CROMPTON & KNOWLES CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 and 1993
1. Basis of Presentation
The accompanying financial statements have been prepared on an
accrual basis. Securities transactions are recorded on the
trade date, and dividend income is recorded on the ex-dividend
date.
2. Plan Description
The Employee Stock Purchase and Savings Plan was adopted by the
Board of Directors of Crompton & Knowles Corporation (the
"Corporation") on January 27, 1976. Effective July 1, 1989 the
Board of Directors amended the Plan to convert it into an
Employee Stock Ownership Plan (the "Plan"). The Plan permits
an eligible employee to elect to participate by authorizing a
withholding of an amount equal to 1%, 2%, 3%, 4%, 5% or 6% of
compensation as the basic contribution to the Plan.
Contributions by the Corporation to the Plan were made at an
amount equal to 66 2/3% of each participating employee's basic
employee contribution to the Plan.
Funds contributed under the Plan are held in a trust fund (the
"Trust") and were invested in five investment funds, the
Crompton & Knowles Stock Fund ("C&K Stock Fund"), the Fixed
Income Fund, the Equity Fund, the Advisers Fund, and the
Mortgage Fund.
The C&K Stock Fund is a fund invested entirely in common stock
of Crompton & Knowles Corporation, and contributions by the
Corporation to the Plan are invested in this fund. The market
value of the common stock is based on quotations from the New
York Stock Exchange.
The Fixed Income Fund is a fund invested under an agreement
with Hartford Life Insurance Company (the "Hartford") pursuant
to which the Hartford guarantees the repayment of principal and
the payment of interest on all amounts on deposit at an
effective annual rate of interest of 6.885% on, and after
January 1, 1994, (7.25% for the period January 1, 1993 through
December 31, 1993, and 7.50% for the period August 1, 1992
through December 31, 1992).
Prior to August 1, 1992 the Fund was invested under an
agreement with John Hancock Mutual Life Insurance Company
("John Hancock") pursuant to which John Hancock guaranteed
repayment of principal and the payment of interest on all
amounts on deposit at an effective annual rate of 11.00% for
the period August 1, 1989 to July 31, 1990, and 9.75% for the
period August 1, 1990 to July 31, 1992.Employee Stock Ownership Plan
- Notes To Financial Statements
Page 2
The value of the Fixed Income Fund is based on contributions
invested and reinvested, interest earned, less withdrawals and
distributions.
The Equity Fund is a fund invested under the terms of a group
annuity contract with the Hartford in the Separate Account A,
which is a pooled separate account maintained by the Hartford
with respect to a portion of its assets, in connection with the
contract and other similar contracts issued by the Hartford.
This fund invests primarily in equity securities such as common
stocks and securities convertible into common stock. The
Equity Fund is valued based on a unit value as determined by
the fund manager as follows:
12/31/94 12/31/93
Unit Value $91.101 $90.358
Total Units Held 26,210.454 19,486.327
The related cost of the Equity Fund at December 31, 1994 was
$2,060,686, and $1,459,278 at December 31, 1993.
Prior to October 31, 1992 the Equity Fund was invested under
the terms of a group annuity contract with John Hancock in the
Pooled Common Stock Class 1L Account of Independence Investment
Associates, Inc., an affiliate of John Hancock. This fund
invested in equity securities such as common stock and
securities convertible into common stock.
The Advisers Fund is a fund invested under the terms of a group
annuity contract with the Hartford in the Separate Account V
which is a pooled separate account maintained by the Hartford
with respect to a portion of its assets, in connection with the
contract and other similar contracts issued by the Hartford.
Assets in the Separate Account V are invested in the HVA
Advisers Fund, Inc. The Hartford Investment Management Company
is an investment advisor to the fund, and Wellington Management
is sub-advisor to the fund. This fund invests in common
stocks, debt securities, and money market instruments. The
Advisers Fund is valued based on a unit of value as determined
by the fund manager as follows:
12/31/94 12/31/93
Unit Value $1.338 $1.383
Total Units Held 484,397.471 337,151.770
The related cost of the Advisers Fund at December 31, 1994 was
$603,983, and $407,010 at December 31, 1993.
Employee Stock Ownership Plan - Notes To Financial Statements
Page 3
The Mortgage Fund is a fund invested under the terms of a group
annuity contract with the Hartford in the Separate Account G
which is a pooled separate account maintained by the Hartford
with respect to a portion of its assets, in connection with the
contract and other similar contracts issued by the Hartford.
The assets in the Separate Account G are invested solely in the
Hartford GNMA/Mortgage Securities Fund. Inc. The Hartford
Investment Management Company is an investment advisor to the
fund. This fund invests in mortgage related securities,
including securities issued by the Government National Mortgage
Association. The Mortgage Fund is valued based on a unit value
as determined by the fund manager as follows:
12/31/94 12/31/93
Unit Value $26.623 $27.201
Total Units Held 8,936.394 7,166.071
The related cost of the Mortgage Fund at December 31, 1994 was
$233,084, and $185,990 at December 31, 1993.
Assets in any of the five funds may be invested in short term
government or other securities pending permanent investment.
Earnings on each fund will be reinvested in that fund.
Each participant is permitted to elect to have his basic
contribution invested in any of the five funds in 10%
increments. As of December 31, 1994 and 1993 the number of
participants by fund were as follows:
1994 1993
C&K Stock Fund 1,293 1,240
Fixed Income Fund 867 867
Equity Fund 360 312
Advisers Fund 128 102
Mortgage Fund 104 98
As of the first day of any month, but not more frequently than
once in any six-month period, a participant may elect to
transfer any part of the value of his basic employee account or
his supplemental employee account, which is invested in one of
the funds, to any of the other funds except the Fixed Income
Fund and the Mortgage Fund. Any such transfer must be in
increments of 5% of the amount invested in the fund from which
the transfer is being made.
