departments, agencies, and authorities required for, and of third parties to, the transactions contemplated hereby (including the CTC Investment, TCA and Foreign Exchange Approvals and the W-L Governmental Approvals) shall have been obtained on terms and conditions reasonably satisfactory to CTC, and all waiting periods specified by law the expiration of which are necessary for the consummation of such transactions shall have passed or been terminated. (e) Litigation. No order of any court, arbitrator or ---------- governmental, regulatory or administrative agency or commission shall be in effect which restrains or prohibits the transactions contemplated hereby, and there shall not have been threatened, nor shall there be pending, any action or proceeding by or before any court, arbitrator or governmental, regulatory or administrative agency or commission, (i) challenging any of the transactions contemplated by this Agreement or seeking monetary relief by reason of the consummation of such transactions or (ii) which might have a material adverse effect on the business or operations of the Venture. (f) Satisfactory Investigations. CTC shall have --------------------------- completed such investigations, reviews and evaluations as it may have instituted pursuant to Section 5.2 hereof and shall have obtained the results of such independent appraisals of the Assets as it shall have reasonably requested, the conclusions of all of which shall be reasonably satisfactory to CTC. (g) Currency Exchange Rate. The rate of currency ---------------------- exchange for the exchange of New Taiwan Dollars for United States Dollars on the Stock Subscription Closing Date shall not be less than NT$22:US$1. 6.2 Conditions Precedent to the Obligations of W-L. The ---------------------------------------------- obligation of W-L to proceed with the Stock Subscription. Closing under this Agreement is subject to the fulfillment, prior to or at the Time of Stock Subscription Closing, of the following conditions (any one or more of which may be waived in whole or in part by W-L at W-L's option): (a) Representations and Warranties of CTC. The ------------------------------------- representations and warranties of CTC contained in Article 4 of this Agreement shall be true, complete and correct on and as of the Stock Subscription Closing Date, with the same force and effect as though such representations and warranties had been made on, as of and with reference to such Date, and W-L shall have received a certificate to such effect signed by the Chairman and President of CTC. (b) Performance and Compliance. CTC shall have -------------------------- reasonably performed all of the covenants and complied with all of the provisions required by this Agreement to be performed or complied with at or before the Time of Stock Subscription Closing, and shall have received a certificate to such effect signed by the Chairman and President of CTC. (c) Satisfactory Instruments. All instruments and ------------------------ documents required to be delivered on the part of CTC to effectuate and consummate the transactions contemplated hereby shall be delivered respectively to W-L or the Venture and shall be in the form and substance satisfactory to W-L and its counsel. (d) Required Approvals and Consents. The shareholders ------------------------------- of W-L (and of CTC, if required by applicable law or regulation) shall have approved this Agreement and the transactions contemplated hereby, all consents and approvals of all governmental departments, agencies, and authorities required for, and of third parties to, the transactions contemplated hereby (including the W-L Governmental Approvals and the CTC Investment, TA and Foreign Exchange Approvals) shall have been obtained on terms reasonably satisfactory to W-L, and all waiting periods specified by law the expiration of which are necessary for the consummation of such transactions shall have passed or been terminated. (e) Litigation. No order of any court, arbitrator or ---------- governmental, regulatory or administrative agency or commission shall be in effect which restrains or prohibits the transactions contemplated hereby, and there shall not have been threatened, nor shall there be pending, any action or proceeding by or before any court, arbitrator or governmental, regulatory or administrative agency or commission challenging any of the transactions contemplated by this Agreement or seeking monetary relief by reason of the consummation of such transactions. (f) Technology Licensing and Transfer Agreement. CTC ------------------------------------------- shall have executed and delivered into escrow pending execution by the Venture at the Assets Purchase Closing a know-how and technology licensing and transfer agreement, in substantially the form attached hereto as Exhibit C (the "KHT Licensing and Transfer Agreement"). Effective on January 1, 1997, Exhibit C has been amended and restated in its entirety in the form attached hereto. (g) Distributor Agreements. Pursuant to the ---------------------- Investment Agreement the parties entered into agreements known as the CEA Distribution Agreement and the Western Hemisphere Distributor Agreement. Effective January 10, 1996, the CEA Distribution Agreement was terminated and is of no further force or effect. Effective on January 1, 1997, the Western Hemisphere Distributor Agreement has been terminated and is of no further force or effect. Any commissions, royalties or other amounts owed under those agreements shall be paid with respect to any orders that were received prior to the effective dates of such terminations provided that the products ordered are thereafter shipped and payment therefor is received. 6.3 Termination. ----------- (a) Termination of Agreement Prior to Closing. This ----------------------------------------- Agreement may be terminated at any time prior to the Stock Subscription Closing: (i) By mutual written consent of CTC and W-L; (ii) By CTC if there has been a material misrepresentation by W-L, a material breach by W-L of any of its warranties or covenants, or if any of the conditions specified in Section 6.1 hereof shall not have been fulfilled by the time required and shall not have been waived by CTC in writing; (iii) By W-L if there has been a material misrepresentation by CTC, a material breach by CTC of any of its warranties or covenants, or if any of the conditions specified in Section 6.2 hereof shall not have been fulfilled by the time required and shall not have been waived by W-L in writing; or (iv) By CTC or W-L if the Stock Subscription Closing shall not have occurred prior to or on June 30, 1994; provided that W-L or CTC may terminate this Agreement pursuant to this subparagraph (iv) only if the Stock Subscription Closing shall not have occurred by such date for a reason other than a failure by the party seeking termination to satisfy the conditions precedent to the obligation of the other party to proceed with the Stock Subscription Closing respectively set forth in Sections 6.1 or 6.2 hereof. (b) Effect of Termination. In the event of --------------------- termination of this Agreement by either CTC or W-L as provided in subsection (a), there shall be no liability on the part of CTC or W-L, except for liabilities arising from a willful, deliberate or negligent breach of this Agreement with respect to which a claim has accrued prior to such termination. (c) Termination of Agreement Following Closing. ------------------------------------------ (i) The provisions of Articles 7, 8, 9, 10 and 11 shall continue in full force and effect following the Time of Stock Subscription Closing until such time as either W-L or CTC and any of their respective Affiliates cease to hold any shares of Venture Stock, whereupon the effectiveness of all such provisions shall terminate finally and absolutely with the exception of Sections 9.8 and 10.14, which shall terminate only upon completion of the action required thereby. (ii) This Agreement will terminate automatically upon listing of the Venture Stock on the Taiwan Stock Exchange of the Republic of China. ARTICLE 7 FINANCING OF VENTURE OPERATIONS ------------------------------- 7.1 Borrowings. To the extent the Venture requires from ---------- time to time additional funds for future operations not generated by its own activities, such additional funds may be borrowed from either W-L or CTC (or both) to the extent (i) permitted by applicable law and (ii) that either, in its discretion, chooses to make such loans, provided that neither W-L nor CTC shall be requested to make loans to the Venture that would not reasonably be made by unrelated third parties. Funds may also be borrowed by the Venture from third parties to the extent available at reasonable rates of interest, and W-L and CTC each may severally or jointly provide, to the extent agreed by them and as permitted by applicable law, such guarantees as may be reasonably required by such third parties in respect of such borrowings in proportion to their respective equity interests in the Venture at the time of borrowing or on such other basis as they may agree. 7.2 Funding Sources; Dilution. Funds shall be obtained by ------------------------- the Venture by the most economic means reasonably available; provided, however, that the Venture shall seek to fund all of its capital requirements by borrowings or the occurrence of indebtedness rather than through contributions or infusions of additional equity capital involving the issuance of additional shares of Venture Stock, unless otherwise agreed between W-L and CTC. In the event that W-L and CTC agree to provide additional shares of Venture Stock, unless otherwise agreed between W-L and CTC. In the event that W-L and CTC agree to provide additional equity capital and either party defaults on such agreement by failure to provide such funding within 30 days after written demand by the Venture or the non-defaulting party, the nondefaulting party will have the right to make the contribution of the defaulting party and receive shares of Venture Stock therefor to the extent permitted by applicable law, subject in the case of CTC to receipt of the necessary R.O.C. governmental approvals with respect to such contribution. ARTICLE 8 ADDITIONAL AGREEMENTS OF THE PARTIES ------------------------------------ 8.1 Indemnification. --------------- (a) By W-L. From and after the Stock Subscription ------ Closing, W-L will indemnify and hold harmless CTC and its subsidiaries, Affiliates, officers, directors, agents, and employees (collectively, the "CTC indemnities") from and against all liabilities, losses, deficiencies, claims, costs and expenses (including, without limitation, reasonable legal fees incurred in connection with any of the foregoing and in seeking indemnification hereunder) suffered by any CTC indemnitee and arising out of any inaccuracy in or breach of any of the representations, warranties, covenants or agreements made by W-L in this Agreement prior to the Time of Stock Subscription Closing ("W-L Indemnifiable Damages"). To the extent the Venture would be a CTC indemnitee for W-L Indemnifiable Damages, W-L shall satisfy its obligation under this Section 8.1(a) by indemnifying that proportion of such W-L Indemnifiable Damages equal to the number of shares of Venture Stock owned by CTC divided by the total number of shares of Venture Stock then outstanding. (b) By CTC. From and after the Stock Subscription ------ Closing, CTC will indemnify and hold harmless W-L and its subsidiaries, Affiliates, officers, directors, agents and employees (collectively, the "W-L indemnities") from and against all liabilities, losses, deficiencies, claims, costs and expenses (including, without limitation, reasonable legal fees incurred in connection with any of the foregoing and in seeking indemnification hereunder) suffered by any W-L indemnitee and arising out of any inaccuracy in or breach of any of the representations, warranties and covenants or agreements made by CTC in this Agreement prior to the Time of Stock Subscription Closing ("CTC Indemnifiable Damages"). To the extent the Venture would be a CTC indemnitee for CTC Indemnifiable Damages, CTC shall satisfy its obligation under this Section 8.1(b) by indemnifying that proportion of such CTC Indemnifiable Damages equal to the number of shares of Venture Stocked owned be W-L divided by the total number of shares of Venture Stock then outstanding. ARTICLE 9 EQUITY OWNERSHIP OF THE VENTURE ------------------------------- 9.1 Restriction on Share Transfers. ------------------------------ (a) Basic Prohibition; Exceptions. Except as ----------------------------- otherwise specifically provided in this Article 9, neither CTC nor W-L will sell, transfer, pledge, encumber, assign or