<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended DECEMBER 31, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
Commission file number 0-12640
KAYDON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3186040
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
ARBOR SHORELINE OFFICE PARK, 19345 US 19 NORTH, CLEARWATER, FL 34624
(Address of principal executive offices)
Registrant's telephone number, including area code (813) 531-1101
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Yes X No
----- ------
Based on the closing sales price of March 17, 1997, the aggregate market value
of the voting stock held by nonaffiliates of the registrant was $706,753,172.
The number of shares outstanding of the registrant's common stock, $0.10 par
value was 16,484,039 as of March 17, 1997.
DOCUMENTS INCORPORATED BY REFERENCE AND THE PART(S) OF THIS FORM 10-K INTO
WHICH EACH DOCUMENT IS INCORPORATED:
KAYDON CORPORATION 1996 ANNUAL REPORT TO STOCKHOLDERS - PARTS I, II AND IV
KAYDON CORPORATION PROXY STATEMENT - PART III
<PAGE> 2
KAYDON CORPORATION FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
INDEX
<TABLE>
<CAPTION>
Part I Page No.
- ------ ------------
<S> <C> <C>
Item 1. Business 1 - 10
Item 2. Properties 11 - 13
Item 3. Legal Proceedings 13 - 15
Item 4. Submission of Matters to Vote of Security Holders 15
Part II
- -------
Item 5. Market for the Registrant's Common Equity &
Related Stockholder Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 17
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management 19
Item 13. Certain Relationships and Related Transactions 19
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) 1. Financial Statements 20
2. Financial Statement Schedules 20
3. Reference to Exhibits 21
(b) Reports on Form 8-K 21
Signatures 22
(c) 1. Exhibit Index 23 - 26
2. Exhibits 27 - 29
</TABLE>
<PAGE> 3
PART I
Item 1. BUSINESS
a. General Development of Business
Kaydon Corporation (the "Company" or "Kaydon") was formed in October
1983. The company has acquired the following operations from 1986 through
1990:
Kaydon Ring & Seal, Inc. 6/30/86
Spirolox 7/17/87
Electro-Tec Corp. 6/23/89
I.D.M. Electronics Ltd. 6/23/89
Kaydon has made the following acquisitions and dispositions in the
past five years:
On December 16, 1991, Kaydon Corporation, through its wholly owned
subsidiaries, Kaydon Acquisition Corp. III and Kaydon Acquisition Corp. U.K.
Ltd., acquired for L.24,000,000 (approximately $43,440,000 when translated at
the exchange rate in effect at the time of purchase) all of the capital stock
of Prizerandom Limited, a United Kingdom corporation, from Clairmont PLC, a
Scotland corporation. Prizerandom Limited is a wholly owned subsidiary of
Clairmont PLC and is the holding company for Cooper Bearings Limited, a United
Kingdom corporation, which was the primary subject of the acquisition.
Cooper Bearings Ltd. is a holding company consisting of the following
operating subsidiaries, all of which are manufacturers or distributors of
complete bearings and related components parts:
<TABLE>
<CAPTION>
COUNTRY OF
SUBSIDIARY INCORPORATION
- ----------------------------------------------------------- -------------
<S> <C>
Cooper Roller Bearings Company Limited ("Cooper U.K.") United Kingdom
Cooper Split Roller Bearings Corporation ("Cooper U.S.") U.S.A.
Cooper Geteilte Rollenlager GmbH ("Cooper Germany") Germany
</TABLE>
1
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Cooper U.K. is a manufacturing operation located in King's Lynn,
Norfolk - U.K. that produces a range of split roller bearings including both a
standard line and custom-designed product. Split bearings are designed
specifically to aid the customer in solving problems where the application of
full round bearings would be impractical. Cooper U.S. and Cooper Germany are
distribution operations located in Virginia Beach, VA - U.S. and Krefeld,
Germany, respectively. The purchase price was financed through Kaydon
Corporation cash plus bank loans from the National Bank of Detroit and
Continental Bank, U.K.
On December 4, 1993, Cooper U.K., a wholly owned subsidiary of Kaydon,
acquired the assets of Kenyon Power Transmission Ltd. ("Kenyon") of Manchester,
England. Kenyon manufactures pulleys and drive components which are
complementary to their product offering. Subsequent to the purchase, Cooper
U.K. moved the assets to their manufacturing facility.
On January 28, 1994, Kaydon Corporation, through its wholly owned
subsidiary, Kaydon Acquisition VI, Inc., acquired for $7,268,000 certain assets
and liabilities of Industrial Tectonics Inc, the ball division of Axel Johnson,
Inc. Industrial Tectonics Inc, located in Dexter, Michigan, manufactures
specialty balls used in measuring devices, floats, valves, ball point pens and
antifriction bearings. This acquisition was consummated by Kaydon Acquisition
VI, Inc. with loaned funds from Kaydon Corporation.
On January 31, 1995, the Company, through its wholly owned subsidiary,
I.D.M. Electronics Ltd. ("I.D.M."), purchased the assets of D J Molding for
$759,000. I.D.M. moved the assets to its plant in Reading, England after the
purchase.
On May 1, 1995, Kaydon Corporation sold the majority of its automotive
operation assets. The net sale proceeds of $3,476,000 approximated the book
value of the assets sold. The Company and the buyer also entered into an
operating lease for the facility in which the business was located. The sales
of the automotive business were less than 4% of the consolidated net sales for
each of 1995, 1994 and 1993 with an operating income contribution percentage
lower than the rest of the Company. In addition, on May 17, 1995, Kaydon
Corporation sold the surplus building resulting from the 1993 plant
consolidation. The net sales proceeds of $1,789,000 approximated book value.
On August 31, 1995, Kaydon Corporation, through its wholly owned
subsidiary, Kaydon Acquisition Corp. V, purchased the stock of Seabee
Corporation for approximately $22,753,000, net of cash received. Seabee,
located in Hampton, Iowa, is a manufacturer of large hydraulic
2
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cylinders and alloy steel castings. This acquisition was accounted for using
the purchase method of accounting and, accordingly, the results of operations of
Seabee have been included in the consolidated financial statements since August
31, 1995, the effective date of the acquisition.
On February 1, 1996, Kaydon Corporation, through its wholly owned
subsidiary, Kaydon Acquisition VII, Inc., purchased the assets of Victor Fluid
Power Co. ("Victor") and Benton Harbor Engineering Co., Inc. ("Benton Harbor")
for $10,699,000. Both companies manufacture hydraulic cylinders and fluid
power components and are complimentary to Seabee Corporation which was
purchased in August, 1995. The Benton Harbor facility was closed in the
acquisition process with the equipment and customer order base being absorbed
into Seabee and Victor. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the results of operations have
been included in the 1996 consolidated financial statements since the date of
acquisition.
b. and c. Financial Information About Industry Segments
and Narrative Description of Business
The Company designs, manufactures and sells custom-engineered products
for a broad and diverse customer base primarily in domestic markets. The
Company's principal products include antifriction bearings, bearing systems and
components, filters and filter housings, specialty retaining rings, specialty
balls, custom rings, shaft seals, hydraulic cylinders, metal castings and
various types of slip-rings. These products are used by customers in a wide
variety of medical, instrumentation, material handling, machine tool
positioning, aerospace, defense, construction and other industrial
applications. The Company is customer-focused and concentrates on providing
cost-effective solutions for its customers through close engineering
relationships with leading manufacturers throughout the world.
