-----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, Qb+BsL2kdB8UWaaM9yS70gKfDyD/NjobeULWEI/U0ZlUlRis4aAVpZijpaeXN2LS 2oe2zJS6JLqJk20fgAyNUg== 0000025757-97-000012.txt : 19970329 0000025757-97-000012.hdr.sgml : 19970329 ACCESSION NUMBER: 0000025757-97-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROMPTON & KNOWLES CORP CENTRAL INDEX KEY: 0000025757 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 041218720 STATE OF INCORPORATION: MA FISCAL YEAR END: 1225 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04663 FILM NUMBER: 97567025 BUSINESS ADDRESS: STREET 1: ONE STATION PL STREET 2: METRO CTR CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033535400 MAIL ADDRESS: STREET 1: ONE STATION PLACE STREET 2: METRO CENTER CITY: STAMFORD STATE: CT ZIP: 06902 10-K 1 1996 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 28, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-4663 Crompton & Knowles Corporation (Exact name of registrant as specified in its charter) Massachusetts 04-1218720 (State or other (I.R.S. Employer jurisdiction Identification No.) of incorporation or organization) One Station Place, Metro Center Stamford, Connecticut 06902 (address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (203) 353-5400 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, $0.10 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, computed as of February 28, 1997, was $1,341,609,190. The number of shares of Common Stock of the registrant outstanding as of February 28, 1997 was 72,961,866. DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Stockholders for fiscal year ended December 28, 1996 ........ Parts I, II and IV Proxy Statement for Annual Meeting of Stockholders on April 29, 1997 ........ Part III CROMPTON & KNOWLES CORPORATION PART I ITEM 1. BUSINESS General Crompton & Knowles Corporation (together with its consolidated subsidiaries, the "Corporation"), was incorporated in Massachusetts in 1900. The Corporation has engaged in the manufacture and sale of specialty chemicals since 1954 and, since 1961, in the manufacture and sale of specialty process equipment and controls. The Corporation expanded its specialty chemical business in 1988 with the acquisitions of Ingredient Technology Corporation, a leading supplier of ingredients for the food and pharmaceutical industries, and Townley Dyestuffs Auxiliaries Company, Ltd., one of the largest independent suppliers of dyes for Great Britain's textile and paper industries. The Corporation made two acquisitions in calendar year 1990, acquiring the business and certain assets and liabilities of Atlantic Industries, Inc., a domestic dye manufacturer, and APV Chemical Machinery, Inc., which manufactured the Sterling line of extruders, extrusion systems and industrial blow molding equipment for the plastics industry. In 1991, the Corporation acquired a wire and cable equipment business from Clipper Machines, Inc. In 1992, the Corporation acquired a pre-metallized dyes business and facility located in Oissel, France. The Corporation made two acquisitions in 1994, the Egan Machinery plastics extrusion, precision coating and cast and blown film equipment business and the plastics and rubber extrusion machinery and parts and after-market services business of McNeil & NRM, Inc. Since January 1995, the Corporation's textile dyes and chemicals business and its specialty process equipment and controls business have been conducted by Crompton & Knowles Colors Incorporated and Davis-Standard Corporation, respectively, wholly owned subsidiaries of the Corporation. In 1995, the Corporation acquired the plastics and rubber extrusion business of McNeil Akron Repiquet SARL, including a manufacturing facility located in Dannemarie, France, and Killion Extruders, Inc., a producer of precision laboratory and small scale extrusion systems in Cedar Grove, New Jersey. In January 1996, the Corporation acquired Klockner ER-WE-PA GmbH, a manufacturer of extrusion coating, cast film and plastic extrusion equipment located in Erkrath, Germany. In April 1996, the Corporation acquired the Hartig line of plastic blow molding machines from Battenfeld Gloucester Engineering Co. In August 1996, Uniroyal Chemical Corporation ("UCC") was merged into and became a wholly owned subsidiary of the Corporation. UCC has no operations, and its sole material asset is the capital stock of Uniroyal Chemical Company, Inc. ("Uniroyal"). Uniroyal is a multinational manufacturer of specialty chemical products, including specialty elastomers, rubber chemicals, crop protection chemicals and additives for the plastics and lubricants industries. Uniroyal's products are currently marketed in approximately 120 countries and serve a wide variety of end use markets including agriculture, petrochemical, automotive, tires, hoses, plastics, appliances, lubricants, construction, recreation and mining. Information as to the sales, operating profit, and identifiable assets attributable to each of the Corporation's business segments during each of its last three fiscal years is set forth in the Notes to Consolidated Financial Statements on page 34 of the Corporation's 1996 Annual Report to Stockholders, and such information is incorporated herein by reference. Products and Services The principal products and services offered by the Corporation are described below. SPECIALTY CHEMICALS Chemicals & Polymers Chemicals & Polymers, the Corporation's largest business with net sales for fiscal 1996 of $493.7 million, has three principal product lines: rubber chemicals, Royalene(R) EPDM rubber and Paracril(R) Nitrile Rubber. The rubber chemicals product line contains over 100 different chemicals for use in processing rubber. Those products include accelerators, antioxidants, antiozonants, chemical foaming agents and waxes. Accelerators are used for curing natural and synthetic rubber, and have a wide range of activation temperatures, curing ranges and use forms. Antiozonants protect rubber compounds from flex cracking and ozone, oxygen and heat degradation. Antioxidants provide rubber compounds with protection against oxygen, light and heat. Blowing agents produce gas by thermal decomposition or via a chemical reaction with other components of a polymer system and are mixed with rubber to produce sponge rubber products. Waxes inhibit static atmospheric ozone cracking in rubber. Tire manufacturers accounted for approximately 60% of the Corporation's rubber chemical sales in fiscal 1996 with the balance of the sales to numerous manufacturers of hoses, belting, sponge and a wide variety of other engineered rubber products. Uniroyal produces and markets approximately 30 different ethylene-propylene-diene rubber ("EPDM") polymer variations. EPDM is popularly known as "crackless rubber" because of its ability to withstand sunlight and ozone without cracking. EPDM's applications include single ply roofing, automobile, garden and radiator hoses, electrical insulation, tire sidewalls, mechanical seals and gaskets, sponge rubber seals for automobile doors, oil additives, and plastic modifiers. Nitrile rubber polymers, produced and marketed by Uniroyal under the Paracril(R) trademark, are resistant to most types of oils. Paracril(R) nitrile rubber is produced in 22 different variations to meet specific end use requirements in automotive hoses, seals, rings, printing rolls, insulation and many other products exposed to oil. Net sales of rubber chemicals during fiscal 1996, 1995 and 1994 were 16.8%, 16.2% and 17.2% of the Corporation's net sales, respectively. The Corporation believes it is the second largest supplier of rubber chemicals in the world, the third largest supplier of EPDM polymers in the world, and the largest supplier of EPDM polymers in North America. Uniroyal's success in this business has been due to several factors, including product performance, effective technical assistance and outstanding customer service which have earned Uniroyal a reputation for excellence and strong customer loyalty. The Chemicals & Polymers business' products are predominantly sold by a direct common sales force to a generally overlapping customer base. The sales force is supported by a highly qualified staff of technical service specialists with extensive field and operational experience. Strong customer relations and market knowledge result from this direct sales effort. In certain geographic areas outside the United States, the Chemicals and Polymers business' products are sold through distributors. Crop Protection The Crop Protection business manufactures and markets a wide variety of agricultural chemicals for many major food crops, including grains, fruits, nuts and vegetables, and many non-food crops, such as tobacco, cotton, turf, flax and ornamental plants. The business focuses its efforts mainly on products used on high value cash crops, such as vegetables, nuts, citrus and tree and vine fruits as opposed to commodity crops such as soybeans and corn. The Crop Protection business had net sales for fiscal 1996 of $353.3 million. The Crop Protection business offers four major crop protection chemical product lines: fungicides; miticides/insecticides; growth regulants and herbicides. Each product line is composed of numerous formulations for specific crops and geographic regions. The Corporation has a substantial presence in its targeted segments of the agrichemicals market due to its strategy of focusing research, product development, and sales and marketing on highly profitable market niches which are less sensitive to competitive pricing pressures than commodity segments of the market. While the products of the Crop Protection business represent a relatively small percentage of the grower's overall costs, these products are often critical to the success or failure of the crops being treated. In addition, product line extensions, attention to application effectiveness and customer service are important factors in developing strong customer loyalty. The Corporation is also a leading producer and marketer of seed treatment chemicals and, through Gustafson, Inc. ("Gustafson"), a wholly owned subsidiary, is a leading producer of seed treatment formulations and equipment. Gustafson has the leading share of the North American commercial seed treatment formulation market and is recognized as a technological leader in this market. Gustafson is engaged directly and through cooperative ventures in developing and formulating seed treatment systems, offering a broad line of chemical formulations which contain fungicides, insecticides and seed conditioning aids in addition to commercial seed treating equipment. These formulations include crop protection chemicals purchased from Uniroyal and other major agricultural chemical producers. Gustafson's expertise enables it to develop and produce formulations consisting of multiple components to obtain optimum efficacy against seed and soil disease pathogens and insects. Gustafson's products are primarily used to treat cotton, cereals, corn, sorghum, soybeans, rapeseed, peanuts and vegetables. Gustafson's equipment line includes numerous models that treat different volumes and types of seed at various dosage rates using many commercial chemical formulations. Gustafson equipment can apply two or more chemicals simultaneously, regardless of the types of formulations. For the last several years, Gustafson has maintained a major developmental program in the field of naturally occurring biological control agents targeted for disease. Gustafson has focused its efforts on naturally occurring organisms as opposed to genetically engineered organisms. The United States Environmental Protection Agency ("EPA") approval and registration process is generally shorter and less costly for novel agricultural products of this type. Gustafson received regulatory approval in 1992 for the first of a series of new biological formulations. In Australia, the Corporation's subsidiary, Hannaford Seedmaster Services Pty. Ltd., provides seed treatment chemicals and treating services to the local market. The Crop Protection business, under the Uniroyal name, promotes seed treatment chemicals in all regions of the world other than North America and Australia and enjoys a substantial position in the international seed treatment market. The Corporation anticipates continuing growth in seed treatment, which is environmentally attractive because it involves very localized use of agricultural chemicals and very low use rates compared to broad foliar or soil treatment. The Crop Protection business markets its products in North America through a direct sales force selling to a distribution network consisting of more than one hundred distributors and direct customers. In the international market, the Crop Protection business' direct sales force services over 300 distributors, dealers and agents. Colors The Colors business had net sales in fiscal 1996 of $271.1 million. Textile dyes manufactured and sold by the Colors business are used on both synthetic and natural fibers for knit and woven garments, home furnishings such as carpets, draperies, and upholstery, and automotive furnishings including carpeting, seat belts, and upholstery. Industrial dyes and chemicals are marketed to the paper, leather, and ink industries for use on stationery, tissue, towels, shoes, apparel, luggage, and other products and for transfer printing inks. The Corporation also markets organic chemical intermediates and a line of chemical auxiliaries for the textile industry, including leveling agents, dye fixatives, and scouring agents. The Corporation is among the largest suppliers of dyes in the United States and is a leading domestic producer of specialty dyes for nylon, polyester, acrylics, and cotton. The Corporation is recognized domestically as a leader in products and dyeing process technology for the broadloom carpet industry. In addition, the Corporation supplies unique dyes for can coating applications and ink-jet computer printers. In Europe, the primary dyes offerings of the Corporation have been acid and pre-metallized dyes for wool and nylon fibers. The Corporation is less of a factor in other segments of the dyes industry and in the European market. Sales of this class of products accounted for 15.0%, 16.3% and 19.3% of the total revenues of the Corporation in 1996, 1995, and 1994, respectively. Domestically, the Corporation sells dyes and chemical auxiliaries predominantly through its own dedicated sales force. The Corporation's position as a leading dyes supplier in the United States has been maintained by satisfying the market's needs with quick customer response, efficient production, quality products and strong technical service. Outside the United States, as much as one-half of the Corporation's sales of dyes and chemical auxiliaries are made through distributors. Specialties The Specialties business consists of two principal product lines: specialty chemicals and Adiprene(R)/ Vibrathane(R) urethane prepolymers. The Specialties business had net sales for fiscal 1996 of $296.6 million. The Corporation offers its customers one of the broadest lines of additives for plastics and lubricants in the specialty chemical industry, including antioxidants, petroleum additives, chemical foaming agents, synthetic fluids, chemical intermediates, polymerization inhibitors, curatives, dispersants and polymer modifiers. These products are used in the manufacture of numerous plastic and petroleum related products which in turn have diverse end uses, including plastic products, adhesives, aerospace, athletic equipment, automotive components, construction, electronics, food packaging, vinyl flooring, wire and cable and automotive and industrial oils and lubricants. These chemicals are often specially developed for a customer's specific manufacturing requirements. Although niche markets within these product categories are highly profitable, the Corporation believes that the relatively small size of these markets combined with their customer specific nature make them unattractive to larger chemical companies. Future growth is expected to result from continued penetration in existing niche markets and expansion into worldwide markets, particularly Europe and Asia, and through the further development of a new series of polymerization inhibitors and high performance antioxidants. Specialty chemicals are sold through a specialized sales force, including technical service professionals who address customer inquiries and problems. The technical service professionals generally have degrees in chemistry and/or chemical engineering and are knowledgeable in specific product application fields. The sales and technical service professionals identify and focus on customers' growth opportunities, working not only with the customers' headquarters staff, but also with their research and development and manufacturing personnel on a worldwide basis. The Corporation believes that Uniroyal is the leading manufacturer of high performance liquid castable urethane prepolymers in the world. Among the most common products using these prepolymers are solid industrial tires, printing rollers, industrial rolls, abrasion-resistant mining products such as chutes, hoppers and slurry transport systems, mechanical goods and a variety of sports equipment and other consumer items. Uniroyal effectively competes in this business by providing efficient customer service and technical assistance through Uniroyal's highly regarded technical service staff. Uniroyal's proven ability to develop new products and new technologies for its customers provides significant competitive advantages. Over 150 grades of urethane prepolymers are commercially available from Uniroyal. Adiprene(R)/Vibrathane(R) is sold directly by a dedicated sales force in the United States, Canada and Australia and by direct sales and through distributorships in Europe, Latin America and the Far East. Adiprene(R)/Vibrathane(R) customers are serviced worldwide by a dedicated technical and research and development staff, because the technology and service needs related to liquid casting is unique. Technical service personnel support field sales worldwide, while a research and development staff is dedicated to support rapidly changing customer needs. Ingredient Technology The Ingredient Technology business had fiscal 1996 net sales of $104.4 million. The Corporation manufactures and sells reaction and compounded flavor ingredients for the food processing, bakery, beverage and pharmaceutical industries; colors certified by the Food & Drug Administration for sale to domestic producers of food and pharmaceuticals; and inactive ingredients for the pharmaceutical industry. The Corporation is also a leading supplier of specialty sweeteners, including edible molasses, molasses blends, malt extracts, and syrups for the bakery, confectionery and food processing industries and a supplier of seasonings and seasoning blends for the food processing industry. The Corporation is a major United States and Canadian supplier of edible molasses, a major United States supplier of malt extracts, and a significant supplier of other sugar-based specialty products. As a supplier of flavors and seasonings, the Corporation has many competitors in the United States and abroad. The products of the Ingredient Technology business are sold predominantly through the Corporation's own sales force. SPECIALTY PROCESS EQUIPMENT AND CONTROLS The Corporation's wholly owned subsidiary, Davis-Standard Corporation, manufactures and sells plastics and rubber extrusion equipment, industrial blow molding equipment, electronic controls, and integrated extrusion systems and offers specialized service and modernization programs for in-place extrusion systems. This business segment had net sales in the 1996 fiscal year of $284.9 million. Integrated extrusion systems, which include extruders in combination with controls and other accessory equipment, are used to process plastic resins and rubber into various products such as plastic sheet used in appliances, automobiles, home construction, sports equipment, and furniture; cast and blown film used to package many consumer products; and extruded shapes used as house siding, furniture trim, and substitutes for wood molding. Integrated extrusion systems are also used to compound engineered plastics, to recycle and reclaim plastics, to coat paper, cardboard and other materials used as packaging, and to apply plastic or rubber insulation to high voltage power cable for electrical utilities and to wire for the communications, construction, automotive, and appliance industries. Industrial blow molding equipment produced by the Corporation is sold to manufacturers of non-disposable plastic items such as tool cases and beverage coolers. The Corporation's HES unit produces electrical and electronic controls primarily for use with extrusion systems. Davis-Standard Corporation is a major user of such controls. The Corporation is a leading producer of extrusion machinery for the plastics industry and a leading domestic producer of industrial blow molding equipment and competes with domestic and foreign producers of such products. The Corporation is one of a number of producers of other types of plastics processing machinery. Sales of this class of products accounted for 15.8%, 16.0%, and 12.8% of the total revenues of the Corporation in 1996, 1995 and 1994, respectively. In the United States, most of the Corporation's sales of specialty process equipment and controls are made by its own dedicated sales force. In other parts of the world, and for export sales from the United States, the Corporation's sales of such equipment and controls are made largely through agents. Sources of Raw Materials Chemicals, steel, castings, parts, machine components, edible molasses, spices, and other raw materials required in the manufacture of the Corporation's products are generally available from a number of sources, some of which are foreign. Uniroyal uses large amounts of petrochemical feedstocks in its chemical manufacturing processes. Large increases in the cost of these petrochemical feedstocks could adversely affect Uniroyal's operating margins. Significant sales of the colors business consist of dyes manufactured from intermediates purchased from foreign sources. The Corporation holds a 50% interest in Rubicon Inc. ("Rubicon"), a manufacturing joint venture between Uniroyal and ICI American Holdings, Inc. ("ICI") located in Geismar, Louisiana, which supplies both ICI and Uniroyal with aniline, and Uniroyal with diphenylamine ("DPA"). The Corporation believes that its aniline and DPA needs in the foreseeable future will be met by production from Rubicon and Uniroyal's DPA facility located in Huddersfield, England. Patents and Licenses The Corporation has over 1,800 United States and foreign patents and pending applications and has trademark protection for approximately 500 product names. Patents, trade names, trademarks, know-how, trade secrets, formulae, and manufacturing techniques assist in maintaining the competitive position of certain of the Corporation's products. Patents, formulae, and know-how are of particular importance in the manufacture of a number of specialty chemicals manufactured and sold by the Corporation, and patents and know-how are also significant in the manufacture of certain wire insulating and plastics processing machinery product lines. The Corporation is licensed to use certain patents and technology owned by other companies, including some foreign companies, to manufacture products complementary to its own products, for which it pays royalties in amounts not considered material to the consolidated results of the enterprise. Products to which the Corporation has such rights include certain crop protection chemicals, dyes, plastics machinery and flavored ingredients. While the existence of a patent is prima facie evidence of its validity, the Corporation cannot assure that any of its patents will not be challenged nor can it predict the outcome of any such challenge. The Corporation believes that no single patent, trademark, or other individual right is of such importance, however, that expiration or termination thereof would materially affect its business. Seasonal Business With the exception of the Crop Protection business, approximately 14% of the annual sales of which occur in the fourth calendar quarter, no material portion of any segment of the business of the Corporation is seasonal. Customers The Corporation does not consider any segment of its business dependent on a single customer or a few customers, the loss of any one or more of whom would have a material adverse effect on the segment. No one customer's business accounts for more than ten percent of the Corporation's gross revenues nor more than ten percent of its earnings before taxes. Backlog Because machinery production schedules range from about 60 days to 10 months, backlog is important to the Corporation's specialty process equipment and controls business. Firm backlog of customers' orders for this business at the end of 1996, totalled approximately $92 million (including $21 million from 1996 acquisitions) compared with $72 million in 1995. It is expected that most of the 1996, backlog will be shipped during 1997. Orders for specialty chemicals and equipment repair parts are filled primarily from inventory stocks and thus are excluded from backlog. Competitive Conditions The Corporation is a major manufacturer of specialty chemicals and specialty process equipment and controls. No single competitor currently competes across the Corporation's full product line in either of its business segments. Competition varies by product and by geographic region, except that in rubber chemicals the market is fairly concentrated. In that market, Uniroyal and its two principal competitors account for approximately 50% of total worldwide sales. In addition, the EPDM and nitrile rubber markets are fairly concentrated. Uniroyal and its two principal competitors in each of these two products account for approximately 69% of sales within the United States and approximately 51% worldwide. Two new EPDM technologies are being developed and commercialized by competitors. The first technology, which is based on a new metallocene catalyst system and which may expand the application areas of EPDM, is also being developed by the Corporation. The second technology is a gas phase process that has not been fully commercialized by any company and cannot be fully assessed at this time. Product performance, service, and competitive prices are all important factors in competing in the specialty chemicals and specialty process equipment and controls businesses. Research and Development The Corporation conducts research and development on a worldwide basis at a number of facilities, including field stations that are used for crop protection research and development activities. Research and development expenditures by the Corporation totalled $52.4 million for the year 1996, $50.1 million for the year 1995 and $44.7 million for the year 1994. Environmental Matters Chemical companies are subject to extensive environmental laws and regulations concerning, among other things, emissions to the air, discharges to land, surface, subsurface strata and water and the generation, handling, storage, transportation, treatment and disposal of waste and other materials and are also subject to other federal, state and local laws and regulations regarding health and safety matters. Environmental Regulation. The Corporation believes that its business, operations and facilities have been and are being operated in substantial compliance in all material respects with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. However, the ongoing operations of chemical manufacturing plants entail risks in these areas and there can be no assurance that material costs or liabilities will not be incurred. In addition, future developments, such as increasingly strict requirements of environmental and health and safety laws and regulations and enforcement policies thereunder, could bring into question the handling, manufacture, use, emission or disposal of substances or pollutants at facilities owned, used or controlled by the Corporation or the manufacture, use or disposal of certain products or wastes by the Corporation and could involve potentially significant expenditures. To meet changing permitting and regulatory standards, the Corporation may be required to make significant site or operational modifications, potentially involving substantial expenditures and reduction or suspension of certain operations. The Corporation incurred $8.8 million of costs for capital projects and $29.8 million for operating and maintenance costs related to environmental compliance at its facilities during fiscal 1996. In fiscal 1997, the Corporation expects to incur approximately $14.5 million of costs for capital projects and $29.9 million for operating and maintenance costs related to environmental compliance at its facilities. During fiscal 1996, the Corporation incurred costs of $12.3 million to clean up previously utilized waste disposal sites and to remediate current and past facilities, and, during the third quarter of the year, recorded a special provision in the amount of $30 million for environmental remediation activities. The Corporation expects to incur costs of approximately $4.1 million during fiscal 1997 to clean up such waste disposal sites. Pesticide Regulation. The Corporation's Crop Protection business is subject to regulation under various federal, state, and foreign laws and regulations relating to the manufacture, sales and use of pesticide products. In August, 1996, Congress enacted significant changes to the Federal Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), governing U.S. sale and use of pesticide products, and the Federal Food, Drug, and Cosmetic Act ("FFDCA"), which limits pesticide residues on food with the Food Quality Protection Act of 1996 ("FQPA"). Under FIFRA, the new law will facilitate registrations and reregistrations of pesticides for special (so called minor) uses and authorize collection of maintenance fees to support pesticide reregistrations. Coordination of regulations implementing FIFRA and FFDCA will be required. Food safety provisions will establish a single standard of safety for pesticide residue on raw and processed foods; provide information through large food retail stores to consumers about the health risks of pesticide residues and how to avoid them; preempt state and local food safety laws if they are based on concentrations of pesticide residues below recently established federal residue limits (called "tolerances"); and ensure that tolerances protect the health of infants and children. FFDCA, as amended by FQPA, authorizes EPA to set a tolerance for a pesticide in or on food at a level which poses "a reasonable certainty of no harm" to consumers. The EPA is required to review all tolerances for all pesticide products within 10 years. It is not known when the Corporation's products will be reviewed under this standard. However, the Corporation does not anticipate any significant restrictions to our product uses based on this EPA review. In April, 1996, UCC announced that it had voluntarily canceled registered uses of its propargite miticide on certain crops in the United States. The action was taken to reduce dietary exposure as requested by the EPA, using the EPA's current risk assessment model. Tests to confirm that propargite does not pose a dietary risk are continuing under EPA approved protocols. Impact of this voluntary action on fiscal 1996 annual pretax earnings was approximately $5.0 million. Propargite will be reviewed under the new FQPA standard; however, no further reduction in use is anticipated. The European Commission ("EC") has established procedures whereby all existing active ingredient pesticides will be reviewed. This EC regulation became effective in 1993 and will result in a review of all commercial products during the next few years. The initial round of reviews covered ninety products, four of which are Corporation's products. It is anticipated that other of the Corporation's products will be reviewed in subsequent years. The process may lead to full re-registration in member states of the EC or may lead to some restrictions, if adverse data is discovered. Employees The Corporation had approximately 5,665 employees on December 28, 1996. Financial Information Concerning Foreign Operations and Export Sales The information with respect to sales, operating profit, and identifiable assets attributable to each of the major geographic areas served by the Corporation and export sales, for each of the Corporation's last three fiscal years, set forth in the Notes to Consolidated Financial Statements on page 34 of the Corporation's 1996 Annual Report to Stockholders, is incorporated herein by reference. The Corporation considers that the risks relating to operations of its foreign subsidiaries are comparable to those of other U.S. companies which operate subsidiaries in developed countries. All of the Corporation's international operations are