otherwise dispose of or limit its right to vote in any manner its shares of Venture Stock (a "Transfer of Shares") other than (i) with the prior written consent of the other party, upon such terms and conditions as the other party in its reasonable discretion may impose, and only after first offering such shares to such other party in accordance with the terms of Section 9.6(a) at a price equal to the price offered by a third party (if any such party shall have made an offer) which offer shall be at a price not less than the Fair Value thereof (as determined pursuant to Section 9.5), (ii) to any Affiliate of which a majority of the voting stock is owned by the transferring party so long as such Affiliate agrees in writing to be bound by this Agreement; provided, that CTC or W-L, respectively, will not -------- permit the sale, transfer, pledge, encumbrance, assignment or other disposition of any voting securities of such Affiliate if such Affiliate shall then own any such shares, and provided -------- further that the transfer or, be its W-L or CTC, shall remain liable for all of its obligations under this Agreement, (iii) in connection with a "nominee" transfer for purposes of compliance with applicable law governing the minimum number of shareholders of the Venture, or (iv) pursuant to temporary or "bridge" financing of its purchase obligations under Article 2 hereof (any recipient of a Transfer of Shares under clauses (ii), (iii) or (iv) hereof being hereinafter referred to as a "Permitted Transferee"). (b) Remedy for Violations. If either W-L or CTC or --------------------- any Permitted Transferee effects a Transfer of Shares in violation of this Section 9.1, the other party shall, in consequence of the injury sustained by such party as a result of such violation, be entitled to receive from the party so effecting the Transfer in the nature of liquidated damages a cash payment in the amount of ten times the greater of (i) the aggregate par value of the shares so transferred or (ii) the proceeds received as a result of the transfer. In no event are such liquidated damages to be considered or construed as in the nature of a penalty, each party hereby acknowledging the difficulty of determining actual damages under the circumstances of such a violation. (c) Sale of Additional Stock. CTC acknowledges that ------------------------ the Venture is considering issuing new shares of stock to a third party. CTC does not object to such issuance provided that the shares are issued for adequate consideration and W-L maintains a majority ownership of the Venture. If the Venture decides to issue any new stock to such third party, neither the Venture nor W-L shall be relieved from their confidentiality obligations with respect to the KHT and they shall require such third party to enter into such confidentiality, noncompetition and other agreements as CTC shall deem appropriate with respect thereto. 9.2 Put Right of CTC; Call Right of W-L. ----------------------------------- (a) Put Right and Initial Purchase Right. CTC shall ------------------------------------ have the one-time right to put to W-L for purchase (the "Put Right") at any time prior to July 1, 1999, 89,255,000 shares of the CTC Subscribed Shares (approximately 14% of the outstanding stock), for their proportionate original CTC Share Subscription Price of NT$892,550,000. The parties acknowledge that CTC exercised its Put-Right as of March 19, 1996 and the put was executed and completed as of that date. (b) Call Right. In consideration of the modification ---------- of the Put Right, W-L shall have the one-time right to call from CTC for purchase (the "Call Right"), at any time on or before March 19, 1998, CTC's entire remaining interest in the CTC Subscribed Shares and any additional shares of Venture Stock representing any stock dividends or the capitalization of retained earnings which have been distributed to CTC in respect of the CTC Subscribed Shares or have been subsequently purchased or otherwise acquired by CTC (collectively, the "Called Shares"). The price per Called Share shall be determined by dividing the Aggregate Call Price by the number of Called Shares, the Aggregate Call Price being equal to NT$318,750,000 plus interest at the rate of 6% per annum, compounded annually and computed from the Stock Subscription Closing Date to the date of the closing of the purchase and sale of the Called Shares pursuant to the Call Right (the "Call Closing Date"); provided, that if any -------- of the Called Shares represent stock dividends or the capitalization of capital surplus distributed with respect to the CTC Subscribed Shares or are shares in addition to the CTC Subscribed Shares which were purchased by CTC for cash or other consideration after the Stock Subscription Closing Date, the Aggregate Call Price shall be increased by the acquisition costs of such shares (cash or non-cash consideration plus taxes paid by CTC in connection with the acquisition) plus interest at the rate of 6% per annum, compounded annually and computed from the date of acquisition to the Call Closing Date. (c) Taxes. All securities transaction taxes imposed ----- by the Republic of China on the sale of the shares under the Purchase Right shall be paid by CTC. All ROC income taxes on the capital gains deriving from the sale of the shares under the Purchase Right shall be paid by W-L. (d) Extension of Time for Exercise. In the event the ------------------------------ Stock Subscription Closing Date occurs after September 30, 1993, the "July 1, 1996" date in subsection (a) will be extended by the number of days to elapse between September 30, 1993 and the Closing Date. 9.3 Purchase Right on Breach of Default. Each of CTC and ----------------------------------- W-L at any time during the term of this Agreement shall have a Purchase Right as to all, but not less than all, of the shares of Venture Stock beneficially owned by the other party at a price equal to Fair Value as of the date of notice given pursuant to Section 9.6(a) upon the continuing or repeated breach by the other part of, or its failure to discharge, its obligations under, or otherwise observe the terms of, this Agreement, but only after such other party has been given notice of the initial breach or failure and an opportunity to cure such breach or failure within 30 days after such notice has been given or such other reasonable period of time as agreed by the parties. 9.4 Put and Call Rights of Both Parties. Upon the ----------------------------------- occurrence of an Incompatibility Sequence, each of CTC and W-L shall have the following rights: (a) Call Right. The right to call for purchase (a ---------- "Call Right") all, but not less than all, of the other party's shares of Venture Stock beneficially owned at a price equal to the Fair Value thereof. The party whose shares are called shall have the right to accept the offer and sell the shares to the other party or alternatively to purchase all of the other party's shares at a price equal to Fair Value. (b) Put Right. The right to put to the other party --------- for purchase (a "Put Right") all, but not less than all, of its shares of Venture Stock beneficially owned at a price equal to Fair Value. For purposes of this Section 9.4, "Incompatibility Sequence" means a series of actions or a course of conduct reflected at meetings of the Venture's Board of Directors evidencing incompatibility of CTC and W-L as holders of Venture Stock resulting, after formal objection by one or both parties and the passage of a period of 60 days for the alteration or correction of such actions or conduct, in irresolvable deadlock or opposition with respect to operating policies or additional investment decisions (including but not limited to the use of debt versus equity financing and the use or disposition of the retained earnings of the Venture). 9.5 Determination of Fair Value. Fair Value shall be --------------------------- determined by agreement of W-L and CTC, or upon their failure to agree, by an independent valuation service selected by CTC and W-L (or selected by their respective independent accountants, if CTC and W-L are unable to agree on such selection). The determination of the firm so acting (the "Independent Valuation Firm") shall be made in accordance with the principles employed for the valuation of companies in similar lines of business at the time of valuation, and such principles shall be clearly articulated in the report of the Independent Valuation Firm setting forth the Fair Value determination (the "Valuation Report"). A preliminary version of the Valuation Report shall be furnished to CTC and W-L, each of whom within 30 days of receipt thereof shall furnish to the Independent Valuation Firm and to the other party any comments or suggestions with respect to the determination or the principles set forth therein. The Independent Valuation Firm shall consider all such comments and suggestions and shall thereupon issue the definitive Valuation Report, which shall be the final determination of Fair Value and binding upon the parties hereto. The fees and expenses of the Independent Valuation Firm shall be borne equally by CTC and W-L, and all other expenses associated with the determination contemplated hereby shall be borne by the party incurring the same. 9.6 Manner of Purchase or Exercise. ------------------------------ (a) Notice. A party desiring to effect a Transfer of ------ Shares under clause (i) of Section 9.1(a) (the "Transferor") will deliver written notice of such proposed Transfer to the other party (the "Purchaser"), offering the Purchaser the right to purchase such shares as hereinbefore provided. Such notice shall specify the number of shares to be transferred, the identity of the prospective third-party transferee (if any), the proposed price requested by the Transferor or offered by the prospective third-party transferee and the terms and conditions under which the shares are to be transferred. The Purchaser shall have a period of 25 days from the date of receipt of such notice to (i) elect to purchase such shares at the price and on the terms so offered, (ii) decline to make such purchase, or (iii) institute the procedures for a Fair Value determination contemplated by Section 9.5 in the event the Purchaser believes the proposed price is below the Fair Value of the shares, in each case by written notice to the Transferor. In the event the Purchaser declines to make the purchase, or fails to give notice to the Transferor by the end of such 25-day period, the Purchaser will be deemed to have consented to the proposed third-party transfer on the terms specified in the Transferor's notice, and the Transferor shall be free to transfer the offered shares to such third party, but at a price and terms set forth in the Transferor's notice. A party desiring to exercise its Purchase, Call or Put Right under Sections 9.2, 9.3 or 9.4, as the case may be (the "Exerciser"), will deliver written notice of its intention to effect such exercise to the other party (the "Exercisee") indicating the provision of this Agreement pursuant to which such exercise is to be effected and the reason for such exercise, if it is appropriate to provide such a reason. (b) Closing. If the parties cannot agree on Fair ------- Value, the Purchaser or Exerciser shall immediately thereafter commence, or cause to be commenced, the determination of Fair Value pursuant to Section 9.5 of this Agreement. The closing of a purchase or exercise shall occur on the date jointly selected by the parties, not less than ten business days nor more than 30 business days subsequent to the delivery of the definitive Valuation Report, subject to any applicable regulatory waiting periods, provided, that an extension for a reasonable period of time will be permitted for the purpose of obtaining financing. Within ten business days of receipt of the definitive Valuation Report, the Purchaser or Exerciser may revoke in writing the purchase offer or exercise of the Purchase, Put or Call Right, respectively. If such offer or exercise of such Purchase, Put or Call Right is not revoked within such ten day period, then the closing of the purchase or exercise of the Purchase, Put or Call Right shall occur. At such closing, the party transferring shares shall deliver or cause to be delivered to the other party the certificate or certificates representing the shares, duly endorsed for transfer or accompanied by duly executed stock powers, and the party receiving shares shall deliver to the other party the aggregate amount of the purchase price, by bank check or by wire transfer of immediately available funds to an account designated by such party. 