Products
Kaydon works closely with its customers to engineer the required
solutions to their design problems. Designed solutions are frequently unique
to a single customer or application. Depending upon the nature of the
application, the design may be used over a protracted time period and in large
numbers, or it may be for a single use.
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<PAGE> 6
The antifriction bearing products of Kaydon incorporate various types
of rolling elements. The ball, tapered roller and cylindrical roller bearings
manufactured by Kaydon are made in sizes ranging from approximately 1" outside
diameter thin section ball bearings to heavy-duty ball bearings with an outside
diameter of 180 inches. These antifriction products are fabricated from
aluminum, bearing-quality steel, stainless steel or special tool steels. They
often incorporate a broad range of features such as gearing, special sealing
systems and mounting arrangements in combination with other mechanical
components.
As a custom manufacturer, many diverse applications are served.
Typical applications include large-diameter ball bearings for hydraulic cranes
and excavators; thin-section ball bearings for rotating joints of industrial
robots; lightweight airborne radar bearings; large-diameter aluminum roller
bearings for military vehicle turret systems; special coalescing elements and
filter housings for diesel fuel filtration on both commercial and military
vehicles; hydraulic filter elements for tractor-mounted farm implement units;
and ultra high-precision roller bearings for gear box applications.
Kaydon's subsidiary, Kaydon Ring and Seal, Inc., manufactures metallic
medium and large bore-size rings for low and medium-speed internal combustion
engines, steam engines, pumps and reciprocating compressors. Sealing rings are
engineered with metallic and nonmetallic products used to limit the leakage of
fluids and gases within engines and a wide variety of other mechanical
products. Sealing rings are used in industrial applications, such as:
compressors, transmissions, hydraulic and pneumatic cylinders, and commercial
and military aircraft, jet engines and control apparatus applications. Shaft
seals are used to seal gases or liquids usually under extreme conditions of
speed, pressure or temperature. Shaft seals are fabricated from a variety of
materials depending on the application.
Electro-Tec Corp. and I.D.M. Electronics Ltd., wholly owned
subsidiaries of Kaydon Corporation, design and manufacture precision,
high-performance slip-rings, slip-ring assemblies, capsules and related
electromechanical devices to meet customers' exact needs and specifications.
Slip-rings are manufactured from injection and transfer-molded plastics,
aluminum and stainless steel castings, bearings and electronic components and
connectors, and are sometimes subjected to an electro-deposition process. They
are used to transmit electrical signals or power between the rotating and
stationary members of an assembly and can be found in combat vehicles, aircraft
inertial guidance systems, telecommunications satellites, aircraft targeting
systems and medical diagnostic equipment.
4
<PAGE> 7
Cooper Roller Bearings Ltd., a wholly owned subsidiary of Kaydon
Corporation, designs and manufactures a range of split roller bearings, which
include both standard and custom-designed lines. Split bearings are designed
specifically to aid the customer in solving problems where the application of
full round bearings would be less desirable. The product is used in a wide
range of applications but particularly those where space and ease of change are
important selection criteria. With the acquisition of the assets of Kenyon
Power Transmission, Cooper U.K. now manufactures pulleys and drive components,
which are complimentary products.
Industrial Tectonics Inc, a wholly owned subsidiary of Kaydon
Corporation, manufactures specialty balls from alloyed steel, plastic, tungsten
carbide, glass and an assortment of other materials. These balls are used in a
variety of applications including gauges, measuring devices, floats, valves,
ball point pens and antifriction bearings.
Seabee Corporation and Victor Fluid Power, Inc, wholly owned
subsidiaries of Kaydon Corporation, design and manufacture hydraulic cylinders
with bores ranging from 2" to 24" and strokes up to 35' in length. This
division also provides both chrome plating and foundry products of both grey
and ductile steel. In addition, Victor produces a line of high pressure pumps
and valves, railroad presses and hydraulic accumulators. The cylinders are
used in manlifts, waste shredding machines, utility trucks, cranes, motion
compensators, drill equipment and various construction equipment.
Approximately 70 percent of Kaydon's sales are to original equipment
manufacturers, which incorporate the Kaydon products in the products they sell.
Many of the applications for the Company's products also provide the
opportunity for participation in the replacement or spare parts markets.
New Product and Industry Segment Information
The Company has not made any public announcement of, or otherwise made
public information about, a new product or a new industry segment which would
require the investment of a material amount of the Company's assets or which
would otherwise result in a material cost.
5
<PAGE> 8
Patents, Trademarks, Licenses, Etc.
The Company does not believe that any material part of its business is
dependent on the continued availability of any one or all of its patents or
trademarks.
Seasonal Nature of Business
The Company does not consider its business to be seasonal in nature.
Working Capital Practices
The Company does not believe that it or the industry in general has
any special practices or special conditions affecting working capital items
that are significant for an understanding of the Company's business.
Customers
Kaydon sells its products to over 1,000 companies throughout the
world. The principal customers are generally large manufacturing corporations.
During 1996, 1995 and 1994, sales to no single customer exceeded 10% of total
sales.
Customers can generally be divided into four major market groups:
Aerospace and Military Equipment, Replacement Parts and Exports, Special
Industrial Machinery and Heavy Industrial Equipment. Sales to these customer
groups for 1996, 1995 and 1994 are set forth in the following table:
Net Sales by Major Market Groups
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- -----------------------
Amount % Amount % Amount %
-------- ------ -------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Aerospace and Military
Equipment $ 46,545 16.0 $ 37,921 16.5 $ 39,625 19.4
-------- ----- -------- ----- -------- -----
Replacement Parts and
Exports 101,808 35.0 88,586 38.5 78,675 38.4
-------- ----- -------- ----- -------- -----
Special Industrial
Machinery 75,271 25.9 63,980 27.8 60,603 29.6
-------- ----- -------- ----- -------- -----
Heavy Industrial
Equipment 67,046 23.1 39,437 17.2 25,792 12.6
-------- ----- -------- ----- -------- -----
Total $290,670 100.0% $229,924 100.0% $204,695 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
6
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Replacement parts are sold mainly through specialized distributors.
Kaydon had export sales of $22,928,000 in 1996, $20,040,000 in 1995, and
$17,184,000 in 1994, with most of such sales concentrated in Canada, Europe and
Japan.
Marketing
Kaydon's sales organization consists of salespersons and
representatives located throughout the United States, Canada, Europe and Asia.
Salespersons are trained to provide technical assistance to customers, as well
as to provide liaison with factory engineering staffs.
A nationwide network of specialized distributors and agents provides
local availability of Kaydon products to serve the requirements of the
replacement market and small original equipment manufacturers.
Manufacturing
Kaydon manufactures virtually all of the products it sells and
utilizes subcontractors only for occasional specialized services. Kaydon's
products require sophisticated processes and equipment, and many of its
products incorporate unique Kaydon-developed production techniques. Certain
satellite and aircraft-type bearing products must meet extraordinary mechanical
tolerances (for example, within 20 millionths of an inch) and some products
such as slip-rings are assembled in quality-controlled "white room"
conditions. Nearly all of Kaydon's products require high levels of incoming
quality control and process quality control. The manufacturing equipment
required for Kaydon's operations entails a very high level of capital
investment for any given level of sales.
Suppliers
Kaydon and its subsidiaries purchase large quantities of raw
materials, mainly bearing-quality steel, special alloy steel, high-grade carbon
and filter media, aluminum alloy and stainless
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steel castings, plastics, wire and electrical connectors, from multiple sources.
Kaydon purchases large amounts of certain types of bearing-quality steel from a
number of foreign suppliers. No significant supply problems have been
encountered in recent years as relationships with suppliers have generally been
good.
