-----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, TLfoUnpGeyrwia65+ZWcOYJH7EDky3yMK0gV0jQyYcKsIL4AcnXJ2D2y0GyGxbhQ 5ynnbQehiFhYBCgiuA3VjA== 0000950112-96-002750.txt : 19960814 0000950112-96-002750.hdr.sgml : 19960814 ACCESSION NUMBER: 0000950112-96-002750 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960813 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: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-09337 FILM NUMBER: 96609156 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 S-1/A 1 CROMPTON & KNOWLES CORPORATION AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1996 REGISTRATION NO. 333-09337 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- CROMPTON & KNOWLES CORPORATION (Exact name of Registrant as Specified in Its Charter) MASSACHUSETTS 2860 04-1218720 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.) ONE STATION PLACE, METRO CENTER STAMFORD, CONNECTICUT 06902 (203) 353-5400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------------- VINCENT A. CALARCO CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER CROMPTON & KNOWLES CORPORATION ONE STATION PLACE, METRO CENTER STAMFORD, CONNECTICUT 06902 (203) 353-5400 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) ------------------- WITH COPY TO: EDWARD D. HERLIHY, ESQ. WACHTELL, LIPTON, ROSEN & KATZ 51 WEST 52ND STREET NEW YORK, NY 10019-6150 (212) 403-1000 ------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / _______ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------- CALCULATION OF REGISTRATION FEE
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED PER SHARE(2) OFFERING PRICE(2) FEE Common Stock, $0.10 par value(1)................... 1,000,000 shares $14.63 $14,630,000 $5,045
(1) Includes one attached Preferred Share Purchase Right per share. Rights initially will trade together with the Common Stock. The value attributable to the Rights, if any, is reflected in the market price of the Common Stock. (2) Pursuant to Rule 457(c) promulgated under the Securities Act of 1933, as amended, and estimated solely for purposes of calculating the registration fee, the proposed maximum aggregate offering price is $14,630,000, which equals the product of (x) $14.63, the average of the high and low prices of the common stock, $0.10 par value, of Crompton & Knowles Corporation (together with the attached Preferred Share Purchase Rights of Crompton & Knowles Corporation, "Crompton Common Stock") as reported on the New York Stock Exchange Composite Tape on July 25, 1996, and (y) 1,000,000, the total number of shares of Crompton Common Stock to be offered hereunder. The proposed maximum offering price per share is equal to the proposed maximum aggregate offering price determined in the manner described in the preceding sentence divided by 1,000,000, the total number of shares of Crompton Common Stock to be offered hereunder. ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROMPTON & KNOWLES CORPORATION CROSS REFERENCE SHEET PURSUANT TO REGULATION S-K, ITEM 501(B)
FORM S-1 ITEM NO. PROSPECTUS HEADING - ------------------------------------------------- ------------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus..... Facing Page; Cross Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.............................. Available Information; Table of Contents 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors; Market Price and Dividend Data; The Company; Historical and Unaudited Pro Forma Combined Capitalization; Unaudited Pro Forma Combined Financial Information 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Plan of Distribution 6. Dilution................................... Not Applicable 7. Selling Security Holders................... Not Applicable 8. Plan of Distribution....................... Oustide Front Cover Page; Plan of Distribution 9. Description of Securities to be Registered................................. Description of Crompton Capital Stock 10. Interests of Named Experts and Counsel..... Legal Matters; Experts 11. Information With Respect to the Registrant................................. Prospectus Summary; Risk Factors; Market Price and Dividend Data; The Company; Recent Developments; Selected Historical Financial Data of Crompton; Management's Discussion and Analysis of Financial Condition and Results of Operations of Crompton; Historical and Unaudited Pro Forma Combined Capitalization; Unaudited Pro Forma Combined Financial Information; Index to Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................ Not Applicable
SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED AUGUST 12, 1996 PROSPECTUS 1,000,000 SHARES [LOGO] CROMPTON & KNOWLES CORPORATION COMMON STOCK ($0.10 PAR VALUE) All of the 1,000,000 shares of common stock, $0.10 par value per share (together with the attached preferred share purchase rights, the "Common Stock" or "Crompton Common Stock"), of Crompton & Knowles Corporation ("Crompton" or the "Company") offered hereby are being offered by Crompton (the "Offering"). Crompton Common Stock is quoted on the New York Stock Exchange ("NYSE") under the trading symbol "CNK." On August 8, 1996, the closing price of Crompton Common Stock as reported on the NYSE Composite Tape was $14.375. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN RISK AND OTHER FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
PRICE TO PLACEMENT FEE PROCEEDS TO PUBLIC OR DISCOUNT(1) COMPANY(2) Per Share(3)...................... $ $ $ Total............................. $ $ $
- -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the Placement Agent against certain liabilities in connection with the Offering, including liabilities under the Securities Act of 1933, as amended. (2) Before deducting estimated expenses of $ . (3) Each share will have attached one Preferred Share Purchase Right which will initially trade together with the share. SALOMON BROTHERS INC Placement Agent The date of this Prospectus is August , 1996. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. AVAILABLE INFORMATION Crompton is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by Crompton with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at its principal office at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048, and Chicago Regional Office, Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates, or through the World Wide Web (http://www.sec.gov). Crompton Common Stock is listed on the NYSE, and such reports, proxy statements and other information concerning Crompton are available for inspection and copying at the offices of the NYSE, 20 Broad Street, New York, New York 10005. Crompton has filed with the Commission a Registration Statement on Form S-1 under the Securities Act of 1933, as amended (together with the rules and regulations promulgated thereunder, the "Securities Act"), with respect to the shares of Crompton Common Stock to be offered hereby (the "Registration Statement"). This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Reference is hereby made to the Registration Statement and related exhibits for further information with respect to Crompton and the securities offered hereby. Statements contained herein concerning the provisions of any document are necessarily summaries of such documents and not complete, and in each instance, reference is made to the copy of such document attached hereto or filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. ii PROSPECTUS SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. This summary is not intended to be complete and is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Prospective investors are urged to read and consider carefully all of the information contained in this Prospectus. As used herein, the terms "Crompton" and "the Company" refer to Crompton & Knowles Corporation and its consolidated subsidiaries, unless the context otherwise requires. THE COMPANY Crompton is engaged in the manufacture and sale of specialty chemicals and specialty process equipment and controls which are marketed throughout the world. Crompton's line of specialty value-added chemicals includes textile and industrial dyes and auxiliary chemicals, reaction flavors, specialty sweeteners, food colors and inactive pharmaceutical additives and coatings. Crompton's specialty process equipment and controls business consists primarily of the manufacture and sale of plastics and rubber extrusion equipment and integrated extrusion systems, industrial blow molding equipment and electronic controls. The principal executive offices of Crompton are located at One Station Place, Metro Center, Stamford, Connecticut 06902, and its telephone number is (203) 353-5400. See "The Company." RECENT DEVELOPMENTS Pursuant to an Agreement and Plan of Merger, dated as of April 30, 1996 (the "Merger Agreement"), Crompton has agreed to the merger (the "Merger") of Tiger Merger Corp., a Delaware corporation and a wholly owned subsidiary of Crompton ("Subcorp"), with and into Uniroyal Chemical Corporation, a Delaware corporation ("Uniroyal"), subject to the approval of the transaction by the stockholders of each of Uniroyal and Crompton at special meetings thereof currently scheduled to be held on August 21, 1996. The Board of Directors of Crompton has fixed the close of business on July 9, 1996, as the record date for determination of holders of Crompton Common Stock entitled to notice of and to vote at such meeting of Crompton stockholders. Accordingly, purchasers of the shares of Crompton Common Stock offered hereby will not be entitled to vote such shares at such special meeting. The Merger will be consummated on the terms and subject to the conditions set forth in the Merger Agreement (which was filed by Crompton with the Commission as an exhibit to Crompton's Quarterly Report on Form 10-Q for the quarter ended March 30, 1996), pursuant to which, among other things, (i) Subcorp will be merged with and into Uniroyal as a result of which Uniroyal will become a wholly owned subsidiary of Crompton, (ii) each issued and outstanding share (other than shares, if any, held in the treasury of Uniroyal or held by Crompton or any of its subsidiaries, which will be cancelled) of common stock, $0.01 par value per share (together with the attached preferred stock purchase rights, "Uniroyal Common Stock"), of Uniroyal will be converted into 0.9577 shares of Crompton Common Stock (with cash in lieu of fractional shares), and (iii) each issued and outstanding share (other than shares, if any, held in the treasury of Uniroyal or held by Crompton or any of its subsidiaries, which will be cancelled, and other than shares as to which dissenters' appraisal rights have been perfected) of Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), of Uniroyal and of Series B Preferred Stock, par value $0.01 per share ("Series B Preferred Stock," and together with the Series A Preferred Stock, "Uniroyal Preferred Stock"), of Uniroyal will be converted into 6.3850 shares of Crompton Common Stock (with cash in lieu of fractional shares). It is currently anticipated that the Merger will be consummated shortly after the special meetings of Crompton and Uniroyal stockholders, assuming the Merger Agreement and the Merger are approved at such meetings and all other conditions to the Merger have been satisfied or waived. Uniroyal, through its subsidiaries, is a major multinational manufacturer of a wide variety of specialty chemical products, including specialty elastomers, rubber chemicals, crop protection chemicals and additives for the plastics and lubricants industries. Uniroyal produces high value added products which are currently marketed in approximately 120 countries. Crompton does not currently 1 intend to make any material changes to the general operating activities of Uniroyal following consummation of the Merger. The principal executive offices of Uniroyal are located at Benson Road, Middlebury, Connecticut 06749, and its telephone number is (203) 573-2000. Uniroyal is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. Prospective investors are urged to read and consider carefully such reports, proxy statements and other information. Uniroyal Common Stock is quoted on the Nasdaq National Market (the "NASDAQ/NM"). Crompton is effecting the Offering in order for the Merger to qualify as a pooling-of-interests for accounting and financial reporting purposes. See "Recent Developments." THE OFFERING Common Stock offered by Crompton............. 1,000,000 shares Common Stock to be outstanding immediately after the Offering........................... 49,039,309 shares(1) NYSE Symbol.................................. CNK Use of Proceeds.............................. The net proceeds to Crompton from the Offering will be used to partially offset the estimated merger costs discussed elsewhere herein. See "Use of Proceeds." Risk Factors................................. See "Risk Factors."
- ------------ (1) Calculated based on 48,039,309 shares of Common Stock outstanding on July 30, 1996, and not giving effect to the up to approximately 26,089,206 shares of Common Stock expected to be issued in connection with the Merger. 2 SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA Selected Historical Financial Data The selected financial data presented below for Crompton as of December 31, 1994 and December 30, 1995 and for the years ended December 25, 1993, December 31, 1994 and December 30, 1995, and Uniroyal as of October 2, 1994 and October 1, 1995 and for the three years ended September 30, 1993, October 2, 1994 and October 1, 1995, have been derived from and are qualified in their entirety by, and should be read in conjunction with, the respective audited financial statements and notes thereto contained herein. See "Index to Financial Statements." Crompton's statement of operations data for the years ended December 28, 1991 and December 26, 1992 and the balance sheet data as of December 28, 1991, December 26, 1992 and December 25, 1993 are derived from audited Crompton consolidated financial statements that are neither included nor incorporated by reference herein. Uniroyal's statement of operations data for the fiscal years ended September 30, 1991 and 1992 and the balance sheet data as of September 30, 1991, 1992 and 1993 are derived from audited Uniroyal financial statements which are neither included nor incorporated by reference herein. The unaudited financial data presented below for the interim periods ended July 1, 1995 and June 29, 1996, and July 2, 1995 and June 30, 1996, are derived from the unaudited consolidated financial statements of Crompton and Uniroyal, respectively, that are contained herein. In the opinion of Crompton, such unaudited financial data have been prepared on the same basis as the audited financial statements contained herein or otherwise filed with the Commission and include all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the information set forth herein. Operating results for the interim periods ended June 29, 1996 and June 30, 1996 are not necessarily indicative of the results that may be expected for the year or for any other interim period.
YEARS ENDED SIX MONTHS ENDED ------------------------------------------------------------------------ ------------------- DECEMBER 28, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29, 1991 1992 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Crompton & Knowles Corporation CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales.................. $450,228 517,718 558,348 589,757 665,513 343,810 332,410 Income before extraordinary charges and cumulative effect of accounting changes.................... $ 35,941 43,265 51,958 50,916 40,493 25,254 19,180 Net income................. $ 35,941 34,465 51,958 50,916 40,493 25,254 19,180 Income per common share before extraordinary charges and cumulative effect of accounting changes.................... $ 0.73 0.87 1.00 1.00 0.84 0.52 0.40 Net income per common share...................... $ 0.73 0.69 1.00 1.00 0.84 0.52 0.40 Weighted average number of shares outstanding......... 49,317 49,967 52,176 51,152 48,448 48,569 48,499 CONSOLIDATED BALANCE SHEET DATA: Total assets............... $308,562 350,715 363,246 432,328 484,138 537,369 Long-term debt............. $ 76,118 24,000 14,000 54,000 64,000 79,000 Cash dividends declared per common share............... $ 0.25 0.31 0.38 0.46 0.525 0.255 0.27
3
YEARS ENDED NINE MONTHS ENDED ------------------------------------------------------------------------- --------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, OCTOBER 2, OCTOBER 1, JULY 2, JUNE 30, 1991 1992 1993 1994 1995 1995 1996 ------------- ------------- ------------- ---------- ---------- ------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Uniroyal Chemical Corporation CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales............ $ 832,302 856,591 907,862 946,454 1,079,321 784,567 829,171 Income (loss) before extraordinary charges and cumulative effect of accounting changes... $ (23,648) (27,790) (24,792) (213,843)(3) 99,429(4) 95,694(4) 17,982 Net income (loss).... $ (23,648) (27,790) (236,733) (213,843)(3) 91,150(4) 87,415(4) 17,541 Income (loss) per common share before extraordinary charges and cumulative effect of accounting changes (1)(2)............... $ (2.15) (2.54) (2.31) (20.31)(3) 5.37(4) 5.80(4) 0.72 Net income (loss) per common share (1)(2).. $ (2.15) (2.54) (21.85) (20.31)(3) 4.92(4) 5.30(4) 0.70 Weighted average number of shares outstanding(2)....... 11,167 11,038 10,847 10,543 18,461 16,436 24,582 CONSOLIDATED BALANCE SHEET DATA (5): Total assets......... $ 1,253,370 1,228,569 1,225,438 1,056,017 1,171,707 1,161,047 Long-term debt....... $ 854,619 880,343 1,034,799 1,048,225 910,156 888,856
- ------------ (1) Calculated based on income (loss) available to common shareholders after preferred dividends earned of $375, $262, $267, $292, $395, $298 and $313 for the years ended September 30, 1991, 1992 and 1993, October 2, 1994, and October 1, 1995, and the nine-month periods ended July 2, 1995 and June 30, 1996, respectively. (2) During the second quarter of fiscal 1995, Uniroyal completed an initial public offering. Upon consummation of the offering, certain redeemable common stock owned by Uniroyal management was converted into a single class of common stock. Weighted average number of shares outstanding reflects the conversion on a retroactive basis for all periods presented. (3) Includes an after-tax write-off of $163 million for impairment of certain intangible assets. (4) Includes a gain of $78.9 million related to a deferred tax asset reserve. (See note 10 under "Unaudited Pro Forma Combined Financial Information--Notes To Unaudited Pro Forma Combined Financial Information.") (5) Uniroyal has not declared any dividends on its common stock during the periods indicated above. 4 UNAUDITED SELECTED PRO FORMA COMBINED FINANCIAL DATA The unaudited selected pro forma combined financial data shown below gives effect to the Merger using the pooling-of-interests basis of accounting. The pro forma statement of operations data reflects the combination of statement of operations data of Crompton for each of the years ended December 25, 1993, December 31, 1994 and December 30, 1995, and the six-month periods ended July 1, 1995 and June 29, 1996, with statement of operations data of Uniroyal for each of the years ended September 30, 1993, October 2, 1994 and October 1, 1995, and the six-month periods ended July 2, 1995 and June 30, 1996. The pro forma balance sheet data reflects the combination of balance sheet data of Crompton as of December 25, 1993, December 31, 1994, December 30, 1995 and June 29, 1996 with balance sheet data of Uniroyal as of September 30, 1993, October 2, 1994, October 1, 1995 and June 30, 1996. The selected pro forma combined financial data should be read in conjunction with the unaudited pro forma combined financial information and notes thereto, which are included elsewhere in this Prospectus. These pro forma data do not purport to be indicative of the results that would have actually been obtained if the Merger had been in effect for the above-mentioned periods and on the dates indicated or that may be obtained in the future.
SIX MONTHS YEARS ENDED ENDED --------------------------------------------- --------------------- DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29, 1993 AND 1994 AND 1995 AND 1995 AND 1996 AND SEPTEMBER 30, OCTOBER 2, OCTOBER 1, JULY 2, JUNE 30, 1993 1994 1995 1995 1996(4) ------------- ------------ ------------ -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA STATEMENT OF OPERATIONS DATA: (2) Net sales................ $ 1,466,210 1,536,211 1,744,834 916,736 930,101 Operating profit........ $ 187,372 1,417(5) 218,122 139,986 131,756 Income (loss) before extraordinary charges and cumulative effect of accounting changes.................. $ 27,166 (162,927)(5) 139,922(6) 131,484(6) 45,530 Income (loss) per common share before extraordinary charges and cumulative effect of accounting changes (1)...................... $ 0.43 (2.65)(5) 2.11(6) 1.96(6) 0.63(7) Weighted average number of shares outstanding (1)...................... 63,689 61,515 66,394 67,109 72,405 PRO FORMA BALANCE SHEET DATA: Total assets............. $ 1,588,684 1,488,345 1,655,845 1,698,416 Long-term debt........... $ 1,048,799 1,102,225 974,156 1,007,906(3) Cash dividends declared per common share (8)..... $ 0.38 0.46 0.525 0.255 0.27
- ------------ (1) Common and common equivalent shares outstanding were calculated assuming a conversion rate of 0.9577 shares of Crompton Common Stock for each share of Uniroyal Common Stock, and 6.3850 shares of Crompton Common Stock for each share of Uniroyal Preferred Stock as provided for in the Merger Agreement. (2) The Pro Forma Statement of Operations Data does not include an estimated $55 million of after tax costs associated with the Merger, as such costs are non-recurring and will be reflected in the statement of operations of the combined company in its first reporting period. 5 (3) Long-term debt includes the financing of the estimated costs of the Merger (see notes 1, 2 and 6 under "Historical and Unaudited Pro Forma Combined Capitalization--Notes to Historical and Unaudited Pro Forma Combined Capitalization"), net of proceeds from the issuance from treasury stock of 1,000,000 shares of Crompton Common Stock to be issued in an offering to take place prior to the consummation of the Merger. (4) After the consummation of the Merger, Uniroyal will change its fiscal year-end to conform with that of Crompton. Results of operations for Uniroyal's quarter ended December 31, 1995 were a net loss of $8.4 million which will be reflected as a one-time adjustment to stockholders' equity in the combined company's 1996 financial statements. (5) Includes an after-tax write-off of $163 million for impairment of certain intangible assets. (6) Includes a gain of $78.9 million related to a deferred tax asset reserve. (See note 10 under "Unaudited Pro Forma Combined Financial Information--Notes To Unaudited Pro Forma Combined Financial Information.") (7) The calculation of pro forma income (loss) per common share before extraordinary charges and cumulative effect of accounting changes does not reflect as outstanding 1,000,000 shares of Crompton Common Stock to be issued in an offering prior to the consummation of the Merger, as such amounts are not reflective of historical trends for the combined company. Assuming the issuance of 1,000,000 shares of treasury stock (see note 3 above) had taken place at the beginning of the year, income per common share before extraordinary charges and cumulative effect of accounting changes for the six months ended 1996 would have been $0.62. (8) Represents Crompton's historical dividends per share. Uniroyal has not declared any dividends on its common stock during the periods presented. 6 RISK FACTORS Purchasers of shares of Common Stock should carefully consider and evaluate all of the information set forth in this Prospectus, including the risk factors listed below. See "The Company," "Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Crompton" for a discussion of other factors generally affecting Compton's business. ENVIRONMENTAL CONSIDERATIONS Crompton's operations are subject to numerous laws and regulations relating to the protection of human health and the environment in the U.S. and abroad. 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 federal, state and local laws and regulations regarding health and safety matters. 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 Crompton or the manufacture, use, emission or disposal of certain products or wastes by Crompton and could involve potentially material expenditures for Crompton. To meet changing permitting and regulatory standards, Crompton may be required to make significant site or operational modifications, potentially involving substantial expenditures and reductions or suspensions of certain operations. Crompton is involved in claims, litigation, administrative proceedings and investigations of various types in a number of jurisdictions. Several 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. Crompton and an inactive subsidiary have been identified by the United States Environmental Protection Agency (the "EPA"), state or local governmental agencies, and other potentially responsible parties (each a "PRP"), as PRPs for 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 PRPs for such site, including Crompton or its subsidiary, despite the involvement of other PRPs. In each such case, Crompton or its subsidiary is one of a large number of PRPs so identified. In certain instances, a number of other financially responsible PRPs are also involved, and Crompton expects that any ultimate liability resulting from such matters will be apportioned between Crompton or its subsidiary and such other parties. While Crompton believes it is unlikely, the resolution of these matters could have a material adverse effect on Crompton's consolidated results of operations if a significant number of these matters is resolved unfavorably. See "The Company -- Environmental Matters," "-- Environmental Matters Following the Merger," and "Management's Discussion and Analysis of Financial Condition and Results of Operations of Crompton." VOLATILITY OF STOCK PRICE The trading price of the Common Stock after the Offering could be subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant contracts, changes in management or new products or services by Crompton or its competitors, general trends in the industry and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations which have affected the market price for many companies in similar 7 industries and which have often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of Crompton Common Stock. EFFECT OF CERTAIN ANTITAKEOVER PROVISIONS The Crompton Articles of Organization (the "Crompton Articles") and Crompton By-Laws contain certain provisions that would likely have an effect of delaying or deterring a change in control of Crompton. Such provisions require, among other things, (i) a classified Board of Directors, with each class containing as nearly as possible one-third of the whole number of members of the Board of Directors and the members of each class serving for three-year terms, (ii) a vote of at least 80% of the holders of Crompton's voting securities to approve certain business combination transactions with a stockholder who is the beneficial owner of 10% or more of Crompton's outstanding voting securities, (iii) a vote of a least 80% of Crompton's voting securities to amend certain of the Crompton Articles and Crompton By-Laws, (iv) advance notice procedures with respect to nominations of directors other than by or at the direction of the Board of Directors, and (v) a vote of two-thirds ( 2/3) of Crompton's outstanding voting securities to approve certain merger and consolidation agreements involving Crompton. The preferred share purchase rights of Crompton that trade with the Crompton Common Stock would likely have a similar delaying or deterring effect. In addition, Crompton's Board of Directors has the authority to issue up to 250,000 shares of Preferred Stock, without par value, in one or more series and to fix the voting powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof without stockholder approval. See "Description of Crompton Capital Stock." OPERATING HAZARDS Crompton's revenues are dependent on the continued operation of its various manufacturing facilities. The operation of chemical manufacturing plants involves many risks, including the breakdown, failure or substandard performance of equipment, natural disasters and the need to comply with directives of government agencies. The occurrence of material operational problems, including but not limited to the above events, may have a material adverse effect on the productivity and profitability of a particular manufacturing facility, or with respect to certain facilities, Crompton as a whole, during the period of such operational difficulties. Crompton's operations are also subject to various hazards incident to the production of industrial chemicals, including the use, handling, processing, storage and transportation of certain hazardous materials. These hazards can cause personal injury and loss of life, severe damage to and destruction of property and equipment, environmental damage and suspension of operations. Claims arising from any future catastrophic occurrence may result in Crompton being named as a defendant in lawsuits asserting potentially large claims. GENERAL LITIGATION EXPENSE In addition to the matters discussed above, because the production of certain chemicals involves the use, handling, processing, storage and transportation of hazardous materials, and because certain of Crompton's products constitute or contain hazardous materials, Crompton has been subject to claims of injury from direct exposure to such materials and from indirect exposure when such materials are incorporated into other companies' products. There can be no assurance that as a result of past or future operations, there will not be additional claims of injury by employees or members of the public due to exposure, or alleged exposure, to such materials. Furthermore, Crompton also has exposure to present and future claims with respect to workplace exposure, workers' compensation and other matters, arising from events both prior to and after the Offering. There can be no assurance as to the actual amount of these liabilities or the timing thereof. See "The Company -- Legal Proceedings." 8 DEPENDENCE UPON KEY PERSONNEL Crompton is dependent upon the efforts of its executive officers and scientific staff. The loss of certain of these key employees could materially and adversely affect Crompton's business. Crompton's success will depend on its ability to retain key employees, and, if any depart, to replace them with personnel of comparable scientific and management capability. NEED FOR ADDITIONAL CAPITAL Crompton presently expects that the net proceeds of this Offering, together with existing working capital, anticipated cash flows from operations, and funds available from existing bank lines of credit and commitments will be sufficient to meet its capital and liquidity needs through at least 1997. However, Crompton's capital needs may increase depending upon several factors, including future acquisitions, changes to planned research and development activities, expanded manufacturing and commercialization programs, additional technological, regulatory and competitive developments and timing of regulatory approvals for new products. As a result, Crompton may need to raise additional funds. There can be no assurance that additional financing would be available and, if available, that the terms would be acceptable to Crompton. LEVERAGE OF UNIROYAL Uniroyal and its subsidiaries had approximately $888.9 million of long-term debt at June 30, 1996. Following the Merger, the ability of Uniroyal and its subsidiaries to meet their respective debt service obligations and to reduce their respective total debt will be dependent upon the future performance of Crompton and Uniroyal and its subsidiaries, which, in turn, will be subject to general economic conditions and to financial, business and other factors, including factors beyond their control. If Crompton, through Uniroyal, is unable to generate sufficient cash flow from operations in the future, Crompton may be required to refinance all or a portion of Uniroyal's existing debt or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained, particularly in view of Uniroyal's high levels of debt, the fact that assets have been given as collateral to secure indebtedness of Uniroyal, and the debt incurrence restrictions under existing debt arrangements. If no such refinancing or additional financing were available, Uniroyal or its subsidiaries could be forced to default on their respective debt obligations and, as an ultimate remedy, seek protection under the federal bankruptcy laws. See "Historical and Unaudited Pro Forma Combined Capitalization" and "Unaudited Pro Forma Combined Financial Information." INTERNATIONAL OPERATIONS Crompton operates on a worldwide basis and is therefore affected by foreign currency exchange rate fluctuations. Crompton operates manufacturing facilities in Europe which serve primarily the European market. Exchange rate disruptions between the United States and European currencies, and among European currencies, are not expected to have a material effect on year-to-year comparisons of Crompton's earnings. Cash deposits, borrowings and forward exchange contracts are used to hedge fluctuations between the U.S. and European currencies, and among European currencies, if such fluctuations are earnings related. Such hedging activities are not significant in total. Political and economic uncertainties in certain of the countries in which Crompton operates may expose it to risk of loss. Crompton does not believe that there is currently any likelihood of material loss through political or economic instability, seizure, nationalization or similar event. Crompton cannot predict, however, whether events of this type in the future could have a material adverse effect on its operations. 9 HOLDING COMPANY STRUCTURE Crompton conducts a substantial portion of its operations through subsidiaries, and is dependent on the cash flow of its subsidiaries in order to pay dividends. Following the Merger, certain agreements governing indebtedness of Uniroyal's subsidiaries and applicable state laws may restrict the payment of distributions and the making of loans and advances by such subsidiaries to Crompton. CONSUMMATION OF THE MERGER The Merger will be consummated on the terms and subject to the conditions set forth in the Merger Agreement. It is currently anticipated that the Merger will be consummated shortly after the special meetings of Crompton and Uniroyal stockholders, assuming the Merger Agreement and the Merger are approved at such meetings and all other conditions to the Merger have been satisfied or waived. There can be no assurances that the Merger will be consummated, whether or not approved by the Crompton and Uniroyal stockholders, or as to the effect of the Merger on the results of operations and performance of Crompton on a going forward basis. See "Recent Developments." LITIGATION RELATING TO MERGER Crompton, Uniroyal and the Directors of Uniroyal were named as defendants in a purported class action lawsuit (the "Stockholder Action") filed in connection with the proposed Merger in the Court of Chancery, County of New Castle, State of Delaware. Fassbender v. Mazaika, C.A. No. 14980. The Stockholder Action alleged, among other things, that defendant directors breached their fiduciary duties by pursuing the Merger at an allegedly unfair and inadequate price; by agreeing to the proposed Merger without having conducted an "auction process or active market check" or a full and thorough investigation; and by agreeing to the allegedly unfair terms of the Merger. The Stockholder Action was brought on behalf of a purported class of persons consisting of the stockholders of Uniroyal other than defendants. Counsel for Uniroyal, Crompton and Subcorp and the counsel for plaintiff entered into a memorandum of understanding (the "Memorandum of Understanding") dated August 5, 1996 in connection with the settlement of the Stockholder Action. Among other things, the Memorandum of Understanding provides that, in full settlement of the claims asserted, (i) the Merger Agreement be amended so as to reduce the fee payable to Crompton upon termination of the Merger Agreement under certain circumstances from $50 million to $35 million, (ii) Uniroyal promptly disseminate to Uniroyal stockholders its third quarter results, (iii) the defendants publicly disclose the proposed settlement by a filing with the Commission and (iv) the plaintiff withdraw his request for a preliminary injunction enjoining consummation of the Merger. The Merger Agreement was amended as of August 7, 1996 to reduce the termination fee as contemplated in the Memorandum of Understanding. The consummation of the proposed settlement is subject to (i) completion by the plaintiff of discovery, (ii) execution of definitive settlement documents, (iii) notice to members of the plaintiff class and (iv) approval by the Delaware Court of Chancery. In connection with the proposed settlement, the defendants have agreed that they will not oppose plaintiff's counsel's application for an award of fees and expenses not to exceed $350,000 in the aggregate, to be paid by Crompton and/or Uniroyal. Uniroyal and its directors have denied, and continue to deny, that any of them have committed any violations of law or breaches of duty to plaintiff or any member of the plaintiff class, Uniroyal or its stockholders, or anyone else. The defendants entered into the Memorandum of Understanding in order to eliminate the distraction and expense of further litigation. PATENTS AND PROPRIETARY RIGHTS Crompton's success depends in large part on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. Crompton owns 10 patents, trade names, and trademarks and uses know-how, trade secrets, formulae, and manufacturing techniques which assist in maintaining the competitive position of certain of its products. Patents, expiring in 1999 and thereafter, formulae, and know-how are of particular importance in the manufacture of a number of the dyes and flavor ingredients sold in Crompton's specialty chemicals business, and patents and know-how are also significant in the manufacture of certain wire insulating and plastics processing machinery product lines. Crompton is also licensed to use certain patents and technology owned by 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 Crompton has such rights include certain dyes, plastics machinery and flavored ingredients. There can be no assurance that any of Crompton's patent applications will be approved, that Crompton will develop additional proprietary products that are patentable, that any patents issued to Crompton will provide Crompton with competitive advantages or will not be challenged by any third parties or that the patents of others will not prevent the commercialization of products incorporating Crompton's technology. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of Crompton's products or, if patents are issued to Crompton, design around Crompton's patents. Any of the foregoing results could have a material adverse effect on Crompton. The commercial success of Crompton also depends, in part, on its ability to avoid infringing patents issued to others. If Crompton were determined to be infringing any third-party patent, Crompton would be required to pay damages, alter its products or processes, obtain licenses or cease certain activities. In addition, if patents are issued to others which contain claims that compete or conflict with those of Crompton and such competing or conflicting claims are ultimately determined to be valid, Crompton may be required to pay damages, to obtain licenses to these patents, to develop or obtain alternative technology or to cease using such technology. If Crompton is required to obtain any licenses, there can be no assurance that Crompton will be able to do so on commercially favorable terms, if at all. Crompton's failure to obtain a license to any technology that it may require to commercialize its products may have a material adverse impact on Crompton. Litigation, which could result in substantial costs to Crompton, may also be necessary to enforce any patents issued or licensed to Crompton or to determine the scope and validity of third-party proprietary rights. If competitors of Crompton prepare and file patent applications in the United States that claim technology also claimed by Crompton, Crompton may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial cost to Crompton, even if the eventual outcome is favorable to Crompton. An adverse outcome of any such litigation or interference proceeding could subject Crompton to significant liabilities to third parties, require disputed rights to be licensed from third parties or require Crompton to cease using such technology. Crompton also relies on trade secrets, proprietary know-how and technological advances which it seeks to protect, in part, by confidentiality agreements with its collaborators, employees and consultants. There can be no assurance that these agreements will not be breached, that Crompton would have adequate remedies for any breach, or that Crompton's trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others. See "The Company -- Patents and Licenses." 11 USE OF PROCEEDS The net proceeds to Crompton from the Offering are estimated to be approximately $15 million after deducting estimated costs, assuming a price to the public of $15 1/8 per share. Such proceeds will be used to partially offset the estimated merger costs discussed elsewhere herein. Crompton is effecting the Offering in order for the Merger to qualify as a pooling-of-interests for accounting and financial reporting purposes. MARKET PRICE AND DIVIDEND DATA The following table reflects the range of the reported high and low prices of Crompton Common Stock on the NYSE Composite Tape and the per share dividends paid thereon. The information in the table has been adjusted to reflect retroactively all applicable stock splits.