9.7 CTC Board Representation. Until such time as its ------------------------ Purchase Right under Section 9.2 expires, CTC will be entitled to representation on the Board of Directors of the Venture otherwise than in proportion to its holdings of shares of Venture Stock, as provided in Section 1.3. Thereafter, CTC will be entitled to Board representation in proportion to its holdings of shares of Venture Stock; provided, however, that at all times during the -------- effective term of this Agreement CTC will have the right to have at least one nominee on the Board of Directors. 9.8 Elimination of Supermajority Vote Provisions. In the -------------------------------------------- event that CTC's Purchase Right under Section 9.2 expires by its terms without being exercised, the Articles of Incorporation of the Venture shall thereafter be amended to delete therefrom all provisions requiring a supermajority vote in respect of Board of Directors or shareholder approval other than those required by the laws of the Republic of China. It is hereby acknowledged by the parties that Articles 17 and 28 of the Articles of Incorporation shall be specifically amended to provide for those protections normally provided for shareholders according to their respective holdings by the laws of the Republic of China. 9.9 Change of Venture Name. The Venture shall reasonably ---------------------- promptly change or modify its name so as to delete therefrom the word "CarTech" upon the earlier to occur of the following: (i) January 1, 2000; or (ii) if CTC and all its Permitted Transferees at any time cease to hold any shares of Venture Stock. Thereafter, the Venture will not use in its name or in product literature identifying it the words "Carpenter" or "CarTech" or any word or phrase substantially similar thereto. If W-L and all its Permitted Transferees at any time cease to hold any shares of Venture Stock, the Venture shall reasonably promptly change or modify its name so as to delete therefrom the word "Walsin" and will not use in its name or in product literature identifying it the words "Walsin" or "Lihwa" or any word or phrase substantially similar thereto. ARTICLE 10 MISCELLANEOUS PROVISIONS ------------------------ 10.1 Governing Law. This Agreement shall be construed and ------------- interpreted according to the laws of the Republic of China applicable to contracts made and to be performed therein. 10.2 Arbitration. All disputes, controversies or ----------- differences which may arise between the parties under or in respect of this Agreement, or for breach hereof (other than disputes relating to Fair Value, which shall be subject exclusively to the provisions of Section 9.5) which remain unresolved after 60 days following notice thereof given by a party hereto will be submitted to and finally resolved by arbitration conducted in accordance with to the rules of the International Chamber of Commerce as then in effect. Unless the parties otherwise agree, arbitration proceedings will be conducted in the English language in the City of Zurich, Switzerland. Judgment upon any award reached in any such proceeding may be entered in any court of competent jurisdiction. 10.3 Waiver. Any party hereto may, at its option, waive in ------ writing any or all of the conditions herein contained to which its obligations hereunder are subject. 10.4 Amendment and Modification. W-L, CTC and the Venture, -------------------------- by mutual consent of their respective Boards of Directors or the officers authorized by such Boards of Directors, may amend or modify and supplement this Agreement in such manner as may be agreed upon in writing. To be effective, any such amendment, modification or supplement must be in writing signed by an authorized representative of the party against whom enforcement of the same is sought. 10.5 Consents; Other Action. Each of the parties ---------------------- hereto shall use its reasonable best efforts to obtain the consent or approval of each person, entity or governmental authority or agency, if any, whose consent or approval shall be required pursuant to this Agreement or otherwise in order to permit it to consummate the transactions contemplated hereby in the manner contemplated hereby, and each agrees to use its reasonable best efforts to take any such other action as may be required by any law, regulation or rule in order to carry out the transactions contemplated hereby and to cause the conditions precedent to be satisfied. This Agreement shall not constitute an agreement to assign any interest in any contract, bid, purchase order, agreement or instrument to be transferred to the Venture, or any claim, right or benefit arising thereunder or resulting therefrom, if an assignment without the consent of a third party would constitute a breach or violation thereof or adversely affect the rights of the Venture or the other parties hereto or their respective Affiliates thereunder. If a consent of a third party which is required in order to assign any such contract, bid, purchase order, agreement or instrument or any claim, right or benefit arising thereunder or resulting therefrom is not obtained prior to the Time of Closing, or if an attempted assignment thereof would be ineffective or would adversely affect the ability of the parties hereto will cooperate in effecting any lawful and economically feasible arrangement to provide that the Venture shall receive such interest in the benefits under any such contract, bid, purchase order, agreement or instrument or the equivalent value thereof; and any transfer or assignment to the Venture by the parties hereto or their respective Affiliates of any interest under any such contract, bid, purchase order, agreement or instrument that requires the consent of a third party shall be made subject to such consent or approval being obtained. 10.6 Titles and Headings. The titles and headings contained ------------------- in this Agreement preceding the text of the sections and subsections hereof are inserted solely for the convenience of reference and shall not constitute a part of this Agreement nor affect in any way its meaning, construction or interpretation. 10.7 Notices and Communications. All notices, requests, -------------------------- demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered in person, (ii) sent by electronic facsimile transmission (with receipt confirmed), (iii) mailed by first class, certified or registered mail with postage prepaid or (iv) sent by overnight courier, to the other party or parties at the following addresses (or to such other address as shall be furnished in writing from time to tome by any party to the others): (a) If to W-L, to: Walsin Lihwa Corporation 12th Floor 117 Ming Sheng East Road, Section 3 Taipei, Taiwan Republic of China Attention: Mr. Yu Lon Chiao, President Fax No.: 02-719-7304 (b) If to CTC, to: Carpenter Technology Corporation 101 West Bern Street Reading, Pennsylvania 19603 United States of America Attention: Robert W. Cardy, Chairman and Chief Executive Officer Fax No.: 610-208-2361 with a copy to: John R. Welty, Esquire Vice President, General Counsel & Secretary Carpenter Technology Corporation 101 West Bern Street Reading, Pennsylvania 19603 United States of America Fax No.: 610-208-3068 (c) If to the Venture, to: Walsin-CarTech Corporation c/o Walsin Lihwa Corporation 12th Floor 117 Ming Sheng East Road, Section 3 Taipei, Taiwan Republic of China Attention: I-Lin Cheng, President Fax No.: 02-719-7304 10.8 Assignment; Successors. This Agreement shall be ---------------------- binding upon and inure to the benefit of the parties named herein and their respective successors and assigns, provided, however, that this Agreement shall not be assignable or otherwise transferable without the consent of the other parties hereto, except as specifically provided herein. 10.9 Expenses. Whether or not the transactions contemplated -------- hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. 10.10 Counterparts. This Agreement may be executed in two or ------------ more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.11 Further Assurances. After the Asset Purchase Closing, ------------------ -------------- each party hereto shall from time to time, at any other party's request, prepare, execute and deliver to such other party such other documents and take such other action as such other party may reasonably request so as to more effectively sell, transfer, assign and deliver and vest in the Venture good and marketable title to the Facility as provided in this Agreement, or otherwise to consummate the transactions contemplated hereby. 10.12 Severability. If any term, provision, covenant or ------------ restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such which may be hereafter declared invalid, void or unenforceable. 10.13 Survival of Representations and Warranties. The ------------------------------------------ representations and warranties contained herein shall survive the Closing. 10.14 Entire Agreement. This Agreement including the ---------------- Exhibits, schedules and the agreements and other documents referred to herein, and any other agreements collateral hereto subsequently signed by the parties hereto, shall constitute the entire agreement between the parties with respect to the subject matter hereof, and shall supersede all previous negotiations and writings with respect to such subject matter other than the Confidentiality Agreement which shall remain in full force and effect until termination thereof by its terms. ARTICLE 11 DEFINITIONS ----------- 11.1 "Affiliate" means, with respect to a specified person, a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. For purposes of this definition, "person" means any individual, partnership, corporation, trust or other entity, and "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. 11.2 "Agreement" has the meaning set forth in the first paragraph of page 1 of this Agreement. 11.3 "Assets" has the meaning set forth in the second paragraph of page 1 of this Agreement. 11.4 "Assets Purchase Agreement" has the meaning set forth in Section 2.4 of this Agreement. 11.5 "Assets Purchase Closing" has the meaning set forth in Section 2.5 of this Agreement. 11.6 "Assets Purchase Price" has the meaning set forth in Section 2.4 of this Agreement. 11.7 "CEA Distribution Agreement" has the meaning set forth in Section 6.2(g) of this Agreement. 11.8 "Call Right" has the meaning set forth in Section 9.4(a) of this Agreement. 11.9 "Chinese Economic Area" means the Republic of China (Taiwan), the Peoples Republic of China (including Hong Kong), Indonesia, Thailand, Singapore, Malaysia, North and South Korea, Japan, the Philippines, Brunei, Burma, Cambodia, Laos and Vietnam. 11.10 "Confidentiality Agreement" has the meaning set forth in Section 5.1 of this Agreement. 11.11 "CTC" has the meaning set forth in the first paragraph of page 1 of this Agreement. 11.12 "CTC Indemnifiable Damages" has the meaning set forth in Section 8.1(b) of this Agreement. 11.13 "CTC Indemnitees" has the meaning set forth in Section 8.1(b) of this Agreement. 11.14 "CTC Share Subscription Price" has the meaning set forth in Section 2.2 of this Agreement. 11.15 "CTC Subscribed Shares" has the meaning set forth in Section 2.2 of this Agreement. 11.16 "Exercisee" has the meaning set forth in Section 9.6(a) of this Agreement. 11.17 "Exerciser" has the meaning set forth in Section 9.6(a) of this Agreement. 11.18 "Facility" has the meaning set forth in the second paragraph of page 1 of this Agreement. 11.19 "Incompatibility Sequence" has the meaning set forth in Section 9.4(b) of this Agreement. 11.20 "Independent Valuation Firm" has the meaning set forth in Section 9.5 of this Agreement. 11.21 "KHT Licensing and Transfer Agreement" has the meaning set forth in Section 6.2(f) of this Agreement. 11.22 [RESERVED] 11.23 "Permitted Transferee" has the meaning set forth in Section 9.1(a) of this Agreement. 11.24 "Product" has the meaning set forth in the second paragraph of page 1 of this Agreement. 11.25 "Purchase Right" has the meaning set forth in Section 9.3 of this Agreement. 11.26 "Purchaser" has the meaning set forth in Section 9.6(a) of this Agreement. 11.27 "Put Right" has the meaning set forth in Section 9.4(b) of this Agreement. 11.28 "Stock Subscription Closing" has the meaning set forth in Section 2.3 of this Agreement. 11.29 "Stock Subscription Closing Date" has the meaning set forth in Section 2.3 of this Agreement. 11.30 "Time of Assets Purchase Closing" has the meaning set forth in Section 2.5 of this Agreement. 11.31 "Time of Stock Subscription Closing" has the meaning set forth in Section 2.3 of this Agreement. 11.32 "Transfer of Shares" has the meaning set forth in Section 9.1 of this Agreement. 11.33 "Transferor" shall have the meaning set forth in Section 9.6(a) of this Agreement. 