-----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, GUWqIAUL3deQqAMQ/CcwOHoiKVLvdGHuDFw9kbiE5vDRTNPacYmCSQEISzEXOXaf 0zVdNWlhDezg+Bu4K4/opA== 0000009984-03-000007.txt : 20030512 0000009984-03-000007.hdr.sgml : 20030512 20030512094158 ACCESSION NUMBER: 0000009984-03-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARNES GROUP INC CENTRAL INDEX KEY: 0000009984 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490] IRS NUMBER: 060247840 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04801 FILM NUMBER: 03691693 BUSINESS ADDRESS: STREET 1: 123 MAIN ST CITY: BRISTOL STATE: CT ZIP: 06010 BUSINESS PHONE: 8605837070 MAIL ADDRESS: STREET 1: 123 MAIN ST CITY: BRISTOL STATE: CT ZIP: 06010 FORMER COMPANY: FORMER CONFORMED NAME: ASSOCIATED SPRING CORP DATE OF NAME CHANGE: 19760518 10-Q 1 e10q03q1.txt BARNES GROUP INC FORM 10Q 1ST QTR 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM l0-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 March 31, 2003 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For transition period from -------------------- to -------------------- Commission File Number 1-4801 BARNES GROUP INC. (a Delaware Corporation) I.R.S. Employer Identification No. 06-0247840 123 Main Street, Bristol, Connecticut 06010 Telephone Number (860) 583-7070 Number of common shares outstanding at May 7, 2003 - 20,109,022 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the exchange Act). Yes X No --- --- -1- BARNES GROUP INC. FORM 10-Q INDEX For the Quarterly period ended March 31, 2003 DESCRIPTION PAGES - ----------- ----- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Income for the three months ended March 31, 2003 and 2002 3 Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 4-5 Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 6 Notes to Consolidated Financial Statements 7-13 Report of Independent Accountants 14 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-19 ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 19 ITEM 4. Controls and Procedures 20 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds 20 ITEM 6. Exhibits and Reports on Form 8-K 20-21 Signatures 22 Certifications 23-24 Exhibit Index 25-26 -2- PART I. FINANCIAL INFORMATION Item 1. Financial Statements BARNES GROUP INC. CONSOLIDATED STATEMENTS OF INCOME Three months ended March 31, 2003 and 2002 (Dollars in thousands, except per share data) (Unaudited) 2003 2002 -------- -------- Net sales $218,734 $194,236 Cost of sales 142,230 130,298 Selling and administrative expenses 63,294 52,381 -------- -------- 205,524 182,679 -------- -------- Operating income 13,210 11,557 Other income 613 427 Interest expense 4,110 3,390 Other expenses 278 137 -------- -------- Income before income taxes 9,435 8,457 Income taxes 2,076 1,691 -------- -------- Net income $ 7,359 $ 6,766 ======== ======== Per common share: Net income: Basic $ .38 $ .37 Diluted .37 .36 Dividend .20 .20 Average common shares outstanding: Basic 19,531,719 18,497,371 Diluted 19,894,312 19,026,049 See accompanying notes. -3- BARNES GROUP INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS March 31, December 31, 2003 2002 --------- ------------ (Unaudited) Current assets Cash and cash equivalents $ 32,061 $ 28,355 Accounts receivable, less allowances (2003-$3,125; 2002-$2,891) 129,358 97,533 Inventories Finished goods 71,770 58,244 Work-in-process 18,754 16,993 Raw materials and supplies 12,980 13,572 -------- -------- 103,504 88,809 Deferred income taxes 16,487 16,024 Prepaid expenses 10,565 7,916 -------- -------- Total current assets 291,975 238,637 Deferred income taxes 22,294 22,610 Property, plant and equipment 432,689 429,312 Less accumulated depreciation 275,139 269,872 -------- -------- 157,550 159,440 Goodwill 212,549 164,594 Other assets 89,331 67,249 -------- -------- Total assets $773,699 $652,530 ======== ======== See accompanying notes. -4- BARNES GROUP INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31, 2003 2002 --------- ------------ (Unaudited) Current liabilities Accounts payable $ 78,405 $ 63,389 Accrued liabilities 72,443 61,853 Long-term debt - current 6,849 6,837 -------- -------- Total current liabilities 157,697 132,079 Long-term debt 277,187 214,125 Accrued retirement benefits 90,898 87,162 Other liabilities 12,370 10,944 Contingencies (Note 10) Stockholders' equity Common stock-par value $0.01 per share Authorized: 60,000,000 shares Issued: 22,037,769 shares stated at par value 220 220 Additional paid-in capital 53,167 53,511 Treasury stock at cost, 2003-2,101,694 shares 2002-3,081,718 shares (41,474) (61,847) Retained earnings 258,349 255,147 Accumulated other non-owner changes to equity (34,715) (38,811) -------- -------- Total stockholders' equity 235,547 208,220 -------- -------- Total liabilities and stockholders' equity $773,699 $652,530 ======== ======== See accompanying notes. -5- BARNES GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2003 and 2002 (Dollars in thousands) (Unaudited) 2003 2002 ------- ------- Operating activities: Net income $ 7,359 $ 6,766 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 8,532 7,883 Gain on disposition of property, plant and equipment (32) (61) Changes in assets and liabilities: Accounts receivable (15,986) (14,742) Inventories 506 4,198 Prepaid expenses (1,489) (255) Accounts payable 4,869 (6,288) Accrued liabilities 1,373 1,078 Deferred income taxes 922 1,071 Long-term pension asset (698) (1,150) Other 526 855 ------- ------- Net cash provided (used) by operating activities 5,882 (645) Investing activities: Proceeds from disposition of property, plant and equipment 204 306 Capital expenditures (3,301) (4,393) Business acquisitions, net of cash acquired (61,167) (23,011) Other (172) (68) ------- ------- Net cash used by investing activities (64,436) (27,166) Financing activities: Net increase in notes payable 2,852 3,947 Payment on long-term debt (137) -- Proceeds from the issuance of long-term debt 63,500 10,000 Proceeds from the issuance of common stock 440 999 Common stock repurchases (154) (96) Dividends paid (3,983) (3,703) Other (915) -- ------- ------- Net cash provided by financing activities 61,603 11,147 Effect of exchange rate changes on cash flows 657 (1,535) ------- ------- Increase (decrease) in cash and cash equivalents 3,706 (18,199) Cash and cash equivalents at beginning of period 28,355 48,868 ------- ------- Cash and cash equivalents at end of period $32,061 $30,669 ======= ======= Supplemental Disclosure of Cash Flow Information: Non-cash financing and investing activities include the 2003 issuance of $18.5 million of treasury stock in connection with the Kar acquisition. See accompanying notes. -6- Notes to Consolidated Financial Statements: 1. Summary of Significant Accounting Policies ------------------------------------------ The accompanying unaudited consolidated balance sheet and consolidated statements of income and cash flows have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial statements do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. For additional information, please refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of management, all adjustments, including normal recurring accruals considered necessary for a fair presentation, have been included. Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. Stock-Based Compensation ------------------------ The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation. (Dollars in thousands, except per share data) Three Months ended March 31, 2003 2002 ------ ------ Net income, as reported $7,359 $6,766 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 472 300 Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,411) (1,269) ------ ------ Pro forma net income $6,420 $5,797 ====== ====== Earning per share: Basic - as reported $ .38 $ .37 Basic - pro forma .33 .31 Diluted - as reported .37 .36 Diluted - pro forma .32 .30 The fair value of each stock option grant on the date of grant has been estimated using the Black-Scholes option-pricing model. Assumptions used for the 2003 grants were: Risk-free interest rate - 2.33%; expected life - -7- 3.8 years; expected volatility - 35%; expected dividend yield - 3.52%. The weighted-average grant date fair value of options granted during 2003 was $4.13. 2. Net Income Per Common Share --------------------------- For the purpose of computing diluted earnings per share, the weighted average number of shares outstanding was increased by 362,593 and 528,678 for the periods ended March 31, 2003 and 2002, respectively, for the potential dilutive effects of stock-based incentive plans. As of March 31, 2003 there were 4,237,691 options for shares of common stock outstanding of which 2,237,531 were considered dilutive. There were no adjustments to net income for the purposes of computing income available to common stockholders for those periods. 3. Acquisitions ------------ On February 6, 2003, the Company acquired Kar Products, LLC and certain assets of a related company, A.& H. Bolt & Nut Company Ltd. (Kar), which management believes is a leading full service distributor of maintenance, repair and operating (MRO) supplies to industrial, construction, transportation and other markets. The acquisition expands both geographic scope and product line reach of the Barnes Distribution segment. Kar has a diversified customer base that operates in all 50 states, Puerto Rico, and Canada, further enhancing Barnes Distribution's leadership position within the MRO market and its international presence. The results of operations of Kar have been included in the consolidated financial statements since the purchase date. The purchase price of $78.5 million, excluding transaction costs, was financed through a combination of $4.0 million cash, $56.0 million of debt and $18.5 million (923,506 shares) of Barnes Group common stock. The Company anticipates achieving a number of post-acquisition cost savings and other synergies through headquarters and infrastructure consolidation. The Company is in the process of obtaining third-party valuations of certain assets acquired with Kar. Thus, the allocation of the purchase price is subject to refinement. Any amounts attributable to such assets are expected to be finalized during 2003. The aggregate purchase price, including transaction costs of $1.2 million, was $79.7 million. The following table summarizes the estimate of fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands): Current assets $30,155 Property, plant, and equipment 3,634 Intangible assets 17,211 Goodwill 47,908 ------- Total assets acquired 98,908 ------- Current liabilities (16,150) Other liabilities (3,091) ------- Total liabilities assumed (19,241) ------- Net assets acquired $79,667 ======= -8- The following table reflects the pro forma operating results of the Company for the three months ended March 31, 2003 and 2002, which gives effect to the acquisition of Kar as if it had occurred on January 1, 2003 and January 1, 2002, respectively. The pro forma results are based on assumptions that the Company believes are reasonable under the circumstances. The pro forma results are not necessarily indicative of the operating results that would have occurred if the acquisition had been effective January 1, 2003 and 2002, nor are they intended to be indicative of results that may occur in the future. The pro forma information does not include the effect of synergies and cost reduction initiatives related to the acquisition. The underlying pro forma information includes the historical financial results of the Company and Kar adjusted for the amortization expense associated with the assets acquired, the Company's financing arrangements and certain purchase accounting adjustments. (Dollars in thousands, except per share data) Three Months ended March 31, 2003 2002 -------- -------- Net sales $230,685 $225,759 Income before income taxes 9,834 9,998 Net income 7,599 7,690 Per common share: Basic $ .38 $ .40 Diluted .38 .39 4. Goodwill and Other Intangible assets ------------------------------------ The following table sets forth the change in the carrying amount of goodwill for each reportable segment for the period ended March 31, 2003: (Dollars in thousands) Associated Barnes Barnes Total Spring Aerospace Distribution BGI ---------- --------- ------------ -------- January 1, 2003 $ 76,377 $ 30,900 $ 57,317 $164,594 Goodwill acquired 47 -- 47,908 47,955 -------- -------- -------- ------- March 31, 2003 $ 76,424 $ 30,900 $105,225 $212,549 ======== ======== ======== ======== The $47.9 million goodwill acquired relates to the acquisition of Kar in February 2003. The Company is in the process of obtaining third-party valuations of certain intangible assets acquired with Kar. The purchase price allocation is expected to be finalized during 2003. Intangible assets, other than goodwill, consist of patents and registered trademarks and customer lists/relationships. These assets are being amortized over their estimated useful lives ranging up to 30 years. In connection with the acquisition of Kar, the Company recorded intangible assets primarily related to customer lists/relationships in 2003 of $17.2 million which is being amortized over their estimated useful life and will -9- result in approximately $1.6 million of amortization expense in 2003. The Company is in the process of obtaining third-party valuations of these and other intangibles and thus the amount is subject to refinement. 5. Business Reorganization Accruals -------------------------------- In connection with the Curtis acquisition in May 2000, the Company recorded certain integration costs. The Company recorded total costs of $6.4 million related primarily to lease consolidation costs, facility closure costs and reductions in personnel. As of March 31, 2003, an accrual of approximately $1.4 million remained, related to future lease payments. During the fourth quarter of 2001, the Company recorded pretax charges of $4.8 million, primarily for Associated Spring, related to actions aimed at reducing the Company's infrastructure including the closure of an Associated Spring plant in Texas. As of March 31, 2003, the remaining balance of $0.3 million related to post-closure holding costs for the Texas plant, now closed and being held for sale. In connection with the Kar acquisition in February 2003, the Company has recorded certain integration costs. The integration plan includes combining the headquarters functions and consolidating warehousing and distribution networks. As a result, the Company recorded total costs of $3.9 million that related primarily to lease consolidation costs, facility closure costs and reductions primarily in administrative personnel. These costs associated with the acquired business are reflected as assumed liabilities in the allocation of the purchase price to net assets acquired. The Company anticipates recording additional integration costs in 2003 when additional warehouse consolidation plans are finalized. 