CROMPTON COMMON STOCK --------------- CALENDAR QUARTERS HIGH LOW DIVIDENDS - ------------------------------------------------------ --------------- --------------- --------- 1993: First quarter..................................... $24 3/4 $21 3/8 $ 0.08 Second quarter.................................... 27 1/4 21 0.10 Third quarter..................................... 23 1/4 19 0.10 Fourth quarter.................................... 23 7/8 17 5/8 0.10 1994: First quarter..................................... $24 1/8 $19 5/8 $ 0.10 Second quarter.................................... 23 5/8 17 3/8 0.12 Third quarter..................................... 18 1/2 15 7/8 0.12 Fourth quarter.................................... 16 5/8 13 7/8 0.12 1995: First quarter..................................... $17 3/8 $15 7/8 $ 0.12 Second quarter.................................... 20 13 3/8 0.135 Third quarter..................................... 15 3/4 13 5/8 0.135 Fourth quarter.................................... 14 7/8 12 0.135 1996: First quarter..................................... 15 1/2 13 0.135 Second quarter.................................... 18 3/8 13 7/8 0.135 Third quarter (through August 8, 1996)............ 16 7/8 13 1/8 --
On August 8, 1996, the most recent practicable date prior to the date of this Prospectus, the closing price of the Common Stock was $14 3/8 per share as reported on the NYSE Composite Tape. Crompton anticipates that it will pay an annual cash dividend of $0.05 per share. However, the timing and amount of any future dividends remain within the discretion of the Crompton Board of Directors and will depend on Crompton's future earnings, financial condition, capital requirements and other factors. 12 THE COMPANY GENERAL Crompton was incorporated in Massachusetts in 1900. Crompton 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. Crompton 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. Crompton 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, Crompton acquired a wire and cable equipment business from Clipper Machines, Inc. In 1992, Crompton acquired a pre-metallized dyes business and facility located in Oissel, France. Crompton 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. Effective January 1, 1995, Crompton'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 Crompton. In 1995, Crompton 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 January 1996, Crompton acquired Klockner ER-WE-PA GmbH, a manufacturer of extrusion coating, cast film and plastic extrusion equipment located in Erkrath, Germany, and retained Salomon Brothers to assist in exploring strategic alternatives to maximize shareholder value with respect to the Ingredient Technology Corporation business, which Crompton currently intends to retain. In April 1996, Crompton announced the acquisition of the Hartig product line of industrial blow molding systems. Information as to the sales, operating profit, and identifiable assets attributable to each of Crompton's business segments during each of its last three fiscal years is set forth in the Notes to Consolidated Financial Statements contained elsewhere in this Prospectus. See "Index to Financial Statements." PRODUCTS AND SERVICES The principal products and services offered by Crompton are described below. Specialty Chemicals. Textile dyes manufactured and sold by Crompton 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. Crompton also markets organic chemical intermediates and a line of chemical auxiliaries for the textile industry, including leveling agents, dye fixatives, and scouring agents. Sales of this class of products accounted for 43%, 50%, and 57% of the total revenues of Crompton in 1995, 1994, and 1993, respectively. Crompton 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. Crompton 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. Sales of this class of products accounted for 15%, 17%, and 16% of the total revenues of Crompton in 1995, 1994, and 1993, respectively. 13 Domestically, Crompton sells specialty chemicals predominantly through its own dedicated sales force. Outside the United States, as much as one-half of Crompton's sales of specialty chemicals are made through distributors. Specialty Process Equipment and Controls. Crompton 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. Sales of this class of products accounted for 42%, 33%, and 27% of the total revenues of Crompton in 1995, 1994, and 1993, respectively. 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. Crompton's HES unit produces electrical and electronic controls primarily for use with extrusion systems. Crompton is a major user of such controls. In the United States, most of Crompton'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, Crompton'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 Crompton's products are generally available from a number of sources, some of which are foreign. Substantial sales of the dyes and auxiliary chemicals business consist of dyes manufactured from intermediates purchased from foreign sources. Crompton has not experienced significant interruptions or other significant problems in obtaining raw materials. PATENTS AND LICENSES Crompton owns patents, trade names, and trademarks and uses know-how, trade secrets, formulae, and manufacturing techniques which assist in maintaining the competitive position of certain of its products. Patents, expiring in 1999 and thereafter, formulae, and know-how are of particular importance in the manufacture of a number of the dyes and flavor ingredients sold in Crompton's specialty chemicals business, and patents and know-how are also significant in the manufacture of certain wire insulating and plastics processing machinery product lines. Crompton 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. Crompton is also licensed to use certain patents and technology owned by 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 Crompton has such rights include certain dyes, plastics machinery and flavored ingredients. SEASONAL BUSINESS No material portion of any segment of the business of Crompton is seasonal. 14 CUSTOMERS Crompton 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 an adverse effect on the segment. No one customer's business accounts for more than ten percent of Crompton'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 Crompton's specialty process equipment and controls business. Firm backlog of customers' orders for this business at December 30, 1995, totalled approximately $72 million compared with $66 million at December 31, 1994. The increase in the backlog was attributable to the $9 million of backlog acquired in the Killion and Repiquet acquisitions in 1995. It is expected that all of the December 30, 1995 backlog will be shipped during 1996. Orders for specialty chemicals and equipment repair parts are filled primarily from inventory stocks and thus are excluded from backlog. COMPETITIVE CONDITIONS Crompton has many competitors in each of its business segments. Crompton 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. Crompton is less of a factor in other segments of the domestic dyes industry and in the European market. Crompton is also 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, Crompton has many competitors in the United States and abroad. Crompton 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. Crompton is one of a number of producers of other types of plastics processing machinery. No one competitor or small number of competitors is believed to be dominant in any of Crompton's major markets. Product performance, service, and competitive prices are all important factors in competing in the specialty chemicals and specialty process equipment and controls product lines. Crompton has gained leadership positions in its chosen markets by providing quality products, technical service and performance know-how to solve problems and add value to customers' products. Crompton often develops new products in response to a customer's specific needs. Crompton's success as a producer of specialty process equipment and controls has been augmented by its strength as a supplier of aftermarket systems and services, including maintenance, parts and systems upgrade support. RESEARCH AND DEVELOPMENT Crompton employs about 285 engineers, draftsmen, chemists, and technicians responsible for developing new and improved chemical products and process equipment systems for the industries served by Crompton. Often, new products are developed in response to specific customer needs. Crompton's process of developing and commercializing new products and product improvements is ongoing and involves many products, no one of which is large enough to significantly impact Crompton's results of operations from year to year. Research and development expenditures totalled $14.0 million for the year 1995, $12.1 million for the year 1994, and $11.2 million for the year 1993. ENVIRONMENTAL MATTERS Crompton's manufacturing facilities are subject to various federal, state and local requirements with respect to the discharge of materials into the environment or otherwise relating to the protection of the environment. Although precise amounts are difficult to define, in 1995, Crompton spent approximately $15.8 million to comply with those requirements, including approximately $4.9 million in capital expenditures. Such capital expenditures are estimated to be $3.5 million in 1996. Crompton has been designated, along with others, as a potentially responsible party under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or comparable 15 state statutes, at two waste disposal sites; and an inactive subsidiary has been designated, along with others, as a potentially responsible party at two other sites. While the cost of compliance with existing environmental requirements is expected to increase, based on the facts currently known to Crompton, management expects that those costs, including the cost to Crompton of remedial actions at the waste disposal sites where it has been named a potentially responsible party, will not have a material effect on Crompton's liquidity and financial condition and that the cost to Crompton of any remedial actions will not be material to the results of Crompton's operations in any given year. EMPLOYEES Crompton had 2,761 employees on December 30, 1995. 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 Crompton and export sales, for each of Crompton's last three fiscal years, is set forth in the Notes to Consolidated Financial Statements contained elsewhere in this Prospectus. See "Index to Financial Statements." Crompton 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 Crompton's international operations are subject to fluctuations in the relative values of the currencies in the various countries in which its activities are conducted. PROPERTIES The following table sets forth information as to the principal operating properties of Crompton and its subsidiaries:
OWNERSHIP BUSINESS SEGMENT DATES OR LEASE AND LOCATION PRODUCTS BUILT EXPIRATION - ---------------------------------- ---------------------------------- ---------- ----------- Specialty Chemicals: Carrollton, TX office and plant Seasonings 1982 1997 Des Plaines, IL office and plant Flavors 1968 Owned Elyria, OH office and plant Seasonings 1978 2001 Gibraltar, PA office, laboratory Textile and other dyes 1964-1980 Owned and chemical plant Lowell, NC chemical plant Textile dyes, organic chemicals 1961 Owned Mahwah, NJ office, laboratory and Flavors and Seasonings 1984-1989 2004 plant Newark, NJ chemical plant Textile dyes, organic chemicals 1949-1985 Owned Nutley, NJ office, laboratory and Textile and other dyes 1949-1977 Owned chemical plant Oissel, France office, laboratory Textile and other dyes 1946-1992 Owned and chemical plant Reading, PA chemical plant Textile dyes, organic chemicals 1910-1979 Owned and food colors Tertre, Belgium office, laboratory Textile and other dyes 1970 Owned and chemical plant Vineland, NJ office and plant Food and pharmaceutical 1995 Owned ingredients and colors Specialty Process Equipment and Controls: Cedar Grove, NJ office and machine Precision Laboratory extrusion 1929 1996 shop equipment and extrusion systems Dannemarie, France office and Extrusion systems 1967-1980 Owned machine shop
16
OWNERSHIP BUSINESS SEGMENT DATES OR LEASE AND LOCATION PRODUCTS BUILT EXPIRATION - ---------------------------------- ---------------------------------- ---------- ----------- Edison, NJ office and machine shop Blow molding and extrusion 1974-1979 2000 equipment Erkrath, Germany office and Extrusion systems 1954-1991 Owned machine shop Pawcatuck, CT office and machine Plastics and rubber extrusion and 1965-1985 Owned shop electronic control equipment and systems Pawcatuck, CT office and machine Extrusion systems 1968 1998 shop Somerville, NJ office and machine Extrusion systems 1966-1994 Owned shop
All plants are built of brick, tile, concrete, or sheet metal materials and are of one-floor construction except parts of the plants located in Reading and Gibraltar, Pennsylvania, Nutley, Cedar Grove, and Somerville, New Jersey, Oissel and Dannemarie, France, Erkrath, Germany, and Tertre, Belgium. All are considered to be in good operating condition, well maintained, and suitable for Crompton's requirements. LEGAL PROCEEDINGS In the normal course of its business, Crompton is subject to investigations, claims and legal proceedings, some of which concern environmental matters, involving both private and governmental parties. In some cases, the remedies sought or damages claimed may be substantial. While each of these matters is subject to various uncertainties as to outcome, and some of them may be decided unfavorably to Crompton, based on the facts known to Crompton and on consultation with legal counsel, management of Crompton believes that there are no such matters pending or threatened which will have a material effect on the financial position of Crompton or the results of Crompton's operations in any given year. OPERATIONS FOLLOWING THE MERGER Following the Merger, the operating activities of the combined company will consist of the following: 1995 SALES (% OF TOTAL) ------------ Chemicals and Polymers......................................... 27% Crop Protection................................................ 19% Dyes and Auxiliary Chemicals................................... 16% Equipment and Controls......................................... 16% Specialties.................................................... 16% Food and Pharmaceutical Ingredients............................ 6% --- 100% --- --- The food and pharmaceutical ingredients business, which Crompton had considered selling, will be retained and Crompton has no current intention to sell the business. Upon completion of the Merger, the Chemicals and Polymers, Crop Protection, and Specialties businesses of Uniroyal and the existing businesses of Crompton will all report directly to Vincent A. Calarco. The managements of all of the operating businesses and the nature and scope of their activities will remain essentially the same following the Merger. During the past three years, Crompton's dyes and auxiliary chemicals business has been adversely affected primarily by external factors including a retail apparel recession in the United States, slow economic growth in Europe, fashion trends favoring lighter colors which require less dyes, and lower pricing resulting from aggressive marketing on the part of competitors. Although there has been some recent improvement with regard to these external factors, further improvement is required in order for Crompton to regain earlier sales and profitability levels for the business. 17 In the first six months of 1996, Crompton's specialty equipment business reported a 36% decrease in operating profit primarily attributable to lower unit volume in its more profitable domestic business. Domestic equipment orders weakened industry-wide during the second half of 1995 and have not recovered. An improvement in domestic orders is necessary for the business to regain earlier profitability levels. Crompton currently anticipates capital spending during the next several years at a level of approximately $60 million annually and debt repayment at a level of approximately $75 million annually. This should be possible as a result of anticipated cash flows and the planned reduction of Crompton's annual dividend payments on its common stock from $0.54 to $0.05 per share, to be paid annually rather than quarterly as in the past. The change in the dividend should make available an additional $24 million annually for debt reduction. Crompton has repurchased shares of its common stock in 1994 (2,954,700 shares) and 1995 (272,800 shares), but has no current intention of making further repurchases, and the Board of Directors of Crompton rescinded an outstanding authorization to repurchase shares in July 1996. ENVIRONMENTAL MATTERS FOLLOWING THE MERGER 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 federal, state and local laws and regulations regarding health and safety matters. 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 Crompton or Uniroyal or the manufacture, use, emission or disposal of certain products or wastes by Crompton or Uniroyal and could involve potentially material expenditures for Crompton or Uniroyal. To meet changing permitting and regulatory standards, Crompton and Uniroyal may be required to make significant site or operational modifications, potentially involving substantial expenditures and reductions or suspensions of certain operations. Crompton and Uniroyal are involved in claims, litigation, administrative proceedings and investigations of various types in a number of jurisdictions. A number of such matters involve claims for a material amount of damages and relate to or allege environmental liabilities, including clean-up costs associated with hazardous waste disposal sites, natural resource damages, property damage and personal injury. Crompton and Uniroyal have been identified by the EPA, state or local governmental agencies, and other PRPs, as a PRP for 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 PRPs for such site, including Crompton or Uniroyal, despite the involvement of other PRPs. In many cases, Crompton or Uniroyal is one of several hundred PRPs so identified. In a few instances, Uniroyal is one of only a handful of PRPs. In certain instances, a number of other financially responsible PRPs are also involved, and Crompton and Uniroyal expect that any ultimate liability resulting from such matters will be apportioned between Crompton or Uniroyal and such other parties. The combined companies intend to assert all meritorious legal defenses and all other equitable factors which are available with respect to the above matters. Neither company is assuming any environmental liability of the other as a result of the Merger. While Crompton and Uniroyal believe it is unlikely, the resolution of these matters could have material adverse effect on the combined companies' consolidated results of operations if a significant number of these matters is resolved unfavorably. 18 RECENT DEVELOPMENTS MERGER WITH UNIROYAL CHEMICAL CORPORATION Pursuant to the Merger Agreement, Crompton has agreed to the merger of Subcorp with and into Uniroyal, subject to the approval of the transaction by the stockholders of each of Uniroyal and Crompton at special meetings thereof currently scheduled to be held on August 21, 1996. The Board of Directors of Crompton has fixed the close of business on July 9, 1996, as the record date for determination of holders of Crompton Common Stock entitled to notice of and to vote at such meeting of Crompton stockholders. Accordingly, purchasers of the shares of Crompton Common Stock offered hereby will not be entitled to vote such shares at such special meeting. The Merger will be consummated on the terms and subject to the conditions set forth in the Merger Agreement (which was filed by Crompton with the Commission as an exhibit to Crompton's Quarterly Report on Form 10-Q for the quarter ended March 30, 1996), pursuant to which, among other things, (i) Subcorp will be merged with and into Uniroyal as a result of which Uniroyal will become a wholly owned subsidiary of Crompton, (ii) each issued and outstanding share (other than shares, if any, held in the treasury of Uniroyal or held by Crompton or any of its subsidiaries, which will be cancelled) of Uniroyal Common Stock will be converted into 0.9577 shares of Crompton Common Stock (with cash in lieu of fractional shares), and (iii) each issued and outstanding share (other than shares, if any, held in the treasury of Uniroyal or held by Crompton or any of its subsidiaries, which will be cancelled, and other than shares as to which dissenters' appraisal rights have been perfected) of Uniroyal Preferred Stock will be converted into 6.3850 shares of Crompton Common Stock (with cash in lieu of fractional shares). It is currently anticipated that the Merger will be consummated shortly after the special meetings of Crompton and Uniroyal stockholders, assuming the Merger Agreement and the Merger are approved at such meetings and all other conditions to the Merger have been satisfied or waived. Uniroyal, through its subsidiaries, is a major multinational manufacturer of a wide variety of specialty chemical products, including specialty elastomers, rubber chemicals, crop protection chemicals and additives for the plastics and lubricants industries. Uniroyal produces high value added products which are currently marketed in approximately 120 countries. Crompton does not currently intend to make any material changes to the general operating activities of Uniroyal following consummation of the Merger. The principal executive offices of Uniroyal are located at Benson Road, Middlebury, Connecticut 06749, and its telephone number is (203) 573-2000. Uniroyal is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. Prospective investors are urged to read and consider carefully such reports, proxy statements and other information. Uniroyal Common Stock is quoted on the NASDAQ/NM. Crompton is effecting the Offering in order for the Merger to qualify as a pooling-of-interests for accounting and financial reporting purposes. CERTAIN LITIGATION Crompton, Uniroyal and the directors of Uniroyal were named as defendants in a purported class action lawsuit filed in connection with the proposed Merger in the Court of Chancery, County of New Castle, State of Delaware. Fassbender v. Mazaika, C.A. No. 14980. The Stockholder Action alleged, among other things, that the defendant directors breached their fiduciary duties by pursuing the Merger at an allegedly unfair and inadequate price; by agreeing to the proposed Merger without having conducted an "auction process or active market check" or a full and thorough investigation; and by agreeing to the allegedly unfair terms of the Merger. The Stockholder Action was brought on behalf of a purported class of persons consisting of the stockholders of Uniroyal other than defendants. Counsel for Uniroyal, Crompton and Subcorp and the counsel for plaintiff entered into the Memorandum of Understanding in connection with the settlement of the Stockholder Action. Among other things, the Memorandum of Understanding provides that, in full settlement of the claims asserted, (i) the Merger Agreement be amended so as to reduce the fee payable to Crompton upon termination of the Merger Agreement under certain circumstances from $50 million to $35 million, (ii) Uniroyal promptly disseminate to Uniroyal stockholders its third quarter results, (iii) the defendants publicly 19 disclose the proposed settlement by a filing with the Commission and (iv) the plaintiff withdraw his request for a preliminary injunction enjoining consummation of the Merger. The Merger Agreement was amended as of August 7, 1996 to reduce the termination fee as contemplated in the Memorandum of Understanding. The consummation of the proposed settlement is subject to (i) completion by the plaintiff of discovery, (ii) execution of definitive settlement documents, (iii) notice to members of the plaintiff class and (iv) approval by the Delaware Court of Chancery. In connection with the proposed settlement, the defendants have agreed that they will not oppose plaintiff's counsel's application for an award of fees and expenses not to exceed $350,000 in the aggregate, to be paid by Crompton and/or Uniroyal. Uniroyal and its directors have denied, and continue to deny, that any of them have committed any violations of law or breaches of duty to plaintiff or any member of the plaintiff class, Uniroyal or its stockholders, or anyone else. The defendants entered into the Memorandum of Understanding in order to eliminate the distraction and expense of further litigation. DESCRIPTION OF CERTAIN INDEBTEDNESS Crompton has obtained a commitment letter from Citicorp USA, Inc. and Citicorp Securities, Inc. in connection with credit facilities in the aggregate amount of $600 million to be extended to Crompton and Uniroyal Chemical Company, Inc., a wholly owned subsidiary of Uniroyal ("Uniroyal Chemical"), immediately prior to the Effective Time (i) to replace certain bank credit facilities of Crompton and Uniroyal Chemical that would otherwise be in default and subject to acceleration as a result of the consummation of the Merger, (ii) to redeem or repurchase public debt of Uniroyal and Uniroyal Chemical (including in connection with the Merger), (iii) to pay transaction costs relating to the Merger and (iv) for general corporate purposes, including, without limitation, to make acquisitions and capital expenditures and to provide working capital for Crompton and Uniroyal Chemical following the Merger. The credit facilities to be extended to Crompton and Uniroyal Chemical upon the completion of the proposed Merger are revolving facilities with five year terms. Of the total amount of the facilities, $300 million will be extended to Crompton and its operating subsidiaries and $300 million will be extended to Uniroyal Chemical. The Crompton facility is secured by a pledge of the stock of its operating subsidiaries and the Uniroyal Chemical facility by a pledge of the stock of its operating subsidiaries and by a security interest in the accounts receivable and inventory of Uniroyal Chemical. Interest rates payable include several options including a spread over LIBOR that varies based on the Debt/EBITDA ratio for the trailing four fiscal quarters and will be set initially at .875% over LIBOR. Approximately $42 million of Uniroyal Chemical debt and $140 million of Crompton debt outstanding under existing bank credit facilities at the date of the Merger will be repaid at no penalty with funds from the new credit facilities. In addition, if holders of some or all of the 9% Senior Notes Due 2000 of Uniroyal Chemical accept its offer to purchase the 9% Notes at 101% of their principal amount under the terms of the governing indenture (as described below), additional debt repayment of up to $253 million will result. The extraordinary loss associated with such repayment, including 1% of the amount repaid and the write-off of unamortized financing fees, would be a maximum of $4.8 million, net of tax, if all $253 million of the 9% Notes are repaid. Assuming none of the 9% Notes are repaid, the $600 million credit facilities may be reduced, at the election of Crompton, to $450 million. Of the $450 million, $182 million will be used to repay debt under outstanding bank credit facilities, as explained above, and the balance of $268 million will be available for general corporate purposes, including the payment of an estimated $62 million ($55 million after tax) in merger related expenses. In addition, Uniroyal has three series of public debt outstanding, comprised of $283 million principal amount of 10 1/2% Senior Notes Due 2002, $232 million principal amount of 11% Senior Subordinated Notes Due 2003 and $127 million principal amount at maturity of 12% Subordinated Discount Notes Due 2005, and Uniroyal Chemical has one series outstanding of 9% Senior Notes Due 2000 in the principal amount of $253 million (collectively, the "Notes"), which in the aggregate comprises $895 million in indebtedness. The Notes contain a requirement that, within 30 days after a 20 change of control of Uniroyal (which will occur upon consummation of the Merger), Uniroyal or Uniroyal Chemical, as the case may be, must make an offer to purchase all outstanding Notes at 101% of the principal amount thereof. Waivers of this requirement have been obtained from the holders of a majority in principal amount (as required under the governing indentures) of each of the 10 1/2%, 11% and 12% Notes of Uniroyal. Supplemental indentures have been executed by Uniroyal and the respective trustees for such Notes giving effect to such waivers, which are binding on all holders of such Notes whether or not such holders consented to the waiver. In consideration for receipt of waivers from holders of such Notes, Uniroyal has agreed to pay, promptly following consummation of the Merger, to each such holder who delivered to the respective trustee prior to 5:00 p.m., Eastern Time, on June 27, 1996 a properly completed, executed and dated consent to such waiver (provided such consent was not revoked) a one-time cash payment in the amount of $3.75 for each $1,000 principal amount (at maturity) of such Notes to which the consent relates. The aggregate amount that will become payable by Uniroyal in consideration for such waivers upon consummation of the Merger is approximately $2.4 million ($1.4 million after tax). With respect to the 9% Notes of Uniroyal Chemical, no such waivers have been sought; instead, Crompton and Uniroyal Chemical expect to have adequate capacity under the aforementioned $600 million new credit facilities to fund the purchase of any 9% Notes that are tendered pursuant to the offer. 21 SELECTED HISTORICAL FINANCIAL DATA OF CROMPTON The selected financial data presented below for Crompton as of December 31, 1994 and December 30, 1995 and for the years ended December 25, 1993, December 31, 1994 and December 30, 1995, have been derived from and are qualified in their entirety by, and should be read in conjunction with, the audited financial statements and notes thereto contained herein. See "Index to Financial Statements." Crompton's statement of operations data for the years ended December 28, 1991 and December 26, 1992 and the balance sheet data as of December 28, 1991, December 26, 1992 and December 25, 1993 are derived from audited Crompton consolidated financial statements that are neither included nor incorporated by reference herein. The unaudited financial data presented below for the interim periods ended July 1, 1995 and June 29, 1996 are derived from the unaudited consolidated financial statements of Crompton contained herein. In the opinion of Crompton, such unaudited financial data have been prepared on the same basis as the audited financial statements contained herein and include all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the information set forth herein. Operating results for the interim period ended June 29, 1996 are not necessarily indicative of the results that may be expected for the year or for any other interim period.
YEARS ENDED SIX MONTHS ENDED ------------------------------------------------------------------------ -------------------- DECEMBER 28, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29, 1991 1992 1993 1994 1995 1995 1996 ------------ ------------ ------------ ------------ ------------ -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Crompton & Knowles Corporation CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................. $450,228 517,718 558,348 589,757 665,513 343,810 332,410 Income before extraordinary charges and cumulative effect of accounting changes........ $ 35,941 43,265 51,958 50,916 40,493 25,254 19,180 Net income................ $ 35,941 34,465 51,958 50,916 40,493 25,254 19,180 Income per common share before extraordinary charges and cumulative effect of accounting changes................... $ 0.73 0.87 1.00 1.00 0.84 0.52 0.40 Net income per common share..................... $ 0.73 0.69 1.00 1.00 0.84 0.52 0.40 Weighted average number of shares outstanding........ 49,317 49,967 52,176 51,152 48,448 48,569 48,499 CONSOLIDATED BALANCE SHEET DATA: Total assets.............. $308,562 350,715 363,246 432,328 484,138 537,369 Long-term debt............ $ 76,118 24,000 14,000 54,000 64,000 79,000 Cash dividends declared per common share......... $ 0.25 0.31 0.38 0.46 0.525 0.255 0.27
22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CROMPTON The following should be read in conjunction with the year-end consolidated financial statements and quarterly financial statements of Crompton contained elsewhere in this Prospectus. See "Index to Financial Statements." FINANCIAL CONDITION AND LIQUIDITY Acquisitions In January 1995, Crompton acquired the business and certain assets of McNeil Akron Repiquet S.a.r.l. in France. In March 1995, Crompton acquired Killion Extruders, Inc. Costs of these acquisitions were accounted for based on the purchase method and, accordingly, the results of operations of these businesses have been included in the Consolidated Statements of Earnings since their dates of acquisition. Liquidity and Capital Resources The December 30, 1995 working capital balance of $126.2 million increased $4.6 million from the December 31, 1994 balance of $121.6 million, while the current ratio declined to 1.8 from 1.9 at the end of 1994. The decline in the current ratio is primarily attributable to the increase in notes payable. Days sales in receivables increased slightly to 55 days in 1995 from 54 days in 1994. Inventory turnover averaged 2.8 in 1995, compared to 3.0 in 1994. Cash flow from operating activities of $26.7 million increased $4.9 million from $21.8 million in 1994 and was used with cash reserves and increased borrowings to finance acquisitions, fund capital expenditures, pay cash dividends and repurchase 272,800 shares of Crompton's outstanding common shares. Dividends paid in 1995 of $25.2 million represent a payout ratio of 62% of earnings. Crompton's debt-to-capital ratio increased to 34% from 29% at year-end 1994. Capital expenditures of $18.2 million decreased $3.5 million from $21.7 million in 1994. Capital expenditures are expected to approximate $16 million in 1996 primarily for expansion and improvement of operating facilities in the United States and Europe. Crompton's long-term liquidity needs including such items as capital expenditures and dividends are expected to be financed through operations. Crompton has available uncommitted short-term lines of credit of $115 million that are unsecured, and a revolving credit agreement providing for unsecured borrowings up to $125 million through September 1998. At year-end, there were $60.4 million of short-term borrowings outstanding under Crompton's uncommitted short-term lines of credit and $60 million outstanding under the revolving credit agreement. Inflation During the last three years, inflation has not been a significant factor in the net earnings of Crompton. The LIFO method of accounting is used for a major portion of Crompton's inventories. Under this method, the cost of products sold approximates current costs and thus reduces possible distortion of reported earnings due to rising costs. Crompton continually emphasizes cost controls and efficient management of resources to mitigate the influence of inflation. International Operations The lower U.S. dollar exchange rate versus primarily the Belgian Franc and the French Franc accounted for the favorable adjustment of $4.5 million in the accumulated translation adjustment account since year-end 1994. 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 Crompton's foreign operations. The net asset value of 23 foreign operations amounting to $81.4 million, representing primarily Belgian Francs and French Francs, is not currently being hedged with respect to translation into U.S. dollars. Crompton operates manufacturing facilities in Europe which serve primarily the European market. Exchange rate disruptions between the United States and European currencies, and among European currencies, are not expected to have a material effect on year-to-year comparisons of Crompton's earnings. Cash deposits, borrowings and forward exchange contracts are used to hedge fluctuations between the U.S. and European currencies, and among European currencies, if such fluctuations are earnings related. Such hedging activities are not significant in total. Research and Development Crompton employs about 285 engineers, draftsmen, chemists, and technicians responsible for developing new and improved chemical products and process equipment systems for the industries served by Crompton. Often, new products are developed in response to specific customer needs. Crompton's process of developing and commercializing new products and product improvements is ongoing and involves many products, no one of which is large enough to significantly impact Crompton's results of operations from year to year. Research and development expenditures totaled $14.0 million, $12.1 million and $11.2 million in the fiscal years 1995, 1994 and 1993, respectively. Environmental Matters Crompton's manufacturing facilities are subject to various federal, state and local requirements with respect to the discharge of materials into the environment or otherwise relating to the protection of the environment. Although precise amounts are difficult to define, Crompton spent approximately $15.8 million in 1995 to comply with those requirements, including approximately $4.9 million in capital expenditures. Such capital expenditures are estimated to be $3.5 million in 1996. Crompton has been designated, along with others, as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or comparable state statutes, at two waste disposal sites; and an inactive subsidiary has been designated, along with others, as a potentially responsible party at two other sites. While the cost of compliance with existing environmental requirements is expected to increase, based on the facts currently known to Crompton, management of Crompton expects that those costs, including the cost to Crompton of remedial actions at the waste disposal sites where it has been named a potentially responsible party, will not be material to the results of Crompton's operations in any given year. OPERATING RESULTS--1995 AS COMPARED TO 1994 Overview Consolidated net sales increased 13% to $665.5 million from $589.8 million in 1994. Net earnings declined 20% to $40.5 million from $50.9 million in 1994. Earnings per common share declined 16% to $.84 from $1.00 in the prior year. Average shares outstanding decreased 2.7 million to 48.5 million primarily as a result of Crompton's share repurchase program, which was discontinued in July 1996 in connection with the Merger. The gross margin percentage decreased to 28.8% from 31.5% in 1994 primarily from lower margins in the specialty chemicals segment. Consolidated operating profit of $72.3 million was 11% lower than 1994 as the specialty process equipment and controls segment increased 29% while the specialty chemicals segment decreased 30%. Specialty Chemicals Crompton's specialty chemicals segment reported sales of $385.6 million representing a decline of 2% from 1994. The decrease was attributable to lower selling prices (-4%), offset in part primarily by 24 foreign currency translation. The proportion of sales outside the United States increased slightly to 26% from 25% in 1994. Domestic dyes sales declined 8% reflecting lower selling prices (-5%) and lower unit volume (-3%) as weak demand primarily for apparel dyes continued to negatively affect the business. International dyes sales increased by 3% versus 1994 due primarily to foreign currency translation (6%) and unit volume (4%), offset by lower selling prices (-7%). Sales of specialty ingredients increased 5% reflecting primarily increased unit volume. Operating profit declined 30% to $42.6 million from $60.8 million in 1994. The decline was primarily due to domestic and international dyes. Domestic dyes declined primarily due to lower pricing. International dyes declined primarily due to lower pricing and exchange rate fluctuations among European currencies. The percentage of operating profit outside the United States decreased to 13% from 21% in 1994. Specialty Process Equipment and Controls Crompton's specialty process equipment and controls segment reported sales of $279.9 million representing an increase of 43% from $196.2 million in 1994. Approximately 27% was attributable to the incremental impact of acquisitions with the balance primarily from increased unit volume. International sales of $71 million increased 48% from 1994 and accounted for 25% of total segment sales versus 24% in 1994. Operating profit increased 29% to $40.2 million 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. The increase in the backlog was attributable to the $9 million of backlog acquired in the Killion and Repiquet acquisitions in 1995. Other Selling, general and administrative expenses increased 14% primarily due to the impact of acquisitions. Depreciation and amortization increased 13% over 1994 primarily as a result of a higher fixed asset base including acquisitions. Interest expense increased $6.2 million over 1994 reflecting the increased levels of borrowings in 1995. Other income declined $876 thousand versus 1994 primarily due to lower foreign exchange gains. Crompton's effective tax rate of 36.8% was up slightly from the prior year level of 36.3%. OPERATING RESULTS--1994 AS COMPARED TO 1993 Overview Consolidated net sales of $589.8 million increased 6% from $558.3 million in 1993. Net earnings of $50.9 million declined 2% from $52 million in 1993. Earnings per common share of $1.00 were unchanged from the prior year. Average shares outstanding decreased 1 million to 51.2 million primarily as a result of Crompton's share repurchase program, which was discontinued in July 1996 in connection with the Merger. The gross margin percentage of 31.5% decreased slightly from 31.8% in 1993. Consolidated operating profit of $81.1 million was 2% lower than 1993 as profit of the specialty process equipment and controls segment increased 20% while the specialty chemicals segment decreased 11%. Specialty Chemicals Crompton's specialty chemicals segment reported sales of $393.6 million representing a decline of 3% from 1993. The decrease was primarily attributable to lower selling prices (-2%) and unit volume (-1%). The proportion of sales outside the United States was 25% in 1994, unchanged from 1993. 25 Domestic dyes sales declined 6% reflecting lower selling prices (-4%) and lower unit volume (-2%) as demand for apparel dyes remained weak. International dyes sales were 5% lower than 1993 due primarily to lower unit volume under a long-term supply agreement. Specialty ingredients sales increased 5% reflecting increased unit volume in all major product groups. Operating profit declined 11% to $60.8 million from $68 million in 1993 due primarily to lower pricing and unit volume offset in part by lower dye intermediate costs. The percentage of operating profit outside the United States was 21% in 1994, unchanged from 1993. Specialty Process Equipment and Controls Crompton's specialty process equipment and controls segment reported sales of $196.2 million representing an increase of 30% from $151 million in 1993. Approximately 21% was attributable to the acquisition of Egan Machinery with the balance attributable equally between pricing and unit volume. Export sales of $48 million increased 18% from 1993 and accounted for 24% of total segment sales versus 27% in 1993. Operating profit increased 20% to $31.2 million from $26 million in 1993. Approximately 7% was attributable to the acquisition of Egan Machinery with the balance attributable primarily to unit volume and improved pricing offset in part by higher manufacturing costs. The equipment order backlog totalled $66 million at the end of 1994 compared to $38 million at the end of 1993. Other Selling, general and administrative expenses increased 10% primarily due to the acquisition of Egan Machinery and the impact of inflation. Depreciation and amortization increased 10% over 1993 primarily as a result of the Egan Machinery acquisition and a higher fixed asset base. Interest expense of $2.2 million was double the amount in 1993 reflecting the increased level of borrowings in 1994. Other income declined $163 thousand versus 1993. Crompton's effective tax rate of 36.3% was slightly lower than the prior year level of 37%. 26 SECOND QUARTER RESULTS Overview Consolidated net sales of $167.6 million for the second quarter of 1996 declined 5% from the comparable 1995 period. Net earnings of $9.7 million declined 19% versus the second quarter of 1995. Net earnings per common share of $.20 were 20% lower than the $.25 reported last year. Gross margin as a percentage of net sales decreased to 29.1% from 29.5% in the second quarter of 1995 primarily as a result of lower margins in the specialty process equipment and controls segment. Consolidated operating profit of $17.0 million declined 20% from the second quarter of 1995 as the specialty chemicals segment approximated the prior years quarter and the specialty process equipment and controls segment decreased 42%. Specialty Chemicals The Company's specialty chemicals segment reported sales of $96.9 million which represents a decline of 4% from the second quarter of 1995. The decrease was attributable to the impact of lower selling prices (-3%) and lower unit volume (-1%). Domestic dyes sales of $46.9 million declined 5% from the comparable 1995 quarter due to lower selling prices (-4%) and lower unit volume (-1%). International dyes sales of $23.6 million declined 12% versus the second quarter of 1995 primarily as a result of lower selling prices (-4%) and the balance primarily from lower unit volume under a long-term supply agreement. Specialty ingredients sales of $26.5 million rose 7% primarily as a result of increased unit volume. The percentage of sales outside the United States was 26%, versus 28% in the comparable 1995 period. Operating profit of $13.0 million approximated the $13.1 million reported in the second quarter of 1995. The percentage of operating profit outside the United States increased to 20% from 15% in the comparable quarter in 1995. Specialty Process Equipment and Controls The Company's specialty process equipment and controls segment reported sales of $70.7 million, which represents a decrease of 5% from the second quarter of 1995. The decrease was attributable primarily to lower unit volume in the domestic business (as lower demand for U.S. extrusion equipment continued) more than offsetting a 23% increase from acquisitions (primarily ER-WE-PA). Export sales shipped from the U.S. accounted for 16% of total segment sales versus 19% in the comparable period in 1995. International sales increased as a result of the ER-WE-PA acquisition and accounted for 24% of total segment sales versus 6% in the second quarter 1995. Operating profit for the second quarter of 1996 declined 42% to $6.4 million primarily attributable to lower unit volume in the higher margin domestic business. International operating profit was not significant in either the second quarter of 1996 or 1995. The order backlog for extruders and related equipment at the end of the second quarter of 1996 amounted to $89 million (including ER-WE-PA backlog of $16 million) compared to $72 million at December 30, 1995. Other Selling, general and administrative expenses of $27.6 million increased 3% versus the comparable period in 1995 primarily due to the impact of acquisitions. Depreciation and amortization of $4.1 million increased 9% versus 1995 primarily as a result of a higher fixed asset base including acquisitions. Interest expense increased $259 thousand primarily as a result of increased borrowings. Other income increased $186 thousand versus the second quarter of 1995. The effective tax rate of 35.0% decreased from the 37.5% in the comparable 1995 period. 27 YEAR-TO-DATE RESULTS Overview Consolidated net sales of $332.4 million for the first six months of 1996 decreased 3% from the comparable period in 1995. Net earnings of $19.2 million decreased 24% versus the $25.3 million earned in the first half of 1995. Net earnings per common share of $.40 decreased 23% from the $.52 reported last year. Gross margin as a percentage of net sales decreased to 29.1% from 30.1% in the comparable 1995 period primarily as a result of lower margins in the specialty process equipment and controls segment. Consolidated operating profit of $33.8 million declined 23% from $43.8 million in the first half of 1995 as specialty chemicals decreased 10% and specialty process equipment and controls decreased 36%. Specialty Chemicals The Company's specialty chemicals segment reported sales of $193.0 million representing a 5% decrease from $203.8 million in the first six months of 1995. The decrease was primarily attributable to the impact of lower unit volume (-3%) and lower selling prices (-2%). Domestic dyes sales of $93.5 million were 8% lower than the first six months of 1995 primarily due to lower unit volume (-5%) and lower selling prices (-3%). International dyes sales of $47.0 million decreased by 9% versus 1995 primarily as an equal result of lower selling prices and lower unit volume. Specialty ingredients sales rose 4% to $52.5 million reflecting primarily increased unit volume. The percentage of sales outside the United States decreased slightly to 26% from 27% for the comparable period in 1995. Operating profit of $25.8 million for the first six months of 1996 decreased 10% from 1995. The decrease was attributable primarily to the impact of lower pricing in the domestic dyes business. The percentage of operating profit outside the United States remained the same at 16% from year to year. Specialty Process Equipment and Controls The Company's specialty process equipment and controls segment reported sales of $139.4 million versus $140.0 million for the first six months of 1995. The slight decline was comprised of a 22% increase attributable to the incremental impact of acquisitions offset primarily by lower unit volume in the domestic business. Export sales shipped from the U.S. accounted for 22% of total segment sales versus 19% in the comparable period in 1995. International sales of $28.2 million increased from $4.7 million in 1995 primarily as a result of the ER-WE-PA acquisition and accounted for 20% of total segment sales versus 3% in the first six months of 1995. Operating profit of $13.5 million decreased 36% versus the comparable 1995 period due primarily to the decline in unit volume in the higher margin domestic business. International operating profit was not significant in either the first half of 1996 or 1995. Other Selling, general and administrative expenses of $54.7 million increased 5% versus the first six months of 1995 primarily due to the impact of acquisitions. Depreciation and amortization of $8.1 million increased 8% versus the 1995 period primarily as a result of a higher fixed capital base including acquisitions. Interest expense of $4.3 million increased $728 thousand primarily as a result of increased borrowings. Other income of $451 thousand increased $210 thousand versus 1995. The effective tax rate of 36.0% decreased from the 37.6% in the comparable 1995 period. 28 Liquidity and Capital Resources The June 29, 1996 working capital balance of $130.6 million increased $4.4 million from $126.2 million at year-end 1995. The current ratio declined slightly to 1.7 from 1.8 at the end of 1995. Days sales in receivables averaged 63 days in the first half of 1996, versus 55 days for all of 1995, primarily as a result of longer collection periods in the specialty process equipment and controls business. Inventory turnover averaged 2.8 for the first half of 1996 unchanged from year-end 1995. Cash flows from operating activities of $9.0 million increased $5.7 million from the first half of 1995 primarily attributable to decreases in working capital requirements partially offset by lower earnings. Cash provided by operations and increased borrowings were used to finance acquisitions, fund capital expenditures and pay cash dividends. The Company's debt to total capital ratio increased to 39% from 34% at year-end 1995. Capital expenditures are expected to approximate $16 million in 1996 primarily for expansion and improvement of operating facilities in the United States and Europe. The Company's long-term liquidity needs including such items as capital expenditures and dividends are expected to be financed from operations. International Operations The stronger U.S. dollar exchange rate versus the Belgian Franc and French Franc accounted primarily for the reduction of $4.0 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 Company operates manufacturing facilities in Europe which serve primarily the European market. Exchange rate disruptions between the United States and European currencies, and among European currencies, are not expected to have a material effect on year-to-year comparisons of the Company's earnings. Research and Development Research and development expenditures totaled $6.9 million for the first half of 1996 compared to $7.2 million in the comparable 1995 period. 29 HISTORICAL AND UNAUDITED PRO FORMA COMBINED CAPITALIZATION The following table sets forth the historical capitalization of Crompton and Uniroyal as of June 29, and June 30, 1996, respectively, and the pro forma combined capitalization as of June 29, 1996, giving effect to the Merger. The pro forma combined information set forth below is not necessarily indicative of what the actual combined capitalization would have been had the foregoing transaction been consummated, nor does it give effect to (a) any transactions other than the foregoing transaction and those discussed in the accompanying Notes to Historical and Unaudited Pro Forma Combined Capitalization, or (b) Crompton's results of operations since June 29, 1996, or Uniroyal's results of operations since June 30, 1996. Accordingly, the pro forma combined information set forth below does not purport to be indicative of the actual combined capitalization as of the date hereof, the effective time of the Merger (the "Effective Time"), or any future date. The following table should be read in conjunction with the historical financial statements of Crompton which are contained elsewhere herein, and the unaudited pro forma combined financial information, the related notes, and the other information contained elsewhere in this Prospectus. See "Unaudited Pro Forma Combined Financial Information."