11.34 "Valuation Report" has the meaning set forth in Section 9.5 of this Agreement. 11.35 "Venture" has the meaning set forth in the second paragraph of page 1 of this Agreement. 11.36 "Venture Stock" means authorized shares of capital stock of the Venture as they may exist from time to time during the term of this Agreement. 11.37 "Western Hemisphere Distributor Agreement" has the meaning set forth in Section 6.2(g) of this Agreement. 11.38 "W-L" has the meaning set forth in the first paragraph of page 1 of this Agreement. 11.39 "W-L Governmental Approvals" has the meaning set forth in Section 3.2 of this Agreement. 11.40 "W-L Indemnifiable Damages" has the meaning set forth in Section 8.1(a) of this Agreement. 11.41 "W-L Indemnitee" has the meaning set forth in Section 8.1(b) of this Agreement. 11.42 "W-L Share Subscription Price" has the meaning set forth in Section 2.1 of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. WALSIN LIHWA CORPORATION By: s/Yu Lon Chiao ----------------------- Yu Lon Chiao, Chairman CARPENTER TECHNOLOGY CORPORATION By: s/Dennis M. Draeger ------------------------- Dennis M. Draeger Senior Vice President Steel Operations WALSIN-CARTECH SPECIALTY STEEL CORPORATION, to the extent set forth in Section 1.7 hereof By: s/Yu Lon Chiao ------------------------ Yu Lon Chiao, Chairman EX-10 8 TRUST AGREEMENT DIR TRUST AGREEMENT --------------- Carpenter Technology Corporation Non-Qualified Benefits Trust for Directors TRUST AGREEMENT effective as of the 1st day of May, 1997, by and between Carpenter Technology Corporation, a corporation organized under the laws of the State of Delaware (hereinafter referred to as the "Company"), and THE CHASE MANHATTAN BANK, a banking corporation organized under the laws of the State of New York (hereinafter referred to as the "Trustee"). BACKGROUND ---------- The Company maintains the benefit plans listed on Exhibit A hereto (the "Plans") for the benefit of various of its Directors. The Company intends to create a trust, to which it will contribute cash, or other property acceptable to the Trustee, to help the Company meet its obligations under the Plans, and to assure that, subject to the sufficiency of the Trust Fund, payments provided for by the Plans are not improperly withheld in the event of a Change in Control of the Company. The establishment of this Trust shall not affect the Company's continuing obligation to make payments under the Plans, except that the liability shall be reduced to the extent payments are made by the Trustee hereunder. The assets of the Trust Fund shall be, and shall remain, subject to the claims of the Company's general creditors in the event of the Company's insolvency. Otherwise, the Trust shall be irrevocable until all liabilities under all Plans have been satisfied, at which time the Trust shall terminate, and all remaining assets of the Trust Fund shall be returned to the Company. The Trust is intended to be a "grantor trust" with the result that the corpus and income of the Trust are treated as assets and income of the Company pursuant to sections 671 through 679 of the "Code". The Company intends that the Plans not be deemed funded (within the meaning of Title I of ERISA) despite the existence of this Trust. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and the Trustee covenant and agree as follows: ARTICLE I DEFINITIONS; ESTABLISHMENT OF TRUST ----------------------------------- Section 1.01 Definitions. Whenever used in this ----------- Trust Agreement, unless otherwise provided or the context otherwise requires: (a) "Account" shall mean an account maintained in ------- respect of a Participant pursuant to Section 4.02. (b) "Benefits" shall mean, with respect to each -------- Participant, the benefits payable to or in respect of that Participant pursuant to the applicable Plan listed on Exhibit A. (c) "Change in Control" is defined in Article III. ----------------- (d) "Code" shall mean the Internal Revenue Code of ---- 1986, as amended from time to time. (e) "Committee" shall mean the Human Resources --------- Committee of the Company's Board of Directors, or its successor. (f) "Company" shall mean Carpenter Technology ------- Corporation or any successor company by merger, acquisition or otherwise. (g) "ERISA" means the Employee Retirement Income ----- Security Act of 1974, as amended from time to time. (h) "Investment Manager" shall mean any person or ------------------ entity that qualifies as an Investment Manager under section 3(38) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and is appointed by the Pension Board or a duly authorized officer of the Company to manage Trust assets that are not invested in life insurance policies. (i) "Participant" shall mean each person entitled to ----------- benefits under any Plan, including the beneficiaries pursuant to any Plan. (j) "Pension Board" shall mean the Pension Board as ------------- defined in the General Retirement Plan for Employees of Carpenter Technology Corporation. (k) "Plan" shall mean any plan listed on Exhibit A ---- hereto, as in effect from time to time. "Plans" shall mean all such plans. (l) "Trust" shall mean the trust established under ----- this Trust Agreement. (m) "Trust Agreement" shall mean this trust agreement, --------------- as from time to time amended. (n) "Trust Fund" shall mean the trust fund held from ---------- time to time by the Trustee hereunder consisting of all contributions received by the Trustee together with the investments and reinvestment made therewith and all net profits and earnings thereon less all payments and charges therefrom. (o) "Trustee" shall mean The Chase Manhattan Bank, or ------- its successor, or an officer, director or employee of such a Trustee exercising any fiduciary powers under this Trust Agreement; provided, however, that in no event may any subsidiary or affiliate of the Company or any Participant be such a successor Trustee. Section 1.02 Establishment and Title of the Trust. ------------------------------------ The Company hereby establishes with the Trustee a trust to be known as the "Carpenter Technology Corporation Non-Qualified Benefits Trust for Directors," consisting of such sums of money and other property acceptable to the Trustee as from time to time may be paid or delivered to the Trustee pursuant to this Trust Agreement. The Trust Fund shall be held by the Trustee in trust and shall be dealt with in accordance with the provisions of this Trust Agreement. Section 1.03 Acceptance by the Trustee. The Trustee ------------------------- accepts the Trust established hereunder on the terms and conditions set forth herein and agrees to perform the duties imposed on it by this Trust Agreement. ARTICLE II INVESTMENT AND ADMINISTRATION OF THE TRUST FUND ----------------------------------------------- Section 2.01 Investment of the Trust Fund. Except as ---------------------------- directed by any Investment Manager, the Pension Board or a duly authorized officer of the Company, the Trustee shall have the exclusive responsibility and authority to hold, invest, reinvest and administer the assets of the Trust, hereinafter referred to as the "Fund", in accordance with the terms of this Trust Agreement. The Trustee shall be under no liability for any loss of any kind that may result when it follows proper written directions of the Pension Board or a duly authorized officer of the Company which are in accordance with the terms of the Trust Agreement and not contrary to law. (a) If an Investment Manager is so appointed by the Pension Board or a duly authorized officer of the Company to manage any portion of the Trust Fund, the Trustee's only responsibility with respect to such portion shall be: (1) except as otherwise directed by the Pension Board or a duly authorized officer of the Company, to retain custody of the assets of such portion of the Trust Fund; and (2) to follow the written directions of the Investment Manager with respect to such portion of the Trust Fund. (b) The Trustee shall incur no liability with respect to the investment of any portion of the Trust Fund if an Investment Manager has been appointed to manage that portion of the Trust Fund, by the Pension Board or a duly authorized officer of the Company for either: (1) following the written directions of the Investment Manager; or (2) failing to act in the absence of written directions from the Investment Manager. Notwithstanding anything to the contrary herein contained, the Pension Board or a duly authorized officer of the Company may direct the transfer of such part or all of the Fund as it shall deem advisable to The Chase Manhattan Bank as trustee of any trust ("Collective Trust") maintained by it as a common trust fund as defined under section 584 of the Code, now or hereinafter maintained by it as a medium for the collective investment of assets of trusts and which it may elect to make available to non-qualified benefit trusts, and the Pension Board or a duly authorized officer of the Company may direct the withdrawal of any part or all of the Fund so transferred. To the extent of the interest of the Trust in any Collective Trust, the terms of the agreement or declaration of trust establishing such Collective Trust shall be a part of this Trust as if set forth in full herein, and any assets transferred to any Collective Trust shall be held, invested and administered in accordance with such agreement or declaration of trust, which shall be controlling notwithstanding any contrary provision of this Agreement. Section 2.02 Plan Insurance. The Company may apply -------------- for and maintain such contracts of insurance with one or more insurance companies and on such rating or risk terms as the Company may determine to be appropriate for the provision of benefits under the Plans. The Trust shall be the policyholder and owner of such contracts. The Trustee, only as directed by the Pension Board or a duly authorized officer of the Company, shall pay premiums or other charges with respect to such contracts from assets of the Trust Fund. Section 2.03 Investments of Insurance. The Pension ------------------------ Board or a duly authorized officer of the Company may direct the Trustee to apply for and maintain contracts of insurance with one or more companies for investment purposes pursuant to Section 2.05(m), using the proceeds of such insurance to fund the Trust. The Trustee shall be the policyholder and owner of such contracts. The Trustee, only as directed by the Pension Board or a duly authorized officer of the Company, shall exercise any and all investment options, decisions or rights that the Trustee has as policyholder and owner of such insurance policies held for investment purposes. (a) If the Trustee is directed by the Pension Board or a duly authorized officer of the Company to purchase an insurance policy for investment purposes, the Trustee's only responsibility with respect to such policy shall be: (1) except as otherwise directed by the Pension Board or a duly authorized officer of the Company, to retain custody of such policy; and (2) to follow the written directions of the Pension Board or a duly authorized officer of the Company with respect to such policy. (b) The Trustee shall incur no liability with respect to the purchase of an insurance policy purchased for investment purposes if directed by the Pension Board or a duly authorized officer of the Company for either: (1) following the written directions of the Pension Board or a duly authorized officer of the Company with respect to such policy; or (2) failing to act in the absence of written directions from the Pension Board or a duly authorized officer of the Company with respect to such policy. Section 2.04 Funding Policy. From time to time the -------------- Pension Board or a duly authorized officer of the Company may communicate to the Trustee in writing the current funding policy and method that have been established to carry out the objectives of the Trust. The Trustee's discretion in investing and reinvesting the principal and income of the Fund shall be subject to the funding policy, and the Trustee shall have the duty to act strictly in accordance with and may rely upon, such funding policy, and any changes therein, as so communicated to the Trustee from time to time in writing. Section 2.05 Investment Powers of Trustee. Subject ---------------------------- to the direction of an Investment Manager, the Pension Board or a duly authorized officer of the Company, or with respect to assets subject to the Trustee's investment, management and control, the Trustee shall have, with respect to any securities or other property at any time held by it and constituting part of the Fund, power: (a) to purchase, receive or subscribe for any securities or other property and to retain in trust such securities or other property; (b) to