subject to fluctuations in the relative values of the currencies in the various countries in which its activities are conducted. ITEM 2. PROPERTIES The following table sets forth information as to the principal operating properties of the Corporation and its subsidiaries: Location Facility Products/Businesses UNITED STATES Alabama Bay Minette Plant* Specialties Connecticut Bethany Research Center* Crop Protection Middlebury Office and Crop Protection, Research Center** Chemicals & Polymers and Specialties Naugatuck Plant, Research Center* Crop Protection, Chemicals & Polymers and Specialties Pawcatuck Office and Plastics and Rubber Machine Shop* Extrusion and Electronic Control Equipment and Systems Stamford Office** Corporate Headquarters Idaho Marsing Plant Crop Protection Lease Land; Own Building Illinois Des Plaines Office and Plant* Flavors Pekin Plant** Crop Protection Iowa Des Moines Plant** Crop Protection Louisiana Geismar Plant* Crop Protection, Chemicals & Polymers and Specialties Minnesota Eden Prairie Plant** Crop Protection New Jersey Cedar Grove Office and Precision Laboratory Machine Shop** Extrusion Equipment & Extrusion Systems Edison Office and Blow Molding and Machine Shop** Extrusion Equipment Mahwah Office, Laboratory Flavors and and Plant** Seasonings Newark Plant* Textile Dyes and Organic Chemicals Nutley Office, Laboratory Textile and Other and Plant* Dyes Somerville Office and Extrusion Systems Machine Shop* Vineland Office and Plant* Food & Pharmaceutical Ingredients and Colors North Carolina Charlotte Office and Dyes Laboratory* Gastonia Plant* Crop Protection and Specialties Lowell Plant* Textile Dyes, Organic Chemicals Ohio Elyria Office and Plant** Seasonings Painesville Plant* Chemicals & Polymers Pennsylvania Gibraltar Office, Laboratory Textile and Other and Plant* Dyes Reading Plant* Textile Dyes, Organic Chemicals and Food Colors Texas Carollton Office and Plant** Seasonings Frisco Research Center* Crop Protection INTERNATIONAL Bahamas Freeport Plant* Specialties Belgium Brussels Office** Dyes Tertre Office, Laboratory Textile and Other and Plant* Dyes Brazil Rio Claro Plant* Crop Protection, Chemicals & Polymers and Specialties Canada Ontario Elmira Plant* Crop Protection, Chemicals & Polymers and Specialties Guelph Research Center* Crop Protection, Chemicals & Polymers and Specialties France Dannemarie Office and Extrusion Systems Machine Shop* Oissel Office, Laboratory Textile and Other and Plant* Dyes Germany Erkrath Office and Extrusion Systems Machine Shop* Italy Latina Plant* Crop Protection, Chemicals & Polymers and Specialties Mexico Tampico Plant* Chemicals & Polymers and Specialties The Netherlands Amsterdam Plant* Crop Protection United Kingdom Langley Office** Chemicals & Polymers, Specialties, Dyes and Crop Protection _______________ * Facility Owned by the Corporation **Facility Leased by the Corporation Uniroyal Chemical holds a 50% interest in Rubicon, which operates a chemical production facility located in Geismar, Louisiana that in part is dedicated to producing certain intermediates for Uniroyal Chemical. Uniroyal Chemical leases the land and owns the facilities at its Huddersfield, England site which is operated by a third party under contract to manufacture DPA for Uniroyal Chemical. All facilities are considered to be in good operating condition, well maintained, and suitable for the Corporation's requirements. ITEM 3. LEGAL PROCEEDINGS The Corporation is involved in claims, litigation, administrative proceedings and investigations of various types in several jurisdictions. A number of such matters involve claims for a material amount of damages and relate to or allege environmental liabilities, including clean-up costs associated with hazardous waste disposal sites, natural resource damages, property damage and personal injury. Environmental Liabilities. Each quarter, the Corporation evaluates and reviews estimates for future remediation and other costs to determine appropriate environmental reserve amounts. For each site, a determination is made of the specific measures that are believed to be required to remediate the site, the estimated total cost to carry out the remediation plan, the portion of the total remediation costs to be borne by the Corporation and the anticipated time frame over which payments toward the remediation plan will occur. As a result of current information and analysis, the Corporation recorded a special provision of $30 million during the third quarter of 1996 for environmental remediation activities. The total amount accrued for such environmental liabilities at December 28, 1996, was $96.2 million. The Corporation estimates the potential liabilities to range from $68 million to $130 million at December 28, 1996. It is reasonably possible that the Corporation's estimates for environmental remediation liabilities may subsequently change should additional sites be identified, further remediation measures be required or undertaken, the interpretation of current laws and regulations be modified or additional environmental laws and regulations be enacted. The Corporation generally assesses the possibility for toxic tort claims. Such liabilities are dependent upon complex factors. Five facilities have been identified where the possibility for toxic tort claims may be significant, i.e. as situations where chemicals are believed to have migrated off-site, thus posing risk of exposure. There are no lawsuits pending involving any of these five facilities. Virtually all, if not all, of the off-site disposal sites to which the Corporation may have sent toxic materials pose a possibility for toxic tort claims. There are currently pending five toxic tort claims against Uniroyal Chemical and others arising from these off-site disposal sites. The Corporation has been identified by federal, state or local governmental agencies, and by other potentially responsible parties (a "PRP") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state statutes, as a PRP with respect to costs associated with waste disposal sites at various locations in the United States. Because these regulations have been construed to authorize joint and several liability, the EPA could seek to recover all costs involving a waste disposal site from any one of the PRP's for such site, including the Corporation, despite the involvement of other PRPs. In many cases, the Corporation is one of several hundred PRPs so identified. In a few instances, the Corporation is one of only a handful of PRPs. In certain instances, a number of other financially responsible PRPs are also involved, and the Corporation expects that any ultimate liability resulting from such matters will be apportioned between the Corporation and such other parties. In addition, the Corporation is involved with environmental remediation and compliance activities at some of its current and former sites in the United States and abroad. The more significant of these matters are described below. . Beacon Heights and Laurel Park - Uniroyal is a member of the Beacon Heights Coalition, a group of entities engaged in remedial work at the Beacon Heights site in the State of Connecticut pursuant to a Consent Decree entered in 1987. The actions required by this Consent Decree have been essentially completed. There is a continuing requirement for operation and maintenance at the site. Over many years, Uniroyal has entered into and performed activities pursuant to a series of Administrative Orders with respect to the Laurel Park site located in the State of Connecticut. The EPA, the State of Connecticut, and the Laurel Park Coalition (consisting of Uniroyal and a number of other parties) have entered into a Consent Decree governing the design and implementation of the selected remedy. Remedial construction began at the Laurel Park site in July 1996, and is anticipated to be completed in 1998. Consolidated litigation brought by the Beacon Heights and Laurel Park Coalitions seeking contribution to the costs from the owner/operators of the site and later from other identified generator parties has resulted in substantial recoveries from a number of parties. In November 1996, the United States Court of Appeals for the Second Circuit reversed judgments granted to other defendants in that litigation and the litigation will be remanded for further proceedings. . Cleve Reber - Uniroyal and three other corporations named in an Administrative Order issued by the EPA have complied with such Order which governs remediation of the site located in the State of Louisiana. The cooperating parties are negotiating a consent agreement with the EPA for operation and maintenance of the site and to resolve all of the EPA's past cost claims. . Petro Processors - This matter relating to a site in the State of Louisiana was initiated in 1981. Litigation was instituted by the EPA against a number of parties, including Uniroyal, Inc. (which Uniroyal has agreed to indemnify), seeking cleanup of the Petro Processors site. A Consent Decree was entered to settle the case in February 1984, which required the defendants to clean up the site to the satisfaction of the EPA under supervision of the court. A settlement among the ten defendants, dated December 16, 1983, defines the percentage to be borne by each defendant of the currently estimated future cost of $100 million to complete remediation of the site. Although the allocations are subject to a confidentiality order, Uniroyal believes that the amount it will pay will not be material to its financial condition or results of operations. . Vertac - Uniroyal and its Canadian subsidiary, Uniroyal Chemical Ltd., were joined with others as defendants in consolidated civil actions brought in the United States District Court, Eastern District of Arkansas, Western Division by the United States of America, the State of Arkansas and Hercules Incorporated ("Hercules") relating to a Vertac Chemical Corporation site in Jacksonville, Arkansas allegedly contaminated by dioxins. Uniroyal has been dismissed from the litigation. On November 18, 1993, the liability phase of trial in this matter, as to Uniroyal Chemical Ltd., concluded with the issuance of a jury verdict holding that Uniroyal Chemical Ltd. is liable under CERCLA Section 107 to the United States of America, the State of Arkansas and Hercules; that there is a reasonable basis for divisibility in this matter so that Uniroyal Chemical Ltd.'s liability is not joint and several; that Uniroyal Chemical Ltd. is not liable in contribution to Hercules; and that Hercules is liable in contribution to Uniroyal Chemical Ltd. The Court has received full briefs on the issues of which, if any, portions of the jury verdict are binding and which are advisory only, but has yet to rule on such issues or enter judgment in the matter. If interlocutory appeals from judgment once entered are not allowed, the allocation phase of the proceedings will begin. No ultimate determination of the amount of Uniroyal Chemical Ltd.'s liability, if any, is expected prior to the end of 1997. In addition, a new case was filed by several individuals seeking natural resource damages. Uniroyal Chemical Ltd. filed a Motion to Dismiss and the plaintiffs voluntarily withdrew the action, without prejudice. Recently, Uniroyal and Uniroyal Chemical Ltd. received a notice from the U.S. Department of Interior of its intent to perform a Natural Resource Damage Assessment at the site. Other Environmental Matters . Sundor Canada Inc. - On July 13, 1990, Sundor Canada Inc. ("Sundor") instituted suit against Uniroyal Chemical Ltd. and others including the Ontario Ministry of the Environment and the Regional Municipality of Waterloo in the Ontario Court of Justice (General Division) at Toronto claiming that Uniroyal Chemical Ltd. and others are responsible for losses resulting from Sundor's recall of packaged juices and fruit due to Sundor's use of the public water derived from Elmira groundwater which was allegedly contaminated by Uniroyal Chemical Ltd. Uniroyal Chemical Ltd. has asserted, inter alia, that such recall was completely voluntary and in any event unnecessary to protect health and was not caused or justified by any activities of Uniroyal Chemical Ltd. Uniroyal Chemical Ltd. has instituted third-party claims against its co-defendants in the action. Co-defendants in the action have instituted third-party claims against Uniroyal Chemical Ltd. Examinations for discovery, restricted to the issue of damages suffered by the plaintiff, were held in March 1995. The plaintiff has provided additional information requested by defendants relating to plaintiff's damages. Mediation of this claim commenced in March 1997. The Corporation intends to assert all meritorious legal defenses and all other equitable factors which are available to it with respect to the above matters. The Corporation believes that the resolution of these environmental matters will not have a material adverse effect on its consolidated financial position. While the Corporation believes it is unlikely, the resolution of these environmental matters could have a material adverse effect on its consolidated results of operations in any given year if a significant number of these matters are resolved unfavorably. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information concerning the range of market prices for the Corporation's Common Stock on the New York Stock Exchange and the amount of dividends paid thereon during the past two years, set forth in the Notes to Consolidated Financial Statements on page 35 of the Corporation's 1996 Annual Report to Stockholders, is incorporated herein by reference. The number of registered holders of Common Stock of the Corporation on December 28, 1996, was 4,588. ITEM 6. SELECTED FINANCIAL DATA The selected financial data for the Corporation for each of its last five fiscal years, set forth under the heading "Five Year Selected Financial Data" on page 37 of the Corporation's 1996 Annual Report to Stockholders, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of the Corporation's financial condition and results of operations, set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 18 through 21 of the Corporation's 1996 Annual Report to Stockholders, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Corporation, notes thereto, and supplementary data, appearing on pages 22 through 36 of the Corporation's 1996 Annual Report to Stockholders, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information called for by this item concerning directors of the Corporation is included in the definitive proxy statement for the Corporation's Annual Meeting of Stockholders to be held on April 29, 1997, which has been filed with the Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, and such information is incorporated herein by reference. The executive officers of the Corporation are as follows: Vincent A. Calarco, age 54, has served as President and Chief Executive Officer of the Registrant since 1985 and Chairman of the Board since 1986. Mr. Calarco has been a member of the Board of Directors of the Registrant since 1985. Robert W. Ackley, age 55, has served as a Vice President of the Registrant since 1986 and as President of Davis-Standard Corporation (prior to 1995, Davis-Standard Division) since 1983. Peter Barna, age 53, has served as Vice President-Finance of the Registrant since 1996 and served as Treasurer of the Registrant from 1980 to 1996 and Chief Accounting Officer of the Registrant from 1986 to 1996. Joseph B. Eisenberg, age 55, has served as Executive Vice President, Chemical & Polymers, of Uniroyal since 1994; and served as Vice President and General Manager of the Chemicals and Polymers Division of Uniroyal from 1991-1994. John T. Ferguson II, age 50, has served as Vice President of the Registrant since 1996, and General Counsel and Secretary of the Registrant since 1989. Gerald H. Fickenscher, Ph.D., age 53, has served as Vice President European Region of Uniroyal since 1997, and served as President, Dyes and Chemicals - Europe, for the Registrant and as Managing Director of Crompton & Knowles Europe, S.A. from 1994-1997. Edmund H. Fording, Jr., age 60, has served as Vice President of the Registrant since 1991 and as President of Crompton & Knowles Colors Incorporated (prior to 1995, the Dyes and Chemicals Division) since 1989. Marvin H. Happel, age 57, has served as Vice President -Organization and Administration of the Registrant since 1996 and Vice President-Organization from 1986-1996. Alfred F. Ingulli, age 55, has served as Executive Vice President, Crop Protection of Uniroyal since 1994; and served as Vice President and General Manager, Crop Protection Division of Uniroyal from 1989-1994. Eric W. Johnson, age 57, has served as Vice President, Chemical Operations, Uniroyal Chemical since 1985. Charles J. Marsden, age 56, has served as Senior Vice President and Chief Financial Officer of the Registrant since 1996 and as Vice President-Finance and Chief Financial Officer and as a member of the Board of Directors of the Registrant since 1985. Rudy M. Phillips, age 55, has served as President of Ingredient Technology Corporation since January, 1996. William A. Stephenson, age 49, has served as Executive Vice President, Specialty Chemicals of Uniroyal since 1994; and served as Vice President and General Manager, Specialties Division, Uniroyal from 1990-1994. The term of office of each of the above-named executive officers is until the first meeting of the Board of Directors following the next annual meeting of stockholders and until the election and qualification of his successor. There is no family relationship between any of such officers, and there is no arrangement or understanding between any of them and any other person pursuant to which any such officer was selected as an officer. ITEM 11. EXECUTIVE COMPENSATION Information called for by this item is included in the definitive proxy statement for the Corporation's Annual Meeting of Stockholders to be held on April 29, 1997, which has been filed with the Commission pursuant to Regulation 14A, and such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information called for by this item is included on pages 1 and 5 of the definitive proxy statement for the Corporation's Annual Meeting of Stockholders to be held on April 29, 1997, and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information called for by this item is included in the definitive proxy statement for the Corporation's Annual Meeting of Stockholders to be held on April 29, 1997, and such information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Financial statements and Independent Auditors' Report, as required by Item 8 of this form, which appear on pages 22 through 36 of the Corporation's 1996 Annual Report to Stockholders and are incorporated herein by reference: (i) Consolidated Statements of Operations for the fiscal years ended 1996, 1995, and 1994; (ii) Consolidated Balance Sheets for the fiscal years ended 1996 and 1995; (iii) Consolidated Statements of Cash Flows for the fiscal years ended 1996, 1995, and 1994; (iv) Consolidated Statements of Stockholders' Equity [Deficit] for the fiscal years ended 1996, 1995 and 1994; (v) Notes to Consolidated Financial Statements; and (vi) Independent Auditors' Report of KPMG Peat Marwick LLP 2. Independent Auditors' Report and Consent, and Financial Statement Schedule II, Valuation and Qualifying Accounts, required by Regulation S-X. Pages S-1 and S-2 hereof. 3. The following exhibits are either filed herewith or incorporated herein by reference to the respective reports and registration statements identified in the parenthetical clause following the description of the exhibit: Exhibit No. Description 2 Agreement and Plan of Merger dated April 30, 1996, by and among Crompton & Knowles Corporation, Tiger Merger Corp. and UCC. (Exhibit 2 to Form 10-Q for the period ended March 31, 1996.) 3(i) Restated Articles of Organization of the Corporation filed with the Commonwealth of Massachusetts on October 27, 1988, as amended on April 10, 1990 and on April 14, 1992. (Exhibit 3(a) to Form 10-K for the fiscal year ended December 26, 1992.) 3(ii) By-laws of the Corporation as amended to date. 4.1 Rights Agreement dated as of July 20, 1988, between the Registrant and The Chase Manhattan Bank, N.A., as Rights Agent. (Exhibit 1 to Form 8-K dated July 29, 1988.) 4.2 Agreement dated as of March 28, 1991, amending Rights Agreement dated as of July 20, 1988, between the Registrant and The Chase Manhattan Bank, N.A., as Rights Agent. (Exhibit 4(i)(i) to Form 10-K for the fiscal year ended December 29, 1990.) 4.3 Form of Indenture, dated as of February 8, 1993, among UCC and State Street Bank and Trust Company, as Trustee, relating to the 10 1/2% Notes, including form of securities. (Exhibit 4.1 to the UCC Registration Statement Nos. 33-45296 and 33-45295 on Form S-1 ["UCC Form S-1, Registration No. 33-45296/45295"].) 4.4 Form of Indenture, dated as of February 8, 1993, among UCC and United States Trust Company of New York, as Trustee, relating to the 11% Notes, including form of securities. (Exhibit 4.1(a) to UCC Form S-1, Registration No. 33-45296/45295.) 4.5 Form of Indenture, dated as of February 8, 1993, among UCC and The Shawmut Bank Connecticut, N.A. as Trustee, relating to the 12% Notes, including form of securities. (Exhibit 4.1(b) to UCC Form S-1, Registration No. 33-45296/45295.) 4.6 Form of Indenture, dated as of September 1, 1993, among Uniroyal and State Street Bank and Trust Company, as Trustee, relating to $270 million of 9% Notes, including the form of securities. (Exhibit 4.2 to UCC Form S-1, Registration No. 33-66740.) 4.7 $530 Million Amended and Restated Credit Agreement dated as of December 19, 1996, by and among Crompton & Knowles Corporation and certain of its subsidiaries, as Borrowers, and various lenders, and Citicorp Securities, Inc., as Arranger, and Citicorp USA, Inc., as Agent and the Chase Manhattan Bank, as Managing Agent. (Exhibit 10 to the UCC/Uniroyal Form 10-QT for the transition period ended December 28, 1996.) 4.8 Warrant Agreement, dated as of October 30, 1989, between UCC and Avery, Inc. (Exhibit 10.2 to UCC Form S-1, Registration No. 33-32770.) +10.1 1983 Stock Option Plan of Crompton & Knowles Corporation, as amended through April 14, 1987. (Exhibit 10(c) to Form 10-Q for the quarter ended March 28, 1987.) +10.2 Amendments to Crompton & Knowles Corporation Stock Option Plans adopted February 22, 1988. (Exhibit 10(d) to Form 10-K for the fiscal year ended December 26, 1987.) +10.3 Summary of Management Incentive Bonus Plan for selected key management personnel. (Exhibit 10(m) to Form 10-K for the fiscal year ended December 27, 1980.) +10.4 Supplemental Medical Reimbursement Plan. (Exhibit 10(n) to Form 10-K for the fiscal year ended December 27, 1980.) +10.5 Supplemental Dental Reimbursement Plan. (Exhibit 10(o) to Form 10-K for the fiscal year ended December 27, 1980.) +10.6 Employment Agreement dated February 22, 1988, between the Registrant and Vincent A. Calarco. (Exhibit 10(j) to the Form 10-K for the fiscal year ended December 26, 1987.) +10.7 Form of Employment Agreement entered into in 1988, 1989, 1992, 1994 and 1996 between the Registrant or one of its subsidiaries and nine of the executive officers of the Registrant. (Exhibit 10(k) to Form 10-K for the fiscal year ended December 26, 1987.) +10.8 Form of Employment Agreement dated as of August 21, 1996, between a subsidiary of the Registrant and four executive officers of the Registrant. (Exhibit 10.28 to the UCC/Uniroyal Form 10-K for the fiscal year ended September 28, 1996.) +10.9 Amended Supplemental Retirement Agreement dated October 18, 1995, between the Registrant and Vincent A. Calarco. (Exhibit 10(i) to Form 10-K for the fiscal year ended December 30, 1995.) +10.10 Form of Amended Supplemental Retirement Agreement dated October 18, 1995, between the Registrant and three of its executive officers. (Exhibit 10(j) to Form 10-K for the fiscal year ended December 30, 1995.) +10.11 Form of Supplemental Retirement Agreement dated October 18, 1995, between the Registrant and five of its executive officers. (Exhibit 10(k) to Form 10-K for the fiscal year ended December 30, 1995.) +10.12 Form of Supplemental Retirement Agreement dated as of August 21, 1996, between a subsidiary of the Registrant and two executive officers of the Registrant. (Exhibit 10.29 to the UCC/Uniroyal Form 10-K for the fiscal year ended September 28, 1996.) +10.13 Form of Supplemental Retirement Agreement dated as of August 21, 1996, between a subsidiary of the Registrant and two executive officers of the Registrant. (Exhibit 10.30 to the UCC/Uniroyal Form 10-K for the fiscal year ended September 28, 1996.) +10.14 Supplemental Retirement Agreement Trust Agreement dated October 20, 1993, between the Registrant and Shawmut Bank, N.A. (Exhibit 10(l) to Form 10-K for the fiscal year ended December 25, 1993.) +10.15 Amended Benefit Equalization Plan dated October 20, 1993. (Exhibit 10(m) to Form 10-K for the fiscal year ended December 25, 1993.) +10.16 Amended Benefit Equalization Plan Trust Agreement dated October 20, 1993, between the Registrant and Shawmut Bank, N.A. (Exhibit 10(n) to Form 10-K for the fiscal year ended December 25, 1993.) +10.17 Amended 1988 Long Term Incentive Plan. (Exhibit 10(o) to Form 10-K for the fiscal year ended December 25, 1993.) *+10.171 Amendment No. 4 to 1988 Long Term Incentive Plan. 10.18 Trust Agreement dated as of May 15, 1989, between the Registrant and Shawmut Worcester County Bank, N.A. and First Amendment thereto dated as of February 8, 1990. (Exhibit 10(w) to Form 10-K for the fiscal year ended December 30, 1989.) +10.19 Form of 1992 - 1994 Long Term Performance Award Agreement. (Exhibit 10(y) to Form 10-K for the fiscal year ended December 28, 1991.) +10.20 Crompton & Knowles Corporation Restricted Stock Plan for Directors approved by the stockholders on April 9, 1991. (Exhibit 10(z) to Form 10-K for the fiscal year ended December 28, 1991.) *+10.21 Amended 1993 Stock Option Plan for Non-Employee Directors. 10.22 Form of Assignment and Assumption of Raw Materials Agreement, dated as of October 30, 1989, between UCC and Avery. (Exhibit 10.1 to UCC Form S-1, Registration No. 33-32770.) +10.23 UCC Purchase Right Plan, as amended and restated as of March 16, 1995. (Exhibit 10.1 to the UCC Form 10-Q for the period ended April 2, 1995 ["UCC April 1995 Form 10-Q"].) +10.24 UCC 1993 Stock Option Plan. (Exhibit 28.1 to UCC's Registration Statement No. 33-62030 on Form S-8, filed on May 4, 1993.) +10.25 Form of Amendment No. 2 to the UCC 1993 Stock Option Plan. (Exhibit 10.2 to the UCC April 1995 Form 10-Q.) +10.26 Form of Executive Stock Option Agreement, dated as of November 15, 1993. (Exhibit 10.22 to the UCC 1994 Form 10-K.) *+10.27 Form of 1996 - 1998 Long Term Performance Award Agreement entered into in 1996 between the Registrant or one of its subsidiaries and fourteen of the executive officers of the Registrant. *11 Statement re computation of per share earnings. *13 1996 Annual Report to Stockholders of Crompton & Knowles Corporation. (Not to be deemed filed with the Securities and Exchange Commission except those portions expressly incorporated by reference into this report on Form 10-K.) *21 Subsidiaries of the Registrant. *23 Consent of independent auditors. (See Item 14(a)2 herein.) *24 Power of attorney from directors and executive officers of the Registrant authorizing signature of this report. (Original on file at principal executive offices of Registrant.) *27 Financial Data Schedule for the fiscal year ended December 28, 1996. *29 Annual Report on Form 11-K of Crompton & Knowles Corporation Employee Stock Ownership Plan for the fiscal year ended December 31, 1996. *99 Independent Auditors' Report of Deloitte & Touche LLP. * Copies of these Exhibits are annexed to this report on Form 10-K provided to the Securities and Exchange Commission and the New York Stock Exchange. + This Exhibit is a compensatory plan, contract or arrangement in which one or more directors or executive officers of the Registrant participate. (b) There were no reports on Form 8-K filed during the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CROMPTON & KNOWLES CORPORATION (Registrant) Date: March 28, 1997 By:/s/ Charles J. Marsden Charles J. Marsden Senior Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Name Title Vincent A. Calarco* Chairman of the Board, President, and Director (Principal Executive Officer) Charles J. Marsden* Senior Vice President and Director (Chief Financial Officer) Peter Barna* Vice President - Finance (Principal Accounting Officer) James A. Bitonti* Director Robert A. Fox* Director Roger L. Headrick* Director Leo I. Higdon, Jr.* Director Michael W. Huber* Director C. A. Piccolo* Director Patricia K. Woolf* Director Date: March 28, 1997 *By:/s/ Charles J. Marsden Charles J. Marsden as attorney-in-fact Independent Auditors' Report and Consent The Board of Directors and Stockholders Crompton & Knowles Corporation: Under date of January 30, 1997, we reported on the consolidated balance sheet of Crompton & Knowles Corporation and subsidiaries ("the Company") as of December 28, 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year then ended, which are included in this Form 10-K. Our report includes an explanatory paragraph regarding our responsibility for the Company's 1995 and 1994 consolidated financial statements. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule included in this Form 10-K for the year then ended. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the 1996 information set forth therein. We previously audited and reported on the consolidated financial statement schedule as of and for the years ended December 30, 1995 and December 31, 1994 of Crompton & Knowles Corporation and subsidiaries prior to the Company's pooling-of-interests with Uniroyal Chemical Corporation, as more fully described in the notes to the consolidated financial statements under the heading "Accounting Policies - Business Combination". We also audited the combination of the financial statement schedule as of and for the years ended December 30, 1995 and December 31, 1994, after restatement for the pooling-of-interests referred to above; in our opinion, the restated schedule, when considered in relation to the basic consolidated financial statements taken as a whole, has been properly combined on the basis described in the aforementioned note to the consolidated financial statements. We consent to the incorporation by reference in the registration statement (Nos. 33-21246, 33-42280 and 33-67600) on Form S-8 of Crompton & Knowles Corporation of our report, which includes an explanatory paragraph regarding our responsibility related to the Company's consolidated balance sheet as of December 30, 1995 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the two-year period then ended, dated January 30, 1997, relating to the consolidated balance sheet of Crompton & Knowles Corporation and subsidiaries as of December 28, 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the year then ended, which report appears in the December 28, 1996 Annual Report on Form 10-K of Crompton & Knowles Corporation. We also consent to the incorporation by reference in the registration statement (No. 33-21246) on Form S-8 of Crompton & Knowles Corporation of our report dated March 20, 1997 relating to the statements of financial condition of Crompton & Knowles Corporation Employee Stock Ownership Plan as of December 31, 1996 and 1995, and the related statements of income and changes in plan equity for each of the years in the three-year period ended December 31, 1996, as included in Exhibit 29 of said Form 10-K. /s/ KPMG Peat Marwick LLP Stamford, Connecticut March 28, 1997 S-1 Schedule II CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts (In thousands of dollars) Additions Balance at charged to Adjustments Balance beginning costs and at end of year expenses Recurring Other of year Fiscal Year ended December 28, 1996: Allowance for doubtful accounts $ 6,142 $ 2,333 $ (1,525)(1) $ 349 (6) $ 7,299 Accumulated amortization of cost in excess of acquired net assets 29,562 5,835 140 (2) 1,079 (6) 36,616 Accumulated amortization of other intangible assets 89,036 15,700 (296)(2) 3,723 (6) 108,163 Fiscal Year ended December 30, 1995: Allowance for doubtful accounts $ 6,281 $ 1,415 $ (1,584)(1) $ 30 (3) $ 6,142 Accumulated amortization of cost in excess of acquired net assets 23,816 5,544 214 (2) (12)(5) 29,562 Accumulated amortization of other intangible assets 75,486 14,887 (815)(2) (522)(5) 89,036 Fiscal Year ended December 31, 1994: Allowance for doubtful accounts $ 6,018 $ 1,204 $ (963)(1) $ 22 (3) $ 6,281 Accumulated amortization of cost in excess of acquired net assets 32,608 6,270 76 (2) (15,138)(4)(5) 23,816 Accumulated amortization of other intangible assets 95,231 20,101 (432)(2) (39,414)(4) 75,486 (1) Represents accounts written off as uncollectible (net of recoveries) denominated in foreign currencies. (2) Represents the translation effect of intangible assets denominated i (3) Represents allowance related to the acquisition of Killion Extruders (4) Represents write-offs due to the 1994 intangible asset revaluation a (5) Represents intangible asset retirements. (6) Represents adjustment to conform fiscal year of Uniroyal. S-2 EX-3 2 EXHIBIT 3(II) Exhibit 3(ii) BY-LAWS of CROMPTON & KNOWLES CORPORATION ARTICLE I Stockholders Section 1. Annual Meeting. The annual meeting of the stockholders shall be held on the last Tuesday of April in each year, at such time as shall be fixed by the Board of Directors in the call of the meeting. If that day be a legal holiday at the place where the meeting is to be held, the meeting shall be held on the next succeeding day not a legal holiday at such place. Purposes for which an annual meeting is to be held, in addition to those prescribed by law, by the Articles of Organization, or by these By-Laws, may be specified by the Board of Directors in the notice of the meeting. Section 2. Special Meeting in Lieu of Annual Meeting. If no annual meeting has been held in accordance with the foregoing provisions, a special meeting of the stockholders may be held in lieu thereof. Any action taken at such special meeting shall have the same force and effect as if taken at the annual meeting, and in such case all references in these By-Laws to the annual meeting of the stockholders shall be deemed to refer to such special meeting. Any such special meeting shall be called as provided in Section 3 of this Article I. Section 3. Special Meetings. A special meeting of the stockholders may be called at any time by the chairman of the Board, the President, or by the Board of Directors. A special meeting of the stockholders shall be called by the Clerk (or, in the case of the death, absence, incapacity, or refusal of the Clerk, by any other officer) upon written application of one or more stockholders who hold at least forty percent in interest of the capital stock entitled to vote at the meeting. Each call of a meeting shall state the place, date, hour, and purposes of the meeting. Section 4. Place of Meetings. All meetings of the stockholders shall be held at such place, either within or without the Commonwealth of Massachusetts, within the United States as shall be fixed by the board of Directors in the notice of the meeting. Any adjourned session of any meeting of the stockholders shall be held within the United States at the place designated in the vote of adjournment. Section 5. Notice of Meetings. A written notice of each meeting of stockholders, stating the placated, hour, and purposes of the meeting, shall be given at least seven days before the meeting to each stockholder entitled to vote thereat and to each stockholder who, by law, by the Articles of Organization, or by these By-Laws, is entitled to notice, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid, addressed to such stockholder at his address as it appears in the records of the Corporation. Such notice shall be given by the Clerk or an Assistant Clerk or by an officer designated by the Board of Directors. Whenever notice of a meeting is required to be given to a stockholder under any provision of the Business Corporation Law of the Commonwealth of Massachusetts or of the Articles of Organization or these By-Laws, a written waiver thereof, executed before or after the meeting by such stockholder or his attorney thereunto authorized and filed with the records of the meeting, shall be deemed equivalent to such notice. Section 6. Quorum of Stockholders. At any meeting of the stockholders, a quorum shall consist of a majority in interest of all stock issued and outstanding and entitled to vote at the meeting, except when a larger quorum is required by law, by the Articles of Organization, or by these By-Laws. Stock owned directly or indirectly by the Corporation, if any, shall not be deemed outstanding for this purpose. Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice Section 7. Action by Vote. When a quorum is present at any meeting, a plurality of the votes properly cast for election to any office shall elect to such office, and a majority of the votes properly cast upon any question other than an election to an office shall decide the question, except when a larger vote is required by law, by the Articles of Organization, or by these By-Laws. Section 8. Voting. Stockholders entitled to vote shall have one vote for each share of stock held by them of record according to the records of the Corporation, unless otherwise provided by the Articles of organization. No ballot shall be required for any vote for election to any office unless requested by a stockholder present or represented at the meeting and entitled to vote in such election. The Corporation shall not, directly or indirectly, vote any share of its own stock. Section 9. Proxies. To the extent permitted by law, stockholders entitled to vote may vote either in person or by written proxy. No proxy dated more than six months before the meeting named therein shall be valid All proxies shall be filed with the clerk of the meeting before being voted. Unless otherwise specified or limited by their terms, such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. ARTICLE II Board of Directors Section 1. Number, Election, and Terms. Subject to the rights of the holders of Preferred Stock to elect additional directors under specified circumstances as provided in Article 4 of the Articles of organization, the Board of Directors shall consist of not less than six nor more than 15 persons, the exact number to be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority vote of the directors then in office. The Board of Directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, as nearly equal in number as possible, with the term of office of one class expiring at the annual meeting of stockholders each year. At each annual meeting of the stockholders of the Corporation, the successors to the class of directors whose terms expire at the meeting shall be elected to hold office for terms expiring at the annual meeting of stockholders held in the third year following the year of their election. If the number of directors is changed, any increase or decrease shall be apportioned by the Board of Directors among the classes so as to maintain the number of directors in each class as nearly equal as possible. Each director shall hold office until the annual meeting for the year in which such director's term expires and until such director's successor shall be elected and shall qualify. No director need to be a stockholder. Section 2. Nomination. Nominations for the election of directors may be made by the Board of directors or a committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by mailing it, postage prepaid, to the Clerk of the Corporation not later than (a) with respect to an election to be held at an annual meeting of stockholders, ninety (90) days prior to the anniversary date of the immediately preceding annual meeting, and (b) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth (i) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder;(iv) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (v) the consent of each nominee to serve as a director of the Corporation if so elected. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Section 3. Newly Created Directorships and Vacancies. Newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other cause shall be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Section 4. Removal of Directors. Any director may be removed from office by stockholder vote at any time, with or without assigning any cause, but only by the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Any director may also be removed from office for cause by vote of a majority of the directors then in office. Section 5. Directors Elected by Holders of Preferred Stock. Whenever the holders of any class or series of Preferred stock or of any other class or series of shares issued by the Corporation shall have the right, voting separately as a class or series, to elect one or more directors under specified circumstances, the election, term of office, filling of vacancies, and other features of such directorships shall be governed by the terms of the Articles of Organization applicable thereto, and none of the provisions of Sections 1 to 4 of this Article II shall apply with respect to directors so elected. Section 6. Resignations. Any director, member of a committee, or officer may resign at any time by delivering his resignation in writing to the Chairman of the Board, the President, the Clerk, or to a meeting of the Board of Directors. Such resignation shall be effective upon receipt unless specified to be effective at some other time. Section 7. Powers. Except as reserved to the stockholders by law, the Articles of Organization, or by these By-Laws, the business of the Corporation shall be managed by the Board of Directors who shall have and may exercise all the powers of the Corporation. Section 8. Executive Committee. The Board of Directors may, by vote of a majority of the directors then in office, elect from their number an Executive Committee, which shall consist of the Chief Executive Officer and such number of other directors as the Board shall determine. The Executive Committee shall have and may exercise, when the Board of Directors is not in session, the authority of the Board of Directors in the management of the business of the Corporation, except that it shall not have authority to: (a) Change the principal office of the Corporation; (b) Amend the By-Laws; (c) Issue stock; (d) Establish and designate series of stock or fix and determine the relative rights and preferences of any series of stock; (e) Elect officers required by law or these By-Laws to be elected by the stockholders or directors or fill vacancies in any such offices; (f) Change the number of the Board of Directors or fill vacancies in the Board of Directors; (g) Remove officers or directors from office; (h) Authorize the payment of any dividend or distribution to stockholders; (i) Authorize the reacquisition for value of stock of the Corporation; or (j) Authorize a merger which by law may be authorized by the Board of Directors. Section 9. Other Committees. The Board of Directors may, by vote of a majority of the directors then in office, elect from their number other committees and may delegate to any such committee or committees some or all of the powers of the Board of Directors except those powers which by law, by the Articles of Organization, or by these By-Laws they are prohibited from delegating. Except as the board of Directors may otherwise determine, the Executive Committee and any such other committee may make rules for the conduct of its business, but unless otherwise provided by the Board of Directors or such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these By-Laws for the conduct of business by the Board of Directors. The Board of Directors shall have power to rescind any vote, resolution, or other action of any committee, provided that the rights of third parties shall not be impaired by such rescission. Section 10. Regular Meetings. At least one regular meeting of the Board of Directors shall be held in each quarter of the calendar year. A regular meeting of the Board of Directors shall be held without call or notice immediately after and at the same place as the annual meeting of the stockholders. Other regular meetings of the Board of Directors may be held without call or notice at such places and at such times as the Board of Directors may, from time to time, determine, provided that notice of the first regular meeting following any such determination shall be given to absent directors. Section 11. Special Meetings. Special meetings of the Board of Directors may be held at any time and at any place designated in the call of the meeting, when called by the Chairman of the Board, the President, or by two or more directors. Section 12. Notice of Meetings. It shall be sufficient notice to a director of a meeting of the Board of Directors to send notice by mail at least forty-eight (48) hours or by telegram at least twenty-four (24)hours before the meeting, addressed to such director at his usual or last known business or residence address, or to give notice to such director in person or by telephone at least twenty-four (24) hours before the meeting. Notice of a meeting need not be given to any director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. Section 13. Quorum of Directors. At any meeting of the Board of Directors, a majority of the directors then in office shall constitute a quorum. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting maybe held as adjourned without further notice. Section 14. Action by Vote. When a quorum is present at any meeting, a majority of the directors present may take any action, except when a larger vote is required by law, by the Articles of organization, or by these By-Laws. Section 15. Action by Written Consent. Unless the Articles of Organization otherwise provide, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all the directors or members of the committee, as the case maybe, consent to the action in writing and the written consents are filed with the records of the meetings of the Board of Directors or such committee. Such consents shall be treated for all purposes as a vote taken at a meeting. Section 16. Participation Through Communications Equipment. Unless otherwise provided by law or the Articles of Organization, members of the Board of Directors or of any committee thereof may participate in a meeting of such Board or committee, as the case may be, through conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence in person at a meeting. Section 17. Compensation of Directors. The Board of Directors may provide for the payment to any of the directors, other than officers or employees of the Corporation, of a specified amount for services as a director or member of a committee of the Board, or of a specified amount for attendance at each regular or special Board or committee meeting, or of both, and all directors shall be reimbursed for expenses of attendance at any such meeting; provided, however, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE III Officers and Agents Section 1. Enumeration; Qualification. The officers of the Corporation shall be a President, a Treasurer, a Clerk, and such other officers, including, without limitation, a Chairman of the Board, one or more Vice Presidents, Assistant Treasurers, and Assistant Clerks as the Board of Directors from time to time may in their discretion elect or appoint. In addition, the Corporation shall have such other agents as may be appointed by management in accordance with these By-Laws. The Chairman of the Board and the President shall each be a director. The Clerk shall be a resident of Massachusetts unless the Corporation had a resident agent appointed for the purpose of service of process. Any two or more offices may be held by the same person. Any officer may be required by the Board of Directors to give bond for the faithful performance of his duties to the Corporation in such amount and with such sureties as the directors may determine. Section 2. Powers. Subject to law, to the Articles of Organization, and to the other provisions of these By-Laws, each officer shall have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to his office and such duties and powers as the Board of Directors may from time to time designate. Section 3. Election. The Chairman of the Board, if any, the President, the Treasurer, and the Clerk shall be elected annually by the Board of Directors at their first meeting following the annual meeting of the stockholders. Other officers, if any, may be elected or appointed by the Board of Directors at said meeting or at any other time. Section 4. Tenure. Except as otherwise provided by law, by the Articles of Organization, or by these By-Laws, the Chairman of the Board, if any, the President, the Treasurer, and the Clerk shall hold office until the first meeting of the Board of Directors following the next annual meeting of the stockholders and until their respective successors are chosen and qualified, and each other officer shall hold office for such term as may be designated in the vote electing or appointing him, or in each case until such officer sooner dies, resigns, is removed, or becomes disqualified. Section 5. Chief Executive Officer. The Chief Executive Officer of the Corporation shall be the chairman of the Board, the President, or such other officer as may from time to time be designated by the Board of Directors. If no such designation is made, the President shall be the Chief Executive Officer. The Chief Executive Officer shall, subject to the control of the Board of Directors, have general charge and supervision of the business of the Corporation and, except as the Board of Directors shall otherwise determine, shall preside at all meetings of the stockholders and of the Executive Committee. Unless otherwise determined by the Board of Directors, the Chief Executive Officer shall have the authority to appoint such agents, in addition to those officers enumerated in Section 1 of this Article III as being elected or appointed by the Board of Directors, as he shall deem appropriate and to define their respective duties and powers. Section 6. Chairman of the Board. If a Chairman of the Board of Directors is elected, he shall preside at all meetings of the Board of Directors and shall have the duties and powers specified in these By-Laws and such other duties and powers as may be determined by the Board of Directors. Section 7. Presidents and Vice Presidents. The President shall have the duties and powers specified in these By-Laws and shall have such other duties and powers as may be determined by the Board of directors. The Vice Presidents shall have duties and powers as shall be designated from time to time by the board of Directors. Unless the Board of Directors otherwise determines, one Vice President shall be designated as the Chief Financial Officer of the Corporation and, as such, shall be the chief financial and accounting officer of the Corporation and shall have the duties and powers commonly incident thereto. Section 8. Treasurer and Assistant Treasurers. The Treasurer shall have general responsibility for the corporate treasury function, shall be in charge of its funds and valuable paper, books of account, and accounting records, and shall have such other duties and powers as may be designated from time to time by the Board of Directors. Any Assistant Treasurer shall have such other duties and powers as shall be designated from time to time by the Board of Directors or the Treasurer. Section 9. Clerk and Assistant Clerks. The Clerk shall record all proceedings of the stockholders and Board of Directors in a book or series of books to be kept for that purpose, which book or books shall be kept at the principal office of the Corporation and shall be open at all reasonable time to the inspection of any stockholder. In the absence of the Clerk from any meeting of the stockholders or Board of directors, an Assistant Clerk, or if there be none or he is absent, a temporary clerk chosen at the meeting, shall record the proceedings thereof in the aforesaid book. Any Assistant Clerks shall have such other duties and powers as shall be designated from time to time by the Board of Directors or the Clerk. The Clerk or any Assistant Clerk may also have the title Secretary or Assistant Secretary, as the case may be, and may execute or attest documents using either title. ARTICLE IV Capital Stock Section 1. Stock Certificates. Each stockholder shall be entitled to a certificate stating the number and the class and the designation of the series, if any, of the shares held by him, in such form as shall, in conformity to law, be prescribed from time to time by the Board of Directors. Such certificate shall be signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer. Such signatures may be facsimile if the certificate is signed by a transfer agent or by a registrar, other than a director, officer, or employee of the Corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer pursuant to the Articles of Organization, these By-Laws, or any agreement to which the Corporation is a party shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back either the full text of the restriction or a statement of the existence of such restriction and a statement that the Corporation will, upon written request, furnish a copy thereof to the holder of such certificate without charge. Every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either the full text of the preferences, voting powers, qualifications, and special and relative rights of the shares of each class and series authorized to be issued or a statement of the existence of such preferences, powers, qualifications, and rights and a statement that the Corporation will, upon written request, furnish a copy thereof to the holder of such certificate without charge. Section 2. Lost Certificates. In the case of the alleged loss, destruction, or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such conditions as the Board of directors may prescribe. When authorizing such issue of a new certificate, the Board may in its discretion require the owner of such lost, destroyed, or mutilated certificate, or his legal representative, to give the Corporation a bond, with or without surety, sufficient in the Board's opinion to indemnify the Corporation against any loss or claim that may be made against it with request to the certificate alleged to have been lost, destroyed, or mutilated. Section 3. Transfer of Shares. Subject to the restrictions, if any, stated or noted on the stock certificates, shares of stock may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the Board of Directors or the transfer agent of the Corporation may reasonably require. Except as may be otherwise required by law, by the Articles of Organization, or by these By-Laws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to receive notice and to vote with respect thereto, regardless of any transfer, pledge, or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-Laws. Section 4. Record Date and Closing Transfer Books. The Board of Directors may fix in advance a time, which shall not be more than sixty (60) days before the date of any meeting of stockholders or the date for a payment of any dividend or making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting any adjournment thereof or the right to receive such dividend or distribution or the right to give such consent or dissent, and in such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the Corporation after the record date; or without fixing such record date the Board of Directors may for any of such purposes close the transfer books for all of any part of such period. If no record date is fixed and the transfer books are not closed, the record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the date next preceding the day on which notice is given, and record date for determining stockholders for any other purpose shall be at the close of business on the date on which the Board of directors acts with respect thereto. ARTICLE V Indemnification of Directors and Officers The Corporation shall, to the full extent permitted by law, indemnify each of its directors and officers(including persons who serve at its request as directors, officers, or trustees of another organization in which it has any interest, direct or indirect, as a shareholder, creditor, other otherwise or who serve at its request in any capacity with respect to any employee benefit plan) against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise, or as fines and penalties, and counsel fees, reasonably incurred by him in connection with the defense or disposition of any action, suit, or other proceeding, whether civil or criminal, in which he may be involved or with which he may be threatened, while in office or thereafter, by reason of his being or having been such a director, officer, or trustee, except with respect to any matter as to which he shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interests of the Corporation or, to the extent that such matter relates to service with respect to an employee benefit plan, in the best interests of the participants of beneficiaries of such employee benefit plan; provided, however, that as to any matter disposed of by a compromise payment by such director or officer, pursuant to a consent decree of otherwise, no indemnification either for said payment or for any other expenses shall be provided unless such compromise shall be approved as in the best interests of the Corporation, after notice that it involves such indemnification: (a) by a disinterested majority of the directors then in office; or (b) by a majority of the disinterested directors then in office, provided that there has been obtained an opinion in writing of independent legal counsel to the effect that such director or officer appears to have acted in good faith in the reasonable belief that his action was in the best interests of the Corporation; or (c) by the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a single class, exclusive of any stock owned by any interested director or officer. Expenses, including counsel fees, reasonably incurred by any director or officer in connection with the defense or disposition of any such action, suite, or other proceeding may be paid from time to time by the Corporation, at the discretion of a majority of the disinterested directors then in office, in advance of the final disposition thereof upon receipt of an undertaking by such director or officer to repay the amounts so paid to the Corporation if it is ultimately determined that indemnification for such expenses is not authorized under this Article V, which undertaking may be accepted without reference to the financial ability of such director or officer to make repayment. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any director or officer may be entitled. As used in this section, the terms "director" and "officer"include their respective heirs, executors, and administrators, an "interested" director or officer is one against whom in such capacity the proceedings in question of another proceeding on the same or similar grounds is then pending or threatened, and a "disinterested" director is one against whom no such proceeding is then pending or threatened. Nothing contained in this section shall affect any rights to indemnification to which corporate personnel other than directors and officers may be entitled by contractor otherwise under law. The Board of Directors may authorize the purchase and maintenance of insurance, in such amounts as the Board of Directors may from time to time deem appropriate, on behalf of any person who is or was a director or officer or agent of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, or agent of another organization in which it has any interest, direct or indirect, as a shareholder, creditor, or otherwise, or with respect to any employee benefit plan, against any liability incurred by him in any such capacity, or arising out of his status as such, whether or not such person is entitled to indemnification by the Corporation pursuant to this Article V or otherwise and whether or not the Corporation would have the power to indemnify him against such liability. ARTICLE VI Miscellaneous Section 1. Corporate Seal. The seal of the Corporation shall be circular in form and shall bear substantially the following legend: "Crompton & Knowles Corporation, Incorporated Under Chapter 51 Acts of 1900 Massachusetts Laws"; provided, however, that the Board of Directors may from time to time alter or amend the form of the seal or the inscription thereon. Section 2. Fiscal Year. The fiscal year of the Corporation shall be such period as shall from time to time be determined by the Board of Directors. Section 3. Authorization of Loans and Indebtedness. No loan shall be contracted on behalf of the Corporation, and no bond, note, debenture, guarantee, or other obligation or evidence of indebtedness of the Corporation issued with respect thereto shall be made, executed, and delivered, unless authorized by the Board of Directors, which authorization may be general or confined to specific instances. Section 4. Execution of Documents. Except as the Board of Directors may generally or in specific instances authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, checks, drafts, and other orders for the payment of money out of the funds of the Corporation, and (if the issuance thereof shall have been authorized pursuant to Section 3 of this Article VI) all bonds, notes, debentures, guarantees, an other obligations or evidences of indebtedness of the Corporation shall be executed by the Chairman of the Board, the President, any Vice President, or the Treasurer. Section 5. Voting of Securities. Except as the Board of Directors may generally or in specific instances direct otherwise, the Chairman of the Board, the President, any Vice President, or the Treasurer shall have the power, in the name and on behalf of the Corporation, to waive notice of, appoint any person or persons to act as proxy or attorney-in-fact of the Corporation (with or without power of substitution)to vote at, or attend and act for the Corporation at, any meeting of holders of shares or other securities of any other organization of which the Corporation holds shares or securities. Section 6. Appointment of Auditor. The Board of Directors, or a committee thereof, shall each year select independent public accountants to report to the stockholders on the financial statements of the Corporation for such year. The selection of such accountants shall be presented to the stockholders for their approval at the annual meeting each year; provided, however, that if the stockholders shall not approve the selection made by the Board, the Board shall appoint other independent public accountants for such year. ARTICLE VII Amendments Except as provided in the second paragraph of this Article VII, these By-Laws may be altered, amended, or repealed, and new By-Laws not inconsistent with any provision of the Articles of organization or applicable statute may be made either by the affirmative vote of a majority of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, at any annual or special meeting of the stockholders called for the purpose, or (except with respect to any provision hereof which by law, the Articles of organization, or these By-Laws requires action by the stockholders) by the affirmative vote of a majority of the Board of Directors then in office. Not later than the time of giving notice of the meeting of stockholders next following the making, amending, or repealing by the Board of Directors of any By-Law, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the By-Laws. Any By-Law made, amended, or repealed by the Board of Directors may be altered, amended, repealed, or reinstated by the stockholders. Notwithstanding anything contained in these By-Laws to the contrary, the affirmative vote of the holders of 80% of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, adopt any provision inconsistent with, or repeal by provision of Section 1, 2, 3, or 4 of Article II of these By-Laws or this Article VII. EX-10.171 3 EXHIBIT 10.171 Exhibit 10.171 AMENDMENT No. 4 Crompton & Knowles Corporation 1988 Long Term Incentive Plan THIS AMENDMENT NO. 4 dated as of the 21st day of August, 1996, to the 1988 Long Term Incentive Plan, as amended (the "Plan"), of Crompton & Knowles Corporation ("the Company"), amends the Plan. WHEREAS, the Company desires to amend the Plan to increase the number of shares available under the Plan. WHEREAS, the stockholders of the Company on this date approved the amendment of the Plan as hereinafter set forth. NOW, THEREFORE, the Plan is amended as follows: 1. In accordance with Section 11 of the Plan, Section 4 of the Plan shall be amended by replacing the number "4,000,000", which number represents the shares available under the Plan, with the number "10,000,000". 2. The amendment set forth under item 1 hereof shall become effective upon the execution of this amendment by the Company. 3. Except as expressly hereby amended, the Plan is hereby ratified and confirmed in all respects. On and after the date hereof, each reference in the Plan to "this Plan," "hereunder" or words of like import shall mean and be a reference to the Plan as amended hereby. IN WITNESS WHEREOF, this instrument is duly executed as of the date first set forth above. Crompton & Knowles Corporation By: /s/John T. Ferguson II John T. Ferguson II Vice President, General Counsel and Secretary EX-10.21 4 EXHIBIT 10.21 Exhibit 10.21 CROMPTON & KNOWLES CORPORATION 1993 Stock Option Plan for Non - Employee Directors (Reflect 5/15/95 Amendment) 1. Purpose The purpose of this 1993 Stock Option Plan for Non - Employee Directors (the "Plan") of Crompton & Knowles Corporation (the "Company") is to attract and retain highly qualified non-employee directors of the Company and to encourage non-employee directors to own shares of the Company's Common Stock, $.10 par value ("Common Stock"). 