6. Debt ---- In February 2003, the Company borrowed $56.0 million under its revolving credit facility in connection with financing the acquisition of Kar. The March 31, 2003 weighted-average interest rate on these borrowings was 3.29%. Also, in conjunction with the acquisition, the Company amended its revolving credit agreement, pursuant to which the maximum ratio of Total Debt to EBITDA, as defined in the revolving credit agreement, was increased to 3.25 times for the first three quarters of 2003 and will decline to 3.0 times at December 31, 2003. The actual ratio at March 31, 2003 was 3.05. At March 31, 2003, the Company classified $3.5 million of borrowings under lines of credit due within one year as long-term debt. The Company has both the intent and ability, through its revolving credit facility, to refinance this amount on a long-term basis. The Company's debt agreements contain financial covenants that require the maintenance of interest coverage and leverage ratios, and minimum levels of net worth. The agreements also place certain restrictions on indebtedness, capital expenditures and investments by the Company and its subsidiaries. Such covenants and restrictions determine the amount of borrowings, dividends or treasury stock purchases the Company can make under such agreements. -10- Under the most restrictive borrowing capacity covenant in any agreement, $18.1 million of additional capacity was available at March 31, 2003. Under the most restrictive net worth covenant in any agreement, $31.5 was available for payment of dividends or to fund acquisitions of shares of the Company's common stock at March 31, 2003. 7. Comprehensive Income -------------------- Comprehensive income includes all changes in equity during a period except those resulting from the investment by and distributions to, stockholders. For the Company, comprehensive income includes net income, and other non-owner changes to equity, which is comprised of foreign currency translation adjustments and deferred gains and losses related to certain derivative instruments. Statement of Comprehensive Income (Dollars in thousands) (Unaudited) For the three months ended March 31, 2003 2002 ------- ------- Net income $ 7,359 $ 6,766 Unrealized (losses) gains on hedging activities, net of income taxes (171) (618) Foreign currency translation adjustments 4,267 (1,570) ------- ------- Comprehensive income $11,455 $ 4,578 ======= ======= 8. Income Taxes ------------ A reconciliation of the U.S. federal statutory income tax rate to the consolidated effective income tax rate follows: Three months Twelve months ended ended March 31, December 31, 2003 2002 ------------ ------------ U.S. federal statutory income tax rate 35.0% 35.0% State taxes (net of federal benefit) 0.9 0.9 Foreign losses without tax benefit 1.4 3.6 Tax on foreign operations (11.5) (16.0) NASCO equity income (0.9) (0.4) Export sales benefit (1.0) (1.3) ESOP dividend (2.3) (5.8) Other 0.4 2.0 ---- ---- Consolidated effective income tax rate 22.0% 18.0% ==== ==== -11- 9. Information on Business Segments -------------------------------- The following tables set forth information about the Company's operations by its three reportable business segments: (Dollars in thousands) For the three months ended March 31, 2003 2002 -------- -------- Revenues Associated Spring $ 85,065 $ 75,565 Barnes Aerospace 42,329 47,410 Barnes Distribution 93,847 72,865 Intersegment sales (2,507) (1,604) -------- -------- Total revenue $218,734 $194,236 ======== ======== Operating profit Associated Spring $ 7,624 $ 7,033 Barnes Aerospace 2,706 2,880 Barnes Distribution 3,197 1,902 -------- -------- Total operating profit 13,527 11,815 Interest income 295 124 Interest expense (4,110) (3,390) Other expense (277) (92) -------- -------- Income before income taxes $ 9,435 $ 8,457 ======== ======== The Kar acquisition added approximately $98.9 million of assets to the Barnes Distribution segment assets. 10. Contingencies ------------- Retirement Savings Plan: The Company guarantees a minimum rate of return on certain pre-April 2001 assets of its 401(k) Retirement Savings Plan (the "Plan"). This guarantee will become a liability for the Company if, and to the extent that, the value of the related Company stock does not cover the guaranteed asset value when an employee who had invested in the Barnes Group stock investment election or vested in the Company match, which is paid in Barnes Group stock, withdraws from the Plan. The following table provides a number of hypothetical market values of the Company's stock compared to the estimated guarantee amounts based on those market values: (Dollars in thousands, except for per share data) Stock price Plan per share Guarantee ----------- --------- $25.00 $ 34 20.00 400 15.00 4,400 10.00 13,400 5.00 22,600 0.00 32,900 -12- The closing price of the Company's stock on March 31, 2003 was $21.16, resulting in an estimated guarantee on Plan assets of $0.2 million. Restrictions on Stock Consideration for Spectrum Plastics: The sole shareholder of Spectrum Plastics received 119,048 shares of the Company's common stock as partial consideration for Spectrum Plastics. For the one-year period following the required holding period under the Federal securities laws, which ended April 29, 2003, the sole shareholder has agreed not to sell the Company shares received in the acquisition at a price below $25.20 per share without the consent of the Company. In the event he sells any of the shares during this period with the consent of the Company or during the one month following this period, the Company will pay to him an amount equal to the difference between $25.20 per share and a lesser price at which he sells such shares. Product Warranties: The Company provides product warranties in connection with the sale of products. Product warranty liabilities were not significant as of March 31, 2003. ------------------------ With respect to the unaudited consolidated financial information of Barnes Group Inc. for the three-month period ended March 31, 2003 and 2002, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated April 17, 2003 appearing herein, states that they did not audit and they do not express an opinion on that unaudited consolidated financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the Act) for their report on the unaudited consolidated financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act. -13- REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Barnes Group Inc. We have reviewed the accompanying consolidated statements of income and cash flows of Barnes Group Inc. and its subsidiaries for each of the three-month periods ended March 31, 2003 and 2002, and the consolidated balance sheet as of March 31, 2003. This interim financial information is the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2002, and the related consolidated statements of income, stockholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated January 31, 2003 (except for Note 3, which is as of February 6, 2003) we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP ------------------------------ PricewaterhouseCoopers LLP Hartford, Connecticut April 17, 2003 -14- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies ---------------------------- The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting policies are disclosed in Note 1 of the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. The most significant areas involving management judgments and estimates are described in Management's Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, to which there have been no material changes. Actual results could differ from those estimates. Acquisitions ------------ On February 6, 2003, the Company acquired Kar Products, LLC and certain assets of a related company, A.& H. Bolt & Nut Company Ltd. (Kar), a leading full service distributor of maintenance repair and operating (MRO) supplies to industrial, construction, transportation and other markets. The acquisition expands both the geographic scope and product line of the Barnes Distribution segment. Kar has a diversified customer base that operates in all 50 states, Puerto Rico, and Canada, further enhancing Barnes Distribution's leadership position within the MRO market and international presence. The results of operations of Kar have been included in the consolidated financial statements since the purchase date. The consideration for the acquisition of $78.5 million was financed through a combination of $4.0 million cash, $56.0 million of debt and $18.5 million (923,506 shares) of Barnes Group common stock. Management has authorized certain integration activities aimed at achieving a number of post-acquisition cost savings and other synergies through headquarters and infrastructure consolidation. This integration plan includes combining the headquarters functions and consolidating warehousing and distribution networks. As a result, the Company recorded total costs of $3.9 million related primarily to lease consolidation costs, facility closure costs and reductions in personnel. These costs associated with the acquired business are reflected as assumed liabilities in the allocation of the purchase price to net assets acquired. The total cost of the acquisition may change based on final purchase price adjustments and finalization of integration plans. -15- Results of Operations --------------------- The following table sets forth, as a percentage of revenue, the Company's consolidated statement of income data: Three months ended March 31, 2003 2002 ----- ----- Net sales 100.0% 100.0% Cost of sales 65.0 67.1 ----- ----- Gross profit 35.0 32.9 Selling and administrative expenses 29.0 27.0 ----- ----- Operating income 6.0 5.9 Other income 0.3 0.2 Interest expense 1.9 1.7 Other expense 0.1 -- Income taxes 0.9 0.9 ----- ----- Net income 3.4% 3.5% ===== ===== Net sales for the first quarter 2003 were a record $218.7 million, up 12.6% from $194.2 million in the first quarter last year. The sales increase primarily reflected the Company's recent acquisitions, which contributed $19.2 million to Barnes Distribution and $9.9 million to Associated Spring. This growth was partially offset by a 10.7% decline in sales at Barnes Aerospace. First quarter 2003 operating income was $13.2 million compared to $11.6 million in the first three months of 2002. These results reflect higher operating profit at Associated Spring and Barnes Distribution and lower operating profit in the Barnes Aerospace segment. The Company-wide operating income margin was 6.0% compared with 5.9% a year ago. This increase was driven, for the most part, by a higher gross margin, which improved to 35.0% from 32.9% a year ago. This increase in gross margin reflects higher gross profit margins at Barnes Distribution, combined with an overall shift in the sales mix to the higher margin distribution business. Selling and administrative expenses increased as a percentage of sales compared to last year's first quarter. This was also driven by the higher proportion of sales in the distribution business, which has a higher selling expense component. Also impacting operating expenses were higher personnel costs, specifically pension and other postretirement benefit costs. Segment Review - Sales and Operating Profit ------------------------------------------- Associated Spring's sales for first quarter 2003 were $85.1 million, compared to $75.6 million a year ago. Sales during the quarter reflected nearly $10.0 million of incremental sales from recent acquisitions and continued growth in the sales of nitrogen gas spring products. Partially offsetting these items was a drop in sales related to a planned withdrawal from the heavy truck brake spring market, as well as a decline in sales to the telecommunications and electronics markets. Operating profit for the segment was $7.6 million in the first quarter of 2003 compared with $7.0 million for the same period a year ago. This increase reflected the higher sales volume and the benefits of last year's closure of the Texas facility, which were partially offset by higher personnel costs, primarily pension and other postretirement expenses. Overall light vehicle production is -16- expected to be slightly lower in 2003 compared to 2002. The impact on Associated Spring, whether positive or negative, is unclear and is ultimately dependent upon the actual light vehicle production mix. The end markets for telecommunications and electronics products are expected to remain weak in the near term. Barnes Aerospace's first quarter 2003 sales were $42.3 million, down 10.7% compared with $47.4 million in 2002, reflecting the continued challenging commercial aerospace marketplace. Operating profit was $2.7 million for the current quarter, down slightly from $2.9 million during last year's first quarter reflecting the lower sales volume. Operating profit was positively impacted by headcount reductions and other actions taken throughout Barnes Aerospace in 2002 aimed at positioning the business for a period of lower commercial aerospace volume. First quarter 2002 operating profit included $0.5 million of severance costs. Orders recorded during the first quarter of 2003 were $38.3 million and order backlog at March 31, 2003 was $148.2 million, compared with $151.8 million at year-end 2002. Impacting first quarter 2003 orders and backlog was an order cancellation of approximately $7.1 million related to a single OEM customer. Direct and indirect orders for the U.S. military were approximately 26% of the orders booked during the first quarter of 2003. Recent events such as the war in Iraq and the outbreak of severe acute respiratory syndrome (SARS) have had a negative impact on air travel, the long-term effects of which are unclear. Barnes Distribution's sales in the first three months of 2003 were $93.8 million, up 28.8% from $72.9 million in 2002. The increase in sales for the quarter included $19.2 million from the February 6, 2003 acquisition of Kar and the translation impact resulting from the weakening of the U.S. dollar relative to foreign currencies. Sales in the North American business were positively impacted by an increased focus on national and regional account development and an e-commerce platform initiated in 2002. This was offset by a drop in other sales, reflecting the continued weakness in the manufacturing and industrial sectors. Operating profit for the first quarter 2003 was $3.2 million, up 68.1% from $1.9 million a year ago. The improvement in operating results was driven primarily by higher profitability in Barnes Distribution's North American operations, which included a higher