3. Income Taxes
The Internal Revenue Service has issued a determination letter
to the effect that the Plan as amended through 1994 is a
qualified plan under Section 401(a) of the Internal Revenue
Code of 1954 (the Code), as amended.
Employee Stock Ownership Plan - Notes To Financial Statements
Page 4
The Board of Directors of the Corporation amended the Plan,
effective as of July 1, 1989, to convert it to an employee
stock ownership plan. The amendments to the Plan included both
changes to convert the Plan to an employee stock ownership plan
and other changes required or permitted by the Code.
Management and counsel believe that these amendments will not
effect the qualified status of the Plan.
It is believed that, in general, the federal income tax
consequences of participation in the Plan under present law
will be as follows:
Participants are not subject to federal income tax on employer
contributions made under the Plan or on income earned by the
Trust until amounts are withdrawn or distributed. Any
withdrawal from the Plan will be tax free to the extent of the
participant's contributions to the Plan prior to 1987. If the
amount exceeds such pre-1987 contributions of the participant,
the excess will be treated as being in part a tax free return
of the participant's contribution made to the Plan after 1986
and in part as a taxable distribution subject to federal income
tax at ordinary rates based on the ratio at the time of
withdrawal of the participant's total contributions after 1986
to the total value of the participant's accounts. If the
withdrawal or distribution qualifies as a lump sum
distribution, amounts attributable to participation in a
predecessor plan prior to 1974 may qualify for capital gains
treatment (phased out over the years 1987-1991), and the
ordinary income portion attributable to post-1973 participation
may be taxed under a special five-year income averaging
provision if the participant is over age 59 1/2 (or a special
ten-year income averaging provision if the participant turned
50 before January 1, 1986). If a distribution includes shares
of common stock of Crompton & Knowles Corporation, taxation of
any appreciation in the value of such shares over their cost to
the Trust will be deferred until the later sale or exchange of
such shares. Taxable withdrawals or distributions after
January 1, 1987, in addition to being taxed as ordinary income
will be subject to an additional 10% income tax unless the
withdrawal or distribution is on account of the death or
disability of the participant, is made after he turns age 59
1/2 or retires after age 55, or is used for certain deductible
medical expenses. A participant who receives total
distributions from all retirement plans in a single year in
excess of $150,000 ($144,551 in some cases) may be subject to
an excise tax of 15% of the excess amount.
Employee Stock Ownership Plan - Notes To Financial Statements
Page 5
The foregoing is only a brief summary of the tax consequences
of participation in the Plan. Each participant should consult
his own personal advisor to review the tax consequences of
making any elections under the Plan and to determine his own
tax liability.
4. Participant Vesting
A participant in the Plan is fully vested in all of his
accounts under the Plan upon his death, retirement, disability,
or attainment of age 65 or upon change in control of the
Corporation. A participant whose employment terminates for any
reason before his death or retirement is entitled to receive
l00% of his own contributions plus earnings thereon and will
receive his employer contribution account plus earnings thereon
based upon a schedule under which the account is 100% vested
after five years of participation in the Plan, or after
completion of five years of service with the Corporation. The
non-vested portion of the employer contribution account will be
forfeited under certain circumstances and held to reduce future
contributions to be made by the Corporation to the Plan.
5. Investments
A. Unrealized appreciation in Crompton & Knowles
Corporation common stock:
12/31/94 12/31/93 12/31/92
Unrealized
apprec. at the
beginning of
the year $31,807,154 $36,989,039 $37,236,932
Unrealized
apprec. at the
end of the year 19,773,207 31,807,154 36,989,039
Increase/(decrease)
in unrealized
appreciation $(12,033,946) $(5,181,885) $( 247,893)
Employee Stock Ownership Plan - Notes To Financial Statements
Page 6
B. Net purchases (sales) of shares of Crompton & Knowles
Corporation common stock consist of the following:
Contributions Net
And Sales and Purchases
Purchases Withdrawals (Sales)
1994
No. of shares 145,724 86,429 59,295
Cost amount $2,446,717 485,144 $1,961,573
1993
No. of shares 131,841 269,060 (137,219)
Cost amount $2,924,833 $1,275,893 $1,648,940
1992
No. of shares 156,816 105,023 51,793
Cost amount $3,062,632 $ 409,398 $2,653,234
C. Gain on sale of investments and withdrawals of Crompton &
Knowles Common Stock:
1994 1993 1992
Aggregate
proceeds $1,727,888 $5,890,730 $2,018,533
Aggregate cost
(FIFO) 485,144 1,275,893 409,398
Net gain $1,242,744 $4,614,837 $1,609,135
6. Plan Expenses
Significant costs of Plan administration, which are payable
from the Trust or by the Corporation, are generally paid by the
Corporation.
stock
Independent Auditors' Report
The Board of Directors
Crompton & Knowles Corporation:
We have audited the accompanying statements of financial condition of Crompton
& Knowles Corporation Employee Stock Ownership Plan (the Plan) as of December
31, 1994 and 1993, and the related statements of income and changes in plan
equity for each of the years in the three-year period ended December 31,
1994. These financial statements are the responsibility of the Plan's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Plan
as of December 31, 1994 and 1993, and the results of its operations
for each of the years in the three-year period ended December 31, 1994
in conformity with generally accepted accounting
principles.
Stamford, Connecticut
March 10, 1995
stock
2