-----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, IfhTmggl/eBpUWAisRwm4q82hqFIVNUaMqdbcbv23kbGveDQ92IMHttKv/FlZGLb OhzH95UIwdoXnlOgHLJujA== 0000025757-99-000041.txt : 19990811 0000025757-99-000041.hdr.sgml : 19990811 ACCESSION NUMBER: 0000025757-99-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990626 FILED AS OF DATE: 19990810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROMPTON & KNOWLES CORP CENTRAL INDEX KEY: 0000025757 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 041218720 STATE OF INCORPORATION: MA FISCAL YEAR END: 1225 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04663 FILM NUMBER: 99682709 BUSINESS ADDRESS: STREET 1: ONE STATION PL STREET 2: METRO CTR CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033535400 MAIL ADDRESS: STREET 1: ONE STATION PLACE STREET 2: METRO CENTER CITY: STAMFORD STATE: CT ZIP: 06902 10-Q 1 CROMPTON & KNOWLES CORPORATION 2ND QTR. 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 26, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission File No. 1-4663 Crompton & Knowles Corporation (exact name of registrant as specified in its charter) Massachusetts 04-1218720 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Station Place, Metro Center Stamford, Connecticut 06902 (address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203)353-5400 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 such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 14, 1999 Common Stock, $.10 par value 65,465,975 shares CROMPTON & KNOWLES CORPORATION FORM 10-Q FOR QUARTER ENDED JUNE 26, 1999 INDEX PART I. FINANCIAL INFORMATION: Item 1. Condensed Financial Statements and Accompanying Notes . Consolidated Statements of Earnings (unaudited) - Second quarter and six months ended 1999 and 1998 . Consolidated Balance Sheets - June 26, 1999 (unaudited) and December 26, 1998 . Consolidated Statements of Cash Flows (unaudited) - Six Months ended 1999 and 1998 . Notes to Consolidated Financial Statements (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION: Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signatures *Exhibit 10.1 Amended and Restated Employment Agreement *Exhibit 10.2 Amended Crompton & Knowles Corporation 1998 Long Term Incentive Plan *Exhibit 27 Financial Data Schedules * A copy of this Exhibit is annexed to this report on Form 10-Q provided to the Securities and Exchange Commission. UNAUDITED CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Second quarter and six months ended 1999 and 1998 (In thousands, except per share data) Second quarter ended Six months ended 1999 1998 1999 1998 Net sales $ 409,174 $ 474,337 $ 805,466 $ 951,556 Cost of products sold 248,582 292,091 495,877 594,556 Selling, general and administrative 60,066 66,074 120,656 133,347 Depreciation and amortization 18,666 20,394 37,503 40,487 Research and development 11,278 13,200 22,586 26,363 Equity income (2,379) - (9,434) - Operating profit 72,961 82,578 138,278 156,803 Interest expense 12,953 20,505 26,107 44,118 Other (income) expense 451 (1,258) (40,255) (1,547) Earnings before income taxes and extraordinary loss 59,557 63,331 152,426 114,232 Provision for income taxes 21,588 23,536 55,254 42,494 Earnings before extraordinary loss 37,969 39,795 97,172 71,738 Extraordinary loss on early extinguishment of debt (1,085) (13,843) (1,085) (15,794) Net earnings $ 36,884 $ 25,952 $ 96,087 $ 55,944 Basic Earnings per common share: Earnings before extraordinary loss $ .58 $ .53 $ 1.46 $ .96 Extraordinary loss (.02) (.18) (.02) (.21) Net earnings $ .56 $ .35 $ 1.44 $ .75 Diluted Earnings per common share: Earnings before extraordinary loss $ .57 $ .52 $ 1.43 $ .94 Extraordinary loss (.02) (.18) (.02) (.21) Net earnings $ .55 $ .34 $ 1.41 $ .73 Dividends per common share $ .05 $ .05 $ .05 $ .05 See accompanying notes to consolidated financial statements. - 2 - June 26, 1999 UNAUDITED CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets June 26, 1999 and December 26, 1998 (In thousands of dollars) June 26, December 26, 1999 1998 ASSETS CURRENT ASSETS Cash $ 14,243 $ 12,104 Accounts receivable 199,368 173,668 Inventories 318,711 334,562 Other current assets 82,788 77,422 Total current assets 615,110 597,756 NON-CURRENT ASSETS Property, plant and equipment 449,804 473,403 Cost in excess of acquired net assets 145,563 166,184 Other assets 170,715 171,550 $ 1,381,192 $ 1,408,893 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 15,327 $ 17,305 Accounts payable 106,396 117,338 Accrued expenses 133,451 139,401 Income taxes payable 79,657 103,179 Other current liabilities 14,711 17,149 Total current liabilities 349,542 394,372 NON-CURRENT LIABILITIES Long-term debt 668,975 646,857 Postretirement health care liability 142,995 142,727 Other liabilities 142,686 158,234 STOCKHOLDERS' EQUITY Common stock 7,733 7,733 Additional paid-in capital 240,884 238,615 Retained earnings (deficit) 76,830 (15,985) Accumulated other comprehensive income (49,737) (37,571) Treasury stock at cost (197,944) (125,246) Deferred compensation (772) (843) Total stockholders' equity 76,994 66,703 $ 1,381,192 $ 1,408,893 See accompanying notes to consolidated financial statements. - 3 - UNAUDITED CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Six months ended 1999 and 1998 (In thousands of dollars) Increase (decrease) to cash 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 96,087 $ 55,944 Adjustments to reconcile net earnings to net cash provided by operations: Gain on sale of specialty ingredients (42,060) - Extraordinary loss on early debt extinguishment 1,085 15,794 Depreciation and amortization 37,503 40,487 Equity income (9,434) - Changes in assets and liabilities, net (a) (85,078) 2,177 Net cash provided (used) by operations (a) (1,897) 114,402 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of specialty ingredients 103,000 - Capital expenditures (34,078) (21,341) Acquisitions - (5,927) Other investing activities (3,100) 235 Net cash provided (used) by investing activities 65,822 (27,033) CASH FLOWS FROM FINANCING ACTIVITIES Redemption of 11% and 12% notes - (352,802) Proceeds on long-term borrowings 22,118 279,313 Proceeds (payments) on short-term borrowings (1,978) 1,174 Premium paid on early extinguishment of debt (1,437) (15,289) Treasury stock acquired (74,596) - Dividends paid (3,272) (3,721) Other financing activities (3,121) 9,343 Net cash used by financing activities (62,286) (81,982) CASH Effect of exchange rates on cash 500 (1,163) Change in cash 2,139 4,224 Cash at beginning of period 12,104 10,607 Cash at end of period $ 14,243 $ 14,831 (a) 1999 includes tax payment of $48 million relating to fourth quarter 1998 Gustafson gain and 1998 includes Gustafson cash flow of $14 million and accounts receivable discounting of $20 million. See accompanying notes to consolidated financial statements. -4- CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (unaudited) PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS The information included in the foregoing consolidated financial statements is unaudited but reflects all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. Included in accounts receivable are allowances for doubtful accounts of $10.8 million in 1999 and $9.8 million at December 26, 1998. Accumulated depreciation amounted to $433.3 million in 1999 and $434.7 million at December 26, 1998. Accumulated amortization of cost in excess of acquired net assets amounted to $41.1 million in 1999 and $44.6 million at December 26, 1998. Accumulated amortization of patents, unpatented technology, trademarks and other intangibles included in other assets amounted to $126.9 million in 1999 and $120.9 million at December 26, 1998. Cash payments during the quarters ended June 26, 1999 and June 27, 1998 included interest of $26.5 million and $40.7 million, respectively, and income taxes of $76.8 million and $9.6 million, respectively. It is suggested that the interim consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in the Company's 1998 Annual Report on Form 10- K. CAPITAL STOCK As of June 26, 1999, there were 77,332,751 common shares issued at $.10 par value, of which 11,876,760 shares were held in the treasury. INVENTORIES Components of inventories are as follows: June 26, Dec. 26, (In thousands) 1999 1998 Finished goods $226,735 $226,663 Work in process 40,501 45,237 Raw materials and supplies 51,475 62,662 $318,711 $334,562 EARNINGS PER COMMON SHARE The computation of basic earnings per common share is based on the weighted average number of common shares outstanding. The computation of diluted earnings per common share is based on the weighted average number of common and common equivalent shares outstanding. The following is a reconciliation of the shares used in the computations: (In thousands) Second Quarter Six Months 1999 1998 1999 1998 Weighted average common shares outstanding 65,488 74,430 66,603 74,267 Stock options and other equivalents 1,147 2,383 1,322 2,346 Weighted average common and common equivalent shares outstanding 66,635 76,813 67,925 76,613 BUSINESS SEGMENT DATA The Company evaluates a segment's performance based on several factors, of which a primary financial measure is operating profit. In computing operating profit, the following items have not been deducted: interest expense, other (income) expense and income taxes. Intersegment sales are not significant. Second Quarter Ended June 26, June 27, (In thousands) 1999 1998 SALES Specialty Chemicals Performance Chemicals $ 112,567 $ 116,228 Crop Protection 81,340 100,545 Colors 53,765 64,610 Other - 23,346 247,672 304,729 Polymers & Polymer Processing Equipment Polymers 79,410 88,456 Polymer Processing Equipment 82,092 81,152 161,502 169,608 Total net sales $ 409,174 $ 474,337 OPERATING PROFIT Specialty Chemicals Performance Chemicals $ 13,847 $ 16,121 Crop Protection 30,131 30,079 Colors 5,860 8,063 Other - 2,510 49,838 56,773 Polymers & Polymer Processing Equipment Polymers 22,686 21,126 Polymer Processing Equipment 5,511 9,832 28,197 30,958 General corporate expense ( 5,074) ( 5,153) Total operating profit $ 72,961 $ 82,578 Six Months Ended June 26, June 27, (In thousands) 1999 1998 SALES Specialty Chemicals Performance Chemicals $ 226,081 $ 229,500 Crop Protection 147,058 208,388 Colors 103,943 125,710 Other - 48,151 477,082 611,749 Polymers & Polymer Processing Equipment Polymers 158,145 175,046 Polymer Processing Equipment 170,239 164,761 328,384 339,807 Total net sales $ 805,466 $ 951,556 OPERATING PROFIT Specialty Chemicals Performance Chemicals $ 26,849 $ 30,348 Crop Protection 52,245 58,358 Colors 10,562 14,937 Other - 4,998 89,656 108,641 Polymers & Polymer Processing Equipment Polymers 44,093 39,476 Polymer Processing Equipment 16,323 20,198 60,416 59,674 General corporate expense ( 11,794) ( 11,512) Total operating profit $ 138,278 $ 156,803 Segment assets in the Other category of Specialty Chemicals declined $65.0 million due to the disposition of the specialty ingredients business. There are no other material changes in total assets for any other segments from the amounts disclosed as of year-end 1998. COMPREHENSIVE INCOME An analysis of the Company's comprehensive income follows: Second Quarter Ended June 26, June 27, (In thousands) 1999 1998 Net earnings $ 36,884 $ 25,952 Other comprehensive expense: Foreign currency translation adjustments ( 262) ( 1,343) Comprehensive income $ 36,622 $ 24,609 Six Months Ended June 26, June 27, (In thousands) 1999 1998 Net earnings $ 96,087 $ 55,944 Other comprehensive expense: Foreign currency translation adjustments ( 12,166) ( 4,539) Comprehensive income $ 83,921 $ 51,405 The balance of accumulated other comprehensive income includes accumulated translation adjustments and minimum pension liability in the amounts of $48.7 million and $1.0 million at June 26, 1999, and $36.6 million and $1.0 million at December 26, 1998. MERGER AGREEMENT On May 31, 1999, the Company's board of directors approved a definitive agreement (the "Merger Agreement") for a tax-free, stock-for-stock merger of equals with Witco Corporation ("Witco"). The Merger Agreement provides, among other things, subject to the terms and conditions set forth therein, that (a) the Company will merge with and into CK Witco Corporation ("CK Witco"), a wholly- owned subsidiary of the Company (the "First Step Merger") and (b) immediately thereafter, Witco will merge with and into CK Witco Corporation (the "Second Step Merger"). The First Step Merger, together with the Second Step Merger, will be known as the "Merger", so that CK Witco is the surviving corporation. Under the terms of the Merger, each share of the Company's common stock will be automatically converted into one share of CK Witco common stock, and each share of Witco common stock will be exchanged for .9242 shares of CK Witco common stock. The Merger, which will be accounted for as a purchase, is subject to approval by the shareholders of both companies at special meetings of stockholders to be held on September 1, 1999. Common stockholders of record on July 23, 1999 will be eligible to vote at the special meeting. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECOND QUARTER RESULTS Overview Consolidated net sales of $409.2 million for the second quarter of 1999 decreased 14% from the comparable period in 1998. After adjusting to exclude $57 million from deconsolidated joint ventures and the sale of the specialty ingredients business, net sales decreased 2%, primarily as a result of lower Colors sales. International sales, including U.S. exports, were 42% of total sales, up from 40% in the second quarter of 1998. Net earnings before extraordinary losses decreased 5% to $38.0 million, or $.58 per share basic and $.57 per share diluted, compared to $39.8 million, or $.53 per share basic and $.52 per share diluted, in the second quarter of 1998. Net earnings increased 42% to $36.9 million, or $.56 per share basic and $.55 per share diluted, compared to $26.0 million, or $.35 per share basic and $.34 per share diluted, in the second quarter of 1998. Gross margin as a percentage of sales increased to 39.2% from 38.4% in the second quarter of 1998. The increase was attributable primarily to improved product mix and lower raw material and manufacturing costs partially offset by lower pricing. Consolidated operating profit of $73.0 million declined 12%; however, excluding the impact of deconsolidated joint ventures and the sale of the specialty ingredients business, operating profit was down 4% versus the second quarter of 1998. Specialty Chemicals Performance chemicals sales of $112.6 million decreased 3% from the second quarter of 1998. Rubber chemical sales were lower by 5% primarily due to lower pricing, while specialty additive sales were about equal to the prior year. Operating profit of $13.8 million was 14% below the $16.1 million in the prior year primarily as a result of lower pricing in rubber chemicals. Crop protection sales of $81.3 million decreased 19% from the prior year primarily as a result of the deconsolidation of the seed treatment joint venture. Excluding the $22.2 million impact of the joint venture deconsolidation, crop protection sales increased 4% from the second quarter of 1998. The increase in sales was achieved despite the poor condition of the U.S. farm economy and poor April and May weather conditions in California. Benefitting the quarter were increased exports to China and the Middle East, new product registrations in Eastern Europe and improved California weather in June. Operating profit of $30.1 million was essentially unchanged from the prior year. However, excluding the $3.4 million impact of the seed treatment joint venture deconsolidation, operating profit increased 13% from 1998, primarily as a result of increased sales volume, lower manufacturing costs and improved product mix. Colors sales of $53.8 million decreased 17% from $64.6 million in the second quarter of 1998 primarily as a result of continuing weakness in the U.S. and European textile dye markets. Lower selling prices in the quarter accounted for 6% of the sales decline. Operating profit of $5.9 million decreased 27% from $8.1 million in 1998 primarily as a result of lower sales volume and pricing. Other sales and operating profit decreased $23.3 million and $2.5 million, respectively, as a result of the sale of the specialty ingredients business effective the first day of fiscal 1999. Polymers & Polymer Processing Equipment Polymers sales of $79.4 million decreased 10% from 1998 primarily as a result of the deconsolidation of the nitrile rubber joint venture. Excluding the $11.2 million impact from the joint venture deconsolidation, polymer sales were 3% higher than the second quarter of 1998. EPDM sales were up 4% primarily as a result of higher pricing, while urethane sales increased 1% over the prior year. Operating profit of $22.7 million increased 7% over the prior year. Excluding the joint venture deconsolidation, operating profit increased 9% from the second quarter of 1998 primarily as a result of improved pricing and lower raw material costs offset in part by lower equity income from the nitrile rubber joint venture. Polymer processing equipment sales of $82.1 million increased 1% from $81.2 million in the prior year despite lower selling prices of approximately 5%. New orders during the quarter were significantly below shipments and the equipment order backlog declined to $103 million from $118 million at the end of the first quarter. Operating profit of $5.5 million was down 44% from $9.8 million in 1998 primarily as a result of lower pricing and a shift in sales to lower margin systems. Other Selling, general and administrative expenses of $60.1 million decreased 9% versus the second quarter of 1998 primarily due to the impact of the deconsolidation of the joint ventures and the sale of the specialty ingredients business. Depreciation and amortization (down 8%) and research and development costs (down 15%) also declined as a result of the deconsolidation of the joint ventures and the sale of the specialty ingredients business. Equity income of $2.4 million in the second quarter of 1999 was primarily attributable to the seed treatment joint venture. Interest expense of $13.0 million decreased 37% primarily due to lower levels of indebtedness and lower interest cost on borrowings used to redeem high cost debt in 1998. Other expense of $.5 million compares to other income of $1.3 million in 1998. The effective tax rate of 36.2% compares favorably with 37.2% in the comparable 1998 quarter. YEAR-TO-DATE RESULTS Overview Consolidated net sales of $805.5 million for the first six months of 1999 decreased 15% from the comparable period in 1998. After adjusting to exclude $131.7 million from deconsolidated joint ventures and the sale of the specialty ingredients business, net sales decreased 2%, primarily as a result of lower Colors sales. International sales, including U.S. exports, were 43% of total sales, up from 40% in the six months of 1998. Net earnings increased 72% to $96.1 million, or $1.44 per share basic and $1.41 per share diluted, compared to $55.9 million, or $.75 per share basic and $.73 per share diluted, in the first six months of 1998. Before after-tax special items (a $26.8 million gain from the sale of the specialty ingredients business in 1999 and extraordinary losses on early extinguishment of debt of $1.1 million in 1999 and $15.8 million in 1998), net earnings were $70.4 million, or $1.07 per share basic and $1.04 per share diluted, compared with $71.7 million, or $.96 per share basic and $.94 per share diluted, in the prior year. Gross margin as a percentage of sales increased to 38.4% from 37.5% in the first six months of 1998. The increase was attributable primarily to improved product mix and lower raw material and manufacturing costs partially offset by lower pricing. Consolidated operating profit of $138.3 million declined 12%; however, excluding the impact of deconsolidated joint ventures and the sale of the specialty ingredients business, operating profit was down 2% from last year. Specialty Chemicals Performance chemicals sales of $226.1 million decreased 1% from the first six months of 1998. Rubber chemical sales were lower by 3% primarily due to lower pricing, while specialty additive sales were higher by 1 percent. Performance chemicals operating profit of $26.8 million decreased 12% versus the second quarter of 1998 primarily as a result of lower pricing in rubber chemicals. Crop protection sales of $147.1 million decreased 29% from the prior year primarily as a result of the deconsolidation of the seed treatment joint venture. Excluding the $61.9 million impact of the joint venture deconsolidation, crop protection sales were essentially unchanged from the prior year. Operating profit of $52.2 million decreased 10% from the prior year primarily due to the seed treatment joint venture. Excluding the $10.0 million impact of the joint venture deconsolidation, operating profit was 8% higher than 1998 primarily as a result of improved product mix and lower manufacturing costs. Colors sales of $103.9 million decreased 17% from the first six months of 1998 primarily as a result of weakness in the U.S. and European textile dye markets. Lower selling prices for the year account for 5 percent of the sales decline. Operating profit of $10.6 million was 29% lower than the first six months of 1998 primarily as a result of lower sales volume and pricing. Other sales and operating profit decreased $48.2 million and $5.0 million, respectively, as a result of the sale of the specialty ingredients business effective the first day of fiscal 1999. Polymers & Polymer Processing Equipment Polymers sales of $158.1 million decreased 10% from 1998 primarily as a result of the deconsolidation of the nitrile rubber joint venture. Excluding the $21.7 million impact from the joint venture deconsolidation, polymer sales were 3% higher than the first six months of 1998. EPDM sales increased 5% resulting primarily from higher selling prices. Urethane sales were essentially unchanged from the prior year. Operating profit of $44.1 million increased 12% over the prior year primarily as a result of improved pricing and lower raw material costs. Polymer processing equipment sales of $170.2 million were 3% higher than the first six months of 1998 despite lower pricing of 3%. Operating profit of $16.3 million was 19% lower than 1998 primarily as a result of lower pricing and a shift in sales to lower margin systems. Other Selling, general and administrative expenses of $120.7 million decreased 10% versus the six months of 1998 primarily due to the impact of the deconsolidation of the joint ventures and the sale of the specialty ingredients business. Depreciation and amortization (down 7%) and research and development costs (down 14%) also declined as a result of the deconsolidation of the joint ventures and the sale of the specialty ingredients business. Equity income of $9.4 million in the first six months of 1999 was primarily attributable to the seed treatment joint venture. Interest expense of $26.1 million decreased 41% primarily due to lower levels of indebtedness and lower interest cost on borrowings used to redeem high cost debt in 1998. Other income of $40.3 million includes a gain in the amount of $42.1 million from the sale of the specialty ingredients business offset partially by $2.2 million in fees related to the accounts receivable securitization program. The effective tax rate of 36.2% compares favorably with 37.2% in the comparable 1998 period. LIQUIDITY AND CAPITAL RESOURCES The June 26, 1999 working capital balance of $265.6 million increased $62.2 million from the year-end 1998 balance of $203.4 million, while the current ratio increased to 1.8 from 1.5. The increase was primarily due to a seasonal increase in accounts receivable of the crop protection business and to a $48.2 million income tax payment related to the 1998 Gustafson gain. Days sales in receivables averaged 43 days in the six month period in 1999, versus 54 days in the same period in 1998, principally due to the impact of the accounts receivable securitization program. Inventory turnover averaged 3.0, compared to 3.2 in 1998, primarily as a result of the joint venture deconsolidations. Net cash used by operations of $1.9 million changed $116.3 million from the net cash provided by operations of $114.4 million in the first half of 1998, primarily due to the 1999 tax payment on the 1998 Gustafson gain, 1998 cash flow provided by Gustafson of $14 million and accounts receivable discounting of $20 million in the first half of the prior year. Cash provided from the sale of the specialty ingredients business and