2. Participation All directors of the Company who are not employees of the Company or any subsidiary of the Company shall be eligible to participate in the Plan. 3. Administration (a) Grants. Grants of stock options under the Plan shall be automatic as provided in Section 6. (b) Committee. A committee (the "Committee"), which shall be the Committee on Executive Compensation of the Board or such other committee composed of three or more directors or other persons appointed for such purpose by the Board, shall administer the Plan. If at any time no committee designated to administer the Plan shall be in office, the functions of the Committee shall be exercised by the Board. (c) Rules; Committee Action. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines, and practices governing the Plan as it shall from time to time deem advisable and to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreement relating thereto). The Committee may act only by a majority of its members then in office, except that the members thereof may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee. 4. Stock Available for Options (a) Shares Available. Subject to adjustment under subsection (b), options may be granted under the Plan in respect of a maximum of 100,000 shares of Common Stock. Shares subject to an option that expires or terminates unexercised shall again be available for options hereunder to the extent of such expiration or termination. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) Adjustment. In the event of any stock dividend, extraordinary cash dividend, creation of a class of equity securities, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, issuance of warrants or activation of rights to purchase Common Stock at a price substantially below fair market value, or similar change affecting the Common Stock, such adjustment shall be made in the maximum number and kind of shares subject to the Plan, in the number and kind of shares subject to outstanding options and subsequent options grants, and in the purchase price of outstanding options as the Board shall deem to be appropriate under the circumstances to prevent substantial dilution or enlargement of the rights granted to participants hereunder. 5. Nonstatutory Stock Options All options granted under the Plan shall be nonstatutory options not intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 6. Terms and Conditions of Options Each option granted under the Plan shall be evidenced by a written instrument in such form as the Committee may approve and shall be subject to the following terms and conditions: (a) Grant of Options. As used in the Plan, the term "Grant Date" means the date of the first regular meeting of the Boardin the forth quarter of each calendar year. Each year, an option shall be granted automatically to each eligible director on the Grant Date to purchase that number of full shares of Common Stock determined by dividing an amount equal to twice the annual retainer then payable to directors for service on the Board by the Fair Market Value (as hereinafter defined) of the Common Stock on the Grant Date. (b) Purchase Price. The purchase price for Common Stock subject to an option shall be 100% of the Fair Market Value of the Common Stock on the Grant Date. (c) Fair Market Value. As used in the Plan, the term "Fair Market Value" means the mean, as of any given date, between the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange Composite Index on such date (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred). (d) Expiration Date of Options. The expiration date of each option shall be fixed by the Committee, but no option granted under the Plan shall be exercisable more than ten years after the Grant Date. (e) Exercisability of Options. Options shall be exercisable in whole or in part with respect to 50% of the shares covered thereby on or after the first anniversary of the Grant Date and as to the remaining 50% of such shares on or after the second anniversary of the Grant Date. (f) Termination of Service. In the event service on the Board by the holder of any option terminates for any reason other than disability, death, or Change in Control (as hereinafter defined), the then outstanding options of such holder may thereafter be exercised, to the extent exercisable at the time of such termination, for a period of one year from the date of such termination but in no event after the stated expiration date of each option. (g) Disability or Death; Change in Control. In the event service on the Board by the holder of any option terminates by reason of disability, death, or Change in Control, the then outstanding options of such holder will become immediately exercisable, to the extent not otherwise exercisable, and will expire one year after such termination. Such options may be exercised during such one-year period regardless of their stated expiration dates. The rights of the option holder may be exercised by the holder's guardian or legal representative in the case of disability and by the beneficiary designated by the holder in writing delivered to the Company or, if none has been designated, the holder's estate in the case of death. (h) Exercise and Payment. Options may be exercised only by written notice to the Secretary of the Company accompanied by payment of the full purchase price for the shares as to which they are exercised. The purchase price may be paid in cash, in shares of Common Stock already owned for at least six months by the optionee (or other person entitled to exercise the option), or partly in cash and partly in such shares of Common Stock. The value of shares delivered in payment of the purchase price shall be their Fair Market Value, as determined above, as of the date of exercise. Upon receipt of such notice and payment, the Company shall promptly issue and deliver to the optionee (or other person entitled to exercise the option) a certificate or certificates for the number of shares as to which the exercise is made. (i) Change in Control. As used herein, a "Change in Control" means a change in control of the Company of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the effective date of the Plan, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, such a "Change in Control" shall be deemed to have occurred if: (i) A third person, including a "group" as such term is used in Section 13(d)(3) of the Exchange Act, other than the trustee of a Company employee benefit plan, becomes the beneficial owner, directly or indirectly, of 20 percent or more of the combined voting power of the Company's outstanding voting securities ordinarily having the right to vote for the election of directors of the Company; (ii) During any period of 24 consecutive months individuals who, at the beginning of such consecutive 24-month period, constitute the Board of Directors of the Company (the "Board" generally and as of the effective date of the Plan the "Incumbent Board") cease for any reason (other than retirement upon reaching normal retirement age, disability, or death) to constitute at least a majority of the Board; provided that any person becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (iii) The Company shall cease to be a publicly owned corporation having its outstanding stock listed on the New York Stock Exchange or quoted in the NASDAQ National Market System. 7. Options not Transferable Options granted under the Plan shall not be transferable by the holder other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act ("ERISA") or the rules thereunder. 8. Limitation of Rights Neither the Plan nor the granting of any option hereunder shall constitute an agreement or understanding that the Company will retain a director for any period of time or at any particular rate of compensation. The holder of an option shall have no rights as a shareholder with respect to shares as to which the option has not been exercised and payment made hereunder. 9. Purchase for Investment Unless the options and shares of Common Stock covered by the Plan have been registered under the Securities Act of 1933, as amended, or the Company has determined that such registration is unnecessary, each holder exercising an option may be required by the Company to represent in writing that such holder is acquiring the shares subject to the option for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. 10. Compliance with Regulations It is the intention of the Company that the Plan comply in all respects with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and that eligible directors remain disinterested persons for purposes of administering other employee benefit plans of the Company and having such other plans be exempt from Section 16(b) of the Exchange Act. Therefore, if any Plan provision or Committee rule is later found not to be in compliance with Rule 16b-3 or if any Plan provision or Committee rule would disqualify eligible directors from remaining disinterested persons, that provision or rule shall be deemed null and void, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3. 11. Effective Date of the Plan The Plan shall be effective as of the date it is adopted by the Board. Options granted under the Plan may not be exercised prior to the time the Plan shall have been approved by the holders of a majority of the outstanding Common Stock present or represented and entitled to vote at a meeting of shareholders of the Company. If such approval of the Plan by the shareholders is not obtained within one year of the adoption of the Plan by the Board, the Plan and any options granted pursuant to the Plan shall be null and void. 12. Amendment of the Plan The Board may amend, suspend, or terminate the Plan or any portion thereof at any time, provided that no amendment affecting the amount of Common Stock subject to options granted under the Plan, the exercise price of options, or the timing of grants may be made more than once every six months, other than to comport with changes in the Code, ERISA, or the rules thereunder. 13. Governing Law The Plan shall be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts. Amended 10/18/95 Amended 05/15/96 EX-10.27 5 EXHIBIT 10.27 Exhibit 10.27 1996-1998 Long Term Performance Award Agreement This Agreement, dated as of , 1996, is made by and between (the "Corporation") and (the "Executive"). WHEREAS, the Corporation has adopted the 1988 Long Term Incentive Plan (the "Plan") for the purpose of attracting, motivating and retaining key employees by offering them long term performance-based incentives and an opportunity to acquire ownership of shares of the Corporation's common stock. NOW, THEREFORE, the Executive, a key employee of the Corporation, is granted the opportunity to earn shares of common stock of the Corporation in accordance with the terms and conditions of the Plan and this Agreement. 1. The Executive is hereby granted the opportunity to earn a maximum of maximum shares of the common stock of the Corporation (the actual number of shares earned by the Executive, if any, hereinafter being called the "Award") during the Performance Period. 2. Performance Period The Performance Period shall be January 1, 1996, to December 31, 1998. 3. Performance Objectives There shall be two Performance Objectives used to determine the amount of the Award, if any, earned by the Executive, as follows: (a) Return on Equity Objective This objective, which must be achieved in order for the Executive to earn an Award, shall be the achievement by the Corporation of an average annual return on common equity for the Performance Period equal to or greater than the lesser of (i) fifteen percent (15%) or (ii) the average annual return on common equity achieved by a select group of specialty chemical companies as monitored by the Corporation. (b) Earnings Per Share ("EPS") Objective This objective shall be the achievement by the Corporation of cumulative earnings per share for the Performance Period of not less than $3.06 per common share. The following table shows by way of example the cumulative earnings per share which will be realized by the Corporation if the earnings per share increase annually during the Performance Period at rates of ten, thirteen and fifteen percent from the 1995 base of $.84 per share and the Award associated with cumulative earnings per share at each of those levels: Threshold Award Target Award Maximum Award Cumulative EPS $3.06 $3.22 $3.36 Award Earned The actual Award, if any, earned by the Executive shall be based upon the actual cumulative earnings per share achieved by the Corporation during the Performance Period, and except in the event that cumulative earnings per share for the Performance Period are equal to the amounts shown in the above table, shall be determined by interpolation from the values shown in the table. 4. Termination of Employment During Performance Period (a) If the Executive's employment with the Corporation terminates during the Performance Period because of death, disability, retirement or a Change in Control, the Executive Compensation Committee of the Board of Directors of the Corporation (the "Committee") may, in its sole discretion, make a pro rata Award to the Executive. (b) In the event that the Executive's employment with the Corporation terminates during the Performance Period for any reason other than death, disability, retirement or a Change in Control, the Executive shall not be entitled to receive any Award for the Performance Period. 5. After the date of any Award to the Executive hereunder, and prior to the transfer to the Executive of all of the shares of the Corporation comprising the Award, the Executive shall have the right to instruct the Trustee of the Crompton & Knowles Corporation Long Term Incentive Plan Trust as to the voting of such number of shares of the Corporation comprising the Award as are held by the Trustee, together with any other shares held by the Trustee in any account which may be established by the Trustee on or after the date of the Award in the name of the Executive. 6. The Executive shall be paid, at the time any shares earned by him are transferred to him, such sum of money or, at the sole discretion of the Corporation, such additional shares or other property, as shall be equal to the Executive's pro rata share of the Trust earnings to the date of and attributable to such payment, but less such cash or shares, if any, as the Corporation shall in its sole discretion determine are required to be withheld to pay taxes due on the cash or shares then being transferred to the Executive. The Executive shall have the right to defer any portion of the earned Award. 7. Any Award made to the Executive hereunder shall vest in the Executive and the Executive shall be entitled to receive the Award only as follows: 25% on December 31, 1998 25% on December 31, 1999 25% on December 31, 2000 25% on Retirement of the Executive Notwithstanding any other provision of this Section 7, upon the termination of the Executive's employment with the Corporation on or after December 31, 1998, due to death, disability, retirement or a Change in Control, any Award theretofore earned by the Executive hereunder shall immediately become fully vested in him. Termination of the Executive's employment with the Corporation on or after December 31, 1998, for any reason other than those specified in the preceding sentence shall cause the forfeiture of any portion of an Award not vested prior to the date of such termination of employment. 8. This Agreement does not alter the "at will" nature of the Executive's employment with the Corporation, which employment may be terminated at any time by the Executive or the Corporation. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. CROMPTON & KNOWLES CORPORATION By:_______________________ _______________________ Executive EX-11 6 EXHIBIT 11 CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share data) PRIMARY YEAR ENDED Dec.28, Dec.30, Dec.31, 1996 1995 1994 Earnings Earnings(loss) before extraordinary charge $ (22,054) $ 139,922 $ (162,927) Extraordinary loss on early extinguishment of debt (441) (8,279) - Net earnings(loss) $ (22,495) $ 131,643 $ (162,927) Shares Weighted average shares outstanding 72,026 65,572 60,908 Common stock equivalents - 699 - Average shares outstanding 72,026 66,271 60,908 Per share Earnings(loss) before extraordinary charge $ (.31) $ 2.11 $ (2.67) Extraordinary loss on early extinguishment of debt - (.12) - Net earnings(loss) $ (.31) $ 1.99 $ (2.67) FULLY DILUTED YEAR ENDED Dec.28, Dec.30, Dec.31, 1996 1995 1994 Earnings Earnings(loss) before extraordinary charge $ (22,054) $ 139,922 $ (162,927) Extraordinary loss on early extinguishment of debt (441) (8,279) - Net earnings(loss) $ (22,495) $ 131,643 $ (162,927) Shares Weighted average shares outstanding 72,026 65,572 60,908 Common stock equivalents - 717 - Average shares outstanding 72,026 66,289 60,908 Per share Earnings(loss) before extraordinary charge $ (.31) $ 2.11 $ (2.67) Extraordinary loss on early extinguishment of debt - (.12) - Net earnings(loss) $ (.31) $ 1.99 $ (2.67) EX-13 7 1996 ANNUAL REPORT Exhibit 13 Crompton & Knowles Corporation 1996 Annual Report Service Technology Performance Crompton & Knowles Corporation Crompton & Knowles is a global producer and marketer of specialty chemicals and equipment with 5,700 employees in research, manufacturing, sales and administrative facilities in the United States, Canada, Europe, Asia and Latin America. The company's 73 million shares of common stock outstanding are traded on the New York Stock Exchange under the symbol CNK. Crompton & Knowles has gained leadership positions in its chosen markets by providing quality products,technical service and performance know-how to solve customer problems and add value to customers' products. The company has six primary lines of business grouped into two segments: Specialty Chemicals Segment Chemicals & Polymers Business Description A leading worldwide producer and marketer of rubber chemicals, EPDM rubber polymers and nitrile rubber polymers. Product Trademarks Delac(R) accelerators, Naugard(R) antioxidants, Flexzone(R) antiozonants,Celogen(R) chemical foaming agents, Royalene(R) EPDM, Paracril(R) nitrile rubber Markets Rubber chemicals for producers of rubber products such as tires, hoses, belting, sponge and engineered rubber products; EPDM for producers of single ply roofing, electrical insulation, seals, gaskets, sponge rubber and oil additives; nitrile rubber for producers of oil-resistant seals, hoses, rings, printing rolls and insulation. Crop Protection Business Description Manufactures and markets agricultural chemicals,including fungicides, miticides/insecticides, growth regulants and herbicides; and is a leading producer of seed treatment formulations and equipment Product Trademarks Vitavax(R), Terrazole(R) and Procure(R) fungicides; Omite(R) and Comite(R) miticides; Dimilin(R) insecticide; Harvade(R), Royal MH-30(R) and B-Nine(R) growth regulants; Alanap(R) and Pantera(R) herbicides; Gustafson and Hannaford Seedmaster seed treatment Markets Worldwide growers of major food crops such as grains, fruits, nuts and vegetables and non-food crops including tobacco, cotton, turf, flax and ornamental plants Colors Business Description A major producer and marketer of textile, paper, leather and specialty dyes Product Trademarks Sevron(R), Nylanthrene(R), Intralan(R), Intracid(R), Intracron(R), Supernylite(R), Intralite(R), Superlitefast(R), Intramet(R), Intrasil(R), Intratherm(R), Intrabond(R), and Intrapel(R) Markets International producers of apparel, home furnishings, automotive fabrics, paper, leather and inks Specialties Business Description A leading global producer and marketer of specialty additives for plastics and lubricants and a leading manufacturer of high performance liquid castable urethane prepolymers. Product Trademarks Naugard(R) antioxidants, polymerization inhibitors,Trilene(R) liquid polymers, Synton(R) PAO synthetic fluids Naugalube(R) petroleum additives, Tonox(R) curatives, Polywet(R) dispersants, Polybond(R) polymer modifiers, Celogen(R) chemical foaming agents, Adiprene(R)and Vibrathane(R) urethane prepolymers Markets Specialty additives for producers of plastic and petroleum products used in adhesives, athletic equipment, automotive parts, construction materials, food packaging, industrial oils and lubricants. Urethane prepolymers for abrasion resistant applications such as solid industrial tires, printing and industrial rolls, mining equipment and consumer goods. Ingredients Business Description Produces and markets ingredients and ingredient systems including reaction and compounded flavors, specialty sweeteners, colors, coatings, excipients, carriers and binders. Product Trademarks Flav-O-Roast(TM), Savory Saute(R), Ulta-Meat(TM), Maltoline(R), Nulomoline(R), Sucrovert(R), Nulofond(R), Homemaid(R), Dri- Flo(R), Rise'N Shine(R), and Miracle Middles(TM) for food processing; Gel-Tone(TM), Gel-Klear, Chroma-Kote(R), Chroma- Tone(R), Dri-Klear(R), Nu-Pareil(R), Nu-Core(R), Nu-Tab(R), Cal-Carb(R) for pharmaceuticals Markets Food processing industries including bakery, confectionery, cereal, snack, convenience and institutional feeding establishments such a restaurants, fast food outlets and cafeterias; producers of pharmaceutical products such as vitamins, nutritional supplements, prescription, over-the-counter and generic drugs. Specialty Process Equipment & Controls Segment Davis-Standard Business Description A leading worldwide manufacturer, marketer and technical service supplier of plastics and rubber extrusion equipment, industrial blow molding equipment, related electronic controls and integrated extrusion systems. Product Trademarks Davis-Standard(R), Egan, NRM Extrusion, Sterling FHB Hartig, Killion, ER-WE-PA, Mark VI(TM), Gemini(R), EPIC III(TM), Thermatic(R), DSB(R) Markets Worldwide processors of plastic resins and elastomers making products such as plastic sheet for appliances, construction and automobiles; cast and blown film for packaging of consumer items; extruded shapes for construction and furniture; compounders of engineered plastics; recyclers of plastics; producers of wire and cable products; producers of non-disposable containers. The New Crompton & Knowles Chemicals & Polymers Crop Protection Colors Davis-Standard Ingredients Specialties Financial Highlights (In thousands of dollars, except per share amounts) 1996 1995 Net sales $1,803,969 $1,744,834 Operating profit1 $ 103,615 $ 218,122 Interest expense $ 114,244 $ 122,398 Net earnings (loss)2 $ (22,495) $ 131,643 Net earnings (loss) per share $ (.31) $ 1.99 Total assets $1,657,190 $1,655,845 Long-term debt $1,054,982 $ 974,156 Cash flow from operations $ 95,353 $ 106,348 1 Operating profit before merger and related costs of $85 million and a special charge for environmental costs of $30 million in 1996 and exclusive of certain special income, net of $4.9 million in 1995 would be as follows: Adjusted operating profit $ 218,615 $ 213,222 2 Net earnings before after-tax merger and related costs of $68.1 million, a special charge for environmental costs of $18.5 million and an extraordinary charge of $.5 million in 1996 and exclusive of a special tax credit of $78.9 million, an extraordinary charge of $8.3 million and other special income, net of $4.4 million in 1995 would be as follows: Adjusted net earnings $ 64,594 $ 56,642 (Pie chart) Percentage of Sales By Business Chemicals & Polymers 27% Crop Protection 20% Specialties 16% Specialty Process Equipment & Controls 16% Colors 15% Ingredients 6% (Bar chart) Sales (In Billions of Dollars) (Bar chart) Earnings On Average Total Capital (Before Special Items) (Bar chart) Earnings On Sales (Before Special Items) Worldwide Locations (World map showing national and international office and plant locations) World Headquarters Stamford, CT Map Legend Manufacturing Research & Development Sales and Business Offices Welcome to the NEW Crompton & Knowles. In 1996 we undertook the most significant strategic move in the 156-year history of our company. By completing the merger with Uniroyal Chemical Corporation we set Crompton & Knowles on course for extending its success with new businesses and new products in markets around the world. With this milestone event our company is positioned to build upon our standing as one of the most successful participants in the worldwide specialty chemicals industry. The merger supports our declared corporate objectives to expand our asset base in specialty chemicals; significantly increase worldwide market positions; add new platforms for growth; and enhance our company's earnings power. Combined, these four corporate objectives are aimed at achieving a single strategic objective which has guided this management over the years: Increase shareholder value. The NEW Crompton & Knowles is a $1.8 billion, broadly-based, specialty chemicals company dedicated to meeting customer needs through innovative technology, problem solving technical service and product performance. This will be accomplished by 5,700 skilled and dedicated employees developing, producing and selling products in 82 countries. In brief, the NEW Crompton & Knowles has six major lines of business. The largest business, Chemicals and Polymers, which accounts for 27 percent of sales, produces and markets chemicals for the processing of natural and synthetic rubber, and produces EPDM and nitrile rubbers; Crop Protection, accounts for 20 percent of sales and produces and markets chemicals to protect crops from infestation and disease and markets seed treatment services; Colors, which accounts for 15 percent of sales, produces and markets dyes for the textile industry and industrial products; Specialties, which accounts for 16 percent of sales, produces and markets chemical additives for the plastics and petroleum industries, as well as urethane prepolymers; Specialty Ingredients, which accounts for six percent of total corporate sales, produces ingredients for the food and pharmaceuticals industries; Specialty Process Equipment and Controls, accounts for 16 percent of sales and manufactures, sells and services systems used in the processing of plastics. Crompton & Knowles logo Uniroyal Chemical logo The merger with Uniroyal Chemical has tripled the size of the company and expanded its global reach while reinforcing its presence and leadership in many international markets and businesses. The NEW Crompton & Knowles is a market leader, positioned as number one or two in thirteen key markets globally or in North America. This strength has enabled our international sales to reach $718 million, or 40 percent of total corporate revenues in 1996, up from 35 percent in 1995. We have long recognized the value of a strong international presence. The NEW Crompton & Knowles has both the corporate presence and the geographic reach to meet competitive international trade challenges and compete effectively on a global scale. However, we recognize that in the final analysis all business is local. Our company's success over the past twelve years was derived from an intimate understanding of our customers' needs within each market segment, and an ability to satisfy those needs with meaningful one-on-one solutions based on an entrepreneurial spirit and a customer-first strategy. This, coupled with the positioning of the corporation to achieve leadership positions in key market segments is what we call nichemanship. This concept has been central to our past success and remains key to our future performance as the NEW Crompton & Knowles. Successful exploitation of niches calls for continuous assessment and improvement; for seeking ways to establish and maintain new competitive advantages; and for producing and marketing products which play a key role in improving our customer success. This means putting our customers first and is at the heart of our strategy. As a $1.8 billion corporation, we have new strength on which to build. Nonetheless, we are a series of small businesses embracing small business values that are key to maintaining sustainable competitive advantage. Regardless of size, these values of being first, focused and fast will help us to achieve our objectives. To innovate, to be first, in our view, is indispensable in the high-performance business culture we seek in the NEW Crompton & Knowles. Employees committed to be first are creative. They make independent decisions, take prudent risks and lead with determination. photo caption Vincent A. Calarco Focus is characterized by a clear and precise understanding of the company's objectives and the knowledge and skill to execute a plan for success. The third element, acting fast, involves a responsiveness to customers that keeps us first in satisfying their needs. Whether it's a new product introduction, a delivery schedule, or customer service, doing it fast is a critical advantage. As we blend the best of the Crompton & Knowles and Uniroyal Chemical business cultures we fully expect our strategy will help us to grow our company for all constituencies, especially for you, our shareholders. Our company's committed management team, responsible for assuring the success of this niche strategy at the NEW Crompton & Knowles, has a proven track record of success in each of our businesses. In subsequent sections of this report our senior operating managers review the performance, key issues and opportunities for each of these business units. There are challenges, to be sure, but you will note that there are also substantial opportunities for our company. With the support and participation of our committed employees we will achieve notable successes in 1997 and over the long-term. When we announced our company's merger with Uniroyal in the Spring of 1996, we committed to reducing costs by as much as $10 million of corporate expenses. We identified those savings in 1996 and began realizing some of these savings late in the fourth quarter of the year. The full benefits of the reductions will accrue throughout 1997. Cost-effective asset management has been a hallmark of Crompton & Knowles over the years and these principles will continue to guide our plans and our actions. Our strong focus on efficient asset management should reinforce your confidence that the NEW Crompton & Knowles will improve its balance sheet, which, as a result of the merger, has approximately $1 billion of total debt. Our company's excellent cash flow should enable us to reduce this debt by at least $75 million a year and to achieve an investment grade debt rating within five years. To strengthen our ability to lower debt at an accelerated pace, we reduced the company's dividend to five cents a share to be paid annually each May. While our company has had a history of regular dividend growth, most of our future growth in shareholder value will come through capital appreciation, as it has in the past. To assure the ongoing growth of the NEW Crompton & Knowles we will continue to fund capital projects at a level to enable us to realize our goal of achieving annual earnings per share gains of at least 10 percentage points above inflation before deleveraging. This is an exciting time for everyone associated with our company. We are combining the cultures of two corporations with more than 255 combined years of tradition to form a greater, more powerful, more resourceful, and more profitable enterprise. We are confident that our goals are clear, our programs are achievable, the interests of our suppliers, customers, employees and shareholders are aligned, and that the NEW Crompton & Knowles is built for success. Thank you for your support. We look forward to keeping you informed of our progress. Respectfully yours, Vincent A. Calarco Chairman, President & Chief Executive Officer March 17, 1997 photo caption The new management team of Crompton & Knowles, photographed at the President's Meeting in September last year. The team met for three days for strategy sessions and other planning issues. Our Businesses Chemicals & Polymers 6 Crop Protection 8 Colors 10 Specialties 12 Ingredients 14 Davis-Standard 15 Chemicals & Polymers "Our leading market positions, supported by our strong technology and highly efficient operations, will enable us to continue to satisfy our customers' needs and to grow with them." Joseph B. Eisenberg Executive Vice President Chemicals & Polymers Uniroyal Chemical Company, Inc. photo caption Weather stripping made of Royalene(R) EPDM limits water, dust and noise penetration in automotive vehicles. Specialty Chemicals Segment Sales of the specialty chemicals segment increased four percent to $1.5 billion in 1996. Operating profit of $216.3 million was 11 percent above the prior year's level of $195.2 million after adjustment for certain special income, net of $4.9 million. All businesses within the segment Chemicals & Polymers, Crop Protection, Specialties and Food Ingredients achieved improved sales and profitability during the year, with the exception of Colors, which continued to be affected by worldwide overcapacity and resultant price competition. The company's largest business, Chemicals & Polymers,increased sales by four percent to $493.7 million during the year. This growth was lead by rubber chemicals and Paracril nitrile rubber, offset in part by slightly lower sales of Royalene EPDM. Rubber chemicals benefitted from increased worldwide consumption of rubber in 1996, accompanied by generally firmer prices throughout the year. As the worldwide rubber chemicals industry has undergone recent consolidations of producers, the company has maintained its number two worldwide market share position based on its competitive strengths which include a longstanding history of product innovation, a record of outstanding service to the world's leading producers of rubber products and backward integration in key raw materials used in the company's products. In 1996, the company built on these strengths by introducing new products, increasing capacity and improving production efficiencies. New product introductions included Bonding Agent TZ which gained significant interest in applications demanding superior adhesion to brass-coated steel wire used in tires, steel reinforced conveyor belts and radiator hoses, and a new vulcanization accelerator aimed at reducing potentially undesirable nitrosomines generated by traditional chemical agents. At the Geismar, Louisiana production facility, the company's largest rubber chemicals plant, debottlenecking and process improvement programs lead to significant increases in output utilizing existing capacity. In fact, the Quality Circle team responsible for some of the changes was voted first place winner by the Association for Quality and Participation from among 10,000 members and 4,400 corporations for the team process used to implement the improvements. The Geismar facility also received the 1996 Regional Administrator's Environmental Excellence Award from the Federal Environmental Protection Agency for its non-hazardous deep-well injection program and the State of Louisiana's 1997 Governor's Award for outstanding achievement for pollution prevention. photo caption Paracril(R) nitrile rubber's excellent oil-resistant properties ensure consistent performance of cables and hoses in engine compartments. Consistent with the company's global manufacturing and technical service strategy, at mid-year, Uniroyal Chemical started up a joint venture facility in Thailand to produce antiozonants for the growing markets in Southeast Asia. The growth outlook for the worldwide rubber chemicals industry varies by geographic region. In North America, growth is expected to remain at historic rates about equal to GDP growth through the end of the decade. Significantly faster growth is expected in Asia/Pacific and Latin America. In the EPDM polymer business the company's sales in 1996 were slightly lower than the prior year. Nevertheless, Uniroyal Chemical maintained its position as the leader in North America and the third largest producer in the world. Sales and pricing weakened over the year in anticipation of new U.S.