Environmental Matters
Reference is made to "Management's Discussion and Analysis" on pages
15 and 16 of Kaydon's 1996 Annual Report to Stockholders which is incorporated
herein by reference.
Employees
On December 31, 1996, Kaydon employed 2,265 employees. Hourly
employees at the Muskegon facilities (including Norton Shores) are represented
by the International Association of Machinists and Aerospace Workers. The
current collective bargaining agreement is effective until December 3, 1997.
The Baltimore hourly employees are also represented by the International
Association of Machinists and Aerospace Workers. The current collective
bargaining agreement is effective until November 8, 1998. Greeneville hourly
employees are represented by the United Steelworkers of America, with the
current collective bargaining agreement effective until January 26, 2000.
Dexter hourly employees are represented by the International Union United
Automobile, Aerospace and Agricultural Implement Workers of America, UAW, with
the current collective bargaining agreement effective until November 5, 1999.
The hourly employees at Granite Falls are represented by the International
Association of Machinists and Aerospace Workers, with the current collective
bargaining agreement effective until October 11, 1997. The remaining domestic
factory employees, as well as all office employees, are non-union.
Kaydon provides its employees with a full range of insurance, pension
and deferred compensation benefits. The Company believes its levels of total
compensation are equal to or better than comparable companies in communities
adjacent to each facility.
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Backlog
Kaydon sells certain products on a build-to-order basis that requires
substantial order lead time. This results in a backlog of unshipped, scheduled
orders. Other products are manufactured on the basis of sales projections or
annual blanket purchase orders. Orders for such products are not entered into
backlog until explicit shipping releases are received. Kaydon's backlog was
$117,262,000 at December 31, 1996 and $101,852,000 at December 31, 1995. Based
on experience, management would expect to ship over the following twelve months
about 90 percent of the year-end backlog. Backlog has become less indicative
of future results as the Company has made efforts to shorten manufacturing lead
times, creating a faster response to customer orders.
Competition
Kaydon competes with divisions of SKF Industries, Timken Corporation,
Torrington/Fafnir, Rotek, FAG, EG&G Inc., Litton Poly-Scientific and numerous
other smaller companies.
The markets served by Kaydon are large and extremely competitive. The
major domestic competitors generally produce a wide line of standard products
and do not specialize in custom products. The major domestic bearing
manufacturers nonetheless do offer special-engineered bearings. The markets
for Kaydon's special-machined components, fabricated products, filters, rings
and seals are very diverse. Consequently, management feels that the size of
the total market for such products cannot be meaningfully estimated.
In all of the markets served by Kaydon, the principal methods of
competition involve price, product performance, engineering support and timely
delivery.
Many of Kaydon's domestic competitors are part of large, worldwide
manufacturing concerns and have significantly greater financial resources.
While foreign competition is intense and growing for all industrial components,
the special nature of Kaydon's products and the close working relationship with
its customers have somewhat limited the impact of foreign competition on
domestic business.
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Government Contracts and Renegotiation
Various provisions of federal law and regulations require, under
certain circumstances, the renegotiation of military procurement contracts or
the refund of profits determined to be excessive. Based on Kaydon's experience
under such provisions, management believes that no material renegotiation or
refunds (if any) will be required.
d. Information About International Operations
Information with respect to operations by geographic area appears in
Note 17, "Business Segment Information" of the Notes to Consolidated Financial
Statements set forth on page 31 of the Annual Report to Stockholders, which is
incorporated herein by reference. Fluctuating exchange rates and factors
beyond the control of the Company, such as tariffs and foreign economic
policies, may affect future results of foreign operations.
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Item 2. PROPERTIES
The following chart lists the principal locations, activity (use) and
square footage of Kaydon's most significant facilities as of December 31, 1996
and indicates whether the property is owned or leased:
<TABLE>
<CAPTION>
Owned or
Location Activity Sq. Ft. Leased
-------- -------- ------- --------
<S> <C> <C> <C>
Clearwater, FL Corporate Headquarters 11,743 Leased
Muskegon, MI Engineering Laboratory 232,250 Owned
(Norton Shores) Manufacturing Facility
Muskegon, MI Rental Property 162,476 Owned
(Norton Shores)
Newaygo, MI Rental Property 16,800 Owned
Dexter, MI Manufacturing Facility 56,627 Owned
Sumter, SC Manufacturing Facility 168,400 Leased
Sumter, SC Manufacturing Facility 115,200 Owned
Greeneville, TN Manufacturing Facility 80,700 Owned
LaGrange, GA Manufacturing Facility 87,000 Owned
Baltimore, MD Manufacturing Facility 725,000 Owned
St. Louis, MO Manufacturing Facility 18,500 Leased
Blacksburg, VA Manufacturing Facility 111,400 Owned
Virginia Beach, VA Warehouse 28,713 Owned
Offices 9,855 Owned
Hampton, IA Manufacturing Facility 298,380 Owned
Hampton, IA Manufacturing Facility 67,968 Owned
Granite Falls, MN Manufacturing Facility 114,000 Leased
Krefeld, Germany Warehouse 10,032 Leased
King's Lynn, England Manufacturing Facility 153,000 Owned
Reading, England Manufacturing Facility 26,000 Leased
Monterrey, NL, Mexico Manufacturing Facility 32,000 Owned
</TABLE>
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Kaydon owns the manufacturing facility and the leased building located
in Muskegon (Norton Shores), the leased building located in Newaygo, the
manufacturing facilities located in Dexter, Sumter, Greeneville, LaGrange,
Baltimore, Blacksburg, Hampton, Monterrey, Mexico, and King's Lynn, England and
the warehouse facility in Virginia Beach. Kaydon operates at two sites in
Sumter, one site is owned and the other is leased (under a capitalized lease)
in connection with a $4,000,000 Industrial Revenue Bond financing for a term
expiring April 1, 1997, with an option to purchase the property during the
pendency of the lease and an obligation to purchase the property for nominal
consideration upon its expiration. The St. Louis property is leased for a term
expiring July 31, 1997. The property in Reading, England, is leased for a term
expiring May 1, 2009. The Krefeld, Germany property is leased for a term
expiring September 30, 1997. The Corporate office located in Clearwater,
Florida is leased for a term expiring May 31, 2001. The manufacturing facility
in Granite Falls, Minnesota is leased for a term expiring January 30, 1999.
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Kaydon Corporation is the sole shareholder of the following operating
subsidiaries:
<TABLE>
<CAPTION>
Date
Subsidiary Formed/Acquired
---------- ---------------
<S> <C>
Kaydon Ring and Seal, Inc. June 17, 1986
(a Delaware corporation)
Kaydon S.A. de C.V. April 10, 1987
(a Mexico corporation)
Electro-Tec Corp. June 23, 1989
(a Delaware corporation)
I.D.M. Electronics Ltd. June 23, 1989
(a United Kingdom corporation)
Cooper Roller Bearings Company Limited December 16, 1991
(a United Kingdom corporation)
Cooper Split Roller Bearings Corporation December 16, 1991
(a Virginia corporation)
Cooper Geteilte Rollenlager GmbH December 16, 1991
(a Germany corporation)
Industrial Tectonics Inc January 28, 1994
(a Delaware corporation)
Kaydon Acquisition Corp. V August 31, 1995
d/b/a Seabee Corporation
(a Delaware corporation)
Kaydon Acquisition VII, Inc. February 1, 1996
d/b/a Victor Fluid Power, Inc.