HISTORICAL ------------------------------ PRO FORMA JUNE 29, 1996 JUNE 30, 1996 -------------------------------- CROMPTON UNIROYAL ADJUSTMENTS COMBINED ------------- ------------- ----------- ---------- (IN THOUSANDS) (UNAUDITED) Short-term debt: Notes payable................. $ 75,358 42,245 -- 117,603 Current portion of long-term debt............................ -- 11,122 -- 11,122 ------------- ------------- ----------- ---------- Total short-term debt..... 75,358 53,367 -- 128,725 Long-term debt.................. 79,000 888,856 40,050(1)(2) 1,007,906(6) ------------- ------------- ----------- ---------- Total debt................ $ 154,358 942,223 40,050 1,136,631 ------------- ------------- ----------- ---------- Stockholders' equity (deficit): Preferred stock............... $ -- 4,172 (4,172)(3) -- Common stock.................. 5,336 254 2,100(3)(4) 7,690 Additional paid-in capital.... 59,567 177,032 (9,230)(1)(3)(4)(5) 227,369 Retained earnings (deficit)... 240,326 (429,919) (55,000)(2) (244,593)(7) Pension liability adjustment...................... -- (3,617) -- (3,617) Cumulative translation adjustment...................... 2,301 (25,008) -- (22,707) Treasury stock................ (62,831) (10,644) 26,252(1)(5) (47,223) Deferred compensation......... (1,890) -- -- (1,890) ------------- ------------- ----------- ---------- Total stockholders' equity (deficit)....................... 242,809 (287,730) (40,050) (84,971) ------------- ------------- ----------- ---------- Total capitalization...... $ 397,167 654,493 -- 1,051,660 ------------- ------------- ----------- ---------- ------------- ------------- ----------- ---------- Ratio of total debt to total capitalization.................. 38.9% 144% 108.1% ------------- ------------- ---------- ------------- ------------- ----------
30 NOTES TO HISTORICAL AND UNAUDITED PRO FORMA COMBINED CAPITALIZATION (1) Reflects the issuance from treasury stock of 1,000,000 shares of Crompton Common Stock, in an offering to take place prior to consummation of the Merger. The issuance of such shares is required to reduce treasury share purchases within two years of the initiation date of the Merger to less than 10 percent of the Crompton shares to be issued in exchange for all of the outstanding shares of Uniroyal, in order to qualify for pooling-of-interests accounting. Proceeds are calculated based on an estimated offering price of $15 1/8 per share, net of estimated costs of $175,000. The net proceeds of $14,950,000 will be used to partially offset the estimated merger costs discussed in note (2). (2) Estimated costs expected to be incurred as a result of the Merger comprise principally bonus and severance $27.6 million, investment banking $12.4 million, legal $6 million, bank revolver and other debt fees $5.2 million, and other fees and costs $10.8 million, net of the expected tax benefit of $7 million. (3) Assumes the issuance of 6.3850 shares of Crompton Common Stock for each share of Uniroyal Preferred Stock as provided for in the Merger Agreement. (4) Reflects the conversion of all outstanding shares of Uniroyal Common Stock (par value .01 per share) into shares of Crompton Common Stock (par value .10 per share) at a conversion rate of 0.9577 shares of Crompton Common Stock for each share of Uniroyal Common Stock. (5) Reflects the retirement of Uniroyal treasury stock, as provided for in the Merger Agreement. (6) Depending upon adverse movement within the credit markets, it is possible that holders of some or all of the 9% Notes of Uniroyal Chemical will accept Uniroyal Chemical's offer to purchase the notes at 101% of their principal amount under the terms of the indenture (see description under the caption "Recent Developments--Description of Certain Indebtedness"). If that should occur, up to $253 million of the new revolving facility may be used to redeem the 9% Notes. This would result in additional long-term debt of $1.5 million and, together with the write-off of unamortized financing fees, an extraordinary charge of approximately $4.8 million, net of tax. (7) The pro forma combined balance sheet excludes a one-time cash payment of approximately $2.4 million ($1.4 million after tax) to be provided to certain Uniroyal noteholders in consideration for waivers of certain provisions of the indentures governing Uniroyal's notes. See "Recent Developments--Description of Certain Indebtedness." 31 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined financial information gives effect to the Merger using the pooling of interests basis of accounting. The information is based upon the historical financial statements of Crompton and Uniroyal and should be read in conjunction with such historical financial statements, the related notes, and the other information contained elsewhere in this Prospectus. Certain items derived from Crompton's and Uniroyal's historical financial statements have been reclassified to conform to the pro forma combined presentation. The unaudited pro forma combined financial information is not necessarily indicative of what the actual combined financial position or results of operations would have been had the foregoing transaction been consummated on the dates set forth therein, nor does it give effect to (a) any transaction other than the Merger, (b) Crompton's results of operations since June 29, 1996 or Uniroyal's results of operations since June 30, 1996, or (c) all of the synergies, cost savings, and one-time charges expected to result from the Merger. Accordingly, the pro forma combined financial information does not purport to be indicative of the financial position or results of operations as of the date hereof or for any period ended on the date hereof, as of the Effective Time, for any period ending at the Effective Time, or as of or for any other future date or period. 32 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 29, 1996 (CROMPTON) AND JUNE 30, 1996 (UNIROYAL) (IN THOUSANDS)
PRO FORMA PRO FORMA CROMPTON UNIROYAL ADJUSTMENTS COMBINED -------- ---------- ----------- --------- ASSETS Current assets: Cash and cash equivalents............ $ 3,869 31,243 -- 35,112 Accounts receivable.................. 128,173 153,411 -- 281,584 Inventories.......................... 170,147 196,468 -- 366,615 Other current assets................. 29,070 44,072 -- 73,142 -------- ---------- ----------- --------- Total current assets............. 331,259 425,194 -- 756,453 Property, plant and equipment, net..... 134,204 378,223 -- 512,427 Intangible assets...................... 60,594 228,701 -- 289,295 Deferred income taxes.................. -- 65,727 -- 65,727(10) Other assets........................... 11,312 63,202 -- 74,514 -------- ---------- ----------- --------- $537,369 1,161,047 -- 1,698,416 -------- ---------- ----------- --------- -------- ---------- ----------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable........................ $ 75,358 42,245 -- 117,603 Accounts payable..................... 58,913 90,440 -- 149,353 Current portion of long-term debt.... -- 11,122 -- 11,122 Accrued liabilities.................. 66,351 109,168 -- 175,519 -------- ---------- ----------- --------- Total current liabilities........ 200,622 252,975 -- 453,597 Long-term debt......................... 79,000 888,856 40,050(1)(2) 1,007,906(11) Accrued postretirement liability....... 7,768 180,966 -- 188,734 Other liabilities...................... 7,170 125,980 -- 133,150 -------- ---------- ----------- --------- Total liabilities................ 294,560 1,448,777 40,050 1,783,387 Stockholders' equity (deficit): Preferred stock...................... -- 4,172 (4,172)(3) -- Common stock......................... 5,336 254 2,100(3)(4) 7,690 Additional paid-in capital........... 59,567 177,032 (9,230)(1)(3)(4)(5) 227,369 Retained earnings (deficit).......... 240,326 (429,919) (55,000)(2) (244,593)(12) Pension liability adjustment......... -- (3,617) -- (3,617) Cumulative translation adjustment.... 2,301 (25,008) -- (22,707) Treasury stock....................... (62,831) (10,644) 26,252(1)(5) (47,223) Deferred compensation................ (1,890) -- -- (1,890) -------- ---------- ----------- --------- Total stockholders' equity (deficit).............................. 242,809 (287,730) (40,050) (84,971) -------- ---------- ----------- --------- $537,369 1,161,047 -- 1,698,416 -------- ---------- ----------- --------- -------- ---------- ----------- ---------
See accompanying Notes to Unaudited Pro Forma Combined Financial Information. 33 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 25, 1993 (CROMPTON) AND SEPTEMBER 30, 1993 (UNIROYAL) (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA CROMPTON UNIROYAL ADJUSTMENTS COMBINED -------- -------- -------------- --------- Net sales................................. $558,348 907,862 -- 1,466,210 Operating costs and expenses: Cost of products sold................... 380,941 616,208(7) (70,802)(6) 926,347 Selling, general and administrative..... 82,970 181,999(7) (44,479)(6) 220,490 Depreciation and amortization........... 12,076 -- 77,792(6) 89,868 Research & development.................. -- -- 42,133(6) 42,133 -------- -------- -------------- --------- Operating profit.......................... 82,361 109,655 (4,644) 187,372 Interest expense.......................... 1,093 120,567 -- 121,660 Other expense (income).................... (1,205) 7,347 (4,644)(6) 1,498 -------- -------- -------------- --------- Income (loss) before income taxes, extraordinary charges and cumulative effect of accounting changes.............. 82,473 (18,259) -- 64,214 Income taxes.............................. 30,515 6,533 -- 37,048 -------- -------- -------------- --------- Income (loss) before extraordinary charges and cumulative effect of accounting changes................................... $ 51,958 (24,792) -- 27,166 -------- -------- -------------- --------- -------- -------- -------------- --------- Income (loss) per common share before extraordinary charges and cumulative effect of accounting changes.............. $ 1.00 (2.31) 0.43 -------- -------- --------- -------- -------- --------- Weighted average shares outstanding(8).... 52,176 10,847 63,689 -------- -------- --------- -------- -------- ---------
See accompanying Notes to Unaudited Pro Forma Combined Financial Information. 34 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994 (CROMPTON) AND OCTOBER 2, 1994 (UNIROYAL) (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA CROMPTON UNIROYAL ADJUSTMENTS COMBINED -------- --------- ----------- --------- Net sales.............................. $589,757 946,454 -- 1,536,211 Operating costs and expenses: Cost of products sold................ 403,784 638,933(7) (69,823)(6) 972,894 Selling, general and administrative......................... 91,581 192,754(7) (44,256)(6) 240,079 Depreciation and amortization........ 13,298 -- 72,841(6) 86,139 Research & development............... -- -- 44,682(6) 44,682 Write-off of intangibles............. -- 191,000 -- 191,000 -------- --------- ----------- --------- Operating profit....................... 81,094 (76,233) (3,444) 1,417 Interest expense....................... 2,167 128,567 -- 130,734 Other expense (income)................. (1,042) 125 (3,444)(6) (4,361) -------- --------- ----------- --------- Income (loss) before income taxes...... 79,969 (204,925) -- (124,956) Income taxes........................... 29,053 8,918 -- 37,971 -------- --------- ----------- --------- Net income (loss)...................... $ 50,916 (213,843) -- (162,927) -------- --------- ----------- --------- -------- --------- ----------- --------- Net income (loss) per common share..... $ 1.00 (20.31) (2.65) -------- --------- --------- -------- --------- --------- Weighted average shares outstanding(8)....................... 51,152 10,543 61,515 -------- --------- --------- -------- --------- ---------
See accompanying Notes to Unaudited Pro Forma Combined Financial Information. 35 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 30, 1995 (CROMPTON) AND OCTOBER 1, 1995 (UNIROYAL) (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA CROMPTON UNIROYAL ADJUSTMENTS COMBINED -------- ---------- ----------- --------- Net sales............................... $665,513 1,079,321 -- 1,744,834 Operating costs and expenses: Cost of products sold................. 473,654 718,809(7) (66,297)(6) 1,126,166 Selling, general and administrative... 104,535 212,435(7) (46,632)(6) 270,338 Depreciation and amortization......... 15,035 -- 65,083(6) 80,118 Research & development................ -- -- 50,090(6) 50,090 -------- ---------- ----------- --------- Operating profit........................ 72,289 148,077 (2,244) 218,122 Interest expense........................ 8,364 114,034 -- 122,398 Other expense (income).................. (166) (326) (2,244)(6) (2,736) -------- ---------- ----------- --------- Income before income taxes and extraordinary charge.................... 64,091 34,369 -- 98,460 Income taxes (benefit).................. 23,598 (65,060)(10) -- (41,462) -------- ---------- ----------- --------- Income before extraordinary charge...... $ 40,493 99,429 -- 139,922 -------- ---------- ----------- --------- -------- ---------- ----------- --------- Income per common share before extraordinary charge.................... $ 0.84 5.37 2.11 -------- ---------- --------- -------- ---------- --------- Weighted average shares outstanding(8)........................ 48,448 18,461 66,394 -------- ---------- --------- -------- ---------- ---------
See accompanying Notes to Unaudited Pro Forma Combined Financial Information. 36 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 1, 1995 (CROMPTON) AND JULY 2, 1995 (UNIROYAL) (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA CROMPTON UNIROYAL ADJUSTMENTS COMBINED -------- -------- -------------- --------- Net sales................................. $343,810 572,926 -- 916,736 Operating costs and expenses: Cost of products sold................... 240,358 370,031 (33,387)(6) 577,002 Selling, general and administrative..... 52,158 105,587 (22,369)(6) 135,376 Depreciation and amortization........... 7,494 -- 32,484(6) 39,978 Research & development.................. -- -- 24,394(6) 24,394 -------- -------- ------- --------- Operating profit.......................... 43,800 97,308 (1,122) 139,986 Interest expense.......................... 3,602 57,377 -- 60,979 Other expense (income).................... (241) (3,233) (1,122)(6) (4,596) -------- -------- ------- --------- Income before income taxes and extraordinary charge.................... 40,439 43,164 -- 83,603 Income taxes (benefit).................... 15,185 (63,066)(10) -- (47,881) -------- -------- ------- --------- Income before extraordinary charge........ $ 25,254 106,230 -- 131,484 -------- -------- ------- --------- -------- -------- ------- --------- Income per common share before extraordinary charge.................... $ 0.52 5.57 1.96 -------- -------- --------- -------- -------- --------- Weighted average shares outstanding (8)... 48,569 19,081 67,109 -------- -------- --------- -------- -------- ---------
See accompanying Notes to Unaudited Pro Forma Combined Financial Information. 37 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 29, 1996 (CROMPTON) AND JUNE 30, 1996 (UNIROYAL) (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA PRO FORMA CROMPTON UNIROYAL ADJUSTMENTS(2) COMBINED(9) -------- -------- -------------- --------- Net sales................................... $332,410 597,691 -- 930,101 Operating costs and expenses: Cost of products sold..................... 235,802 388,687 (34,282)(6) 590,207 Selling, general and administrative....... 54,658 109,950 (24,891)(6) 139,717 Depreciation and amortization............. 8,126 -- 34,222(6) 42,348 Research & development.................... -- -- 26,073(6) 26,073 -------- -------- ------- --------- Operating profit............................ 33,824 99,054 (1,122) 131,756 Interest expense............................ 4,330 53,696 -- 58,026 Other expense (income)...................... (451) 1,294 (1,122)(6) (279) -------- -------- ------- --------- Income before income taxes and extraordinary charge...................... 29,945 44,064 -- 74,009 Income taxes................................ 10,765 17,714 -- 28,479 -------- -------- ------- --------- Income before extraordinary charge.......... $ 19,180 26,350 -- 45,530 -------- -------- ------- --------- -------- -------- ------- --------- Income per common share before extraordinary charge...................... $ 0.40 1.07 0.63 -------- -------- --------- -------- -------- --------- Weighted average shares outstanding(8)...... 48,499 24,684 72,405 -------- -------- --------- -------- -------- ---------
See accompanying Notes to Unaudited Pro Forma Combined Financial Information. 38 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION (1) Reflects the issuance from treasury stock of 1,000,000 shares of Crompton Common Stock in an offering to take place prior to consummation of the Merger. The issuance of such shares is required to reduce treasury share purchases within two years of the initiation date of the Merger to less than 10 percent of the Crompton shares to be issued in exchange for all of the outstanding shares of Uniroyal, in order to qualify for pooling of interests accounting. Proceeds are calculated based on an estimated offering price of $15 1/8 per share, net of estimated costs of $175,000. The net proceeds of $14,950,000 will be used to partially offset the estimated merger costs discussed in note (2). (2) Estimated costs expected to be incurred as a result of the Merger comprise principally bonus and severance $27.6 million, investment banking $12.4 million, legal $6 million, bank revolver and other debt fees $5.2 million and other fees and costs $10.8 million, net of the expected tax benefit of $7 million. The Unaudited Pro Forma Combined Statements of Operations do not include such estimated costs associated with the Merger, as these costs are non-recurring and will be reflected in the statement of operations of the combined company in its first reporting period. (3) Assumes the issuance of 6.3850 shares of Crompton Common Stock for each share of Uniroyal Preferred Stock as provided for in the Merger Agreement. (4) Reflects the conversion of all outstanding shares of Uniroyal Common Stock (par value .01 per share) into shares of Crompton Common Stock (par value .10 per share) at a conversion rate of 0.9577 shares of Crompton Common Stock for each share of Uniroyal Common Stock as provided for in the Merger Agreement. (5) Reflects the retirement of Uniroyal treasury stock, as provided for in the Merger Agreement. (6) Reflects certain reclassifications of research and development and depreciation and amortization expenses made to conform to Crompton's and the combined company's intended presentations. (7) Historical Uniroyal amounts for the fiscal years ended September 30, 1993, October 2, 1994, and October 1, 1995 reflect certain reclassifications of research and development and other expenses made to conform with Uniroyal's current historical presentation. (8) Common and common equivalent shares outstanding were calculated assuming a conversion rate of 0.9577 shares of Crompton Common Stock for each share of Uniroyal Common Stock, and 6.3850 shares of Crompton Common Stock for each share of Uniroyal Preferred Stock as provided for in the Merger Agreement. (9) After the consummation of the Merger, Uniroyal will change its fiscal year-end to conform with that of Crompton. Results of operations for Uniroyal's quarter ended December 31, 1995 were a net loss of $8.4 million which will be reflected as a one-time adjustment to stockholders' equity in the combined company's 1996 financial statements. (10) As a result of the interest savings from Uniroyal's March 1995 IPO, Uniroyal's previously recorded tax valuation reserve was reduced. Accordingly, Uniroyal included a benefit of $78.9 million for this reduction in its tax provision for fiscal 1995. Uniroyal's remaining net deferred tax asset as of 10/1/95 of some $82 million, including NOL carryforwards which do not expire until the year 2008, requires future taxable income of approximately $200 million to be fully realized. Uniroyal's 1995 pretax income was approximately $34 million. Pretax income for the first three quarters of fiscal 1996 was approximately $30 million. (11) Depending upon adverse movement within the credit markets, it is possible that holders of some or all of the 9% Notes of Uniroyal Chemical will accept Uniroyal Chemical's offer to purchase the notes at 101% of their principal amount under the terms of the indenture (see description under the caption "Recent Developments--Description of Certain Indebtedness"). If that should occur, 39 up to $253 million of the new revolving facility may be used to redeem the 9% Notes. This would result in additional long-term debt of $1.5 million, and together with the write-off of unamortized financing fees, an extraordinary charge of approximately $4.8 million, net of tax. (12) The pro forma combined balance sheet excludes a one-time cash payment of approximately $2.4 million ($1.4 million after tax) to be provided to certain Uniroyal noteholders in consideration for waivers of certain provisions of the indentures governing Uniroyal's notes. See "Recent Developments--Description of Certain Indebtedness." 40 DIRECTORS AND EXECUTIVE OFFICERS OF CROMPTON DIRECTORS OF CROMPTON Set forth below is information as of March 15, 1996 with respect to each person who currently is, and immediately following the Merger will be, a director of Crompton. VINCENT A. CALARCO, 53, Chairman of the Board, President and Chief Executive Officer of Crompton. He is former Vice President for Strategy and Development, Uniroyal, Inc., and former President of Uniroyal Chemical Company. Mr. Calarco has been a director since 1985. Mr. Calarco also serves as a director of Caremark International Inc. JAMES A. BITONTI, 65, is President and Chief Executive Officer of TCOM, L.P., an aerostat systems manufacturer, integrator and operator, Columbia, MD. He is a retired Vice President of International Business Machines Corporation, where he held the positions of Assistant Group Executive of the Asia/Pacific Group and President of the Communication Products Division. Mr. Bitonti has been a director of Crompton since 1983 and is Chairman of the Executive Compensation Committee. He also serves as a director of E-Systems, Inc., and as a director and the Chief Executive Officer of KFX, Inc. ROBERT A. FOX, 58, is President and Chief Executive Officer of Foster Poultry Farms, a privately held, integrated poultry company, Livingston, CA. He is former Executive Vice President of Revlon, Inc., a cosmetics, fragrances and toiletries manufacturer, New York, NY; and former Chairman and Chief Executive Officer of Clarke Hooper America, an international marketing services firm, Irvine, CA. Mr. Fox has been a director of Crompton since 1990 and is a member of the Executive Compensation Committee and Nominating Committee. He is also a director of the American Balanced Fund, the Growth Fund of America, Inc., the New Perspective Fund and the Income Fund of America, Inc., and a trustee of the Euro-Pacific Growth Fund. ROGER L. HEADRICK, 59, is President and Chief Executive Officer of the Minnesota Vikings Football Club, Eden Prairie, MN, and President and Chief Executive Officer of ProtaTek International, Inc., a biotechnology animal vaccine company, St. Paul, MN. Mr. Headrick is former Executive Vice President and Chief Financial Officer of The Pillsbury Company, a food processing and restaurant company, Minneapolis, MN. He has been a director of Crompton since 1988 and is Chairman of the Nominating Committee and a member of the Executive Compensation Committee. He also serves as a director of Caremark International Inc. LEO I. HIGDON, JR., 49, is Dean of the Darden Graduate School of Business Administration at the University of Virginia, Charlottesville, VA. He is a former Managing Director and member of the Executive Committee of Salomon Brothers, an investment banking firm, New York, NY. Mr. Higdon became a director of Crompton in 1993 and is Chairman of the Audit Committee and a member of the Nominating Committee. He is a director of CPC International Corporation and Newmont Mining Corp. MICHAEL W. HUBER, 68, is retired Chairman of the Board of J. M. Huber Corporation, a diversified manufacturing and natural resource development company, Edison, NJ. He has been a director of Crompton since 1983 and is a member of the Executive Compensation Committee and the Audit Committee. He also serves as a director of Norland Medical Systems, Inc. CHARLES J. MARSDEN, 55, Vice President-Finance and Chief Financial Officer of Crompton. Mr. Marsden has been a director of Crompton since 1985. C.A. (LANCE) PICCOLO, 55, is Chairman and Chief Executive Officer of Caremark International Inc., a provider of alternate-site health-care services, Northbrook, IL. He is former Executive Vice President of Baxter International Inc., a supplier of health-care products, Deerfield, IL. He has been a director of Crompton since 1988 and is a member of the Audit Committee and the Nominating Committee. Mr. Piccolo is also a director of Caremark International Inc. 41 PATRICIA K. WOOLF, PH.D., 61, is a private investor, and lecturer in the Department of Molecular Biology, Princeton University. She has been a director of Crompton since 1994 and is a member of the Audit Committee. Dr. Woolf is also a director of the American Balanced Fund, the Income Fund of America, Inc., the Growth Fund of America, Inc., Smallcap World Fund, Inc., the New Economy Fund, the National Life Insurance Co. of Vermont, and General Public Utilities Corporation. BOARD MEETINGS AND COMMITTEES The Board of Directors of Crompton held five regular meetings during 1995. All of the directors except Mr. Bitonti attended at least 75% of the aggregate of the meetings of the Crompton Board and of the committees on which they served in 1995. The Crompton Board has established three committees to assist it in the discharge of its responsibilities. The Audit Committee, no member of which is an employee of Crompton, meets periodically with Crompton's independent auditor to review the scope of the annual audit and the policies relating to internal auditing procedures and controls, provides general oversight with respect to the accounting principles employed in Crompton's financial reporting, and reviews Crompton's annual report on Form 10-K prior to its filing each year. The Audit Committee also recommends to the Crompton Board each year the selection of the auditor, has responsibility for approving professional non-audit services provided by the independent auditor, considers the possible effect of providing such non-audit services on the auditor's independence, and reviews the range of fees of the auditor for both audit and non-audit services. The Audit Committee held two meetings during 1995. The Committee on Executive Compensation is composed of directors who are not employees of Crompton. Its functions include approval of the level of compensation for executive officers serving on the Crompton Board, adoption of bonus and deferred compensation plans and arrangements for executive officers, and administration of the Crompton & Knowles Corporation 1993 Stock Option Plan for Non-Employee Directors, the Crompton & Knowles Corporation Restricted Stock Plan for Directors and the Corporation's 1988 Long-Term Incentive Plan (the "1988 Plan"). The Executive Compensation Committee held two meetings during 1995. The Nominating Committee is also composed of directors who are not employees of Crompton. The Committee makes recommendations with respect to the organization, size, and composition of the Crompton Board, identifies suitable candidates for Crompton Board membership and reviews their qualifications, proposes a slate of directors for election by the stockholders at each annual meeting, and assists the Crompton Board in providing for orderly succession in the top management of Crompton. The Nominating Committee met once in 1995. EXECUTIVE OFFICERS OF CROMPTON Set forth below is information as of March 15, 1996 with respect to each person who currently is, and immediately following the Merger will be, an executive officer of Crompton. VINCENT A. CALARCO, age 53, has served as President and Chief Executive Officer of Crompton since 1985 and Chairman of the Board since 1986. He is former Vice President for Strategy and Development, Uniroyal, Inc. (1984-1985), and former President of Uniroyal Chemical Company (1979-1984). Mr. Calarco has been a member of the Board of Directors of Crompton since 1985. Mr. Calarco also serves as a director of Caremark International Inc. ROBERT W. ACKLEY, age 54, has served as a Vice President of Crompton since 1986 and as President of Davis-Standard Corporation (formerly the Davis-Standard Division) since 1983. PETER BARNA, age 52, has served as Treasurer of Crompton since 1980 and as Principal Accounting Officer since 1986. 42 JOHN T. FERGUSON, II, age 49, has served as General Counsel and Secretary of Crompton since 1989. NICHOLAS FERN, PH.D., age 52, has served as President, Dyes and Chemicals--Asia, for Crompton since 1994, as President of Crompton's International Dyes and Chemicals Division from 1992 to 1994, and as Managing Director of Crompton & Knowles Europe, S.A. (formerly Crompton & Knowles Tertre) from 1978 to 1994. GERALD H. FICKENSCHER, PH.D., age 52, has served as President, Dyes and Chemicals--Europe, for Crompton and as Managing Director of Crompton & Knowles Europe, S.A. since 1994. He is the former Chief Financial Officer of Uniroyal Chemical Corporation (1986-1994). EDMUND H. FORDING, JR., age 59, has served as Vice President of Crompton since 1991 and as President of Crompton & Knowles Colors Incorporated (formerly the domestic Dyes and Chemicals Division) since 1989. He is the former General Manager of the Dyes Division of Hilton Davis Co. (1988-1989) and Director of the Organic Department of Mobay Corporation (1980-1988). MARVIN H. HAPPEL, age 56, has served as Vice President--Organization of Crompton since 1986. He is the former Director of Human Resources of Uniroyal Chemical Company (1979-1986). CHARLES J. MARSDEN, age 55, has served as Vice President--Finance and Chief Financial Officer and as a member of the Board of Directors of Crompton since 1985. RUDY M. PHILLIPS, age 54, has served as President of Ingredient Technology Corporation since January, 1996. He is a former Vice President of Ingredient Technology Corporation (1988-1996). The term of office of each of the above-named executive officers is until the first meeting of the Board of Directors of Crompton following Crompton's 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. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS OF CROMPTON COMPENSATION OF DIRECTORS Directors who are employees of Crompton receive no additional compensation for services on the Board of Directors of Crompton. Members of the Crompton Board who are not employees receive an annual retainer of $20,000 (committee chairmen receive an additional retainer of $2,500) and a fee of $7,500 for meeting service, and are reimbursed for expenses incurred in attending meetings. Crompton also provides $25,000 of term life insurance and accidental death and travel insurance coverage for each non-employee director. Under the Crompton & Knowles Corporation Restricted Stock Plan for Directors, one quarter of each director's retainer and fees is paid in shares of Crompton's common stock. A director may elect to receive any portion or all of the remainder of the retainer and fees in common stock under the plan. All shares issued under the plan are held by Crompton until the recipient of the shares leaves the Crompton Board, however the directors receive all dividends on the shares and may vote the shares. The Crompton & Knowles Corporation 1993 Stock Option Plan for Non-Employee Directors provides for the issuance to non-employee directors on the date of the first regular meeting of the Crompton Board in the fourth quarter of each calendar year of an option to purchase that number of full shares of Crompton's common stock determined by dividing the amount of the annual retainer payable to non-employee directors for service on the Crompton Board by the fair market value of the 43 stock on the date of the grant. The exercise price of the options is to be equal to such fair market value on the date of grant. The options are to vest over a two-year period and are to be exercisable over a ten-year period from the date of grant. The plan provides for the grant of options with respect to a maximum of 100,000 shares of stock. Options to be granted under the plan are nonstatutory options not intended to qualify as incentive stock options under the Code. REPORT OF THE COMMITTEE ON EXECUTIVE COMPENSATION Executive Compensation Philosophy The compensation program for Crompton's executive officers is administered in accordance with a pay for performance philosophy to link executive compensation with the values, objectives, business strategy, management initiatives and financial performance of Crompton. In addition, a significant portion of each executive officer's compensation is contingent upon the creation of shareholder value. The Committee on Executive Compensation of the Board (the "Committee") believes that stock ownership by management and restricted stock-based performance compensation plans serve to align the interests of management and other shareholders in the enhancement of shareholder value. The Committee further maintains that long-term strategic leadership commitment is promoted through vesting a significant portion of restricted stock performance awards at retirement. The compensation of Crompton's executive officers is comprised of cash and equity components and is designed to be competitive and highly leveraged based upon corporate financial performance and shareholder returns. The compensation program provides an opportunity to earn compensation in the third quartile within the chemical industry as well as within a broader group of companies of comparable size and complexity. Actual compensation levels may be greater or less than average competitive levels in surveyed companies based upon annual and long-term performance of Crompton as well as individual performance. The measures of performance utilized under Crompton's compensation plans are as follows: . Annual actual after-tax earnings performance versus targeted after-tax earnings performance. . Annual actual return on capital performance versus targeted return on capital performance. . Annual actual revenue performance versus targeted revenue performance. . Three-year average annual return on equity and after-tax earnings per share growth. Base Salaries Base salaries and salary ranges for the executive officers are based upon competitive data gathered from several national and highly recognized compensation services. The Committee on Executive Compensation reviews and approves the salary ranges for the executive officers. Management Incentive Plan Crompton's Management Incentive Plan is an annual incentive program for executive officers and other key managers. The purpose of the plan is to provide a direct financial incentive in the form of an annual cash award to executives who achieve the annual goals for their business unit and Crompton. The plan includes the Annual Incentive Compensation Plan for "A" Group of Senior Executives, which provides for an annual incentive pool for eligible executives based upon Crompton's return on stockholders' equity. Awards from the incentive pool are made annually by the Committee on Executive Compensation, with the maximum award not to exceed 100% of a participant's base salary. At the present time, Mr. Calarco is the only participant authorized to receive such awards. 44 The other officers named in the compensation table below participate in a plan which provides for the payment of annual awards from a fund established with reference to the return on capital employed of Crompton as a whole, or of the business unit for which the officer is responsible. Assuming a stipulated level for return on capital employed has been attained, individual awards are based 60% on the achievement by the applicable business unit of specific objectives with respect to revenue, after-tax earnings, and return on capital, and 40% on the achievement by the individual of individual management objectives. Stock Options and Restricted Stock The stock option and restricted stock program is a long-term incentive plan for Crompton's executive officers and other key managers. The objectives of the program are to align executive and shareholder long-term interests by creating a strong and direct link between executive pay and shareholder return, and to enable executives to develop and maintain a significant, long-term stock ownership position in Crompton's common stock. The executive officers listed in the compensation table below receive a major portion of their compensation in the form of shares of Crompton's common stock. They receive annual grants of stock options, priced at fair market value on the date of grant. The number of options granted in 1995 was in the second quartile of all companies included in industrial company survey data available to the Committee. The factors used to award options include overall corporate performance, percentile rankings, base salary, and total compensation. In addition, Crompton's executive officers have received the opportunity under the 1988 Plan to earn shares of restricted stock based upon Crompton's cumulative after-tax earnings growth and return on equity over a three-year period. These grants have the potential to deliver above-average compensation if the goals are met. If the employment of an individual terminates after an award is earned for any reason other than death, disability, retirement, or a change in control of Crompton, any shares that have not vested will be forfeited. Crompton exceeded the performance criteria established under the 1988 Plan for the period 1989-1991. Awards for the 1989-1991 period vest and are distributed to individuals in common stock of Crompton in five installments, the first four having been distributed on December 9, 1992, December 6, 1993, December 13, 1994, and December 12, 1995, and the final one to be distributed upon retirement. Crompton met the performance criteria established under the 1988 Plan for the period 1992-1994. Awards for the 1992-1994 period vest and are distributed to individuals in common stock of Crompton in four uniform installments, one during each of the years 1994-1996, and the final one upon retirement. If the employment of an individual terminates for any reason other than death, disability, retirement or a change in control of Crompton, all shares that have not vested will be forfeited. Compensation of Chief Executive Officer The Committee did not increase Mr. Calarco's base salary of $495,000 during fiscal year 1995. The Executive Compensation Committee administers the Annual Incentive Compensation Plan for "A" Group of Senior Executives. Currently, the CEO is the only participant in this plan. Each year, a pool of funds is made available under this plan based upon Crompton's return on equity (ROE). At higher ROE levels, larger percentages of net income are allocated to the pool. The maximum incentive which the CEO may receive is equal to the lesser of 100% of salary or $650,000. The maximum award may be reduced if other goals, such as those for revenue and earnings growth, are not achieved. Based on the performance of Crompton in 1995 and the achievement of a return on average common equity of 17.4%, and an increase in sales of 13%, Mr. Calarco earned $415,000 under the Annual Incentive Compensation Plan for "A" Group of Senior Executives. The Committee believes Mr. Calarco has continued to manage Crompton extremely well in a particularly challenging business climate and has achieved above 45 average results in comparison to others in the chemical industry. For example, the Crompton's average ROE for the 1991 to 1995 period was 23.4% which placed the Crompton in the top quartile of the peer group of 22 specialty chemical companies reflected in the performance graphs on pages 9 and 10 below. The stock options granted to Mr. Calarco during 1995 are consistent with the design of Crompton's executive compensation program and are shown in the compensation table below. Tax Deductibility of Executive Compensation The Committee's policy on the tax deductibility of compensation paid to Crompton's CEO and other executive officers is to maximize deductibility to the extent possible without abdicating all of its discretionary power. To this end, the Committee has reviewed all of Crompton's plans and has taken several actions as follows. First, the Committee has assured that the gains on non-qualified stock option grants will be deductible by amending the 1988 Plan to place a limit on the number of option shares that one individual may receive. The limit is 25% of the total share authorization. Secondly, the Committee resolved to continue the practice of not repricing options. Finally, at the 1994 annual meeting of shareholders, the shareholders approved the material terms of the performance goal for the Annual Incentive Compensation Plan for "A" Group of Senior Executives, which is "performance-based" under Section 162(m) of the Code, and amounts paid under the plan are fully deductible. Committee on Executive Compensation Decisions on compensation of Crompton's executive officers are made by the four member Committee on Executive Compensation, a committee of the Board of Directors composed of the persons listed below, all of whom are non-employee directors. The Committee has retained an independent executive compensation consultant to evaluate Crompton's executive compensation program and has access to independent compensation data. The Committee on Executive Compensation: James A. Bitonti, Chairman Robert A. Fox Roger L. Headrick Michael W. Huber Notwithstanding anything to the contrary set forth in any of Crompton's previous filings under the Securities Act or the Exchange Act that might incorporate future filings, including this Joint Proxy Statement/Prospectus, in whole or in part, the foregoing Report of the Committee on Executive Compensation and the following Performance Graphs shall not be deemed incorporated by reference into any such filings. 46 PERFORMANCE GRAPHS The following graph compares the cumulative total return on the common stock of Crompton for the last five fiscal years with the returns on the Standard & Poor's 500 Stock Index, the Standard & Poor's Specialty Chemicals Index and a peer group of 22 specialty chemical companies, assuming the investment of $100 in Crompton's common stock, the S&P 500 Index, the S&P Specialty Chemicals Index and the peer group companies on December 31, 1990, and the reinvestment of all dividends. The peer group investment is weighted based on total market capitalization at the beginning of each fiscal year. COMPARISON OF FIVE-YEAR CUMULATIVE RETURN CROMPTON & KNOWLES CORPORATION, S&P 500, S&P SPECIALTY CHEMICALS, AND PEER GROUP $300 $250 $200 $150 $100 $50 $0 1990 1991 1992 1993 1994 1995 C & K $100 $257 $268 $270 $205 $173 S & P 500 100 130 140 154 156 215 Peer Group 100 151 166 171 165 193 S&P Specialty 100 141 149 170 149 195 Chemicals 47 The graph below shows the cumulative total return to Crompton's stockholders since December 31, 1984, shortly before Mr. Calarco became President and CEO, compared with the same indices shown on the previous graph, thus illustrating the relative performance of Crompton's common stock during Mr. Calarco's entire tenure with Crompton. COMPARISON OF ELEVEN-YEAR CUMULATIVE RETURN CROMPTON & KNOWLES CORPORATION, S&P 500, S&P SPECIALTY CHEMICALS, AND PEER GROUP $2,500 $2,000 $1,500 $1,000 $500 $0
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 C & K $100 $132 $188 $216 $337 $695 $792 $2,032 $2,122 $2,135 $1,620 $1,366 S & P 500 100 132 156 164 191 252 244 318 342 376 382 524 Peer Group 100 132 159 178 197 258 276 417 457 473 455 533 S&P Specialty 100 137 156 162 177 216 207 292 310 353 308 404 Chemicals
The specialty chemical peer group comprises the following 22 companies: Betz Laboratories, Inc., The Dexter Corporation, Ecolab Inc., Engelhard Corporation, Ethyl Corporation, Ferro Corporation, H.B. Fuller Company, Great Lakes Chemical Corporation, M. A. Hanna Company, International Flavors & Fragrances Inc., Lawter International, Inc., Loctite Corporation, The Lubrizol Corporation, Nalco Chemical Company, Pall Corporation, Petrolite Corporation, Quaker Chemical Corporation, RPM, Inc., A. Schulman, Inc., Sigma-Aldrich Corporation, Valspar Corporation, and Witco Corporation. The S&P Specialty Chemicals Index companies are W.R. Grace & Co., Great Lakes Chemical Corporation, Morton International Inc. and Nalco Chemical Company. 48 EXECUTIVE COMPENSATION The following tables set forth information concerning compensation paid or to be paid to the chief executive officer of Crompton and each of the four most highly compensated executive officers of Crompton other than the chief executive officer, for services to Crompton in all capacities during 1993, 1994 and 1995, and options granted to and exercised by the same individuals during the period indicated. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ----------------------- AWARDS ANNUAL COMPENSATION ----------------------- RESTRICTED SECURITIES ALL OTHER NAME AND -------------------- STOCK UNDERLYING COMPEN- PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS(#) SATION($)(1) - -------------------------------------------- ---- --------- -------- ---------- ---------- --------- Vincent A. Calarco.......................... 1995 495,000 415,000 -- 110,000 89,687 Chairman of the Board 1994 493,000 300,000 -- 78,000 111,870 President and CEO 1993 472,917 495,000 -- 60,000 105,480 Charles J. Marsden.......................... 1995 250,000 55,000 -- 28,000 39,512 Vice President-- 1994 240,000 56,000 -- 22,000 42,121 Finance and 1993 230,000 112,000 -- 17,000 44,393 Chief Financial Officer Robert W. Ackley............................ 1995 216,000 117,000 -- 26,500 36,714 V.P. and President-- 1994 203,750 108,000 -- 20,000 36,383 Davis-Standard Corporation 1993 188,750 100,000 -- 16,000 33,357 John T. Ferguson II......................... 1995 178,000 30,000 -- 10,500 27,314 General Counsel and 1994 168,000 35,000 -- 12,500 29,656 Secretary 1993 156,667 67,000 -- 9,500 33,060 Edmund H. Fording, Jr....................... 1995 175,167 25,000 -- 10,500 24,774 V.P. and President-- 1994 166,000 29,000 -- 8,000 23,891 Crompton & Knowles 1993 166,000 59,000 -- 11,500 25,531 Colors Incorporated