gross profit margin, and incremental operating profit contributed by Kar. Other Income/Expense -------------------- Interest expense increased in 2003 as a result of higher borrowings related primarily to the Kar acquisition, coupled with a reduction in the amount of debt subject to interest rate swaps. Income Taxes ------------ The Company's effective tax rate for first quarter 2003 was 22.0%, compared with 20.0% in 2002's first quarter and 18.0% for the full year 2002. The higher rate in 2003 is primarily due to an additional deduction for the Company's Retirement Savings Plan (RSP) dividends in 2002, and an anticipated shift in 2003 earnings to countries with higher tax rates, primarily the United States. The 2002 tax deduction included a retroactive election for the 2001 dividend distribution, the result of an amendment to the Company's RSP. Net Income and Net Income Per Share ----------------------------------- Consolidated net income for the first quarter of 2003 and 2002 was $7.4 million and $6.8 million, respectively. Basic and diluted earnings per share for the first quarter of 2003 were $.38 and $.37 compared to 2002's basic and diluted earnings per share of $.37 and $.36, respectively. -17- Liquidity and Capital Resources ------------------------------- Management assesses the Company's liquidity in terms of its overall ability to generate cash to fund its operating and investing activities. Of particular importance in the management of liquidity are cash flows generated from operating activities, capital expenditure levels, dividends, capital stock transactions, effective utilization of surplus cash positions overseas and adequate bank lines of credit. The Company's ability to generate cash from operations in excess of its internal operating needs is one of its financial strengths. Management continues to focus on cash flow optimization and anticipates that operating activities in 2003 will provide sufficient cash to take advantage of opportunities for organic business expansion and to meet the Company's current financial commitments. On May 7, 2003, the Company filed a prospectus supplement with the Securities and Exchange Commission pursuant to a shelf registration statement, indicating the Company's intent to offer for sale 2,000,000 shares of its common stock. The shelf registration statement was declared effective on April 11, 2003. Proceeds from this offering will be used to reduce the incremental borrowings related to the Kar acquisition. Future acquisitions are expected to be financed through a mix of internal cash, borrowing and equity. Net cash provided by operating activities in the first three months of 2003 was $5.9 million, compared to a net cash use of $0.6 million in 2002's first quarter. The significant improvement in the first quarter of 2003 operating cash flow reflects higher operating results and a lower use of working capital. Net cash used by investing activities in the first quarter of 2003 was $64.4 million compared with $27.2 million in 2002. The significant increase in this year's investing activities was due, in large part, to the acquisition of Kar in February 2003. Investing activity in 2002 included the acquisition of Seeger-Orbis. Capital spending in 2003 was below the 2002 level. Net cash provided by financing activities was $61.6 million in the first three months of 2003 compared to $11.1 million in the comparable period of 2002. In 2003, proceeds from additional borrowings were used to fund the Kar acquisition. The Company maintains bank-borrowing facilities to supplement internal cash generation. At March 31, 2003, the Company had a $150.0 million borrowing facility under a three-year revolving credit agreement, of which $98.0 million was borrowed at an interest rate of 3.29%. Additionally, the Company had $15.0 million in uncommitted short-term bank credit lines, of which $3.5 million was in use at March 31, 2003. Borrowing capacity is limited by various debt covenants. The most restrictive covenant requires the Company to maintain a ratio of Total Debt to EBITDA, as defined in the revolving credit agreement, of not more than 3.25 times at March 31, 2003. The actual ratio at March 31, 2003 was 3.05 times and would have allowed additional borrowings of $18.1 million. The covenant will decline to 3.0 times at December 31, 2003 which the Company expects to meet. The Company believes its credit facilities coupled with cash generated from operations are adequate for its anticipated future requirements. The $150 million shelf registration statement permitting offerings of both debt and equity, which was declared effective on April 11, 2003 will provide the Company increased flexibility for future financing activities. -18- First quarter 2003 earnings before interest, taxes, depreciation and amortization (EBITDA) were $22.1 million compared to $19.7 million in the first quarter of 2002. EBITDA is a measurement not calculated in accordance with generally accepted accounting principles (GAAP). The Company defines EBITDA as net income plus income taxes, interest expense and depreciation and amortization. The Company does not intend EBITDA to represent cash flows from operations as defined by GAAP, and the reader should not consider it as an alternative to net income, net cash provided by operating activities or any other items calculated in accordance with GAAP, or as an indicator of the Company's operating performance. The Company's definition of EBITDA may not be comparable with EBITDA as defined by other companies. The Company believes EBITDA is commonly used by financial analysts and others in the industries in which the Company operates and, thus, provides useful information to investors. Management uses EBITDA as one measure of leverage capacity and debt servicing ability. Following is a reconciliation of EBITDA to the Company's net income: (Dollars in thousands) Three months ended March 31, 2003 2002 ------- ------- Net income $ 7,359 $ 6,766 Add back: Income taxes 2,076 1,691 Depreciation & amortization 8,532 7,883 Interest expense 4,110 3,390 ------- ------- EBITDA $22,077 $19,730 ======= ======= Forward-Looking Statements -------------------------- This quarterly report may contain certain forward-looking statements as defined in the Private Securities Litigation and Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements. Investors are encouraged to consider these risks and uncertainties as described within the Company's periodic filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not limited to, the following: the ability of the Company to integrate newly acquired businesses and to realize acquisition synergies on schedule; changes in market demand for the types of products and services produced and sold by the Company; the Company's success in identifying, and attracting customers in, new markets; the Company's ability to develop new and enhanced products to meet customers' needs on time; the effectiveness of the Company's marketing and sales programs; increased competitive activities including pricing, advertising and promotions that could adversely affect customer demand for the Company's products; changes in economic, political and public health conditions, worldwide and in the locations where the Company does business; interest and foreign exchange rate fluctuations; and changes in laws and regulations. Item 3. Quantitative and Qualitative Disclosure About Market Risk There has been no significant change in the Company's exposure to market risk during the first three months of 2003. For discussion of the Company's exposure to market risk, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2002. -19- Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures. During the 90-day period prior to the filing date of this report, management, including the Company's President and Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon, and as of the date of, that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. Changes in Internal Controls. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date when the Company's President and Chief Executive Officer and Chief Financial Officer carried out their evaluation. No significant deficiencies or material weaknesses in the internal controls were identified in the evaluation. PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- On February 6, 2003, the Company issued 923,506 shares of its common stock valued at approximately $18.5 million to the former owner of Kar Products, LLC in partial consideration for the Company's acquisition of Kar Products, LLC. This issuance was exempt from the registration requirements of the Act by Section 4(2) of the Act because it did not involve a public offering. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit 2.1 Membership Interest and Asset Purchase Agreement, dated as of January 15, 2003, by and among Barnes Group Inc., Barnes Group Canada Corp., Kar Products, LLC, A. & H. Bolt & Nut Company Ltd., GC-Sun Holdings II, L.P., A. & H. Bolt Holdings, Inc., Sunsource Canada Investment Company, GC-Sun, Inc., GC-Sun G.P. II, Inc., GS-Sun G.P., Inc., and GC-Sun Holdings, L.P. Exhibit 4.1(i) Registration Rights Agreement, dated as of February 6, 2003, by and between Barnes Group Inc. and GC-Sun Holdings II, L.P. (ii) Letter Agreement, dated as of March 31, 2003, by and between Barnes Group Inc. and GC-Sun Holdings II, L.P. Exhibit 4.2 Amendment No. 1, dated as of February 5, 2003, to Revolving Credit Agreement dated as of June 14, 2002. -20- Exhibit 4.3 Amendment No. 2, dated as of February 5, 2003, to Note Purchase Agreement dated as December 1, 1995. Exhibit 4.4 Amendment No. 1, dated as of February 5, 2003, to Note Agreement dated as November 12, 1999. Exhibit 4.5 Amendment No. 2, dated as of February 5, 2003, to Note Agreement dated as of November 21, 2002. Exhibit 4.6 Guarantee, dated as of February 6, 2003, by Kar Products, LLC in favor of Senior Lenders at Barnes Group Inc. Exhibit 10.1 Barnes Group Inc. Performance-Linked Bonus Plan for Selected Executive Officers. Exhibit 10.2 Barnes Group Inc. Amended Employee Stock and Ownership Program as further amended. Exhibit 15 Letter regarding unaudited interim financial information. Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Form 8-K A report on Form 8-K regarding the execution of a definitive agreement to acquire Kar Products was filed with the Commission on January 21, 2003. A report on Form 8-K regarding the completion of the acquisition of Kar Products was filed on February 20, 2003. -21- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Barnes Group Inc. (Registrant) Date May 12, 2003 By /s/ William C. Denninger ------------ ------------------------------- William C. Denninger Senior Vice President, Finance and Chief Financial Officer (the principal financial officer) Date May 12, 2003 By /s/ Francis C. Boyle, Jr. ------------ ------------------------------- Francis C. Boyle, Jr. Vice President, Controller (the principal accounting officer) -22- CERTIFICATIONS I, Edmund M. Carpenter, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Barnes Group Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 12, 2003 /s/ Edmund M. Carpenter ----------------------- Edmund M. Carpenter President and Chief Executive Officer -23- I, William C. Denninger, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Barnes Group Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 12, 2003 /s/ William C. Denninger ------------------------- William C. Denninger Chief Financial Officer -24- EXHIBIT INDEX BARNES GROUP INC. Quarterly Report on Form 10-Q For Quarter ended March 31, 2003 ------------------------------------ Exhibit No. Description Reference - ---------- ----------- --------- 2.1 Membership Interest and Asset Incorporated by reference Purchase Agreement, dated as of to Exhibit 2.1 to the January 15, 2003, by and among Company's report on Form Barnes Group Inc., Barnes Group 8-K filed February 20, 2003. Canada Corp., Kar Products, LLC, A. & H. Bolt & Nut Company Ltd., GC-Sun Holdings II, L.P., A. & H. Bolt Holdings, Inc., Sunsource Canada Investment Company, GC-Sun, Inc., GC-Sun G.P. II, Inc., GS-Sun G.P., Inc., and GC-Sun Holdings, L.P. 4.1 (i) Registration Rights Agreement, Incorporated by reference dated as of February 6, 2003, by to Exhibit 4.1 to the and between Barnes Group Inc. and Company's report on Form GC-Sun Holdings II, L.P. 8-K filed February 20, 2003. (ii) Letter Agreement, dated as of Incorporated by reference March 31, 2003, by and between to Exhibit 4.14 to the Barnes Group Inc. and GC-Sun Company's registration Holdings II, L.P. statement of Form S-3 file April 2, 2003. 4.2 Amendment No. 1, dated as of Incorporated by reference February 5, 2003, to Revolving to Exhibit 4.1(ii) to the Credit Agreement dated as of Company's report on Form June 14, 2002. 10-K for the year ended December 31, 2002. 4.3 Amendment No. 2, dated as of Incorporated by reference February 5, 2003, to Note to Exhibit 4.3(iv) to the Purchase Agreement dated as Company's report on Form December 1, 1995. 10-K for the year ended December 31, 2002. 4.4 Amendment No. 1, dated as of Incorporated by reference February 5, 2003, to Note to Exhibit 4.4(ii) to the Agreement dated as Company's report on Form November 12, 1999. 10-K for the year ended December 31, 2002. -25- 4.5 Amendment No. 2, dated as of Incorporated by reference February 5, 2003, to Note to Exhibit 4.5(iii) to Agreement dated as of the Company's report on November 21, 2002. Form 10-K for the year ended December 31, 2002. 4.6 Guarantee, dated as of Incorporated by reference February 6, 2003, by Kar to Exhibit 4.7 to the Products, LLC in favor of Company's report on Senior Lenders at Barnes Form 10-K for the year Group Inc. ended December, 31, 2002. 10.1 Barnes Group Inc. Performance- Incorporated by reference Linked Bonus Plan for Selected to Annex I to the Executive Officers Company's Proxy Statement Dated March 15, 2001 for the Annual Meeting of Stockholders held April 12, 2001 that was filed on March 13, 2001. 10.2 Barnes Group Inc. Amended Filed with this report. Employee Stock and Ownership Program as further amended. 15 Letter regarding unaudited Filed with this report. interim financial information. 99.1 Certification Pursuant to 18 Furnished with this U.S.C. Section 1350 as Adopted report. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 Furnished with this U.S.C. Section 1350 as Adopted report. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -26- Exhibit 15 May 12, 2003 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated April 17, 2003 on our review of interim financial information of Barnes Group Inc. (the "Company") as of and for the period ended March 31, 2003 and included in the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in its Registration Statements on Form S-3 (No. 333-104242), and Form S-8 (Nos. 2- 56437, 2-91285, 33-20932, 33-30229, 33-91758, 33-27339, 333-41398, 333-88518 and 333-57658). Very truly yours, /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Hartford, Connecticut Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Barnes Group Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edmund M. Carpenter, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Edmund M. Carpenter - ----------------------- Edmund M. Carpenter Chief Executive Officer May 12, 2003 A signed original of this written statement required by Section 906 has been provided to Barnes Group Inc. and will be retained by Barnes Group Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Barnes Group Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William C. Denninger, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ William C. Denninger - ------------------------ William C. Denninger Chief Financial Officer May 12, 2003 A signed original of this written statement required by Section 906 has been provided to Barnes Group Inc. and will be retained by Barnes Group Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-10 3 exh102q03q1.txt BARNES GROUP INC EXHIBIT 10.2 Exhibit 10.2 BARNES GROUP INC. AMENDED EMPLOYEE STOCK AND OWNERSHIP PROGRAM AS FURTHER AMENDED 1. PURPOSE The purpose of the Plan is to provide a means through which the Company may attract able persons to provide services to or enter and remain in the employ with the Company and its Subsidiaries and to provide a means whereby they can acquire and maintain Common Stock ownership, or be paid incentive compensation measured by reference to the value of Common Stock, thereby strengthening their commitment to the welfare of the Company and promoting an identity of interest between stockholders of the Company and these service providers and employees. So that the appropriate incentive can be provided, the Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Restricted Stock Awards, Restricted Stock Unit Awards, Performance Share or Cash Unit Awards, and SARs or any combination of the foregoing. 2. DEFINITIONS The following definitions shall be applicable throughout the Plan. (a) "Acceleration Event" shall have the meaning set forth in Section 8(e). (b) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (c) "Award" means, individually or collectively, any Incentive Stock Option, Nonqualified Stock Option, Restricted Stock Award, Restricted Stock Unit Award, Performance Share or Cash Unit Award, or SAR under the Plan. (d) "Award Agreement" means the agreement between the Company and a Participant who has been granted an Award which defines the rights and obligations of the parties with respect to such Award. (e) "Award Period" means a period of time within which performance is measured for the purpose of determining whether an Award of Performance Share or Cash Units has been earned. (f) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (g) "Board" means the Board of Directors of the Company. 1 (h) "Change-in-Control" shall have the meaning set forth in Section 11(p). (i) "Code" means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section. (j) "Committee" means the committee appointed by the Board to administer the Plan as described in Section 4. (k) "Common Stock" means the common stock of the Company. (l) "Company" means Barnes Group Inc. (m) "Date of Grant" means the date on which the granting of an Award is authorized or such other date as may be specified in such authorization. (n) "Disability" means, with respect to Incentive Stock Options, "permanent and total disability" as defined in Section 22(e)(3) of the Code, and, for all other purposes shall have the meaning set forth in the Company's long-term disability plan. (o) "Eligible Person" means any person regularly employed by or providing consulting or other services to the Company or a Subsidiary. An Award other than an Incentive Stock Option may be granted to an Eligible Person, in connection with hiring, retention or otherwise, prior to the date the Eligible Person first performs services for the Company or a Subsidiary, provided that such Award shall not become vested prior to the date on which the Eligible Person completes one continuous year of employment/service with the Company and/or Subsidiaries. (p) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (q) "Fair Market Value" on a given date means (i) if the Stock is listed on a national securities exchange, the closing sale prices reported as having occurred on the primary exchange on which the Stock is listed and traded on the date prior to such date, or, if there is no such sale on that date, then on the last preceding date on which such a sale was reported; (ii) if the Stock is not listed on any national securities exchange but is quoted in the National Market System of The Nasdaq Stock Market on a last sale basis, the average between the high bid price and low ask price reported on the date prior to such date, or, if there is no such sale on that date, then on the last preceding date on which a sale was reported; or (iii) if the Stock is not listed on a national securities exchange nor quoted in the National Market System of The Nasdaq Stock Market on a last sale basis, the amount determined by the Committee to be the fair market value based upon a good faith attempt to value the Stock accurately. 2 (r) "Group" means a principal business segment of the Company, including by way of example and not limitation, Associated Spring, Barnes Aerospace, and Barnes Distribution. (s) "Holder" means a Participant who has been granted an Award, or a permitted transferee of such a Participant. (t) "Incentive Stock Option" means an Option granted by the Committee to a Participant under the Plan which is designated by the Committee as an "incentive stock option" within the meaning of Section 422 of the Code. (u) "Nonqualified Stock Option" means an Option granted under the Plan which is not designated as an Incentive Stock Option. (v) "Normal Termination" means termination of employment or service with the Company or a Subsidiary other than by reason of death or Disability. (w) "Option" means an Award granted under Section 7 of the Plan. (x) "Option Period" means the period described in Section 7(c). (y) "Option Price" means the exercise price set for an Option described in Section 7(a). (z) "Participant" means an Eligible Person who has been selected by the Committee to participate in the Plan and to receive an Award pursuant to Section 6. (aa) "Performance Goals" means the performance objectives established by the Committee with respect to an Award Period, Restricted Period, or Option Period with respect to Performance Share or Cash Units, Restricted Stock, Restricted Stock Units, Options or SARs respectively, established for the purpose of determining whether, and to what extent, such Awards will be earned for an Award Period, Restricted Period or Option Period. (bb) "Performance Cash Unit" means a hypothetical equivalent to a number of dollars established by the Committee and granted in connection with an Award made under Section 8 of the Plan. (cc) "Performance Share Unit" means a hypothetical investment equivalent equal to one share of Stock granted in connection with an Award made under Section 8 of the Plan. (dd) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) any member of the Barnes family (by blood or marriage) or any entity for the benefit of, or controlled by, a member of the Barnes family (by blood or marriage), (ii) the Company or a Subsidiary, (iii) a trustee or other fiduciary holding 3 securities under an employee benefit plan of the Company or any of its Affiliates, (iv) an underwriter temporarily holding securities pursuant to an offering of such securities, or (v) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (ee) "Plan" means the Company's Employee Stock And Ownership Program, as amended. (ff) "Restricted Period" means, with respect to any share of Restricted Stock, the period of time determined by the Committee during which such Award is subject to the restrictions set forth in Section 9 of the Plan, and, with respect to any Restricted Stock Unit, the period of time determined by the Committee during which such Award is subject to the restrictions, terms and conditions referred to in Section 9A of the Plan. (gg) "Restricted Stock" means shares of Stock issued or transferred to a Participant subject to forfeiture and the other restrictions set forth in Section 9 of the Plan. (gg-A) "Restricted Stock Units" means shares of Stock that will be issued or transferred to a Participant at a future time or times if the Restricted Stock Units are not forfeited and the other restrictions, terms and conditions referred to in Section 9A of the Plan are satisfied. (hh) "Restricted Stock Award" means an Award of Restricted Stock granted under Section 9 of the Plan. (hh-A) "Restricted Stock Unit Award" means an Award of Restricted Stock Units granted under Section 9A of the Plan. (ii) "SAR" means a stock appreciation right which entitles a Participant to receive, in cash or Stock (valued at Fair Market Value), at the discretion of the Committee, an amount equal to the excess of the Fair Market Value of a specified number of shares of Stock at the time of exercise over the Option Price established by the Committee. (jj) "Securities Act" means the Securities Act of 1933, as amended. (kk) "SEC" means Securities and Exchange Commission. (ll) "Stock" means the Common Stock of the Company or such other authorized shares of stock of the Company as from time to time may be authorized for use under the Plan. (mm) "Subsidiary" means any corporation or other business entity in which the Company owns a significant equity interest, as determined in the discretion of the Committee; provided, that, with respect to Incentive Stock Options, the term "Subsidiary" shall mean a "subsidiary corporation" as defined in Section 424(f) of the Code. 4 3. EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL The Plan is effective as of February 1, 2000. The validity of any and all Awards granted pursuant to the Plan is contingent upon approval of the Plan by the stockholders of the Company in a manner which complies with Section 422(b)(1) of the Code and Section 162(m)(4)(C)(ii) of the Code. The expiration date of the Plan, after which no Awards may be granted hereunder, shall be January 31, 2005; provided, however, that the administration of the Plan shall continue in effect until all matters relating to the payment of Awards previously granted have been settled. 4. ADMINISTRATION The Plan shall be administered by the Committee, which shall be composed of at least two persons, each member of which, at the time he or she takes any action with respect to an Award under the Plan, shall be a "Non-Employee Director", as defined in Rule 16b-3 under the Exchange Act, or any successor rule or regulation, and an "outside director", as defined in Treasury Regulations Section 1.162-27(e)(3), or any successor regulation, unless the Board determines otherwise. The majority of the members of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present or acts approved in writing by a majority of the Committee shall be deemed the acts of the Committee. Subject to the provisions of the Plan, the Committee shall have exclusive power to: (a) Select the Eligible Persons to participate in the Plan; (b) Determine the nature and extent of the Awards to be made to each Participant, and determine whether an Award is intended to qualify as performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code; (c) Determine the time or times when Awards will be made to Eligible Persons; (d) Determine the duration of each Award Period and Restricted Period; (e) Determine the conditions to which the payment of Awards may be subject; (f) Establish the Performance Goals, if any, for each Award Period; (g) Prescribe the form of Award Agreement or other form or forms evidencing Awards; and 5 (h) Cause records to be established in which there shall be entered, from time to time as Awards are made to Eligible Persons, the date of each Award, the number of Incentive Stock Options, Nonqualified Stock Options, Performance Share or Cash Units, shares of Restricted Stock, Restricted Stock Units and SARs awarded by the Committee to each Eligible Person, and the expiration date and the duration of any applicable Award Period or Restricted Period. The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt, or revise such rules and regulations and to make all such determinations relating to the Plan as it may deem necessary or advisable for the administration of the Plan. Without limiting the generality of the foregoing, the Committee shall have the authority to establish and administer performance goals applicable to Awards under the Plan, and the authority to certify that such performance goals are attained, within the meaning of Treasury Regulation Section 1.162-27(c)(4). The Committee's interpretation of the Plan or any documents evidencing Awards granted pursuant thereto and all decisions and determinations by the Committee with respect to the Plan shall be final, binding, and conclusive on all parties. Any provision of the Plan to the contrary notwithstanding, the Committee shall not have the authority to reduce the exercise price of outstanding Options, whether by canceling the Options and issuing substitute Awards in replacement thereof or otherwise. Any provision of the Plan to the contrary notwithstanding, to the extent permitted by, and on the terms and subject to the conditions of, applicable law, including in particular but not limited to Sections 141(c) and 157(c) of the General Corporation Law of Delaware, the power and authority of the Committee under the Plan, including but not limited to its power and authority to make, administer and interpret Awards, may be exercised by the Chief Executive Officer of the Company and the chairperson of the Committee, but only with respect to Eligible Persons and Participants who are not and have never been (i) officers or directors of the Company within the meaning of Section 16(b) of the Exchange Act and the related SEC regulations, or (ii) "covered employees" within the meaning of Section 162(m)(3) of the Code, and only if and to the extent that the Committee expressly authorizes the Chief Executive Officer and the chairperson of the Committee to exercise such power and authority. If and to the extent that the Chief Executive Officer of the Company and the chairperson of the Committee exercise the power and authority of the Committee in accordance with the preceding sentence, the term "Committee" as used in this Plan shall include the Chief Executive Officer of the Company and the chairperson of the Committee. 