sell, exchange, redeem or otherwise dispose of any securities or other property at public or private sale for cash, on credit, or for other securities or property, and to grant options for the purchase or exchange thereof without liability on the purchasers to see to the application of the purchase money; (c) to participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to any securities or other property held in the Fund, and to consent to or oppose any such plan or any action thereunder, or any contract, lease, mortgage, purchase, sale or other action by any person or corporation; (d) to deposit any securities or other property with any protective, reorganization or similar committee; and to pay and agree to pay part of the expenses and compensation of any such committee and any assessment levied with respect to any securities or other property so deposited; (e) to exercise conversion and subscription rights pertaining to any securities or other property held in the Fund; (f) to extend the time of payment of any obligation held in the Fund; (g) to enter into stand-by agreements for future investment, either with or without a stand-by fee; (h) to hold any moneys received by the Trustee in a common trust fund as defined under Section 584 of the Code, now or hereinafter maintained by it as a medium for the collective investment of assets of trusts, or any other comparable fund the Trustee deems advisable; (i) to exercise all voting rights with respect to any investment and to grant proxies, discretionary or otherwise; (j) to collect and receive any and all money, securities or other property due to the Fund and to give full discharge therefor; (k) with the consent of the Company, to settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust; with the consent of Carpenter, to commence or defend suits or legal proceedings to protect any interest of the Trust; and, with the consent of Carpenter, to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal (subsequent to a Change in Control the consent of Carpenter is not required to pursue the powers granted in this Section); (l) for the purposes of the Trust and if so instructed by the Investment Manager, the Pension Board or a duly authorized officer of the Company, to borrow money from others, to issue its promissory note or notes therefore, and to secure the repayment thereof by pledging any securities or other property in its possession; provided, however, that no such loan or advance shall be made by the Trustee hereunder other than as temporary advances to the Fund, on a cash or overdraft basis, on which no interest is payable and provided further that no insurance contract shall be pledged except to secure a loan to pay premiums thereon; (m) to purchase insurance contracts, and pay premiums with respect thereto; (n) to organize under the laws of any state a corporation or trust for the purpose of acquiring and holding title to any securities or other property which it is authorized to acquire under this Trust Agreement and to exercise with respect thereto any or all of the powers set forth in this Trust Agreement. Section 2.06 Discretionary Powers of Trustee. The ------------------------------- Trustee shall have the following powers and authority with respect to the fund: (a) to employ suitable agents and counsel and to pay their reasonable and proper expenses and compensation; (b) to register any securities held by it hereunder in its own name or in the name of a nominee with or without the addition of words indicating that such securities are held in a fiduciary capacity and to hold any securities in bearer form and to deposit any securities or other property in a depository or a clearing corporation; (c) to make, execute and deliver, as Trustee, any and all deed, leases, mortgages, conveyances, waivers, releases or other instruments in writing necessary or desirable for the accomplishment of any of the powers listed in Section 2.05; and (d) generally, to do all acts, whether or not expressly authorized, which the Trustee may deem necessary or desirable for the protection of the Fund. Section 2.07 Securities or Other Property. The words ---------------------------- "securities or other property" as used in this Trust Agreement shall be deemed to refer to any property, real or personal, or part interest therein, wherever situate, including, but not limited, to governmental, corporate or personal obligations, trust and participation certificates, leaseholds, fee titles, mortgages and other interests in realty, preferred and common stocks, certificates of deposit, put and call options and other option contracts of any type, foreign or domestic, whether or not traded on any exchange, tangible personal property, contracts for future or immediate receipt or delivery of property, evidences of indebtedness or ownership in foreign corporation or other enterprises, indebtedness of foreign governments, limited partnerships, insurance contracts, and any other evidences of indebtedness or ownership including securities or other property of the Company, without being limited to the classes of property in which trustees are authorized to invest trust funds by any law or any rule of court of any State. Section 2.08 Trustee's Authority. Persons dealing ------------------- with the Trustee shall be under no obligation to see the proper application of any money paid or property delivered to the Trustee or to inquire into the Trustee's authority as to any transaction. Section 2.09 Protection Clause. Neither the Company ----------------- nor the Trustee shall be responsible for any insurance company's failure to make payments provided by such contract, or for the action of any person which may delay payment or render a contract null and void or unenforceable in whole or in part. Section 2.10 Following a Change In Control - ----------------------------- Following the occurrence of a Change in Control as defined in Section 3.01, the Trustee shall follow the last funding policy communicated in writing by the Pension Board or a duly authorized officer of the Company prior to such Change in Control. Notwithstanding instructions to the contrary, the maturity of investment instruments shall at all times be selected to permit the timely payment of benefits under the Plans. ARTICLE III CHANGE IN CONTROL ----------------- Section 3.01 Definition of Change in Control. For ------------------------------- purposes of this Trust, a "Change in Control" of the Company shall be deemed to have occurred if: (a) a "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (b) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Section 3.01(a), 3.01(c) or 3.01(d) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (d) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. Section 3.02 Definition of a Potential Change in ----------------------------------- Control. For purposes of this Trust, a "Potential Change in - ------- Control" of the Company shall be deemed to have occurred if: (a) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (b) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; (c) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities, increases his beneficial ownership of such securities by 5% or more of the combined voting power of the Company's then outstanding securities on the effective date of this Agreement; or (d) the Board of Directors of the Company adopts a resolution to the effect that, for purposes of this Trust, a "potential change in control" has occurred. Such a resolution will be provided to the Trustee in certified form. Section 3.03 Requirement of Notice. Notwithstanding --------------------- the definitions in Sections 3.01 and 3.02, no Change in Control or Potential Change in Control shall be deemed to have occurred for purposes of this Trust Agreement unless and until the Trustee has actual written notice from the Company or from any person who was an officer of the Company prior to the alleged Change in Control or the alleged Potential Change in Control that such Change in Control or Potential Change in Control has occurred. ARTICLE IV CONTRIBUTIONS ------------- Section 4.01 Contributions by the Company. ---------------------------- (a) The Company will deliver contributions hereunder to the Trustee at such times, and in such amounts, as the Company may determine to be appropriate to enable the Trust to accumulate assets sufficient to pay all, or any part, as determined by the Company, of the benefits payable under the Plans. (b) Upon the occurrence of a Potential Change in Control, the Company, if it so chooses, will deliver to the Trustee cash and/or marketable securities having a fair market value in an amount equal to the sum of the amounts, determined by an actuary selected by the Company, which will be sufficient to fund fully the Company's obligations to pay to the Participants the full amount of all Benefits to which they may become entitled pursuant to the Plans. The actuarial basis employed by such actuary shall include the following assumptions: no interest will be earned on plan assets; Directors' fees will increase at the rate of 10% per annum; there will be no change in the plan; and, a Director will be assumed to terminate at such time as to maximize his benefits under the Plans but not later than age 70. Any such contribution shall be identified to the Trustee, by the Company, as a Section 4.01(b) contribution. (c) In addition to contributions made to the Trust pursuant to Sections 4.01(a) and 4.01(b), the Company shall deliver to the Trustee any amounts which the Trustee is required to pay pursuant to Section 6.02. (d) The Trustee shall be responsible only for contributions actually received by it hereunder. The Trustee shall have no duty or authority to ascertain whether any contributions should be made to it or to bring any action or proceeding to enforce any obligation to make any such contribution. (e) In the event that the Trust is overfunded; any amount of such assets constituting the overfunding shall: (1) first, be transferred to the Carpenter Technology Corporation Non-Qualified Employee Benefits Trust ("the Employees' Trust") until the Employees' Trust becomes overfunded; and (2) second, returned to the Company. (f) For the purposes of Section 4.01(e), above, the Trust is "overfunded" when the amount of assets held in the Trust Fund exceed 110% of the present value of the future benefits expected to be paid under the Plans. The present value of future benefits shall be calculated as the projected benefit obligation ("PBO"), as described in Statement No. 87 of the Financial Accounting Standards Board, except that projected service will be taken into account as if accrued. The present value shall be calculated using the actuarial assumptions used to determine the Company's pension expense for the General Retirement Plan for Employees of Carpenter Technology Corporation, except that the discount rate shall be adjusted to the extent that assets held by the Trust are subject to tax. The determination of whether the Trust is overfunded shall be made by a qualified actuary selected by the Human Resources Committee. Section 4.02 Accounts. -------- (a) Before a Change In Control. The Company shall -------------------------- create a separate Account for each Participant, cause records to be maintained by the Company, or retain a separate recordkeeper as the Company's agent, reflecting the amount, if any, credited to that Participant in accordance with the terms of the Deferred Compensation Plan for Non- Management Directors of Carpenter Technology Corporation (the "Deferred Compensation Plan"). When a contribution is made, the Company shall notify the Trustee of the amount of such contribution allocable to each Participant's Account and/or specific plans. The Trustee shall not be required to maintain any separate account records, but shall rely solely upon the information maintained by the Company and the notice to the Trustee as herein provided. The remainder, (or all thereof if no allocation is indicated) of such contribution shall not be specifically allocated to any Plan or any Participant, but shall be available to discharge the Company's obligations to make benefit payments under any of the Plans in accordance with the applicable provisions of Article V. The Company shall, however, provide to the Trustee, with respect to each Plan, at such intervals as the Company shall determine, but in no event less frequently than annually, a schedule listing each Participant, each Plan under which that Participant has accrued a benefit and the amount of such benefit. The Trustee shall have no responsibility with respect to the determination or accuracy of any such allocations and/or the accrued benefits due any participant or plan as herein provided, but shall rely solely