- ------------ (1) Includes the following amounts paid during 1995 under Crompton's Supplemental Medical and Dental Reimbursement Plans (SMD), and employer contributions to Crompton's Employee Stock Ownership Plan (ESOP) and Individual Account Retirement Plan (IARP) (with that portion of the ESOP and IARP contributions in excess of the Section 401(k) and Section 415 limitations having been paid into Crompton's Benefit Equalization Plan): Mr. Calarco, $2,235 (SMD), $31,802 (ESOP), $55,560 (IARP); Mr. Marsden, $5,027 (SMD), $13,065 (ESOP), $21,420 (IARP); Mr. Ackley, $1,074 (SMD), $12,960 (ESOP), $22,680 (IARP); Mr. Ferguson, $4,397 (SMD), $9,063 (ESOP), $13,854 (IARP); and Mr. Fording, $1,291 (SMD), $8,166 (ESOP), $15,317 (IARP). Total restricted stock outstanding for the persons shown in the table at the end of fiscal year 1995: Vincent A. Calarco, 276,033 shares valued at $3,657,437, of which 132,033 shares valued at $1,749,437 are forfeitable; Charles J. Marsden, 80,232 shares valued at $1,063,074, of which 36,232 shares valued at $480,074 are forfeitable; Robert W. Ackley, 50,002 shares valued at $662,527, of which 23,002 shares valued at $304,777 are forfeitable; Edmund H. Fording, 12,691 shares valued at $168,156, all of which shares are forfeitable; and John T. Ferguson II, 9,634 shares valued at $127,651, all of which shares are forfeitable. Dividends are paid on restricted shares from the date of grant but do not vest and are not distributed until the underlying shares are distributed. 49 OPTION GRANTS IN LAST FISCAL YEAR(1)
POTENTIAL INDIVIDUAL GRANTS REALIZABLE -------------------------------------------------- VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER TOTAL STOCK OF OPTIONS PRICE APPRECIATION SECURITIES GRANTED TO FOR OPTION TERM UNDERLYING EMPLOYEES EXERCISE ------------------- OPTIONS IN FISCAL PRICE EXPIRATION 5%($) 10%($) NAME GRANTED(#) YEAR ($/SH) DATE $21.18 $33.72 - ---------------------------------- ---------- ---------- ----------- ---------- ------- --------- V.A. Calarco...................... 102,308(2) 33.0% 13.00 11/17/05 836,879 2,119,822 7,692(3) 2.5% 13.00 10/17/05 62,921 159,378 C.J. Marsden...................... 20,808(2) 6.7% 13.00 11/17/05 170,209 431,142 7,692(3) 2.5% 13.00 10/17/05 62,921 159,378 R.W. Ackley....................... 18,808(2) 6.1% 13.00 11/17/05 153,849 389,702 7,692(3) 2.5% 13.00 10/17/05 62,921 159,378 J.T. Ferguson II.................. 4,589(2) 1.5% 13.00 11/17/05 37,538 95,084 5,911(3) 1.9% 13.00 10/17/05 48,352 122,476 E.H. Fording, Jr.................. 2,058(2) 0.7% 13.00 11/17/05 16,834 42,642 8,442(3) 2.7% 13.00 10/17/05 69,056 174,918
- ------------ (1) An option entitles the holder to purchase one share of the common stock of Crompton at a purchase price equal to the fair market value of Crompton's common stock on October 18, 1995, the date of grant of all of the options shown in the table. All options are subject to expiration prior to the dates shown in the table in case of death or termination of employment. Fifty percent of the options shown in the table are exercisable beginning on the first anniversary of the date of grant, and fifty percent are exercisable beginning on the second anniversary of the date of grant. The purchase price for stock on the exercise of options may be paid in cash or in shares of Crompton's common stock already owned by the option holder, or by a combination thereof. In the event of a change in control of Crompton, all of the options shown in the table will immediately become exercisable. (2) Non-qualified options. (3) Incentive options. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES (1)
VALUE OF UNEXERCISED NUMBER OF SECURITIES IN-THE-MONEY SHARES UNDERLYING UNEXERCISED AT FY-END($) ACQUIRED ON VALUE OPTIONS FY-END(#) 12/30/95--FMV $13.2500 EXERCISE REALIZED -------------------------- --------------------------- NAME (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------- ----------- ---------- ----------- ------------- ------------ ------------- V.A. Calarco................ -- -- 894,160 149,000 5,697,531.73 27,500.00 C.J. Marsden................ 16,300 253,791.00 237,376 39,500 1,251,138.93 7,125.00 R.W. Ackley................. 11,500 110,687.50 62,000 36,500 -- 6,625.00 J.T. Ferguson II............ 8,834 65,167.26 38,250 16,750 -- 2,625.00 E.H. Fording, Jr............ -- -- 74,500 14,500 204,172.50 2,625.00
- ------------ (1) All numbers reflect the 2-for-1 stock split on May 22, 1992. (2) Fair market value at date of exercise less exercise price. Compensation Committee Interlocks and Insider Participation Messrs. Fox, Headrick and Huber served as members and Mr. Bitonti served as Chairman of the Executive Compensation Committee of the Crompton Board during the last completed fiscal year. No member of the Executive Compensation Committee is a current or former officer or employee of Crompton or any of its subsidiaries. During 1995, Mr. Calarco served as a director of Caremark International Inc., of which Mr. Piccolo is Chairman and Chief Executive Officer. 50 Retirement Plans Each of the persons shown in the Summary Compensation Table on page 11 is covered by a supplemental retirement agreement with Crompton. Under each supplemental agreement, the aggregate benefit payable on an annualized basis from employer contributions under Crompton's Individual Account Retirement Plan to each officer at normal retirement age will be supplemented by Crompton so that the total annual benefit payable to him for life will be 35%, 50% or 60% of the average total compensation (including salary and bonus) paid to him during the highest five years of the last ten years prior to his normal retirement age. A supplemental benefit in a reduced amount may be payable in the event of termination of employment prior to normal retirement age. At any time after the date on which benefit payments commence, the officer may elect to receive a single lump sum equal to 90% of the actuarial equivalent of the benefit otherwise payable to the officer. An officer may elect to have his supplemental benefit under the agreement paid in a form which will provide for the continuation of benefits, to a beneficiary selected by him, upon his death after retirement. Each agreement also provides for the payment of a reduced benefit to the officer's beneficiary in the event of his death prior to normal retirement age and for the payment of disability benefits in addition to those available under Crompton's regular disability insurance program. Benefits under each agreement are payable only if the officer has completed at least five years of service after entering into the agreement, does not voluntarily terminate his employment unless such termination is the result of his retirement under a retirement plan or is with approval of the Crompton Board, and meets certain other conditions set forth in the agreement. Each of the supplemental retirement agreements also provides that if, after a change in control of Crompton (as defined in the agreement) has occurred, the officer's employment is terminated by Crompton other than for cause, disability, or death or the officer resigns for good reason (as defined in the agreement), the officer will be vested in an unreduced benefit equal to 35%, 50% or 60% (whichever level is applicable to him under the agreement) of his average total compensation over the highest five of the last ten years of his employment. In the event the officer is under age 55 when terminated, the benefit would be based on his final average total compensation projected to age 55 in accordance with certain assumptions set forth in the agreement. The benefit would be paid annually for life commencing at age 65, with provision made for payment to the officer's beneficiary of the value of the expected benefit in the event of his death prior to attaining that age. The following table sets forth the estimated aggregate annual benefit payable to each of the officers named in the table under his supplemental retirement agreement, from employer contributions to the IARP, and (in the case of Mr. Ackley) under a retirement plan which was terminated in 1982, upon retirement at or after normal retirement age based on each officer's compensation history to date and assuming payment of such benefit in the form of a life annuity: ESTIMATED ANNUAL NAME OF INDIVIDUAL RETIREMENT BENEFIT - -------------------------- ------------------ Vincent A. Calarco........ $523,900 Charles J. Marsden........ 158,892 Robert W. Ackley.......... 145,642 John T. Ferguson II....... 71,852 Edmund H. Fording, Jr..... 72,485 Employment Agreements Mr. Calarco is employed pursuant to an employment agreement which was amended and restated in February 1988. The amended agreement provides for Mr. Calarco's employment as Chairman of the Board, President and Chief Executive Officer for a term of three years, with automatic annual one year extensions of the term unless Crompton gives notice at least 60 days prior to the anniversary of the date of the agreement that the term will not be extended. The amended agreement calls for a base salary of not less than $310,000 and for Mr. Calarco's continued participation in employee benefit plans and other fringe benefit arrangements substantially as in the past. In the event Mr. Calarco's employment is 51 terminated by Crompton other than for cause, disability, or death or by Mr. Calarco for good reason (as defined in the agreement), Crompton is obligated to pay Mr. Calarco his salary to the date of termination, incentive compensation in an amount no less than the bonus paid to him for the prior year pro-rated to that date, and a lump sum termination payment equal to three times the sum of his then current salary and the highest bonus paid to him during the three years preceding his termination, to continue other employee benefits provided under the agreement for a period of three years or until he obtains other employment, and to make certain additional payments to cover any excise tax imposed under the Code on the amounts payable as a result of his termination and any legal fees incurred by Mr. Calarco in enforcing Crompton's obligations under the agreement. Crompton has entered into employment agreements with certain other key management employees, including Messrs. Marsden, Ackley, Ferguson and Fording. Each agreement is operative only upon the occurrence of a change in control (as defined in the agreement) and is intended to encourage the executive to remain in the employ of Crompton by providing him with greater security. Absent a change in control, the agreement does not require Crompton to retain the executive or to pay him any specified level of compensation or benefits. In the event of a change in control, the agreement provides that there will be no change, without the executive's consent, in the salary, bonus opportunity, benefits, duties, and location of employment of the executive for a period of one or two years after the change in control. If, during such period, the executive's employment is terminated by Crompton other than for cause, disability, or death or the executive resigns for good reason (as defined in the agreement), Crompton will pay the executive his salary to the date of termination, incentive compensation in an amount no less than the bonus paid to him for the prior year pro-rated to that date, and a lump sum severance payment equal to one or two times (depending on the executive) the sum of his base salary and the highest bonus paid to him during the three years preceding his termination and will continue other employee benefits similar to those provided to the executive prior to his termination for a period of one or two years or until his earlier employment with another employer. 52 PRINCIPAL STOCKHOLDERS OF CROMPTON The directors and the executive officers of Crompton have advised Crompton that they were directly or indirectly the beneficial owners of outstanding common stock of Crompton at the close of business on February 9, 1996, as set forth below, in each case representing less than one percent of such shares outstanding except as otherwise indicated. No person was known to the Crompton Board to be the beneficial owner of more than 5% of Crompton's outstanding voting securities as of February 9, 1996.
AMOUNT AND NATURE OF BENEFICIAL TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNERSHIP(1) PERCENT OF CLASS - -------------- -------------------------------------------- -------------------------- ---------------- Common Vincent A. Calarco.......................... 1,744,427(2) 3.6%(15) Common James A. Bitonti............................ 29,547(3) Common Robert A. Fox............................... 30,829(4) Common Roger L. Headrick........................... 57,190(5) Common Leo I. Higdon, Jr........................... 2,906(6) Common Michael W. Huber............................ 19,889(7) Common Charles J. Marsden.......................... 480,450(8) Common C.A. (Lance) Piccolo........................ 14,452(9) Common Patricia K. Woolf........................... 3,413(10) Common Robert W. Ackley............................ 349,110(11) Common John T. Ferguson II......................... 56,119(12) Common Edmund H. Fording, Jr....................... 96,227(13) Common Directors and Executive Officers as a Group (17 persons)................................ 3,277,696(14) 6.6%(16)
- ------------ (1) Except as noted below, the officers and directors have both sole voting and sole investment power over the shares reflected in this table. (2) Includes 894,160 shares which Mr. Calarco had the right to acquire through stock options exercisable within 60 days of February 9, 1996; 496,944 shares held under the 1988 Plan and the Employee Stock Ownership Plan, as to which he has voting but no investment power; and 58,872 shares owned by his wife and 18,721 shares held by him or his wife as custodian for their children, as to which he disclaims beneficial ownership. (3) Includes 2,397 shares which Mr. Bitonti had the right to acquire through stock options exercisable within 60 days of February 9, 1996; 11,200 shares owned jointly by Mr. Bitonti with his wife; 10,494 shares held under the Restricted Stock Plan for Directors; and 4,800 shares owned by his wife as to which he disclaims beneficial ownership. (4) Includes 2,397 shares which Mr. Fox had the right to acquire through stock options exercisable within 60 days of February 9, 1996; and 8,448 shares held under the Restricted Stock Plan for Directors. (5) Includes 2,397 shares which Mr. Headrick had the right to acquire through stock options exercisable within 60 days of February 9, 1996; and 10,173 shares held under the Restricted Stock Plan for Directors. (6) Includes 1,555 shares which Mr. Higdon had the right to acquire through stock options exercisable within 60 days of February 9, 1996; and 1,351 shares held under the Restricted Stock Plan for Directors. (7) Includes 2,397 shares which Mr. Huber had the right to acquire through stock options exercisable within 60 days of February 9, 1996; and 7,492 shares held under the Restricted Stock Plan for Directors. (8) Includes 237,376 shares which Mr. Marsden had the right to acquire through stock options exercisable within 60 days of February 9, 1996; 106,665 shares held under the 1988 Plan and the Employee Stock Ownership Plan, as to which he has voting but no investment power; and 19,000 shares owned by his wife as to which he disclaims beneficial ownership. (9) Includes 2,397 shares which Mr. Piccolo had the right to acquire through stock options exercisable within 60 days of February 9, 1996; and 9,115 shares held under the Restricted Stock Plan for Directors. (10) Includes 622 shares which Ms. Woolf had the right to acquire through stock options exercisable within 60 days of February 9, 1996; and 1,845 shares held under the Restricted Stock Plan for Directors. (11) Includes 62,000 shares which Mr. Ackley had the right to acquire through stock options exercisable within 60 days of February 9, 1996; 86,912 shares held under the 1988 Plan and the Employee Stock Ownership Plan, as to which he has voting but no investment power; and 2,400 shares owned by his wife, as to which he disclaims beneficial ownership. (12) Includes 38,250 shares which Mr. Ferguson had the right to acquire through stock options exercisable within 60 days of February 9, 1996; 15,189 and shares held under the 1988 Plan, the Employee Stock Ownership Plan, and a Benefit Equalization Plan Trust as to which he has voting but no investment power. (13) Includes 74,500 shares which Mr. Fording had the right to acquire through stock options exercisable within 60 days of February 9, 1996; and 9,164 shares held under the 1988 Plan and the Employee Stock Ownership Plan, as to which he has voting but no investment power. (14) Includes 1,441,921 shares which the officers and directors in the group had the right to acquire through stock options exercisable within 60 days of February 9, 1996. (15) 2.4%, giving effect to the issuance of up to 26,089,206 shares of Crompton Common Stock in the Merger. (16) 4.4%, giving effect to the issuance of up to 26,089,206 shares of Crompton Common Stock in the Merger. 53 DESCRIPTION OF CROMPTON CAPITAL STOCK Under the Crompton Articles, Crompton is authorized to issue (i) 250,000,000 shares of Crompton Common Stock, of which 48,039,309 shares were issued and outstanding as of July 9, 1996 and (ii) 250,000 shares of Preferred Stock, without par value, none of which was issued and outstanding. CROMPTON COMMON STOCK The holders of Crompton Common Stock are entitled to receive dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor. The holders of Crompton Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders of Crompton Common Stock are entitled to receive, upon any liquidation of Crompton, all remaining assets available for distribution to stockholders after satisfaction of Crompton's liabilities and the preferential rights of any preferred Stock that may then be issued and outstanding. The outstanding shares of Crompton Common Stock are, and the shares to be issued in the Merger will be, fully paid and nonassessable. The holders of Crompton Common Stock have no preemptive, conversion or redemption rights. The transfer agent and registrar for the Crompton Common Stock is Chemical Mellon Shareholder Services. PREFERRED SHARE PURCHASE RIGHTS On July 20, 1988, the Crompton Board declared a dividend of one preferred share purchase right on each outstanding share of Crompton Common Stock. The Crompton Rights, which expire on August 4, 1998, were issued on August 5, 1988 to stockholders of record on that date and were authorized to be issued in respect of each share of Crompton Common Stock subsequently issued. Under certain circumstances each Crompton Right will entitle the holder to purchase one eight-hundredth of a share of Series A Junior Participating Preferred Stock, without par value (the "Series A Junior Preferred Shares"), of Crompton at an exercise price of $18.75 per one eight-hundredth of a Series A Junior Preferred Share, subject to adjustment. The Crompton Rights will not be exercisable or transferable apart from the Crompton Common Stock until the earlier to occur of either: (i) ten days following a public announcement that a person or group has acquired 20% or more of the outstanding Crompton Common Stock, or (ii) ten business days following commencement of, or a public announcement of an intention to make, a tender or exchange offer, which would result in the beneficial ownership by a person or group of 20% or more of the outstanding Crompton Common Stock. The Crompton Rights will not have any voting rights nor be entitled to dividends. If, after the Crompton Rights become exercisable, Crompton is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power is sold, provision will be made for each holder of a Crompton Right to receive on exercise of the Crompton Right, that number of shares of common stock of the acquiring company which at the item of such transaction would have a market value of two times the exercise price of the Crompton Right. In addition, in the event a person or group shall become the beneficial owner of 20% or more of the outstanding Crompton Common Stock (an "Acquiring Person"), each holder of a Crompton Right other than an Acquiring Person shall have the right, upon exercise of a Crompton Right, to purchase shares of Crompton Common Stock having a market value equal to two times the exercise price of the Crompton Right. Notwithstanding the foregoing, any Crompton Rights that are owned or acquired by an Acquiring Person will be void and the holder thereof shall have no right to exercise or transfer such Crompton Rights. The Crompton Rights are redeemable at $.00125 per Crompton Right at any time prior to the time that a person or group acquires beneficial ownership of 20% or more of the outstanding Crompton Common Stock. 54 CERTAIN CHARTER AND BY-LAW PROVISIONS The Crompton Articles and Crompton By-Laws contain certain provisions that would likely have an effect of delaying or deterring a change in control of Crompton. Such provisions require, among other things, (i) a classified Board of Directors, with each class containing as nearly as possible one-third of the whole number of members of the Board of Directors and the members of each class serving for three-year terms, (ii) a vote of at least 80% of the holders of Crompton's voting securities to approve certain business combination transactions with a stockholder who is the beneficial owner of 10% or more of Crompton's outstanding voting securities, (iii) a vote of at least 80% of Crompton's voting securities to amend certain of the Crompton Articles and Crompton By-Laws, (iv) advance notice procedures with respect to nominations of directors other than by or at the direction of the Board of Directors, and (v) a vote of two-thirds ( 2/3) of Crompton's outstanding voting securities to approve certain merger and consolidation agreements involving Crompton. PLAN OF DISTRIBUTION Under the terms of a Placement Agreement dated as of , 1996 (the "Placement Agreement"), the shares of Common Stock offered hereby are being offered by the Company through Salomon Brothers Inc, as exclusive placement agent (the "Placement Agent"), which has agreed to use its best efforts to solicit offers to purchase such shares on the terms and subject to the conditions set forth therein. The shares of Common Stock offered hereby may also be sold to the Placement Agent, acting as principal, at a discount for resale to one or more purchasers at market prices prevailing at the time of sale or at negotiated prices. After the Common Stock is released for sale to the public, the offering price and other selling terms may be varied by the Placement Agent. The Company shall have the right, in its discretion, to reject any offer received by it, in whole or in part. The Placement Agent shall have the right, in its discretion, without notice to the Company, to reject any offer received by it, in whole or in part. The Company will pay the Placement Agent a commission of % of the aggregate purchase price of the shares of Common Stock offered hereby. The Placement Agreement provides that Crompton will indemnify the Placement Agent against certain liabilities in connection with the Offering, including liabilities under the Securities Act, or to contribute to payments that the Placement Agent may be required to make in respect thereof. Payment of the purchase price of the shares of Common Stock offered hereby will be required to be made in immediately available funds in The City of New York. Salomon Brothers Inc has provided financial advisory services to the Company and to entities related to the Company and may in the future provide financial advisory services to the Company or such other entities, for which it has received or expects to receive customary fees. LEGAL MATTERS The validity of the shares of Crompton Common Stock offered hereby will be passed upon for Crompton by Wachtell, Lipton, Rosen & Katz, special counsel to Crompton. EXPERTS The consolidated financial statements of Crompton as of December 30, 1995 and December 31, 1994, and for the years ended December 30, 1995, December 31, 1994, and December 25, 1993, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Uniroyal as of October 1, 1995 and October 2, 1994, and for the years ended October 1, 1995, October 2, 1994, and September 30, 1993, have been included herein and in the Registration Statement in reliance upon the report of Deloitte & Touche LLP, independent auditors, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing. 55 INDEX TO FINANCIAL STATEMENTS
PAGE ---- ANNUAL CONSOLIDATED FINANCIAL STATEMENTS OF CROMPTON & KNOWLES CORPORATION: Consolidated Statements of Earnings for the fiscal years ended December 30, 1995, December 31, 1994, and December 25, 1993............................................. F-2 Consolidated Balance Sheets at December 30, 1995 and December 31, 1994............. F-3 Consolidated Statements of Cash Flows for the fiscal years ended December 30, 1995, December 31, 1994, and December 25, 1993............................................. F-4 Consolidated Statements of Stockholders' Equity for the fiscal years ended December 30, 1995, December 31, 1994, and December 25, 1993............................... F-5 Notes to Consolidated Financial Statements......................................... F-6 Independent Auditors' Report....................................................... F-16 INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF CROMPTON & KNOWLES CORPORATION: Consolidated Statements of Earnings (Unaudited) for the quarters and six months ended June 29, 1996 and July 1, 1995............................................. F-17 Consolidated Balance Sheets (Unaudited) at June 29, 1996 and December 30, 1995..... F-18 Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 29, 1996 and July 1, 1995................................................................ F-19 Notes to Consolidated Financial Statements for the quarter ended June 29, 1996 (Unaudited).......................................................................... F-20 ANNUAL CONSOLIDATED FINANCIAL STATEMENTS OF UNIROYAL CHEMICAL CORPORATION: Consolidated Statements of Operations for the fiscal years ended October 1, 1995, October 2, 1994, and September 30, 1993.............................................. F-24 Consolidated Balance Sheets at October 1, 1995 and October 2, 1994................. F-25 Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended October 1, 1995, October 2, 1994, and September 30, 1993................... F-26 Consolidated Statements of Cash Flows for the fiscal years ended October 1, 1995, October 2, 1994, and September 30, 1993.............................................. F-27 Notes to Consolidated Financial Statements......................................... F-28 Independent Auditors' Report....................................................... F-53 INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF UNIROYAL CHEMICAL CORPORATION: Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 1996, and July 2, 1995, and for the nine months ended June 30, 1996, and July 2, 1995.......................................................................... F-54 Consolidated Balance Sheets (Unaudited) at June 30, 1996 and October 1, 1995....... F-55 Consolidated Statements of Cash Flows (Unaudited) for the nine months ended June 30, 1996, and July 2, 1995....................................................... F-56 Notes to Unaudited Consolidated Financial Statements............................... F-57
F-1 CROMPTON & KNOWLES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FISCAL YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994, AND DECEMBER 25, 1993 (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1995 1994 1993 -------- -------- -------- Net sales................................................... $665,513 $589,757 $558,348 -------- -------- -------- Costs and Expenses Cost of products sold..................................... 473,654 403,784 380,941 Selling, general and administrative....................... 104,535 91,581 82,970 Depreciation and amortization............................. 15,035 13,298 12,076 Interest.................................................. 8,364 2,167 1,093 Other income.............................................. (166) (1,042) (1,205) -------- -------- -------- Total costs and expenses................................ 601,422 509,788 475,875 -------- -------- -------- Earnings Earnings before income taxes.............................. 64,091 79,969 82,473 Income taxes.............................................. 23,598 29,053 30,515 -------- -------- -------- Net earnings.............................................. $ 40,493 $ 50,916 $ 51,958 -------- -------- -------- -------- -------- -------- Net Earnings Per Common Share............................... $ .84 $ 1.00 $ 1.00 -------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-2 CROMPTON & KNOWLES CORPORATION CONSOLIDATED BALANCE SHEETS FISCAL YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1995 1994 -------- -------- Assets Current Assets Cash................................................................. $ 918 $ 1,832 Accounts receivable.................................................. 112,693 81,859 Inventories.......................................................... 154,846 157,356 Other current assets................................................. 23,038 19,610 -------- -------- Total current assets............................................. 291,495 260,657 Non-Current Assets Property, plant and equipment........................................ 129,991 117,105 Cost in excess of acquired net assets................................ 51,922 43,429 Other assets......................................................... 10,730 11,137 -------- -------- $484,138 $432,328 -------- -------- -------- -------- Liabilities and Stockholders' Equity Current Liabilities Notes payable........................................................ $ 60,439 $ 39,670 Accounts payable..................................................... 49,415 47,000 Accrued expenses..................................................... 35,136 33,369 Income taxes payable................................................. 3,747 4,138 Other current liabilities............................................ 16,578 14,865 -------- -------- Total current liabilities........................................ 165,315 139,042 -------- -------- Non-Current Liabilities Long-term debt....................................................... 64,000 54,000 Accrued postretirement liability..................................... 7,559 8,698 Deferred income taxes................................................ 7,217 6,681 Stockholders' Equity Common stock, $.10 par value--issued 53,361,072 shares............... 5,336 5,336 Additional paid-in capital........................................... 59,440 62,241 Retained earnings.................................................... 234,113 218,837 Accumulated translation adjustment................................... 6,320 1,858 Treasury stock at cost............................................... (62,972) (54,213) Deferred compensation................................................ (2,190) (10,152) -------- -------- Total stockholders' equity....................................... 240,047 223,907 -------- -------- $484,138 $432,328 -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-3 CROMPTON & KNOWLES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FISCAL YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994, AND DECEMBER 25, 1993 INCREASE (DECREASE) TO CASH (IN THOUSANDS OF DOLLARS)
1995 1994 1993 -------- -------- -------- Cash Flows from Operating Activities Net earnings............................................... $ 40,493 $ 50,916 $ 51,958 Adjustments to reconcile net earnings to net cash provided by operations: Depreciation and amortization............................ 15,035 13,298 12,076 Deferred income taxes.................................... 729 2,389 340 Deferred compensation.................................... 768 (332) 1,611 Changes in assets and liabilities: Accounts receivable...................................... (27,234) 5,815 (11,798) Inventories.............................................. 8,247 (34,695) (253) Other current assets..................................... (3,080) (2,735) 722 Other assets............................................. (485) (943) 2 Accounts payable and accrued expenses.................... (4,719) (8,186) (4,937) Income taxes payable..................................... 323 (7,986) 3,918 Other current liabilities................................ (1,938) 4,777 (1,435) Accrued postretirement liability......................... (1,139) (386) 310 Other.................................................... (264) (175) (109) -------- -------- -------- Net cash provided by operations............................ 26,736 21,757 52,405 -------- -------- -------- Cash Flows from Investing Activities Acquisitions............................................... (9,538) (13,734) -- Capital expenditures....................................... (18,249) (21,710) (14,299) Other investing activities................................. (1,505) 590 1,972 -------- -------- -------- Net cash used by investing activities...................... (29,292) (34,854) (12,327) -------- -------- -------- Cash Flows from Financing Activities Proceeds from (payments on) long-term borrowings........... 10,000 40,000 (10,000) Change in notes payable.................................... 20,675 34,533 (282) Treasury stock acquired.................................... (4,296) (47,647) (5,103) Treasury stock issued under stock options and other plans........................................................ 393 1,756 1,905 Dividends paid............................................. (25,217) (23,309) (19,482) -------- -------- -------- Net cash provided (used) by financing activities........... 1,555 5,333 (32,962) -------- -------- -------- Cash Effect of exchange rates on cash........................... 87 312 (273) -------- -------- -------- Change in cash............................................. (914) (7,452) 6,843 Cash at beginning of year.................................. 1,832 9,284 2,441 -------- -------- -------- Cash at end of year........................................ $ 918 $ 1,832 $ 9,284 -------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-4 CROMPTON & KNOWLES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FISCAL YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994, AND DECEMBER 25, 1993 (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1995 1994 1993 -------- -------- -------- Common Stock Balance at beginning and end of year...................... $ 5,336 $ 5,336 $ 5,336 -------- -------- -------- Additional Paid-in Capital Balance at beginning of year.............................. 62,241 61,783 59,644 Stock options and other issuances......................... (410) 1,592 2,139 Return of shares from long-term incentive plan trust...... (2,391) -- -- Issuance under long-term incentive plan................... -- (1,134) -- -------- -------- -------- Balance at end of year.................................... 59,440 62,241 61,783 -------- -------- -------- Retained Earnings Balance at beginning of year.............................. 218,837 191,230 158,754 Net earnings.............................................. 40,493 50,916 51,958 Cash dividends declared on common stock ($.525 per share in 1995, $.46 in 1994, and $.38 in 1993)................ (25,217) (23,309) (19,482) -------- -------- -------- Balance at end of year.................................... 234,113 218,837 191,230 -------- -------- -------- Accumulated Translation Adjustment Balance at beginning of year.............................. 1,858 (557) 3,803 Equity adjustment for translation of foreign currencies... 4,462 2,415 (4,360) -------- -------- -------- Balance at end of year.................................... 6,320 1,858 (557) -------- -------- -------- Treasury Stock Balance at beginning of year.............................. (54,213) (11,278) (7,956) Issued, primarily under stock options (72,729 shares in 1995, 58,957 shares in 1994, and 489,976 in 1993)....... 340 276 1,781 Common stock acquired (272,800 shares in 1995, 2,954,700 shares in 1994 and 280,000 in 1993)......................... (4,296) (47,647) (5,103) 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.................................... (62,972) (54,213) (11,278) -------- -------- -------- Deferred Compensation Balance at beginning of year.............................. (10,152) (6,518) (8,129) Return of shares from long-term incentive plan trust...... 7,194 -- -- Issuance under long-term incentive plan................... -- (3,302) -- Amortization.............................................. 768 (332) 1,611 -------- -------- -------- Balance at end of year.................................... (2,190) (10,152) (6,518) -------- -------- -------- Total stockholders' equity................................ $240,047 $223,907 $239,996 -------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-5 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of all subsidiaries. Intercompany balances and transactions are eliminated in consolidation. The Company's fiscal year ends on the last Saturday in December for domestic operations and a week earlier for most foreign operations. Translation of Foreign Currencies Foreign currency accounts are translated into U.S. dollars as follows: exchange rates at the end of the period are used to translate all assets and liabilities; average exchange rates during the year are used to translate income and expense accounts. Gains and losses resulting from the translation of foreign currency balance sheet accounts into U.S. dollars are included in a separate caption, "Accumulated translation adjustment," in the stockholders' equity section of the consolidated balance sheets. Property, Plant and Equipment Property, plant and equipment are carried at cost, less accumulated depreciation. Depreciation expense ($13,204 in 1995, $11,935 in 1994 and $10,828 in 1993) 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--5 to 15 years, and furniture and fixtures--5 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 using the last-in, first-out (LIFO) method for a significant portion of chemicals inventories and the first-in, first-out (FIFO) method for the remaining inventories. Cost in Excess of Acquired Net Assets The cost of acquisitions in excess of tangible and identifiable intangible assets in the amount of $51,922 has, in the opinion of management based on the undiscounted expected cash flows of the businesses, incurred no permanent impairment in value. This cost is being amortized using the straight-line method over periods from twenty to forty years. Accumulated amortization amounted to $8,281 in 1995 and $6,622 in 1994. Research and Development Expenditures for research and development costs are charged to operations as incurred ($14,027 in 1995, $12,106 in 1994, and $11,184 in 1993). 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 $72,400 at December 30, 1995, were distributed to the Company in the form of dividends, since it is management's intention to permanently invest such earnings in the related foreign operations. If distributed, such earnings would incur income tax expense at substantially less than the U.S. income tax rate, primarily because of the offset of foreign tax credits. F-6 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Statements of Cash Flows Cash includes bank term deposits of three months or less. Cash payments during the years ended 1995, 1994 and 1993 included interest of $8,488, $2,005 and $1,556 and income taxes of $23,515, $35,319 and $24,347, respectively. Earnings Per Common Share The computation of earnings per common share is based on the weighted average number of common and common equivalent shares outstanding amounting to 48,447,686 in 1995, 51,151,525 in 1994 and 52,175,691 in 1993. 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. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Such fair values must often be determined by using one or more methods that indicate value based on estimates of quantifiable characteristics as of a particular date. Values were estimated as follows: Cash, short-term receivables and accounts payable--The carrying amount approximates fair value because of the short maturity of these instruments. Notes payable and long-term debt--Fair values of short-term borrowings and long-term debt approximate carrying value because interest rates on such debt are at variable market rates. Hedging contracts--Consists primarily of forward foreign currency contracts carried at market. Other Disclosures Included in accounts receivable are allowances for doubtful accounts in the amount of $3,269 in 1995 and $3,829 in 1994. Included in other current liabilities are customer deposits in the amount of $11,322 in 1995 and $11,183 in 1994. Accounting Standard Changes In March 1995, the Financial Accounting Standards Board issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which is effective in 1996. The statement requires companies to review assets for possible impairment and provides guidelines for recognition of impairment losses related to long-lived assets and certain intangibles. The Company is evaluating the impact of the statement, but expects that the guidelines required by the statement will not result in impairment of value that would have a material effect on the Company's net earnings and financial position in 1996. In October 1995, the Financial Accounting Standards Board issued Statement No. 123 "Accounting for Stock-Based Compensation" which is effective in 1996. The Company intends to follow the option that permits entities to continue to apply current accounting standards to stock based employee compensation arrangements. Effective with year-end 1996 reporting, the Company will disclose in the notes to the consolidated financial statements the impact on net earnings and earnings per share as if Statement No. 123 were applied. F-7 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Acquisitions In January 1995, the Company acquired the business and certain assets of McNeil Akron Repiquet S.a.r.l. in France at a cost of $4,638. In March 1995, the Company acquired Killion Extruders, Inc. at a cost of $4,900. 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 the purchase price over fair value of net assets acquired in the amount of $9,649 is being amortized over forty years. The operating results of each acquisition are included in the Consolidated Statements of Earnings since the date of the acquisition. Inventories 1995 1994 -------- -------- Finished goods........................................ $ 89,177 $ 90,386 Work in process....................................... 30,316 32,640 Raw materials and supplies............................ 35,353 34,330 -------- -------- $154,846 $157,356 -------- -------- -------- -------- At December 30, 1995, inventories valued using the last-in, first-out (LIFO) method amounted to $70,550 ($75,958 at December 31, 1994). The LIFO reserve was not significant in 1995 and 1994. Property, Plant and Equipment 1995 1994 -------- -------- Land.................................................. $ 7,490 $ 7,292 Buildings and improvements............................ 71,677 61,926 Machinery and equipment............................... 133,111 113,296 Furniture and fixtures................................ 4,030 3,662 Construction in progress.............................. 12,975 16,620 -------- -------- 229,283 202,796 Less accumulated depreciation......................... 99,292 85,691 -------- -------- $129,991 $117,105 -------- -------- -------- -------- Leases The future minimum rental payments under operating leases having initial or remaining non-cancellable lease terms in excess of one year (as of December 30, 1995) total $21,434 as follows: $5,533 in 1996, $4,254 in 1997, $3,637 in 1998, $3,223 in 1999, $1,676 in 2000 and $3,111 in later years. Total rental expense for all operating leases was $8,126 in 1995, $7,305 in 1994, and $6,509 in 1993. All long-term leases expire prior to 2013. 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. F-8 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Debt Long-term debt is summarized as follows: 1995 1994 ------- ------- Revolving credit loans.................................. $60,000 $50,000 Industrial revenue bonds................................ 4,000 4,000 ------- ------- Total long-term debt.............................. $64,000 $54,000 ------- ------- ------- ------- The industrial revenue bonds mature in 1997 and carry an interest rate that fluctuates within the tax exempt market. The average interest rate incurred in 1995 was 3.8%. The bonds are secured by a bank letter of credit. In June 1995, the Company amended its credit agreement with a group of five banks whereby the unsecured revolving credit loans available to the Company were increased to $125,000 through September 28, 1998. The agreement calls for interest at the prime rate on revolving loans, but offers pricing options based on certificate of deposit and Eurodollar rates which generally are more favorable than the prime rate option. The Company must pay an annual fee of .15% of the total unused commitment. The covenants of the revolving credit agreement impose restrictions on the Company with respect to debt and tangible net worth levels. These restrictions are not expected to adversely affect the Company's operations. At December 30, 1995, the $60,000 borrowed under the revolving credit agreement bore an interest rate of 6.2%. At December 30, 1995, unsecured notes payable outstanding of $60,439 borrowed under the Company's uncommitted lines of credit bore a variable interest rate of 6.0%. The aggregate annual maturities of long-term debt are $4,000 in 1997 and $60,000 in 1998. Income Taxes The components of pretax earnings and taxes are as follows: 1995 1994 1993 ------- ------- ------- PreTax Earnings: Domestic.................................... $59,306 $67,555 $68,498 Foreign..................................... 4,785 12,414 13,975 ------- ------- ------- Total....................................... $64,091 $79,969 $82,473 ------- ------- ------- ------- ------- ------- Taxes: Domestic Current taxes............................. $21,500 $23,361 $27,857 Deferred taxes............................ 1,604 2,057 (587) ------- ------- ------- $23,104 $25,418 $27,270 ------- ------- ------- ------- ------- ------- Foreign Current taxes............................... $ 1,369 $ 3,303 $ 2,318 Deferred taxes.............................. (875) 332 927 ------- ------- ------- $ 494 $ 3,635 $ 3,245 ------- ------- ------- ------- ------- ------- Total Current taxes............................... $22,869 $26,664 $30,175 Deferred taxes.............................. 729 2,389 340 ------- ------- ------- $23,598 $29,053 $30,515 ------- ------- ------- ------- ------- ------- F-9 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) The following is a percentage reconciliation of computed "expected" tax expense to actual tax expense: 1995 1994 1993 ---- ---- ---- Computed "expected" tax expense.................. 35.0% 35.0% 35.0% State taxes (net of U.S. tax benefit)............ 4.3 3.6 3.6 Foreign tax differential......................... (1.8) (0.9) (2.0) Other, net....................................... (0.7) (1.4) .4 ---- ---- ---- 36.8% 36.3% 37.0% ---- ---- ---- ---- ---- ---- Provisions have been made for deferred income 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 asset as of December 30, 1995 and December 31, 1994, are as follows: 1995 1994 ------- ------- Deferred tax asset: Inventory reserves.................................... $ 3,596 $ 3,239 Bad debt reserves..................................... 515 232 Deferred compensation liability....................... 885 638 Various expense accruals.............................. 3,395 4,475 Accrued postretirement liability...................... 3,024 3,598 ------- ------- Total deferred tax assets......................... 11,415 12,182 Deferred tax liability--depreciation.................... (10,241) (10,279) ------- ------- Net deferred tax asset............................ $ 1,174 $ 1,903 ------- ------- ------- ------- Total deferred tax assets for 1995 and 1994 include current assets of $8,391 and $8,584, respectively. The deferred tax liability is non-current for 1995 and 1994. Capital Stock The Company is authorized to issue 250,000,000 shares of common stock at a par value of $.10. There are 53,361,072 common shares issued, of which 5,351,962 and 4,703,891 shares were held in the treasury at December 30, 1995 and December 31, 1994, respectively. 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. Stock Incentive Plans The 1988 Long Term Incentive Plan (the 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 F-10 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 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. There were 4,000,000 shares of common stock reserved for awards under the 1988 Plan. The 1993 Stock Option Plan for Non-Employee Directors authorizes 100,000 shares to be optioned to non-employee directors at the rate of 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 equaling 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 30, 1995 deferred compensation relating to such shares in the amount of $2,190 is being amortized over an estimated service period of six to fifteen years. In June 1995, the trustee returned 448,000 common shares to the Company representing those shares which have not yet been earned under the incentive program. Compensation expense relating to unearned shares is being accrued annually based upon the expected level of incentive achievement. Changes during 1995, 1994 and 1993 in shares under option are summarized as follows:
PRICE PER SHARE ------------------------------- RANGE AVERAGE SHARES ------------ --------------- --------- Outstanding at 12/26/92............................. $ 1.29-22.78 $ 7.88 1,929,900 Granted............................................. 19.31-23.75 19.45 218,736 Exercised........................................... 1.29-18.31 2.87 (424,419) Lapsed.............................................. 4.01-19.19 14.01 (6,667) Outstanding at 12/25/93............................. 2.15-23.75 10.57 1,717,550 Granted............................................. 14.63-21.44 14.83 282,647 Exercised........................................... 2.15-9.31 5.59 (57,473) Lapsed.............................................. 9.31-19.31 18.12 (27,001) Outstanding at 12/31/94............................. 2.47-23.75 11.24 1,915,723 Granted............................................. 9.31-16.06 13.07 330,481 Exercised........................................... 2.49-9.31 6.40 (61,299) Lapsed.............................................. 9.31-23.75 18.04 (23,791) Outstanding at 12/30/95............................. $ 2.47-23.75 $ 11.59 2,161,114 Exercisable at 12/30/95............................. $ 2.47-23.75 $ 10.64 1,592,779
Shares available for grant at December 30, 1995 and December 31, 1994 were 536,302 and 842,992, respectively. 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 $2,020, $1,677 and $1,617 in 1995, 1994 and 1993, respectively. Postretirement Health Care Benefits The Company provides health benefits attributable to past service of eligible retired and active employees under the Company's postretirement health care benefit plans. Effective January 1, 1992, the F-11 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Company adopted the provisions of FASB Statement No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." In 1994, the Company adopted several changes to its postretirement health care benefit plans including an annual cap for medical premiums paid by the Company, higher deductible amounts and out-of-pocket limits on medical payments. The plan amendments resulted in a prior service gain of $3,254 which is being amortized over the average remaining employee service period of 15 years. Postretirement health care benefit expense did not have a material effect on net earnings for the years 1995, 1994 and 1993. The financial status of the accrued postretirement liability is as follows: 1995 1994 ------- ------ Retirees................................................. $ 3,834 $2,812 Fully eligible active participants....................... 662 608 Other active participants................................ 1,150 1,240 ------- ------ Total accumulated postretirement liability............... 5,646 4,660 Unrecognized actuarial gain (loss)....................... (1,113) 784 Unrecognized prior service gain.......................... 3,026 3,254 ------- ------ $ 7,559 $8,698 ------- ------ ------- ------ For measurement purposes, a 11.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995. The rate is assumed to decrease 1% per year to 6.5% in 2000 and remain at that level thereafter. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0%. An increase in the assumed health care cost rate of 1% in each year would increase the accumulated postretirement benefit obligation by approximately $460. Pensions The Company maintains a defined contribution pension plan for eligible employees under provisions of section 401(k) of the Internal Revenue Code. The plan provides for Company contributions at a certain percentage of each participant's salary and allows voluntary tax-deferred employee contributions up to a stated percentage of salary. Other foreign and domestic pension plans are not significant. Total pension expense aggregated $4,516 in 1995, $4,251 in 1994 and $4,036 in 1993. Contingencies In the normal course of its business, the Company is subject to investigations, claims and legal proceedings, some of which concern environmental matters, involving both private and governmental parties. In some cases, the remedies sought or damages claimed may be substantial. While each of these matters is subject to various uncertainties as to outcome, and some of them may be decided unfavorably to the Company, based on the facts known to the Company and on consultation with legal counsel, management believes that there are no such matters pending or threatened which will have a material effect on the financial position of the Company or the results of the Company's operations in any given year. F-12 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Foreign Operations Financial data applicable to the Company's foreign operations are as follows: 1995 1994 1993 -------- ------- -------- Net sales................................... $113,280 $97,848 $103,356 Net earnings................................ $ 4,291 $ 8,779 $ 10,730 Assets...................................... $113,852 $90,508 $ 82,789 Business Segment Data Sales by segment represent sales to unaffiliated customers only. Intersegment sales and transfers between geographic areas are nominal and have not been disclosed separately. 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
1995 1994 1993 -------- -------- -------- Sales Specialty chemicals....................................... $385,647 $393,544 $407,280 Specialty process equipment and controls.................. 279,866 196,213 151,068 -------- -------- -------- $665,513 $589,757 $558,348 -------- -------- -------- -------- -------- -------- Operating Profit Specialty chemicals....................................... $ 42,609 $ 60,783 $ 68,067 Specialty process equipment and controls.................. 40,154 31,195 25,967 General corporate expenses................................ (10,474) (10,884) (11,673) -------- -------- -------- 72,289 81,094 82,361 Interest expense.......................................... (8,364) (2,167) (1,093) Other income.............................................. 166 1,042 1,205 -------- -------- -------- Earnings before income taxes.............................. $ 64,091 $ 79,969 $ 82,473 -------- -------- -------- -------- -------- -------- Identifiable Assets Specialty chemicals....................................... $318,020 $313,457 $281,804 Specialty process equipment and controls.................. 150,320 103,151 69,279 -------- -------- -------- 468,340 416,608 351,083 Corporate................................................. 15,798 15,720 12,163 -------- -------- -------- $484,138 $432,328 $363,246 -------- -------- -------- -------- -------- -------- Depreciation and Amortization Specialty chemicals....................................... $ 11,510 $ 11,141 $ 10,628 Specialty process equipment and controls.................. 3,328 1,995 1,324 -------- -------- -------- 14,838 13,136 11,952 Corporate................................................. 197 162 124 -------- -------- -------- $ 15,035 $ 13,298 $ 12,076 -------- -------- -------- -------- -------- --------
F-13 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1995 1994 1993 -------- -------- -------- Capital Expenditures Specialty chemicals....................................... $ 15,076 $ 18,891 $ 12,057 Specialty process equipment and controls.................. 3,087 2,756 2,131 -------- -------- -------- 18,163 21,647 14,188 Corporate................................................. 86 63 111 -------- -------- -------- $ 18,249 $ 21,710 $ 14,299 -------- -------- -------- -------- -------- -------- Information by Major Geographic Segment 1995 1994 1993 -------- -------- -------- Sales United States............................................. $552,233 $491,909 $454,992 Europe.................................................... 94,347 88,693 93,808 Other..................................................... 18,933 9,155 9,548 -------- -------- -------- $665,513 $589,757 $558,348 -------- -------- -------- -------- -------- -------- Exports to Unaffiliated Customers Included in United States sales: Far East.................................................. $ 16,895 $ 19,858 $ 26,244 Latin America............................................. 12,225 15,027 10,183 Europe.................................................... 23,713 9,381 7,251 Other..................................................... 11,989 10,178 4,338 -------- -------- -------- 64,822 54,444 48,016 -------- -------- -------- Included in European sales: Far East.................................................. -- 10,117 8,649 Latin America............................................. 4,422 4,631 4,261 Other..................................................... 3,042 6,362 3,756 -------- -------- -------- 7,464 21,110 16,666 -------- -------- -------- $ 72,286 $ 75,554 $ 64,682 -------- -------- -------- -------- -------- -------- Operating Profit United States............................................. $ 77,893 $ 79,148 $ 79,536 Europe.................................................... 4,166 12,038 13,736 Other..................................................... 704 792 762 -------- -------- -------- 82,763 91,978 94,034 General corporate expenses................................ (10,474) (10,884) (11,673) -------- -------- -------- $ 72,289 $ 81,094 $ 82,361 -------- -------- -------- -------- -------- -------- Identifiable Assets United States............................................. $370,286 $341,820 $280,457 Europe.................................................... 105,408 85,578 77,203 Other..................................................... 8,444 4,930 5,586 -------- -------- -------- $484,138 $432,328 $363,246 -------- -------- -------- -------- -------- --------
F-14 CROMPTON & KNOWLES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Summarized Unaudited Quarterly Financial Data
1995 -------------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- -------- -------- Net sales........................................ $168,193 $175,617 $159,065 $162,638 Gross profit..................................... 51,634 51,818 44,606 43,801 Net earnings..................................... 13,196 12,058 8,077 7,162 Net earnings per common share.................... .27 .25 .17 .15 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 1994 -------------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- -------- -------- Net sales........................................ $133,594 $154,452 $142,821 $158,890 Gross profit..................................... 42,684 50,952 44,025 48,312 Net earnings..................................... 12,758 16,107 10,224 11,827 Net earnings per common share.................... .25 .31 .20 .24 Common dividends per share....................... .10 .12 .12 .12 Market price per common share: High........................................... 24 1/8 23 5/8 18 1/2 16 5/8 Low............................................ 19 5/8 17 3/8 15 7/8 13 7/8
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. F-15 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders CROMPTON & KNOWLES CORPORATION We have audited the consolidated balance sheets of Crompton & Knowles Corporation and subsidiaries as of December 30, 1995 and December 31, 1994 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the fiscal years in the three-year period ended December 30, 1995. 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 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crompton & Knowles Corporation and subsidiaries at December 30, 1995 and December 31, 1994 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 30, 1995 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Stamford, Connecticut January 24, 1996 F-16 CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) QUARTERS AND SIX MONTHS ENDED JUNE 29, 1996 AND JULY 1, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERS ENDED SIX MONTHS ENDED -------------------- -------------------- JUNE 29, JULY 1, JUNE 29, JULY 1, 1996 1995 1996 1995 -------- -------- -------- -------- Net sales........................................ $167,570 $175,617 $332,410 $343,810 -------- -------- -------- -------- Cost of products sold............................ 118,854 123,799 235,802 240,358 Selling, general and administrative.............. 27,564 26,736 54,658 52,158 Depreciation and amortization.................... 4,117 3,769 8,126 7,494 Interest......................................... 2,293 2,034 4,330 3,602 Other income..................................... (199) (13) (451) (241) -------- -------- -------- -------- Total costs and expenses....................... 152,629 156,325 302,465 303,371 -------- -------- -------- -------- Earnings before income taxes..................... 14,941 19,292 29,945 40,439 Income taxes..................................... 5,229 7,234 10,765 15,185 -------- -------- -------- -------- Net earnings..................................... $ 9,712 $ 12,058 $ 19,180 $ 25,254 -------- -------- -------- -------- -------- -------- -------- -------- Net earnings per common share.................... $ .20 $ .25 $ .40 $ .52 -------- -------- -------- -------- -------- -------- -------- -------- Dividends per common share....................... $ .135 $ .135 $ .27 $ .255 -------- -------- -------- -------- -------- -------- -------- -------- Average shares outstanding....................... 48,499 48,577 48,499 48,569 -------- -------- -------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-17 CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 29, 1996 AND DECEMBER 30, 1995 (IN THOUSANDS OF DOLLARS)
JUNE 29, DECEMBER 30, 1996 1995 -------- ------------ ASSETS CURRENT ASSETS Cash............................................................... $ 3,869 $ 918 Accounts receivable................................................ 128,173 112,693 Inventories........................................................ 170,147 154,846 Other current assets............................................... 29,070 23,038 -------- ------------ Total current assets........................................... 331,259 291,495 NON-CURRENT ASSETS Property, plant and equipment...................................... 134,204 129,991 Cost in excess of acquired net assets.............................. 60,594 51,922 Other assets....................................................... 11,312 10,730 -------- ------------ $537,369 $484,138 -------- ------------ -------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable...................................................... $ 75,358 $ 60,439 Accounts payable................................................... 58,913 49,415 Accrued expenses................................................... 39,212 35,136 Income taxes payable............................................... 6,050 3,747 Other current liabilities.......................................... 21,089 16,578 -------- ------------ Total current liabilities...................................... 200,622 165,315 -------- ------------ NON-CURRENT LIABILITIES Long-term debt..................................................... 79,000 64,000 Accrued postretirement liability................................... 7,768 7,559 Deferred income taxes.............................................. 7,170 7,217 STOCKHOLDERS' EQUITY Common stock....................................................... 5,336 5,336 Additional paid-in capital......................................... 59,567 59,440 Retained earnings.................................................. 240,326 234,113 Accumulated translation adjustment................................. 2,301 6,320 Treasury stock at cost............................................. (62,831) (62,972) Deferred compensation.............................................. (1,890) (2,190) -------- ------------ Total stockholders' equity..................................... 242,809 240,047 -------- ------------ $537,369 $484,138 -------- ------------ -------- ------------
See accompanying notes to consolidated financial statements. F-18 CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 29, 1996 AND JULY 1, 1995 (IN THOUSANDS OF DOLLARS)
JUNE 29, JULY 1, 1996 1995 -------- ------- Increase (decrease) to cash CASH FLOWS FROM OPERATING ACTIVITIES Net earnings........................................................... $ 19,180 $25,254 Adjustments to reconcile net earnings to net cash provided by operations: Depreciation and amortization........................................ 8,126 7,494 Deferred compensation................................................ 300 383 Changes in assets and liabilities, net............................... (18,638) (29,845) -------- ------- Net cash provided by operations.................................. 8,968 3,286 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions........................................................... (15,713) (8,633) Capital expenditures................................................... (6,209) (10,037) Other investing activities............................................. (954) (584) -------- ------- Net cash used by investing activities............................ (22,876) (19,254) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term borrowings..................................... 15,000 -- Change in notes payable................................................ 15,074 33,329 Net treasury stock activity............................................ 104 (3,395) Dividends paid......................................................... (12,967) (12,361) -------- ------- Net cash provided by financing activities........................ 17,211 17,573 -------- ------- CASH Effect of exchange rates on cash....................................... (352) 110 -------- ------- Change in cash......................................................... 2,951 1,715 Cash at beginning of period............................................ 918 1,832 -------- ------- Cash at end of period.................................................. $ 3,869 $ 3,547 -------- ------- -------- -------
See accompanying notes to consolidated financial statements. F-19 CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS QUARTER ENDED JUNE 29, 1996 (UNAUDITED) (IN THOUSANDS) PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS The information included in the foregoing consolidated financial statements is unaudited but reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Included in accounts receivable are allowances for doubtful accounts of $3,017 in 1996 and $3,269 at December 30, 1995. Accumulated depreciation amounted to $105,527 in 1996 and $99,292 at December 30, 1995. Accumulated amortization of cost in excess of acquired net assets amounted to $9,044 in 1996 and $8,281 at December 30, 1995. Other current liabilities primarily include customer deposits. It is suggested that the interim consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in the Company's 1995 Annual Report on Form 10-K. CAPITAL STOCK There are 53,361,072 common shares issued at $.10 par value, of which 5,321,763 shares and 5,351,962 shares were held in the treasury at June 29, 1996 and December 30, 1995, respectively. INVENTORIES Components of inventories are as follows JUNE 29, DEC. 30, 1996 1995 -------- -------- Finished goods........................................ $ 96,213 $ 89,177 Work in process....................................... 37,993 30,316 Raw materials and supplies............................ 35,941 35,353 -------- -------- $170,147 $154,846 -------- -------- -------- -------- EARNINGS PER COMMON SHARE The computation of earnings per common share is based on the weighted average number of common and common equivalent shares outstanding. 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. ACQUISITIONS In January 1996, the Company acquired ER-WE-PA, GMBH at a cost of $10,025 subject to audit adjustment. In April 1996, the Company acquired the Hartig line of industrial blow molding systems at a cost of $5,688. The acquisitions have been accounted for using the purchase method and, accordingly, F-20 CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) QUARTER ENDED JUNE 29, 1996 (UNAUDITED) (IN THOUSANDS) the acquired assets and liabilities have been recorded at their fair values at the dates of acquisition. The excess cost of the purchase price over fair value of net assets acquired in the amount of $9,142 is being amortized over forty years. The operating results of each acquisition are included in the consolidated statements of earnings since the date of acquisition. BUSINESS SEGMENT DATA QUARTER ENDED -------------------- JUNE 29, JULY 1, 1996 1995 -------- -------- SALES Specialty chemicals................................... $ 96,935 $101,229 Specialty process equipment and controls.............. 70,635 74,388 -------- -------- $167,570 $175,617 -------- -------- -------- -------- OPERATING PROFIT Specialty chemicals................................... $ 13,039 $ 13,133 Specialty process equipment and controls.............. 6,395 11,043 General corporate expense............................. (2,399) (2,863) -------- -------- Operating profit...................................... 17,035 21,313 Interest expense...................................... (2,293) (2,034) Other income.......................................... 199 13 -------- -------- Earnings before income taxes.......................... $ 14,941 $ 19,292 -------- -------- -------- -------- SIX MONTHS ENDED -------------------- JUNE 29, JULY 1, 1996 1995 -------- -------- SALES Specialty chemicals................................... $193,018 $203,771 Specialty process equipment and controls.............. 139,392 140,039 -------- -------- $332,410 $343,810 -------- -------- -------- -------- OPERATING PROFIT Specialty chemicals................................... $ 25,830 $ 28,724 Specialty process equipment and controls.............. 13,501 21,100 General corporate expense............................. (5,507) (6,024) -------- -------- Operating profit...................................... 33,824 43,800 Interest expense...................................... (4,330) (3,602) Other income.......................................... 451 241 -------- -------- Earnings before income taxes.......................... $ 29,945 $ 40,439 -------- -------- -------- -------- F-21 CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) QUARTER ENDED JUNE 29, 1996 (UNAUDITED) (IN THOUSANDS) RECENT EVENT Pursuant to an Agreement and Plan of Merger, dated as of April 30, 1996 (the "Merger Agreement"), Crompton has agreed to the merger (the "Merger") of Tiger Merger Corp., a Delaware corporation and a wholly owned subsidiary of Crompton ("Subcorp"), with and into Uniroyal Chemical Corporation, a Delaware corporation ("Uniroyal"), subject to the approval of the transaction by the stockholders of each of Uniroyal and Crompton at special meetings thereof currently scheduled to be held on August 21, 1996. The Board of Directors of Crompton has fixed the close of business on July 9, 1996, as the record date for determination of holders of Crompton common stock entitled to notice of and to vote at such meeting of Crompton stockholders. The Merger will be accounted for on a pooling-of-interests basis and will be consummated on the terms and subject to the conditions set forth in the Merger Agreement (which was filed by Crompton with the Commission as an exhibit to Crompton's Quarterly Report on Form 10-Q for the quarter ended March 30, 1996), pursuant to which, among other things, (i) Subcorp will be merged with and into Uniroyal as a result of which Uniroyal will become a wholly owned subsidiary of Crompton, (ii) each issued and outstanding share (other than shares, if any, held in the treasury of Uniroyal or held by Crompton or any of its subsidiaries, which will be canceled) of common stock, $0.01 par value per share (together with the attached preferred stock purchase rights, "Uniroyal Common Stock"), of Uniroyal will be converted into 0.9577 shares of Crompton common stock (with cash in lieu of fractional shares), and (iii) each issued and outstanding share (other than shares, if any, held in the treasury of Uniroyal or held by Crompton or any of its subsidiaries, which will be canceled, and other than shares as to which dissenters' appraisal rights have been perfected) of Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), of Uniroyal and of Series B Preferred Stock, par value $0.01 per share ("Series B Preferred Stock," and together with the Series A Preferred Stock, "Uniroyal Preferred Stock"), of Uniroyal will be converted into 6.3850 shares of Crompton common stock (with cash in lieu of fractional shares). It is currently anticipated that the Merger will be consummated shortly after the special meetings of Crompton and Uniroyal stockholders, assuming the Merger Agreement and the Merger are approved at such meetings and all other conditions of the Merger have been satisfied or waived. Crompton, Uniroyal and the Directors of Uniroyal were named as defendants in a purported class action lawsuit (the "Stockholder Action") filed in connection with the proposed Merger in the Court of Chancery, County of New Castle, State of Delaware. Fassbender v. Mazaika, C.A. No. 14980. The Stockholder Action alleged, among other things, that defendant directors breached their fiduciary duties by pursuing the Merger at an allegedly unfair and inadequate price; by agreeing to the proposed Merger without having conducted an "auction process or active market check" or a full and thorough investigation; and by agreeing to the allegedly unfair terms of the Merger. The Stockholder Action was brought on behalf of a purported class of persons consisting of the stockholders of Uniroyal other than defendants. Counsel for Uniroyal, Crompton and Subcorp and the counsel for plaintiff entered into a memorandum of understanding (the "Memorandum of Understanding") dated August 5, 1996 in connection with the settlement of the Stockholder Action. Among other things, the Memorandum of Understanding provides that, in full settlement of the claims asserted, (i) the Merger Agreement be amended so as to reduce the fee payable to Crompton upon termination of the Merger Agreement under certain circumstances from $50 million to $35 million, (ii) Uniroyal promptly disseminate to Uniroyal F-22 CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) QUARTER ENDED JUNE 29, 1996 (UNAUDITED) (IN THOUSANDS) stockholders its third quarter results, (iii) the defendants publicly disclose the proposed settlement by a filing with the Commission and (iv) the plaintiff withdraw his request for a preliminary injunction enjoining consummation of the Merger. The Merger Agreement was amended as of August 7, 1996 to reduce the termination fee as contemplated in the Memorandum of Understanding. The consummation of the proposed settlement is subject to (i) completion by the plaintiff of discovery, (ii) execution of definitive settlement documents, (iii) notice to members of the plaintiff class and (iv) approval by the Delaware Court of Chancery. In connection with the proposed settlement, the defendants have agreed that they will not oppose plaintiff's counsel's application for an award of fees and expenses not to exceed $350,000 in the aggregate, to be paid by Crompton and/or Uniroyal. Uniroyal and its directors have denied, and continue to deny, that any of them have committed any violations of law or breaches of duty to plaintiff or any member of the plaintiff class, Uniroyal or its stockholders, or anyone else. The defendants entered into the Memorandum of Understanding in order to eliminate the distraction and expense of further litigation. F-23 UNIROYAL CHEMICAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL YEAR ---------------------------------------- 1995 1994 1993 ---------- ----------- ----------- Net sales............................................ $1,079,321 $ 946,454 $ 907,862 Operating costs and expenses: Cost of products sold.............................. 758,970 675,578 651,021 Selling, general and administrative expenses....... 172,274 156,109 147,186 Write-off of intangible assets (Note 7)............ 191,000 ---------- ----------- ----------- Operating income (loss).............................. 148,077 (76,233) 109,655 Interest expense (Note 8)............................ 114,034 128,567 120,567 Other income (expense), net.......................... 326 (125) (7,347) ---------- ----------- ----------- Income (loss) before provision (benefit) for income taxes, extraordinary charges and cumulative effect of accounting changes.............................. 34,369 (204,925) (18,259) Provision (benefit) for income taxes (Note 11)....... (65,060) 8,918 6,533 ---------- ----------- ----------- Income (loss) before extraordinary charges and cumulative effect of accounting changes.............. 99,429 (213,843) (24,792) Extraordinary charges--early retirement of debt (Notes 3 and 8): Debt Repurchase, net of income tax benefit of $4,490........................................... (8,279) The Company Refinancing, net of income tax benefit of $700.............................................. (71,832) Uniroyal Chemical Refinancing, net of income tax benefit of $699...................................... (28,253) Cumulative effect of accounting changes for: Environmental restoration liability, net of income tax benefit of $4,884 (Note 16).................. (11,530) Other post retirement benefits, net of income tax benefit of $28,913 (Note 12)......................... (100,326) ---------- ----------- ----------- Net income (loss).................................... 91,150 (213,843) (236,733) Preferred stock dividends earned during the period... 395 292 267 ---------- ----------- ----------- Net income (loss) applicable to common stockholders....................................... $ 90,755 $ (214,135) $ (237,000) ---------- ----------- ----------- ---------- ----------- ----------- Per share data: Income (loss) before extraordinary charges and cumulative effect of accounting changes.............. $ 5.34 $ (18.62) $ (2.08) Extraordinary charges................................ (0.44) -- (8.40) Cumulative effect of accounting changes.............. -- -- (9.38) Preferred stock dividends............................ (0.02) (0.03) (0.02) ---------- ----------- ----------- Net income (loss) applicable to common stockholders....................................... $ 4.88 $ (18.65) $ (19.88) ---------- ----------- ----------- ---------- ----------- ----------- Weighted average number of shares outstanding........ 18,606,637 11,484,176 11,920,199 ---------- ----------- ----------- ---------- ----------- -----------
See Notes to Consolidated Financial Statements. F-24 UNIROYAL CHEMICAL CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
1995 1994 ---------- ---------- Assets Current assets Cash and cash equivalents (Note 4)............................... $ 29,519 $ 121,344 Accounts receivable--net (Notes 5 and 8)......................... 172,081 154,444 Inventories (Notes 2 and 8)...................................... 177,647 153,117 Deferred income taxes and other current assets................... 26,287 7,373 ---------- ---------- Total current assets......................................... 405,534 436,278 Property, plant and equipment--net (Notes 2 and 6)................. 394,472 340,899 Investments in and advances to unconsolidated affiliates (Notes 2 and 7)............................................................. 31,355 27,403 Intangible assets--net (Notes 2 and 7)............................. 241,710 208,153 Deferred income taxes (Note 11).................................... 63,890 1,284 Deferred charges and other non-current assets--net (Note 2)........ 34,746 42,000 ---------- ---------- $1,171,707 $1,056,017 ---------- ---------- ---------- ---------- Liabilities and Stockholders' Equity (Deficit) Current liabilities Short-term debt.................................................. $ 33,305 $ 24,494 Current portion of long-term debt (Note 8)....................... 11,434 2,917 Accounts payable................................................. 94,826 82,386 Accrued payroll and employee benefits............................ 27,291 21,611 Accrued interest................................................. 25,988 30,454 Accrued income taxes............................................. 29,150 28,272 Other accrued expenses........................................... 23,936 18,551 ---------- ---------- Total current liabilities.................................... 245,930 208,685 Long-term debt (Notes 3 and 8)..................................... 910,156 1,048,225 Postretirement benefits other than pensions (Note 12).............. 180,413 180,688 Accruals for environmental restoration (Note 16)................... 58,690 63,270 Pension liability (Note 13)........................................ 47,694 47,455 Other non-current liabilities...................................... 28.053 34,857 Commitments and contingencies (Notes 14, 15 and 16) Redeemable capital stock (Note 10)................................. -- 24,996 Stockholders' equity (deficit) (Notes 3 and 10) Preferred Stock, $0.01 par value; 50,000,000 shares authorized: Series A cumulative redeemable preferred stock, 29,721 shares issued and outstanding, stated at the total liquidation preference......................................................... 2,972 2,972 Series B preferred stock, 12,000 shares issued and outstanding, stated at the total liquidation preference......................... 1,200 1,200 Common Stock, $0.01 par value: 205,000,000 shares authorized, 25,289,831 shares issued (including 1,139,873 treasury shares) (Note 3) 253 -- Common Stock, $0.01 par value: Class A, 200,000,000 shares authorized, (8,702,179 shares issued including 511,724 treasury shares).................... -- 87 Class B, 393,311 shares issued, including 16,691 treasury shares............................................................. -- 4 Additional paid-in capital....................................... 176,799 -- Accumulated deficit.............................................. (447,460) (538,610) Pension liability adjustment..................................... (3,617) (1,903) Cumulative translation adjustment................................ (18,488) (9,964) Treasury stock, at cost.......................................... (10,888) (5,945) ---------- ---------- Total stockholders' deficit.................................. (299,229) (552,159) ---------- ---------- $1,171,707 $1,056,017 ---------- ---------- ---------- ----------
See Notes to Consolidated Financial Statements. F-25 UNIROYAL CHEMICAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL ------------------- ---------------------------- PAID-IN ACCUMULATED SERIES A SERIES B NO CLASS CLASS A CLASS B CAPITAL DEFICIT -------- -------- -------- ------- ------- ---------- ----------- Balance, September 30, 1992...................... $ 81 $ 4 $ 274 $ (68,621) Net loss........................................ (236,733) Pension liability adjustment (Note 13).......... Proceeds from the exercise of warrants (Note 10).............................................. 1 99 Purchase of shares for treasury................. Translation adjustment.......................... Reclassification of Preferred Stock............. $2,972 $1,200 Adjustment of Redeemable Capital Stock carrying value............................................ (350) (17,986) Dividends on Preferred Stock.................... (980) -------- -------- --- ------- ------- ---------- ----------- Balance, September 30, 1993...................... 2,972 1,200 82 4 23 (324,320) Net loss........................................ (213,843) Pension liability adjustment (Note 13).......... Proceeds from the exercise of warrants (Note 10).............................................. 1 99 Purchase of shares for treasury................. Translation adjustment.......................... Reclassification of Common Stock................ 4 4,061 Adjustment of Redeemable Capital Stock carrying value............................................ (4,183) (447) -------- -------- --- ------- ------- ---------- ----------- Balance, October 2, 1994......................... 2,972 1,200 87 4 (538,610) Net income...................................... 91,150 Pension liability adjustment (Note 13).......... Proceeds from the exercise of warrants (Note 10).............................................. $ 3 332 Purchase rights exercised....................... (38) Translation adjustment.......................... IPO proceeds--net............................... 134 146,492 Reclassification of Common Stock (Note 10)...... 91 (87) (4) Reclassification of Redeemable Capital Stock (Note 10)........................................ 25 30,013 -------- -------- --- ------- ------- ---------- ----------- Balance, October 1, 1995......................... $2,972 $1,200 $253 $ -- $ -- $176,799 $(447,460) -------- -------- --- ------- ------- ---------- ----------- -------- -------- --- ------- ------- ---------- ----------- PENSION CUMULATIVE LIABILITY TRANSLATION TREASURY ADJUSTMENT ADJUSTMENT STOCK TOTAL ---------- ----------- -------- --------- Balance, September 30, 1992.................................... $ (2,175) $ (4,370) $ (74,807) Net loss...................................................... (236,733) Pension liability adjustment (Note 13)........................ (506) (506) Proceeds from the exercise of warrants (Note 10).............. 100 Purchase of shares for treasury............................... $ (5,757) (5,757) Translation adjustment........................................ (5,798) (5,798) Reclassification of Preferred Stock........................... 4,172 Adjustment of Redeemable Capital Stock carrying value......... (18,336) Dividends on Preferred Stock.................................. (980) ---------- ----------- -------- --------- Balance, September 30, 1993.................................... (2,681) (10,168) (5,757) (338,645) Net loss...................................................... (213,843) Pension liability adjustment (Note 13)........................ 778 778 Proceeds from the exercise of warrants (Note 10).............. 100 Purchase of shares for treasury............................... (188) (188) Translation adjustment........................................ 204 204 Reclassification of Common Stock.............................. 4,065 Adjustment of Redeemable Capital Stock carrying value......... (4,630) ---------- ----------- -------- --------- Balance, October 2, 1994....................................... (1,903) (9,964) (5,945) (552,159) Net income.................................................... 91,150 Pension liability adjustment (Note 13)........................ (1,714) (1,714) Proceeds from the exercise of warrants (Note 10).............. 335 Purchase rights exercised..................................... 99 61 Translation adjustment........................................ (8,524) (8,524) IPO proceeds--net............................................. 146,626 Reclassification of Common Stock (Note 10).................... -- Reclassification of Redeemable Capital Stock (Note 10)........ (5,042) 24,996 ---------- ----------- -------- --------- Balance, October 1, 1995....................................... $ (3,617) $ (18,488) $(10,888) $(299,229) ---------- ----------- -------- --------- ---------- ----------- -------- ---------
See Notes to Consolidated Financial Statements. F-26 UNIROYAL CHEMICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FISCAL YEAR --------------------------------- 1995 1994 1993 -------- --------- -------- Cash Flows from (used in) Operating Activities Income (loss) before extraordinary charges and cumulative effect of accounting changes................................ $ 99,429 $(213,843) $(24,792) Adjustments for non-cash items: Write-off of intangible assets.......................... 191,000 Depreciation............................................ 44,239 44,390 42,192 Amortization............................................ 20,844 28,451 35,600 Non-cash interest and amortization of debt expense...... 18,781 37,782 19,105 Gain on sales of assets, net (Note 18).................. (4,163) Change in deferred income taxes (Note 11)............... (76,865) (3,569) (8,001) Other non-cash charges, net............................. 590 3,417 3,392 Change in current assets and liabilities: Accounts receivable..................................... (18,823) (8,336) (13,137) Inventories............................................. (8,425) (12,497) (11,662) Accounts payable........................................ 12,296 6,522 5,704 Other current assets and liabilities, net............... 8,067 9,539 (2,190) Change in non-current liabilities......................... (13,905) (6,005) (1,057) Other operating activities--net........................... (310) (919) 193 -------- --------- -------- Net cash flows from operating activities.................. 85,918 71,769 45,347 -------- --------- -------- Cash Flows from (used in) Investing Activities Additions to property, plant and equipment................ (69,495) (30,380) (46,061) Acquisitions, including working capital of $17,756 in 1995 (Note 18)................................................... (98,497) (6,231) (1,352) Proceeds from sales of assets (Note 18)................... 26,006 Additional investments in affiliates...................... (5,636) (5,921) Other investing activities--net........................... (1,202) 510 (215) -------- --------- -------- Net cash flows used in investing activities............... (174,830) (16,016) (47,628) -------- --------- -------- Cash Flows from (used in) Financing Activities Issuance of long-term debt................................ 45,055 1,031,265 Repayments of long-term debt (including related premiums)............................................... (197,768) (2,960) (977,585) Debt issuance costs....................................... (2,945) (690) (42,151) Short-term borrowings--net................................ 9,301 15,059 5,860 Proceeds from the Offering--net (Note 3).................. 146,626 Purchases of treasury stock............................... (1,161) (3,001) (5,757) Other financing activities--net........................... (780) 562 229 -------- --------- -------- Net cash flows from (used in) financing activities........ (1,672) 8,970 11,861 -------- --------- -------- Effects of exchange rate changes on cash.................. (1,241) 401 (2,083) -------- --------- -------- Increase (decrease) in cash and cash equivalents.......... (91,825) 65,124 7,497 Cash and cash equivalents, beginning of period............ 121,344 56,220 48,723 -------- --------- -------- Cash and cash equivalents, end of period.................. $ 29,519 $ 121,344 $ 56,220 -------- --------- -------- -------- --------- -------- Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest--net (Note 4).................................. $ 99,379 $ 89,968 $105,620 Income taxes............................................ 8,671 4,910 7,740