additional borrowings under the Company's revolving credit agreement were used primarily to fund the net cash used by operations, repurchase common shares, finance capital expenditures and pay the dividend. The Company's debt to total capital decreased to 90% from 91% at year-end 1998. The Company's liquidity needs, including debt servicing, are expected to be financed from operations. The Company has available a revolving credit agreement providing for borrowings of $545 million through September 2003. Borrowings under the agreement amounted to $327.1 million at June 26, 1999 and carried a weighted average interest rate of 5.7%. In addition, the Company has available an accounts receivable securitization program to sell up to $82 million of domestic accounts receivable to an agent bank. As of June 26, 1999, $80 million of domestic accounts receivable had been sold under this agreement. In September 1998, the Company announced a share repurchase program to buy back 7.5 million shares or approximately 10% of the common shares then outstanding. In January 1999, the Company announced another share repurchase program for 6.8 million shares, or approximately 10% of the common shares then outstanding. During the first half of 1999, the Company repurchased 4.1 million common shares and from September 1998 to date, has repurchased 9.5 million shares at an average price of $17.85 per share. Capital expenditures are expected to approximate $70 million in 1999, primarily for replacement needs and improvement of domestic and foreign facilities. MARKET RISK During the second quarter of 1999, the Company settled an outstanding $230 million interest rate lock contract ("Interest Hedge") with a major financial institution. The Interest Hedge would have expired on September 1, 2000. The fair market value of long-term debt is subject to interest rate risk. The Company's long-term debt amounted to $669.0 million at June 26, 1999. The fair market value of such debt was $685.9 million, and with respect to notes, has been determined based on quoted market prices. YEAR 2000 ISSUES The Company has assessed and continues to assess its Information Technology ("IT") infrastructures including those systems that are typically viewed as non-IT systems to determine and address any potential problems that may result from Year 2000 compliance issues. As generally known, Year 2000 compliance issues pertain to the ability of computerized systems to recognize and process date sensitive information beginning January 1, 2000. The Company has performed this assessment over the last three years and has been implementing appropriate steps to be Year 2000 compliant in both its IT and non-IT systems. Under the Company's current environment, IT systems include mission critical applications that directly support the Company's operations. These IT systems also include networked personal computers running desktop applications. Typical non-IT systems within the Company's environment include process controls and other microcontrollers containing imbedded computer chips. The Company has completed its assessment of its non-IT systems and is aggressively undertaking measures to remedy such systems. The Company expects to complete this remediation by October 1999. The Company employs a number of major mission critical IT systems in its Specialty Chemicals and Polymers businesses. These systems have been fully upgraded and tested to address Year 2000 compliance issues. The Company's Polymer Processing Equipment business is supported by a legacy system that runs on a mid-range computer system. This system has been reworked and tested, and the Company believes that it is now Year 2000 compliant. The Company has assessed all other IT systems including non-IT systems in this business segment and has undertaken necessary steps to address any Year 2000 compliance issues. This business currently sells equipment controls containing programs and microchips. The Company believes that these products which are used in the operation of extrusion machinery are Year 2000 compliant. The Company has operations in Europe, Asia Pacific, and Latin America supported by IT systems operating on mid-range computers. The Company has completed upgrading these IT systems to address Year 2000 compliance. The Company is actively looking into the overall Year 2000 readiness of its major business partners including vendors, suppliers, and service providers in order to determine that the Company's operations will not be disrupted in the event that any such third party failed to have Year 2000 compliant systems. The Company has received assurances from nearly all of the major business entities that it conducts business with that these entities will be able to conduct business beyond January 1, 2000, without any disruption. The Company continues to provide status information of its Year 2000 compliance effort to its customers and assures its customers that the Company's IT infrastructure will continue to function properly beyond January 1, 2000. The Company has spent approximately $5.6 million to assess and correct Year 2000 compliance issues in its IT infrastructure through June 26, 1999. The Company estimates that it will spend an additional $.7 million to complete the remediation of Year 2000 compliance issues in its IT infrastructure. The Company is committed to allocate funds to remediate any other Year 2000 compliance issues in the course of its ongoing assessment of its IT infrastructure. Year 2000 compliance costs are not expected to have a material effect on the Company's results of operations. The Company does not expect to have any material risk exposure emanating from its internal IT infrastructure. While it is not expected to occur, failure of the Company's suppliers and key customers to address Year 2000 compliance could have a material adverse impact on the Company's operations. In particular, failure of the Company's energy and telecommunication suppliers to address Year 2000 compliance could have a material adverse impact on the Company's operations. The Company is continuing to assess its efforts to mitigate any potential risk associated with Year 2000 compliance and is actively pursuing the development of appropriate contingency plans when needed. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the Financial Accounting Standards Board issued Statement No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" which delays the effective date of Statement No. 133 to fiscal years beginning after June 15, 2000. The Company plans to adopt this statement in the first quarter of 2001. ENVIRONMENTAL MATTERS The Company is involved in claims, litigation, administrative proceedings and investigations of various types in a number of jurisdictions. A number of such matters involve claims for a material amount of damages and relate to or allege environmental liabilities, including clean-up costs associated with hazardous waste disposal sites, natural resource damages, property damage and personal injury. The Company and some of its subsidiaries have been identified by federal, state or local governmental agencies, and by other potentially responsible parties (each a "PRP") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state statues, as a PRP with respect to costs associated with waste disposal sites at various locations in the United States. In addition, the Company is involved with environmental remediation and compliance activities at some of its current and former sites in the United States and abroad. Each quarter, the Company evaluates and reviews estimates for future remediation and other costs to determine appropriate environmental reserve amounts. For each site, a determination is made of the specific measures that are believed to be required to remediate the site, the estimated total cost to carry out the remediation plan, the portion of the total remediation costs to be borne by the Company and the anticipated time frame over which payments toward the remediation plan will occur. As of June 26, 1999, the Company's reserves for environmental remediation activities totaled $92 million. It is reasonably possible that the Company's estimates for environmental remediation liabilities may change in the future should additional sites be identified, further remediation measures be required or undertaken, the interpretation of current laws and regulations be modified or additional environmental laws and regulations be enacted. The Company intends to assert all meritorious legal defenses and all other equitable factors which are available to it with respect to the above matters. The Company believes that the resolution of these environmental matters will not have a material adverse effect on the consolidated financial position of the Company. While the Company believes it is unlikely, the resolution of these environmental matters could have a material adverse effect on the Company's consolidated results of operations in any given year if a significant number of these matters are resolved unfavorably. FORWARD-LOOKING STATEMENTS Certain statements made in this Form 10-Q are forward looking statements that involve risks and uncertainties. These statements are based on currently available information and the Company's actual results may differ significantly from the results discussed. Investors are cautioned that there can be no assurances that the actual results will not differ materially from those suggested in such forward-looking statements. Part II -- OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to page 16 of the Registrant's 1998 Annual Report on Form 10-K for information pertaining to an action instituted by the Connecticut Department of Environmental Protection against Uniroyal involving wastewater discharges at Uniroyal's Naugatuck, Connecticut plant. On July 30, 1999, the parties entered into a Consent Judgment whereby Uniroyal agreed to pay the sum of $1,200,000 and to comply with certain injunctive provisions relating mainly to its discharges to the publicly owned treatment works. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Number Description 10.1* Amended and Restated Employment Agreement 10.2* Amended Crompton & Knowles Corporation 1998 Long Term Incentive Plan 27* Financial Data Schedules (b) A report on Form 8-K was filed by Crompton & Knowles Corporation on June 2, 1999. A report on Form 8-K/A was filed by Crompton & Knowles Corporation on June 8, 1999. * Copies of these Exhibits are annexed to this report on Form 10-Q provided to the Securities and Exchange Commission and the New York Stock Exchange. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CROMPTON & KNOWLES CORPORATION (Registrant) August 10, 1999 By:/s/ Peter Barna Peter Barna Vice President, Finance & Chief Financial Officer August 10, 1999 By:/s/ John T. Ferguson II John T. Ferguson II Vice President, General Counsel and Secretary EX-10.1 2 EXHIBIT 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT between Crompton & Knowles Corporation, a Massachusetts corporation (the "Corporation"), and Vincent A. Calarco (the "Executive"), dated this 31st day of May, 1999. WHEREAS, the Corporation and the Executive are parties to an employment agreement dated March 5, 1985, as amended on April 7, 1986, and further amended on February 22, 1988, and the Corporation and the Executive wish to amend and restate such employment agreement, and WHEREAS, the Corporation, on behalf of itself and its shareholders, wishes to employ the Executive, and the Executive is willing to serve in the employ of the Corporation, on the terms and conditions provided below; IT IS, THEREFORE, AGREED: 1. Employment Period. The Corporation hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Corporation, for the Employment Period. Unless sooner terminated pursuant to Section 4, the Employment Period shall be the period beginning on the date hereof (the "Effective Date") and ending on the third anniversary of the Effective Date; provided, however, that beginning on the date two years after the date hereof, and on each annual anniversary of such date (each such date being referred to as a "Renewal Date"), the Employment Period shall be automatically extended so as to terminate on the earlier of (x) three years from such Renewal Date or (y) the first day of the month coinciding with or next following the Executive's normal retirement date under the Individual Account Retirement Plan or any successor retirement plan ("Normal Retirement Date"), unless at least 60 days prior to the Renewal Date the Corporation shall give notice that the Employment Period shall not be so extended. The period from the Effective Date until the earlier of (i) the Date of Termination (as defined in Section 4(e)) or (ii) the end of the period described in the preceding sentence is hereinafter referred to as the "Employment Period." 