upon such information provided to it by the Company. (b) Following a Change In Control. Upon notice to the ----------------------------- Trustee that a Change in Control has occurred, or that a Potential Change in Control has occurred and that the Company has invoked the allocation procedures of this Section 4.02(b), the Trustee, based upon the schedule of such benefits most recently provided to the Trustee by the Company, shall allocate all of the Trust Fund's assets as follows: assets shall first be allocated to the Deferred Compensation Plan portion of each Participant's Account in an amount equal to each Participant's accrued benefit therein not previously allocated thereto. In the event that the Trust Fund's assets are insufficient to fully fund each Participant's accrued benefit under the Deferred Compensation Plan, the assets shall be allocated ratably to the Participants' Accounts in the ratio that the accrued benefits in respect of each such Participant under said Deferred Compensation Plan bear to the total accrued benefits of all such Participants under said plan. The balance of the assets shall be allocated to each participant's account in an amount equal to each participant's accrued benefit under all of the Plans other than the Deferred Compensation Plans. If the assets of the Trust Fund, after making provision for the Deferred Compensation Plan, are insufficient to fully fund all of the accrued benefits of all Participants under all of the other Plans, those assets shall be allocated ratably to the Participants' Accounts in the ratio that the accrued benefits in respect of each such Participant under all of such other Plans bear to the total accrued benefits of all such Participants under all such other Plans. Section 4.03 Delivery to the Company. Any Section ----------------------- 4.01(b) contribution delivered to the Trustee shall be returned to the Company without interest on the 181st day following (and exclusive of the date of) its receipt by the Trustee, unless within 180 days following such receipt by the Trustee, a notice of the "Change in Control" shall have been received by the Trustee pursuant to Section 3.03. Such 180-day period shall be extended for an additional 180-day period for any "Potential Change in Control" which occurs or continues during any initial or extended 180-day period. The Company will provide the Trustee with written notice of any extension. Section 4.04 Trustee's Agent. The Trustee shall be --------------- entitled to retain such actuarial, accounting, legal and other services as it may deem necessary to accomplish and/or maintain such allocations, payments and/or Participant Account records as are provided for under Articles IV and V hereof or to conduct its investment responsibilities under Section 2.06, and to pay for such services as an expense of the Trust Fund out of the assets of the Trust Fund, unless promptly paid by the Company. ARTICLE V PAYMENT OF BENEFITS ------------------- Section 5.01 Payments by Trustee. ------------------- (a) Prior to a Change In Control. Until such time as ---------------------------- Section 5.01(b) applies, all payments to Participants in any of the Plans shall be made by the Company, as agent for the Trustee, in accordance with the applicable provisions of the Plans. Upon receipt of written instructions to the Trustee from the Company of the amount needed to pay such benefits the Trustee shall promptly disburse such funds to the Company and, upon that disbursement shall have no further responsibility with respect to such funds or their application. (b) Following a Change In Control. Following notice ----------------------------- to the Trustee that a Change in Control has occurred, and subject to the limitation of Section 5.01(c), the Trustee shall make payments to Participants and their beneficiaries from the Trust Fund in accordance with the payment schedule most recently provided by the Company to the Trustee prior to the occurrence of the Change in Control; provided, however, that if the Company and a Participant agree to the substitution of a new payment schedule with respect to such Participant following the occurrence of a Change in Control, the Trustee shall instead make payments in accordance with such substitute payment schedule. In the event that the Company and a Participant (or in the event of his death, his Beneficiary) disagree as to the amount, form or duration of benefit payments under a Plan, the Trustee shall continue to make benefit payments pursuant to the payment schedule most recently provided by the Company prior to a Change in Control until authorized to make payments under a substitute schedule by both the Participant (or Beneficiary) and the Company or until the Trustee receives a final non-appealable order from a court of competent jurisdiction to alter such benefit payment schedule. (c) Any amount paid under this Section 5.01 shall be charged by the Company or the Trustee, as the case may be, against the Account of the applicable Participant and no payment with respect to an Account shall be made in excess of the amount credited to such Account. (d) The Trustee shall not make any payments to Participants or beneficiaries from the Trust Fund except as provided in this Section 5.01 even though it may be informed from another source that payments are due under a Plan. The Trustee shall be fully protected in making payments or omitting to make payments in accordance with Section 5.01(b). Section 5.02 Determinations by Committee or Company. -------------------------------------- (a) If at any time the Company or, if Section 5.01(b) applies, the Trustee, determines that any amount held in the Trust Fund is includible in the gross income of a Participant or his beneficiary for federal income tax purposes prior to payment of such amount from the Trust Fund, the Trustee, upon notice from the Company or, if Section 5.01(b) applies, upon notice by a Participant or Beneficiary, in the format provided in Exhibit B, that based on a (i) change in the tax or revenue laws of the United States of America, (ii) a published ruling or similar announcement issued by the Internal Revenue Service, (iii) a regulation issued by the Secretary of the Treasury or his delegate, (iv) a decision by a court of competent jurisdiction involving the Participant or Beneficiary, or (v) a closing agreement made under Code Section 7121 that is approved by the Internal Revenue Service and involves the Participant or Beneficiary, that Participant or Beneficiary has recognized or will recognize income for federal income tax purposes with respect to amounts that are or will be payable to him under the Plans before they are paid to him, shall pay such amount to such person in the manner directed by the Committee or by such notice to the Trustee and the Participant's Account shall be charged, or his accrued benefit reduced, accordingly. (b) If at any time the Company prior to a Change in Control determines that the amount allocated to the Account of any Participant exceeds the amount reasonably expected to be necessary to provide the Benefits payable in respect of such Participant from such Account, such excess may be reallocated to the Accounts of other Participants or held as part of the unallocated Fund, as determined by the Company. If at any time prior to a Change in Control the Committee determines that the Benefits in respect of all Participants have been paid in full, the Committee shall so notify the Trustee in writing. Section 5.03 Withholding, Returns and Reports. -------------------------------- (a) Prior to a Change in Control. Prior to a Change ---------------------------- in Control, the Company shall withhold all required federal, state and local taxes from benefit payments under any of the Plans, and remit those withholdings to the appropriate taxing authorities. The Company shall also be responsible for the preparation of all information reports, returns, receipts and other communications required by Chapter 61 of the Code to be filed with, or distributed to, any person or governmental entity. (b) Following a Change in Control. Following a Change ----------------------------- in Control, the Trustee shall assume the Company's responsibilities under Section 5.03(a) with respect to benefit payments under any of the Plans, and shall reduce such benefit payments by the amount of any such required withholding. The Trustee shall remit the net benefit payments to the Participants and shall pay the required tax withheld to the Company, which shall continue to be responsible for the preparation and filing of all items required by Chapter 61 of the Code, as enumerated in Section 5.03(a). (c) The Company and the Trustee shall cooperate with each other in providing any information reasonably necessary to enable the other to carry out any of its responsibilities under this Section 5.03. Section 5.04 Company's Continuing Obligations. -------------------------------- Notwithstanding any provisions of this Trust Agreement to the contrary, the Company shall remain obligated to pay the Benefits under the Plan. To the extent the amount in the Trust Fund is not sufficient to pay any Benefits when due, the Company shall pay such deficiency directly to the person entitled thereto. Nothing in this Trust Agreement shall relieve the Company of its liabilities to pay the Benefits except to the extent such liabilities are met by the application of Trust Fund assets. Section 5.05 Company's Income. The Company agrees ---------------- that all income, deductions and credits of the Trust Fund belong to it as owner for income tax purposes and will be included on the Company's income tax returns to the extent required by applicable law. ARTICLE VI CONCERNING THE TRUSTEE ---------------------- Section 6.01 Notices to the Trustee. Except as ---------------------- provided in Section 5.02, the Trustee may rely on the authenticity, truth and accuracy of: (a) any notice, direction, certification, approval or other writing of the Company, if evidenced by an instrument signed in the name of the Company by its Chairman, President, any Vice President, Secretary, Assistant Secretary or Treasurer, and believed in good faith by it to be genuine; (b) any notice, direction, certification, approval or other written, oral or other transmitted form of instruction received by the Trustee and believed by it in good faith to be genuine and to be sent by or on behalf of the Committee; or (c) any copy of a resolution of the Board of Directors of the Company, if certified by the Secretary or an Assistant Secretary of the Company under its corporate seal. (d) The Company shall furnish the Trustee from time to time with a list of the names and signatures of the officers or other persons authorized to act under this Section 6.01(a) and (b), or in any other manner authorized to notify or instruct the Trustee pursuant to the provisions of this Agreement. Any such list shall be certified by the Secretary or an Assistant Secretary of the Company, and may be relied upon by the Trustee until it receives a revised list. Section 6.02 Expenses of the Trust Fund. The Trustee -------------------------- shall pay out of the Trust Fund: (a) all brokerage fees and transfer tax expenses and other expenses incurred in connection with the sale or purchase of investments; (b) all real and personal property taxes, income taxes and other taxes of any kind at any time levied or assessed under any present or future law upon, or with respect to, the Trust Fund or any property included in the Trust Fund; (c) the Trustee's compensation and expenses as provided in Section 6.03, unless promptly paid by the Company; and (d) unless promptly paid by the Company, all other reasonable expenses of administering the Trust. Notwithstanding the foregoing, the Trustee shall, at Company expense and direction, contest the validity of any taxes in any manner deemed appropriate by the Company or its counsel, but only if it has received an indemnity bond or other security satisfactory to it to pay any expenses of such contest; provided, however, that the Trustee shall have no obligation to contest if it receives an opinion of counsel of its choice to the effect that there is no basis in law or fact for such contest. Alternatively, the Company may itself contest the validity of any such taxes. Section 6.03 Compensation of the Trustee. The --------------------------- Company will pay to the Trustee compensation for its services from time to time in accordance with its schedule of fees then in effect for trusts of similar nature, and will reimburse the Trustee for all reasonable expenses (including attorneys' fees) incurred by the Trustee in the administration of the Trust. Section 6.04 Protection of the Trustee. ------------------------- (a) The Company agrees