5. GRANT OF AWARDS; SHARES SUBJECT TO THE PLAN The Committee may, from time to time, grant Awards of Options, Restricted Stock, Restricted Stock Units, Performance Share or Cash 6 Units and/or SARs to one or more Eligible Persons; provided, however, that: (a) The aggregate number of shares of Stock that may be issued or transferred pursuant to all Awards may not exceed 3,450,000, subject to Section 12; provided, however, that no more than 25% of the foregoing number of shares of Stock may be issued or transferred in respect of Restricted Stock, Restricted Stock Units, Performance Share Units and Performance Cash Units, collectively; and provided, further, that the maximum number of shares of Stock with respect to which Options or SARs or Performance Share Unit or Restricted Stock Awards or Restricted Stock Unit Awards, or any combination of Options, SARs, Performance Share Unit Awards, Restricted Stock Unit Awards or Restricted Stock Awards, may be granted during any calendar year to any Eligible Person is 500,000. The maximum amount that may be paid in respect of Performance Cash Units that are granted in any one calendar year to any Eligible Person is $7 million (or the equivalent thereof in Shares based on the Fair Market Value of the shares on the payment date). If, after Performance Share Units or Performance Cash Units are earned, the delivery of shares of Stock or cash is deferred, any additional shares of Stock or amounts attributable to Dividend Equivalents or earnings during the deferral period shall be disregarded in applying the foregoing per Eligible Person limitations. (b) In the event any Option, Restricted Stock Award, Restricted Stock Unit Award, Performance Share or Cash Unit or SAR shall be surrendered, terminate, expire, or be forfeited, the number of shares of Stock no longer subject thereto shall thereupon be released and shall thereafter be available for new Awards under the Plan. If the person exercising an Option pays the purchase price of the shares subject to such Option by delivering shares of Common Stock to the Company (either through actual delivery or by attestation) in accordance with the provisions of Section 7(b) below, or pays the withholding taxes due in connection with the grant, exercise, vesting, distribution, or payment of any Award or the shares subject thereto (including without limitation any withholding taxes due as a result of an election made by an Eligible Person under Section 83(b) of the Code) by delivering shares of Common Stock to the Company or having the Company withhold shares of Common Stock otherwise issuable in connection with the Award in accordance with the provisions of Section 11(d) below, the number of shares so delivered or withheld shall be added back to the aggregate number of shares available for issuance or transfer under the Plan so that the aggregate number of shares that may be issued or transferred under the Plan pursuant to Section 5(a) above shall have been charged only for the net number of shares issued or transferred by the Company in connection with the Award; provided, however, that none of the surrendered or withheld shares shall be available for issuance under Incentive Stock Options. 7 (c) Stock delivered by the Company in settlement of Awards under the Plan may be authorized and unissued Stock or Stock held in the treasury of the Company or may be purchased on the open market or by private purchase. (d) The Committee may, in its sole discretion, require a Participant to pay consideration for an Award in an amount and in a manner as the Committee deems appropriate. (e) The Committee may only grant Incentive Stock Options to Eligible Persons who are employees of the Company or a subsidiary corporation as defined in Section 424 of the Code. (f) Under the Plan, the Committee may grant Awards that qualify as performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code, as well as Awards that do not so qualify. Awards that the Committee intends to qualify as performance-based compensation within the meaning of Section 162(m)(4)(C) shall be granted and administered in a manner that will enable such Awards to qualify as performance-based compensation. Any provision of the Plan to the contrary notwithstanding, the Plan shall be interpreted, administered and construed to permit the Committee to grant Awards that qualify as performance-based compensation as well as Awards that do not so qualify, and any provision of the Plan that cannot be so interpreted, administered or construed shall to that extent be disregarded. 6. ELIGIBILITY Participation shall be limited to Eligible Persons selected by the Committee. 7. STOCK OPTIONS AND SARS Subject to Section 5(e), the Committee is authorized to grant one or more Incentive Stock Options, Nonqualified Stock Options or SARs to any Eligible Person. Each Option or SAR so granted shall be subject to the following conditions or to such other conditions as may be reflected in the applicable Award Agreement. (a) Option Price. The exercise price ("Option Price") per share of Stock for each Option or SAR shall be set by the Committee at the time of grant but shall not be less than the Fair Market Value of a share of Stock at the Date of Grant or, other than with respect to Incentive Stock Options, at a date subsequent to the Date of Grant as specified in the Option Award Agreement. (b) Manner of Exercise and Form of Payment. SARs which have become exercisable may be exercised by delivery of written notice of exercise to the Committee. Options which have become exercisable may 8 be exercised by delivery of written notice of exercise to the Committee accompanied by payment of the Option Price. The Option Price shall be payable either (i) by United States dollars in cash or by check, (ii) at the discretion of the Committee, by either actual delivery of shares or by attestation, through shares of Stock valued at the Fair Market Value at the time the Option is exercised (provided that such Stock has been held by the Participant for at least six months unless such Stock was acquired through an open market purchase within six months before actual delivery or attestation), or (iii) at the discretion of the Committee, by a cashless exercise procedure that the Company determines satisfies the provisions of section 220.3(e)(4) (or a successor provision) of Regulation T promulgated by the Board of Governors of the Federal Reserve System(1), or (iv) at the discretion of the Committee, by any combination of (i), (ii) and (iii) above. (c) Option Period and Expiration. Options and SARs shall vest and become exercisable in such manner and on such date or dates determined by the Committee and shall expire after such period, not to exceed ten years, as may be determined by the Committee (the "Option Period"); provided, however, that notwithstanding any vesting dates set by the Committee, the Committee may, in its sole discretion, accelerate the exercisability of any Option or SAR, which acceleration shall not affect the terms and conditions of any such Option or SAR other than with respect to exercisability. If an Option or SAR is exercisable in installments, such installments or portions thereof which become exercisable shall remain exercisable until the Option or SAR expires. In granting any Option or SAR, the Committee may specify such termination and cancellation provisions as the Committee may determine; provided, however, that in the event a Participant terminates service or employment due to death, Disability, retirement (as defined in any qualified retirement plan maintained by the Company), or, in the case of a non-employee director, after attaining age 55, termination of the Option Period shall occur no later than the fifth anniversary of such date of termination, and in the event of any other termination, termination of the Option Period shall occur no later than the third anniversary of such date of termination. Any Incentive Stock Option that is exercised three months after the Participant's employment with the Company and any Subsidiary terminates (or one year after such employment terminates, if the Participant is disabled within the meaning of Section 22(e)(3)) of the Code, or at any time after such three months' or one year period, will not be eligible for federal tax treatment as an Incentive Stock Option unless the exercise takes place after the death of the Participant by the estate of the Participant or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the Participant. 9 - ----------------------------------------- (1) 12 C.F.R. Section 220.3(e)(4). (d) Other Terms and Conditions. In addition, each Option or SAR granted under the Plan shall be evidenced by an Award Agreement, which shall contain such provisions as may be determined by the Committee and, except as may be specifically stated otherwise in such Award Agreement, which shall be subject to the following terms and conditions: (i) Each Option or SAR issued pursuant to this Section 7 or portion thereof that is exercisable shall be exercisable for the full amount or for any part thereof. (ii) Each share of Stock purchased through the exercise of an Option issued pursuant to this Section 7 shall be paid for in full at the time of the exercise. Each Option shall cease to be exercisable, as to any share of Stock, when the Holder purchases the share or when the Option expires. (iii) Subject to Section 11(k), Options and SARs issued pursuant to this Section 7 shall not be transferable by the Holder except by will or the laws of descent and distribution and shall be exercisable during the Holder's lifetime only by the Holder. (iv) Each Option and SAR issued pursuant to this Section 7 shall vest and become exercisable by the Holder in accordance with the vesting schedule established by the Committee and set forth in the Award Agreement; provided, however, that no Option or SAR shall be exercisable prior to the date on which the Participant completes both (A) six months of continuous service with the Company or a Subsidiary after the date on which the Option or SAR was granted, and (B) one year of continuous service with the Company or a Subsidiary, unless termination of service occurs due to death, Disability, retirement (as defined in any qualified retirement plan maintained by the Company), after a Change-in-Control, or, in the case of a non-employee director, after attaining age 55. (v) Each Award Agreement may contain a provision that, upon demand by the Committee for such a representation, the Holder shall deliver to the Committee at the time of any exercise of an Option issued pursuant to this Section 7 a written representation that the shares to be acquired upon such exercise are to be acquired for investment and not for resale or with a view to the distribution thereof. Upon such demand, delivery of such representation prior to the delivery of any shares issued upon exercise of an Option issued pursuant to this Section 7 shall be a condition precedent to the right of the Holder to purchase any shares. In the event certificates for Stock are delivered under the Plan with respect to which such investment representation has been obtained, the Committee may cause a legend or legends to be placed on such certificates to make appropriate reference to such representation and to restrict transfer in the absence of compliance with applicable federal or state securities laws. 10 (vi) Each Incentive Stock Option Award Agreement shall contain a provision requiring the Holder to notify the Company in writing immediately after the Holder makes a disqualifying disposition of any Stock acquired pursuant to the exercise of such Incentive Stock Option. A disqualifying disposition is any disposition (including any sale) of such Stock before the later of (a) two years after the Date of Grant of the Incentive Stock Option or (b) one year after the date the Holder acquired the Stock by exercising the Incentive Stock Option. (e) Incentive Stock Option Grants to 10% Stockholders. Notwithstanding anything to the contrary in this Section 7, if an Incentive Stock Option is granted to a Participant who owns stock representing more than ten percent of the voting power of all classes of stock of the Company or of a Subsidiary, the Option Period shall not exceed five years from the Date of Grant of such Option and the Option Price shall be at least 110 percent of the Fair Market Value (on the Date of Grant) of the Stock subject to the Option. (f) $100,000 Per Year Limitation for Incentive Stock Options. To the extent the aggregate Fair Market Value (determined as of the Date of Grant) of Stock for which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under all plans of the Company and its Subsidiaries) exceeds $100,000, such excess Incentive Stock Options shall be treated as Nonqualified Stock Options. (g) Conversion of Incentive Stock Options into Nonqualified Stock Options; Termination of Incentive Stock Options. The Committee, at the written request of any Holder, may in its discretion, take such actions as may be necessary to convert such Holder's Incentive Stock Options (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Nonqualified Stock Options at any time prior to the expiration of such Incentive Stock Options, regardless of whether the Holder is an employee of the Company or a Subsidiary at the time of such conversion. Such actions may not, however, include extending the Option Period or reducing the exercise price of such Incentive Stock Options. At the time of such conversion, the Committee (with the consent of the Holder) may impose such conditions on the exercise of the resulting Nonqualified Stock Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with the Plan. Nothing in the Plan shall be deemed to give any Holder the right to have such Holder's Incentive Stock Options converted into Nonqualified Stock Options, and no such conversion shall occur until and unless the Committee takes appropriate action. The Committee, with the consent of the Holder, may also terminate any portion of any Incentive Stock Option that has not been exercised at the time of such termination. 