2. Position and Duties. (a) During the Employment Period, the Executive shall serve as the Corporation's President and Chief Executive Officer. In that capacity the Executive shall be a member of the Corporation's Board of Directors (the "Board"), the Board's Executive Committee, and such other committees of the Board as the Board may from time to time designate. The Executive agrees to accept such employment and to perform the responsibilities of the offices to which he is appointed in accordance with the Bylaws of the Corporation. (b) Excluding periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Corporation and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use reasonable best efforts to perform faithfully and efficiently such responsibilities. The Executive may (i) serve on corporate, civic or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions and (iii) manage personal investments, so, long as such activities do not significantly interfere with the performance of the Executive's responsibilities. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, such prior conduct of activities, and any subsequent conduct of activities similar in nature and scope shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Corporation. 3. Compensation. (a) Base Salary. During the Employment Period, the Executive shall receive a base salary ("Base Salary") at an annual rate of no less than $750,000. During the Employment Period, the Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time to reflect increases in the cost of living and such other increases as shall be consistent with increases in base salary awarded in the ordinary course of business to other key executives. Any increase in the Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The Base Salary shall not be reduced after any such increase. (b) Annual Bonus. During the Employment Period, the Executive shall be eligible to receive an annual cash bonus, with a target bonus equal to 100% of his Base Salary. (c) Incentive, Savings and Retirement Plans. The Executive shall be entitled to participate during the Employment Period in all savings and retirement plans and programs through the qualified plans of the Corporation or through nonqualified substitutes in which the Executive has agreed to participate in lieu of the qualified plans, and all short and long-term incentive plans and programs applicable to other key executives or similar plans approved by the Board of Directors for the Executive, but in no event shall such plans and programs, in the aggregate, provide the Executive with compensation, benefits and reward opportunities less favorable than those provided by the Corporation and its affiliated companies for the Executive under such plans and programs as in effect at any time during the 90-day period immediately preceding the Effective Date. (d) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under each welfare benefit plan of the Corporation, including, without limitation, all medical, dental, disability, life, group life, accidental death and travel accident insurance plans and programs of the Corporation and its affiliated companies, as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect at any time thereafter with respect to other key executives. Without limiting the generality of the foregoing, the Corporation agrees to provide life insurance coverage on the Executive, payable to a beneficiary or beneficiaries of his designation, in an amount not less than $500,000, $100,000 of which will be group term life insurance paid for by the Corporation and the balance to be whole life insurance for which the Corporation will loan the annual premium payment to the Executive under the terms of the program provided to other key executives of the Corporation. (e) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Corporation as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect at any time thereafter with respect to other key executives. (f) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including without limitation the use of an automobile, driver and payment of related expenses, and club memberships, in accordance with the policies of the Corporation as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect at any time thereafter with respect to other key executives. (g) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to secretarial and other assistance, at least equal to those provided to the Executive at any time during the 90-day period immediately preceding the Effective Date or, it more favorable to the Executive, as provided at any time thereafter with respect to other key executives. (h) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the policies of the Corporation as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect at any time thereafter with respect to other key executives. 4. Termination. (a) Death or Disability. This Agreement shall terminate automatically upon the Executive's death. The Corporation may terminate this Agreement, after having established the Executive's Disability (pursuant to the definition of "Disability" set forth below), by giving to the Executive written notice of its intention to terminate the Executive's employment. In such a case, the Executive's employment with the Corporation shall terminate effective on the 90th day after receipt of such notice (the "Disability Effective Date"), unless the Executive has previously returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" means physical or mental disability which, after the expiration of more than 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Corporation or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement to acceptability not to be unreasonably withheld). (b) Cause. The Corporation may terminate the Executive's employment for "Cause." For purposes of this Agreement, "Cause" means (i) the Executive's willful and continued failure to substantially perform assigned duties with the Corporation (other than any such failure resulting from incapacity due to physical or mental illness or any such actual or anticipated failure resulting from termination for Good Reason), after a demand for substantial performance is delivered to the Executive by the Board, specifically identifying the manner in which the Board believes that the duties have not been substantially performed; or (ii) the Executive's willful conduct which is demonstratably and materially injurious to the Company. For purposes of this paragraph (b), no act, or failure to act, shall be considered "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that such action or omission was in the best interest of the Corporation. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" means (i) (A) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 2 of this Agreement or (B) any other action by the Corporation which results in a diminishment in such position, authority, duties or responsibilities, other than an insubstantial and inadvertent action which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Corporation to comply with any of the provisions of Section 3 of this Agreement, other than an insubstantial and inadvertent failure which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive; (iii) the Corporation's requiring the Executive to be based at any office or location other than that at which the Executive is based at the Effective Date, except for travel reasonably required in the performance of the Executive's responsibilities and substantially consistent with business travel obligations of the Executive as of the Effective Date and except for the relocation of the Executive at the Company's headquarters in Middlebury, Connecticut; (iv) any purported termination by the Corporation of the Executive's employment otherwise than as permitted by this Agreement, it being understood that any such purported termination shall not be effective for any purpose of this Agreement other than establishing the Date of Termination pursuant to paragraph (e) below; or (v) any failure by the Corporation to comply with and satisfy Section 10(b) of this Agreement. (d) Notice of Termination. Any termination by the Corporation for Cause or by the Executive for Good Reason shall be effected by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). In the case of termination for Cause, the Notice of Termination shall not be effective unless it takes the form of a copy of a resolution duly adopted in good faith by the affirmative vote of the entire membership of the Board at a meeting of the Board called and held for the purpose, after reasonable notice and an opportunity for the Executive, together with counsel, to be heard before the Board, which resolution shall state that the Executive has given "Cause" within the meaning set forth above in clause (i) or (ii) of the second sentence of paragraph (b) above, and specifying the particulars thereof in detail. (e) Date of Termination. "Date of Termination" means the date of the Executive's Death, the Disability Effective Date, or the date of receipt of an effective Notice of Termination or any later date specified therein, as the case may be. If the Executive's employment is terminated by the Corporation in breach of this Agreement, the Date of Termination shall be the date on which the Corporation notifies the Executive of such termination. 5. Obligations of the Corporation upon Termination. (a) Death. If the Executive's employment is terminated by reason of the Executive's death, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement other than those obligations accrued hereunder at the date of the Executive's death. Anything in this Agreement to the contrary notwithstanding, the Executive's family shall be entitled to receive benefits at least equal to those provided by the Corporation to surviving families of executives of the Corporation under such plans, programs and policies relating to family death benefits, if any, as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter with respect to other key executives and their families, including, without limitation, the Medical Benefits (as defined below). (b) Disability. If the Executive's employment is terminated by reason of the Executive's Disability, the Executive shall be entitled after the Disability Effective Date to receive disability and other benefits at least equal to those provided by the Corporation to disabled employees and/or their families in accordance with such plans, programs and policies relating to disability, if any, as in effect during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter with respect to other key executives and their families, including, without limitation, the Medical Benefits (as defined below). (c) Cause. If the Executive's employment shall be terminated for Cause, the Corporation shall pay the Executive his full Base Salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and shall have no further obligations to the Executive under this Agreement. (d) Good Reason; Other Than for Cause or Disability. If, during the Employment Period, the Corporation shall terminate the Executive's employment other than for Cause, Disability, or death, or the employment of the Executive shall be terminated by the Executive for Good Reason: (i) The Corporation shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) if not theretofore paid, the Executive's Base Salary through the Date of Termination at the rate in effect on the Date of Termination or, if higher, at the highest rate in effect at any time within the 90-day period preceding the Effective Date; and (B) the greater of (i) a lump sum equal to the amount of any incentive compensation which has been allocated for the calendar year in which the Date of Termination occurs or (ii) the product of (x) the total incentive compensation paid to the Executive for the last full fiscal year ending during