See Notes to Consolidated Financial Statements. F-27 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION AND NATURE OF OPERATIONS Uniroyal Chemical Corporation (formerly UCC Investors Holding, Inc.) (the "Company") was incorporated in Delaware in December 1988 for the sole purpose of acquiring Uniroyal Chemical Company, Inc. ("Uniroyal Chemical") in October 1989 (the "Acquisition"). Immediately following the Company Refinancing (see Note 8), through a series of mergers, Uniroyal Chemical became a direct wholly-owned subsidiary of the Company. Uniroyal Chemical, a New Jersey corporation, directly and indirectly through a number of domestic and foreign subsidiaries and affiliates, manufactures and markets rubber chemicals and polymers, crop protection chemicals and other specialty chemicals. The Company sells its rubber chemical and polymer products primarily to the tire and automotive industries, commercial building and construction materials manufacturers, and manufacturers of engineered rubber products. Its crop protection chemicals are sold primarily to domestic agricultural distributors, seed companies and multinational chemical companies and its other specialty chemicals are sold primarily to plastics, petroleum, petrochemical and recreational equipment manufacturers. The Company's products are sold both domestically and internationally with approximately 40% of its sales derived from markets outside the United States. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year During fiscal 1994, the Company conformed to a 52 or 53 week fiscal year ending on the Sunday nearest September 30. The fiscal years for the financial statements presented were for the 52 weeks ended October 1, 1995 and October 2, 1994 and the year ended September 30, 1993. Principles of Consolidation The accompanying financial statements include the accounts of the Company and its 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 accounts and transactions have been eliminated. Translation 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 reported as a component of stockholders' equity (deficit). For foreign subsidiaries operating in highly inflationary economies, principally the Brazilian operations, monetary balance sheet accounts and related revenues 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. Operations for fiscal years 1995 and 1994 included translation gains of $1.6 million and $2.7 million, respectively, while fiscal year 1993 included a translation loss of $1.9 million. In addition, foreign currency transaction losses charged to operations for fiscal years 1995, 1994 and 1993 were $3.8 million, $6.6 million and $4.3 million, respectively. F-28 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Inventories Inventories are stated at the lower of cost or market. Cost is determined on a monthly average basis for the materials component and on a first-in, first-out (FIFO) basis for other components. A summary of inventory components is as follows: 1995 1994 -------- -------- (IN THOUSANDS) Finished goods........................................ $129,263 $107,923 Work in process....................................... 7,437 8,453 Raw materials......................................... 40,947 36,741 -------- -------- $177,647 $153,117 -------- -------- -------- -------- Property, Plant and Equipment Property, plant and equipment is stated at cost and where appropriate, includes interest capitalized during construction. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets which range from 2 to 39 years. Intangible Assets The cost of patents and unpatented technology is amortized over their estimated useful lives averaging approximately eleven years. The excess of cost over the fair value of net assets of businesses acquired is being amortized on a straight-line basis over twenty to forty years. A summary of intangible assets is as follows:
1995 1994 -------- -------- (IN THOUSANDS) Excess of cost over net assets acquired, net of accumulated amortization of $21,281 and $17,194.................................. $133,726 $121,894 Patents and unpatented technology, net of accumulated amortization of $58,457 and $48,374.................................................... 51,867 59,070 -------- -------- Other intangible assets, net of accumulated amortization of $29,356 and $25,607.............................................................. 56,117 27,189 -------- -------- $241,710 $208,153 -------- -------- -------- --------
Each year 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 determined that any assets have been permanently impaired, the amount of the impaired asset is written-off against earnings in the quarter in which the impairment is determined. See Note 7 for further discussion of intangible assets. Deferred debt issuance expenses are being amortized using the interest method over the expected terms of the respective debt. F-29 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Research and Development Research and development costs, which are expensed as incurred, were $37.8 million, $34.2 million and $32.4 million during fiscal years 1995, 1994 and 1993, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3--INITIAL PUBLIC OFFERING AND DEBT REPURCHASE During the second quarter of fiscal 1995, the Company completed an initial public offering (the "Offering") and sold 13,350,000 shares of its common stock at $12.00 per share. The proceeds of the Offering, after deducting underwriting discounts, other fees and expenses were $146.6 million. The net proceeds along with $45.7 million of available cash and borrowings under the 1993 Credit Facility were used to (i) retire an aggregate of $181.7 million of the Company's 12% Subordinated Discount Notes, 11% Senior Subordinated Notes, and 10.5% Senior Notes (collectively the "Debt Repurchase") and (ii) pay related premiums and accrued interest. Interest expense will be reduced by approximately $20.9 million annually as a result of the Debt Repurchase (see Note 20). As a result of the Debt Repurchase, the Company recognized an extraordinary charge of $8.3 million comprised of redemption premiums ($5.9 million), and the write-off of unamortized financing fees ($6.9 million), net of related tax benefit of $4.5 million. NOTE 4--CASH AND CASH EQUIVALENTS The Company considers cash in banks, certificates of deposit and commercial paper maturing within 90 days of issuance as cash and cash equivalents for the purposes of reporting cash flows. Cash and cash equivalents presented on the balance sheet include cash equivalents of $5.7 million and $90.2 million at October 1, 1995 and October 2, 1994, respectively. NOTE 5--ACCOUNTS RECEIVABLE Accounts receivable, net, consisted of the following: 1995 1994 -------- -------- (IN THOUSANDS) Trade accounts receivable............................. $162,169 $133,356 Notes receivable...................................... 1,812 2,435 Due from affiliates................................... 5,864 8,740 Other receivables..................................... 5,109 12,365 Less--allowance for doubtful accounts................. (2,873) (2,452) -------- -------- $172,081 $154,444 -------- -------- -------- -------- F-30 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, net, consisted of the following: 1995 1994 --------- --------- (IN THOUSANDS) Land and land improvements.......................... $ 22,223 $ 16,619 Buildings and building improvements................. 75,315 65,423 Machinery and equipment............................. 508,724 444,303 Less--accumulated depreciation and amortization..... (211,790) (185,446) --------- --------- $ 394,472 $ 340,899 --------- --------- --------- --------- NOTE 7--WRITE-OFF OF INTANGIBLE ASSETS As stated in Note 2, it has been the policy of the Company to evaluate 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 asset is written-off against earnings in the current period. In connection with the Company's acquisition of Uniroyal Chemical in 1989, the $800 million purchase price resulted in the recognition of identifiable intangible assets such as patented and unpatented technology and trademarks and tradenames which are attributable to specific businesses and the recognition of goodwill which was allocated to the businesses based on their pro rata profitability at the time of the acquisition. For the period subsequent to the acquisition through September 1993, the Company's operating income had grown at a compound annual rate of 1.0% principally because of flat earnings of the Chemicals and Polymers ("C&P") Division during this period of time. These results were due principally to prolonged recessionary conditions in many of the industrialized regions of the world and economic difficulties in Eastern Europe, the former Soviet Union and Brazil. While these factors impacted the C&P business since 1990, and had prevented earnings in this business from growing, in calendar 1994 there was a pronounced acceleration in the downward pricing pressure on rubber chemical products that began in October 1993 which caused a decline in earnings of the C&P business in fiscal 1994. The existence of excess capacity in the marketplace and an increasing trend by customers in the automotive and tire industries worldwide who sought to lower their operating costs in part through price reductions from their suppliers were the primary factors causing this pricing pressure. Due to that recent decline in earnings, management projected earnings and cash flow of the C&P business through the year 2028 (40 years from the date of the 1989 acquisition). The projection reflected competitive conditions affecting selling prices and an assumption that per unit manufacturing costs would be maintained at current levels. Selling, general and administrative costs were expected to increase at the expected rate of inflation of 3%. Capital spending was limited to maintaining current manufacturing capacity plus amounts expected to be necessary to comply with current environmental regulations. This projected level of future cash flow indicated that the Company could have been required to refinance a portion of its debt at maturity because projected cash flow alone would not have been sufficient to repay such debt. Based on this projection of undiscounted operating income before amortization of intangible assets and after considering interest on indebtedness and payments for environmental restoration, the Company concluded that the existing unamortized cost of the intangible F-31 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 7--WRITE-OFF OF INTANGIBLE ASSETS--(CONTINUED) assets associated with the C&P business could not be recovered from future cash flows from this business, and the value of such assets was therefore permanently impaired. Consequently, the Company wrote off the $191.0 million carrying value of such assets during the quarter ended March 31, 1994, comprised of goodwill ($119.1 million), patented and unpatented technology ($54.0 million), trademarks and tradenames ($11.7 million) and investments in affiliates ($6.2 million), to reflect the Company's best estimates of future operating results and cash flows. Management believes that the intangible assets associated with the Company's other two businesses, Crop Protection and Specialties, are recoverable from the projected cash flows of their respective businesses and are therefore not impaired. NOTE 8--LONG-TERM DEBT A summary of long-term debt is as follows:
1995 1994 -------- ---------- (IN THOUSANDS) Long-term debt--the Company: 10.5% Senior Notes Due 2002........................................ $283,078 $ 300,000 11% Senior Subordinated Notes Due 2003............................. 232,175 325,000 12% Subordinated Discount Notes Due 2005........................... 91,857 148,476 -------- ---------- Total long-term debt--the Company.............................. 607,110 773,476 -------- ---------- Long-term debt--Uniroyal Chemical: 9% Senior Notes Due 2000........................................... 270,000 270,000 Italian Financing.................................................. 39,468 -- Bahamian Financing................................................. 3,812 6,353 Other.............................................................. 1,200 1,313 -------- ---------- Total long-term debt--Uniroyal Chemical........................ 314,480 277,666 -------- ---------- Less--Amounts due within one year.................................. (11,434) (2,917) -------- ---------- Total long-term debt........................................... $910,156 $1,048,225 -------- ---------- -------- ----------
THE COMPANY'S DEBT The Company Refinancing On February 8, 1993, the Company completed a refinancing plan (the "Company Refinancing") designed to improve its operating and financial flexibility by reducing its future interest expense, extending the maturity of a substantial portion of its debt and enhancing its liquidity. The Company Refinancing included the following primary components: (i) the issuance of $300 million of 10.5% Senior Notes Due 2002, $325 million of 11.0% Senior Subordinated Notes Due 2003 and $125 million initial accreted value of 12.0% Subordinated Discount Notes Due 2005 (collectively the "New Notes"); (ii) the repayment of the Company's 14% Senior Discount Notes and Uniroyal Chemical Acquisition Corporation's ("UCAC"), Uniroyal Chemical's parent company prior to UCAC's merger with and into the Company, 13.5% Senior Subordinated Notes and 14.25% Subordinated Notes (collectively the "Old Notes"); and (iii) the restructuring of the Company's then existing holding company structure (see F-32 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--LONG-TERM DEBT--(CONTINUED) Note 1). The Company Refinancing resulted in an extraordinary charge of $71.8 million, during the second quarter of fiscal 1993, comprised of redemption premiums on the Old Notes ($52.3 million) and the write-off of unamortized debt issuance costs and debt discounts (together $14.1 million) and other fees and expenses ($6.1 million), net of a related tax benefit of $0.7 million. 10.5% Senior Notes The 10.5% Senior Notes Due 2002 (the "10.5% Senior Notes") were issued by UCC Investors Holding, Inc. ("Holding") (now the Company), and are unsecured. The 10.5% Senior Notes are not redeemable prior to maturity except that up to $105 million aggregate principal amount is redeemable, in whole or in part, at the option of the Company from the proceeds of one or more public stock offerings of the Company at 110% of the principal then outstanding, plus accrued and unpaid interest, if redeemed at any time prior to February 1, 1996 (See Note 3). 11% Senior Subordinated Notes The 11% Senior Subordinated Notes Due 2003 (the "11% Senior Subordinated Notes") were issued by Holding (now the Company) and are unsecured. The 11% Senior Subordinated Notes are redeemable in whole or in part, at the option of the Company 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. In addition, up to $113.75 million aggregate principal amount is redeemable in whole or in part at the option of the Company from the proceeds of one or more public stock offerings of the Company at 110% of the principal amount then outstanding, plus accrued and unpaid interest, at any time prior to February 1, 1996 (See Note 3). 12% Subordinated Discount Notes The 12% Subordinated Discount Notes Due 2005 (the "12% Subordinated Discount Notes") were issued by Holding (now the Company), and after the Debt Repurchase, have a final accreted value of $126.6 million at May 1, 1998 and are unsecured. Beginning May 1, 1998, cash interest will accrue on these securities and will be payable semiannually. The 12% Subordinated Discount Notes are redeemable in whole or in part, at the option of the Company anytime after May 1, 1998, at 100% of their principal amount, plus accrued and unpaid interest. In addition, an amount representing an aggregate of up to 35% of their principal amount at maturity, in whole or in part, is redeemable at the option of the Company, from the proceeds of one or more public stock offerings at a redemption price (expressed as a percentage of accreted value as of the redemption date) plus accrued and unpaid interest at 111%, if redeemed prior to February 1, 1996 (see Note 3). Upon a change in control (as defined in the related indentures), the Company shall make an offer to purchase the New Notes at a purchase price equal to 101% of the principal amounts (or accreted value), thereof, plus accrued and unpaid interest. UNIROYAL CHEMICAL DEBT Uniroyal Chemical Refinancing On September 1, 1993, Uniroyal Chemical completed a refinancing plan (the "Uniroyal Chemical Refinancing") designed to further improve the Company's operating and financial flexibility and enhance its opportunities for growth by extending the maturity of a significant portion of its debt and F-33 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--LONG-TERM DEBT--(CONTINUED) enhancing its liquidity. The Uniroyal Chemical Refinancing consisted of proceeds from the offering of $270 million principal amount of 9% Senior Notes Due 2000 (the "9% Senior Notes") which together with available cash was used to redeem and repay $270 million aggregate principal amount of Uniroyal Chemical's Senior Secured Notes due March 31, 1997 (the "Senior Secured Notes"). In connection with the Uniroyal Chemical Refinancing, Uniroyal Chemical recognized an extraordinary charge of $28.3 million comprised of redemption premiums $(27.3 million), the write-off of unamortized debt issue costs $(5.7 million), the write-off of an unamortized deferred gain related to a previously settled interest rate swap contract $(4.2 million) and other fees and expenses $(0.2 million), net of a related tax benefit of $0.7 million. 9% Senior Notes The 9% Senior Notes were issued by Uniroyal Chemical and are unsecured. The 9% Senior Notes are not redeemable prior to maturity, except upon a change in control (as defined in the related indenture) whereupon Uniroyal Chemical shall make an offer 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. The 9% Senior Notes rate pari passu in right of payment with all existing and future senior indebtedness of Uniroyal Chemical, including the 1993 Credit Facility. Italian Financing During the second quarter of fiscal 1995, Uniroyal Chemical's subsidiary in Italy borrowed $56.7 million (the "Italian Financing") to purchase the worldwide crop protection business of Solvay Duphar B.V. (the "Duphar Acquisition"). The Italian Financing is comprised of a long-term amount of $44.8 million (the "Loan") and a revolving credit facility amount of $11.9 million (the "Facility") and terminates on March 31, 2000. The Loan requires ten semiannual principal payments beginning on September 30, 1995 with the last payment due on March 31, 2000. The interest rate on the Loan is based on the Italian interbank rate offered in Rome (RIBOR) or the interbank interest rate offered on London (LIBOR), as set forth in the Italian Financing loan agreement, and resets at each semiannual principal payment date. The interest rate on the Loan at October 1, 1995 was 12.8%. Cash advances under the Facility may be disbursed with one, two, three or six month maturities determined by the Company's request. The interest rate on each cash advance under the Facility is determined on the same basis as the Loan and must be repaid at the maturity date. Outstanding borrowings under the Facility at October 1, 1995 were $6.2 million with an interest rate of 12.4%. The Italian Financing is secured by mortgages on certain of the property, plant and equipment owned by Uniroyal Chemical's Italian subsidiary. Bahamian Financing During the first fiscal quarter of 1993, Uniroyal Chemical's subsidiary in the Bahamas borrowed $10.8 million under a financing arrangement (the "Bahamian Financing") guaranteed by the Overseas Private Investment Corporation ("OPIC"), a United States quasi-governmental agency. The proceeds of the Bahamian Financing were used to repay Uniroyal Chemical in the United States for advances made to the Bahamian subsidiary in connection with the 1991 purchase and retrofitting of a manufacturing facility in that country. The Bahamian Financing requires quarterly principal payments aggregating $2.5 million in fiscal year 1996 and $1.3 million in fiscal year 1997. These payments will be funded from the operations of the Bahamian facility. The interest rate on the Bahamian Financing is F-34 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--LONG-TERM DEBT--(CONTINUED) fixed at approximately 7.6% and interest is payable quarterly. The Bahamian Financing is secured by a mortgage on certain of the property, plant and equipment at the aforementioned facility. Credit Commitments During 1990, Uniroyal Chemical, together with a wholly-owned subsidiary, Gustafson, Inc., entered into a $100 million credit agreement (the "Credit Facility") with a syndicate of banks led by Citibank N.A., as agent. In connection with the Uniroyal Chemical Refinancing, Uniroyal Chemical renewed and extended the Credit Facility pursuant to an amended and restated credit agreement (the "1993 Credit Facility"). Borrowings under the 1993 Credit Facility are limited to the lesser of (i) a borrowing base related to the amount of supporting collateral or (ii) $100 million and in each case reduced by certain letters of credit, guarantees and collateral for interest rate swap agreements. The borrowings are secured by domestic accounts receivable and inventory. The borrowings under the 1993 Credit Facility at October 1, 1995 were $17.6 million, however, Uniroyal Chemical could have borrowed up to $71.2 million from this facility. Uniroyal Chemical also has lines of credit, which are principally unsecured, available to finance foreign operations. Unused foreign lines of credit at October 1, 1995 aggregated $38.1 million. The average amount of short-term borrowings outstanding during the periods ending October 1, 1995, October 2, 1994 and September 30, 1993 were $28.1 million, $10.2 million, and $7.4 million, respectively. The weighted average interest rate on short-term borrowings at October 1, 1995, October 2, 1994, and September 30, 1993 was 8.8%, 5.8% and 8.2%, respectively. Debt Covenants The Company's various debt agreements contain covenants which limit their ability to incur additional debt, pay cash dividends or make certain other payments. The 1993 Credit Facility requires Uniroyal Chemical to maintain certain financial ratios and to maintain an agreed upon level of net worth. Payments from Uniroyal Chemical to the Company (with certain exceptions) are generally limited to funds needed to service debt, to pay dividends on the Company's preferred stock and for certain other purposes. If the Company or any of its subsidiaries is in default of payment or other provisions permitting acceleration under any agreement governing debt with a principal amount in excess of $5.0 million, Uniroyal Chemical would be prohibited from transferring any funds to the Company. Maturities At October 1, 1995, the scheduled maturities of long-term debt during the next five fiscal years were: 1996--$11.4 million; 1997--$9.9 million; 1998--$10.1 million; 1999--$11.6 million and 2000-- $271.2 million. NOTE 9--FINANCIAL INSTRUMENTS At October 1, 1995, the Company had an interest rate swap contract outstanding with a major financial institution. Net receipts or payments on the Swap are accrued and recognized as adjustments to interest expense. It is the Company's practice to monitor the financial standing of the counterparties to its interest rate swap contracts. The Company is exposed to credit losses in the event of counterparty nonperformance, but does not anticipate such nonperformance. F-35 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--FINANCIAL INSTRUMENTS--(CONTINUED) Effective on September 22, 1993, the Company entered into the Swap with a notional principal amount of $270.0 million (which is equal to the principal amount of the Uniroyal Chemical Senior Notes). The Swap required the Company to make semiannual payments to its counterparty of an amount equal to six month LIBOR and required the counterparty to make semiannual payments in an amount equal to the lesser of (i) 5.24% or (ii) 10.23% less the six month LIBOR. The interest rates on the Swap reset every six months in arrears, except for the first two semiannual periods for which the Company received approximately $3.7 million in fiscal 1994. As a result of the increased interest rate environment during fiscal 1994, the Company accrued $14.3 million in fiscal 1994, representing the estimated cost of marking to market the option embedded in the Swap. During fiscal 1994, the Company amended the Swap which requires the Company to make semiannual payments to its counterparty of an amount equal to a six month LIBOR and requires the counterparty to make semiannual payments at a fixed rate of 5.24%. The Company's floating interest rate resets every six months in arrears beginning on March 22, 1995 with the last payment due on December 10, 1999. The Company paid approximately $2.6 million under the Swap in fiscal 1995. The Company locked in LIBOR rates for the March 22, 1996 and September 22, 1996 settlement dates at weighted average interest rate of 6.43% and 6.23%, respectively. These weighted average interest rates will result in net payments to the counterparty of approximately $1.7 million at March 22, 1996 and $1.5 million at September 22, 1996. A settlement of the fair market value of the Swap as of October 1, 1995, would require a payment to the counterparty of approximately $12.8 million. The company remains sensitive to changes in prevailing interest rates because approximately $72.8 million of indebtedness of the Company at October 1, 1995 effectively bears interest at a floating rate. Accordingly, a 1.0% change in prevailing interest rates would result in a $0.7 million change in annual interest expense. Beyond fiscal 1996, an additional $270 million of notional principal will effectively bear interest at a floating rate and therefore, a 1% change in prevailing interest rates would result in an additional $2.7 million change in annual interest expense. The carrying amounts for cash and cash equivalents, accounts receivable, short-term debt, accounts payable and other accrued liabilities approximate fair value because of the short maturities of these instruments. The market values of long-term debt (including current portion) were $935.1 million and $1,057.8 million at October 1, 1995 and October 2, 1994, respectively, and have been determined based on quoted market prices. However, these securities are generally not redeemable except upon a change in control (as defined in the related indentures) or in the case of a public stock offering (See Note 3). NOTE 10--STOCKHOLDERS' EQUITY (DEFICIT) Series A and Series B Preferred Stock During fiscal 1993, certain members of management (the "Management Investors") sold all of their Series A and Series B Preferred Stock (including those shares held in treasury) to an outside interest. In connection with such sale, the Management Investors repaid $1.1 million of non-recourse secured promissory notes (the "Management Notes") in their entirety. The effect of these transactions was to reduce Redeemable Capital Stock of the Company by approximately $3.1 million. The Company offset this reduction with a credit of $4.2 million to stockholders' equity net of an increase in cash of $1.1 million from the repayment of the Management Notes. F-36 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED) No dividends were paid by the Company on its Series A Preferred Stock and Series B Preferred Stock during fiscal 1995 and 1994. During fiscal 1993, the Company paid dividends on its Series A Preferred Stock and Series B Preferred Stock for approximately $938,000 and $42,000, respectively. Cash dividends may be restricted by the Companies various debt agreements (see Note 8). The Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") is redeemable at the option of the Company at any time at a per share redemption price of $100 plus all accrued and unpaid dividends. Dividends accrue at the prime interest rate (the "Dividend Rate") and are payable quarterly when, as and if declared by the Board of Directors. Cash dividends may be restricted by the Company's various debt agreements (see Note 8). Any unpaid dividends will compound at the Dividend Rate. Following the registration of the Series A Preferred Stock under the Securities Act of 1933, as amended, if dividends are in arrears for four or more quarters (whether consecutive or not) subsequent to October 31, 1994, the holders of Series A Preferred Stock voting as a class, have the right to elect an additional director of the Company until all dividends in arrears have been paid. The holders of the Series A Preferred Stock have no other voting rights except as provided by law. The Series A Preferred Stock ranks junior to the Series B Preferred Stock as to dividends and equal to the Series B Preferred Stock as to liquidation. Dividends in arrears on the Series A Preferred Stock at October 1, 1995 were $0.6 million. The Series B Preferred Stock is redeemable at the option of the Company at any time at a per share redemption price of $100 plus all accrued and unpaid dividends. Dividends accrue at the prime interest rate and are payable semiannually when, as and if declared by the Board of Directors. Cash dividend payments may be restricted by Companies' various debt agreements (see Note 8). The holders have no voting rights except as provided by law. Dividends in arrears on the Series B Preferred Stock at October 1, 1995 were $0.2 million. Rights Plan On April 29, 1993, the Board of Directors of the Company declared a dividend distribution of one right (the "Right") for each outstanding share of Common Stock to stockholders of record. Each Right entitles the registered holder to purchase from the Company a unit consisting of one-hundredth of a share (a "Unit") of Series C Junior Participating Preferred Stock, par value $.01 per share (the "Series C Preferred Stock"), at a purchase price of $60 per Unit, subject to adjustment. Under certain circumstances and subject to certain limitations, upon the occurrence of certain events, the Rights may become rights to purchase Common Stock or common stock of an acquiring company. As of October 1, 1995, no Rights to purchase shares of the Series C Preferred Stock were exercised and no Rights to purchase Common Stock were exercisable. Redeemable Capital Stock As a result of the Offering, the Company decreased its stockholders' deficit significantly. In addition, amounts previously presented as redeemable capital stock were reclassified as part of stockholders' deficit. Upon consummation of the Offering, the stock owned by management and included in redeemable capital stock was no longer redeemable. In addition, all shares of Class A Common Stock and Class B Common Stock were converted into an equal number of shares of Common Stock concurrent with the completion of the Offering. F-37 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED) Stock Options, Warrants and Purchase Rights
OCTOBER 2, OCTOBER 1, 1994 ADDITIONS REDUCTIONS 1995 ---------- --------- ---------- ---------- Warrants.......................................... 556,930 -- (335,000) 221,930 Purchase Right Plan............................... 757,030 -- (31,150) 725,880 1993 Stock Option Plan............................ 1,860,758 150,000 (154,780) 1,855,978
In connection with the Acquisition, the Company issued warrants to purchase up to 856,930 shares, subject to adjustment, of Class A Common Stock (now "Common Stock") of the Company initially for $1 per share (the "Exercise Price"). The holder may exercise these warrants, in whole or in part, until they expire on October 30, 1999. The Exercise Price may be voluntarily reduced by the Company's Board of Directors or otherwise adjusted in accordance the the terms of the Warrant Agreement. During fiscal 1995, 335,000 warrants were exercised while in each of fiscal years 1994 and 1993, 100,000 warrants were exercised. On October 30, 1989, the Company approved a stock purchase plan (as amended, the "Purchase Right Plan") pursuant to which rights to purchase (the "Purchase Rights") up to 757,030 shares of Class B Common Stock may be granted to certain participating senior members of management of the Company (the "Participants"). As of February 1, 1991, December 1, 1991, January 1, 1993, and September 30, 1994, the Board of Directors distributed Purchase Rights, of which Purchase Rights for 133,356, 201,621, 34,343 and 356,560 shares of Common Stock, respectively, are still outstanding. The exercise price for the Purchase Rights distributed on February 1, 1991 is $3.00 per share, the exercise price for the Purchase Rights distributed on January 1, 1993 and December 1, 1991 is $5.00 per share and the exercise price for the Purchase Rights distributed on September 30, 1994 is $13.00. As of October 1, 1995, Purchase Rights for 725,880 shares were outstanding under the Purchase Right Plan. Each Purchase Right is non-transferable and is subject to expiration following termination of the Participants employment under certain circumstances or fiscal year 2004, if earlier. The Company amended its Stock Appreciation Plan effective January 1, 1993, with certain employees other than Management Investors. The Stock Appreciation Plan provides for awards which, upon a triggering event (certain extraordinary events, as defined, such as an initial public offering), entitle the participant, for each vested stock appreciation unit held, the difference between $1.00 and the fair market value of a share of Common Stock (defined as the lesser of (i) $5.00 per share or (ii) the fair market value of a share of Common Stock). Compensation expense related to outstanding stock appreciation rights ("SAR's") equal to the difference between the lesser of $5.00 per share or the fair market value of the Class B Common Stock and $1.00 was accrued over the vesting period, which ended October 2, 1994. Compensation expense charged to operations during fiscal years 1994 and 1993 related to outstanding SAR's was $0.3 million for each year. As a result of the IPO, the Company paid approximately $1.2 million as awards under the Stock Appreciation Plan. In addition, pursuant to the 1993 Stock Option Plan (as described below), each plan participant was granted a non-qualified stock option for each performance and term unit held under the Stock Appreciation Plan. The exercise price of the option is $5.00 per share. Effective as of January 1, 1993, the Company adopted the 1993 Stock Option Plan for officers, other key employees and non-employee directors of the Company (the "Stock Option Plan"). The Stock Option Plan provides that the Company may grant incentive stock options, non-qualified stock options or SAR's. The maximum number of shares that may be issued or transferred pursuant to the options or F-38 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10--STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED) SAR's is 3,500,000. The options are generally exercisable for a period of ten years from the date of grant. The options generally will vest one-third on the first anniversary of the date of grant and one-third of each of the following two anniversaries of such date of grant. Options will otherwise vest upon the first to occur of: (i) a change in control of ownership or (ii) involuntary termination of the optionee's employment without cause. The Stock Option Plan also allows for the grant of SAR's, which cover the same shares as covered by the options. A SAR under the Stock Option Plan is exercisable to the extent the related stock option is exercisable. Upon the exercise of such SAR, the related stock option is cancelled and conversely, when an option is exercised, the corresponding SAR is cancelled. As of October 1, 1995, 261,315 options under the Stock Option Plan have been granted at $5.00 per share, 40,000 have been granted at $11.25 per share and 12,000 have been granted at $13.00 per share of which 261,315 are to SAR holders (all at $5.00 per share) and are fully vested, and 52,000 to non-employee directors which vest as described above. Pursuant to the Stock Option Plan, options to purchase an aggregate of 1,370,663 shares of Common Stock at a price of $11.25 per share were granted in November 1993 and options to purchase 175,000 shares of Common Stock at a price of $13.00 per share were granted in September 1994 and in both cases at the estimated fair market value at the date of the grants. One half of these options (the "Time Options") become exercisable on the third anniversary of the date of the grant or upon a change of control of the Company, unless, in either case, the employee is terminated for any reason in which case the Time Options will terminate. The other half of these options (the "Performance Options") became exercisable upon the completion of the Offering (see Note 3). On November 8, 1995, the Company filed Registration Statements on Form S-8 to register 757,030 shares pursuant to the Purchase Rights Plan and 2,000,000 shares pursuant to the Stock Option Plan. On May 4, 1993 the Company also filed a Registration Statement on Form S-8 to register 1,500,000 shares pursuant to the Stock Option Plan. In October 1993, the Company adopted the 1993 Uniroyal Chemical Corporation Employee Incentive/Liquidity Plan (the "Incentive Plan") which was designed to provide certain senior executives and other key personnel with an equity-based incentive and to provide some immediate liquidity for the Management Investors and participants in the Employee Stock Purchase Plan who desired to sell common shares at that time. The Incentive Plan provided for a limited amount of liquidity for participants and, during March 1994, 309,598 shares of Class B Common Stock held by certain of the Management Investors and 34,877 shares of Class B Common Stock held by participants in the Employee Stock Purchase Plan (some of whom were also Management Investors), respectively, were sold pursuant to the Incentive Plan. Such shares were reclassified as Class A Common Stock. In addition, in connection with the Incentive Plan, certain members of senior management agreed not to sell or otherwise transfer any shares of common stock held by them for a three-year period, subject to certain exceptions. F-39 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--INCOME TAXES The provision (benefit) for income taxes on operations are as follows:
FISCAL YEAR ENDED ---------------------------- 1995 1994 1993 -------- ------ ------ (IN THOUSANDS) Current: Federal........................................................ $ 2,427 $ 585 $4,153 Foreign........................................................ 9,234 6,895 6,158 State.......................................................... 1,326 5,030 4,226 -------- ------ ------ 12,987 12,510 14,537 -------- ------ ------ Deferred: Federal........................................................ (67,683) -- (5,584) Foreign........................................................ (4,064) (2,447) (1,279) State.......................................................... (6,300) (1,145) (1,141) -------- ------ ------ (78,047) (3,592) (8,004) -------- ------ ------ $(65,060) $8,918 $6,533 -------- ------ ------ -------- ------ ------
Included in income from operations before taxes for the fiscal years 1995, 1994 and 1993 was $17.1 million, $11.0 million and $2.9 million, respectively, of income from foreign operations. The provision (benefit) for taxes on income differs from the United States statutory rate for the following reasons:
FISCAL YEAR ENDED ------------------------------- 1995 1994 1993 -------- -------- ------- (IN THOUSANDS) Provision (benefit) for income taxes at statutory tax rate.... $ 12,029 $(71,724) $(6,345) Increase (decrease) resulting from the following: Goodwill write-off (Note 7)................................. -- 42,718 -- Impact of valuation allowance............................... (78,880) 34,931 -- Foreign dividends and withholding taxes, net of federal benefit....................................................... 2,367 2,136 3,602 Goodwill amortization....................................... 1,092 1,680 2,277 Other permanent differences................................. 348 978 937 Foreign income tax rate differential........................ (2,127) (1,786) 1,388 State income taxes, net of federal benefit.................. 555 (433) 2,133 Effect of tax rate changes.................................. -- -- 759 Other, net.................................................. (444) 418 1,782 Actual provision (benefit) for income taxes................. $(65,060) $ 8,918 $ 6,533 -------- -------- ------- -------- -------- -------
F-40 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--INCOME TAXES--(CONTINUED) The provision (benefit) for deferred income taxes, resulting from differences in the amount of deferred tax assets and deferred tax liabilities from period to period, were due to the following:
FISCAL YEAR ENDED ------------------------------- 1995 1994 1993 -------- ------- -------- (IN THOUSANDS) Impact of valuation allowance................................. $(78,880) $34,931 -- Intangible asset write-off (Note 7)........................... -- (28,496) -- Amortization (principally intangibles)........................ (5,456) (8,749) $(10,578) Interest rate swap transactions............................... 1,074 (5,651) 593 Net operating loss ("NOL"), alternative minimum tax ("AMT") and other tax credit carryforwards............................ 4,622 4,929 (2,069) Excess of tax over book depreciation.......................... 66 1,841 4,521 Sale of product line.......................................... -- (1,599) -- Effect of tax rate changes.................................... -- 654 492 Deductible (nondeductible) accruals........................... (1,063) (464) (421) Other, net.................................................... 1,590 (988) (542) -------- ------- -------- $(78,047) $(3,592) $ (8,004) -------- ------- -------- -------- ------- --------
The components of total deferred tax assets and liabilities were as follows:
1995 1994 ---- ---- (IN MILLIONS) Deferred tax assets Other postretirement benefits............................................... $ 70 $ 70 NOL carryforwards and AMT credit carryforwards.............................. 46 47 Accruals for environmental restoration...................................... 23 25 Pensions.................................................................... 15 18 Accrued liabilities--current................................................ 10 5 Other non-current liabilities............................................... 9 10 Inventories................................................................. 3 4 Other....................................................................... 3 5 ---- ---- $179 $184 ---- ---- ---- ---- Deferred tax liabilities Property, plant, and equipment--net......................................... $ 54 $ 55 Patents and unpatented technology--net...................................... 20 22 Deferred charges and other non-current assets--net.......................... 2 2 Investments in and advances to unconsolidated affiliates.................... 2 2 Other....................................................................... -- 2 ---- ---- $ 78 $ 83 ---- ---- ---- ----
The Company had established a valuation allowance of $99 million (of which $94 million was in the United States) at October 2, 1994 against its deferred tax assets primarily as a result of a significant net operating loss carryforward position in the United States. The Company believes that due to the Debt Repurchase (see Note 3) and expected future taxable income, it is more likely than not that a significant portion of these deferred tax benefits will be realized, and therefore, the valuation allowance F-41 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--INCOME TAXES--(CONTINUED) was reduced in fiscal 1995. Accordingly, the Company has included a benefit of $78.9 million for this reduction in its tax provisions for fiscal 1995. At October 1, 1995, the Company has a valuation allowance of $19 million (of which $15 million is in the United States). At October 1, 1995, the Company had NOL carryforwards of $100.5 million, expiring in the year 2008, which can be used to reduce future Federal taxable income, while certain of the Company's foreign subsidiaries had aggregate NOL carryforwards of $20.8 million which can be used to reduce future taxable income in those countries. As a result of the Offering (see Note 3), the Company 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. At October 1, 1995, the Company had unremitted earnings of foreign subsidiaries of $39.3 million for which a deferred tax liability had not been recognized. Corporate laws in foreign countries limit the extent of the repatriation of annual earnings for certain of the Company's foreign subsidiaries while for others, the Company's intention is to permanently reinvest these foreign earnings. A change in foreign corporate law and/or a change in the Company's reinvestment policy would result in the recognition of a deferred tax liability. In addition, the determination of the amount of the unrecognized deferred tax liability for the temporary difference related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration is not practicable. NOTE 12--POSTRETIREMENT BENEFITS OTHER THAN PENSION Postretirement benefits other than pensions represent unfunded future obligations of the Company and are comprised of the following: 1995 1994 -------- -------- (IN THOUSANDS) Other postretirement benefits......................... $176,650 $176,800 Other postemployment benefits......................... 3,763 3,888 -------- -------- $180,413 $180,688 -------- -------- -------- -------- The Company provides certain health care and life insurance benefits for substantially all retired associates and their beneficiaries and covered dependents in the United States and Canada. Other posretirement benefits for retired associates of the Company in other countries are covered by government-sponsored plans. Effective October 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") which requires the Company to accrue, while associates are working, the expected cost of providing such postretirement benefits to associates, their beneficiaries and covered dependents. In adopting SFAS 106, the Company recognized the transition obligation as a one-time charge against earnings. The cumulative effect of this accounting change resulted in a non-cash charge to earnings of $100.3 million (net of related tax benefit of $28.9 million) effective October 1, 1992. F-42 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--POSTRETIREMENT BENEFITS OTHER THAN PENSION--(CONTINUED) The Company's net periodic postretirement benefit cost included the following components:
1995 1994 1993 ------ ------ ------- (IN THOUSANDS) Service cost-benefits earned during the period................... $1,303 $2,444 $ 3,912 Interest cost on accumulated postretirement benefit obligation... 9,878 11,303 13,418 Government contributions......................................... -- (1,414) (4,586) Actual return on assets.......................................... (677) (365) (543) Curtailment gain................................................. -- (448) -- Net amortization and deferral.................................... (5,718) (7,590) 319 ------ ------ ------- Net periodic postretirement benefit cost......................... $4,786 $3,930 $12,520 ------ ------ ------- ------ ------ -------
Postretirement benefits generally are not pre-funded, except for certain plans funded by the United States government, and are paid by the Company as incurred. A reconciliation of the funded status of the plans to the amounts recorded in the Company's balance sheet is set forth below.