11 (h) Substitution of Options. The Committee may grant Options and/or SARs in substitution for options or stock appreciation rights held for stock in corporations acquired by the Company with terms in accordance with the terms for such previous options, but with an appropriate adjustment in the exercise price and number of shares subject to the options in compliance with the requirements of Section 424 of the Code. 8. PERFORMANCE SHARE OR CASH UNITS (a) Award Grants. The Committee is authorized to establish performance programs to be effective over designated Award Periods determined by the Committee. Award Periods applicable to Performance Share or Cash Unit Awards shall be at least three years in length; provided that payment of such Awards may be made before the completion of the applicable Award Period in the circumstances set forth in Sections 8(c), 8(e) and 11(p) below. The Committee may grant Awards of Performance Share or Cash Units to Eligible Persons in accordance with such performance programs. Before or within 90 days after the beginning of each Award Period, the Committee will establish written Performance Goals based upon financial objectives for the Company for such Award Period and a schedule relating the accomplishment of the Performance Goals to the Awards to be earned by Participants. Performance Goals may include absolute or relative growth in earnings per share or rate of return on stockholders' equity or other measurement of corporate performance and may be determined on an individual basis or by categories of Participants. However, with respect to Performance Share or Cash Unit Awards which the Committee intends to qualify as performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code, the Performance Goals shall consist of targeted levels of, targeted levels of return on, or targeted levels of growth for, one or more of the following on a consolidated Company, consolidated Group, business unit or divisional level, as the Committee may specify: earnings per share, net income, operating income, performance profit (operating income minus an allocated charge approximating the Company's cost of capital, before or after tax), gross margin, revenue, working capital, total assets, net assets, stockholders' equity, or cash flow. The foregoing Performance Goals shall be determined in accordance with generally accepted accounting principles, except to the extent the Committee directs otherwise within the earlier of (i) 90 days after the start of the Award Period or (ii) a date on which no more than one fourth of the Award Period has elapsed, and may include or exclude any or all of the following items, as the Committee may specify: extraordinary, unusual or non-recurring items; discontinued operations; effects of accounting changes; effects of currency fluctuations; effects of financing activities (by way of example, without limitation, effect on earnings per share of issuing convertible debt securities); expenses for restructuring or productivity initiatives; non-operating items; effects of acquisitions and acquisition expenses; and effects of divestitures and divestiture expenses. Any such Performance 12 Goal or combination of such Performance Goals may apply to the Participant's Award in its entirety or to any designated portion or portions of the Award, as the Committee may specify. The Committee shall determine the number of Performance Share or Cash Units to be awarded, if any, to each Eligible Person who is selected to receive such an Award. (b) Determination of Award. At the completion of a Performance Award Period, or at other times as specified by the Committee, the Committee shall calculate the number of shares of Stock or amount of cash earned with respect to each Participant's Performance Share or Cash Unit Award by multiplying the number of Performance Units granted to the Participant by a performance factor representing the degree of attainment of the Performance Goals. (c) Payment of Performance Share or Cash Unit Awards. Performance Share or Cash Unit Awards shall be payable in that number of shares of Stock or that amount of cash determined in accordance with Section 8(b); provided, however, that, at its discretion, the Committee may make payment to any Participant of Performance Share Units in the form of cash upon the specific request of such Participant. The amount of any payment made in cash shall be based upon the Fair Market Value of the Stock on the business day prior to payment. Payments of Performance Share or Cash Unit Awards shall be made as soon as practicable after the completion of an Award Period; provided, however, that if the Performance Goals for an Award Period are attained before the completion of such Award Period, payment of Performance Share or Cash Unit Awards granted with respect to such Award Period may be made at such time or times after the first year of the Award Period and before the completion of such Award Period as the Committee may direct, and, provided further, that if a Participant makes the election described below, Performance Share or Cash Units (with any Cash Units being converted into equivalent Performance Share Units) shall instead be credited to the Participant's Performance Share Account. Such credit of Performance Shares to a Participant's Performance Share Account shall be made as of the same date as payment of the Award would have been made to the Participant had no prior election been made. (i) Elections. Any election to have an Award or a portion of an Award credited to a Performance Share Account shall be made on a written form provided by the Company for such purpose and shall only be effective with respect to Awards that may be made on and after the January 1 following the Company's receipt of such form, provided that such form is received by the December 24 prior to the applicable January 1. Any such election shall be made only in increments of ten percent (10%) of the Award (rounded to the 13 nearest whole share) and shall be effective only for Awards made during the year in which the election becomes effective. (ii) Performance Share Account. The Company shall maintain on its books and records a Performance Share Account to record its liability for future payments to the Participant or his or her beneficiary pursuant to the Plan. However, a Performance Share Account under the Plan shall constitute an unfunded arrangement; the Company shall not be required to segregate or earmark any of its assets for the benefit of the Participant or his or her beneficiary, and the amount reflected in a Performance Share Account shall be available for the Company's general corporate purposes and shall be available to the Company's general creditors. The amount reflected in a Performance Share Account shall not be subject in any manner to anticipation, alienation, transfer or assignment by the Participant or his or her beneficiary, and any attempt to anticipate, alienate, transfer or assign the same shall be void. Neither the Participant nor his or her beneficiary may assert any right or claim against any specific assets of the Company in respect of a Performance Share Account, and the Participant and his or her beneficiary shall have only a contractual right against the Company for the amount reflected in a Performance Share Account. Notwithstanding the foregoing, in order to pay amounts which may become due under the Plan in respect of a Participant's Performance Share Account, the Company may establish a grantor trust (hereinafter the "Trust") within the meaning of Section 671 of the Code. Some or all of the assets of the Trust may be dedicated to providing benefits to the Participants pursuant to the Plan, but, nevertheless, all assets of the Trust shall at all times remain subject to the claims of the Company's general creditors in the event of the Company's bankruptcy or insolvency. (iii) Dividend Equivalents. On every date on which a dividend or other distribution is paid with respect to Common Stock, commencing with the first such payment date after the date on which a Performance Share is credited to a Participant's Performance Share Account and continuing until such Performance Share is either forfeited or paid out, there shall be credited to the Participant's Performance Share Account a Dividend Equivalent in respect of such Performance Share. A Dividend Equivalent shall mean, with respect to a whole Performance Share credited to a Participant's Performance Share Account, a measure of value equal to the fractional share of Common Stock that could be purchased with the amount that would have been paid to the Participant as a dividend or other distribution 14 if the Participant had owned a whole share of Common Stock in lieu of said whole Performance Share, the date of such deemed purchase being the dividend payment date. Dividend Equivalents are expressed in the form of Performance Shares. Notwithstanding the foregoing, the Committee may decide when granting a Performance Share that Dividend Equivalents with respect to such Performance Share shall be paid to a Participant as accrued, rather than credited to the Participant's Performance Share Account. (iv) Participant not a Stockholder. The Participant shall have no stockholder's rights with respect to any shares of Common Stock in respect of which Performance Shares are credited to his or her Performance Share Account. (v) Payments in Respect of Performance Shares. (1) Termination of Employment or Provision of Services: In the event of a Participant's Normal Termination and without a payment date having been specified as provided below, such Participant shall be entitled to receive payment in respect of the entire amount then credited to his or her Performance Share Account. Such payment shall be made in the form of the number of shares of Common Stock equal to the number of whole Performance Shares then credited to the Participant's Performance Share Account, with any fractional Performance Share being paid in cash determined on the basis of the value of a corresponding fractional share of Common Stock on the business day preceding the date of payment. Said shares of Common Stock and any cash amount shall be transferred to the Participant within sixty (60) days after the Participant's Normal Termination. (2) Election of Participant: Upon prior written election by a Participant, the Participant shall be entitled to receive payment in respect of an Award of Performance Shares, to the extent then vested, and any Dividend Equivalents earned on such Award on the date or dates specified in such written election. Such election must either be made as part of the election to have such Award of Performance Shares credited to a Performance Share Account as provided above, or at any time at least one year prior to the date on which such payment would otherwise be made. Such payment shall be made in the form of the number of shares of Common Stock equal to the number of whole Performance Shares, including related Dividend Equivalents, then credited to the Participant's Performance Share Account with respect to such Award, with any fractional Performance Share being paid in cash determined on the basis of the value of a corresponding fractional share of Common Stock on the business day preceding the date of payment. The Participant's Performance Share Account thereafter shall be reduced to reflect 15 the foregoing payment. Nothing herein shall preclude separate elections with respect to separate Awards. (3) Disability or Death While Employed by or Providing Services to the Company: Notwithstanding an election made pursuant to the preceding section, in the event of a Participant's termination of employment or provision of services for reasons of Disability or death, the Participant or his or her beneficiary, as the case may be, shall be entitled to receive payment in respect of the entire amount then credited to his or her Performance Share Account. Such payment shall be made in the form of the number of shares of Common Stock equal to the number of whole Performance Shares then credited to the Participant's Performance Share Account, with any fractional Performance Share being paid in cash determined on the basis of the value of a corresponding fractional share of Common Stock on the business day preceding the date of payment. Said shares of Common Stock and any cash amount shall be transferred to the Participant or his or her beneficiary within sixty (60) days after the Company has been notified in writing of the Disability or death of the Participant and has been provided with any additional information, forms or other documents it may reasonably request. (4) Hardship Payment: Notwithstanding an election made pursuant to the Plan or the Participant's continued employment with or provision of services to the Company, if the Committee, upon written petition of the Participant, determines, in the Committee's sole discretion, that the Participant has suffered an unforeseeable financial emergency, the Participant shall be entitled to receive, as soon as practicable following such determination, payment sufficient to meet the cash needs arising from the unforeseeable financial emergency, not in excess of the number of whole Performance Shares then credited to the Participant's Performance Share Account. Such payment shall be made, at the election of the Participant, either (i) in the form of the number of whole shares of Common Stock, the proceeds from the sale of which would be sufficient to meet the cash needs arising from the unforeseeable financial emergency, not in excess of the number of whole Performance Shares then credited to the Participant's Performance Share Account; (ii) in cash equal to the value on the business day preceding the date of payment of the number of whole shares of Common Stock available for payment under clause (i) of this sentence; or (iii) in any combination of the methods of payment provided for in clauses (i) and (ii) of this sentence. In the event of a hardship payment in respect of the Participant's entire Performance Share Account, any fractional Performance Share shall be paid in cash determined on the basis of the value of a corresponding fractional share of Common Stock on the business day preceding 16 the date of payment. For purposes of the foregoing, an unforeseeable financial emergency is an unexpected need for cash arising from an illness, casualty loss, sudden financial reversal, or other such unforeseeable occurrence. Cash needs arising from foreseeable events such as generally the purchase of a house or educational expenses for children shall not be considered to be the result of an unforeseeable financial emergency. Said shares of Common Stock and any cash amount shall be transferred to the Participant as soon as practicable after the Committee determines that the Participant has suffered an unforeseeable financial emergency. The Participant's Performance Share Account thereafter shall be reduced to reflect the foregoing payment. (5) Early Withdrawal: Notwithstanding an election made pursuant to the Plan or the Participant's continued employment with or provision of services to the Company, the Participant, upon written petition to the Committee at any time, shall be entitled to receive payment in respect of all or any portion of the amount then credited to his or her Performance Share Account, subject to a forfeiture penalty of six percent (6%) of the amount of the payment requested by the Participant. Such payment shall be