(a Delaware corporation)
</TABLE>
Item 3. LEGAL PROCEEDINGS
The Company, together with other companies, certain former officers,
and certain former directors, has been named as a co-defendant in lawsuits
filed in federal court in New York in 1993. The suits purport to be class
actions on behalf of all persons who have unsatisfied personal injury and
property damage claims against Keene Corporation which filed for bankruptcy
under Chapter 11. The premise of the suits is that assets of Keene were
transferred to Bairnco subsidiaries, of which Kaydon was one in 1983, at less
than fair value. The suits also allege that the Company,
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among other named defendants, was a successor to and alter ego of Keene. In
1994, an examiner was appointed by a bankruptcy court to examine the issues at
stake. On September 23, 1994, the "Preliminary Report of the Examiner" was made
public. In the report, the examiner stated that the alleged fraudulent
conveyance claims against the Company appear to be time-barred by the statute of
limitations, subject to certain possible exceptions which the Company does not
believe are significant or factual. Although the examiner has made certain
recommendations regarding a mechanism to resolve the claims against the Company,
the Court has not taken any action related to the report. Nevertheless, in the
Company's opinion, the report reinforces management's original view that the
claims will ultimately not be sustained. Accordingly, no provision has been
reflected in the consolidated financial statements for any alleged damages. In
June 1995, the creditors' committee filed a complaint in the same bankruptcy
court asserting claims against the Company similar to those previously filed.
On June 12, 1996, the District and Bankruptcy Courts for the Southern District
of New York entered an order confirming the plan of reorganization for Keene
Corporation. As a result, the so-called transactions lawsuit will be
transferred from the Bankruptcy Court for the Southern District of New York to
the District Court for that district and the stay of the transactions lawsuit
was lifted, allowing the Company and other co-defendants to present appropriate
motions to the District Court. Management believes that the outcome of this
litigation will not have a material adverse effect on the Company's financial
position.
In June, 1996 the Company received a subpoena issued by the U.S.
District Court in Bridgeport, Connecticut on behalf of a grand jury
investigating a May 9, 1996 accident involving a Sikorsky helicopter in which
four persons died. The grand jury has requested and received documents and
records relating to a bearing manufactured by Kaydon and used in the Sikorsky
helicopter. In addition, the Defense Logistics Agency of the Defense Contract
Management Command and a "Mishap Board" led by Sikorsky Aircraft Corporation
with participation from certain Federal agencies alleged that product quality
problems or deficiencies exist with respect to the bearing product used in the
Sikorsky helicopter described above. The Company was excluded from
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<PAGE> 17
participation on this "Mishap Board", however, it independently evaluated the
available evidence and refuted the "Mishap Board" findings in its report
submitted to the Navy. Subsequent incidents have occurred in the helicopter
fleet even though the bearings used were newly manufactured, inspected and
approved by Sikorsky personnel, reinforcing the Company's position that the
bearing quality was not the causative action in the May 9, 1996 accident.
Various other claims, lawsuits and environmental matters arising in
the normal course of business are pending against the Company. Management
believes that the outcome of these matters, including the Sikorsky matter
referred to above, will not have a material adverse effect on the Company's
financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1996.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY & RELATED STOCKHOLDER
MATTERS
a. and c. Market Information and Dividends
Information regarding the market price of Kaydon's common stock
appears in the "Quarterly Results of Operations" on page 32 of Kaydon's 1996
Annual Report to Stockholders, which is incorporated herein by reference.
During 1992, the Company effected a two-for-one stock split; accordingly, all
applicable financial data has been restated to reflect the split. Kaydon's
common stock is listed on the New York Stock Exchange ("NYSE") under the symbol
KDN. Kaydon declared cash dividends during 1996, 1995 and 1994 as follows (on
a per-share basis):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
March $0.12 $0.11 $0.10
June 0.12 0.11 0.10
September 0.12 0.11 0.10
December 0.14 0.12 0.11
</TABLE>
Effective with the cash dividend declared in December 1996 and paid in January
1997, Kaydon adopted a plan which calls for quarterly cash dividends of $0.14
per share. This recent increase in the dividend amount reflects Kaydon Board of
Directors' continuing confidence in the growing financial strength of the
Company and their expectation of continued earnings growth.
b. Holders
The number of common equity security holders is as follows:
<TABLE>
<CAPTION>
Number of Holders
of Record
Title of Class As of December 31, 1996
- --------------------------------------- -----------------------
<S> <C>
Common Stock, par value $0.10 per share 1,415
</TABLE>
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Item 6. SELECTED FINANCIAL DATA
Reference is made to "Financial History" on page 14 and "Management's
Discussion and Analysis" on pages 15 and 16 of Kaydon's 1996 Annual Report to
Stockholders, which is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to "To Our Stockholders" on pages 2 and 3 and
"Management's Discussion and Analysis" on pages 15 and 16 of Kaydon's 1996
Annual Report to Stockholders, which is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and related notes
included on pages 18 through 32 of Kaydon's 1996 Annual Report to Stockholders,
which is incorporated herein by reference. Financial statement schedules are
included in Part IV of this filing.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE> 20
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required with respect to directors of Kaydon is
included in the Proxy Statement for the 1997 Annual Meeting of Stockholders of
Kaydon, which has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The information required with respect to
executive officers of the Company is as follows:
<TABLE>
<CAPTION>
Name and Age of Data Pertaining to
Executive Officer Executive Officers
----------------- ------------------
<S> <C>
Lawrence J. Cawley (62) Chairman of the Board and Chief Financial Officer.
Mr. Cawley was appointed as President and Chief Executive
Officer of Kaydon Corporation in 1987 and relinquished the
position of President in September 1989, at which time he
was appointed Chairman of the Board. Effective January of
1992, Mr. Cawley was appointed Chief Financial Officer. In
June 1996, Mr. Cawley relinquished the position of Chief
Executive Officer while retaining his position as Chairman
of the Board and Chief Financial Officer.
He was President of the Bearings Division of Kaydon
Corporation from 1985 to 1987.
Stephen K. Clough (43) President and Chief Executive Officer. Mr. Clough was
appointed President and Chief Operating Officer of Kaydon
Corporation and was elected to the Board of Directors in
September 1989. In June 1996, Mr. Clough relinquished the
title of Chief Operating Officer and was, in turn,
appointed Chief Executive Officer. He had been Vice
President and General Manager of Kaydon's Bearings Division
since 1987, after having joined Kaydon as Vice President of
its Automotive operation in April 1986.
John F. Brocci (54) Vice President of Administration and Secretary. Mr. Brocci
has been Vice President of Administration since joining
Kaydon in March, 1989. He was appointed Secretary in
April, 1992. Prior to joining Kaydon, he was the
Operations Manager for the Sealed Power Division of SPX
Corporation.
</TABLE>
18
<PAGE> 21
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is included in the Proxy Statement
for the 1997 Annual Meeting of Stockholders of Kaydon, which has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is included in the Proxy Statement
for the 1997 Annual Meeting of Stockholders of Kaydon, which has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is included in the Proxy Statement
for the 1997 Annual Meeting of Stockholders of Kaydon, which has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference.
19
<PAGE> 22
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
a. 1. Financial Statements
The following consolidated financial statements of the Company
are included in the Annual Report of the registrant to its
stockholders for the year ended December 31, 1996 which is
incorporated herein by reference in Part II, Item 8 of this
report.