to indemnify and hold harmless the Trustee from and against any and all damages, losses, claims or expenses as incurred (including expenses of investigation and fees and disbursements of counsel to the Trustee and any taxes imposed on the Trust Fund or income of the Trust) arising out of or in connection with the performance by the Trustee of its duties hereunder, except to the extent that any such damages, losses, claims or expenses result from the negligence or willful misconduct of the Trustee, its officers, employees or agents. (b) The Trustee shall incur no liability to any person in discharging its duties hereunder for any action taken or omitted in good faith in conformity with the terms of this Trust Agreement. Each direction, notice, request or approval provided (whether or not certified to the Trustee in writing) by the Company, the Pension Board, or the Committee, shall constitute a certification by the Company to the Trustee that such direction is in conformity with the terms of the Plan and applicable law. Under no circumstances shall the Trustee incur liability to any person for any indirect, consequential or special damages (including, without limitation, lost profits) of any form, whether or not foreseeable and regardless of the form of the action in which such a claim may be brought, with respect to the Trust or its role as Trustee, except as otherwise required by ERISA or New York State law. Section 6.05 Duties of the Trustee. The Trustee will --------------------- be under no obligation to perform any duties whatsoever, except such duties as are specifically set forth as such in this Trust Agreement, and no implied covenant or obligation will be read into this Trust Agreement against the Trustee. The Trustee will not be compelled to take any action toward the execution or enforcement of the Trust or to prosecute or defend any suit in respect thereof, unless indemnified to its satisfaction against loss, costs, liability and expense or there are sufficient assets in the Trust Fund to provide such indemnity; and the Trustee will be under no liability or obligation to anyone with respect to any failure on the part of the Company to perform any of its obligations under the Plans. Nothing in this Trust Agreement should be construed as requiring the Trustee to make any payment in excess of amounts held in the Trust Fund at the time of such payment. Section 6.06 Settlement of Accounts of the Trustee. ------------------------------------- The Trustee shall keep or cause to be kept accurate and detailed records of all investments, receipts, disbursements and other transactions hereunder. Such records shall be open to inspection and audit at all reasonable times during normal business hours by any person designated by the Company. At least annually, or upon such more frequent intervals, but not more frequent than monthly, as the Company may direct, the Trustee shall file with the Company a written statement, listing the investments of the Trust Fund and any uninvested cash balance thereof, and setting forth all receipts, disbursements, payments and other transactions respecting the Trust Fund not included in any such previous statement. Any statement, when approved by the Company, will be binding and conclusive on the Company; and the Trustee will thereby be released and discharged from any liability or accountability to the Company with respect to all matters set forth therein. Omission by the Company to object in writing to any specific items in any such statement, which shall be deemed an account stated, within ninety (90) days after its delivery will constitute approval of the account by the Company. No other accounts or reports shall be required to be given to the Company, except as stated herein or except as otherwise agreed to in writing by the Trustee. Except as provided above, the Trustee shall not be required to file an accounting, judicial or otherwise. Section 6.07 Right to Judicial Settlement. Nothing ---------------------------- contained in this Trust Agreement shall be construed as depriving the Trustee of the right to have a judicial settlement of its accounts, and upon any proceeding for a judicial settlement of the Trustee's accounts or for instructions the only necessary party thereto in addition to the Trustee shall be the Company. Section 6.08 Resignation or Removal of the Trustee. ------------------------------------- The Trustee may at any time resign upon sixty (60) days notice in writing to the Company (which sixty (60) days notice requirement may be waived by agreement in writing of the Company). Prior to a Change in Control, or a Potential Change in Control, the Trustee may be removed by the Company upon sixty (60) days notice in writing to the Trustee (which sixty (60) days notice requirement may be waived by agreement in writing of the Trustee). Section 6.09 Appointment of Successor Trustee. In -------------------------------- the event of the resignation or removal of the Trustee, or in any other event in which the Trustee ceases to act, a successor trustee may be appointed by the Company by instrument in writing delivered to and accepted by the successor trustee. Notice of such appointment will be given by the Company to the retiring trustee, and the successor trustee will deliver to the retiring trustee an instrument in writing accepting such appointment. If no appointment of a successor trustee is made within a reasonable time after such a resignation, removal or other event, any court of competent jurisdiction may appoint a successor trustee. In the event of such resignation, removal or other event, the retiring trustee or its successors and assigns shall file with the Company a final statement to which the provisions of Section 6.06 shall apply. In the event of the appointment of a successor trustee, such successor trustee will succeed to all the right, title and estate of, and will be, the Trustee; and the retiring trustee will after the settlement of its final account as provided for in Section 6.06, and the receipt of any compensation or expenses due it, deliver the Trust Fund to the successor trustee together with all such instruments of transfer, conveyance, assignment and further assurance as the successor trustee may reasonably require. The retiring trustee will retain a first lien upon the Trust Fund to secure all amounts due the retiring trustee pursuant to the provisions of this Trust Agreement. The Company will provide the Trustee with a ratification and release upon such resignation, removal or other event. Section 6.10 Merger or Consolidation of the Trustee. ------------------------------------- Any corporation continuing as the result of any merger or resulting from any consolidation to which merger or consolidation the Trustee is a party, or any corporation to which substantially all the business and assets of the Trustee may be transferred, will be deemed automatically to be continuing as the Trustee. ARTICLE VII ENFORCEMENT ----------- Section 7.01 Enforcement of Trust Agreement and Legal ---------------------------------------- Proceedings. The Company shall have the right to enforce any - ----------- provision of this Trust Agreement in its own name. In any action or proceeding affecting the Trust, the only necessary parties shall be the Company and the Trustee and, except as otherwise required by applicable law, no other person shall be entitled to any notice or service of process. Any judgment entered in such an action or proceeding shall, to the maximum extent permitted by applicable law, be binding and conclusive on all persons having or claiming to have any interest in the Trust. ARTICLE VIII AMENDMENT, REVOCATION AND TERMINATION ------------------------------------- Section 8.01 Amendment. The Company may from time to --------- time prior to the occurrence of a Change in Control or a Potential Change in Control with respect to which the allocation procedures of Section 4.02(b) are invoked, with the Trustee's consent, amend in writing, in whole or in part, any or all of the provisions of this Trust Agreement without the consent of any Participant or any other person; provided, however, that no such amendment shall increase the duties or obligations or change the compensation of the Trustee without the Trustee's written consent. This Trust Agreement may not be amended following a Change in Control nor may it be amended following a Potential Change in Control with respect to which the allocation procedures of Section 4.02(b) are invoked unless the resulting allocations are revoked pursuant to Section 4.03. Section 8.02 Irrevocability. Subject to section -------------- 10.08, the Trust shall be irrevocable and, except as otherwise provided in Section 8.03 and Article IX, shall be held for the exclusive purpose of providing the Benefits to Participants and their beneficiaries and defraying expenses of the Trust in accordance with the provisions of this Trust Agreement. Section 8.03 Termination. The Trust shall terminate ----------- if the Committee provides the Trustee with a written statement to the effect that the Benefits in respect of all Participants have been paid in full. As soon as practicable following such event, the Trustee shall settle its final accounts in accordance with Section 6.06 and, after receipt of any unpaid fees and expenses, shall distribute the balance of the Trust Fund to the Company, provided, however, that after a Change in Control, such Committee statement shall be accompanied by written approvals of the Participants then listed on the most recent payment schedule provided to the Trustee pursuant to Section 4.02. In the event any such Participant does not approve, Section 5.01(b) shall apply. ARTICLE IX CLAIMS OF COMPANY'S CREDITORS ----------------------------- Section 9.01 Insolvency. As used in this Article IX, ---------- the Company shall be deemed to be "Insolvent" if (i) the Company is unable to pay its debts generally as they come due, or (ii) the Company is subject to a proceeding as a debtor under the federal Bankruptcy Code (or any successor federal statute). In the event the Company shall be deemed Insolvent, the assets of the Trust shall be subject to claims of creditors of the Company (hereinafter the "Bankruptcy Creditors"). Section 9.02 Discontinuance of Benefits. If at any -------------------------- time (i) the Company or a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, or (ii) the Trustee is served with any order, process or paper from a court of competent jurisdiction to the effect that the Company is Insolvent, the Trustee shall give notice thereof to the Company, shall discontinue Benefit payments under this Trust Agreement, shall hold the Trust assets for the benefit of the Company's Bankruptcy Creditors, and shall resume payment of Benefits under this Trust Agreement in accordance with Article V only upon: (a) in the case of clause (ii) above, the receipt of an order of a court of competent jurisdiction authorizing or requiring such payment, and (b) in the case of clause (i) above, receipt of written notice from the Company that the Company is not Insolvent. The Board of Directors of the Company and the Company's Treasurer shall be obligated to give the Trustee prompt written notice if the Company becomes Insolvent, with the same consequences as provided in the preceding sentence. If payment of Benefits has been discontinued pursuant to clause (i) of the second preceding sentence, the Board of Directors of the Company, and the Company's Treasurer, shall be obligated to give the Trustee prompt written notice in the event the Company is not Insolvent, and such notice from such Board of Directors or Treasurer shall be treated as notice from the Company for purposes of the second preceding sentence. The Trustee shall not be liable to anyone in the event Benefit payments are discontinued pursuant to this Section 9.02. If the Trustee discontinues payment of Benefits pursuant to this Section 9.02 and subsequently resumes such payment, to the extent the Trust Fund is sufficient for such purpose, the first payment to a Participant following such discontinuance shall include an aggregate amount equal to the payments which would have been made to such Participant under this Trust Agreement but for this Section 9.02, as shall be determined by the Committee or if Section 5.01(b) applies, by the Trustee. No interest shall be due or payable with respect to any such payments in arrears. ARTICLE X MISCELLANEOUS PROVISIONS ------------------------ Section 10.01 Successors. This Trust Agreement shall ---------- be binding upon and inure to the benefit of the Company and the Trustee and their respective successors and assigns. Section 10.02 Nonalienation. Except insofar as ------------- applicable law may otherwise require: (a) no amount payable