made, at the election of the Participant, either (i) in the form of the number of shares of Common Stock equal to the number of whole Performance Shares requested by the Participant in the written petition and then credited to the Participant's Performance Share Account; (ii) in cash equal to the value on the business day preceding the date of payment of the number of whole shares of Common Stock available for payment under clause (i) of this sentence; or (iii) in any combination of the methods of payment provided for in clauses (i) and (ii) of this sentence. In the event of an early withdrawal in respect of the Participant's entire Performance Share Account, any fractional Performance Share shall be paid in cash determined on the basis of the value of a corresponding fractional share of Common Stock on the business day preceding the date of payment. Said shares of Common Stock and any cash amount shall be transferred to the Participant within sixty (60) days after the Company has received the Participant's written petition. The Participant's Performance Share Account thereafter shall be reduced to reflect the foregoing payment and the six percent (6%) forfeiture penalty. (d) Adjustment of Performance Goals. The Committee may, during the Award Period, make such adjustments to Performance Goals as it may deem appropriate, to compensate for, or reflect, (i) extraordinary or non- recurring events experienced during an Award Period by the Company or by any other corporation whose performance is relevant to the determination of whether Performance Goals have been attained; (ii) any significant changes that may have occurred during such Award Period 17 in applicable accounting rules or principles or changes in the Company's method of accounting or in that of any other corporation whose performance is relevant to the determination of whether an Award has been earned; (iii) any significant changes that may have occurred during such Award Period in tax laws or other laws or regulations that alter or affect the computation of the measures of Performance Goals used for the calculation of Awards; or (iv) any other factors which the Committee deems appropriate. However, the Committee may exercise only negative discretion with respect to awards that are intended to qualify as performance-based compensation under Section 162(m)(4)(C) of the Code. With respect to such awards, unless the Committee determines otherwise at any time prior to payment of a Participant's award under the Plan for any Award Period, and subject to the Committee's right to exercise negative discretion, extraordinary, unusual or non-recurring items, discontinued operations, effects of accounting changes, effects of currency fluctuations, effects of financing activities, expenses for restructuring or productivity initiatives, non-operating items, effects of acquisitions and acquisition expenses, and effects of divestitures and divestiture expenses, any of which affect any Performance Goal applicable to such awards (including but not limited to earnings per share) shall be automatically excluded or included in determining the extent to which the Performance Goal has been achieved, whichever will produce the higher award. (e) Acceleration. Any provision of the Plan to the contrary notwithstanding, the Committee may (but need not) provide that Performance Share or Cash Unit Awards will be earned and paid in whole or in part (as the Committee may specify) if an "Acceleration Event" (as hereafter defined) occurs during the Award Period to which such Units relate, whether or not the Performance Goal applicable to such Units is thereafter attained. For this purpose, an "Acceleration Event" means (i) the Participant's employment by the Company and its Subsidiaries terminates by reason of death, Disability or for other reason(s) specified by the Committee, or (ii) a Change-in-Control (as defined in Section 11(p) below) occurs; provided that, with respect to Performance Share Units and Performance Cash Units that are intended to qualify as performance-based compensation under Section 162(m)(4)(C) of the Code, Acceleration Events shall be limited to such events (including without limitation death, Disability and Change-in-Control) as will not prevent such Performance Share Units and Performance Cash Units from qualifying as performance-based compensation under Section 162(m)(4)(C) of the Code if the Performance Goal applicable to such Performance Share and Cash Units is attained and no Acceleration Event occurs. 9. RESTRICTED STOCK AWARDS (a) Award of Restricted Stock. 18 (i) The Committee shall have the authority (1) to grant Restricted Stock Awards, (2) to issue or transfer Restricted Stock to Eligible Persons, and (3) to establish terms, conditions and restrictions applicable to such Restricted Stock, including the Restricted Period, which may differ with respect to each grantee, the time or times at which Restricted Stock shall be granted or become vested and the number of shares to be covered by each grant. (ii) The Holder of a Restricted Stock Award shall execute and deliver to the Company an Award Agreement with respect to the Restricted Stock setting forth the restrictions applicable to such Restricted Stock. If the Committee determines that the Restricted Stock shall be held in escrow rather than delivered to the Holder pending the release of the applicable restrictions, the Holder additionally shall execute and deliver to the Company (1) an escrow agreement satisfactory to the Committee and (2) the appropriate blank stock powers with respect to the Restricted Stock covered by such agreements. If a Holder shall fail to execute a Restricted Stock Award Agreement and, if applicable, an escrow agreement and stock powers, the Award shall be null and void. Subject to the restrictions set forth in Section 9(b), the Holder shall generally have the rights and privileges of a stockholder as to such Restricted Stock, including the right to vote such Restricted Stock, and to receive dividends paid thereon. (iii) Upon the Award of Restricted Stock, the Committee shall cause a Stock certificate registered in the name of the Holder to be issued and, if it so determines, deposited together with the Stock powers with an escrow agent designated by the Committee. If an escrow arrangement is used, the Committee shall cause the escrow agent to issue to the Holder a receipt evidencing any Stock certificate held by it registered in the name of the Holder. (b) Restrictions. (i) Restricted Stock awarded to a Participant shall be subject to the following restrictions until the expiration of the Restricted Period, and to such other terms and conditions as may be set forth in the applicable Award Agreement: (1) if an escrow arrangement is used, the Holder shall not be entitled to delivery of the Stock certificate; (2) the shares shall be subject to the restrictions on transferability set forth in the Award Agreement; and (3) the shares shall be subject to forfeiture to the extent provided in Section 9(d) and the Award Agreement and, to the extent such shares are forfeited, the Stock certificates shall be returned to the Company, and all rights of the Holder to such shares and as a stockholder shall terminate without further obligation on the part of the Company. (ii) The Committee shall have the authority to remove any or all of the restrictions on the Restricted Stock whenever it may determine that, 19 by reason of changes in applicable laws or other changes in circumstances arising after the date of the Restricted Stock Award, such action is appropriate. (c) Restricted Period. The Restricted Period of Restricted Stock shall commence on the Date of Grant and shall expire from time to time as to that part of the Restricted Stock Award indicated in a schedule established by the Committee and set forth in the written Award Agreement. The Restricted Period shall be at least two years; provided, however, that it may be as short as one year if vesting is based on achievement of Performance Goals. (d) Forfeiture Provisions. Except to the extent determined by the Committee and reflected in the underlying Award Agreement, in the event a Participant terminates employment with or ceases to provide services to the Company during a Restricted Period for any reason, that portion of the Award with respect to which restrictions have not expired shall be completely forfeited to the Company. Except as otherwise determined by the Committee, in the event of such a forfeiture, the amount of an Award that would otherwise be payable shall be reduced, but not below zero, by the amount of any dividends previously paid to the Holder with respect to the forfeited Restricted Stock. (e) Delivery of Restricted Stock. Upon the expiration of the Restricted Period with respect to any shares of Stock covered by a Restricted Stock Award, the restrictions set forth in Section 9(b) and the Award Agreement shall be of no further force or effect with respect to shares of Restricted Stock which have not then been forfeited. If an escrow arrangement is used, upon such expiration, the Company shall deliver to the Holder, or his or her beneficiary, without charge, the Stock certificate evidencing the shares of Restricted Stock which have not then been forfeited and with respect to which the Restricted Period has expired (to the nearest full share) and any cash dividends or Stock dividends credited to the Holder's account with respect to such Restricted Stock and the interest thereon, if any. (f) Stock Restrictions. Each certificate representing Restricted Stock awarded under the Plan shall bear the following legend until the end of the Restricted Period with respect to such Stock: "Transfer of this certificate and the shares represented hereby is restricted pursuant to the terms of a Restricted Stock Agreement, dated as of , between Barnes Group Inc. and . A copy of such Agreement is on file at the offices of the Company." Stop transfer orders shall be entered with the Company's transfer agent and registrar against the transfer of legended securities. (g) Deferral. Upon election by a Participant, a whole share of Restricted Stock that would otherwise have been granted to the 20 Participant shall instead be made in the form of Performance Shares, and such Performance Shares shall be credited to the Participant's Performance Share Account, subject to the provisions of Section 8. Such credit of Performance Shares shall be made as of the same date as Restricted Stock would have been awarded to the Participant had no prior election been made. Any such election shall be made by December 24 prior to the year in which the Award for which the election is made will be made, and shall otherwise comply with the requirements for elections in Section 8(c). If an event occurs which would have caused forfeiture of the Restricted Stock for which an election pursuant to this paragraph is made, then the equivalent Performance Shares, along with any related Dividend Equivalents, shall be forfeited. 9A. RESTRICTED STOCK UNIT AWARDS (a) Award of Restricted Stock Units. (i) The Committee shall have the authority (1) to grant Restricted Stock Unit Awards, (2) to issue or transfer Stock to Eligible Persons in payment of Restricted Stock Unit Awards, and (3) to establish terms, conditions and restrictions applicable to such Restricted Stock Units, including the Restricted Period, which may differ with respect to each grantee, the time or times at which Restricted Stock Units shall be granted or become vested and the number of shares to be covered by each grant. (ii) The Holder of a Restricted Stock Unit Award shall execute and deliver to the Company an Award Agreement with respect to the Restricted Stock Units setting forth the restrictions, terms and conditions applicable to such Restricted Stock Units. If a Holder shall fail to execute a Restricted Stock Unit Award Agreement, the Award shall be null and void. (b) Restrictions. (i) Restricted Stock Units awarded to a Participant shall be subject to the following restrictions until the expiration of the Restricted Period, and to such other terms and conditions as may be set forth in the applicable Award Agreement: the Restricted Stock Units shall be subject to forfeiture to the extent provided in Section 9A(d) and the Award Agreement and, to the extent such Restricted Stock Units are forfeited, all rights of the Holder in and to such Restricted Stock Units shall terminate without further obligation on the part of the Company. (ii) The Committee shall have the authority to remove any or all of the restrictions on the Restricted Stock Units whenever it may determine that, by reason of changes in applicable laws or other changes in circumstances arising after the date of the Restricted Stock Unit Award, such action is appropriate. 