1995 1994 --------- --------- (IN THOUSANDS) Fully eligible and other active plan participants.................... $ (39,059) $ (43,031) Retirees............................................................. (96,688) (88,745) --------- --------- Accumulated postretirement benefit obligation........................ (135,747) (131,776) Plan assets at fair value (primarily cash equivalents and marketable securities).......................................................... 7,639 9,072 --------- --------- Funded status........................................................ (128,108) (122,704) Unrecognized prior service cost...................................... (48,679) (54,535) Unrecognized net loss................................................ 137 439 --------- --------- Accrued postretirement benefit cost recorded......................... $(176,650) $(176,800) --------- --------- --------- --------- Assumptions used to calculate the net periodic postretirement benefit cost and to measure the accumulated postretirement benefit obligation are as follows: 1995 1994 1993 ---- ---- ---- (IN THOUSANDS) Weighted-average Discount Rate..................................... 7.50% 8.00% 7.25% Expected Long-term Rate of Return on Plan Assets................... 3.60% 3.60% 3.60%
The decrease in the weighted-average discoutn rate at October 1, 1995, had the effect of increasing the accumulated postretirement benefit obligation at such date by $5.6 million. The assumed health care cost trend rate used was approximately 12% initially, decreasing gradually to approximately 6% in year 2020 and thereafter. An increase in the assumed health care trend rates of 1% in each year would increase the aggregate of service and interest cost for 1995 by $0.4 million and would increase the October 1, 1995 accumulated postretirement benefit obligation by $6.1 million. In November 1992, the FASB issued Statement of Financial Accounting Standards No. 112, "Employers Accounting for Postemployment Benefits" ("SFAS No. 112") which requires the Company F-43 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--POSTRETIREMENT BENEFITS OTHER THAN PENSION--(CONTINUED) to accrue for benefits payable to employees when they leave the Company other than by reason of retirement. SFAS No. 112 was adopted by the Company in fiscal 1995 and did not have a material effect on the Company's financial position or results of operation. NOTE 13--PENSIONS The Company has defined benefit plans covering substantially all associates in the United States and Canada. The Company also has defined contribution plans covering substantially all asociates in the United States and a portion of the associates in Canada. Pension benefits for retired associates of the Company in other countries are covered by government-sponsored plans. The defined benefit plans provide retirement benefits based on the associates' years of service and compensation during employment. The aggregate cost of all retirement plans during fiscal years 1995, 1994 and 1993 was $13.0 million, $10.0 million and $10.1` million, respectively. 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 associates' salary. The Company's net periodic pension cost for the defined benefit plans included the following components:
FISCAL YEAR ------------------------------- 1995 1994 1993 -------- ------- -------- (IN THOUSANDS) Service cost-benefits earned during the period................ $ 4,847 $ 4,102 $ 3,528 Interest cost on projected benefit obligation................. 11,885 10,116 10,384 Actual return on plan assets.................................. (13,442) (2,732) (10,973) Net amortization and deferral................................. 6,389 (4,070) 4,666 -------- ------- -------- Net periodic pension cost..................................... $ 9,679 $ 7,416 $ 7,605 -------- ------- -------- -------- ------- -------- 1995 1994 1993 ----------- ----- ----- For plans in which accumulated benefits exceed assets: Weighted-average Discount Rate.......................... 6.50%--7.50% 8.00% 7.25% Expected Long-term Rate of Return....................... 6.75%--9.00% 9.00% 9.00% Rate of Compensation Increase........................... 3.00%--5.50% 5.50% 5.50% For plans in which assets exceed accumulteed benefits: Weighted-average Discount Rate.......................... 8.00% 8.00% 8.00% Expected Long-term Rate of Return....................... 8.00% 8.00% 8.00% Rate of Compensation Increase........................... 6.00% 6.00% 6.00%
The weighted average discount rate used in the determination of the projected benefit obligation for plans in the United States for which accumulated benefits exeed assets, at October 1, 1995, was decreased from 8.00% to 7.50% which had the effect of increasing the projected benefit obligation and accrued pension cost at such date by $8.8 million and $1.0 million, respectively. Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," required the Company to recognize an additional pension liability during 1995 and 1994 at least equal to each plan's unfunded accumulated benefit obligation with an equal amount to be charged as either an F-44 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 13--PENSIONS--(CONTINUED) intangible asset or a reduction of equity. As of October 1, 1995, an additional liability of $3.6 million and a charge to stockholders' equity of $3.6 million have been recorded. The funded status of the defined benefit pension plans and a reconciliation of the funded status to the amounts recorded in the Company's balance sheet is set forth below:
1995 1994 -------------------------- -------------------------- ACCUMULATED ASSETS ACCUMULATED ASSETS BENEFITS EXCEED BENEFITS EXCEED EXCEED ACCUMULATED EXCEED ACCUMULATED ASSETS BENEFITS ASSETS BENEFITS ----------- ----------- ----------- ----------- (IN THOUSANDS) Vested benefit obligation.................... $(126,103) $ (15,128) $ (98,170) $ (14,335) Non-vested benefit obligation................ (7,374) (6,944) ----------- ----------- ----------- ----------- Accumulated benefit obligation......... (133,477) (15,128) (105,114) (14,335) ----------- ----------- ----------- ----------- Excess of projected benefit obligation over accumulated benefit obligation............... (15,109) (1,562) (15,410) (1,762) ----------- ----------- ----------- ----------- Projected benefit obligation........... (148,586) (16,690) (120,524) (16,097) Plan assets at fair value (primarily cash equivalents and marketable securities)....... 89,931 18,909 72,990 17,846 ----------- ----------- ----------- ----------- Funded status.......................... (58,655) 2,219 (47,534) 1,749 Unrecognized prior service cost.............. 15,689 (691) 4,808 (744) Unrecognized net (gain) loss................. (1,111) 370 (2,826) 932 Unrecognized net transition asset............ (542) (656) Adjustment to recognize minimum liability.... (3,617) (1,903) ----------- ----------- ----------- ----------- Prepaid (accrued) pension cost recorded..................................... $ (47,694) $ 1,356 $ (47,455) $ 1,281 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The data in the above table excludes amounts related to two domestic defined benefit plans because the cost of such plans is reimbursed by the United States government and any excess funding would revert to the government. As of the date of the last actuarial valuation (January 1, 1994), the plan assets at fair value exceeded the projected benefit obligation for both of these plans. The Company's net periodic pension cost for defined contribution plans was $3.3 million, $2.7 million and $2.8 million for the fiscal years 1995, 1994 and 1993, respectively. The Company maintains a retirement plan for certain key executives which provides for supplemental payments upon retirement, disability or death. The obligations are not pre-funded. The Company charged $0.7 million, $0.8 million and $0.8 million to expense for these benefits during the fiscal years 1995, 1994 and 1993, respectively. F-45 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 14--LEASES The Company leases manufacturing, warehouse, transportation and office facilities and equipment. The leases generally provide that the Company pay the taxes, insurance and maintenance expenses related to the leased assets. At October 1, 1995, future minimum lease payments required under non-cancelable operating leases are as follows: FISCAL YEAR (IN THOUSANDS) - -------------------------------------------------------------- -------------- 1996 $ 7,403 1997 6,972 1998 6,408 1999 6,155 2000 5,585 Thereafter 1,597 -------------- $ 34,120 -------------- -------------- Rent expenses under operating leases for the fiscal years 1995, 1994 and 1993 was $6.6 million, $6.2 million and $6.0 million, respectively. NOTE 15--COMMITMENTS In connection with the Duphar Acquisition, the Company assumed an annual commitment to purchase a certain raw material from a Japanese supplier through December 31, 1996. The Company is required to purchase a certain minimum quantity of this raw material at a guaranteed price (in Japanese yen), as specified in the contract. For calendar year 1996, the Company's commitment is approximately $9 million at current exchange rates, which approximates market. The Company does not intend to renew this arrangement in its current "take or pay" form. NOTE 16--CONTINGENCIES 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 federal, state and local laws and regulations regarding health and safety matters. 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 Company or the manufacture, use, emission or disposal of certain products or wastes by the Company and could involve potentially material expenditures. To meet changing permitting and regulatory standards, the Company may be required to make significant site or operational modifications, potentially involving substantial expenditures and reductions or suspension of certain operations. F-46 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 16--CONTINGENCIES--(CONTINUED) In November 1993, the Louisiana Department of Environmental Quality ("LaDEQ") instituted an enforcement action in the nature of a compliance order ("Order") against the Company's Geismar, Louisiana facility. Among other things, the Order directs the Company to make a determination as to whether certain waste streams are hazardous wastes, and if so, to cease using certain tanks and injection wells for management of such streams until a hazardous waste permit is obtained. In July 1995, the LaDEQ formally accepted the Company's determination that such waste streams were non-hazardous, thus permitting continued use of the injection wells. However, the Company will incur approximately $2.0 million to $2.5 million of capital expenditures over the next few years to further the management of these waste streams. 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 has been identified by the United States Environmental Protection Agency (the "EPA"), state or local governmental agencies, and other potentially responsible parties (each a "PRP"), as a PRP for 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 Company, despite the involvement of other PRP's. In many cases, the Company is one of several hundred PRP's so identified. In a few instances, the Company is one of only a handful of PRP's. In certain instances, a number of other financially responsible PRP's are also involved, and the Company expects that any ultimate liability resulting from such matters will be apportioned between the Company and such other parties. Each quarter, management, in cosultation with outside counsel, estimates the range of the Company's liability based on current interpretation of environmental laws and regulations. For each site in which the Company is involved, 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 years in which the Company will make payments toward the remediation plan. These estimates are then adjusted to include the estimated effect of general and specific inflation on future environmental restoration costs. Management estimated the likely range of environmental liabilities to be from $43 million to $112 million in constant dollars for the costs associated with the restoration of identified off-site ($16 million to $46 million) and on-site ($27 million to $66 million) disposal sites. Based on management's interpretation of current environmental laws and regulations, the Company believes the most likely future amount for these environmental liabilities at October 1, 1995, in constant dollars, is approximately $64 million and recognizing inflation is approximately $72 million, the net present value of which ($58.7 million) was recorded as an environmental liability at October 1, 1995. Such amount in constant dollars, is net of $3.8 million of expected reimbursements pursuant to an agreement with the Ontario (Canada) Ministry of the Environment. These estimates may change should additional sites be identified, additional remediation measures be required or undertaken, the interpretation of current laws and regulations be modified or additional environmental laws and regulations be enacted. In accordance with EITF Issue No. 93-5 and SAB No. 92, the Company changed its method of accounting for environmental restoration liabilities effective October 1, 1992, whereby the net present value of the liability is measured using a discount rate equivalent to the rates on United States and F-47 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 16--CONTINGENCIES--(CONTINUED) Canadian Treasury Notes which have maturities comparable to that of the estimated payment stream of the environmental obligations. Accordingly, the discount rates used at October 1, 1995 range from 5.58% to 6.05% in the United States and from 6.72% to 8.09% in Canada. Prior to October 1, 1992, the net present value of its environmental restoration liabilities was discounted at approximately 12%, based on the Company's weighted-average cost of borrowing at that time. The change in the discount rate increased the environmental restoration liability $16.4 million at October 1, 1992 and resulted in a non- cash charge to earnings of $11.5 million (net of a related tax benefit of $4.9 million) during the first quarter of fiscal 1993. At October 1, 1995, the expected future payments for environmental restoration were as follows: 1996--$13 million; 1997--$11 million; 1998--$9 million; 1999--$6 million; 2000--$5 million and 2001 through 2004--$20 million. The total estimated future remediation costs from October 2, 1994 to October 1, 1995 increased approximately $7.3 million after taking into consideration remediation payments during the period. This increase was primarily due to changes in requirements as promulgated by local authorities at the Company's Canadian facility ($4.2 million). In addition, changes at domestic off-site disposal sites were due to (i) updating of allocations (up $2.8 million); (ii) previously unknown or unsuspected site conditions (up $1.9 million); and (iii) increased legal costs related to class action suits (up $1.2 million), offset by revisions of initial remediation plans (down $3.9 million). There were no other material differences in the amounts or periods for which payments were projected. 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. While the Company believes it is unlikely, the resolution of these matters could have a material adverse effect on the Company's consolidated results of operations if a significant number of these matters are resolved unfavorably. F-48 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 17--GEOGRAPHIC DATA The Company and its subsidiaries operate in one industry segment, the manufacture and sale of specialty chemicals and elastomers. Data by geographic area is as follows:
FISCAL YEAR ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- (IN THOUSANDS) Net sales and transfers between geographic areas: United States..................................... $ 942,635 $ 820,256 $ 787,056 Americas (excluding the U.S.)..................... 181,926 169,353 138,073 Europe / Africa................................... 135,805 97,015 94,717 Asia / Pacific.................................... 58,124 56,849 58,315 ---------- ---------- ---------- 1,318,490 1,143,473 1,078,161 ---------- ---------- ---------- ---------- ---------- ---------- Less transfers between geographic areas: United States..................................... 141,063 123,386 110,226 Americas (excluding the U.S.)..................... 51,821 48,074 40,307 Europe / Africa................................... 45,285 22,892 18,438 Asia / Pacific.................................... 1,000 2,667 1,288 ---------- ---------- ---------- 239,169 197,019 170,299 ---------- ---------- ---------- ---------- ---------- ---------- Net sales from geographic areas to unaffiliated customers: United States..................................... 801,572 696,870 676,790 Americas (excluding the U.S.)..................... 130,105 121,279 97,766 Europe / Africa................................... 90,520 74,123 76,279 Asia / Pacific.................................... 57,124 54,182 57,027 ---------- ---------- ---------- $1,079,321 $ 946,454 $ 907,862 ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss) United States..................................... $ 119,131 $ (99,435)(a) $ 89,033 Americas (excluding the U.S.)..................... 19,036 15,689 8,449 Europe / Africa................................... 12,522 8,975 9,015 Asia / Pacific.................................... (2,612) (1,462) 3,158 Less corporate interest and other income/expense, net and eliminations............................ (113,708) (128,692) (127,914) ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes, extraordinary charges and cumulative effect of accounting changes............................. $ 34,369 $ (204,925) $ (18,259) ---------- ---------- ---------- ---------- ---------- ----------
- ------------ (a) Includes a $191 million write-off of intangible assets in the second quarter of fiscal 1994.
F-49 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 17--GEOGRAPHIC DATA--(CONTINUED) 1995 1994 ---------- ---------- (IN THOUSANDS) Assets United States................................... $ 897,702 $ 840,833 Europe / Africa................................. 140,809 85,014 Americas (excluding the U.S.)................... 99,064 94,781 Asia / Pacific.................................. 37,485 31,039 Total identifiable assets....................... 1,175,060 1,051,667 General corporate assets and eliminations....... (3,353) 4,350 ---------- ---------- Total assets................................ $1,171,707 $1,056,017 ---------- ---------- ---------- ---------- Transfers between geographic areas are accounted for at market prices or a negotiated price, with due consideration given to import and tax regulations in effect in the country into which the buying entity is importing the goods as well as the tax regulations in the exporting country. Export sales from the United States were as follows: FISCAL YEAR -------------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Europe / Africa............................ $ 80,136 $ 57,611 $ 58,241 Americas................................... 30,300 23,938 35,374 Asia / Pacific............................. 51,380 38,610 35,674 -------- -------- -------- $161,816 $120,159 $129,289 -------- -------- -------- -------- -------- -------- NOTE 18--ACQUISITIONS AND DIVESTITURES During fiscal 1995, the Company completed the Duphar Acquisition, along with three smaller acquisitions, at an aggregate cost of $98.5 million. The estimated annual sales from the Duphar Acquisition are approximately $60 million, while the estimated annual sales from the three smaller acquisitions (including one in specialty chemicals and two in crop protection), are approximately $20 million. A substantial portion of the cost of the Duphar Acquisition was financed from borrowings in Italy of $57 million ($45 million of long-term debt and $12 million of short-term borrowings). F-50 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 18--ACQUISITIONS AND DIVESTITURES--(CONTINUED) The allocation of the cost of these acquisitions was as follows: (IN THOUSANDS) -------------- Inventories................................................... $ 16,272 Property, plant and equipment................................. 33,763 Patents and other intangibles................................. 33,229 Excess of cost over net assets of business acquired........... 16,073 Deferred charges and other non-current assets................. 1,190 Pension liability............................................. (3,506) Other, net.................................................... 1,476 -------------- $ 98,497 -------------- -------------- In the first quarter of fiscal 1994, the Company sold the foliar nutrients product line of its Crop Protection Division for approximately $17.0 million and recognized a pre-tax gain of approximately $6.4 million in the first quarter of fiscal 1994 from this sale. In the fourth quarter of fiscal 1994, the Company sold its interest in its Argentine affiliate for $9.0 million and recognized a pre-tax loss of approximately $2.3 million from this sale. NOTE 19--QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR QUARTER QUARTER QUARTER QUARTER - ------------------------------------------------------- ------- ------- ------- ------- (IN MILLIONS, EXCEPT PER SHARE AND STOCK PRICE DATA) 1995 Net Sales....................................... $ 211.6 $ 274.3 $ 298.6 $ 294.8 Gross profit.................................... 53.4 90.8 92.9 83.3 Income (loss) before extraordinary charge....... (10.5) 93.8(1) 12.4 3.7 Net income (loss)............................... (10.5) 85.5(1) 12.4 3.7 Per share data (2): Income (loss) before extraordinary charge..... $ (0.92) $ 6.82 $ 0.50 $ 0.16 Net income (loss)............................. (0.92) 6.22 0.50 0.14 Common stock price range(3): High.......................................... -- $12 1/4 $12 1/8 $12 1/4 Low........................................... -- 11 9 7/8 8 1/4 1994 Net Sales $ 180.2 $ 240.0 $ 262.5 $ 263.8 Gross profit.................................... 38.8 65.4 84.1 82.6 Net loss........................................ (15.7) (177.1)(4) (14.8) (6.2) Net loss per share.............................. $ (1.35) $(15.39) $ (1.30) $ (0.57)
- ------------ (1) Includes a gain of $78.9 million related to a deferred tax asset reserve (see Note 11). (2) Quarterly per share data may not equal annual amounts due to changes in the weighted-average shares and share equivalents outstanding. (3) The common stock commenced public trading on March 17, 1995 at the time of the Offering. (4) Includes a charge of $191.0 million for the write-off of intangible assets (see Note 7). F-51 UNIROYAL CHEMICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 20--PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data has been derived from the audited consolidated statement of operations of the Company for the fiscal year ended October 1, 1995 and adjusts such data to give effect to the Offering and the Debt Repurchase as if they had occurred on October 3, 1994.
ACTUAL PRO FORMA(1) ---------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales..................................................... $1,079,321 $ 1,079,321 Operating income.............................................. 148,077 148,077 Interest expense.............................................. 114,034 103,634(2) Income before extraordinary charge............................ 99,429 105,829(2)(3) Income before extraordinary charge per share.................. $ 5.32 $ 4.27 Weighted average number of common shares outstanding.......... 18,607 24,695(4)
NOTES TO PRO FORMA FINANCIAL DATA (1) This pro forma financial data excludes a non-recurring charge which was incurred in connection with the Offering and the Debt Repurchase for the extraordinary loss on early debt extinguishment of $8.3 million (net of a related tax benefit of $4.5 million). (2) Adjustment reflects a reduction in interest expense of $10.4 million resulting from the Debt Repurchase. (3) The actual and pro forma financial data includes a credit related to a deferred tax asset reserve of $78.9 million. Had such credit not occurred in this period, pro forma net income and pro forma earnings per share would have been $26.9 million and $1.07, respectively. (4) Assumes shares of common stock issued in the Offering are outstanding for the entire period presented. F-52 INDEPENDENT AUDITORS' REPORT To Stockholders and Board of Directors Uniroyal Chemical Corporation Middlebury, Connecticut We have audited the consolidated balance sheets of Uniroyal Chemical Corporation and its subsidiaries as of October 1, 1995 and October 2, 1994 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended October 1, 1995, October 2, 1994 and September 30, 1993. 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 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 provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Uniroyal Chemical Corporation and its subsidiaries at the dates indicated and the results of its operations and its cash flows for the periods indicated in conformity with generally accepted accounting principles. As discussed in Notes 12 and 16 to the consolidated financial statements, in fiscal 1993, the Company changed its method of accounting for postretirement benefits other than pensions to conform with the Statement of Financial Accounting Standards No. 106 and its method of accounting for environmental restoration liabilities to conform with Emerging Issues Task Force No. 93-5 and Staff Accounting Bulletin No. 92. /s/ DELOITTE & TOUCHE LLP Stamford, Connecticut November 17, 1995 F-53 UNIROYAL CHEMICAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED--IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED -------------------- -------------------- JUNE 30, JULY 2, JUNE 30, JULY 2, 1996 1995 1996 1995 -------- -------- -------- -------- Net sales........................................ $302,063 $298,604 $829,171 $784,567 Cost of products sold.......................... 194,260 195,837 558,005 519,206 Selling, general and administrative expenses... 56,313 55,241 159,301 150,172 -------- -------- -------- -------- Operating income........................... 51,490 47,526 111,865 115,189 Interest expense................................. 26,742 27,747 80,038 87,972 Other (income) expense........................... 161 (640) 1,712 (1,410) -------- -------- -------- -------- Income before income taxes and extraordinary charges.................... 24,587 20,419 30,115 28,627 Provision (benefit) for income taxes............. 9,923 8,025 12,133 (67,067) -------- -------- -------- -------- Income before extraordinary charges........ 14,664 12,394 17,982 95,694 Extraordinary charges--early retirement of debt............................................. (137) -- (441) (8,279) -------- -------- -------- -------- Net income................................. 14,527 12,394 17,541 87,415 Preferred stock dividends earned................. 103 104 313 298 -------- -------- -------- -------- Net income applicable to common shares..... $ 14,424 $ 12,290 $ 17,228 $ 87,117 -------- -------- -------- -------- -------- -------- -------- -------- Earnings per common share: Income before extraordinary charges............ $ 0.59 $ 0.50 $ 0.72 $ 5.80 Extraordinary charges.......................... (0.01) -- (0.02) (0.50) -------- -------- -------- -------- Net income per common share...................... $ 0.58 $ 0.50 $ 0.70 $ 5.30 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average shares outstanding.............. 24,808 24,572 24,582 16,436
See notes to unaudited consolidated financial statements. F-54 UNIROYAL CHEMICAL CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, OCTOBER 1, 1996 1995 ---------- ---------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents........................................ $ 31,243 $ 29,519 Accounts receivable.............................................. 153,411 159,254 Inventories...................................................... 196,468 177,647 Other current assets............................................. 44,072 39,114 ---------- ---------- Total current assets......................................... 425,194 405,534 Property, plant and equipment, net................................. 378,223 394,472 Intangible assets.................................................. 228,701 241,710 Deferred income taxes.............................................. 65,727 63,890 Other assets....................................................... 63,202 66,101 ---------- ---------- $1,161,047 $1,171,707 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................................. $ 90,440 $ 94,826 Short-term debt.................................................. 42,245 33,305 Current portion of long-term debt................................ 11,122 11,434 Accrued liabilities.............................................. 109,168 119,077 ---------- ---------- Total current liabilities.................................... 252,975 258,642 Long-term debt..................................................... 888,856 910,156 Accrued postretirement liability................................... 180,966 180,413 Other liabilities.................................................. 125,980 121,725 Stockholders' Equity (Deficit): Preferred Stock.................................................. 4,172 4,172 Common Stock..................................................... 254 253 Additional paid-in capital....................................... 177,032 176,799 Accumulated deficit.............................................. (429,919) (447,460) Pension liability adjustment..................................... (3,617) (3,617) Cumulative translation adjustment................................ (25,008) (18,488) Treasury stock................................................... (10,644) (10,888) ---------- ---------- Total stockholders' deficit.................................. (287,730) (299,229) ---------- ---------- $1,161,047 $1,171,707 ---------- ---------- ---------- ----------
See notes to unaudited consolidated financial statements. F-55 UNIROYAL CHEMICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED--IN THOUSANDS)
NINE MONTHS ENDED --------------------- JUNE 30, JULY 2, 1996 1995 -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.......................................................... $ 17,541 $ 87,415 Adjustments to reconcile net income to net cash from operating activities: Depreciation...................................................... 34,541 32,761 Amortization...................................................... 16,338 15,213 Non-cash interest................................................. 12,114 14,928 Deferred income taxes............................................. (1,662) (77,236) Extraordinary charge.............................................. 441 8,279 Other............................................................. 951 702 Changes in operating assets and liabilities: Accounts receivable............................................. 5,316 (17,946) Inventories..................................................... (19,525) (32,687) Accounts payable................................................ (4,307) 10,962 Accrued liabilities............................................. (8,474) (13,747) Other........................................................... (4,739) 5,311 -------- --------- Net cash flows from operating activities...................... 48,535 33,955 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures................................................ (21,582) (44,923) Acquisitions........................................................ -- (94,666) Other............................................................... (2,497) (6,879) -------- --------- Net cash flows used in investing activities................... (24,079) (146,468) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt........................................ (31,048) (189,858) Proceeds from long-term debt........................................ 1,865 45,055 Short-term borrowings, net.......................................... 8,658 29,537 Debt issuance costs................................................. (1,345) (2,877) Proceeds from issuance of stock..................................... 478 147,049 Other............................................................... -- (1,274) -------- --------- Net cash flows from (used in) financing activities............ (21,392) 27,632 Effects of exchange rate changes on cash............................ (1,340) (1,173) -------- --------- Net change in cash and cash equivalents............................. 1,724 (86,054) Cash and cash equivalents, beginning of period...................... 29,519 121,344 -------- --------- Cash and cash equivalents, end of period............................ $ 31,243 $ 35,290 -------- --------- -------- --------- SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid....................................................... $ 75,456 $ 82,933 Income taxes paid................................................... 15,191 5,561
See notes to unaudited consolidated financial statements. F-56 UNIROYAL CHEMICAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Uniroyal Chemical Corporation ("UCC") and its wholly-owned subsidiary Uniroyal Chemical Company, Inc. ("Uniroyal Chemical" and together with UCC and their subsidiaries, the "Companies"). UCC is dependent on cash flow from Uniroyal Chemical and its subsidiaries to service its debt and meet its other cash needs. Accordingly, the consolidated financial statements of Uniroyal Chemical set forth herein are presented on a basis of accounting which reflects substantially all of the operations (primarily interest expense), assets and liabilities of UCC. The statements have been prepared by the Companies without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and according to generally accepted accounting principles, and reflect all adjustments consisting of normal recurring accruals which, in the opinion of management, are necessary for a fair statement of the results of the interim periods presented. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the notes contained in the Companies' audited consolidated financial statements for the year ended October 1, 1995. Certain prior year amounts have been reclassified to conform with the 1996 presentation. 2. INVENTORIES A summary of inventory components is as follows (in thousands): JUNE 30, OCTOBER 1, 1996 1995 -------- ---------- Finished goods........................................ $143,235 $ 129,263 Work in process....................................... 9,743 7,437 Raw materials......................................... 43,490 40,947 -------- ---------- $196,468 $ 177,647 -------- ---------- -------- ---------- 3. CAPITAL STOCK UCC has 50,000,000 shares of Series A and B Preferred Stock authorized at $0.01 par value. As of June 30, 1996, UCC had issued and outstanding 29,721 shares of Series A Cumulative Redeemable Preferred Stock and 12,000 shares of Series B Preferred stock. In addition, UCC has 2,050,000 shares of Series C Junior Participating Preferred Stock authorized at $0.01 par value none of which are issued. UCC also has 205,000,000 shares of Common Stock authorized at $0.01 par value. As of June 30, 1996, UCC had issued 25,422,631 shares, including 1,114,228 treasury shares. Uniroyal Chemical has 2,500 shares of common stock authorized at no par value with 100 shares issued and outstanding. 4. INCOME TAXES The provision for income taxes for the nine months ended June 30, 1996 and July 2, 1995 includes foreign tax provisions of $14.6 million and $8.1 million, respectively. The difference between the effective and statutory federal income tax rate consists primarily of expenses that are not deductible for income tax purposes, including goodwill amortization, as well as state income taxes and the impact of foreign earnings subject to various foreign tax rates and withholding taxes. F-57 UNIROYAL CHEMICAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The benefit for income taxes for the nine months ended July 2, 1995 reflects a benefit of $78.9 million due to the reduction in the Companies' valuation allowance recorded against the Companies' net operating loss carryforward position in the United States. As a result of the debt repurchase concurrent with UCC's initial public offering in March 1995, the Companies expect future taxable income, and therefore it was more likely than not that a significant portion of the loss carryforwards would be realized. 5. DEBT REPURCHASE During April 1996, the Companies repurchased $7.2 million of their long-term debt in the open market. As a result of this repurchase, the Companies recognized an extraordinary charge of $0.1 million comprised of premiums and the write-off of related unamortized fees, net of a related tax benefit of $0.1 million. The 1995 extraordinary charge relates to the debt repurchase concurrent with UCC's initial public offering in March 1995. 6. CONTINGENCIES The Companies' are 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. Uniroyal Chemical has been identified by federal, state or local governmental agencies, and other potentially responsible parties (each a "PRP"), as a PRP for costs associated with waste disposal sites at various locations in the United States. In many cases, Uniroyal Chemical is one of many PRP's so identified. In addition, the Companies are involved with environmental remediation and compliance activities at some of their current and former sites. Each quarter, the Companies evaluate and review 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 Companies' and the anticipated time frame over which payments toward the remediation plan will occur. As of June 30, 1996, the Companies' reserves for environmental liabilities totaled $64.3 million. These estimates 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 Companies intend to assert all meritorious legal defenses and all other equitable factors which are available to them with respect to the above matters. The Companies believe that the resolution of these environmental matters, which may be over the next decade, will not have a material adverse effect on the consolidated financial position of the Companies, but could have a material adverse effect on the Companies' consolidated results of operations in any given year if a significant number of these matters are resolved unfavorably which the Companies believe to be unlikely. 7. MERGER AGREEMENT UCC entered into an Agreement and Plan of Merger, dated as of April 30, 1996 (the "Merger Agreement"), with Crompton & Knowles Corporation ("Crompton") and Tiger Merger Corp. ("Tiger"). The merger agreement provides, among other things, pursuant to the terms and subject to F-58 UNIROYAL CHEMICAL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the conditions therein, that Tiger, a wholly-owned subsidiary of Crompton, will merge with and into UCC (the "Merger"). Under the terms of the Merger Agreement, each share of UCC's common stock issued and outstanding immediately prior to the consummation of the Merger will be converted into .9577 shares of Crompton common stock (the "Exchange Ratio"). The Exchange Ratio is based on the average closing price of Crompton's common stock on the New York Stock Exchange Composite Tape for the twenty trading days ending July 18, 1996. Each share of UCC's Series A Cumulative Redeemable Preferred Stock and Series B Preferred Stock issued and outstanding immediately prior to the consummation of the Merger will be converted into and represent a number of shares of Crompton common stock equal to the Exchange Ratio multiplied by 6.667. The Merger, which is intended to be tax free to UCC shareholders and accounted for as a pooling of interests, is subject to approval by the shareholders of both companies at special meetings of stockholders to be held on August 21, 1996. Common stockholders of record on July 9, 1996 will be eligible to vote at the special meeting. F-59 NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE 1,000,000 SHARES ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CROMPTON & KNOWLES CIRCUMSTANCES, CREATE ANY IMPLICATION CORPORATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION. ------------ TABLE OF CONTENTS COMMON STOCK ($0.10 PAR VALUE) PAGE ---- Available Information.............. ii Prospectus Summary................. 1 Risk Factors....................... 7 Use of Proceeds.................... 12 Market Price and Dividend Data..... 12 [LOGO] The Company........................ 13 Recent Developments................ 19 Selected Historical Financial Data of Crompton...................... 22 Management's Discussion and Analy- sis of Financial Condition and Results of Operations of Crompton.. 23 Historical and Unaudited Pro Forma Combined Capitalization............ 30 Unaudited Pro Forma Combined Financial Information.............. 32 Directors and Executive Officers of Crompton........................... 41 Compensation of Directors and Exec- utive Officers of Crompton......... 43 Principal Stockholders of Crompton........................... 53 Description of Crompton Capital Stock.............................. 54 Plan of Distribution............... 55 Legal Matters...................... 55 SALOMON BROTHERS INC Experts............................ 55 Placement Agent Index to Financial Statements...... F-1 ------------ UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. DATED AUGUST , 1996 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered hereby, other than discounts and commissions. All amounts are estimated except the Securities and Exchange Commission (the "SEC") registration fee and the National Association of Securities Dealers, Inc. ("NASD") registration fee. PAYABLE BY THE REGISTRANT -------------- SEC registration fee.......................................... $ 5,045 NASD registration fee......................................... 1,963 Printing and engraving expenses............................... 75,000* Miscellaneous fees and expenses............................... 1,000* -------------- Total................................................... 83,008* -------------- -------------- - ------------------- * Estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 67 of the Business Corporation Law of the Commonwealth of Massachusetts (the "B.C.L.") sets forth conditions and limitations governing the indemnification of officers, directors, and other persons. The Registrant's By-laws provide that the Registrant 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, or 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 Registrant or, to the extent that such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or 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 or 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 Registrant, 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 Registrant; 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 of officer. Expenses, including counsel fees, reasonably incurred by any director or officer in connection with the defense or disposition of any such action, suit, or other proceeding may be paid from time to time by the Registrant, 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 amount so paid to the Registrant if it is ultimately determined that indemnification for such expenses is II-1 not authorized pursuant to the By-laws, which undertaking may be accepted without reference to the financial ability of such director or officer to make repayment. The Registrant's Restated Articles of Organization provide that a director shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that this shall not eliminate or limit the liability of a director to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 61 or 62 of the B.C.L. (such sections relate generally to the liability of directors for authorizing distributions to shareholders at a time when the Registrant is insolvent or bankrupt and the liability of directors for approving loans to officers or directors of the Registrant which are not repaid and which were not approved or ratified by a majority of disinterested directors or shareholders), or (iv) for any transactions from which the director derived an improper personal benefit. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Registrant for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. The Registrant has insurance to indemnify its directors and officers, within the limits of the Registrant's insurance policies, for those liabilities in respect of which such indemnification insurance is permitted under the laws of the Commonwealth of Massachusetts. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Not applicable. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. The following exhibits are filed as part of this Registration Statement.
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------------------------------------------------------------------------ 1.01 Form of Placement Agreement. 2.01 Agreement and Plan of Merger dated as of April 30, 1996, among the Registrant, Tiger Merger Corp., and Uniroyal Chemical Corporation, included as Annex A in the Joint Proxy Statement/Prospectus included as part of the Registrant's Registration Statement on Form S-4 (Registration Statement No. 333-08539), and incorporated herein by reference. The Registrant agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon Request. 3.01 Restated Articles of Organization of the Registrant filed with the Commonwealth of Massachusetts on October 27, 1988, as amended on April 10, 1990 and on April 14, 1992, filed as Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1992 (Commission File No. 1-4663) and incorporated herein by reference. 3.02 By-laws of the Registrant as amended to date, filed as Exhibit 3(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (Commission File No. 1-4663) and incorporated herein by reference. 4.01 Rights Agreement dated as of July 20, 1988, between the Registrant and The Chase Manhattan Bank, N.A., as Rights Agent, filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated July 29, 1988 (Commission File No. 1-4663) and incorporated herein by reference. 4.02 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, filed as Exhibit 4(i)(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (Commission File No. 1-4663) and incorporated herein by reference.
II-2
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------------------------------------------------------------------------ 4.03 Credit Agreement dated as of September 28, 1992, among the Registrant, five banks, and Bankers Trust Company as Agent, filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-3 (Registration No. 33-52642) and incorporated herein by reference. 4.04 First Amendment to Credit Agreement dated as of September 1, 1994, among the Registrant, five banks, and Bankers Trust Company as Agent, filed as Exhibit 4(b)(2) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (Commission File No. 1-4663) and incorporated herein by reference. 4.05 Second Amendment to Credit Agreement dated as of May 28, 1995, among the Registrant, five banks, and Bankers Trust Company as Agent, filed as Exhibit 4(b)(3) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 5.01 Opinion of Wachtell, Lipton, Rosen & Katz as to the legality of the shares being issued.* 10.01 1983 Stock Option Plan of Crompton & Knowles Corporation, as amended through April 14, 1987, filed as Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 28, 1987 (Commission File No. 1-4663) and incorporated herein by reference. 10.02 Amendments to Crompton & Knowles Corporation Stock Option Plans adopted February 22, 1988, filed as Exhibit 10(d) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1987 (Commission File No. 1-4663) and incorporated herein by reference. 10.03 Amended Annual Incentive Compensation Plan for "A" Group of Senior Executives dated January 24, 1994, filed as Exhibit 10(d) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference. 10.04 Summary of Management Incentive Bonus Plan for selected key management personnel, filed as Exhibit 10(m) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1980 (Commission File No. 1-4663) and incorporated herein by reference. 10.05 Supplemental Medical Reimbursement Plan, filed as Exhibit 10(n) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1980 (Commission File No. 1-4663) and incorporated herein by reference. 10.06 Supplemental Dental Reimbursement Plan, filed as Exhibit 10(o) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1980 (Commission File No. 1-4663) and incorporated herein by reference. 10.07 Employment Agreement dated February 22, 1988, between the Registrant and Vincent A. Calarco, filed as Exhibit 10(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1987 (Commission File No. 1-4663) and incorporated herein by reference. 10.08 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, filed as Exhibit 10(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1987 (Commission File No. 1-4663) and incorporated herein by reference. 10.09 Amended Supplemental Retirement Agreement dated October 18, 1995 between the Registrant and Vincent A. Calarco, filed as Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 10.10 Form of Amended Supplemental Retirement Agreement dated October 18, 1995 between the Registrant and three of its executive officers, filed as Exhibit 10(j) to the Registrant's Annual Report on Form 10- K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference.