-based capacity scheduled to begin production in the first half of 1997. Key markets for Uniroyal Chemical's EPDM include single ply roofing and automotive parts. The company has been a technology pacesetter in the industry, maintaining low-cost production and introducing innovative Royalene EPDM products on an ongoing basis since 1964. In fact, approximately 45 percent of current Royalene EPDM sales derive from products developed by the company within the last five years. Among the innovative new products successfully introduced in 1996 were RoyalEdge polymers specially designed to incorporate in a single polymer multiple grades of EPDM meeting a variety of properties such as high abrasion resistance and a smooth surface for automotive door seal sponges. Royalene LVEP, a new family of low viscosity EPDM polymers, is also finding specialty applications in mechanical goods and plastics modification. On the technology front, a new pilot facility to prove out metallocene catalyst-based technology began operations in 1996. Production from this facility is expected to be commercialized by the end of 1997 and will give the company opportunities to expand use of EPDM into applications not currently served. The company is a pioneer in producing liquid EPDM using metallocene technology, introducing its new product, Trilene, in 1988 for highly specialized applications in products such as lubricants, sealants and coatings. The EPDM industry has grown at an annualized rate of approximately four percent over the last five years. New product applications, new process technology and expanded markets are expected to sustain this growth rate over the next five years. The Uniroyal Chemical operation will continue to participate in this growth and maintain its leading market positions, supported by its proven technology, high levels of customer service and distribution strengths. The third product line within the company's chemicals and polymers business, Paracril nitrile rubber(NBR), had strong sales growth in 1996 as a result of the acquisition of Negromex's NBR business in Mexico, in 1996, increasing Uniroyal Chemical's capacity by nearly 30 percent. The Negromex facility utilizes Uniroyal's process technology and augments its existing production in Painesville, Ohio. It also enhances the company's ability to service international customers demanding the consistent quality and performance of Paracril NBR, widely used in oil resistant applications such as automotive hoses, seals and rings. The company is confident that continuing customer acceptance of the nitrile rubber produced at the new Mexican facility, combined with process efficiency improvements implemented in 1996, will assure strong growth of its Paracril business. photo caption Royalene(R) EPDM's natural ability to withstand harsh weather makes it an outstanding choice for use in single-ply roofing membranes. photo caption Rubber chemicals used in the production of tires assure resistance to ozone, oxygen, light and heat degradation. Crop Protection "With our strategy of marketing a diverse but select line of crop protection products which improve yields on more than 400 crops in 82 countries, we will see ongoing gains in our business." Alfred F. Ingulli Executive Vice President Crop Protection Uniroyal Chemical Company, Inc. The Crop Protection business of Crompton & Knowles, consisting of insecticides, fungicides, plant growth regulants, herbicides and seed treatment chemicals and equipment marketed under the Uniroyal Chemical and Gustafson brand names, had an excellent year in 1996, reporting its 10th consecutive year of record sales and the 13th consecutive year of record profits. 1996 sales for the business were $353.3 million, eight percent above the prior year. photo caption The growing use of genetically engineered seeds is increasing demand for the company's Gustafson seed treatment and equipment to protect seeds from fungus and insect attack. Crop protection's success in achieving these record results derived from its strategy of focusing on distinct market niches with a diverse, yet select product lineup used by thousands of farmers growing more than 400 crops in 82 countries around the world. The value of this global strategy was well demonstrated during 1996 as sales declines in certain products were more than offset by gains elsewhere. Sales of the company's proprietary insecticide Dimilin declined in the United States due to reduced cotton acreage and low insect infestation levels, while lower Omite miticide sales reflected regulatory changes. These declines were more than offset by strong sales of other products around the world. These included international sales of Vitavax, a fungicide which is Crop Protection's largest single product; Procure, a foliar fungicide for grapes, apples and pears; Harvade, a defoliant and maturation agent for cotton, flax and sunflowers; Micromite, a citrus miticide; Comite, a miticide for cotton, corn, potatoes and alfalfa; Royal MH-30, a desuckering agent for tobacco and a sprout inhibitor for onions and potatoes; and Pantera, a post-emergent grass herbicide. photo caption Farmers around the world achieve superior crop yields by using the company's proven crop protection chemicals. photo caption Cotton producers around the world have come to depend on Comite(R) and Dimilin(R) to protect their crop from harmful mites and insects, and during havest they use Harvade(R) defoliant to increase quality and harvest efficiency. Sales growth was also reinforced by the introduction of new products such as Topcide, an insecticide specially designed for use in greenhouses, and Adept, an insect growth regulator used in ornamental production. Late in the year, the company also announced a new, broad-spectrum acaricide based on novel chemistry and developed in its own laboratories, for use on apples, citrus and tea crops. Code-named D-2341, the new product will be first commercialized in Japan, the largest potential market, by a licensed partner starting in 2001. International sales of crop protection products accounted for a record 50 percent of sales in 1996, with notable strength in the Europe/Africa, Latin America and Asia/Pacific regions. The company's seed treatment business also had an excellent year with significantly higher sales and improved profitability. North American seed treatment and equipment operations, conducted under the Gustafson brand name, grew strongly. Contributing to Gustafson's growth was Gaucho(R), an innovative seed treatment insecticide in its first full year of commercial introduction which is rapidly gaining acceptance as a seed treatment due to its lower labor intensity, safety in use, efficacy and significantly lower application rates. Raxil(R), another seed treatment fungicide, was introduced in 1996. The company's international seed treatment operations grew substantially in 1996, especially Europe, Latin America and Australia. Crompton Knowles' strategy in the Crop Protection business will continue to be to develop its own proprietary products, license new products from third parties for exclusive marketing and sales through Uniroyal Chemical's existing distribution network, and to acquire available unique technology or products which would reinforce or broaden the company's niche market positions. In the worldwide seed treatment business, the company uses many of its own specialized products to serve specific market segments. However, recognizing the diverse needs of its broad agricultural customer base, the company also seeks out the latest and best available third party technology and compounds to deliver optimum efficacy in all applications. The strong worldwide demand for raising agricultural production through the application of improved technology presents Crompton & Knowles with numerous opportunities for continued growth of its global Crop Protection business. The acceptance of integrated pest management will continue to reduce the use of many chemicals by farmers, but at the same time will increase the need for highly specialized crop protection chemicals applied at very low concentrations-grams, rather than kilograms per acre-to protect seeds, and plants, and to assure improved yields. The company's product portfolio is particularly compatible with integrated pest management. Similarly, the development of new sophisticated and increasingly valuable genetically engineered seeds will require the use of seed treatment chemicals to guarantee germination and stand establishment for growth into productive plants. In total, while worldwide demand for crop protection products and services is expected to continue to grow at approximately three percent a year, the specialized niche market-driven nature of Crompton & Knowles' business can be expected to enable it to continue to maintain its leadership positions in many market segments and to outpace the industry's growth rate for the foreseeable future. photo caption Agricualtural chemicals used on a wide range of high-value fruit and vegtable crops such as grapes, tomatoes, and apples help growers produce higher yields and more marketable produce. photo caption Serving the expanding ornamental plant market with growth regulants such as B-Nine(R) and Bonzi(R) provides excellent growth opportunities. C&K Colors "High levels of technical service and quality have enabled us to secure premier positions in chosen niche markets even as the dyes industry undergoes worldwide restructuring." Edmund H. Fording, Jr. President Crompton & Knowles Colors Incorporated The Colors business of Crompton & Knowles recorded sales of $271.1 million in 1996, a decline of five percent from the prior year, as the worldwide dyes industry continued to be affected by overcapacity, competitive pricing of dyes, and weak demand for apparel in major markets in the United States and Europe. In the United States, Crompton & Knowles maintained its position as a leading supplier despite difficult market conditions. This was accomplished by rededicating the company's Colors operation to its long standing principles of satisfying the market's need with quick customer response, efficient production, quality products and strong technical service. The effectiveness of this consistent strategy was dramatically confirmed in an industry-wide survey conducted by an independent organization comparing the leading suppliers of dyes in the United States based on responses from major textile customers. Crompton & Knowles was highly rated as a leader in all categories, with a particularly strong showing in the "Best Value" category, which asked customers to name the supplier providing the best combination of product quality, price and service. Of utmost importance also was the recognition of Crompton & Knowles' stability and commitment to the dyes industry. The company's long-term commitment to value guided its actions in 1996 as it countered weak industry fundamentals with actions programmed to build on its proven market strengths. To deliver quality products the company broadened its offerings in key market segments characterized by growth and its own competitive advantage. In the carpet industry, where Crompton & Knowles is a leading supplier and experienced growth during 1996, it added several key products during the year. These included new liquid dyes for carpet producers with continuous production processes seeking ease of application and reproducibility of shade. For use on wool and nylon, the company introduced a new high light fast dye range that applies to both residential and commercial uses, based on the company's proprietary Intralan pre-metallized dye technology. These new dyes have also been introduced for use on nylon apparel. Dyeing of nylon, a specialized technology developed by Crompton & Knowles simultaneously with the invention of nylon fiber, continued to present growth opportunities in 1996. New wet fast acid dyes responded to growth in the athletic activewear and swimwear sectors of the apparel industry. In total, apparel, which accounts for approximately 50 percent of the company's dyes sales, had lower demand and resulted in dyes sales declines during 1996. photo caption Increased production and marketing of dyes for non-apparel applications such as leather, as well as paper and inks, continue to present the company with growth opportunies. photo caption Fashion apparel and hosiery producers turn to Crompton & Knowles Colors as "Best Value" supplier of dyes providing the best combination of product quality, price and service. For the growing home furnishings and industrial apparel continuous dyeing industry, producing textiles for toweling, sheeting, uniforms and other applications utilizing fast-speed high volume dyeing processes, a new color palate of liquid reactive and disperse dyes enabled the company to increase its participation and to grow sales. New quality products serving the paper industry reinforced the company's strong performance in its industrial products area. New colors and expanded product lines also increased business in specialized soluble dyes for the wood stain and ink industries. To support the value of new products, the company continued in 1996 to partner with its customers and suppliers in researching and developing the most efficient processes and systems for the production and application of dyes. Rationalization of the product line with a tight focus on customer needs, combined with a strategy of capital spending specifically targeted on profit improvement projects and debottlenecking to make specialty products, has made Crompton & Knowles the most cost competitive producer in North America. Operating rates at the company's facilities remained high during the year even as debottlenecking resulted in higher throughput rates. The third element in the "Best Value" equation, service, continued to be an area of focus for the company. In recent years the company has successfully installed new computerized order entry and tracking systems tied into production planning to assure the best possible customer service, distribution and delivery. To further strengthen the technical service capabilities of its sales force, in 1996 the company created a new team of Technical Demonstrators who do on-site problem solving at customer locations and run product trials at the company's own laboratories. International Colors operations suffered from the same demand and pricing issues faced by the company in the United States. In Europe, some of these negative effects were offset by an increase in the percent of sales made direct to major customers, in lieu of dealing primarily through agents and distributors. In Asia, sales grew during 1996 in specialty applications in the more developed markets like Taiwan, Korea, Hong Kong and Japan. To increase strategic coordination and effectiveness the company's worldwide Colors operations have been consolidated into a single business, while the regional activities outside the United States will benefit from consolidation with Uniroyal Chemical administrative functions. Crompton & Knowles Colors continues to maintain strong positions in its chosen markets despite negative industry-wide pressures. Trends such as increased apparel imports to the United States from Mexico, using textiles produced and dyed in the United States, will continue to partially offset high textile imports from China and elsewhere in the Pacific region. Nevertheless, the fundamentals of the dyes industry will improve only when the ongoing consolidations of major dyes producers result in a worldwide reduction of production capacity and improved pricing. The company is well positioned to benefit quickly from these events and to resume growth in both sales and profitability over the long term. photo caption The recent introduction of specialized dyes for the continuous dyeing market-serving the towel, linen, sheet and industrial apparel industries- has delivered strong sales growth. photo caption A strong market position in dyes for home furnishings, including carpeting, draperies and upholstery fabics, has enabled the company's Colors operations to grow sales in this sector. Specialties "Our ability to quickly respond to customers' changing requirements with our performance-enhancing specialty products will drive our growth in the global marketplace." William A. Stephenson Executive Vice President Specialties Uniroyal Chemical Company, Inc. Sales for the company's Specialties business, including lubricant and polymer additives, intermediates and urethane prepolymers, increased seven percent, to $296.6 million in 1996, as a result of effective marketing, enhanced global presence, increased production and the introduction of new products. During the year the Uniroyal Chemical business reinforced its position as the world's leading producer and marketer of high performance liquid castable urethane prepolymers. Marketed under the Adiprene and Vibrathane brand names, these prepolymers have gained growing acceptance as the product of choice for use in fabricated parts such as solid industrial tires, mining equipment, printing rolls, sports equipment, and numerous other specialized applications requiring high abrasion resistance and toughness. photo caption Increased demand for fuel efficiency and longer equipment life continues to raise consumption of the company's proprietary lubricant additives such as Synton(R) PAO and Nauglube(R) antioxidants which prolong the service life of a broad range of lubricating fluids. The company's 1996 sales growth of urethane prepolymers was especially strong in international markets. Global marketing programs supported by increased local technical resources have delivered on growing opportunities in Europe, Asia and Latin America. Slower growth of the in-line skate market in the North American market has been offset by new market opportunities that have developed as higher performance wheels have gained popularity. Such shifts in market requirements have kept Uniroyal Chemical in the forefront with its customers as it has developed new or improved prepolymers, applications and processing technologies. The company produces and tests as many as 100 experimental applications a year in its laboratories resulting in a 10 to 15 percent annual expansion of its product line with new prepolymer formulas designed to solve specific customer problems. New- urethane technologies developed within this program include Ribbon Flow systems which can be efficiently applied to exterior surfaces of industrial rolls; Solithane systems which cure at room temperatures; and coatings which meet increasingly restrictive codes regulating volatile organic hydrocarbon emissions. photo caption Producers of petrochemicals such as styrene, acrylics and other monomers increasingly use the company's Naugard polymerization inhibitors to prevent polymer formation during manufacturing. On a broader scale, during 1996 the company introduced several new products, and broadened its offerings of low free isocyanate prepolymers which offer improved customer processability and higher performance in the finished product, while improving workplace safety. Increased production capacity at the company's facility in North Carolina enabled it to meet the growing demand for its low free isocyanate urethane products. In the specialty additives market, lubricant additives, including antioxidants and synthetic fluids which prolong the service life of automotive and industrial lubricants, achieved strong gains in 1996. Synton PAO, a synthetic fluid developed in the company's laboratories, and used in automotive gear oils, remained in high demand through the year as production capacity was expanded significantly at the company's Canadian facility. Sales of Naugalube amine and phenolic antioxidants to the lubricants market continued to increase in 1996. Uniroyal Chemical achieved share gains in all geographic regions as a result of its position as the world's largest producer of diphenylamine, global antioxidant manufacturing strategy, and customer-oriented new product development. For the plastics industry, Uniroyal Chemical offers a broad range of plastics additives. These inhibitors, modifiers and stabilizers improve the processability and performance of plastic resins. Plastics additives delivered another year of strong customer satisfaction, as evidenced by good sales growth. Contributing to this performance was the global growth of polymerization inhibitors produced for the world's major petrochemical manufacturers to inhibit the adverse formation of polymers in the purification of styrene monomer. Enhancing the company's premier position in this market, a new generation inhibitor Naugard SFR was introduced to immediate acceptance by the industry. Plastics antioxidants, which provide protection against oxygen and heat degradation, had higher sales during the year, as did polymer modifiers, which increase the strength and durability of engineered thermoplastics and polyolefins. Sales of chemical foaming agents also grew around the world as demand for closed cell foam plastic products increased. The Specialties operations of Crompton & Knowles have maintained a record of steady growth over the years, as sales have increased more than 10 percent annually since 1991. These gains were achieved by the company's innovative research and development-driven response to demand for abrasion-resistant castable urethanes and increased global demand for high-performance products and value-added specialty additives. The increasing demand for more efficient production systems, and higher product performance combined with stricter environmental standards are expected to provide opportunities for Crompton & Knowles to continue to deliver outstanding growth. photo caption Speedy introduction of customer-responsive products for new applications have made the company the world's leading producer of castable urethane prepolymers for solid industrial wheels such as those used on roller coasters. photo caption Skaters around the world take for granted the abrasion resistance of the company's Adiprene(R) and Vibrathane(R) castable urethane prepolymers used in skate wheels, while simultaneously benefiting from the improved performance of safety helmets and pads produced with plasic resins containing the company's stabilizers, polymer modifiers and chemical foaming agents. Ingredients "Changing consumer tastes for high value convenience and health conscious foods present us with myriad opportunities to supply food producers with integrated flavor solutions developed in our laboratories." Rudy M. Phillips President Ingredient Technology Corporation photo caption Pharmaceuticals producers increasingly depend on the company's ingredients specialist for excipients, coatings, carriers, colors and flavors. photo caption Flavors, seasonings, sweetners and colors produced by the company for bakery applications make it a multi-functional ingredient resource for customers. The Specialty Ingredients business of Crompton & Knowles increased sales by three percent to $104.4 million in 1996. Profitability also improved from the prior year as a result of tightly focused marketing strategies and consolidation of certain operations. The company's focus on specialty ingredients-flavors, seasonings, sweeteners, colors and pharmaceutical excipients-for leading national producers of food and pharmaceutical products resulted in notable gains in certain sectors of the market. The guiding principle for the business continued to be a comprehensive approach to servicing customers with technological breadth including the creation and applications development of innovative and functional flavors, high value flavored seasonings and specialty sweeteners; and pharmaceutical ingredients for a range of significant consumer products. The growing market for rich authentic savory flavors, which respond to demands by both consumers and institutional food service suppliers for more tasty "homemade" meals conveniently packaged for quick and easy preparation, provided numerous opportunities for Crompton & Knowles in 1996. Reaction compounded flavors, using technology developed in the company's laboratories combining flavored ingredients and seasonings, enhance the appearance, mouth feel, aroma and taste of foods as diverse as sauces; meats; rice, potato and pasta side dishes; and the full range of snacks. Applications for rich, authentic savory flavors have increased as food marketers have broadened their offerings of microwaveable and calorie-conscious, lower-fat foods for the home. Similarly, food service manufacturers operating cafeterias, fast food chains, popular restaurants and institutional kitchens increasingly use higher value savory ingredients to enhance the eating experience of food served away from the home. According to Prepared Foods magazine reporting on new product tracking, 12,431 new products were introduced by food processors in the United States through November of 1996. Introductions were high, though off 20 percent from 1995 as consolidations in the food industry continued to impact the market timing of new products. Specialty sweeteners, a North American market segment lead by Crompton & Knowles, remained a mainstay for the company in 1996. Sweetener systems including molasses, honey, malt syrups and specialty sweeteners used for bakery, cereal and confectionery applications to impart flavor and texture, or to naturally improve humectancy or antioxidant qualities, increased sales during the year. photo caption Specialty food ingredients optimize taste, aroma, mouthfeel and appearance for today's fast changing consumer market. The company's flavored seasonings business experienced improved demand in 1996 as food producers continued to respond to consumer preferences for foods with a Southwestern flavor. These include hot/spicy, salsa and barbecue flavors applied to snack foods such as chips and pretzels, especially the new baked or lower fat snacks. Pharmaceutical ingredients continued its domestic growth in 1996 and benefited from a continuing reciprocal marketing arrangement with DMV International to serve markets overseas. Pharmaceutical coatings, colors, excipients and flavors made by the company are used in prescription and over-the-counter drugs and nutritional supplements. At mid-year Crompton & Knowles completed a strategic review of the Specialty Ingredients business, and has restructured it to improve its long-term profitability. To improve efficiencies, two facilities are being closed and production is being consolidated into existing facilities. Research and development activities have been more clearly focused to offer higher value, integrated flavor systems and ingredient "building blocks" to customers on a more timely basis consistent with the accelerated timetables in today's consumer markets Davis-Standard "Our enhanced market positions will benefit us in 1997 as utilization rates of existing plastics processing equipment rises and worldwide consumption of plastic resins continues to increase." Robert W. Ackley President Davis-Standard Corporation Specialty Process Equipment & Controls Segment Sales of specialty process equipment & controls increased by two percent to $284.9 million in 1996, while operating profit declined to $23.4 million from a record $40.2 million in 1995. The results primarily reflect an industry-wide decline in demand for plastics processing equipment offset in part by an acquisition which increased the company's revenues in the international arena. Although consumption and processing of plastics remained at record levels during the year, North American processors of plastics equipment orders slowed in 1996 as the industry focused on increasing utilization rates of the large number of new extrusion systems acquired over the prior two years. As the leading producer of single screw plastics extrusion equipment and related systems for the plastics processing industry in North America, the Davis-Standard subsidiary of Crompton & Knowles was significantly impacted by these events. Weak industry-wide demand not only reduced unit sales, but resulted in lower selling prices and weaker margins. Nevertheless, Davis-Standard was able to maintain its leading market position in North America and continued its strategy of leading technological change in the industry and broadening its product line through niche acquisitions. New products introduced by the company included a new die for CPVC pipe extrusion, designed to eliminate burning and to double the output rate achieved on similar industry systems. The new IL-P Die is capable of producing in excess of 600 pounds of 1/2 inch CPVC pipe per hour on a dual extrusion line. photo caption The health care industry has come to depend on precise multilumen tubing, blood bags and IV bags produced on the company's medical products extrusion systems. photo caption High-speed plastics extrusion systems manufactured by the company produce tubing for fiber optic cable at speeds of up to 750 feet per minute. Utilizing the latest Windows NT technology from the Microsoft Corporation, Davis-Standard introduced a new superior gauge thickness control system for use by all sheet, cast film and extrusion coating processors. The "real time" control combines into a centralized processing system three proprietary technologies developed and proven by the company in separate applications to improve quality. For blown film lines, where the company is a leading equipment supplier, new oscillating nips have enabled customers to achieve higher rates of quality output by limiting the circumference variation of 30-inch rolls of film to less than two millimeters. In response to a trend in the industrial blow molding industry toward large parts manufacturing, Davis-Standard in 1996 augmented its existing blow molding product line with the acquisition of the Hartig line of blow molders. These high technology systems can efficiently produce large blow molded automotive components, industrial containers and outdoor products. The acquisition also expands the company's extrusion equipment offerings for the production of carpet backing, fishing line and non-woven products