to or in respect of any Participant at any time under the Trust shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind, and any attempt to so alienate, sell, transfer, assign, pledge, attach, charge or otherwise encumber any such amount, whether presently or thereafter payable, shall be void; and (b) the Trust Fund shall in no manner be liable for or subject to the debts or liabilities of any Participant. Section 10.03 Communications. -------------- (a) Communications to the Company shall be addressed to the Company at P.O. Box 14662, Reading, PA 19612-4662, Attn. Treasurer, Carpenter Technology Corporation, provided, however, that upon the Company's written request, such communications shall be sent to such other address as the Company may specify. (b) Communications to the Trustee shall be addressed to its Global Investor Services Division, 4-Chase Metrotech Center, 18th Floor, Brooklyn, New York 11245; provided, however, that upon the Trustee's written request, such communications shall be sent to such other address as the Trustee may specify. (c) No communication shall be binding on the Trustee until it is received by the Trustee, and no communication shall be binding on the Company until it is received by the Company. Section 10.04 Headings. Titles to the Sections of -------- this Trust Agreement are included for convenience only and shall not control the meaning or interpretation of any provision of this Trust Agreement. Section 10.05 Third Parties. A third party dealing ------------- with the Trustee shall not be required to make inquiry as to the authority of the Trustee to take any action nor be under any obligation to follow the proper application by the Trustee of the proceeds of sale of any property sold by the Trustee or to inquire into the validity or propriety of any act of the Trustee. Section 10.06 Governing Law. This Trust Agreement and ------------- the Trust established hereunder shall be governed by and construed, enforced, and administered in accordance with the laws of the State of New York. The United States District Court for the Southern District of New York shall have the sole and exclusive jurisdiction over any lawsuit or other judicial proceeding relating to or arising from this Agreement. If that court lacks federal subject matter jurisdiction, the Supreme Court of the State of New York, New York County shall have sole and exclusive jurisdiction. Either of these courts shall have proper venue for any such lawsuit or judicial proceeding, and the parties waive any objection to venue or their convenience as a forum. The parties agree to submit to the jurisdiction of any of the courts specified and to accept service of process to vest personal jurisdiction over them in any of these courts. The parties further hereby knowingly, voluntarily and intentionally waive, to the fullest extent permitted by law, any right to a trial by jury with respect to any such lawsuit or judicial proceeding arising or relating to this Agreement or the transactions contemplated hereby. Section 10.07 Counterparts. This Trust Agreement may ------------ be executed in any number of counterparts, each of which shall be deemed to be the original although the others shall not be produced. Section 10.8 IRS Ruling - Funded Status. The Company -------------------------- intends to apply to the Internal Revenue Service for a ruling to the effect that this Trust is a grantor trust within the meaning of section 671, et. seq. of the Code and that contributions hereunder will not be treated as taxable income to Plan Participants until distributed to those Participants. If the Company is unable to obtain a satisfactory ruling to that effect, or if any Plan is finally determined to be funded within the meaning of Title I of ERISA because of the existence of this Trust and if a Change in Control has not then occurred, the Company shall have the right, notwithstanding the provisions of Article VIII, to further amend or revoke the Trust. If the Trust is revoked, its assets, after deducting any unpaid fees or expenses due the Trustee, shall be returned to the Company. IN WITNESS WHEREOF, this Trust Agreement has been duly executed by the parties hereto as of the day and year first above written. Attest: CARPENTER TECHNOLOGY CORPORATION John R. Welty Secretary By: John A. Schuler ------------------------ Treasurer Attest: THE CHASE MANHATTAN BANK Robert Signorino By: Vito Milillo ----------------------- STATE OF Pennsylvania ) ) COUNTY OF Berks ) Personally appeared John A. Schuler, Treasurer, of Carpenter Technology Corporation, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed as such and the free act and deed of said company, before me May 1, 1997. Anita M. Keltz ------------------------- Notary Public STATE OF New York ) ) ss.: COUNTY OF Kings ) Personally appeared Vito Milillo, Vice President, of the Chase Manhattan Bank, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed as such Vice President and the free act and deed of said company, before me May 20, 1997. Julia R. Scalia -------------------------- Notary Public EXHIBIT "A" ----------- 1. Carpenter Technology Corporation Deferred Compensation Plan For Non-Management Directors effective January 1, 1995, subject to any approved amendments. 2. Carpenter Technology Corporation Director Retirement Plan adopted June 9, 1983, effective August 1, 1981, subject to any approved amendments. EXHIBIT "B" ----------- FORM OF NOTICE CONCERNING EARLY TAXATION ---------------------------------------- I, the undersigned Participant (Beneficiary) under the Carpenter Technology Corporation Non-Qualified Benefits Trust for Directors hereby notify The Chase Manhattan Bank, as Trustee, that pursuant to Section 5.02(a) thereof, the undersigned will recognize income for federal income tax purposes due to funds held in said Trust and request payment of all funds held in my account. I do hereby certify the above to be a true statement and I hereby furnish the following independent verification of the reasons why I will recognize income for federal income tax purposes: [List below the type of independent verification and enclose a copy of such verification.] EX-11 9 EPS Exhibit 11 Carpenter Technology Corporation Primary Earnings Per Common Share Computations For the Years Ended June 30, 1997, 1996 and 1995 1997 1996 1995 -------- -------- -------- (in thousands, except per share data) Net Income for Primary Earnings - ------------------------------- Per Common Share ---------------- Net income $ 59,993 $ 60,148 $ 47,492 Dividends on convertible preferred stock, net of tax benefits (1,578) (1,572) (1,599) -------- -------- -------- Net income for primary earnings per common share $ 58,415 $ 58,576 $ 45,893 ======== ======== ======== Weighted Average Common Shares - ------------------------------ Weighted average number of common shares outstanding 17,579 16,537 16,240 Effect of shares issuable under stock option plans 124 140 87 -------- -------- -------- Weighted average common shares 17,703 16,677 16,327 ======== ======== ======== Primary Earnings Per Common Share $ 3.30 $ 3.51 $ 2.81 - ---------------------------- ======== ======== ======== Exhibit 11 Carpenter Technology Corporation Fully Diluted Earnings Per Common Share Computations For the Years Ended June 30, 1997, 1996 and 1995 1997 1996 1995 -------- -------- -------- (in thousands, except per share data) Net Income for Fully Diluted - ---------------------------- Earnings Per Common Share ------------------------- Net income $ 59,993 $ 60,148 $ 47,492 Assumed shortfall between common and preferred dividend (637) (644) (705) -------- -------- -------- Net income for fully diluted earnings per common share $ 59,356 $ 59,504 $ 46,787 ======== ======== ======== Weighted Average Common Shares - ------------------------------ Weighted average number of common shares outstanding 17,579 16,537 16,240 Assumed conversion of preferred shares 900 909 917 Effect of shares issuable under stock option plans 280 158 152 -------- -------- -------- Weighted average common shares 18,759 17,604 17,309 ======== ======== ======== Fully Diluted Earnings Per - -------------------------- Common Share $ 3.16 $ 3.38 $ 2.70 ---------- ======== ======== ======== EX-12 10 EARNINGS TO FIXED CHGS Exhibit 12 Carpenter Technology Corporation Computations of Ratios of Earnings to Fixed Charges -- unaudited Five years Ended June 30, 1997 (dollars in thousands) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Fixed charges: Interest costs (a) $ 22,330 $ 19,275 $ 17,797 $ 19,651 $ 21,759 Interest component of non-capitalized lease rental expense (b) 2,419 2,074 2,452 2,522 2,532 -------- -------- -------- -------- -------- Total fixed charges $ 24,749 $ 21,349 $ 20,249 $ 22,173 $ 24,291 ======== ======== ======== ======== ======== Earnings as defined: Income before income taxes, extraordinary charge and cumulative effect of changes in accounting principles $ 97,871 $ 95,170 $ 74,571 $ 62,728 $ 42,799 Add: Loss in less-than- fifty-percent-owned persons 1,188 7,025 3,000 910 - Less: Gain on sale of partial interest in less-than-fifty- percent-owned persons - (2,650) - - - Fixed charges less interest capitalized 22,349 21,009 16,994 18,043 23,126 Amortization of capitalized interest 1,879 2,074 1,952 1,788 1,725 -------- -------- -------- -------- -------- Earnings as defined $123,287 $122,628 $ 96,517 $ 83,469 $ 67,650 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 5.0x 5.7x 4.8x 3.8x 2.8x ====== ====== ====== ====== ====== (a) Includes interest capitalized relating to significant construction projects and amortization of debt discount and debt expense. (b) One-third of rental expense which approximates the interest component of non-capitalized leases. EX-23 11 CONSENT Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Carpenter Technology Corporation and subsidiaries on Form S-8 and S-3 (File No. 2-83780, 2-81019, 2-60469, 33-42536, 33-65077, 33-51613 and 33-54045) of our reports dated July 28, 1997, on our audits of the consolidated financial statements and financial statement schedule of Carpenter Technology Corporation and subsidiaries as of June 30, 1997 and 1996, and for the years ended June 30, 1997, 1996 and 1995, which reports are included in this Annual Report on Form 10-K. s/Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania September 18, 1997 EX-24 12 POWER OF ATTORNEY CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/Marcus C. Bennett ________________________________ Marcus C. Bennett Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/William S. Dietrich II ________________________________ William S. Dietrich II Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/C. McCollister Evarts ________________________________ C. McCollister Evarts Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/Carl R. Garr ________________________________ Carl R. Garr Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/William J. Hudson, Jr. ________________________________ William J. Hudson, Jr. Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/Arthur E. Humphrey ________________________________ Arthur E. Humphrey Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/Edward W. Kay ________________________________ Edward W. Kay Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 15th day of September, 1997. s/Frederick C. Langenberg ________________________________ Frederick C. Langenberg Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/J. Michael Fitzpatrick ________________________________ J. Michael Fitzpatrick Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/Marlin Miller, Jr. ________________________________ Marlin Miller, Jr. Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/Paul R. Roedel ________________________________ Paul R. Roedel Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/Robert J. Lawless ________________________________ Robert J. Lawless Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/Peter C. Rossin ________________________________ Peter C. Rossin Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in her capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 15th day of September, 1997. s/Kathryn C. Turner ________________________________ Kathryn C. Turner Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 1997, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 11th day of September, 1997. s/Kenneth L. Wolfe ________________________________ Kenneth L. Wolfe Director EX-27 13 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1997 JUN-30-1997 $18,620 $0 $159,863 $0 $211,483 $402,213 $936,456 $422,820 $1,223,001 $258,045 $244,726 $0 $28,224 $98,215 $322,868 $1,223,001 $939,000 $939,000 $697,892 $697,892 $(3,050) $0 $19,930 $97,871 $37,878 $59,993 $0 $0 $0 $59,993 $3.30 $3.16
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