Highlights of 1996 Annual Report Here, from our 1996 Annual Report, you can find our letter to the shareholders, 1996 financial highlights, corporate mission and background on our operations. You can receive a complete annual report online at the EDGAR Web site. Fiscal 1996 Results Reported net income declined 12% in fiscal 1996. If a special charge in fiscal 1995 is excluded from the comparison, the decline was 21%. Considering that fiscal 1995 results included eight months of earnings from our spun-off lock business and that we started up three new engine plants and a new foundry in fiscal 1996, a decline of only 21% is a significant accomplishment. The decision to construct a new foundry was a response to increased demand for ductile iron components. The decision to move engine manufacturing operations to three new plants was part of our long range plan to maintain our competitive position and generate superior returns for our shareholders. In the market we serve, those two objectives can be met only if we are a low cost producer. We had reluctantly concluded that we could not be a low cost producer assembling engines and manufacturing certain components in our older facilities. We recognized that there would be a short term cost of this move, but that the long term benefit made it imperative. Net income for fiscal 1996 was $92.4 million or $3.19 per share compared with $104.8 million or $3.62 per share for fiscal 1995. Net adjusted cash operating earnings were $5 million more than the cost of capital. Return on average shareholders' investment declined to 19.7%. Dividends increased 7% to $1.05 per share. Operating activities provided $94 million of cash flow in fiscal 1996, compared with $96 million in fiscal 1995. $135 million from earnings and depreciation was offset by a $39 million increase in working capital and $2 million used for other purposes. A major portion of the increase in working capital was a $25 million increase in year-end receivables, a result of a shift in sales from April to June. $94 million of operating cash flow and $20 million from cash reserves were used for $78 million of capital expenditures, for $6 million of debt reduction, and to pay $30 million in dividends. Net sales decreased 4% to $1.287 billion. Fiscal 1995 sales included $63 million from our automotive lock business, STRATTEC SECURITY CORPORATION, which was spun off to our shareholders at the end of February 1995. Excluding those sales from the comparison, net sales increased 1%. Engine unit shipments decreased 1%. Having spun off our automotive lock business, we are focused on providing power for the power products that improve people's efficiency and quality of life. Of all the engines we sell, approximately 85% are used to power lawn and garden equipment. Retail sales of lawn and garden equipment are very seasonal and dependent to a great degree on weather. The seasonality of retail sales and the unpredictability of weather give this business a pattern whose directions are relatively predictable but whose timing is not. An early, wet spring will accelerate retail sales and produce product shortages. Equipment manufacturers will respond by building product earlier for the next season. A late, cold spring will postpone retail sales, perhaps even to the following year, producing excess inventories. Equipment manufacturers will respond by delaying production for the next season. The result for us is more or less seasonality in quarterly sales. Unfavorable weather in the spring of 1995 made our business more seasonal in fiscal 1996. Spring was late and cold in the United States in 1996, and the selling season got off to a slow start. It recovered somewhat in May and June, but manufacturers' shipments of lawn and garden equipment were down approximately 7% for the fiscal year. Our shipments to these manufacturers decreased a smaller percentage, perhaps because equipment manufacturers' inventories increased. Shipments to U.S. manufacturers of other kinds of equipment increased in fiscal 1996. Several products in this category are finding increasing favor with consumers. The product category showing the fastest growth is pressure washers, which can be used to clean driveways, patios, lawn furniture, siding, cars and trucks. (Perhaps you own one. If not, you night consider buying one.) International sales increased despite lower lawn and garden equipment sales in Europe, which also suffered through a cold, late spring. Service sales were modestly lower, due to the late spring and a reduction of inventory in distribution channels. Profit margins decreased in fiscal 1996. One reason was lower production. The main reason, however, was the cost of starting up and moving production to the three new engine plants and the new foundry. The short term costs of this move did exceed our expectations somewhat. The first operations at the new Auburn, Rolla and Statesboro plants began in August. All three plants came up on schedule and close to budget. Costs in our older plants during the transition exceeded our expectation. As work has moved from older plants to new plants, many long time employees have moved to jobs they have never before performed. We underestimated the temporary inefficiencies resulting from unfamiliarity with these jobs. These inefficiencies will linger into fiscal 1997, when additional moves will take place. However, the effect should be smaller than in fiscal 1996. We recognize the need to reduce overhead in our older facilities as work is transferred to the new plants. After the end of the fiscal year, we reached an agreement to sell our Menomonee Falls, Wisconsin facility. About one half of that facility now is used for manufacturing components. Those operations will be moved to available space in our Wauwatosa, Wisconsin plant. The other half is used for service parts and replacement engine packaging and distribution. We will continue to own that portion of the building for up to ten years. Emission Regulations The U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) continue to develop and implement emission regulations for lawn and garden equipment and other equipment powered by small air cooled engines. Federal Phase One regulations have been finalized. The standard specified in these regulations must be met beginning with model year 1997. The regulatory negotiation for Phase Two ended with only partial success, so the standard setting process has reverted to a more traditional procedure. EPA's proposal for Phase Two regulations is expected to be issued within a year, with compliance required beginning in 2001 or later. During the fiscal year CARB granted our petition to relax a portion of its Tier One standard to harmonize it with the federal standard. CARB is reviewing its Tier Two standard, which now is scheduled to become effective in 1999. Technical and economic information submitted to CARB by the Engine Manufacturers Association questioned the feasibility of Tier Two standard. Outlook for Fiscal 1997 As usual, it is impossible to make a precise forecast for fiscal 1997. We will not know for another month whether late summer demand was strong enough to reduce equipment inventories at the retailer and manufacturer levels. Also, many large retailers have not finished the process of selecting their suppliers for the 1997 season. We do believe that retail sales next spring should be good is the weather is normal, and we are not aware of any changes in customer relationships that would significantly affect our business. We believe that costs associated with the transition to new plants should decrease. Thus, we expect improved operating results in fiscal 1997. However, reported earnings will be reduced by a fourth quarter charge for an early retirement window for Milwaukee factory employees. Also, in reaction to the late spring of 1996, U.S. manufacturers of lawn and garden equipment will shift production closer to the spring selling season, so the seasonal pattern of our results will intensify. We enter fiscal 1997 with great expectations, proud of our people's ability to bring up the new plans and looking forward to the benefits of a lower cost structure. Frederick P. Stratton, Jr. Chairman and Chief Executive Officer John S. Shiely President and Chief Operating Officer 1996 Financial Highlights

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