the Employment Period and (y) the fraction obtained by dividing (i) the number of days between the last day of the last full fiscal year ending during the Employment Period and the Date of Termination into (ii) 365; (C) three times the sum of (x) the Executive's annual Base Salary at the rate in effect at the time Notice of Termination was given or, if higher, at the highest rate in effect at any time within the 90-day period preceding the Effective Date and (y) the highest of the total incentive compensation paid to the Executive for each of the last three full fiscal years of the Corporation during the Employment Period; (D) in the case of compensation previously deferred by the Executive, all amounts of such compensation previously deferred and not yet paid by the Corporation; and (E) an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code")) amount of employer contributions that would have been made to the Executive's account pursuant to the Individual Account Retirement Plan and the Employee Stock Purchase and Savings Plan if the Executive had continued in the employ of the Corporation through the third anniversary of the Date of Termination, with compensation equal to the amounts set forth above in clause (C) and had the Executive continued to contribute to the Employee Stock Purchase and Savings Plan at the rate in effect on the Date of Termination. (ii) The Corporation shall, promptly upon submission by the Executive of supporting documentation, pay or reimburse to the Executive any costs and expenses (including moving and relocation expenses) paid or incurred by the Executive which would have been payable under Section 3(e) if the Executive's employment had not terminated. (iii) For the remainder of the Executive's life and that of his spouse, the Corporation shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs and policies described in Section 3(d) of this Agreement if the Executive's employment had not been terminated, as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect at any time thereafter with respect to other key executives and their families (the "Medical Benefits"). (iv) Until the earliest of (A) the day upon which the Executive begins new employment and is eligible for benefits, (B) the third anniversary of the Effective Date, or (C) the Executive's Normal Retirement Date, the Corporation shall continue benefits to the Executive at least equal to those which would have been provided to him in accordance with the plans, programs and policies described in Section 3(f) of this Agreement, other than the Company's providing the Executive with a driver and club memberships, if the Executive's employment had not been terminated, as in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect at any time thereafter with respect to other key executives. 6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Corporation or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Corporation or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Corporation or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 7. Full Settlement. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. The Corporation agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Corporation or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof or as a result of any contest by the Executive concerning the amount payable pursuant to Section 8 of this Agreement, plus in each case interest, compounded quarterly, on the total unpaid amount determined to be payable under this Agreement, such interest to be calculated at a rate equal to 2% in excess of the prime commercial lending rate announced by Chase Manhattan Bank in effect from time to time during the period of such nonpayment. 8. Certain Further Payments by the Company. In the event that any amount paid or distributed to the Executive pursuant to this Agreement (taken together with any amounts otherwise paid or distributed to the Executive in connection with a change of control referred to in Section 280G(b)(i)) are subject to an excise tax under Section 4999 of the Code or any successor or similar provision thereto (the "Excise Tax"), the Corporation shall pay to the Executive an additional amount such that, after taking into account all taxes (including federal, state, local and foreign income, excise and other taxes) incurred by the Executive on the receipt of such additional amount, the Executive is left with the same after-tax amount the Executive would have been left with had no Excise Tax been imposed. 9. Noncompetition and Confidential Information. (a) During the Employment Period, and during a one-year period following any termination of his employment other than a termination by the Executive for Good Reason, the Executive shall not directly or indirectly compete with the Corporation (which shall be deemed as including any subsidiary or affiliate of the Corporation), whether as an individual proprietor or entrepreneur or as an officer, employee, partner, stockholder, or in any capacity connected with any enterprise, in any business in which the Corporation is engaged at the time of the termination of the Executive's employment, within any state or possession of the United States of America or any foreign country within which such business is then being conducted, or within which business is then specifically planned by the Corporation to be conducted. For the purpose of the preceding sentence, conducting business, doing business, or engaging in business shall be deemed to embrace sales to customers or performance of services for customers who are within a relevant geographical area, without any necessity of any presence of the Corporation therein. Nothing herein, however, shall prohibit the Executive from acquiring or holding any issue of stock or securities of any corporation which has any securities listed on a national securities exchange or quoted in the daily listing of over-the- counter market securities; provided that at any one time he and members of his immediate family do not own more than five (5%) percent of the voting securities of any such corporation. (b) The Executive shall hold in a fiduciary capacity for the benefit of the Corporation all secret or confidential information, knowledge or data relating to the Corporation or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Corporation or any of its affiliated companies and which shall not be public knowledge (other than by acts by the Executive or his representatives in violation of this Agreement). After termination of the Executive's employment with the Corporation, the Executive shall not, without the prior written consent of the Corporation, communicate or divulge any such information, knowledge or data to anyone other than the Corporation and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 10. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Corporation shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Corporation and its successors. Any successor to the Corporation shall, by an agreement in form and substance satisfactory to the Executive, expressly assume and agree to perform this Agreement in the same manner and to the same extent as the Corporation would have been required to perform. 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Vincent A. Calarco 27 Forest Glen Drive Woodbridge, CT 06525 If to the Corporation: Crompton & Knowles Corporation Benson Road Middlebury, CT 06749 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Corporation may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) This Agreement contains the entire understanding of the Corporation and the Executive with respect to the subject matter hereof and supersedes all prior agreements between them with respect thereto, including without limitation, the employment agreement between the Company and the Executive dated March 5, 1985, as amended, but shall not supersede the Supplemental Retirement Agreement between the parties dated as of March 22, 1999. (f) As used in this Agreement, the term "affiliated companies" includes any company controlling, controlled by or under common control with the Corporation. IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/Vincent A. Calarco VINCENT A. CALARCO CROMPTON & KNOWLES CORPORATION By:/s/Marvin H. Happel Title: Vice President - Organization and Administration EX-10.2 3 EXHIBIT 10.2 CROMPTON & KNOWLES CORPORATION 1998 LONG TERM INCENTIVE PLAN Section 1. Purpose The purpose of the Plan is to attract and retain key employees of the Company and its Subsidiaries and to motivate such employees to put forth maximum efforts for the success of the business by offering them long term performance-based incentives and an opportunity to acquire ownership of the Company's Stock. Section 2. Definitions For purposes of the Plan, the following terms shall have the meanings set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Change in Control", "Potential Change in Control", and "Change in Control Price" have the meanings set forth in Sections 10(b), (c), and (d), respectively. (c) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (d) "Commission" means the Securities and Exchange Commission or any successor agency. (e) "Committee" means the Committee referred to in Section 3. (f) "Company" means Crompton & Knowles Corporation, a corporation organized under the laws of the Commonwealth of Massachusetts, or any successor corporation. (g) "Disability" means permanent and total disability as determined under procedures established by the Committee for purposes of the Plan. (h) "Early Retirement" means retirement, with the consent for purposes of the Plan of the Committee or such officer of the Company as may be designated from time to time by the Committee, from active employment with the Company or a Subsidiary prior to Normal Retirement. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (j) "Fair Market Value" means, except as provided in Section 7(b), the mean, as of any given date, between the highest and lowest reported sales prices of the Stock on the New York Stock Exchange Composite Index on such date (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred), or if no such reported sales prices are available, the fair market value of the Stock as determined by the Committee in good faith. (k) "Holder" means an Optionee or a Transferee, as defined in Sections 2(p) and (y), respectively. (l) "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. (m) "Long Term Performance Award" or "Long Term Award" means an award under Section 9. (n) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (o) "Normal Retirement" means retirement from active employment with the Company or a Subsidiary at or after age 65. (p) "Optionee" means a person who is granted a Stock Option under Section 6. (q) "Plan" means the Crompton & Knowles Corporation 1998 Long Term Incentive Plan, as set forth herein and as hereafter amended from time to time. (r) "Restricted Stock" means an award under Section 8. (s) "Retirement" means Normal or Early Retirement. (t) "Rule 16b-3" means Rule 16b-3 as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. (u) "Stock" means the Common Stock, $.10 par value, of the Company. (v) "Stock Appreciation Right" means a right granted under Section 7. (w) "Stock Option" or "Option" means an option granted under Section 6. (x) "Subsidiary" means any business entity in which the Company, directly or indirectly, owns 50 percent or more of the total combined voting power of all classes of stock or other equity interest. (y) "Transferee" means a member of an Optionee's Immediate Family, a partnership or a trust to whom or which any Option is transferred as provided in Section 6. Section 3. Administration The Plan shall be administered by the Committee on Executive Compensation of the Board, or such other committee of the Board, composed of not less than three non-employee members of the Board, as shall be designated by the Board from time to time. If at any time no Committee designated to administer the Plan shall be in office, the functions of the Committee specified in the Plan shall be exercised by the Board. Except as limited by the express provisions of the Plan, the Committee shall have the sole and complete authority: (a) to select the officers and other key employees to whom Stock Options, Stock Appreciation Rights, Restricted Stock, and Long