such as diaper material. International sales accounted for 43 percent of Davis-Standard revenues in 1996. The largest single contributor to this near-doubling of international sales, from 25 percent of sales in 1995, was the acquisition of Klockner ER-WE-PA GmbH, a leading producer of extrusion coating, cast film and plastics extrusion equipment based in Germany. The additional 1996 sales revenues from ER-WE-PA more than offset the sales decline experienced in North America. However, costs associated with restructuring the business resulted in losses from this operation. The acquisition is a key element in the company's strategy to broaden its plastics extrusion systems sales. The ER-WE-PA facility, combined with the company's facility in France, gives Davis-Standard the platform to provide customer service and technical support for existing and new customers in Western, Central and Eastern Europe. To further leverage its broad product range with plastics processors in Europe, the company began manufacturing its Killion precision laboratory and medium sized extruders at the French facility. Repiquet handles all local sales, service and technical support for the Killion line of equipment. The segment's equipment order backlog at the end of 1996 was $92 million. Crompton & Knowles is encouraged about the outlook for its Davis-Standard equipment business in 1997 and over the long term by market factors such as rising capacity utilization rates of existing extrusion equipment and growing worldwide plastic resin consumption. Positive internal developments include: enhanced competitive market positions and efficiency improvement programs in the acquired European operations, as well as at existing operations in the United States. Together, these trends and programs will positively affect anticipated performance. photo caption The conversion of plastic resin into many products used by consumers around the world begins with processing through extrusion systems. photo caption Davis-Standard's industrial blow molding systems are used world- wide to produce non-disposable plastic products such as children's playthings. photo caption As a leading suppliers of extrusion systems used to produce sheet and shaped parts, Davis-Standard benefits from increased consumption of plastics in automotive applications. Financials [C&K logo] Mangement's Discussion and Analysis of Financial Condition and Results of Operations 18 Consolidated Financial Statements 22 Notes to Consolidated Finacial Statements 26 Responsibiity for Financial Statements 36 Independent Auditors' Report 36 Five Year Selected Financial Data 37 Board of Directors 38 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Liquidity Merger On August 21, 1996, the Company merged with Uniroyal Chemical Corporation ("Uniroyal") in a common stock transaction that was accounted for on a pooling-of-interests basis. Accordingly, the consolidated financial information for all periods presented include the combined accounts and results of operations of both the Company and Uniroyal. Liquidity and Capital Resources The Company's merger with Uniroyal resulted in combined total debt and stockholders' deficit at December 28, 1996 of $1.1 billion and $96 million, respectively. The Company's debt to total capital percentage was 110%, up from 106% on a combined basis at year-end 1995. The Company's liquidity needs including debt servicing are ultimately expected to be financed from operations. In connection with the merger, the Company entered into a revolving credit agreement ("Agreement") in the amount of $530 million. Borrowings under the Agreement included $300 million available to the Company for working capital and general corporate purposes, $150 million available to Uniroyal Chemical Company, Inc. (a wholly-owned subsidiary of Uniroyal) for working capital and general corporate purposes and $80 million available for borrowings by the European subsidiaries of the Company. The Agreement extends through August 2001 and is secured, in the case of Uniroyal Chemical Company, Inc.'s domestic borrowings, by a security interest in its domestic accounts receivable and inventory. The Agreement calls for interest based upon various options including a spread over LIBOR that varies according to certain debt ratios of the Company for the trailing four quarters and is currently at .875% over LIBOR. Borrowings under the Agreement amounted to $179.5 million at December 28, 1996 and bore a weighted average interest rate of 6.8%. The December 28, 1996 working capital balance of $384.8 million increased $108.4 million from the December 30, 1995 balance of $276.4 million, while the current ratio increased to 2.1 from 1.7. Both increases are primarily attributable to the reduction in notes payable and current debt installments. Days sales in receivables increased to 55 days in 1996 from 50 days in 1995. The increase was primarily attributable to increased foreign sales which generally have longer payment terms. Inventory turnover averaged 3.2 in 1996 compared to 3.3 in 1995. Cash flows from operating activities of $95.4 million decreased $11 million from $106.4 million in 1995 primarily as a result of merger and related costs totalling $68.1 million on an after-tax basis. Net cash provided by operations and proceeds from the sale of treasury stock were used principally to finance acquisitions, fund capital expenditures, reduce indebtedness and pay cash dividends. The current dividend payout has been reduced to $.05 per share payable annually in May. Capital expenditures in 1996 were unusually low at $39.2 million, down from $87.7 million in 1995. Capital expenditures in 1995 included significant expenditures to expand capacity primarily for new products. Capital expenditures are expected to approximate $60 million in 1997 primarily for replacement needs and improvement of domestic and foreign operating facilities. International operations The stronger U.S. dollar exchange rate versus the international currencies in which the Company operates accounted for the unfavorable adjustment of $13.4 million in the accumulated translation adjustment account since year-end 1995. Changes in the balance of this account are primarily a function of fluctuations in exchange rates and do not necessarily reflect either enhancement or impairment of the net asset values or the earnings potential of the Company's foreign operations. The net asset value of foreign operations amounting to $223.5 million is not currently being hedged with respect to translation in U.S. dollars. The Company operates on a worldwide basis and exchange rate disruptions between the United States and foreign currencies are not expected to have a material effect on year-to-year comparisons of the Company's results of operations. Cash deposits, borrowings and forward exchange contracts are used periodically to hedge fluctuations between the U.S. and foreign currencies if such fluctuations are earnings related. Such hedging activities are not significant in total. Environmental Matters The Company is involved in claims, litigation, administrative proceedings and investigations of various types in several jurisdictions. A number of such matters involve claims for a material amount of damages and relate to or allege environmental liabilities, including clean-up costs associated with hazardous waste disposal sites, natural resource damages, property damage and personal injury. The Company and some of its subsidiaries have been identified by Federal, state or local governmental agencies, and by other potentially responsible parties (each a "PRP") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state statutes, as a PRP with respect to costs associated with waste disposal sites at various locations in the United States. In addition, the Company is involved with environmental remediation and compliance activities at some of its current and former sites in the United States and abroad. Each quarter, the Company evaluates and reviews estimates for future remediation and other costs to determine appropriate environmental reserve amounts. For each site a determination is made of the specific measures that are believed to be required to remediate the site, the estimated total cost to carry out the remediation plan, the portion of the total remediation costs to be borne by the Company and the anticipated time frame over which payments toward the remediation plan will occur. Based on current information and analysis, the Company recorded a special provision in the amount of $30 million during the third quarter of 1996 for environmental remediation activities. As of December 28, 1996, the Company's reserves for such environmental liabilities totaled $96.2 million. These estimates may subsequently change should additional sites be identified, further remediation measures be required, the interpretation of current laws and regulations be modified or additional environmental laws and regulations be enacted. The Company intends to assert all meritorious legal defenses and all other equitable factors which are available to it with respect to the above matters. The Company believes that the resolution of these environmental matters will not have a material adverse effect on the consolidated financial position of the Company. While the Company believes it is unlikely, the resolution of these environmental matters could have a material adverse effect on the Company's consolidated results of operations in any given year if a significant number of these matters are resolved unfavorably. Operating Results-1996 as Compared to 1995 Overview Consolidated net sales increased 3% to $1.8 billion from $1.74 billion in 1995. The increase was primarily attributable to the impact of acquisitions (+5%) offset in part primarily by unit volume. The acquisitions include primarily the worldwide crop protection business of Solvay Duphar B.V. acquired in March of 1995 and the extrusion machinery business of Klockner ER-WE-PA GmbH acquired in January of 1996. International sales, including U.S. exports, increased as a percentage of total sales to 40% from 35% in 1995. The net loss for 1996 was $22.5 million, or 31 cents per common share, compared to earnings of $131.6 million, or $1.99 per share, in 1995. Before after-tax merger and related costs of $68.1 million, a special charge for environmental costs of $18.5 million and an extraordinary charge of $.5 million, net earnings were $64.6 million, or 90 cents per share, in 1996, compared with adjusted earnings of $56.6 million, or 85 cents per share, in 1995. The adjusted 1995 results exclude $78.9 million of a special tax credit, an extraordinary charge of $8.3 million and other special income, net of $4.4 million. Average shares outstanding in 1996 were 72 million compared with 66.3 million in 1995. Gross margin as a percentage of net sales increased slightly to 35.1% from 34.9% in the prior year before certain special income of $9.9 million in 1995. Consolidated operating profit, before merger and related costs of $85 million and a special charge for environmental costs of $30 million, increased 3% to $218.6 million from $213.2 million in the prior year before certain special income, net of $4.9 million in 1995. The specialty chemicals segment rose 11% (as adjusted for special income in 1995) and the specialty equipment and controls segment decreased 42%. Specialty Chemicals The Company's specialty chemicals segment sales of $1.52 billion increased 4% from 1995. The increase is primarily attributable to the impact of acquisitions (+2%) and improved pricing. An analysis of sales by major product class within the specialty chemicals segment follows. Chemicals and polymers sales of $493.7 million increased 4% from 1995 primarily attributable to improved selling prices in rubber chemicals and increased unit volume for nitrile rubber, partially offset by lower unit volume and pricing in the EPDM business. Crop protection sales of $353.3 million increased 8% compared to 1995 primarily attributable to the acquisition of the crop protection business of Solvay Duphar B.V. in March of 1995. Lower insecticide sales due to lower U.S. infestation levels and regulatory actions relative to Omite registrations in the U.S. were offset primarily by increases in international sales and sales of seed treatment products. Specialties sales of $296.6 million increased 7% versus 1995 primarily attributable to higher unit volume and improved pricing of urethane prepolymers and unit volume increases in lubricant additives and other specialty chemicals. Colors sales of $271.1 million decreased 5% from 1995 primarily attributable to lower selling prices of approximately 3% and lower unit volume. The lower unit volume was primarily in apparel dyes which account for approximately 50% of the business. Specialty ingredient sales of $104.4 million increased 3% versus 1995 primarily attributable to increased unit volume. Operating profit of $216.3 million increased 11% from $195.2 million in the prior year before certain special income, net of $4.9 million in 1995. The improvement in operating profit resulted primarily from improved pricing and the impact of acquisitions. Specialty Process Equipment and Controls The Company's specialty process equipment and controls sales of $284.9 million represent a 2% increase from 1995. Approximately 20% was attributable to the incremental impact of acquisitions, primarily Klockner ER-WE-PA GmbH, offset partially by 16% lower unit volume reflecting primarily reduced domestic demand for extrusion systems and 2% lower pricing. Operating profit decreased 42% to $23.4 million from $40.2 million in 1995 primarily due to lower selling prices and lower unit volume in the domestic business. The equipment order backlog at the end of 1996 totalled $92 million (including $21 million from 1996 acquisitions) compared to $72 million at the end of 1995. Other Selling, general and administrative expenses increased 3% due primarily to the impact of acquisitions and inflation offset in part by the cost reduction program charge of $5 million in 1995 and the benefits of that program in 1996. Depreciation and amortization of $82.6 million increased 3% compared to 1995 primarily as a result of a higher asset base including acquisitions. Research and development cost of $52.4 million increased 5% versus 1995 primarily as a result of the impact of acquisitions and inflation. Interest expense of $114.2 million decreased 7% from 1995 primarily due to lower levels of indebtedness. Other income of $1.3 million in 1996 decreased $1.4 million versus 1995 primarily due to lower interest income and special licensing income in 1995. The effective tax rate, excluding the impact of merger and related costs ($68.1 million after-tax) and a special charge for environmental costs ($18.5 million after-tax), was 38.9% versus 38% in the prior year before special tax credits of $78.9 million in 1995. Operating Results-1995 as Compared to 1994 Overview Consolidated net sales increased 14% to $1.74 billion from $1.54 billion in 1994. The increase was primarily attributable to the impact of acquisitions (+6%) and the balance primarily due to higher unit volume. The acquisitions include primarily the worldwide crop protection business of Solvay Duphar B.V. acquired in March of 1995 and foreign and domestic extrusion machinery businesses acquired during 1995 and 1994. International sales, including U.S. exports, increased as a percentage of total sales to 35% from 34% in 1994. Net earnings for 1995 were $131.6 million, or $1.99 per share, compared to a net loss of $162.9 million, or $2.67 per share, in 1994. Before a special tax credit of $78.9 million, an extraordinary charge of $8.3 million and other special income, net of $4.4 million, net earnings were $56.6 million, or 85 cents per share, in 1995, compared with adjusted earnings of $34.5 million, or 57 cents per share, in 1994. The adjusted 1994 results exclude the after-tax impact of the write-off of certain intangible assets of $162.5 million and a special tax provision of $34.9 million. Average shares outstanding in 1995 were 66.3 million compared with 60.9 million in 1994. Gross margin as a percentage of net sales decreased to 34.9% (as adjusted for certain special income of $9.9 million in 1995) from 36.7% in 1994. The decrease was primarily attributable to higher raw material costs and lower margin product mix. Operating profit of $213.2 million, before certain special income, net of $4.9 million in 1995, increased 11% from $192.4 million in 1994. The 1994 operating profit excludes the write-off of intangible assets in the amount of $191 million. The increase in operating profit was due to an 8% increase in the specialty chemicals segment and a 29% increase in the specialty process equipment and controls segment. Specialty Chemicals The Company's specialty chemicals segment reported sales of $1.46 billion representing a 9% increase from 1994 primarily attributable to the incremental sales from acquisitions and higher unit volume. An analysis of sales by major product lines within the specialty chemicals segment follows. Chemicals and polymers sales of $476.6 million increased 8% from 1994. Rubber chemical sales in 1995 increased in all geographic regions except Latin America. The increase was primarily attributable to increased unit volume. Sales increased in both the nitrile rubber and EPDM businesses primarily due to improved pricing. Crop protection sales of $326 million increased 22% versus 1994 with 10% due to the acquisition of the worldwide crop protection business of Solvay Duphar B.V. and the remainder due primarily to higher unit volume across all product lines particularly fungicides, insecticides and seed treatment sales. Specialties sales of $276.7 million increased 18% from 1994 primarily attributable to higher unit volume and improved pricing of urethane prepolymers and higher unit volume primarily in chemical intermediates, polymerization inhibitors and plastic additives. Colors sales of $284 million decreased 4% versus 1994 attributable to lower selling prices of 5% offset in part primarily by foreign currency translation. Specialty ingredient sales of $101.6 million increased 5% compared to 1994, reflecting primarily increased unit volume. Operating profit of $195.2 million increased 6% from $184.5 million in 1994. The operating profit in 1995 excludes certain special income, net of $4.9 million while the operating profit in 1994 excludes a write-off of intangibles of $191 million. The improvement in operating profit resulted primarily from an increase in unit volume, improved pricing and the impact of acquisitions. Specialty Process Equipment and Controls The Company's specialty process equipment and controls segment reported sales of $279.9 million representing an increase of 43% from 1994. Approximately 27% of the sales increase was attributable to the incremental impact of acquisitions with the balance primarily from increased unit volume. Operating profit of $40.2 million increased 29% from $31.2 million in 1994. Approximately 11% was attributable to the incremental impact of acquisitions with the balance primarily attributable to unit volume, offset in part by a lower-margin product mix. The equipment order backlog totaled $72 million at the end of 1995 compared to $66 million at the end of 1994. Other Selling, general and administrative expenses of $270.3 million increased 13% versus 1994 primarily due to the impact of acquisitions, increased spending to support a higher sales level and a cost reduction program charge of $5 million. Depreciation and amortization of $80.1 million in 1995 decreased 7% from $86.1 million in 1994 primarily due to lower amortization of intangible assets resulting from the write-off of intangibles in 1994. Research and development costs of $50.1 million increased 12% from 1994 primarily attributable to the impact of the acquisitions and increased spending for product development. Interest expense of $122.4 million decreased 6% from 1994 primarily as a result of a $14.3 million mark-to-market charge in 1994 for an option embedded in an interest rate swap contract offset in part by approximately $5.8 million from the impact of higher rates on the swap contract. Other income of $2.7 million decreased $1.7 million from 1994 primarily due to lower interest income in 1995. The effective tax rate before special tax credits of $78.9 million was 38%, versus 47.8% in 1994 before the write-off of intangible assets ($162.5 million after-tax) and special taxes of $34.9 million. The higher effective tax rate in 1994 was primarily due to higher state income taxes. Consolidated Statements of Operations Fiscal years ended 1996, 1995 and 1994 (In thousands of dollars, except per share data) 1996 1995 1994 Net Sales $1,803,969 $1,744,834 $1,536,211 Costs and Expenses Cost of products sold 1,170,586 1,126,166 972,894 Selling, general and administrative 279,812 270,338 240,079 Depreciation and amortization 82,597 80,118 86,139 Research and development 52,359 50,090 44,682 Merger and related costs 85,000 - - Special environmental provision 30,000 - - Write-off of intangibles - - 191,000 Operating Profit 103,615 218,122 1,417 Interest expense 114,244 122,398 130,734 Other income (1,285) (2,736) (4,361) Earnings Earnings (loss) before income taxes and extraordinary charge (9,344) 98,460 (124,956) Provision (benefit) for income taxes 12,710 (41,462) 37,971 Earnings (loss) before extraordinary charge (22,054) 139,922 (162,927) Extraordinary loss on early extinguishment of debt (441) (8,279) - Net earnings (loss) $(22,495) $131,643 $(162,927) Per Common Share Earnings (loss) before extraordinary charge $(.31) $2.11 $(2.67) Extraordinary loss - (.12) - Net earnings (loss) $(.31) $1.99 $(2.67) See accompanying notes to consolidated financial statements Crompton & Knowles Corporation and Subsidiaries Consolidated Balance Sheets Fiscal years ended 1996 and 1995 (In thousands of dollars, except per share data) 1996 1995 Assets Current Assets Cash $21,120 $30,437 Accounts receivable 267,871 271,947 Inventories 362,349 332,493 Other current assets 90,897 62,152 Total current assets 742,237 697,029 Non-Current Assets Property, plant and equipment 497,979 524,463 Cost in excess of acquired net assets 189,012 185,648 Other assets 227,962 248,705 $1,657,190 $1,655,845 Liabilities and Stockholders' Equity Current Liabilities Current installments of long-term debt $731 $11,434 Notes payable 8,595 93,744 Accounts payable 151,270 144,241 Accrued expenses 143,133 125,063 Income taxes payable 33,214 32,897 Other current liabilities 20,536 13,274 Total current liabilities 357,479 420,653 Non-Current Liabilities Long-term debt 1,054,982 974,156 Postretirement health care liability 181,980 184,209 Other liabilities 159,167 136,012 Stockholders' Equity (Deficit) Common stock, $.10 par value - issued 77,237,421 shares in 1996 and 76,755,875 in 1995 7,724 7,676 Additional paid-in capital 232,010 227,433 Accumulated deficit (257,177) (213,347) Accumulated translation adjustment (25,592) (12,168) Treasury stock at cost (48,083) (62,972) Deferred compensation (1,587) (2,190) Pension liability adjustment (3,713) (3,617) Total stockholders' deficit (96,418) (59,185) $1,657,190 $1,655,845 See accompanying notes to consolidated financial statements Crompton & Knowles Corporation and Subsidiaries Consolidated Statements of Cash Flows Fiscal years ended 1996, 1995 and 1994 Increase (decrease) to cash (in thousands of dollars) 1996 1995 1994 Cash Flows from Operating Activities Net earnings (loss) $(22,495) $131,643 $(162,927) Adjustments to reconcile net earnings (loss) to net cash provided by operations: Depreciation and amortization 82,597 80,118 86,139 Write-off of intangible assets - - 191,000 Noncash interest 16,082 18,781 37,782 Deferred taxes (16,308) (78,611) (1,180) Changes in assets and liabilities: Accounts receivable (9,675) (53,090) (8,716) Inventories (7,033) (178) (47,192) Other current assets (614) 2,707 4,329 Other assets (169) 6,067 (1,862) Accounts payable and accrued expenses 22,548 16,721 20 Income taxes payable 3,249 (813) 120 Other current liabilities 2,066 (6,139) 4,755 Postretirement health care liability (2,653) (1,244) (1,204) Other liabilities 27,106 (9,599) (5,165) Other 652 (15) 819 Net cash provided by operations 95,353 106,348 96,718 Cash Flows from Investing Activities Acquisitions (15,713) (108,035) (19,965) Capital expenditures (39,204) (87,744) (52,090) Proceeds from sale of assets - - 26,006 Other investing activities 2,689 (7,943) (8,013) Net cash used by investing activities (52,228) (203,722) (54,062) Cash Flows from Financing Activities Proceeds from sale of common stock, net 14,150 146,626 - Proceeds (payments) on short-term borrowings (100,434) 29,976 49,592 Proceeds (payments) on long-term borrowings 55,985 (136,807) 37,040 Treasury stock acquired - (4,296) (47,647) Dividends paid (12,967) (25,217) (23,309) Other financing activities 4,873 (4,493) (1,373) Net cash provided (used) by financing activities (38,393) 5,789 14,303 Cash Effect of exchange rates on cash (573) (1,154) 713 Change in cash 4,159 (92,739) 57,672 Cash adjustment to conform fiscal year of Uniroyal (13,476) - - Cash at beginning of period 30,437 123,176 65,504 Cash at end of period $21,120 $30,437 $123,176 See accompanying notes to consolidated financial statements Crompton & Knowles Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity (Deficit) Fiscal years ended 1996, 1995 and 1994 (In thousands of dollars, except per share data) 1996 1995 1994 Common Stock Balance at beginning of year $7,676 $6,365 $6,382 Stock options, warrants and other issuances (481,546 shares in 1996, 332,530 in 1995 and 182,465 in 1994) 48 32 18 Uniroyal sale of common stock (12,785,295 shares) - 1,279 - Uniroyal repurchase (356,153 shares) - - (35) Balance at end of year 7,724 7,676 6,365 Additional Paid-in Capital Balance at beginning of year 227,433 84,527 86,409 Stock options, warrants and other issuances 5,062 (50) 1,682 Sale of common shares (485) - - Uniroyal sale of common stock - 145,34 - Uniroyal repurchase of shares - - (2,430) Return of shares from long-term incentive plan trust - (2,391) - Issuance under long-term incentive plan - - (1,134) Balance at end of year $232,010 227,433 84,527 Accumulated Deficit Balance at beginning of year (213,347 (319,773) (133,537) Net earnings (loss) (22,495) 131,643 (162,927) Adjustment to conform fiscal year of Uniroyal (8,368) - - Cash dividends declared on common stock ($.27 per share in 1996, $.525 in 1995, and $.46 in 1994) (12,967) (25,217) (23,309) Balance at end of year (257,177) (213,347) (319,773) Accumulated Translation Adjustment Balance at beginning of year (12,168) (8,106) (10,725) Equity adjustment for translation of foreign currencies (13,424) (4,062) 2,619 Balance at end of year (25,592) (12,168) (8,106) Treasury Stock Balance at beginning of year (62,972) (54,213) (11,278) Issued, primarily under stock options (54,346 shares in 1996, 72,729 in 1995, and 58,957 in 1994) 254 340 276 Sale of 1,000,000 common shares 14,635 - - Common stock acquired (272,800 shares in 1995 and 2,954,700 in 1994) - (4,296) (47,647) Return of shares from long-term incentive plan trust (448,000 shares) - (4,803) - Issuance under long-term incentive plan (261,399 shares) - - 4,436 Balance at end of year (48,083) (62,972) (54,213) Deferred Compensation Balance at beginning of year (2,190) (10,152) (6,518) Return of shares from long-term incentive plan trust - 7,194 - Issuance under long-term incentive plan - - (3,302) Amortization 603 768 (332) Balance at end of year (1,587) (2,190) (10,152) Pension Liability Adjustment Balance at beginning of year (3,617) (1,903) (2,681) Equity adjustment for pension liability (96) (1,714) 778 Balance at end of year (3,713) (3,617) (1,903) Total stockholders' deficit $ (96,418)$(59,185) $(303,255) See accompanying notes to consolidated financial statements Crompton & Knowles Corporation and Subsidiaries Notes to Consolidated Financial Statements Accounting Policies Business Combination On August 21, 1996, the Company merged (the "Merger") with Uniroyal Chemical Corporation ("Uniroyal") in a common stock transaction that was accounted for on a pooling-of-interests basis. A total of 23,715,181 shares of the Company's common stock was exchanged for all of Uniroyal's outstanding common and preferred shares. The accompanying consolidated financial statements include the accounts of both companies and all information has been restated to reflect the combined operations of both companies. Because of differing fiscal year ends, the balance sheet for year-end 1995 includes the Company as of December 30, 1995 and Uniroyal as of October 1, 1995. The consolidated statements of operations, cash flows and stockholders' equity (deficit) for 1995 and 1994 reflect the combined results of the Company and Uniroyal for their respective December and September fiscal year ends. The 1996 consolidated statements of operations, cash flows and stockholders' equity (deficit)reflect the combined results of both companies for the twelve month period ended December 28, 1996. Accordingly, Uniroyal's net loss of $8.4 million for its fiscal quarter ended December 31, 1995, has been charged to the accumulated deficit account and Uniroyal's change in cash for such quarter has been reflected as a cash adjustment in the consolidated statements of cash flows. Net sales and net earnings (loss) prior to the combination are as follows: Six months (In thousands) June 30, 1996 1995 1994 (Unaudited) Net sales: Company $332,410 $665,513 $589,757 Uniroyal 597,691 1,079,321 946,454 $930,101 $1,744,834 $1,536,211 Net earnings (loss): Company $19,180 $40,493 $50,916 Uniroyal 25,909 91,150 (213,843) $45,089 $131,643 $(162,927) Certain amounts in the accompanying consolidated financial statements have been reclassified to conform with the current year presentation. Principles of Consolidation The accompanying consolidated financial statements include the accounts of all majority-owned subsidiaries. Other companies in which the Company has a 20% to 50% ownership and exercises significant management influence are accounted for in accordance with the equity method. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's fiscal year ends on the last Saturday in December for domestic operations and a week earlier for certain foreign operations. Translation of Foreign Currencies Balance sheet accounts denominated in foreign currencies are translated generally at the current rate of exchange as of the balance sheet date, while revenues and expenses are translated at average rates of exchange during the periods presented. The cumulative foreign currency adjustments resulting from such translation are included in the accumulated translation adjustment account in the stockholders' equity (deficit) section of the consolidated balance sheets. For foreign subsidiaries operating in highly inflationary economies, principally the Brazilian operations, monetary balance sheet accounts and related revenue and expenses are translated at current rates of exchange while non-monetary balance sheet accounts and related revenues and expenses are translated at historical exchange rates. The resulting translation gains and losses related to those countries are reflected in operations and are not significant in any of the years presented. Property, Plant and Equipment Property, plant and equipment are carried at cost, less accumulated depreciation. Depreciation expense ($59.2 million in 1996, $57.4 million in 1995 and $56.3 million in 1994) is computed generally on the straight-line method using the following ranges of asset lives: buildings and improvements: 10 to 40 years, machinery and equipment: 3 to 25 years, and furniture and fixtures: 3 to 10 years. Renewals and improvements which extend the useful lives of the assets are capitalized. Capitalized leased assets and leasehold improvements are depreciated over their useful lives or the remaining lease term, whichever is shorter. Expenditures for maintenance and repairs are charged to expense as incurred. Inventory Valuation Inventories are valued at the lower of cost or market. Cost is determined principally using the first-in, first-out (FIFO) basis. Intangible Assets The excess cost over the fair value of net assets of businesses acquired is being amortized on a straight-line basis over 20 to 40 years. Accumulated amortization was $36.6 million and $29.6 million in 1996 and 1995, respectively. Patents, unpatented technology and other intangibles of $94.8 million in 1996 and $111.2 million in 1995, included in other assets, are being amortized principally on a straight-line basis over their estimated useful lives ranging from 6 to 20 years. Accumulated amortization was $108.2 million and $89.0 million in 1996 and 1995, respectively. Long-Lived Assets In March, 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company adopted the new standard in the first quarter of 1996. The effect of the adoption did not materially impact the Company's financial position or results of operations. The Company evaluates the recoverability of the carrying value of the intangible assets of each of its businesses by assessing whether the projected earnings and cash flows of each of its businesses is sufficient to recover the existing unamortized cost of these assets. On this basis, if the Company determines that any assets have been permanently impaired, the amount of the impaired assets is written-off against earnings in the quarter in which the impairment is determined. In 1994, the Company wrote off $191 million of intangible assets based on lower estimates of future operating results and cash flows of the Chemicals and Polymer business. Research and Development Research and development costs are expensed as incurred. Income Taxes A provision has not been made for U.S. income taxes which would be payable if undistributed earnings of foreign subsidiaries of approximately $116.8 at December 28, 1996, were distributed to the Company in the form of dividends, since certain foreign countries limit the extent of repatriation of earnings, while for others, the Company's intention is to permanently reinvest such foreign earnings. Statements of Cash Flows Cash includes bank term deposits of three months or less. Cash payments during the fiscal years ended 1996, 1995 and 1994 included interest payments of $100.1 million, $107.9 million and $92 million and income tax payments of $28.7 million, $32.2 million and $40.2 million, respectively. Earnings Per Common Share The computations of loss per common share for the fiscal years ended 1996 and 1994 are based on the weighted average number of common shares outstanding amounting to 72,025,840 and 60,907,505, respectively. Common stock equivalents have been excluded because they are antidilutive for such periods. The computation of earnings per share for fiscal year 1995 is based on the weighted average number of common and common equivalent shares outstanding amounting to 66,289,413. A dual presentation of earnings per common share has not been made since there is no significant difference in earnings per share calculated on a primary or fully diluted basis. Financial Instruments Financial instruments are presented in the accompanying consolidated financial statements at either cost or fair value as required by generally accepted accounting principles. Stock-Based Compensation Effective in 1996, the Company adopted FASB Statement No. 123 "Accounting and Disclosure of Stock-Based Compensation". As permitted, the Company elected to continue to follow the provisions of Accounting Principles Board No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for stock-based compensation plans. Further information is provided in the footnote on Stock Incentive Plans. Other Disclosures Included in accounts receivable are allowances for doubtful accounts in the amount of $7.3 million in 1996 and $6.1 million in 1995. Included in other current liabilities are customer deposits in the amount of $18.7 million in 1996 and $11.3 million in 1995. Merger and Related Costs In connection with the merger with Uniroyal, the Company incurred $85 million of merger and related costs. The components of these costs comprise principally severance and other personnel costs of $37.6 million, investment banking fees of $12.5 million, legal fees of $9.7 million, debt related fees of $8.3 million, facility consolidation costs of $6.4 million and other costs of $10.5 million. Acquisitions During 1996, the Company acquired Klockner ER-WE-PA, GmbH and the Hartig line of industrial blow molding systems at an aggregate cost of $15.7 million. During 1995, the Company acquired the worldwide crop protection business of Solvay Duphar, B.V., along with five smaller acquisitions, at an aggregate cost of $108 million. The acquisitions have been accounted for using the purchase method and, accordingly, the acquired assets and liabilities have been recorded at their fair values at the dates of acquisition. The excess cost of purchase price over fair value of net assets acquired in the amount of $34.9 million, is being amortized from 20 to 40 years. The operating results of each acquisition are included in the consolidated statement of operations from the dates of acquisition. Inventories (In thousands) 1996 1995 Finished goods $242,587 $218,440 Work in process 44,445 37,753 Raw materials and supplies 75,317 76,300 $362,349 $332,493 Property, Plant and Equipment (in thousands) 1996 1995 Land and improvements $30,290 $31,399 Buildings and improvements 159,893 141,259 Machinery and equipment 628,378 564,563 Furniture and fixtures 25,979 26,369 Construction in progress 29,173 71,955 873,713 835,545 Less accumulated depreciation 375,734 311,082 $497,979 $524,463 Leases The future minimum rental payments under operating leases having initial or remaining non-cancelable lease terms in excess of one year (as of December 28, 1996) total $47.7 million as follows: $12.2 million in 1997, $11.4 million in 1998, $10.4 million in 1999, $7.7 million in 2000, $2.5 million in 2001 and $3.5 million in later years. Total rental expense for all operating leases was $16.6 million in 1996, $14.7 million in 1995 and $13.5 million in 1994. Real estate taxes, insurance and maintenance expenses generally are obligations of the Company and, accordingly, are not included as part of rental payments. It is expected that, in the normal course of business, leases that expire will be renewed or replaced by leases on other properties. Accrued Expenses (In thousands) 1996 1995 Accrued interest $18,739 $26,282 Current portion of environmental liability 20,270 15,750 Other accruals 104,124 83,031 $143,133 $125,063 Long-term Debt (In thousands) 1996 1995 9% Senior Notes Due 2000 $250,583 $270,000 10.5% Senior Notes Due 2002 283,078 283,078 11% Senior Subordinated Notes Due 2003 232,175 232,175 12% Subordinated Discount Notes Due 2005 103,215 91,857 Credit Agreement 179,466 60,000 Other 7,196 48,480 1,055,713 985,590 Less amounts due within one year (731) (11,434) Total long-term debt $1,054,982 $974,156 9% Senior Notes The 9% Senior Notes due 2000 are an obligation of Uniroyal Chemical Company, Inc. (a wholly-owned subsidiary of Uniroyal) and are unsecured. Interest is payable semi-annually. The 9% Senior Notes are not redeemable prior to maturity, except upon a change in control (as defined in the related indenture) whereupon an offer shall be made to purchase the 9% Senior Notes then outstanding at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. In connection with the Merger, such an offer was made, resulting in $2.2 million of principal being redeemed. The 9% Senior Notes rank pari passu in right of payment with all existing and future senior indebtedness of Uniroyal Chemical Company, Inc. 10.5% Senior Notes The 10.5% Senior Notes Due 2002 are an obligation of Uniroyal and are unsecured. Interest is payable semi-annually. 11% Senior Subordinated Notes The 11% Senior Subordinated Notes Due 2003 are an obligation of Uniroyal and are unsecured. Interest is payable semi-annually. The 11% Senior Subordinated Notes are redeemable in whole or in part, at the option of Uniroyal at any time after May 1, 1998, at prices commencing at 105.5% of par of the then outstanding principal amount, plus accrued and unpaid interest, declining ratably to par by May 1, 2000. 12% Subordinated Discount Notes The 12% Subordinated Discount Notes Due 2005 are an unsecured obligation of Uniroyal and have a final accreted value of $126.6 million at May 1, 1998. Beginning on such date, cash interest will accrue on these securities and will be payable semi-annually. The Notes are redeemable in whole or in part, at the option of Uniroyal at any time after May 1, 1998, at 100% of their principal amount, plus accrued and unpaid interest. Merger Waivers The note indentures require that upon a change in control (as defined in the related indentures), an offer shall be made to purchase all of the notes at a purchase price equal to 101% of the principal amounts (or accreted value), thereof, plus accrued and unpaid interest. In connection with the Merger, waivers of this requirement were obtained for $2.4 million from the holders of a majority in principal amount (as required under the indenture) of each of the notes, except the 9% Senior Notes for which an offer to purchase was made. Debt Repurchases During 1996, the Company repurchased $17.2 million of 9% Senior Notes in the open market. As a result of this repurchase, the Company recognized an extraordinary charge of $441 thousand, net of tax benefit of $293 thousand. During the first quarter of 1995, Uniroyal completed an initial public offering and sold 13,350,000 common shares (12,785,295 converted shares). The proceeds of the offering, after deducting underwriting discounts, other fees and expenses were $146.6 million. The net proceeds along with available cash and borrowings under a bank credit facility were used to retire an aggregate of $181.7 million of the Company's 12% Subordinated Discount Notes, 11% Senior Subordinated Notes, and 10.5% Senior Notes. As a result of the debt repurchase, the Company recognized an extraordinary charge in 1995 of $8.3 million, net of tax benefit of $4.5 million. Credit Agreement In connection with the Merger, the Company entered into a $530 million credit agreement with a syndicate of banks. Borrowings under the credit agreement are divided into three tranches. Tranche I provides a maximum of up to $300 million available to the Company for working capital and general corporate purposes. Tranche II provides a maximum of up to $150 million available to Uniroyal Chemical Company, Inc. (a wholly-owned subsidiary of Uniroyal) for working capital and general corporate purposes. Tranche III allows up to $80 million of borrowings by the European subsidiaries of the Company. Borrowings may be denominated in U.S. dollars or the subsidiary's local currency. The credit agreement extends through August 2001 and is secured, in the case of Uniroyal Chemical Company, Inc.'s domestic borrowings, by a security interest in its domestic accounts receivable and inventory. The credit agreement calls for interest based upon various options including a spread over LIBOR that varies according to certain debt ratios for the trailing four fiscal quarters. In addition, the Company must pay a commitment fee (currently .25%) on the total unused portion of the credit agreement based upon certain debt ratios for the trailing four fiscal quarters. At December 28, 1996, borrowings under the credit agreement of $125 million by the Company and $54.5 million by Uniroyal Chemical Company, Inc. bore a weighted average interest rate of 6.8%. Debt Covenants The Company's various debt agreements contain covenants which limit their ability to incur additional debt, transfer funds between affiliated companies, pay cash dividends or make certain other payments. In addition, the credit agreement requires the Company to maintain certain financial ratios. Maturities In 1996, the scheduled maturities of long-term debt during the next five years and years thereafter were: 1997 - $.7 million; 1998 - $.1 million; 1999 - $.1 million; 2000 - $250.7 million; 2001 - $183.6 million and years thereafter - $620.5 million. Financial Instruments At December 28, 1996, the Company had an interest rate swap contract ("the Swap") outstanding for $270 million with a major financial institution. Net receipts or payments on the Swap are accrued and recognized as adjustments to interest expense. The Swap requires the Company to make semi-annual payments to its counterparty of an amount equal to a six month LIBOR and requires the counterparty to make semi-annual payments at a fixed rate of 5.24%. The Company's floating interest rate resets every six months in arrears with the last payment due on December 10, 1999. The Company paid $3.2 million under the Swap in 1996. A settlement of the fair market value of the Swap as of December 28, 1996, would require a payment of approximately $8.1 million. The Company remains sensitive to changes in prevailing interest rates because approximately $465 million of indebtedness of the Company at December 28, 1996 effectively bears interest at a floating rate. Accordingly, a 1% change in prevailing interest rates would result in a $4.7 million change in annual interest expense. The carrying amounts for cash, accounts receivable, notes payable, accounts payable and other current liabilities approximate fair value because of the short maturities of these instruments. The fair market values of long-term debt (including current installments) were $1,124.8 million and $999.1 million in 1996 and 1995, respectively, and with respect to the notes have been determined based on quoted market prices. Income Taxes The components of earnings (loss) before income taxes and extraordinary loss and the provision (benefit) for income taxes are as follows: Fiscal Year Ended (In thousands) 1996 1995 1994 Pretax Earnings (Loss): Domestic $(32,875) $76,575 $(148,370) Foreign 23,531 21,885 23,414 $(9,344) $98,460 $(124,956) Taxes: Domestic Current $15,576 $25,253 $28,976 Deferred (9,566) (72,379) 912 6,010 (47,126) 29,888 Foreign Current 13,517 10,603 10,198 Deferred (6,817) (4,939) (2,115) 6,700 5,664 8,083 Total Current 29,093 35,856 39,174 Deferred (16,383) (77,318) (1,203) $12,710 $(41,462) $37,971 The provision (benefit) for income taxes differs from the Federal statutory rate for the following reasons: Fiscal Year Ended (In thousands) 1996 1995 1994 Provision (benefit) at statutory rate $(3,270) $34,461 $(43,735) Nondeductible merger and related costs 14,709 - - Goodwill write-off - - 42,718 Impact of valuation allowance (2,904) (78,880) 34,931 Foreign dividends impact 3,744 2,367 2,136 Goodwill amortization 2,214 1,502 2,068 Foreign income tax rate differential (2,168) (3,308) (2,496) State income taxes, net of federal benefit (601) 3,322 2,476 Other, net 986 (926) (127) Actual provision (benefit) for income taxes $12,710 $(41,462) $37,971 Provisions have been made for deferred taxes based on differences between financial statement and tax bases of assets and liabilities using currently enacted tax rates and regulations. The components of the net deferred tax assets and liabilities are as follows: (In thousands) 1996 1995 Deferred tax assets: Pension and other postretirement benefits $91,861 $89,486 Accruals for environmental remediation 30,427 22,905 Other accruals 38,265 22,507 AMT credit and NOL carryforwards 33,399 45,621 Inventories and other 12,569 10,583 Deferred tax liabilities: Property, plant and equipment (63,666) (64,583) Intangibles (14,015) (19,731) Other (4,235) (4,417) Net deferred tax asset before valuation allowance 124,605 102,371 Valuation allowance (16,082) (18,986) Net deferred tax asset after valuation allowance $108,523 $83,385 Net deferred taxes (in thousands) include $47,167 and $28,769 in current assets, $67,308 and $63,890 in long-term assets, $114 and $16 in current liabilities and $5,838 and $9,258 in long-term liabilities in 1996 and 1995, respectively. Uniroyal had NOL carryforwards of $62 million, expiring in the year 2007, which can be used to reduce future Federal taxable income, while certain of the Company's foreign subsidiaries had aggregate NOL carryforwards of $38 million which can be used to reduce future taxable income in those countries. As a result of the Uniroyal sale of common shares in 1995, Uniroyal has undergone an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended. Consequently, the Federal NOL carryforward is subject to an annual limitation as prescribed thereunder. Capital Stock The Company is authorized to issue 250,000,000 shares of common stock at a par value of $.10. There were 77,237,421 shares issued in 1996, of which 4,297,616 shares were held in the treasury, and 76,755,875 shares issued in 1995, of which 5,351,962 shares were held in the treasury. In August, 1996, the Company sold 1,000,000 shares of treasury stock in order to cure a treasury stock taint that would otherwise preclude the use of pooling-of-interests accounting in connection with the Uniroyal merger. The net proceeds in the amount of $14.2 million were used primarily to pay merger and related costs. The Company is authorized to issue 250,000 shares of preferred stock without par value, none of which are outstanding. Preferred share purchase rights ("Rights") outstanding with respect to each share of the Company's common stock entitle the holder to purchase one eight-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $18.75. The Rights cannot become exercisable until ten days following a public announcement that a person or group has acquired 20% or more of the common shares of the Company or intends to make a tender or exchange offer which would result in their ownership of 20% or more of the Company's common shares. The Rights also entitle the holder under certain circumstances to receive shares in another company which acquires the Company or merges with it. Warrants In connection with the Uniroyal merger, the Company assumed warrants that had been issued by Uniroyal to purchase 107,195 converted shares at an adjusted exercise price of $1.04 per share. At December 28, 1996, warrants to purchase such shares were still outstanding (212,543 shares at year-end 1995). The holder may exercise these warrants, in whole or in part, until they expire on October 30, 1999. Warrants exercised amounted to 105,347, 320,830 and 95,770 converted shares for the years 1996, 1995 and 1994, respectively. Stock Incentive Plans The 1988 Long Term Incentive Plan ("1988 Plan") authorizes the Board to grant stock options, stock appreciation rights, restricted stock and long-term performance awards to the officers and other key employees of the Company over a period of ten years. Non-qualified and incentive stock options may be granted under the 1988 plan at prices not less than 100% of the market value on the date of the grant. All outstanding options will expire not more than ten years and one month from the date of grant. In conjunction with shareholder approval of the Merger, the number of common shares covered under the 1988 Plan was increased from 4 million to 10 million shares. The 1993 Stock Option Plan for Non-Employee Directors as amended in 1996 authorizes 200,000 shares to be optioned to non-employee directors at the rate of twice their annual retainer divided by the stock price on the date of grant. The option will vest over a two year period and be exercisable over a ten year period from the date of grant, at a price equal to the fair market value on the date of grant. Under the 1988 Plan, 1,261,000 common shares have been transferred to an independent trustee to administer restricted stock awards for the Company's long term incentive program. At December 28, 1996 deferred compensation relating to such shares in the amount of $1.6 million is being amortized over an estimated service period of six to fifteen years. In 1995, the trustee returned 448,000 common shares to the Company representing those shares which had not been earned under the incentive program. In 1996, the Company granted long-term incentive awards in the amount of 917,000 shares to be earned at the end of 1998 if certain financial criteria are met. If earned, such shares will vest ratably through the year 2000 with the final 25% at retirement. Compensation expense related to unearned shares is accrued annually based upon the expected level of incentive achievement. In connection with the Uniroyal merger, the Company assumed stock options and rights that had been granted by Uniroyal in the amount of 2,188,333 converted shares as of the merger date. Effective in 1996, the Company adopted the provisions of FASB Statement No.123 "Accounting and Disclosure of Stock-Based Compensation." As permitted, the Company elected to continue its present method of accounting for stock-based compensation. Accordingly, compensation expense has not been recognized for stock-based compensation plans other than restricted stock awards under the Company's long-term incentive programs. The Company is required to provide additional information including pro forma disclosures of net earnings (loss) and net earnings (loss) per common share as if the fair value method of accounting as prescribed by FASB Statement No.123 was adopted. Had compensation cost for the Company's stock option and long-term incentive awards been determined under the new method, net earnings (loss) and net earnings (loss) per common share would not be materially different from those reported in 1996 and 1995. The fair value per share of long-term incentive awards in 1996 was $13.88 and the average fair value per share of options was $5.72 in 1996 and $3.51 in 1995. The fair value of options granted was estimated using the Black-Scholes option pricing model with the following assumptions for 1996 and 1995, respectively: dividend yield .34% and 4%, expected volatility 30% and 36%, risk-free interest rate 6.5% and 6%, respectively, and an expected life of five years. Changes during 1996, 1995 and 1994 in shares under option are summarized as follows: Price Per Share Range Average Shares Outstanding at 12/25/93 $ 2.15-23.75 $ 8.87 2,481,626 Granted 11.75-21.44 12.62 2,134,031 Exercised 2.15-9.31 4.66 (144,168) Lapsed 5.22-19.31 12.37 (48,711) Outstanding at 12/31/94 2.47-23.75 10.78 4,422,778 Granted 9.31-16.06 12.62 474,136 Exercised 2.49-9.31 6.21 (72,998) Lapsed 5.22-23.75 14.02 (190,157) Outstanding at 12/30/95 2.47-23.75 10.91 4,633,759 Granted 9.14-16.88 15.11 2,178,022 Exercised 4.01-18.19 10.19 (419,287) Lapsed 3.13-23.75 8.14 (120,519) Outstanding at 12/28/96 $2.47-23.75 $12.47 6,271,975 Exercisable at 12/31/94 $2.47-23.75 $8.89 2,431,013 Exercisable at 12/30/95 $2.47-23.75 $9.98 3,012,170 Exercisable at 12/28/96 $2.47-23.75 $10.87 3,851,369 Shares available for grant at year-end 1996 and 1995 were 4,034,849 and 536,302, respectively. The following table summarizes information concerning currently outstanding and exercisable options: Number Weighted Avg. Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise at end of Contractual Exercise at end of Exercise Prices 1996 Life Price 1996 Price $ 2.47-4.01 603,258 1.45 $3.22 603,258 $3.22 $ 5.22-6.55 523,655 4.74 $5.64 523,655 $5.64 $ 9.14-13.00 1,851,226 6.83 $11.69 1,662,093 $11.54 $13.57-16.88 2,692,869 9.35 $14.95 477,579 $14.05 $18.31-23.75 600,967 5.81 $18.97 584,784 $18.96 6,271,975 7.12 $12.47 3,851,369 $10.87 The Company has an Employee Stock Ownership Plan that is offered to eligible employees of the Company and certain of its subsidiaries. The Company makes contributions equivalent to a stated percentage of employee contributions. The Company's contributions were $2 million, $2 million and $1.7 million in 1996, 1995 and 1994, respectively. Postretirement Health Care Liability The Company provides health and life insurance benefits for certain retired and active employees and their beneficiaries and covered dependents in the U.S. and Canada. Postretirement benefits for retired employees in other countries are generally covered by government-sponsored plans. Net periodic postretirement health care cost included the following components: (In thousands) 1996 1995 1994 Service cost-benefits earned during the period $1,292 $1,372 $2,582 Interest cost on accumulated postretirement benefit obligation 10,134 10,230 11,761 Government contribution - - (1,414) Actual return on plan assets 10 (677) (365) Curtailment gain - - (448) Net amortization and deferral (7,455) (6,660) (8,078) Net periodic postretirement health care cost $3,981 $4,265 $4,038 Postretirement health care is generally not pre-funded, except for certain plans funded by the United States government, and are paid by the Company as incurred. The accumulated postretirement health care liability is as follows: (In thousands) 1996 1995 Fully eligible and other active plan participants $42,559 $40,870 Retirees 100,439 100,523 Accumulated postretirement benefit obligation 142,998 141,393 Plan assets at fair value 5,601 7,639 Unfunded status 137,397 133,754 Unrecognized reduction in prior service cost 45,956 51,705 Unrecognized net loss (1,373) (1,250) Postretirement health care liability $181,980 $184,209 The weighted-average discount rate used to calculate the accumulated health care liability in 1996 and 1995 ranged from 7% - - 8% and the expected long-term rate of return on plan assets was 3.46% and 3.6%, respectively. The assumed health care cost trend rate ranged from 12.5% - 9.7% and is assumed to decrease gradually to a range of 6.07% - 5.5% in 2020 and remain at that level thereafter. An increase in the assumed health care cost rate of 1% in each year would increase the postretirement health care liability by approximately $9 million. Pensions The Company has several defined benefit and defined contribution plans which cover substantially all employees in the United States and Canada. Pension benefits for retired employees of the Company in other countries are generally covered by government- sponsored plans. The defined benefit plans provide retirement benefits based on the employees' years of service and compensation during employment. The Company will make contributions to the defined benefit plans at least equal to the minimum amounts required by law, while contributions to the defined contribution plans are determined as a percentage of each covered employees' salary. The Company's net periodic pension cost for the defined benefit plans included the following components: Fiscal Year Ended (In thousands) 1996 1995 1994 Service cost-benefits earned during the period $5,974 $5,044 $4,334 Interest cost on projected benefit obligation 13,135 11,882 10,068 Actual return on plan assets (8,837) (13,888) (3,114) Net amortization and deferral (1,016) 6,144 (4,465) Net periodic pension cost $9,256 $9,182 $6,823 The funded status and the (accrued) prepaid pension cost of the defined benefit pension plans are as follows: 1996 1995 Accumulated Assets Accumulated Assets Benefits Exceed Benefits Exceed Exceed Accumulated Exceed Accumulated (In thousands) Assets Benefits Assets Benefit Vested benefit obligation $132,958 $20,838 $123,416 $19,501 Non-vested benefit obligation 11,852 284 7,436 173 Accumulated benefit obligation 144,810 21,122 130,852 19,674 Excess of projected benefit obligation over accumulated benefit obligation 22,219 1,601 13,045 1,562 Projected benefit obligation 167,029 22,723 143,897 21,236 Plan assets at fair value 114,604 25,668 91,054 23,788 Funded status (52,425) 2,945 (52,843) 2,552 Unrecognized prior service cost 12,047 (351) 13,093 (691) Unrecognized net (gain) loss 3,672 (342) 1,046 370 Unrecognized net transition asset (557) (606) 211 (745) Equity adjustment to recognize minimum liability (3,713) - (3,617) - (Accrued) prepaid pension cost $(40,976) $1,646 $(42,110) $1,486 The weighted-average discount rate used to calculate the projected benefit obligation in 1996 and 1995 ranged from 6.25% - 8% and 6.5% - 8%, respectively. The expected long-term rate of return on plan assets in 1996 ranged from 6.25% - 9% and from 6.75% - 8% in 1995. The assumed rate of compensation increase ranged from 2% - 6% in 1996 and 3% - 6% in 1995. The Company's net periodic cost for all pension plans, including defined benefit plans, was $17 million, $16.9 million and $13.6 million in 1996, 1995 and 1994, respectively. Contingencies The Company is involved in claims, litigation, administrative proceedings and investigations of various types in several jurisdictions. A number of such matters involve claims for a material amount of damages and relate to or allege environmental liabilities, including clean-up costs associated with hazardous waste disposal sites, natural resource damages, property damage and personal injury. The Company and some of its subsidiaries have been identified by Federal, state or local governmental agencies, and by other potentially responsible parties (a "PRP") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state statutes, as a PRP with respect to costs associated with waste disposal sites at various locations in the United States. In addition, the Company is involved with environmental remediation and compliance activities at some of its current and former sites in the United States and abroad. Each quarter, the Company evaluates and reviews estimates for future remediation and other costs to determine appropriate environmental reserve amounts. For each site, a determination is made of the specific measures that are believed to be required to remediate the site, the estimated total cost to carry out the remediation plan, the portion of the total remediation costs to be borne by the Company and the anticipated time frame over which payments toward the remediation plan will occur. As a result of current information and analysis, the Company recorded a special provision of $30 million during the third quarter of 1996 for environmental remediation activities. The total amount accrued for such environmental liabilities at December 28, 1996 was $96.2 million. The Company estimates the potential environmental liability to range from $68 million to $130 million at December 28, 1996. It is reasonably possible that the Company's estimates for environmental remediation liabilities may subsequently change should additional sites be identified, further remediation measures be required or undertaken, the interpretation of current laws and regulations be modified or additional environmental laws and regulations be enacted. The Company intends to assert all meritorious legal defenses and all other equitable factors which are available to it with respect to the above matters. The Company believes that the resolution of these environmental matters will not have a material adverse effect on its consolidated financial position. While the Company believes it is unlikely, the resolution of these environmental matters could have a material adverse effect on its consolidated results of operations in any given year if a significant number of these matters are resolved unfavorably. Business Segment Data Sales by segment represent sales to unaffiliated customers only. Consolidated operating profit is defined as total revenue less operating expenses. In computing consolidated operating profit, the following items have not been deducted: interest expense, other income and income taxes. Identifiable assets by segment are those assets that are used in the Company's operations in each segment. Corporate assets are principally cash, prepayments and other assets maintained for general corporate purposes. Information by Business Segment (In thousands) 1996 1995 1994 Sales Specialty chemicals $1,519,093 $1,464,968 $1,339,998 Specialty process equipment and controls 284,876 279,866 196,213 $1,803,969 $1,744,834 $1,536,211 Operating Profit Specialty chemicals $216,349 $200,069 $184,524 Specialty process equipment & controls 23,372 40,154 31,195 General corporate expenses (21,106) (22,101) (23,302) Merger and related costs (85,000) - - Special environmental provision (30,000) - - Write-off of intangibles - - (191,000) $103,615 $218,122 $1,417 Identiflable Assets Specialty chemicals $1,436,551 $1,489,727 $1,369,474 Specialty process equipment and controls 196,372 150,320 103,151 Corporate 24,267 15,798 15,720 $1,657,190 $1,655,845 $1,488,345 Depreciation and Amortization Specialty chemicals $78,070 $76,593 $83,982 Specialty process equipment and controls 4,342 3,328 1,995 Corporate 185 197 162 $82,597 $80,118 $86,139 Capital Expenditures Specialty chemicals $37,362 $84,571 $49,271 Specialty process equipment and controls 1,807 3,087 2,756 Corporate 35 86 63 $39,204 $87,744 $52,090 Information by Major Geographic Segment (In thousands) 1996 1995 1994 Net sales and transfers between geographic areas: United States $1,505,011 $1,501,000 $1,318,848 Americas 214,018 191,195 178,508 Europe/Africa 308,675 238,982 179,479 Asia/Pacific 69,052 67,788 67,651 $2,096,756 $1,998,965 $1,744,486 Less transfers between geographic areas: United States $161,048 $147,195 $130,069 Americas 63,580 51,821 48,074 Europe/Africa 67,341 54,115 27,465 Asia/Pacific 818 1,000 2,667 $292,787 $254,131 $208,275 Net sales from geographic areas to unaffiliated customers: United States $1,343,963 $1,353,805 $1,188,779 Americas 150,438 139,374 130,434 Europe/Africa 241,334 184,867 152,014 Asia/Pacific 68,234 66,788 64,984 $1,803,969 $1,744,834 $1,536,211 Transfers between geographic areas are accounted for at market prices or a negotiated price, with due consideration given to trade and tax regulations of the respective countries. Export sales included in United States sales: Americas $54,489 $51,235 $46,041 Europe/Africa 108,349 105,031 68,037 Asia/Pacific 95,321 70,372 60,525 $258,159 $226,638 $174,603 Operating Profit United States $94,210 $206,407 $(11,313) Americas 21,444 19,643 16,481 Europe/Africa 10,052 16,688 20,795 Asia/Pacific (985) (2,515) (1,244) General corporate expenses (21,106) (22,101) (23,302) $103,615 $218,122 $1,417 Identifiable assets United States $1,287,534 $1,292,437 $1,217,519 Americas 99,603 93,451 90,521 Europe/Africa 232,347 230,838 146,381 Asia/Pacific 37,706 39,119 33,924 $1,657,190 $1,655,845 $1,488,345 Summarized Unaudited Quarterly Financial Data (In thousands, except per