<TABLE>
<CAPTION>
Page Number in
Annual Report
to Stockholders
---------------
<S> <C>
Report of Independent Public Accountants 17
Consolidated Balance Sheets
as of December 31, 1996 and 1995 18
Consolidated Statements of Income
for the years ended December 31, 1996, 1995 and 1994 19
Consolidated Statements of Stockholders' Investment
for the years ended December 31, 1996, 1995 and 1994 20
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 21
Notes to Consolidated Financial Statements 22 - 32
</TABLE>
2. Financial Statement Schedules
All schedules required by Form 10-K Annual Report have been
omitted because they were inapplicable, the required
information is included in the notes to the consolidated
financial statements or otherwise is not required under
instructions contained in Regulation S-X.
Financial statements of the Company have been omitted since
the Company is primarily an operating company and all
subsidiaries included in the consolidated financial statements
filed are wholly owned subsidiaries.
20
<PAGE> 23
3. Reference to Exhibits
Reference is made to the Exhibit Index which is found on pages
23 through 26 of this Form 10-K.
b. Reports on Form 8-K
No reports on Form 8-K have been filed during the fourth
quarter of 1996.
21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Kaydon has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KAYDON CORPORATION
-----------------------------------
Registrant
Date: March 21, 1997 By: /s/Lawrence J. Cawley
-----------------------------------
Chairman and Chief Financial Officer
Date: March 21, 1997 By: /s/Stephen K. Clough
-----------------------------------
Chief Executive Officer and President
Date: March 21, 1997 By: /s/Joseph P. Port
-----------------------------------
Vice President Finance and Corporate
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of Kaydon and in
the capacities and on the dates indicated.
/s/Gerald J. Breen
----------------------------------
Gerald J. Breen - Director March 21, 1997
/s/Brian P. Campbell
----------------------------------
Brian P. Campbell - Director March 21, 1997
/s/Lawrence J. Cawley
----------------------------------
Lawrence J. Cawley - Chairman March 21, 1997
/s/Stephen K. Clough
----------------------------------
Stephen K. Clough - Director March 21, 1997
/s/John H.F. Haskell, Jr.
----------------------------------
John H.F. Haskell, Jr. - Director March 21, 1997
22
<PAGE> 25
c. 1. Exhibits Index
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
<S> <C> <C>
2.1 Stock and Asset Purchase Agreement between Exhibit 2 to Kaydon's Registration Statement
Kaydon Acquisition, Inc. (now Kaydon Ring on Form 8-K filed on July 15, 1986, as amended
and Seal, Inc.) and Koppers Company, Inc., by the Registration Statement filed on Form
dated June 26, 1986. 8-K on September 30, 1986 (SEC File
No. 0-12640).
2.2 Agreement of Purchase and Sale between Exhibit 2 to Kaydon's Annual Report on Form
Kaydon Corporation and TRW Automotive 10-K for the year ended December 31, 1987 (SEC
Products, Inc., dated as of June 29, 1987. File No. 0-12640).
2.3 Stock Purchase Agreement among Kaydon Exhibit 2 to Kaydon's Registration Statement
Corporation, Kaydon Acquisition Corp. III, on Form 8-K filed on July 7, 1989, as amended
Kaydon Acquisition Corp. IV, KDI Holdings, by the Registration Statement filed on Form
Inc. and KDI Corporation. 8-K on November 3, 1989 and Registration
Statement filed on Form 8-K on March 27, 1990
(SEC File No. 0-12640).
2.4 Stock Purchase Agreement among Kaydon Exhibit 2 to Kaydon's Registration Statement
Corporation, Kaydon Acquisition Corp. U.K. on Form 8-K filed on December 31, 1991, as
Limited, Murray Ventures PLC and others amended by the Registration Statement filed on
and William Terence Blaney and others. Form 8-K on February 28, 1992 (SEC File
No. 0-12640).
2.5 Asset Purchase Agreement among Kaydon Exhibit 2 to Kaydon's Annual Report on Form
Corporation, Industrial Tectonics Inc and 10-K for the year ended December 31, 1994 (SEC
Axel Johnson, Inc. dated January 28, 1994. File No. 0-12640).
2.6 Stock Purchase Agreement among Kaydon Exhibit 2.6 to Kaydon's Annual Report on Form
Acquisition Corp. V and the shareholders 10-K for the year ended December 31, 1995 (SEC
of Seabee Corporation. File No. 0-12640).
2.7 Asset Purchase Agreement among Kaydon
Acquisition VII, Inc., Keynote Holding
Co., Inc, Victor Fluid Power Co. and
Benton Harbor Engineering Co., Inc. dated
February 1, 1996.
3.1 Certificate of Incorporation of the Exhibit 3 to Kaydon's Registration Statement
Registrant, dated October 21, 1983. on Form S-1 (No. 2-89399).
3.2 Certificate of Amendment to the Exhibit 3 to Kaydon's Registration Statement
Certificate of Incorporation of the on Form S-1 (No. 2-89399).
Registrant, dated November 23, 1983.
3.3 Certificate of Amendment to the Exhibit 3 to Kaydon's Registration Statement
Certificate of Incorporation of the on Form S-1 (No. 2-89399).
Registrant, dated February 6, 1984.
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
<S> <C> <C>
3.4 Certificate of Correction to the Exhibit 3 to Kaydon's Registration Statement
Certificate of Amendment to the on Form S-1 (No. 2-89399).
Certificate of Incorporation of the
Registrant, dated February 17, 1984.
3.5 Form of Restated Certificate of Exhibit 3 to Kaydon's Registration Statement
Incorporation of the Registrant, dated on Form S-1 (No. 2-89399).
March 1984.
3.6 Amendment to Certificate of Incorporation Exhibit 3 to Kaydon's Annual Report on
of the Registrant, dated February 24, Form 10-K for the year ended December 31, 1987
1987. (SEC File No. 0-12640).
3.7 Bylaws of the Registrant, as adopted on Exhibit 3 to Kaydon's Registration Statement
October 27, 1983. on Form S-1 (No. 2-89399).
3.8 Amended Bylaws of the Registrant, as Exhibit 3 to Kaydon's Annual Report on
adopted on February 19, 1986. Form 10-K for the year ended December 31, 1985
(SEC File No. 0-12640).
3.9 Amendment to the Bylaws of the Registrant, Exhibit 3 to Kaydon's Annual Report on
dated as of September 19, 1989. Form 10-K for the year ended December 31, 1989
(SEC File No. 0-12640).
3.10 Certificate of Amendment to the Exhibit 3 to Kaydon's Quarterly Report on
Certificate of Incorporation of the Form 10-Q for the quarter ended March 28, 1992
Registrant, dated April 27, 1992. (SEC File No. 0-12640).
4.1 Form of Stock Certificate for Kaydon Exhibit 3 to Kaydon's Registration Statement
Common Stock. on Form S-1 (No. 2-89399).
4.2 Shareholders Rights Plan dated June 21, Exhibit 1 to Kaydon's Registration of Certain
1995. Classes of Securities on Form 8-A filed June
28, 1995 (SEC File
No. 0-12640).
10.1 Amended and Restated Revolving Credit and Exhibit 4 to Kaydon's Annual Report on
Term Loan Agreement, dated March 14, 1990. Form 10-K for the year ended December 31, 1990
(SEC File No. 0-12640).
10.2 First Amendment to the Amended and Exhibit 4 to Kaydon's Annual Report on
Restated Revolving Credit and Term Loan Form 10-K for the year ended December 31, 1991
Agreement, dated February 22, 1991. (SEC File No. 0-12640).
10.3 Second Amendment to the Amended and Exhibit 4.1 to Kaydon's Annual Report on
Restated Revolving Credit and Term Loan Form 10-K for the year ended December 31, 1994
Agreement, dated February 28, 1994. (SEC File No. 0-12640).