21 (c) Restricted Period. The Restricted Period of Restricted Stock Units shall commence on the Date of Grant and shall expire from time to time as to that part of the Restricted Stock Unit Award indicated in a schedule established by the Committee and set forth in the written Award Agreement. The Restricted Period shall be at least two years; provided, however, that it may be as short as one year if vesting is based on achievement of Performance Goals. (d) Forfeiture Provisions. Except to the extent determined by the Committee and reflected in the underlying Award Agreement, in the event a Participant terminates employment with or ceases to provide services to the Company during a Restricted Period for any reason, that portion of the Award with respect to which restrictions have not expired shall be completely forfeited to the Company. Except as otherwise determined by the Committee, in the event of such a forfeiture, the amount of an Award that would otherwise be payable shall be reduced, but not below zero, by the amount of any dividend equivalents previously paid to the Holder with respect to the forfeited Restricted Stock Units. (e) Delivery of Stock. Upon the expiration of the Restricted Period with respect to any portion of a Restricted Stock Unit Award, the restrictions set forth in Section 9A(b) and the Award Agreement shall be of no further force or effect with respect to that portion of the Restricted Stock Units, if such portion of the Award has not theretofore been forfeited. Upon such expiration, or at such later time or times as the Committee may provide in the Award Agreement, the Company shall deliver to the Holder, or his or her beneficiary, without charge, a Stock certificate evidencing the shares of Stock that the Holder is entitled to receive in payment of that portion of the Restricted Stock Units (to the nearest full share) and any cash dividend equivalents or Stock dividend equivalents to which the Holder may be entitled in accordance with Section 9A(g). In lieu of delivering a Stock certificate, the Company may, either at the election of the Company or the Holder, as the Committee may provide, credit the shares which would otherwise have been certificated to a book entry account in the name of the Holder. (f) Restricted Stock Unit Restrictions. Each Restricted Stock Unit Award shall be subject to the restrictions set forth in Section 11(k) of the Plan. (g) Dividend Equivalents. (i) The Committee may (but need not) provide in the Award Agreement relating to an Award of Restricted Stock Units that, on each date on which a dividend is paid to the holders of Common Stock the record date of which falls during the period commencing on the Date of Grant of such Restricted Stock Units and ending on the first date on which all of the Restricted Stock Units have either been forfeited or 22 paid, the Company will pay the Holder an amount of money determined by multiplying the number of the Restricted Stock Units that were neither forfeited nor paid on or before such dividend record date times the dividend per share paid on such dividend payment date, unless the dividend is paid in property other than cash, in which case times the fair market value on the dividend payment date of such property. Unless the Committee provides otherwise in the Award Agreement, any money paid pursuant to this Section 9A(g)(i) shall be non-forfeitable when paid. (ii) In lieu of paying the Holder money on each dividend payment date referred to in Section 9A(g)(i) above, the Committee may (but need not) provide in the Award Agreement that on each such dividend payment date the Company will credit the Holder on its books with a number of additional stock units (representing the right to receive an equivalent number of shares of Common Stock at the time or times and on the terms and subject to the conditions set forth below and in the applicable Award Agreement) determined in accordance with the following formula: (A x B) /C in which "A" equals the number of Restricted Stock Units that were neither forfeited nor paid on or before such dividend record date plus the number of additional stock units credited pursuant to this Section 9A(g)(ii) before such dividend payment date that were neither forfeited nor paid on or before such dividend record date, "B" equals the dividend per share paid on such dividend payment date or, if the dividend is paid in property other than cash, the fair market value on the dividend payment date of such property, and "C" equals the Fair Market Value of a share of Common Stock on such dividend payment date. Any additional stock units credited pursuant to this Section 9A(g)(ii): (I) may be non-forfeitable when credited or may be subject to forfeiture until, and become non-forfeitable at, such time or times, on such terms and conditions and in such proportions, as the Committee may provide in the Award Agreement, which may (but need not) be the same time or times, terms and conditions and proportions as apply to the Restricted Stock Units in respect of which such additional stock units are credited, (II) may be paid at such time or times as the Committee may provide in the Award Agreement, which may but need not be the same time or times when the Restricted Stock Units in respect of which such additional stock units are credited will be paid, (III) shall be paid in shares of Stock, which may be certificated or credited to a book entry account in the name of the Holder, as the Committee may specify, and (IV) shall be deemed to be Restricted Stock Units for purposes of applying the limitations set forth in and the other provisions of Section 5 of the Plan. 23 10. NON-COMPETITION PROVISIONS In addition to such other conditions as may be established by the Committee, in consideration of the granting of Awards under the terms of the Plan, the Committee, in its discretion, may include non-competition provisions in the applicable Award Agreement. 11. GENERAL (a) Additional Provisions of an Award. Awards under the Plan also may be subject to such other provisions (whether or not applicable to the benefit awarded to any other Participant) as the Committee determines appropriate including, without limitation, provisions to assist the Participant in financing the purchase of Stock upon the exercise of Options, provisions for the forfeiture of or restrictions on resale or other disposition of shares of Stock acquired under any Award, provisions giving the Company the right to repurchase shares of Stock acquired under any Award in the event the Participant elects to dispose of such shares, and provisions to comply with Federal and state securities laws and Federal and state tax withholding requirements. Any such provisions shall be reflected in the applicable Award Agreement. (b) Privileges of Stock Ownership. Except as otherwise specifically provided in the Plan, no person shall be entitled to the privileges of stock ownership in respect of shares of Stock which are subject to Awards hereunder until such shares have been issued to that person. (c) Government and Other Regulations. The obligation of the Company to make payment of Awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by governmental agencies as may be required. Notwithstanding any terms or conditions of any Award to the contrary, the Company shall be under no obligation to offer to sell or to sell and shall be prohibited from offering to sell or selling any shares of Stock pursuant to an Award unless such shares have been properly registered for sale pursuant to the Securities Act with the SEC or unless the Company has received an opinion of counsel, satisfactory to the Company, that such shares may be offered or sold without such registration pursuant to an available exemption therefrom and the terms and conditions of such exemption have been fully complied with. The Company shall be under no obligation to register for sale under the Securities Act any of the shares of Stock to be offered or sold under the Plan. If the shares of Stock offered for sale or sold under the Plan are offered or sold pursuant to an exemption from registration under the Securities Act, the Company may restrict the transfer of such shares and may legend the Stock certificates representing such shares in such manner as it deems advisable to ensure the availability of any such exemption. 24 (d) Tax Withholding. Notwithstanding any other provision of the Plan, the Company or a Subsidiary, as appropriate, shall have the right to deduct from all Awards cash and/or Stock, valued at Fair Market Value on the date of payment, in an amount necessary to satisfy all Federal, state or local taxes as required by law to be withheld with respect to such Awards and, in the case of Awards paid in Stock, the Holder may be required to pay to the Company prior to delivery of such Stock, the amount of any such taxes which the Company is required to withhold, if any, with respect to such Stock. The Company shall accept shares of Stock of equivalent Fair Market Value in payment of such withholding tax obligations if the Holder of the Award elects to make payment in such manner. (e) Claim to Awards and Employment or Service Rights. No employee or other person shall have any claim or right to be granted an Award under the Plan or, having been selected for the grant of an Award, to be selected for a grant of any other Award. Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ or service of the Company or any Subsidiary. (f) Designation and Change of Beneficiary. Each Participant may file with the Committee a written designation of one or more persons as the beneficiary who shall be entitled to receive the rights or amounts payable with respect to an Award due under the Plan upon his or her death. A Participant may, from time to time, revoke or change his or her beneficiary designation without the consent of any prior beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. If no beneficiary designation is filed by the Participant, the beneficiary shall be deemed to be his or her spouse or, if the Participant is unmarried at the time of death, his or her estate. (g) Payments to Persons Other Than Participants. If the Committee shall find that any person to whom any amount is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, or has died, then any payment due to such person or his or her estate (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Committee so directs the Company, be paid to his or her spouse, child, relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Committee and the Company therefor. 25 (h) No Liability of Committee Members. No member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member or on such member's behalf in such member's capacity as a member of the Committee nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the Committee and each other employee, officer or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or willful bad faith; provided, however, that approval of the Board shall be required for the payment of any amount in settlement of a claim against any such person. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. (i) Governing Law. The Plan shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to the principles of conflicts of law thereof. (j) Funding. No provision of the Plan shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Holders shall have no rights under the Plan other than as unsecured general creditors of the Company, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other employees under general law. (k) Nontransferability. A person's rights and interest under the Plan, including amounts payable, may not be sold, assigned, donated, or transferred or otherwise disposed of, mortgaged, pledged or encumbered except, in the event of a Holder's death, to a designated beneficiary to the extent permitted by the Plan, or in the absence of such designation, by will or the laws of descent and distribution; provided, however, the Committee may, in its sole discretion, allow in an Award Agreement for transfer of Awards other than Incentive Stock Options to other persons or entities. (l) Reliance on Reports. Each member of the Committee and each member of the Board shall be fully justified in relying, acting or failing to act, and shall not be liable for having so relied, acted or failed to act in good faith, upon any report made by the independent public accountants of the Company and its Subsidiaries and upon any other information 26 furnished in connection with the Plan by any person or persons other than such member. (m) Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit sharing, group insurance or other benefit plan of the Company except as otherwise specifically provided in such other plan. (n) Expenses. The expenses of administering the Plan shall be borne by the Company. (o) Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. (p) Change-in-Control. Notwithstanding anything in the Plan to the contrary, in the event of a "Change-in-Control", as defined below, all Awards made pursuant to the Plan shall become fully vested immediately, and all Options shall be immediately exercisable (provided that if the "Change-in- Control" occurs with respect to a Subsidiary, only Awards and Options granted to employees of such Subsidiary shall be affected), if the Committee so provides in an Award Agreement, or if so provided in an employment, severance or other agreement of an employee granted an Award. A "Change-in-Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any such securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (1) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or 27 (iii) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or a Subsidiary, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. 12. CHANGES IN CAPITAL STRUCTURE Awards granted under the Plan and any Award Agreements shall be subject to equitable adjustment or substitution, as determined by the Committee in its sole discretion, as to the number, price or kind of a share of Stock or other consideration subject to such Awards (i) in the event of changes in the outstanding Common Stock or in the capital structure of the Company by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the Date of Grant of any such Award, (ii) in the event of any change in applicable laws or any change in circumstances which results in or would result in any substantial dilution or enlargement of the rights granted to, or available for, Participants in the Plan, or (iii) upon the occurrence of any other event which otherwise warrants equitable adjustment because it interferes with the intended operation of the Plan. In addition, in the event of any such corporate or other event, the aggregate number of shares of Stock available under the Plan and the maximum 28 number of shares of Stock with respect to which any one person may be granted Awards shall be appropriately adjusted by the Committee, whose determination shall be conclusive. Notwithstanding the above, in the event of any of the following: (1) The Company is merged or consolidated with another corporation or entity and, in connection therewith, consideration is received by stockholders of the Company in a form other than stock or other equity interests of the surviving entity; (2) All or substantially all of the assets of the Company are acquired by another person; (3) The reorganization or liquidation of the Company; or (4) The Company shall enter into a written agreement to undergo an event described in clauses (1), (2) or (3) above, then the Committee may, in its sole discretion and upon at least 10 days advance notice to the affected persons, cancel any outstanding Awards and pay to the Holders thereof, in cash, the value of such Awards based upon the price per share of Stock received or to be received by other stockholders of the Company in the event. The terms of this Section 12 may be varied by the Committee in any particular Award Agreement. 13. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 14. AMENDMENT AND TERMINATION The Board may at any time terminate the Plan. The Committee may, at any time, or from time to time, amend or suspend and, if suspended, reinstate, the Plan in whole or in part; provided, that any such amendment of the Plan shall be contingent on obtaining the approval of the stockholders of the Company if such amendment would materially increase benefits available to Participants or the Committee determines that such approval is necessary to comply with any requirement of law, including the requirements for qualification of Incentive Stock Options or the rules of any stock exchange, stock market or automated quotation system on which the Company's equity securities are traded or quoted. Effective: See 4/16/03 BOD resolutions. 29 -----END PRIVACY-ENHANCED MESSAGE-----