II-3
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------------------------------------------------------------------------ 10.11 Form of Supplemental Retirement Agreement dated October 18, 1995 between the Registrant and five of its executive officers, filed as Exhibit 10(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 10.12 Supplemental Retirement Agreement Trust Agreement dated October 20, 1993 between the Registrant and Shawmut Bank, N.A., filed as Exhibit 10(l) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference. 10.13 Amended Benefit Equalization Plan dated October 20, 1993, filed as Exhibit 10(m) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference. 10.14 Amended Benefit Equalization Plan Trust Agreement dated October 20, 1993 between the Registrant and Shawmut Bank, N.A., filed as Exhibit 10(n) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference. 10.15 Amended 1988 Long Term Incentive Plan, filed as Exhibit 10(o) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference. 10.16 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, filed as Exhibit 10(w) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (Commission File No. 1-4663) and incorporated herein by reference. 10.17 Form of 1992-1994 Long Term Performance Award Agreement, filed as Exhibit 10(y) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (Commission File No. 1-4663) and incorporated herein by reference. 10.18 Crompton & Knowles Corporation Restricted Stock Plan for Directors approved by the stockholders on April 9, 1991, filed as Exhibit 10(z) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (Commission File No. 1-4663) and incorporated herein by reference. 10.19 Amended 1933 Stock Option Plan for Non-Employee Directors, filed as Exhibit 10(s) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 11.01 Statement re computation of per share earnings, filed as Exhibit 11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1996 (Commission File No. 1-4663) and incorporated herein by reference. 21.01 Subsidiaries of the Registrant, filed as Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 23.01 Consent of KPMG Peat Marwick LLP. 23.02 Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit 5.01). 23.03 Consent of Deloitte & Touche LLP. 24.01 Power of Attorney.*
- ------------ * Filed previously. (b) Financial Statement Schedules. Schedule II--Valuation and Qualifying Accounts of the Registrant (incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663), as amended by Form 10-K/A filed with the Commission on July 9, 1996). II-4 Schedule I and Schedule II of Uniroyal Chemical Corporation (incorporated by reference from Uniroyal Chemical Corporation's Annual Report on Form 10-K for the fiscal year ended October 1, 1995 (Commission File No. 0-25586)). ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stamford, State of Connecticut, on August 12, 1996. CROMPTON & KNOWLES CORPORATION By: /s/ VINCENT A. CALARCO .................................. Vincent A. Calarco Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on August 12, 1996.
SIGNATURE TITLE - --------------------------------------------- --------------------------------------------- /s/ VINCENT A. CALARCO Chairman, President and Chief Executive ............................................. Officer (principal executive officer) Vincent A. Calarco /s/ CHARLES J. MARSDEN Vice President-Finance, Chief Financial ............................................. Officer and Director (principal financial Charles J. Marsden officer) /s/ PETER BARNA Treasurer (principal accounting officer) ............................................. Peter Barna * Director ............................................. 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, Ph.D
*By: /s/ JOHN T. FERGUSON II ........................................ John T. Ferguson II Attorney-in-Fact II-6 EXHIBIT INDEX Exhibits required by S-K item 601:
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ ------------------------------------------------------------------------------------ 1.01 Form of Placement Agreement. 2.01 Agreement and Plan of Merger dated as of April 30, 1996, among the Registrant, Tiger Merger Corp., and Uniroyal Chemical Corporation, included as Annex A in the Joint Proxy Statement/Prospectus included as part of the Registrant's Registration Statement on Form S-4 (Registration Statement No. 333-08539), and incorporated herein by reference. The Registrant agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Commission upon Request. 3.01 Restated Articles of Organization of the Registrant filed with the Commonwealth of Massachusetts on October 27, 1988, as amended on April 10, 1990 and on April 14, 1992, filed as Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1992 (Commission File No. 1-4663) and incorporated herein by reference. 3.02 By-laws of the Registrant as amended to date, filed as Exhibit 3(b) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (Commission File No. 1-4663) and incorporated herein by reference. 4.01 Rights Agreement dated as of July 20, 1988, between the Registrant and The Chase Manhattan Bank, N.A., as Rights Agent, filed as Exhibit 1 to the Registrant's Current Report on Form 8-K dated July 29, 1988 (Commission File No. 1-4663) and incorporated herein by reference. 4.02 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, filed as Exhibit 4(i)(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 1990 (Commission File No. 1-4663) and incorporated herein by reference. 4.03 Credit Agreement dated as of September 28, 1992, among the Registrant, five banks, and Bankers Trust Company as Agent, filed as Exhibit 10.1 to the Registrant's Registration Statement on Form S-3 (Registration No. 33-52642) and incorporated herein by reference. 4.04 First Amendment to Credit Agreement dated as of September 1, 1994, among the Registrant, five banks, and Bankers Trust Company as Agent, filed as Exhibit 4(b)(2) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (Commission File No. 1-4663) and incorporated herein by reference. 4.05 Second Amendment to Credit Agreement dated as of May 28, 1995, among the Registrant, five banks, and Bankers Trust Company as Agent, filed as Exhibit 4(b)(3) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 5.01 Opinion of Wachtell, Lipton, Rosen & Katz as to the legality of the shares being issued.* 10.01 1983 Stock Option Plan of Crompton & Knowles Corporation, as amended through April 14, 1987, filed as Exhibit 10(c) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 28, 1987 (Commission File No. 1-4663) and incorporated herein by reference. 10.02 Amendments to Crompton & Knowles Corporation Stock Option Plans adopted February 22, 1988, filed as Exhibit 10(d) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1987 (Commission File No. 1-4663) and incorporated herein by reference.
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ ------------------------------------------------------------------------------------ 10.03 Amended Annual Incentive Compensation Plan for "A" Group of Senior Executives dated January 24, 1994, filed as Exhibit 10(d) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference. 10.04 Summary of Management Incentive Bonus Plan for selected key management personnel, filed as Exhibit 10(m) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1980 (Commission File No. 1-4663) and incorporated herein by reference. 10.05 Supplemental Medical Reimbursement Plan, filed as Exhibit 10(n) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1980 (Commission File No. 1-4663) and incorporated herein by reference. 10.06 Supplemental Dental Reimbursement Plan, filed as Exhibit 10(o) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1980 (Commission File No. 1-4663) and incorporated herein by reference. 10.07 Employment Agreement dated February 22, 1988, between the Registrant and Vincent A. Calarco, filed as Exhibit 10(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1987 (Commission File No. 1-4663) and incorporated herein by reference. 10.08 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, filed as Exhibit 10(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1987 (Commission File No. 1-4663) and incorporated herein by reference. 10.09 Amended Supplemental Retirement Agreement dated October 18, 1995 between the Registrant and Vincent A. Calarco, filed as Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 10.10 Form of Amended Supplemental Retirement Agreement dated October 18, 1995 between the Registrant and three of its executive officers, filed as Exhibit 10(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 10.11 Form of Supplemental Retirement Agreement dated October 18, 1995 between the Registrant and five of its executive officers, filed as Exhibit 10(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 10.12 Supplemental Retirement Agreement Trust Agreement dated October 20, 1993 between the Registrant and Shawmut Bank, N.A., filed as Exhibit 10(l) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference. 10.13 Amended Benefit Equalization Plan dated October 20, 1993, filed as Exhibit 10(m) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference. 10.14 Amended Benefit Equalization Plan Trust Agreement dated October 20, 1993 between the Registrant and Shawmut Bank, N.A., filed as Exhibit 10(n) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference. 10.15 Amended 1988 Long Term Incentive Plan, filed as Exhibit 10(o) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 25, 1993 (Commission File No. 1-4663) and incorporated herein by reference.
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------ ------------------------------------------------------------------------------------ 10.16 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, filed as Exhibit 10(w) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1989 (Commission File No. 1-4663) and incorporated herein by reference. 10.17 Form of 1992-1994 Long Term Performance Award Agreement, filed as Exhibit 10(y) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (Commission File No. 1-4663) and incorporated herein by reference. 10.18 Crompton & Knowles Corporation Restricted Stock Plan for Directors approved by the stockholders on April 9, 1991, filed as Exhibit 10(z) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1991 (Commission File No. 1-4663) and incorporated herein by reference. 10.19 Amended 1933 Stock Option Plan for Non-Employee Directors, filed as Exhibit 10(s) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 11.01 Statement re computation of per share earnings, filed as Exhibit 11 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 30, 1996 (Commission File No. 1-4663) and incorporated herein by reference. 21.01 Subsidiaries of the Registrant, filed as Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995 (Commission File No. 1-4663) and incorporated herein by reference. 23.01 Consent of KPMG Peat Marwick LLP. 23.02 Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit 5.01). 23.03 Consent of Deloitte & Touche LLP. 24.01 Power of Attorney.*
- ------------ * Filed previously. EX-1.01 2 Exhibit 1.01 CROMPTON & KNOWLES CORPORATION 1,000,000 Shares Common Stock ($0.10 par value) PLACEMENT AGENT AGREEMENT New York, New York August , 1996 Salomon Brothers Inc Seven World Trade Center New York, New York 10048 Dear Sirs: Crompton & Knowles Corporation, a Massachusetts corporation (the "Company"), hereby confirms its agreement with you (the "Placement Agent") with respect to the issuance and sale by the Company of 1,000,000 shares (the "Securities") of Common Stock, $0.10 par value, of the Company ("Common Stock"). Subject to the terms and conditions set forth herein, the Placement Agent will act as exclusive placement agent for the Securities. 1. Representations and Warranties. The Company represents and ------------------------------- warrants to, and agrees with, the Placement Agent as set forth below in this Section 1. Certain terms used in this Section 1 are defined in paragraph (c) hereof. (a) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement (file number 333-09337) on Form S-1, including a related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (the "Act") of the offering and sale of the Securities. The Company may have filed one or more amend- ments thereto, including the related preliminary prospectus, each of which has previously been furnished to you. The Company will next file with the Commission either (A) prior to the effectiveness of such registration statement, a further amendment to such registration statement (including the form of final prospectus) or (B) after the effectiveness of such registration statement, a final prospectus in accor- 2 dance with Rules 430A and 424(b)(1) or (4). In the case of clause (B), the Company has included in such registration statement, as amended at the Effective Date, all information (other than Rule 430A Information) required by the Act and the rules thereunder to be included in the Prospectus with respect to the Securities and the offering thereof. As filed, such amendment and form of final prospectus, or such final prospectus, shall contain all Rule 430A Information, together with all other such required information, with respect to the Securities and the offering thereof and, except to the extent the Placement Agent shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the Execution Time or, to the extent not completed at the Execution Time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Company has advised you, prior to the Execution Time, will be included or made therein. (b) On the Effective Date, the Registration Statement did or will, and when the Prospectus is first filed (if required) in accordance with Rule 424(b) and on the Closing Date, the Prospectus (and any supplements thereto) will, comply in all material respects with the applicable require- ments of the Act and the rules thereunder; on the Effective Date, the Registration Statement did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date, the Prospectus, if not filed pursuant to Rule 424(b), did not or will not, and on the date of any filing pursuant to Rule 424(b) and on the Closing Date, the Prospectus (together with any supplement thereto) will not, include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no -------- ------- representations or warranties as to the information contained in or omitted from the Registration Statement, or the Prospectus (or any supplement thereto) in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of the Placement Agent specifically for inclusion in the Registration 3 Statement or the Prospectus (or any supplement thereto). (c) The terms that follow, when used in this Agreement, shall have the meanings indicated. The term "the Effective Date" shall mean each date that the Registration Statement, any post-effective amendment or amendments thereof, and any Rule 462(b) Registration Statement became or become effective. "Execution Time" shall mean the date and time that this Agreement is executed and delivered by the parties hereto. "Preliminary Prospectus" shall mean any preliminary prospectus referred to in paragraph (a) above and any preliminary prospectus included in the Registration Statement at the Effective Date that omits Rule 430A Information. "Prospectus" shall mean the prospectus relating to the Securities that is first filed pursuant to Rule 424(b) after the Execution Time or, if no filing pursuant to Rule 424(b) is required, shall mean the form of final prospectus relating to the Securities included in the Registration Statement at the Effective Date. "Registration Statement" shall mean the registration statement referred to in paragraph (a) above, including exhibits and financial statements, as amended at the Execution Time (or, if not effective at the Execution Time, in the form in which it shall become effective) and, in the event any post-effective amendment thereof or any Rule 462(b) Registration Statement becomes effective prior to the Closing Date (as hereinafter defined), shall also mean such registration statement as so amended or such Rule 462(b) Registration Statement, as the case may be. Such term shall include any Rule 430A Information deemed to be included therein at the Effective Date as provided by Rule 430A. "Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the Act. "Rule 430A Information" means information with respect to the Securities and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A. "Rule 462(b) Registration Statement" shall mean a registration statement and any amendments thereto filed pursuant to Rule 462(b) relating to the offering covered by the initial registration statement (file number 333- 09337). (d) The Company's authorized equity capitalization is as set forth under the heading "Description of Crompton Capital Stock" in the 4 Prospectus; all the issued and outstanding shares of capital stock, including Common Stock, of the Company have been duly and validly authorized and issued and are fully paid and nonassessable; the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is organized, with full power and authority to own its properties and conduct its business as described in the Prospectus, and the Company has full corporate power and authority to execute and deliver this Agreement and to issue and sell the Securities as herein contemplated. (e) The Company is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of material property or the conduct of material business, and the Company is in compliance in all material respects with the laws, orders, rules and regulations issued or administered by such jurisdictions. (f) Each material subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized with full power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of material property or the conduct of material business; and all of the issued and outstanding capital stock of each material subsidiary of the Company has been duly authorized and validly issued, is fully paid and nonassessable and the shares of such capital stock owned by the Company are owned, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (g) Neither the Company nor any of its material subsidiaries is in breach of, or in default under (nor has any event occurred which with notice, lapse of time, or both would constitute a breach of, or default under), its charter or by-laws or in the performance or 5 observance of any obligation, agreement, covenant or condition contained in any material indenture or other material agreement or material instrument to which the Company or such subsidiary is a party or by which it is bound, and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not result in any breach of or constitute a default under (nor constitute any event which with notice, lapse of time, or both would constitute a breach of, or default under), any provisions of the charter or by-laws of the Company or any of its material subsidiaries or under any provision of any material indenture or other material agreement or material instrument to which the Company or such subsidiary is a party or by which it or its properties may be bound or affected, or under any Federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company or any of its material subsidiaries. (h) This Agreement has been duly authorized, executed, and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium, or similar laws relating to creditors' rights and general principles of equity. (i) The capital stock of the Company, including the Securities, conforms in all material respects to the description thereof contained in the Prospectus and the certificates for the Securities are in due and proper form as required under Massachusetts law. (j) No approval, authorization, consent or order of or filing with any national, state or local governmental or regulatory commission, board, body, authority or agency is required in connection with the issuance and sale of the Securities as contemplated hereby other than registration of the Securities under the Act and any necessary qualification as may be required by the National Association of Securities Dealers, Inc. ("NASD") rules or under the securities or blue sky laws of the various jurisdictions in which the Securities are being offered. (k) Except as is set forth in the Registration Statement or Prospectus, no person has the right, 6 contractual or otherwise, to cause the Company to issue to it, or register pursuant to the Act, any shares of capital stock of the Company upon the issue and sale of the Securities as contemplated hereby, nor does any person have preemptive rights, rights of first refusal or other rights to purchase any of the Securities, which rights have not been waived. (l) KPMG Peat Marwick LLP whose reports on the consolidated financial statements of the Company are filed with the Commission as part of the Registration Statement and Prospectus, are independent accountants within the meaning of the Act and the applicable published rules and regulation thereunder. (m) The Company and each of its material subsidiaries has all necessary licenses, authorizations, consents and approvals and has made all necessary filings required under any Federal, state, local or foreign law, regulation or rule, and has obtained all necessary material authorizations, consents and approvals from other persons, in order to conduct its business; neither the Company nor any of its material subsidiaries is in violation of, or in default under, any such license, authorization, consent or approval or any Federal, state, local or foreign law, regulation or rule or any decree, order or judgment applicable to the Company or such subsidiary. (n) All legal or governmental proceedings, contracts or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement have been so described or filed as required. (o) Except as disclosed in the Prospectus, there are no actions, suits or proceedings pending or, to the Company's knowledge, threatened against the Company or any of its subsidiaries or any of its properties, at law or in equity, or before or by any Federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency which, individually or in the aggregate, are reasonably likely to result in a judgment, decree or order. (p) The financial statements included in the Registration Statement and the Prospectus present 7 fairly the consolidated financial position of the Company as of the dates indicated and the consolidated results of operations and changes in financial position of the Company for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved. (q) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as may be otherwise stated in the Registration Statement or Prospectus, there has not been (i) to the knowledge of the Company, any material adverse change, or any development which reasonably may result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries taken as a whole, (ii) any transaction, which is material to the Company and its subsidiaries taken as a whole, contemplated or entered into by the Company or (iii) any obligation, contingent or otherwise, directly or indirectly incurred by the Company or any of its subsidiaries which is material to the Company and its subsidiaries taken as a whole. 2. Appointment of Placement Agent; Placement of the Securities. ------------------------------------------------------------ (a) Subject to the terms and conditions set forth herein, the Company hereby authorizes the Placement Agent to act as its exclusive agent to solicit offers for the purchase of all or part of the Securities from the Company. So long as this Agreement shall remain in effect, the Company shall not, without the prior consent of the Placement Agent, solicit or accept offers to purchase Securities otherwise than through the Placement Agent. (b) On the basis of the representations and warranties, and subject to the terms and conditions set forth herein, the Placement Agent agrees, as agent of the Company, to use its best efforts to solicit offers to purchase the Securities from the Company on the terms and subject to the conditions set forth in the Prospectus. The Placement Agent shall make reasonable efforts to assist the Company in obtaining performance by each purchaser whose offer to purchase Securities has been solicited by the Placement Agent and accepted by the Company, but the Placement Agent shall not, except as otherwise provided in this Agreement, be obligated to disclose the identity of any 8 purchaser or have any liability to the Company in the event any such purchase is not consummated for any reason. Under no circumstances will the Placement Agent be obligated to purchase any Securities for its own account, and, in soliciting purchases of Securities, the Placement Agent shall act solely as the Company's agent and not as principal. Notwithstanding the foregoing and except as otherwise provided in Section 2(c), it is understood and agreed that the Placement Agent may, solely at its discretion and without any obligation to do so, purchase Securities as principal. (c) Subject to the provisions of this Section 2, offers for the purchase of Securities may be solicited by the Placement Agent as agent for the Company at such times and in such amounts as the Placement Agent deems advisable. The Placement Agent shall communicate to the Company, orally or in writing, each reasonable offer to purchase Securities received by it as agent of the Company. The Company shall have the sole right to accept offers to purchase the Securities and may reject any such offer, in whole or in part. The Placement Agent shall have the right, in its discretion reasonably exercised, without notice to the Company, to reject any offer to purchase Securities received by it, in whole or in part, and any such rejection shall not be deemed a breach of its agreement contained herein. (d) At the time of delivery of, and payment for, any Securities sold by the Company as a result of a solicitation made by, or offer to purchase received by, the Placement Agent, acting on an agency basis, whether the Securities are placed by the Placement Agent or otherwise, the Company agrees to pay the Placement Agent a placement fee equal to [ ]. Payment shall be made to or upon the order of the Placement Agent by wire transfer in federal (same-day) funds to an account designated by the Placement Agent prior to the Closing Date. The Company agrees that the Placement Agent, when purchasing Securities as principal for resale, shall receive compensation in the form of a discount in an aggregate amount equal to [ ]. (e) No Security which the Company has agreed to sell pursuant to this Agreement shall be deemed to have been purchased and paid for, or sold by the Company, until such Security shall have been delivered to the purchaser thereof against payment by such purchaser. If the Company shall default in its obligations to deliver Securities to a purchaser whose offer it has accepted, the Company shall 9 indemnify and hold the Placement Agent harmless against any loss, claim or damage arising from or as a result of such default by the Company. 3. The Closing. The documents required to be delivered by Section 5 ------------ hereof shall be delivered to the Placement Agent at the office of Cravath, Swaine & Moore, counsel for the Placement Agent, at Worldwide Plaza, 825 Eighth Avenue, New York, New York, on , 1996 (the "Closing Date"). 4. Agreements. The Company agrees with the Placement Agent that: ----------- (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the Execution Time, and any amendment thereof, to become effective. Prior to the termination of the offering of the Securities, the Company will not file any amendment of the Registration Statement or supplement to the Prospectus without the prior consent of the Placement Agent, which consent may not be unreasonably withheld. Subject to the foregoing sentence, if the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will cause the Prospectus, properly completed, and any supplement thereto to be filed with the Commission pursuant to the applicable paragraph of Rule 424(b) within the time period prescribed and will provide evidence satisfactory to the Placement Agent of such timely filing. The Company will promptly advise the Placement Agent (i) when the Registration Statement, if not effective at the Execution Time, and any amendment thereto, shall have become effective, (ii) when the Prospectus, and any supplement thereto, shall have been filed (if required) with the Commission pursuant to Rule 424(b), (iii) when, prior to termination of the offering of the Securities, any amendment to the Registration Statement shall have been filed or become effective, (iv) of any request by the Commission for any amendment of the Registration Statement or supplement to the Prospectus or for any additional information, (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (vi) of the receipt by the Company of any notification with respect 10 to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain as soon as possible the withdrawal thereof. (b) If, at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event occurs as a result of which the Prospectus as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act or the rules thereunder, the Company promptly will (i) prepare and file with the Commission, subject to the second sentence of paragraph (a) of this Section 4, an amendment or supplement which will correct such state- ment or omission or effect such compliance and (ii) supply any supplemented Prospectus to you in such quantities as you may reasonably request. (c) As soon as practicable, the Company will make generally available to its security holders and to the Placement Agent an earnings statement or statements of the Company and its subsidiaries which will satisfy the provisions of Section 11(a) of the Act and Rule 158 under the Act and which covers a 12-month period following the Effective Date of the Registration Statement. (d) The Company will furnish to the Placement Agent and counsel for the Placement Agent, without charge, signed copies of the Registration Statement (including exhibits thereto) and as many copies of each Preliminary Prospectus and the Prospectus and any supplement thereto as the Placement Agent may reasonably request. The Company will pay the expenses of printing or other production of all documents relating to the offering. (e) The Company will arrange for the qualification of the Securities for sale under the laws of such jurisdictions as the Placement Agent may designate, and will maintain such qualifications in effect so long as 11 required for the distribution of the Securities and will pay the fee of the National Association of Securities Dealers, Inc., in connection with its review of the offering. The Company will arrange for the listing of the Shares on each exchange on which the Common Stock is currently listed. (f) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 1 of Laws of Florida, Chapter 92- 198, An Act Relating to Disclosure of Doing Business with Cuba, and the --------------------------------------------------------- Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Securities and Exchange Commission or with the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported in the Prospectus, if any, concerning the Company's business with Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. 5. Conditions to the Obligations of the Placement Agent. The ----------------------------------------------------- obligations of the Placement Agent to solicit offers to purchase the Securities as agent of the Company shall be subject to the accuracy of the representations and warranties on the part of the Company contained herein as of the Execution Time and the Closing Date, to the accuracy of the statements of the Company made in any certificates pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) If the Registration Statement has not become effective prior to the Execution Time, unless the Placement Agent agrees in writing to a later time, the Registration Statement will become effective not later than (i) 6:00 PM New York City time on the date of determination of the public offering price, if such determination occurred at or prior to 3:00 PM New York City time on such date or (ii) 12:00 Noon on the business day following the day on which the public offering price was determined, if such determination occurred after 3:00 PM New York City time on such date; if filing of the Prospectus, or any supplement thereto, 12 is required pursuant to Rule 424(b), the Prospectus, and any such supplement, will be filed in the manner and within the time period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or threatened. (b) The Company shall have furnished to the Placement Agent the opinion of John T. Ferguson, II, General Counsel of the Company, dated the Closing Date, to the effect that: (i) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Massachusetts with full corporate power and authority to own its properties and conduct its business as described in the Prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases material properties or conducts material business; (ii) each material subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized with full power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of material property or the conduct of material business; and all of the issued and outstanding capital stock of each material subsidiary of the Company has been duly authorized and validly issued, is fully paid and nonassessable and the shares of such capital stock owned by the Company are owned, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; 13 (iii) the Company's authorized equity capitalization is as set forth in the Prospectus as of the date set forth therein; the capital stock of the Company conforms to the description thereof contained in the Prospectus; the outstanding shares of Common Stock have been duly and validly authorized and issued and are fully paid and nonassessable; the Securities have been duly and validly authorized, and, when issued and delivered to and paid for by the purchasers thereof as contemplated by this Agreement, will be fully paid and nonassessable; the Securities are duly authorized for listing, on the New York Stock Exchange; the certificates for the Securities are in valid and proper form as required under Massachusetts law; and the holders of outstanding shares of capital stock of the Company are not entitled to statutory or contractual preemptive rights or other similar rights to subscribe for the Securities; (iv) to the best knowledge of such counsel, there is no pending or threatened action, suit or proceeding before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries of a character required to be dis- closed in the Registration Statement which is not adequately disclosed in the Prospectus, and there is no franchise, contract, agreement or other document of a character required to be described in the Registration Statement or Prospectus, or to be filed as an exhibit, which is not described or filed as required; and the statements in the Prospectus under the headings "Risk Factors--Litigation Relating to Merger" and "Recent Developments--Certain Litigation" fairly summarize the matters therein described; (v) the Registration Statement has become effective under the Act; any required filing of the Prospectus, and any supplements thereto, pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued, no proceedings for that purpose have 14 been instituted or threatened and the Registration Statement and the Prospectus (other than the financial statements and other financial and statistical information contained therein as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the rules thereunder; and such counsel has no reason to believe that at the Effective Date the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus includes any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (vi) this Agreement has been duly authorized, executed and delivered by the Company; (vii) no consents, approvals, authorizations or orders of any court or governmental agency or body are required for the consummation by the Company of the transactions contemplated herein, except such as have been obtained under the Act and such as may be required under NASD rules or the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Securities as contemplated by this Agreement and such other approvals (specified in such opinion) as have been obtained; (viii) neither the issue and sale of the Securities, nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation of, or constitute a default under any law or the charter or by-laws of the Company or any of its material subsidiaries or the terms of any material indenture or other material agreement or material instrument known to such counsel and to which the Company or any of its material subsidiaries is a party or bound or any judgment, order or decree known to such counsel to be applicable to the 15 Company or any of its material subsidiaries of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over the Company or any of its material subsidiaries; and (ix) no holders of securities of the Company have rights to the registration of such securities under the Registration Statement, which rights have not been waived. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the laws of the State of Massachusetts, the General Corporation Law of the State of Delaware or the federal laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are reasonably satisfactory to counsel for the Placement Agent and (B) as to matters of fact, to the extent deemed proper by such counsel, on certificates of responsible officers of the Company and public officials. References to the Prospectus in this paragraph (b) include any supplements thereto at the Closing Date. (c) The Company shall have furnished to the Placement Agent a certificate of the Company, signed by the Chairman of the Board or the President and the principal financial or accounting officer of the Company, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Registration Statement, the Prospectus, any supplement to the Prospectus and this Agreement and that: (i) the representations and warranties of the Company in this Agreement are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been 16 instituted or, to the Company's knowledge, threatened; and (iii) since the date of the most recent financial statements included in the Prospectus (exclusive of any supplement thereto), to the knowledge of such officers, there has been no material adverse change in the condition (financial or other), earnings, business or properties of the Company and its subsidiaries, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). (d) At the Execution Time and at the Closing Date, KPMG Peat Marwick LLP, shall have furnished to the Placement Agent a letter or letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance reasonably satisfactory to the Placement Agent, confirming that they are independent accountants within the meaning of the Act and the applicable published rules and regulations thereunder and stating in effect that: (i) in their opinion the audited financial statements and financial statement schedules and any pro forma financial statements included in the Registration Statement and the Prospectus and reported on by them comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (ii) on the basis of a reading of the latest unaudited financial statements made available by the Company and its subsidiaries; their limited review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited interim financial information for the quarters ended March 30, 1996 and April 1, 1995, and as at March 30, 1996, as indicated in their report dated , 1996; carrying out certain specified procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter; 17 a reading of the minutes of the meetings of the stockholders and board of directors (and committees thereof) of the Company and its subsidiaries; and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company and its subsidiaries as to transactions and events subsequent to March 30, 1996, nothing came to their attention which caused them to believe that: (1) any unaudited financial statements included in the Registration Statement and the Prospectus do not comply in form in all material respects with applicable accounting requirements of the Act and with the published rules and regulations of the Commission with respect to registration statements on Form S-1; or said unaudited financial statements are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement and the Prospectus; (2) with respect to the period subsequent to March 30, 1996, there were any changes, at a specified date not more than five business days prior to the date of the letter, in the long-term debt of the Company and its subsidiaries or capital stock of the Company or decreases in the stockholders' equity of the Company or net assets of the Company or decreases in working capital of the Company and its subsidiaries, in each case as compared with the amounts shown on the March 30, 1996, consolidated balance sheet included in the Registration Statement and the Prospectus, or for the period from April 1, 1996, to such specified date there were any decreases, as compared with the corresponding period in the preceding year; in net sales or earnings before income taxes or in total or per share 18 amounts of net earnings of the Company and its subsidiaries, except in all instances for changes or decreases set forth in such letter, in which case the letter shall be accompanied by an explanation by the Company as to the significance thereof unless said explanation is not deemed necessary by the Placement Agent; or (3) the information included or incorporated by reference in the Registration Statement and the Prospectus in response to Regulation S-K, Item 301 (Selected Financial Data), Item 302 (Supplementary Financial Information) and Item 402 (Executive Compensation) is not in conformity with the applicable disclosure requirements of Regulation S-K; and (iii) they have performed certain other specified procedures as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company and its subsidiaries) set forth in the Registration Statement and the Prospectus, including the information set forth under the captions "Selected Historical Financial Data of Crompton", "Management's Discussion and Analysis of Financial Condition and Results of Operations of Crompton", "Historical and Unaudited Pro Forma Combined Capitalization" and "Unaudited Pro Forma Combined Financial Information" in the Prospectus, agrees with the accounting records of the Company and its subsidiaries, excluding any questions of legal interpretation; and (iv) on the basis of a reading of the unaudited pro forma financial statements included in the Registration Statement and the Prospectus (the "pro forma financial statements"); carrying out certain specified procedures; inquiries of certain officials of the Company who have responsibility for financial and accounting 19 matters; and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the pro forma financial statements, nothing came to their attention which caused them to believe that the pro forma financial statements do not comply in form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements. References to the Prospectus in this paragraph (d) include any supplement thereto at the date of the letter. (e) Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (d) of this Section 4 or (ii) any change, or any development involving a prospective change, in or affecting the business or properties of the Company and its subsidiaries the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Placement Agent, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto). (f) There shall not have occurred (i) any downgrading in the rating of any debt securities of the Company by any nationally recognized statistical rating organization, or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (ii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any 20 exchange or in the over-the-counter market; (iii) any banking moratorium declared by United States Federal or New York authorities; or (iv) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the Placement Agent's judgment, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with solicitations of offers to purchase, or sales of the Securities. (g) Prior to the Closing Date, the Company shall have furnished to the Placement Agent such further information, certificates and documents as the Placement Agent may reasonably request. If any of the conditions specified in this Section 5 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Placement Agent and counsel for the Placement Agent, this Agreement and all obligations of the Placement Agent hereunder may be canceled at, or at any time prior to, the Closing Date by the Placement Agent. Notice of such cancelation shall be given to the Company in writing or by telephone or telegraph confirmed in writing. 6. Additional Covenants of the Company. The Company covenants and ------------------------------------ agrees with you that: (a) Each acceptance by the Company of an offer for the purchase of Securities solicited by you in your capacity as Placement Agent, and each sale of Securities to you as principal, shall be deemed to be an affirmation that the representations and warranties of the Company contained in this Agreement and in any certificate of the Company delivered to you pursuant hereto are true and correct at the time of such acceptance or sale, as the case may be, and an undertaking that such representations and warranties will be true and correct at the time of delivery to the purchaser or his agent, or you, of the Securities relating to such acceptance or sale, as the case may be, as though made at and as of each such time (and it is understood that such representations and warranties shall relate to the Prospectus as amended or supplemented to each such time). 21 (b) Each time that the Prospectus shall be amended or supplemented, unless otherwise advised by the Placement Agent, the Company shall furnish or cause to be furnished to you forthwith (i) a certificate of the Chief Financial Officer and the Treasurer or the Assistant Treasurer of the Company, (ii) the legal opinion of John T. Ferguson, General Counsel of the Company, and (iii) the letter of KPMG Peat Marwick LLP, in forms reasonably satisfactory to you to the effect that the statements contained in the certificate referred to in Section 5(c) hereof, the legal opinions referred to in Sections 5(b) hereof, and the letter referred to in Section 5(d) hereof, as the case may be, which was last furnished to you are true and correct at the time of such amendment or supplement or sale, as the case may be, as though made at and as of such time (except that such statements shall be deemed to relate to the Prospectus as amended and supplemented to such time) or, in lieu of such certificate, legal opinions, and letter, as the case may be, a certificate, legal opinions, and letter, as the case may be, of the same tenor as the certificate, legal opinions or letter, as the case may be, referred to in said Section 5(b), (c) or (d), as the case may be, modified as necessary to relate to the Prospectus as amended and supplemented to the time of delivery of such certificate, legal opinions or letter, as the case may be. (c) The Company agrees that any obligation of any person who has agreed to purchase Securities to make payment for and take delivery of Security on the applicable settlement date therefor shall be subject to (i) the accuracy of the Company's representations and warranties deemed to be made to the Placement Agent pursuant to Section 6(a) and (ii) satisfaction of the conditions set forth in Sections 5(a) and 5(f), it being understood that under no circumstances shall the Placement Agent have any duty or obligation to exercise the judgment permitted under Section 5(f) on behalf of any such purchaser. 7. Reimbursement of Placement Agent's Expenses. If the sale of the -------------------------------------------- Securities provided for herein is not consummated because any condition to the obligations of the Placement Agent set forth in Section 5 hereof is not satisfied, because of any termination pursuant to Section 9 hereof or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof other than by reason of a default by the Placement Agent, the Company will reimburse the Placement Agent upon demand for all out-of-pocket 22 expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by the Placement Agent in connection with the proposed purchase and sale of the Securities. 8. Indemnification and Contribution. (a) The Company agrees to --------------------------------- indemnify and hold harmless the Placement Agent, the directors, officers, employees and agents of the Placement Agent and each person who controls the Placement Agent within the meaning of either the Act or the Securities Exchange Act of 1934 (the "Exchange Act") against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement for the registration of the Securities as originally filed or in any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in -------- ------- any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Placement Agent specifically for inclusion therein. This indemnity agree- ment will be in addition to any liability which the Company may otherwise have. (b) The Placement Agent severally agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, and each person who controls the Company within the meaning of either the Act or the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Placement Agent, but only with reference to written information relating to the Placement Agent furnished to the Company by or on behalf of the Placement Agent specifically 23 for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which the Placement Agent may otherwise have. The Company acknowledges that the statements set forth in the last paragraph of the cover page and under the heading "Plan of Distribution" in any Preliminary Prospectus and the Prospectus constitute the only information furnished in writing by or on behalf of the Placement Agent for inclusion in any Preliminary Prospectus or the Prospectus, and you, as the Placement Agent, confirm that such statements are correct. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provid- ------- ed, however, that such counsel shall be satisfactory to the indemnified party. - -- ------- Notwithstanding the indemnifying party's election to appoint counsel to repre- sent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indem- nified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to 24 the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company and the Placement Agent agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company and the Placement Agent may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company and by the Placement Agent from the offering of the Securities; provided, however, that in no case shall the -------- ------- Placement Agent be responsible for any amount in excess of the placement fee, discount or commission applicable to the Securities placed or purchased by the Placement Agent hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company and the Placement Agent shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and of the Placement Agent in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses), and benefits received by the Placement Agent shall be deemed to be equal to the total placement fees, discounts and commissions, in each case as set forth on the cover page of the Prospectus. Relative fault shall be determined by reference to whether any alleged untrue statement or 25 omission relates to information provided by the Company or the Placement Agent. The Company and the Placement Agent agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls the Placement Agent within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of the Placement Agent shall have the same rights to contribution as the Placement Agent, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). 9. Termination. The Placement Agent's engagement hereunder may be ------------ terminated by either the Company or the Placement Agent at any time, with or without cause, upon 5 days' written advice to the other party; provided, -------- however, that the Placement Agent will be entitled to reimbursement of expenses - ------- as provided in Section 7 hereof. 10. Representations and Indemnities to Survive. The respective ------------------------------------------- agreements, representations, warranties, indemnities and other statements of the Company or its officers and of the Placement Agent set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Placement Agent or the Company or any of the officers, directors or controlling persons referred to in Section 8 hereof, and will survive delivery of and payment for the Securities. The provisions of Section 7 and 8 hereof shall survive the termination or cancelation of this Agreement. 11. Notices. All communications hereunder will be in writing and -------- effective only on receipt, and, if sent to the Placement Agent, will be mailed, delivered or faxed (212-783-7000) and confirmed to it at Salomon Brothers Inc, at Seven World Trade Center, New York, New York, 10048; or, if sent to the Company, will be mailed, delivered or faxed 26 (203- ) and confirmed to it at One Station Place, Metro Center, Stamford, Connecticut 06902, attention: President. 12. Successors. This Agreement will inure to the benefit of and be ----------- binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 8 hereof, and no other person will have any right or obligation hereunder. 13. Applicable Law. This Agreement will be governed by and construed --------------- in accordance with the laws of the State of New York. If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement among the Company and the Placement Agent. Very truly yours, CROMPTON & KNOWLES CORPORATION, By: ---------------------------- Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first above written. SALOMON BROTHERS INC, By: --------------------- Name: Title: EX-23.01 3 Exhibit 23.01 The Board of Directors Crompton & Knowles Corporation One Station Place, Metro Center Stamford, CT 06902 We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the Registration Statement/Prospectus. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Stamford, Connecticut August 9, 1996 EX-23.03 4 EXHIBIT 23.03 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-09337 of Crompton & Knowles Corporation on Form S-1 of our report dated November 17, 1995, relating to the financial statements of Uniroyal Chemical Corporation appearing in the Prospectus, which is a part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Stamford, Connecticut August 12, 1996 -----END PRIVACY-ENHANCED MESSAGE-----