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
<S> <C> <C>
10.4 Third Amendment to the Amended and Exhibit 4.2 to Kaydon's Annual Report on Form 10-K
Restated Revolving Credit and Term for the year ended December 31, 1994 (SEC
Loan Agreement, dated March 29, 1994. File No. 0-12640).
10.5 Letter, dated March 22, 1984, whereby the Exhibit 4 to Kaydon's Registration Statement
Registrant undertakes to furnish to the on Form S-1 (No. 2-89399).
Securities and Exchange Commission, upon
request, a copy of certain instruments as
provided in Item 601(b)(4)(iii)(A) of
Regulation S-K.
10.6 Kaydon Corporation Employee Stock Exhibit 10.1 to Kaydon's Annual Report on
Ownership and Thrift Plan as amended and Form 10-K for the year ended December 31, 1994
restated December 14, 1994 effective (SEC File No. 0-12640).
January 1, 1989.
10.7 Management Incentive Compensation Plan. Exhibit 10 to Kaydon's Registration Statement
on Form S-1 (No. 2-89399).
10.8 Electro-Tec Corporation Employee Exhibit 10.2 to Kaydon's Annual Report on
Retirement Benefit Plan as amended and Form 10-K for the year ended December 31, 1994
restated December 14, 1994 effective July (SEC File No. 0-12640)
1, 1989.
10.9 Kaydon Corporation 1993 Stock Option Plan. Exhibit A to Kaydon's Proxy Statement dated
March 10, 1993.
10.10 Kaydon Corporation 1993 Non-Employee Exhibit B to Kaydon's Proxy Statement dated
Directors Stock Option Plan. March 10, 1993.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (10.11 AND 10.12 ONLY)
10.11 Kaydon Corporation Supplemental Executive Exhibit 10.11 to Kaydon's Annual Report on
Retirement Plan. Form 10-K for the year ended December 31, 1995
(SEC File No. 0-12640).
10.12 Change in Control Compensation Agreements Exhibit 10.12 to Kaydon's Annual Report on
Versions A & B. Form 10-K for the year ended December 31, 1995
(SEC File No. 0-12640).
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE TO
- ------- ----------- ----------------------------
<S> <C> <C>
10.13 Seabee Corporation Pension and Retirement Exhibit 4.3 to Kaydon's Registration Statement
Savings Plan. on Form S-8 (No. 333-15903), as amended by
filing with the SEC pursuant to Rule 424(c) of
the Securities Act of 1933 on November 12,
1996.
11 Schedule of Computation of Net Income Per
Share.
13 Financial Section of Annual Report to
Stockholders.
21 Subsidiaries of Registrant.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule (for SEC Use Only).
</TABLE>
26
<PAGE> 1
EXHIBIT 2.7
ASSET PURCHASE AGREEMENT
Between
KAYDON ACQUISITION VII, INC.
And
KEYNOTE HOLDING CO., INC.
And
VICTOR FLUID POWER CO.
And
BENTON HARBOR ENGINEERING CO., INC.
JANUARY 30, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
1. SALE AND PURCHASE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Transfer of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Assumed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2. PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Allocation of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.3 Adjustment to Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 Time and Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 Transfer of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.3 Delivery of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4. REPRESENTATIONS AND WARRANTIES OF SELLERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.1 Organization, Standing, etc. of Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.2 Authorization; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.3 Consents; Defaults; Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.4 Machinery and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.5 Intellectual Property and Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.6 Employment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.7 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.9 Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.10 Broker, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.11 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.12 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.13 No Burdensome Restrictions, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.14 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.15 Accuracy of Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.16 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.17 Leases and Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.18 Condition of Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.19 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.20 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.21 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.22 Labor Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.23 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.24 Terex Corporation Not a Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
5. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.1 Organization, Standing and Authority of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.2 Authorization; Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.3 Assumption of Assumed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.4 Consents, Defaults, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
5.5 Broker, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.6 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.7 Financial Capability to Consummate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6. COVENANTS OF SELLERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.1 Maintenance of Assets; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.2 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.3 Continuing Responsibility for Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 18
6.4 Environmental Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
6.5 Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7. COVENANTS OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.1 Negative Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.2 Assumption of Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8. CONDITIONS TO OBLIGATION OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.1 Accuracy of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.2 Performance by Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.3 Sellers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.4 Opinion of Sellers' Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.5 Corporate Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.6 Instruments of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.7 Examination Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.8 VIC Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9. CONDITIONS TO OBLIGATION OF SELLERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.1 Accuracy of Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.2 Performance by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.3 Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.4 Opinion of Buyer's Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.5 Corporate Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
9.6 Delivery of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
10. COVENANT NOT TO COMPETE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
10.1 Non-competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
10.2 Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
10.3 Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
11. ADDITIONAL COVENANTS OF BUYER AND SELLERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.1 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.2 Bulk Sales Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.3 Rights to Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
11.4 Use of Trade Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.5 Access and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS; INDEMNIFICATION; ETC. . . . . . . . . . . . . . . . . 45
12.1 Survival of Representations, Warranties and Covenants . . . . . . . . . . . . . . . . . . . . . . . 45
12.2 Indemnification by Sellers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
12.3 Indemnification by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
12.4 Environmental Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
13. LEASE OF VICTOR PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
14. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
15. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
16. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
17. AMENDMENTS; TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
18. EFFECT OF THIS AGREEMENT; COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
19. GOVERNING LAW AND JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
20. REMEDIES AND INDEMNITIES CUMULATIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
21. ASSIGNMENTS; SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
22. PRESS RELEASES AND ANNOUNCEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
23. CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
-iii-
<PAGE> 5
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made and executed as of January 30,
1996, between KAYDON ACQUISITION VII, INC., a Delaware corporation (the
"Buyer"), VICTOR FLUID POWER CO., a Michigan corporation and BENTON HARBOR
ENGINEERING CO., INC., a Michigan corporation (the "Sellers"), KEYNOTE HOLDING
CO., INC., a Delaware corporation ("Keynote") with reference to the
following facts:
Sellers are a wholly-owned subsidiaries of Keynote and wishes to sell
to Buyer and Buyer wishes to purchase from Sellers all of the business and
certain assets relating to Sellers' manufacturing business located in Benton
Harbor, Michigan and Granite Falls, Minnesota (the "Business").
In consideration of the premises and the mutual covenants contained
herein, Sellers, Keynote and Buyer agree as follows:
1. SALE AND PURCHASE OF ASSETS
1.1 Transfer of Assets. In reliance on the representations and
warranties contained herein and subject to the terms and conditions hereof,
Sellers shall on the Closing Date (as defined in Section 3 herein) sell,
convey, transfer, assign and deliver, free and clear of all liens, mortgages,
security interests, pledges, charges, agreements, restrictions, claims, defects
in title and encumbrances of any kind or description, except for those items
listed on the attached Exhibit 1.1 (collectively referred to herein as "Claims
and Encumbrances"), and Buyer shall purchase from Sellers, all of Sellers'
right, title and interest in and to the tangible and intangible assets (the
"Assets") of Sellers (excluding any hazardous materials or substances located
at the Benton Harbor facility), including:
(a) Inventories. All inventory, including, without
limitation, all work in process, finished parts and products and raw
materials ("Inventory");
<PAGE> 6
(b) Machinery and Equipment. All machinery, equipment,
tools, vehicles, furniture, tooling, fixtures, molds, dies, and all
other tangible property used in the Business, including, without
limitation, the machinery and equipment described on Exhibit 1.1(b)
hereto ("Machinery and Equipment"). Provided Buyer shall have the
right during the six (6) months transition period from the Benton
Harbor facility in its sole discretion, to abandon any machinery or
equipment, in which case Seller shall have the right to dispose of
such items as it sees fit.