Term Performance Awards may from time to time be granted; (b) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Long Term Performance Awards, or any combination thereof are to be granted, hereunder; (c) to determine the number of shares to be covered by each award granted hereunder; (d) to determine the terms and conditions of any award granted hereunder (including, but not limited to, the share price, any restriction or limitation, any vesting acceleration or any forfeiture waiver regarding any Stock Option or other award and the shares of Stock relating thereto), based on such factors as the Committee shall determine; (e) to adjust the performance goals and measurements applicable to performance-based awards pursuant to the terms of the Plan; and (f) to determine to what extent and under what circumstances Stock and other amounts payable with respect to an award shall be deferred. The Committee shall have the authority to adopt, alter, and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable, to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreement relating thereto), and otherwise to supervise the administration of the Plan. The Committee may act only by a majority of its members then in office, except that the members thereof may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. Any determination made by the Committee pursuant to the provisions of the Plan with respect to any award shall be made in its sole discretion at the time of the grant of the award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company Plan participants. Section 4. Stock Subject to Plan The total number of shares of Stock reserved for distribution pursuant to Stock Options or other awards under the Plan shall be equal to the sum of (i) such shares, if any, as are available for awards under the Company's 1988 Long Term Incentive Plan and 1993 Stock Option Plan for Non-Employee Directors on October 18, 1998, and (ii) such shares, if any, which are the subject of awards granted under any prior plan of the Company and which are forfeited for any reason, which expire, which are not earned as a result of the failure to meet the requirements of an award, which are tendered as full or partial payment of the option exercise price for other shares, or which are tendered or withheld for the payment of taxes in connection with any award under any such plan. Such shares may consist, in whole or in part, of authorized and unissued shares or issued shares heretofore or hereafter reacquired and held as treasury shares. If an outstanding Stock Option or Stock Appreciation Right shall expire or terminate without having been exercised in full, or if any Restricted Stock award or Long Term Performance Award is not earned or is forfeited in whole or in part, the shares subject to the unexercised or forfeited portion of such award shall again be available for distribution in connection with awards under the Plan. In the event that a Stock Option is exercised by tendering shares to the Company as full or partial payment of the option exercise price, only the number of shares issued net of the shares tendered shall be deemed delivered under the Plan. Further, shares tendered or withheld for the payment of taxes in connection with any award shall again be available for distribution in connection with awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, or other change in corporate structure affecting the Stock, such substitution or adjustments shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Stock Options, in the determination of the amount payable upon exercise of outstanding Stock Appreciation Rights, and in the number of shares subject to other outstanding awards granted under the Plan as may be determined by the Committee, in its sole discretion, to be equitable to prevent substantial dilution or enlargement of the rights granted to participants hereunder, provided, however, that the number of shares subject to any award will always be a whole number. The Committee shall give notice to each participant of any adjustment made pursuant to this paragraph, and upon such notice, such adjustment shall be effective and binding for all purposes of the Plan. Shares issued under the Plan as the result of the settlement or assumption of, or substitution of awards under the Plan for, any awards or obligations to grant future awards of any entity acquired by or merging with the Company shall not reduce the number of shares available for delivery under the Plan. The maximum number of shares available for delivery under the Plan through Incentive Stock Options shall be 2,500,000 shares. The maximum number of shares available for awards under Sections 8 and 9 hereof shall be equal to thirty-five percent of the total shares available for distribution under the Plan. Section 5. Eligibility All employees of the Company and its Subsidiaries (but excluding, except as otherwise provided in Section 6, members of the Committee and any person who serves only as a director) who in the opinion of the Committee are responsible for or contribute to the management, growth, and profitability of the business of the Company or its Subsidiaries are eligible to be granted awards under the Plan. Section 6. Stock Options Stock Options may be granted alone or in addition to other awards granted under the Plan and may be of two types: Incentive Stock Options and Non-Qualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant any Optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights); provided, however, that the Committee shall not have the authority to grant Incentive Stock Option to any non-employee director. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. The Committee shall not grant Stock Options to any one individual with respect to more than twenty-five percent (25%) of the shares of Stock reserved for distribution pursuant to Stock Options or other awards under the Plan. Stock Options shall be evidenced by option agreements, the terms and provisions of which may differ. An option agreement shall indicate on its face whether it is an agreement for Incentive Stock Options or Non-Qualified Stock Options. The grant of a Stock Option shall occur on the date the Committee by resolution selects an employee as a participant in any grant of Stock Options, determines the number of Stock Options to be granted to such employee, and specifies the terms and provisions of the option agreement; provided, however, that the Committee may designate in such resolution a later date as the date of grant of any or all of the Stock Options covered thereby. The Company shall notify a participant of any grant of Stock Options, and a written option agreement or agreements shall be duly executed between the Company and the participant. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended, or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Optionee affected, to disqualify any Incentive Stock Option under such Section 422. On the date of the first meeting of the Board in the fourth quarter of each year, the Committee may grant to each non- employee director a Non-Qualified Stock Option to purchase up to 7,500 shares of Stock. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be equal to the Fair Market Value of the Stock on the date of grant or such higher price as shall be determined by the Committee at grant. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no incentive Stock Option shall be exercisable more than 10 years after the date of grant of the Option, and no Non-Qualified Stock Option shall be exercisable more than 10 years and one month after the date of grant of the Option. (c) Transferability of Options. (i) No Stock Option shall be transferable by the Optionee other than by will, by the laws of descent and distribution or in accordance with the provisions of Section 6(c)(ii). (ii) Subject to applicable securities laws, the Committee may determine that a Non-Qualified Stock Option may be transferred by the Optionee to one or more members of the Optionee's Immediate Family, as defined in Section 6(c)(iii), to a partnership of which the only partners are members of the Optionee's Immediate Family, or to a trust established by the Optionee for the benefit of one or more members of the Optionee's Immediate Family. No Transferee to whom or which a Non-Qualified Stock Option is transferred may further transfer such Stock Option. A Non-Qualified Stock Option transferred pursuant to this Section shall remain subject to the provisions of the Plan, including, but not limited to, the provisions of this Section 6 relating to the exercise of the Stock Option upon the death, Disability, Retirement or other termination of employment of the Optionee, and shall be subject to such other rules as the Committee shall determine. (iii) For purposes of this Section 6, "Immediate Family" of the Optionee means the Optionee's spouse, parents, children and grandchildren. (d) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee; provided, however, that, except as provided in Sections 6(e), (f), (g), and 10, no Stock Option shall be exercisable prior to the first anniversary date of the granting of the Stock Option. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. (e) Termination by Death. Subject to Section 6(j), if an Optionee's employment or service on the Board terminates by reason of death, any Stock Option held by such Optionee or any Transferee of such Optionee may thereafter be exercised, to the extent then exercisable or on such accelerated basis as the Committee may determine, for a period of two years from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the expiration of the stated term of any such Stock Option is less than one year following the death of the Optionee, the Stock Option shall be exercisable for a period of one year from the date of such death. (f) Termination by Reason of Disability. Subject to Section 6(j), if an Optionee's employment or service on the Board terminates by reason of Disability, any Stock Option held by such Optionee or any Transferee of such Optionee may thereafter be exercised by the Holder, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine, for a period of two years from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the Holder dies while any such Stock Option remains exercisable , any unexercised Stock Option held by such Holder at death shall continue to be exercisable to the extent to which it was exercisable at the time of the Holder's death for a period of 12 months from the date of such death. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (g) Termination by Reason of Retirement. Subject to Section 6(j), if an Optionee's employment or service on the Board terminates by reason of Retirement, any Stock Option held by such Optionee or any Transferee of such Optionee may thereafter be exercised by the Holder, to the extent it was exercisable at the time of Retirement or on such accelerated basis as the Committee may determine, for a period of three years from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the Holder dies within such three-year period, any unexercised Stock Option held by such Holder shall, notwithstanding the expiration of such three-year period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) Other Termination. Subject to Section 6(j), if an Optionee's employment terminates for any reason other than death, Disability, Retirement, or cause, any Stock Option held by such Optionee or any Transferee of such Optionee may thereafter be exercised by the Holder, to the extent it was exercisable at the time of termination, for a period of three months from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the Holder dies within such three-month period, any unexercised Stock Option held by such Holder shall, notwithstanding the expiration of such three-month period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death. If an Optionee's employment is terminated for cause, all rights under any Stock Option held by such Optionee or any Transferee of such Optionee shall expire immediately upon the giving to the Optionee of notice of such termination, unless otherwise determined by the Committee. (i) Method of Exercise. Stock Options shall be exercisable (i) during the Holder's lifetime, only by the Holder or by the guardian or legal representative of the Holder, and (ii) following the death of the Holder, only by the person to whom they are transferred by will or the laws of descent and distribution. For purposes of this Section 6(i) only, the term "Holder" shall include any person to whom a Stock Option is transferred by will or the laws of descent and distribution. Subject to the provisions of this Section 6, Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price in cash (including check, bank draft, money order, or such other instrument as the Company may accept). Unless otherwise determined by the Committee at any time or from time to time, payment in full or in part may also be made (i) by delivering a duly executed notice of exercise together with irrevocable instructions from the Holder to a broker to deliver promptly to the Company sufficient proceeds from a sale or loan of the shares subject to the Stock Option to pay the purchase price, or (ii) in the form of unrestricted Stock already owned by the Holder or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the Stock Option is exercised). If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock, such Restricted Stock (and any replacement shares relating thereto) shall remain restricted in accordance with the original terms of the Restricted Stock award in question, and any additional Stock received upon the exercise shall be subject to the same forfeiture restrictions, unless otherwise determined by the Committee. No shares of Stock shall be issued until full payment therefor has been made. Subject to any forfeiture restrictions that may apply if a Stock Option is exercised using Restricted Stock, a Holder shall have all of the rights of a stockholder of the Company, including the right to vote the shares and the right to receive dividends, with respect to shares subject to the Stock Option when the Holder has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 13(a). Shares issued upon exercise of a Stock Option shall be issued in the name of the Holder or, at the request of the Holder, in the names of such Holder and the Holder's spouse with right of survivorship. (j) Cashing Out of Options. In any case when a Stock Option is exercised after the death of a Holder, the Committee may elect to cash out all or any part of the Stock Option by paying the person to whom the Stock Option has been transferred by reason of the death of the Holder an amount, in cash or shares of Stock, equal in value to the excess of the Fair Market Value of the Stock over the option price on the effective date of such cash out. (k) Substitute Options. Stock Options or Stock Appreciation Rights may be granted under the Plan from time to time in substitution for stock options or stock appreciation rights held by employees of any corporation who, as the result of a merger, consolidation, or combination of such other corporation with, or the acquisition of all or substantially all of the assets or stock of such other corporation by, the Company or a Subsidiary, become employees of the Company or a Subsidiary. The terms and conditions of any substitute Stock Options or Stock Appreciation Rights so granted may vary from the terms and conditions set forth in the Plan to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options or stock appreciation rights in substitution for which they are granted; provided, however, that in the event a stock option for which a substitute Stock Option is being granted is an incentive stock option, no such variation shall be permitted the effect of which would be to adversely affect the status of any such substitute Stock Options as an Incentive Stock Option. No Stock Option or Stock Appreciation Right shall be granted under the Plan in substitution for any Stock Option or Stock Appreciation Right previously issued under the Plan if the exercise price of the substitute Stock Option or Stock Appreciation Right is less than the exercise price of the previously issued Stock Option or Stock Appreciation Right. (l) Deferral of Option Gains. An Optionee may elect to defer to a future date receipt of the shares of Stock to be acquired upon exercise of a Stock Option. Such election shall be made by delivering to the Company not later than six months prior to the exercise of the Stock Option a written notice of the election specifying the future date (the "Deferral Date") for receipt of the shares. At any time, and from time to time, prior to the delivery to the Optionee of shares the receipt of which has been deferred as provided in this section, the Optionee may designate by written notice to the Company a new date, which date shall be later than the Deferral Date, and such new date shall thereafter be the Deferral Date with respect to such shares. Section 7. Stock Appreciation Rights A Stock Appreciation Right may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such Right may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such Right may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right independent of a Stock Option grant may also be awarded by the Committee, in which event the provisions of this Section 7 shall be applied for purposes of determining the operation of such Stock Appreciation Right as if a Non-Qualified Stock Option had been granted on the date of the grant of and in conjunction with such independent Stock Appreciation Right. A Stock Appreciation Right granted with respect to a given Stock Option shall terminate and no longer be exercisable to the extent of the shares with respect to which the related Stock Option is exercised or terminates. A Stock Appreciation Right may be exercised by a Holder in accordance with the provisions of this Section 7 by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the Holder shall be entitled to receive an amount determined in the manner prescribed in Section 7(b). The Stock Option which has been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Right has been exercised. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (a) Exercisability. A Stock Appreciation Right shall be exercisable only at such time or times and to the extent that the Stock Option to which it relates is exercisable in accordance with the provisions of Section 6 and this Section 7; provided, however, that a Stock Appreciation Right shall not be exercisable during the first six months of its term by an Optionee who is actually or potentially subject to Section 16(b) of the Exchange Act, unless otherwise determined by the Committee in the event of death or Disability of the Optionee prior to the expiration of the six-month period. (b) Payment Upon Exercise. Upon the exercise of a Stock Appreciation Right, a Holder shall be entitled to receive an amount in cash, shares of Stock, or both equal in value to the excess of the Fair Market Value on the date of exercise of one share of Stock over the option exercise price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised. The Committee shall have the right to determine the form of payment in each case. In the case of a Stock Appreciation Right held by an Optionee who is actually or potentially subject to Section 16(b) of the Exchange Act, the Committee: (i) may require that such Stock Appreciation Right be exercised only in accordance with any applicable "window period" provisions of Rule 16b-3; and (ii) in the case of a Stock Appreciation Right relating to a Non-Qualified Stock Option, may provide that the amount to be paid upon exercise of such Stock Appreciation Right during a Rule 16b-3 "window period" shall be based on the highest mean sales price of the Stock as reported on the New York Stock Exchange Composite Index on any day during such "window period". (c) Non-transferability. A Stock Appreciation Right shall be transferable only when and to the extent that the related Stock Option would be transferable under Section 6(c). (d) Effect of Change in Control. The Committee may provide, at the time of grant, that a Stock Appreciation Right can be exercised only in the event of a Change in Control or a Potential Change in Control, subject to such terms and conditions as the Committee may specify at grant. The Committee may also provide that, in the event of a Change in Control or a Potential Change in Control, the amount to be paid upon the exercise of a Stock Appreciation Right shall be based on the Change in Control Price, subject to such terms and conditions as the Committee may specify at grant. Section 8. Restricted Stock (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees to whom and the time or times at which grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture, and any other terms and conditions of the awards, in addition to those contained in Section 8(c). The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. Each participant receiving a Restricted Stock award shall be issued a certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Crompton & Knowles Corporation 1998 Long Term Incentive Plan and a Restricted Stock Agreement. Copies of such Plan and Agreement are on file at the offices of Crompton & Knowles Corporation, One Station Place, Metro Center, Stamford, Connecticut 06902." The Committee may require that the certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Terms and Conditions. Shares of Restricted Stock shall be subject to the following terms and conditions: (i) Subject to the provisions of the Plan and the Restricted Stock Agreement referred to in Section 8(c)(vi), during such period commencing with the date of such award as shall be set by the Committee (the "Restriction Period"), the participant shall not be permitted to sell, assign, transfer, pledge, or otherwise encumber shares of Restricted Stock. Within these limits, the Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or in part, based on service, performance, and such other facts or criteria as the Committee may determine. (ii) Except as provided in Section 8(c)(i), the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company, including the right to vote the shares and the right to receive any cash dividends thereon; provided, however, that the Committee may provide at the time of an award that cash dividends shall be automatically deferred and reinvested in additional Restricted Stock. Dividends on Restricted Stock which are payable in Stock shall be paid in the form of additional shares of Restricted Stock. (iii) Except to the extent otherwise provided in the applicable Restricted Stock Agreement and Sections 8(c)(i) and (iv), upon termination of a participant's employment for any reason during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant. (iv) In the event of the death of a participant during the Restriction Period or in the event of hardship or other special circumstances of a participant whose employment is involuntarily terminated (other than for cause) during the Restriction Period, the Committee may waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. (v) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, unlegended certificates for such shares shall be delivered to the participant. (vi) Each award shall be confirmed by, and be subject to the terms of, a Restricted Stock Agreement. Section 9. Long Term Performance Awards (a) Awards and Administration. Long Term Performance Awards may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the nature, length, and starting date of the performance period (the "Performance Period") for each Long Term Performance Award, which shall be at least two years (subject to Section 10), and shall determine the performance objectives to be used in valuing Long Term Performance Awards and determining the extent to which such Long Term Performance Awards have been earned. The maximum award for any individual with respect to any one year of any Performance Period shall be 200,000 shares of Stock. Performance objectives may vary from participant to participant and between groups of participants and shall be based upon one or more of the following Company, Subsidiary, business unit, or individual performance factors or criteria (on a pre- or post-tax basis and on an aggregate or per share basis) as the Committee may deem appropriate: earnings, sales, Stock price, return on equity, assets or capital, economic value added, cash flow, total shareholder return, costs, margins, market share, any combination of the foregoing. Performance Periods may overlap