share data) 1996 First Second Third Fourth Net sales $460,468 $469,633 $468,391 $405,477 Gross profit 165,929 173,965 164,557 128,932 Earnings (loss) before extraordinary charge $21,154 $24,376 $(69,572) $1,988 Net earnings (loss) 21,154 23,935 (69,572) 1,988 Earnings (loss) per common share before extraordinary charge .29 .34 (.97) .03 Net earnings (loss) per common share .29 .34 (.97) .03 Common dividends per share .135 .135 - - Market price per common share: High 15 1/2 18 3/8 17 20 1/8 Low 13 13 7/8 13 1/8 16 1/8 (In thousands, except per share data) 1995 First Second Third Fourth Net sales $442,515 $474,221 $453,819 $374,279 Gross profit 167,605 172,129 156,889 122,045 Earnings (loss) before extraordinary charge 107,032 24,452 11,812 (3,374) Net earnings (loss) 98,753 24,452 11,812 (3,374) Earnings (loss) per common share before extraordinary charge 1.72 .34 .16 (.06) Net earnings (loss) per common share 1.59 .34 .16 (.06) Common dividends per share .12 .135 .135 .135 Market price per common share: High 17 3/8 20 15 3/4 14 7/8 Low 15 7/8 13 3/8 13 5/8 12 Responsibility for Financial Statements The accompanying financial statements have been prepared in conformity with generally accepted accounting principles and have been audited by KPMG Peat Marwick LLP, Independent Certified Public Accountants, whose report is presented herein. Management of the Company assumes responsibility for the accuracy and reliability of the financial statements. In discharging such responsibility, management has established certain standards which are subject to continuous review and are monitored through the Company's financial management and internal audit group. The Board of Directors pursues its oversight role for the financial statements through its Audit Committee which consists of outside directors. The Audit Committee meets on a regular basis with representatives of management, the internal audit group and KPMG Peat Marwick LLP. Independent Auditors' Report The Board of Directors and Stockholders Crompton & Knowles Corporation We have audited the accompanying consolidated balance sheet of Crompton & Knowles Corporation and subsidiaries (the Company) as of December 28, 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 28, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. We have previously audited and reported on the consolidated balance sheet of the Company as of December 30, 1995, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the two-year period then ended, prior to their restatement for the 1996 pooling-of-interests. The contribution of the Company to assets, revenues and net income represented 29 percent, 38 percent and 31 percent of the respective 1995 restated totals. Separate financial statements of the other company included in the restated consolidated balance sheet as of December 30, 1995, and the restated consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the two-year period then ended, were audited and reported on separately by other auditors. We also audited the combination of the accompanying consolidated balance sheet as of December 30, 1995 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the two-year period then ended, after restatement for the 1996 pooling of interests; in our opinion, such consolidated statements have been properly combined on the basis described in the notes to the consolidated financial statements under the heading "Accounting Policies - Business Combination." (KPMG Signature) Stamford, Connecticut January 30, 1997 Five Year Selected Financial Data (In millions of dollars, except per share data) 1996 1995 1994 1993 1992 Summary of Operations Net sales $1,804.0 1,744.8 1,536.2 1,466.2 1,374.3 Cost of products sold $1,170.6 1,126.2 972.9 926.3 859.1 Selling, general and administrative $279.8 270.3 240.1 220.5 207.3 Depreciation and amortization $82.6 80.1 86.1 89.9 89.2 Research and development $52.4 50.1 44.7 42.1 41.1 Merger and related costs $85.0 - - - - Special environmental provision $30.0 - - - - Write-off of intangibles $ - - 191.0 - - Operating profit $103.6 218.1 1.4 187.4 177.6 Interest expense $114.2 122.4 130.7 121.7 132.4 Other expense (income)$(1.3) (2.7) (4.4) 1.5 6.7 Earnings (loss) before income taxes, extraordinary charge and cumulative effect of accounting changes $(9.3) 98.4 (124.9) 64.2 38.5 Provision (benefit) for income taxes $12.7 (41.5) 38.0 37.0 23.0 Earnings (loss) before extraordinary charge and cumulative effect of accounting changes $(22.0) 139.9 (162.9) 27.2 15.5 Extraordinary charge $(.5) (8.3) - (100.1) (3.0) Cumulative effect of accounting changes $ - - - (111.9) (5.8) Net earnings (loss) $ (22.5) 131.6 (162.9) (184.8) 6.7 Special items, net of tax (included above): Merger and related costs $(68.1) - - - - Special environmental provision $(18.5) - - - - Early extinguishment of debt $ (.5) (8.3) - (100.1) (3.0) Change in deferred tax valuation allowance $ - 78.9 (34.9) - - Write-off of intangibles $ - - (162.5) - - Cumulative effect of accounting changes $ - - - (111.9) (5.8) Other $ - 4.4 - - - Total special items $(87.1) 75.0 (197.4) (212.0) (8.8) Per Share Statistics Earnings (loss) before extraordinary charge and cumulative effect of accounting changes$(.31) 2.11 (2.67) .44 .25 Net earnings (loss) $(.31) 1.99 (2.67) (2.98) .11 Dividends $ .27 .52 .46 .38 .31 Book value $ (1.32) (.83) (5.15) (1.17) 2.37 Common stock trading range: High 20 1/8 20 24 1/8 27 1/4 23 7/8 Low 13 12 13 7/8 17 5/8 16 Average shares outstanding (thousands) 72,026 66,289 60,908 61,941 61,476 Financial Position Current assets $742.2 697.0 696.9 582.7 537.5 PP&E, net $498.0 524.5 458.0 456.3 452.7 Other assets $417.0 434.3 333.4 549.7 568.6 Total assets $1,657.2 1,655.8 1,488.3 1,588.7 1,558.8 Current liabilities $ 357.5 420.6 361.6 285.4 285.0 Long-term debt $1,055.0 974.2 1,102.2 1,048.8 904.3 Other liabilities $ 341.1 320.2 327.8 326.4 223.1 Stockholders' equity (deficit) $ (96.4) (59.2) (303.3) (71.9) 146.4 Current ratio 2.1 1.7 1.9 2.0 1.9 Total capital $ 967.9 1,020.1 866.1 994.1 1,057.8 Total debt-to-capital %110.0 105.8 135.0 107.2 86.2 Profitability Statistics (Before Special Items) % Operating profit on sales 12.1 12.2 12.5 12.8 12.9 % Earnings on sales 3.6 3.2 2.2 1.9 1.1 % Earnings on average total capital 12.8 14.2 11.2 8.3 8.8 Other Statistics Capital spending $ 39.2 87.7 52.1 60.4 47.3 Depreciation $ 59.2 57.4 56.3 53.0 52.3 Sales per employee $ .315 .309 .293 .289 .277 Board of Directors 2,3 James A. Bitonti President and Chief Executive Officer TCOM, L.P. 4 Vincent A. Calarco Chairman of the Board President and Chief Executive Officer 2,3 Robert A. Fox President and Chief Executive Officer Foster Poultry Farms 3,4 Roger L. Headrick President and Chief Executive Officer Minnesota Vikings Football Club 1,4 Leo I. Higdon, Jr. Dean The Darden Graduate School of Business Administration University of Virginia 1,3 Michael W. Huber Retired Chairman of the Board J.M. Huber Corporation Charles J. Marsden Senior Vice President and Chief Financial Officer 1,2 C.A. Piccolo President and Chief Executive Officer HealthPIC Consultants, Inc. 1,2 Patricia K. Woolf, Ph.D. Private Investor and Lecturer Department of Molecular Biology Princeton University 1 Member of Audit Committee 2 Member of Nominating Committee 3 Member of Committee on Executive Compensation 4 Member of Finance Committee Corporate Data Corporate Officers and Operating Management Vincent A. Calarco Chairman, President and Chief Executive Officer Robert W. Ackley Vice President President, Davis-Standard Corporation Joseph B. Eisenberg Executive Vice President, Chemicals and Polymers Uniroyal Chemical Company, Inc. Edmund H. Fording, Jr. Vice President President, Crompton & Knowles Colors Incorporated Alfred F. Ingulli Executive Vice President, Crop Protection Uniroyal Chemical Company, Inc. Rudy M. Phillips President, Ingredient Technology Corporation William A. Stephenson Executive Vice President, Specialties Uniroyal Chemical Company, Inc. Charles J. Marsden Senior Vice President and Chief Financial Officer Peter Barna Vice President, Finance John T. Ferguson II Vice President, General Counsel and Secretary Marvin H. Happel Vice President, Organization and Administration Frank Manganella Treasurer Michael F. Vagnini Controller Corporate Headquarters One Station Place, Metro Center Stamford, CT 06902 (203) 353-5400 Auditors KPMG Peat Marwick LLP Stamford, CT Transfer Agent and Registrar Chase Mellon Shareholder Services L.L.C. 85 Challenger Road Ridgefield Park, NJ 07660 (800) 288-9541 Annual Meeting The annual meeting of stockholders will be held at 11:15 a.m. on Tuesday, April 29, 1997, at the Tara Stamford Hotel, 2701 Summer Street, Stamford, Connecticut 06905 Form 10-K A copy of the Company's report on Form 10-K for 1996, as filed with the Securities and Exchange Commission, may be obtained free of charge by writing to the Secretary of the Corporation, One Station Place, Metro Center, Stamford, CT 06902 Crompton & Knowles is a member of the Chemical Manufacturers Association and a signatory of the Association's Responsible Care(R) Program. The company is committed to a continuous good faith effort to improve performance in health, safety and environmental quality. (C) 1997 Crompton & Knowles Corporation. All rights reserved. (C&K Logo) and (Uniroyal logo) are registered trademarks of Crompton & Knowles Corporation; (R) and (TM) indicate registered and unregistered trade and service marks. Gaucho and Raxil are trademarks of Bayer Corporation. [Crompton & Knowles logo] CROMPTON & KNOWLES CORPORATION One Station Place, Metro Center, Stamford, CT 06902 EX-21 8 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries of the Registrant The following are subsidiaries of Crompton & Knowles Corporation: Name Place of Organization CK Holding Corporation Delaware Crompton & Knowles Overseas Corporation Delaware Crompton & Knowles Canada Limited Canada Crompton & Knowles Europe S.A. Belgium Crompton & Knowles (France) S.A. France Crompton & Knowles (Hong Kong) Ltd. Hong Kong Crompton & Knowles (Korea) Ltd. Korea Davis-Standard Corporation Delaware Davis-Standard (France) SARL France Crompton & Knowles Colors Incorporated Delaware ER-WE-PA Davis-Standard GmbH Germany Ingredient Technology Corporation Delaware Grandma Food Products, Ltd. Canada Killion Extruders, Inc. New Jersey Uniroyal Chemical Corporation Delaware Uniroyal Chemical Company, Inc. New Jersey Lokar Enterprises, Inc. Delaware Uniroyal Chemical Company Limited Scotland Naugatuck Treatment Company Connecticut Uniroyal Chemical Limited Bahamas/Delaware Interbel Trading, Inc. Florida Uniroyal Chemical Investments Ltd. Canada Gustafson, Inc. Minnesota Uniroyal Chemical International Company Texas Uniroyal Chemical Brazil Holding, Inc. Delaware Uniroyal Quimica Sociedad Anonima Comerciale Argentina Industrial Gustafson International Company Texas Uniroyal Chemical S.A.R.L Switzerland Uniroyal Chemical S.A. Spain Uniroyal Chemical (Proprietary) Limited South Africa Uniroyal Chemical Taiwan Ltd Taiwan Uniroyal Chemical Pty. Ltd. Australia Unicorb Limited England Uniroyal Chemical Export Limited Delaware Uniroyal Chemical Leasing Company, Inc. Delaware Industrias Gustafson S.A. de C.V. Mexico (Continued) The following are subsidiaries of Crompton & Knowles Corporation: Name Place of Organization Uniroyal Chemical Ltd/Ltee Canada Uniroyal Chemical Asia, Ltd. Delaware Trace Chemicals Inc. Nevada Uniroyal Chemical Technology B.V. The Netherlands Hannaford Seedmaster Services (Australia) Australia Pty. Ltd. Uniroyal Chemical International Sales Barbados Corporation Novaquim Holdings S.A. de C.V. Mexico Hancock Tire Company Limited Canada Uniroyal Chemical Partipacoes Ltda. Brazil Uniroyal Chemical Holdings B.V. The Netherlands Novaquim S.A. de C.V. Mexico Uniroyal Quimica S.A. Brazil Uniroyal Chimica S.p.A Italy Uniroyal Chemical B.V. The Netherlands Monochem, Inc. Louisiana Rubicon Inc. Louisiana TOA Uni Chemical Manufacturing Ltd. Thailand TOA Uni Chemicals Ltd. Thailand Unikor Chemical Inc. Korea EX-24 9 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY We, the undersigned officers and directors of Crompton & Knowles Corporation, hereby severally constitute and appoint Vincent A. Calarco, Charles J. Marsden, and John T. Ferguson II, and each of them severally, our true and lawful attorneys or attorney, with full power to them and each of them to execute for us, and in our names in the capacities indicated below, and to file with the Securities and Exchange Commission the Annual Report on Form 10-K of Crompton & Knowles Corporation for the fiscal year ended December 30, 1995, and any and all amendments thereto. IN WITNESS WHEREOF, we have signed this Power of Attorney in the capacities indicated on January 23, 1996. Signature Title Signature Title Principal Executive Officer: Chairman of the Board, President, CEO /s/Robert A. Fox Director /s/Vincent A. Calarco and Director Robert A. Fox Vincent A. Calarco Principal Financial /s/Roger L. Headrick Director Officer: Roger L. Headrick Vice President Finance & /s/Charles J. Marsden Director /s/Leo I. Higdon, Jr. Director Charles J. Marsden Leo I. Higdon, Jr. Principal Accounting /s/Michael W. Huber Director Officer: Michael W. Huber /s/Peter Barna Treasurer /s/C.A. Piccolo Director Peter Barna C.A. Piccolo /s/James A. Bitonti Director /s/Patricia K. Woolf Director James A. Bitonti Patricia K. Woolf EX-27 10 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-28-1996 DEC-28-1996 21,120 0 267,871 7,299 362,349 742,237 497,979 375,734 1,657,190 357,479 1,054,982 0 0 7,724 (104,142) 1,657,190 1,803,969 1,803,969 1,170,586 1,700,354 (1,285) 2,329 114,244 (9,344) 12,710 (22,054) 0 (441) 0 (22,495) (0.31) (0.31)
EX-99 11 ANNUAL REPORT ON FORM 11-K Exhibit 29 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________ FORM 11-K (Mark One) X Annual Report pursuant to Section 15 (d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1996 OR Transition report pursuant to Section 15 (d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ________ to __________ Commission file number 1-4663 A. Full title of the Plan and the address of the Plan, if different from that of the issuer named below: CROMPTON & KNOWLES CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN B. Name of issuer of the securities held pursuant to the Plan and the address of its principal executive office: Crompton & Knowles Corporation One Station Place - Metro Center Stamford, Connecticut 06902 Exhibit 29 CROMPTON & KNOWLES CORPORATION Employee Stock Ownership Plan EXHIBIT INDEX Form 11-K for the Fiscal Year Ended December 31, 1996 Exhibit Description No. of Exhibit 1. Consent of KPMG Peat Marwick LLP independent certified public accountants. CROMPTON & KNOWLES CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1996 AND 1995 PLAN ASSETS AND EQUITY 1996 Fixed C&K Equity Advisers Mortgage Income Fund Stock Fund Fund Fund Fund Total Investments: Common stock of Crompton & Knowles Corporation - 2,034,175 shares at market value (cost $16,360,444) in 1996 $ - $39,157,869 $ - $ - $ - $39,157,869 Hartford Life Insurance Company group annuity contract 14,481,933 - 7,595,484 1,304,476 353,485 23,735,378 U S Treasury Note - 5.75% due 9/30/97 at market value (cost $1,949,115) 1,957,361 - - - - 1,957,361 Cash and short-term investments at cost, which approximates market 688 25,266 510 210 26 26,700 Contribution receivable from Crompton & Knowles Corporation 62,986 266,818 47,978 17,223 5,413 400,418 Accrued income 28,706 - - - - 28,706 Plan Assets and Equity including $429,560 payable to participants at 12/31/96 $16,531,674 $39,449,953 $ 7,643,972 $ 1,321,909 $ 358,924 $65,306,432 1995 Fixed C&K Equity Advisers Mortgage Income Fund Stock Fund Fund Fund Fund Total Investments: Common stock of Crompton & Knowles Corporation - 2,110,683 shares at market value (cost $15,647,527) in 1995 $ - $27,966,550 $ - $ - $ - $27,966,550 Hartford Life Insurance Company group annuity contract 17,882,428 - 3,196,868 647,252 309,648 22,036,196 Cash and short-term investments at cost, which approximates market - 26,164 - - - 26,164 Contribution receivable from Crompton & Knowles Corporation 67,233 297,111 34,216 15,525 7,501 421,586 Accrued income - - - - - - Plan Assets and Equity $17,949,661 $28,289,825 $ 3,231,084 $ 662,777 $ 317,149 $50,450,496 See accompanying notes to financial statements CROMPTON & KNOWLES CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1996 Fixed C&K Equity Advisers Mortgage Income Fund Stock Fund Fund Fund Fund Total Investment income: Cash dividends on investment in common stock of Crompton & Knowles Corporation and interest on short-term investments $ 1,800 $ 578,701 $ 1,882 $ 572 $ 74 $ 583,029 Realized gain on sale of investments and withdrawals - 1,978,007 - - - 1,978,007 Interest earned - US Treasury notes 34,539 - - - - 34,539 Interest earned - Hartford Life Insurance Company group annuity contract 1,026,153 - - - - 1,026,153 Net investment income 1,062,492 2,556,708 1,882 572 74 3,621,728 Increase (decrease) in unrealized appreciation of investments 8,246 10,478,402 1,263,104 150,395 15,469 11,915,616 Contributions: Em - - - - - - Employees 842,652 1,522,889 529,652 202,809 73,913 3,171,915 Employer - Net of forfeitures - 2,018,734 - - - 2,018,734 Withdrawals and Distributions (2,469,946) (2,829,299) (409,757) (124,901) (38,154) (5,872,057) Employee interfund transfers (861,431) (2,587,306) 3,028,007 430,257 (9,527) - Net increase/(decrease) in Plan Equity for the Year (1,417,987) 11,160,128 4,412,888 659,132 41,775 14,855,936 Plan Equity at the beginning of year 17,949,661 28,289,825 3,231,084 662,777 317,149 50,450,496 Plan Equity at the end of year $ 16,531,674 $ 39,449,953 $ 7,643,972 $ 1,321,909 $ 358,924 $ 65,306,432 1995 Fixed C&K Equity Advisers Mortgage Income Fund Stock Fund Fund Fund Fund Total Investment income: Cash dividends on investment in common stock of Crompton & Knowles Corporation and interest on short-term investments $ 2,885 $ 1,072,287 $ 2,371 $ 1,257 $ 190 $ 1,078,990 Realized gain on sale of investments and withdrawals - 1,297,120 - - - 1,297,120 Interest earned - US Treasury notes - - - - - - Interest earned - Hartford Life Insurance Company group annuity contract 1,051,264 - - - - 1,051,264 Net investment income 1,054,149 2,369,407 2,371 1,257 190 3,427,374 Increase (decrease) in unrealized appreciation of investments - (7,454,185) 824,777 120,815 37,820 (6,470,773) Contributions: Em 67,972 1,846 104,571 17,065 - 191,454 Employees 881,159 1,741,948 373,786 158,134 73,737 3,228,764 Employer - Net of forfeitures - 2,043,854 - - - 2,043,854 Withdrawals and Distributions (936,731) (1,662,650) (159,231) (48,740) (12,506) (2,819,858) Employee interfund transfers 1,818,848 (1,226,417) (326,925) (243,879) (21,627) - Net increase/(decrease) in Plan Equity for the Year 2,885,397 (4,186,197) 819,349 4,652 77,614 (399,185) Plan Equity at the beginning of year 0 0 0 0 0 0 Plan Equity at the end of year $ 2,885,397 $ (4,186,197)$ 819,349 $ 4,652 $ 77,614 $ (399,185) 1994 Fixed C&K Equity Advisers Mortgage Income Fund Stock Fund Fund Fund Fund Total Investment income: Cash dividends on investment in common stock of Crompton & Knowles Corporation and interest on short-term investments $ 4,357 $ 879,230 $ 4,847 $ 1,583 $ 652 $ 890,669 Realized gain on sale of investments and withdrawals - 1,242,744 - - - 1,242,744 Interest earned - US Treasury notes - - - - - - Interest earned - Hartford Life Insurance Company group annuity contract 949,787 - - - - 949,787 Net investment income 954,144 2,121,974 4,847 1,583 652 3,083,200 Increase (decrease) in unrealized appreciation of investments - (12,033,946) 25,662 (14,931) (4,103) (12,027,318) Contributions: Em 1,039 - 221 - - 1,260 Employees 701,355 1,548,111 268,877 94,419 53,431 2,666,193 Employer - Net of forfeitures - 1,676,755 - - - 1,676,755 Withdrawals and Distributions (972,580) (2,231,903) (122,309) (28,957) (15,192) (3,370,941) Employee interfund transfers 750,591 (1,286,569) 416,791 123,419 (4,232) - Net increase/(decrease) in Plan Equity for the Year 1,434,549 (10,205,578) 594,089 175,533 30,556 (7,970,851) Plan Equity at the beginning of year 13,629,715 42,681,600 1,817,646 482,592 208,979 58,820,532 Plan Equity at the end of year $ 15,064,264 $ 32,476,022 $ 2,411,735 $ 658,125 $ 239,535 $ 50,849,681 See accompanying notes to financial statements CROMPTON & KNOWLES CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 and 1995 1. Basis of Presentation The accompanying financial statements have been prepared on an accrual basis. Securities transactions are recorded on the trade date, and dividend income is recorded on the ex-dividend date. 2. Plan Description The Employee Stock Purchase and Savings Plan was adopted by the Board of Directors of Crompton & Knowles Corporation (the "Corporation") on January 27, 1976. Effective July 1, 1989 the Board of Directors amended the Plan to convert it into an Employee Stock Ownership Plan (the "Plan"). The Plan permits an eligible employee to elect to participate by authorizing a withholding of an amount equal to 1%, 2%, 3%, 4%, 5% or 6% of compensation as the basic contribution to the Plan. Contributions by the Corporation to the Plan were made at an amount equal to 66 2/3% of each participating employee's basic employee contribution to the Plan. Funds contributed under the Plan are held in a trust fund (the "Trust") and were invested in five investment funds, the Crompton & Knowles Stock Fund ("C&K Stock Fund"), the Fixed Income Fund, the Equity Fund, the Advisers Fund, and the Mortgage Fund. The C&K Stock Fund is a fund invested entirely in common stock of Crompton & Knowles Corporation, and contributions by the Corporation to the Plan are invested in this fund. The market value of the common stock is based on quotations from the New York Stock Exchange. The Fixed Income Fund is a fund invested under an agreement with Hartford Life Insurance Company (the "Hartford") pursuant to which the Hartford guarantees the repayment of principal and the payment of interest on all amounts on deposit at an Employee Stock Ownership Plan - Notes To Financial Statements Page 2 effective annual rate of interest of 6.46% on, and after January 1, 1996, (6.50% for the period January 1, 1995 through December 31, 1995, and 6.885% for the period January 1, 1994 through December 31, 1994). The value of the Fixed Income Fund is based on contributions invested and reinvested, interest earned, less withdrawals and distributions. The Equity Fund is a fund invested under the terms of a group annuity contract with the Hartford in the Separate Account A, which is a pooled separate account maintained by the Hartford with respect to a portion of its assets, in connection with the contract and other similar contracts issued by the Hartford. This fund invests primarily in equity securities such as common stocks and securities convertible into common stock. The Equity Fund is valued based on a unit value as determined by the fund manager as follows: 12/31/96 12/31/95 Unit Value $158.091 $126.392 Total Units Held 48,045.124 25,293.156 The related cost of the Equity Fund at December 31, 1996 was $5,448,269, and $2,245,895 at December 31, 1995. The Advisers Fund is a fund invested under the terms of a group annuity contract with the Hartford in the Separate Account V which is a pooled separate account maintained by the Hartford with respect to a portion of its assets, in connection with the contract and other similar contracts issued by the Hartford. Assets in the Separate Account V are invested in the HVA Advisers Fund, Inc. The Hartford Investment Management Company is an investment advisor to the fund, and Wellington Management is sub-advisor to the fund. This fund invests in common stocks, debt securities, and money market instruments. The Advisers Fund is valued based on a unit of value as determined by the fund manager as follows: 12/31/96 12/31/95 Unit Value $1.982 $1.708 Total Units Held 658,050.649 378,784.471 Employee Stock Ownership Plan - Notes To Financial Statements Page 3 The related cost of the Advisers Fund at December 31, 1996 was $1,061,099, and $531,228 at December 31, 1995. The Mortgage Fund is a fund invested under the terms of a group annuity contract with the Hartford in the Separate Account G which is a pooled separate account maintained by the Hartford with respect to a portion of its assets, in connection with the contract and other similar contracts issued by the Hartford. The assets in the Separate Account G are invested solely in the Hartford GNMA/Mortgage Securities Fund. Inc. The Hartford Investment Management Company is an investment advisor to the fund. This fund invests in mortgage related securities, including securities issued by the Government National Mortgage Association. The Mortgage Fund is valued based on a unit value as determined by the fund manager as follows: 12/31/96 12/31/95 Unit Value $32.155 $30.764 Total Units Held 10,993.208 10,065.191 The related cost of the Mortgage Fund at December 31, 1996 was $304,253, and $269,734 at December 31, 1995. Assets in any of the five funds may be invested in short term government or other securities pending permanent investment. Earnings on each fund will be reinvested in that fund. Each participant is permitted to elect to have his basic contribution invested in any of the five funds in 10% increments. As of December 31, 1996 and 1995 the number of participants by fund were as follows: 1996 1995 C&K Stock Fund 1,515 1,541 Fixed Income Fund 933 994 Equity Fund 607 503 Advisers Fund 274 225 Mortgage Fund 146 142 As of the first day of any month, but not more frequently than once in any six-month period, a participant may elect to Employee Stock Ownership Plan - Notes To Financial Statements Page 4 transfer any part of the value of his basic employee account or his supplemental employee account, which is invested in one of the funds, to any of the other funds except the Fixed Income Fund and the Mortgage Fund. Any such transfer must be in increments of 5% of the amount invested in the fund from which the transfer is being made. 3. Income Taxes The Internal Revenue Service has issued a determination letter to the effect that the Plan as amended through 1994 is a qualified plan under Section 401(a) of the Internal Revenue Code of 1954 (the Code), as amended. The Board of Directors of the Corporation amended the Plan, effective as of July 1, 1989, to convert it to an employee stock ownership plan. The amendments to the Plan included both changes to convert the Plan to an employee stock ownership plan and other changes required or permitted by the Code. Management and counsel believe that these amendments will not effect the qualified status of the Plan. It is believed that, in general, the federal income tax consequences of participation in the Plan under present law will be as follows: Participants are not subject to federal income tax on employer contributions made under the Plan or on income earned by the Trust until amounts are withdrawn or distributed. Any withdrawal from the Plan will be tax free to the extent of the participant's contributions to the Plan prior to 1987. If the amount exceeds such pre-1987 contributions of the participant, the excess will be treated as being in part a tax free return of the participant's contribution made to the Plan after 1986 and in part as a taxable distribution subject to federal income tax at ordinary rates based on the ratio at the time of withdrawal of the participant's total contributions after 1986 to the total value of the participant's accounts. If the withdrawal or distribution qualifies as a lump sum distribution, amounts attributable to participation in a predecessor plan prior to 1974 may qualify for capital gains treatment (phased out over the years 1987-1991), and the ordinary income portion attributable to post-1973 participation Employee Stock Ownership Plan - Notes To Financial Statements Page 5 may be taxed under a special five-year income averaging provision if the participant is over age 59 1/2 (or a special ten-year income averaging provision if the participant turned 50 before January 1, 1986). If a distribution includes shares of common stock of Crompton & Knowles Corporation, taxation of any appreciation in the value of such shares over their cost to the Trust will be deferred until the later sale or exchange of such shares. Taxable withdrawals or distributions after January 1, 1987, in addition to being taxed as ordinary income will be subject to an additional 10% income tax unless the withdrawal or distribution is on account of the death or disability of the participant, is made after he turns age 59 1/2 or retires after age 55, or is used for certain deductible medical expenses. A participant who receives total distributions from all retirement plans in a single year in excess of $150,000 ($144,551 in some cases) may be subject to an excise tax of 15% of the excess amount. The foregoing is only a brief summary of the tax consequences of participation in the Plan. Each participant should consult his own personal advisor to review the tax consequences of making any elections under the Plan and to determine his own tax liability. 4. Participant Vesting A participant in the Plan is fully vested in all of his accounts under the Plan upon his death, retirement, disability, or attainment of age 65 or upon change in control of the Corporation. A participant whose employment terminates for any reason before his death or retirement is entitled to receive l00% of his own contributions plus earnings thereon and will receive his employer contribution account plus earnings thereon based upon a schedule under which the account is 100% vested after five years of participation in the Plan, or after completion of five years of service with the Corporation. The non-vested portion of the employer contribution account will be forfeited under certain circumstances and held to reduce future contributions to be made by the Corporation to the Plan. Employee Stock Ownership Plan - Notes To Financial Statements Page 6 5. Investments A. Unrealized appreciation in Crompton & Knowles Corporation common stock: 12/31/96 12/31/95 12/31/94 Unrealized apprec. at the beginning of the year $12,319,023 $19,773,208 $31,807,154 Unrealized apprec. at the end of the year 22,797,425 12,319,023 19,773,208 Increase/(decrease) in unrealized appreciation $10,478,402 $( 7,454,185)$(12,033,946) B. Net purchases (sales) of shares of Crompton & Knowles Corporation common stock consist of the following: Contributions Net And Sales and Purchases Purchases Withdrawals (Sales) 1996 No. of shares 165,334 241,842 ( 76,508) Cost amount $2,569,042 $1,856,125 $( 712,917) 1995 No. of shares 283,757 151,659 132,098 Cost amount $4,307,961 $1,039,233 $3,268,728 1994 No. of shares 145,724 86,429 59,295 Cost amount $2,446,717 $485,144 $1,961,573 Employee Stock Ownership Plan - Notes to Financial Statements Page 7 C. Gain on sale of investments and withdrawals of Crompton & Knowles Common Stock: 1996 1995 1994 Aggregate proceeds $3,834,132 $2,336,353 $1,727,888 Aggregate cost (FIFO) 1,856,125 1,039,233 485,144 Net gain $1,978,007 $1,297,120 $1,242,744 6. Plan Expenses Significant costs of Plan administration, which are payable from the Trust or by the Corporation, are generally paid by the Corporation. Independent Auditors' Report The Board of Directors Crompton & Knowles Corporation: We have audited the accompanying statements of financial condition of Crompton & Knowles Corporation Employee Stock Ownership Plan (the Plan) as of December 31, 1996 and 1995, and the related statements of income and changes in plan equity for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Plan as of December 31, 1996 and 1995, and the income and changes in plan equity for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Stamford, Connecticut March 20, 1997 EX-99 12 REPORT OF DELOITTE & TOUCHE Exhibit 99 INDEPENDENT AUDITORS' REPORT Board of Directors Uniroyal Chemical Corporation We have audited the consolidated balance sheet of Uniroyal Chemical Corporation and its subsidiaries as of October 1, 1995 and the related consolidated statements of operations, stockholders' equity(deficit) and cash flows for the years ended October 1, 1995 and October 2, 1994 (not presented separately herein). Our audits also included the financial statement schedule of valuation and qualifying accounts for the years ended October 1, 1995 and October 2, 1994 (not presented separately herein). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provided a reasonable basis for our opinion. In our opinion, such consolidated financial statements (not presented separately herein) present fairly, in all material respects, the financial position of Uniroyal Chemical Corporation and its subsidiaries as of October 1, 1995, and the results of their operations and their cash flows for the years ended October 1, 1995 and October 2, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule (not presented separately herein), when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/Deloitte & Touche LLP Deloitte & Touche LLP Stamford, Connecticut November 17, 1995 -----END PRIVACY-ENHANCED MESSAGE-----