(c) Intangible Personal Property. All intangible
personal property, including (i) all procedures, processes, products,
formulae, scientific, technical and other information, trade secrets,
ideas, licenses, franchises, customer lists, vendor lists, plans,
specifications, designs, drawings, catalogues, manuals, reports,
samples, prototypes, know-how, items in application, development or
other pending status and all similar items which are owned by Sellers
and applicable to or used in the operation of the Business
("Intellectual Property"), including, without limitation, the items of
Intellectual Property of Sellers described on Exhibit 1.1(c) hereto,
(ii) rights pursuant to all contracts applicable to or used in the
operation of the Business, including, without limitation, the
contracts listed on Exhibit 4.17 hereto, (iii) the leases of real and
personal property applicable to or used in the operation of the
Business described on Exhibit 4.17 hereto, (iv) all computer and
automatic machinery software programs and source disks, program
documentation, tapes, manuals, forms, guides and other materials with
respect thereto applicable to or used in the Business, and (v) to the
extent the same are transferable, all federal, state or local
governmental or regulatory permits, licenses, approvals and franchises
which are owned or have
2
<PAGE> 7
been received by Sellers in connection with the operation of the
Business or ownership of the Assets (collectively, "Permits"),
including, without limitation, the Permits which are listed on
Exhibit 4.7 hereto;
(d) Patents, Trademarks and Copyrights. All registered
and unregistered trademarks, trademark applications, trade names,
service marks and service names and the goodwill of the Business
connected therewith or symbolized thereby, and all copyrights, patents
and patent applications, including, without limitation, the items
listed on the attached Exhibit 1.1(d).
(e) Records. All accounting information pertaining to
the operations of the Business and all media in which all or any of
the information, knowledge, data or records relating to the Business
may be related or stored, all customer lists, customer files,
personnel records, credit information, pending litigation documents,
insurance documents, pension documents, advertising, promotional and
sales materials, sales data, surveys, account histories, information
relating to sales or servicing of products applicable to, used in or
manufactured by the Business;
(f) Miscellaneous Assets. All goodwill of the Business
and all information, identification of supplies, gross data, recorded
knowledge, and all warranties inuring to the benefit of Sellers in
connection with the Business;
(g) Cash. All cash on hand, (except that Buyer shall not
assume any negative cash balance), and
(h) Accounts Receivable and Notes Receivable. All
accounts receivable and notes receivable, provided, that any accounts
receivable existing on the books of the Sellers as of December 31,
1995 attributable to sales to Terex Corporation or any
3
<PAGE> 8
of its subsidiaries shall be paid in full by Terex and its subsidiaries
at or prior to the Closing.
1.2 Assumed Liabilities. At the Closing, Buyer shall assume only
(i) the obligations or liabilities of Sellers listed on the combined balance
sheet of Sellers dated October 31, 1995 and attached as Exhibit 1.2 hereto in
the amounts listed therein, as such amounts may have increased or decreased
since that date in the ordinary course of business. Provided, however, that
Buyer's obligation to assume the liability to Congress Financial Corporation,
shall under no condition whatsoever exceed Seven Million Seven Hundred Thousand
Dollars ($7,700,000.00) which Buyer will pay-off at Closing. Provided,
further, Buyer is not assuming the liabilities listed on said Balance Sheet to
the SBA in the amount of Three Hundred Ninety-Three Thousand Five Hundred Fifty
Dollars ($393,550.00); nor to Yellow Medicine County Bank in the amount of Four
Hundred Ninety-Three Thousand Two Hundred Fifty-Four Dollars ($493,254.00) nor
to Minnesota Development Authority in the amount of Ninety-Three Thousand Nine
Hundred Seventy-Four Dollars ($93,974.00) which liability is secured by a
mortgage on the real property of the Victor facility (referred to in this
Agreement as the "Victor Property"), nor to Terex Corporation in the amount of
Five Hundred Twenty Six Thousand Five Hundred and no/100 Dollars ($526,500.00).
(a) Those additional liabilities set forth on the
attached Exhibit 1.2(a). Except for the foregoing liabilities, Buyer
shall not assume any obligation, duty or liability of any nature
whatsoever, fixed or contingent, including, without limitation:
(i) any liability of Sellers for violation of Environmental
Requirements; generation, management, handling, transportation,
treatment, storage, disposal, delivery, discharge, release or emission
of any Hazardous Material or other substance;
4
<PAGE> 9
Environmental Damages; or any other action, omission or condition
affecting the environment arising from the conduct of the Business or
occurrences prior to the Closing Date, including, without limitation,
those conditions specified on Exhibit 4.12 as described herein;
(ii) any tax liabilities or similar assessments arising from the
conduct of the Business or occurrences prior to the Closing Date or
arising from the transfer of the Assets and consummation of the
transactions contemplated hereby, including, without limitation, any
liabilities for sales, bulk sales, use, transfer, stamp or income
taxes, and any filing, recording or similar fees or charges; (iii) any
liabilities for breach or default by Sellers under any contract, lease
or agreement assigned to Buyer hereunder, which accrued prior to the
Closing Date; (iv) any liability with respect to any claim, suit,
action or judicial, administrative or arbitration proceeding made or
pending or commenced against Sellers at or prior to the Closing Date,
or made or commenced after the Closing Date in respect of any action,
omission or condition occurring or existing prior to the Closing Date;
(v) any undisclosed liabilities, which accrued prior to the Closing
Date and (vi) any collective bargaining agreement (other than the
Agreement covering employees at the Victor location), labor or
employment agreement liabilities, any pension plan withdrawal or other
liability, severance liability, funding deficiency, workmen's
compensation, employee life and health insurance or similar liability
to any employee or former employee of Sellers, including, without
limitation, any such liability under any multi-employer or
single-employer plan, contract or arrangement, or any other liability
in respect of any employee attributable to or in respect of any period
prior to the Closing Date. Sellers shall discharge and satisfy, when
and if due and payable, all
5
<PAGE> 10
liabilities which are not specifically assumed by Buyer under this
Agreement and shall, upon request of Buyer, give Buyer evidence of such
payment.
In the event Buyer is assessed with a liability it did not assume
hereunder, Buyer shall notify Sellers in writing of such assessment and provide
Sellers ten (10) business days to either acknowledge the liability or dispute
it. If Sellers acknowledges such assessment of liability, Sellers may either,
at its sole option, (i) discharge and satisfy such liability directly, (ii)
dispute such liability and indemnify and hold Buyer harmless, or (iii) pay Buyer
the full amount of such assessed liability. Under no circumstances shall
Sellers pay Buyer for any liability which Buyer satisfies and discharges on
Sellers' behalf unless Buyer first provides Sellers with the notice required
herein.
1.3 Excluded Assets. The Assets shall not include the assets of
Sellers listed in Exhibit 1.3 attached hereto.
2. PRICE
2.1 Purchase Price. The purchase price for the Assets based on
Sellers' balance sheet attached as Exhibit 1.2 hereto shall be the sum of Two
Million Five Hundred Thousand Dollars ($2,500,000) in cash (transferred via wire
transfer) at Closing, plus the assumption of liabilities described in Paragraph
1.2.
2.2 Allocation of Purchase Price. The Purchase Price paid for
the respective Assets will be as shown on an allocation exhibit to be provided
by Buyer to Sellers prior to the Closing which shall be approved by Sellers.