and participants may participate simultaneously with respect to Long Term Performance Awards that are subject to different Performance Periods and different performance factors and criteria. Long Term Performance Awards shall be confirmed by, and be subject to the terms of, a Long Term Performance Award Agreement. The terms of such awards need not be the same with respect to each participant. At the beginning of each performance Period, the Committee shall determine for each Long Term Performance Award subject to such Performance Period the range of dollar values or number of shares of Stock (including Restricted Stock) to be awarded to the participant at the end of the Performance Period if and to the extent that the relevant measures of performance for such Long Term Performance Award are met. Such dollar values or number of shares of Stock may be fixed or may vary in accordance with such performance or other criteria as may be determined by the Committee. (b) Adjustment of Awards. The Committee may adjust the performance goals and measurements applicable to Long Term Performance Awards to take into account changes in law and accounting and tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the inclusion or exclusion of the impact of extraordinary or unusual items, events, or circumstances in order to avoid windfalls or hardships. (c) Termination of Employment. Subject to Section 10 and unless otherwise provided in the applicable Long Term Performance Award Agreement, if a participant terminates employment during a Performance Period because of death, Disability, or Retirement, such participant shall be entitled to a payment with respect to each outstanding Long Term Performance Award at the end of the applicable Performance Period: (i) based, to the extent relevant under the terms of the award, upon the participant's performance for the portion of such Performance Period ending on the date of termination and the performance of the Company or any applicable business unit for the entire Performance Period, and (ii) prorated for the portion of the Performance Period during which the participant was employed by the Company or a Subsidiary, all as determined by the Committee. The Committee may provide for an earlier payment in settlement of such award in such amount and under such terms and conditions as the Committee deems appropriate. Subject to Section 10 and except as otherwise provided in the applicable Long Term Performance Award Agreement, if a participant terminates employment during a Performance Period for any other reason, then such participant shall not be entitled to any payment with respect to the Long Term Performance Awards subject to such Performance Period, unless the Committee shall otherwise determine. (d) Form of Payment. The earned portion of a Long Term Performance Award may be paid currently or on a deferred basis with such interest or earnings equivalent as may be determined by the Committee. Payment shall be made in the form of cash or whole shares of Stock, including Restricted Stock, or a combination thereof, either in a lump sum payment or in annual installments, all as the Committee shall determine. Section 10. Change in Control Provisions (a) Impact of Event. In the event of: (i) a "Change in Control" as defined in Section 10(b), unless otherwise determined by the Committee or the Board prior to the occurrence of such Change in Control, or (ii) a "Potential Change in Control" as defined in Section 10(c), but only if and to the extent so determined by the Committee or the Board, the following acceleration and valuation provisions shall apply: (1) Stock Options and Stock Appreciation Rights outstanding as of the date such Change in Control or such Potential Change in Control is determined to have occurred and not then exercisable and vested shall become fully exercisable and vested; provided, however, that, in the case of Stock Appreciation Rights held by an Optionee who is actually subject to Section 16(b) of the Exchange Act, such Stock Appreciation Rights shall not become exercisable and vested unless they shall have been outstanding for at least six months at the date such Change in Control is determined to have occurred. (2) The restrictions and forfeiture provisions applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become fully vested. (3) The value of all outstanding Stock Options, Stock Appreciation Rights, and Restricted Stock shall, unless otherwise determined by the Committee at or after grant, be cashed out on the basis of the "Change in Control Price", as defined in Section 10(d), as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. (4) Any outstanding Long Term Performance Awards shall, unless the Committee otherwise determines, be vested and paid out based on the prorated target results for the Performance Periods in question, unless the Committee provides prior to the Change in Control event for a different payment. (b) Definition of "Change in Control". For purposes of Section 10(a), a "Change in Control" means a change in control of the Company of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the effective date of the Plan, pursuant to Section 13 or 15(d) of the Exchange Act; provided that, without limitation, such a "Change in Control" shall be deemed to have occurred if: (i) A third person, including a "group" as such term is used in Section 13(d)(3) of the Exchange Act, other than the trustee of a Company employee benefit plan, becomes the beneficial owner, directly or indirectly, of 20 percent or more of the combined voting power of the Company's outstanding voting securities ordinarily having the right to vote for the election of directors of the Company; (ii) During any period of 24 consecutive months individuals who, at the beginning of such consecutive 24-month period, constitute the Board of Directors of the Company (the "Board" generally and as of the effective date of the Plan the "Incumbent Board") cease for any reason (other than retirement upon reaching Normal Retirement age, Disability, or death) to constitute at least a majority of the Board; provided that any person becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the Directors comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (iii) The Company shall cease to be a publicly owned corporation having its outstanding Stock listed on the New York Stock Exchange or quoted in the NASDAQ National Market System. (c) Definition of "Potential Change in Control". For purposes of Section 10(a), a "Potential Change in Control" means the happening of any one of the following: (i) The entering into an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 10(b); or (ii) The acquisition of beneficial ownership, directly or indirectly, by any entity, person, or group (other than the trustee of a Company employee benefit plan) of securities of the Company representing five percent or more of the combined voting power of the Company's outstanding voting securities and the adoption by the Board of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of the Plan. (d) Change in Control Price. For purposes of this Section 10, "Change in Control Price" means the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Index or paid or offered in any bona fide transaction related to an actual or potential Change in Control of the Company at any time during the preceding 60-day period as determined by the Committee, except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the Committee decides to cash out such Stock Options. Section 11. Amendments and Termination The Board may amend, suspend, or discontinue the Plan or any portion thereof at any time, but no amendment, suspension, or discontinuation shall be made which would impair the rights of a Holder under a Stock Option or a recipient of a Stock Appreciation Right, Restricted Stock award, or Long Term Performance Award theretofore granted without the Holder's or recipient's consent or which, without the approval of the Company's stockholders, would: (a) except as expressly Provided in the Plan, increase the total number of shares reserved for the purpose of the Plan; (b) decrease the option price of any Stock Option to less than the Fair Market Value on the date of grant; (c) change the class of employees eligible to participate in the Plan; (d) extend the maximum option periods under Section 6(b); or (e) amend, suspend or discontinue this Section 11. The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but no such amendment shall impair the right of any holder without the holder's consent. Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules, as well as other developments. Section 12. Unfunded Status of Plan It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or make payments; provided, however, that, unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. Section 13. General Provisions (a) All certificates for shares of Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. The Committee may require any Optionee purchasing shares pursuant to a Stock Option to represent to and agree with the Company in writing that the Optionee is acquiring the shares without a view to the distribution thereof. (b) Nothing contained in this Plan shall prevent the Company or a Subsidiary from adopting other or additional compensation arrangements for its employees. (c) Neither the adoption of the Plan nor the granting of any Stock Option, Stock Appreciation Right, Restricted Stock or Long Term Award shall confer upon any employee any right to continued employment or constitute an agreement or understanding that the Company will retain a director for any period of time or at any particular rate of compensation, nor shall the same interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any employee or the service of any director at any time. (d) No later than the date on which the Company is required to withhold taxes in respect of an award, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any Federal, state, local, or other taxes of any kind required by law to be withheld with respect to such award or any payment or distribution made in connection therewith. Unless otherwise determined by the Committee, withholding obligations may be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement; provided, however, that in the case of any Optionee who is actually subject to Section 16(b) of the Exchange Act, any such settlement shall comply with the applicable requirements of Rule 16(b)-3. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. (e) The reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall be permissible only if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). (f) The Committee shall establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable with respect to outstanding awards under the Plan in the event of the participant's death are to be paid. (g) The Plan and all awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Connecticut. Section 14. Effective Date of Plan; Shareholder Approval The Plan shall be effective as of the date it is adopted by the Board, subject however to the approval of the Plan by the holders of at least a majority of the outstanding shares of Stock of the Company present or represented and entitled to vote at a meeting of shareholders of the Company. Awards may be made under the Plan on and after its effective date; provided, however, that any such awards shall be null and void if shareholder approval of the Plan is not obtained within 12 months of the adoption of the Plan by the Board. Section 15. Term of Plan No Stock Option, Stock Appreciation Right, Restricted Stock award, or Long Term Performance Award shall be granted on or after the tenth anniversary of the effective date of the Plan, but awards granted prior to such tenth anniversary (including, without limitation, Long Term Performance Awards for Performance Periods commencing prior to such tenth anniversary) may extend beyond that date. Adopted: October 14, 1998 Amended: July 21, 1999 EX-27 4
5 0000025757 CROMPTON & KNOWLES CORPORATION 1,000 6-MOS DEC-25-1999 JUN-26-1999 14,243 0 199,368 10,766 318,711 615,110 449,804 433,335 1,381,192 349,542 668,975 0 0 7,733 69,261 1,381,192 805,466 805,466 495,877 667,188 (40,255) 2,179 26,107 152,426 55,254 97,172 0 (1,085) 0 96,087 1.44 1.41
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