2.3 Adjustment to Purchase Price. The purchase price described in
paragraph 2.1 hereof, shall be adjusted upward or downward as a result of any
change in the net worth of
6
<PAGE> 11
Sellers from the amount set forth on Seller's balance sheet of October 31, 1995
and the balance sheet as of the date of Closing.
3. THE CLOSING
3.1 Time and Place. The Closing of the sale and purchase of the
Assets (the "Closing") shall take place at the offices of _____________________
in ______________, ___________ as soon as practicable following Buyer receipt
of the No Association Letter from Minnesota Pollution Control Agency Voluntary
Investigation and Cleanup ("VIC") Program as more fully described in Paragraph
8.8 (a) hereof, (the "Closing Date"). In the event the No Association Letter
is not received by January 31, 1996, the parties shall have the right to extend
the Closing Date or terminate the Purchase Agreement. Sellers shall close down
the operations of Benton Harbor and terminate all employees prior to the
Closing Date. The delivery of all documents by the parties and the performance
of all acts at the Closing shall be deemed to have occurred simultaneously.
3.2 Transfer of Assets. At the Closing, Sellers shall deliver to
Buyer such bills of sale, endorsements, assignments and other good and
sufficient instruments of conveyance and transfer, in form and substance
reasonably satisfactory to Buyer and its counsel, as shall be effective to
convey and transfer to and vest in Buyer title to the Assets, free and clear of
any Claims and Encumbrances, except such Claims and Encumbrances listed on
Exhibit 1.1 attached hereto. Simultaneously with such delivery, Sellers shall
take such action as may be necessary or reasonably requested by Buyer to place
Buyer in possession and control of the Assets.
3.3 Delivery of Purchase Price. Buyer shall pay to Sellers via
wire transfer at the Closing, the full amount of the Purchase Price.
7
<PAGE> 12
4. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers represents and warrants to Buyer as follows:
4.1 Organization, Standing, etc. of Sellers. Each of the Sellers
is duly organized, validly existing and in good standing under the laws of the
State of Michigan, and has all requisite power to own or lease and to operate
its properties and to carry on the Business as conducted with the Assets.
4.2 Authorization; Binding Effect. This Agreement has been duly
executed and delivered by Sellers and constitutes the legally binding
obligation of Sellers in accordance with its terms.
4.3 Consents; Defaults; Etc. Except as set forth on the attached
Exhibit 4.3, neither the execution, delivery or performance by Sellers of this
Agreement nor the consummation by Sellers of the transactions contemplated
hereby (i) is prohibited by, or requires Sellers to obtain or make any consent,
authorization, approval, filing or registration under, any law, rule or
regulation, judgment, order, writ, injunction or decree which is binding upon
Sellers, or any of the Assets, or (ii) will violate any provision of, result in
any default or acceleration of any obligations under, result in the creation or
imposition of any lien on any of the Assets pursuant to, or require any consent
under, any indenture, lease, mortgage or other agreement to which Sellers is a
party or by which Sellers or any of the Assets is otherwise bound.
4.4 Machinery and Equipment. Except as listed in Exhibit 4.4
attached hereto, all Machinery and Equipment has been maintained so as to be,
and all of the Machinery and Equipment is, in good operating condition and
repair (ordinary wear and tear excepted), and
8
<PAGE> 13
to the best of Sellers' knowledge, after due inquiry, there are no repairs which
are required to be made to the Machinery and Equipment, except as listed in
Exhibit 4.4.
4.5 Intellectual Property and Processes. Exhibit 1.1(c) includes
all of the material Intellectual Property, and all patents, trademarks and
copyrights owned by, used or necessary for use in the Business. The formulae,
manufacturing procedures, processes, know-how and trade secrets used or
necessary for use in the operation of the business are hereinafter referred to
as the "Processes". The United States trademark registrations listed on the
attached Exhibit 1.1(c) and, to the best of Sellers' knowledge, after due
inquiry, the Intellectual Property and Processes which are owned by Sellers are
owned free and clear of any license, sublicense, agreement, right,
understanding, judgment, order, decree or stipulation, and Sellers, to the best
of its knowledge, after due inquiry, has not infringed on or misappropriated
any intellectual property of third parties. To the best of Sellers' knowledge
no third party has infringed or misappropriated any Intellectual Property,
patents, trademarks and Copyrights or Processes.
4.6 Employment Matters. Except as listed on the attached Exhibit
4.6, there is no claim of any employee or any former employee of Sellers for
any unpaid compensation or remuneration of any nature, including, without
limitation, contingent salaries, incentive payments, pension benefits (whether
or not vested), (excluding benefits to be paid in the future from pension
trusts established and administered for such purpose by Sellers), medical
expense reimbursement, vacation pay, severance payments and other awards,
interests and payments. Exhibit 4.6 shall contain the current funding status
of the Victor Pension Plan.
4.7 Permits. Attached as Exhibit 4.7 hereto is a list of all
material Permits Sellers has obtained in connection with the operation and
ownership of the Assets, and, except
9
<PAGE> 14
Permits that Buyer designates as not to be transferred in Exhibit 4.7, or which
have been designated as non-transferable or transferable only with consent from
a third party or government or regulatory body on Exhibit 4.7, each of the
Permits is transferable by Sellers without notice to or consent from any third
party or governmental or regulatory body. Sellers shall take all reasonable
steps requested by Buyer to enable Buyer to obtain in its own name any Permit
that is not so transferable. The Permits listed on Exhibit 4.7 constitute all
of the Permits required to operate the Business as previously conducted by
Sellers. Except as listed on attached Exhibit 4.7, there are no proceedings
pending or, to the best of Sellers' knowledge, threatened which may result in
the revocation, cancellation or suspension, or any adverse modification, of any
Permit.
4.8 Litigation. Except as listed on the attached Exhibit 4.8,
there is no suit, action, proceeding, investigation or inquiry pending or, to
the best of Sellers' knowledge, threatened (or any basis therefor), at law or
in equity or before any governmental department, commission, board, body,
agency or instrumentality, domestic or foreign, against Sellers which affects
or could have a material effect on the Assets or involves or could involve the
validity or legality of this Agreement or any action taken or to be taken
pursuant hereto.
4.9 Certain Tax Matters. Sellers has paid, accrued on its Latest
Financial Statement, or will pay when due all income, sales, use, business,
occupation, personal or real property or any similar taxes and all taxes of any
kind related to any period prior to the Closing Date, including without
limitation, any tax relating to the wages, benefits or income of any employee,
consultant or commission agent connected with the Assets, whether owed by
Sellers or by any such employee, consultant or commission agent.
10
<PAGE> 15
4.10 Broker, etc. Except as set forth on the attached Exhibit
4.10, Sellers have employed no finder, broker, agent or other intermediary in
connection with the negotiation or consummation of this Agreement or any of the
transactions contemplated hereby.
4.11 Title to Assets. Except as set forth on the attached Exhibit
4.11, Sellers has undivided marketable title, legal and equitable, in and to
all of the Assets being sold under this Agreement. The Assets are owned by
Sellers free and clear of any Claims and Encumbrances, except liens for current
taxes and assessments not yet due and payable and those liens, Claims and
Encumbrances described on the attached Exhibit 4.11. All of the Assets are
located in Benton Harbor, Michigan and Granite Falls, Minnesota or such other
location listed in Exhibit 4.11. The Assets, taken as a whole, constitute all
of the operating properties and assets which are reasonably necessary for the
conduct of the Business as conducted by Sellers.
4.12 Compliance With Laws. Except as set forth on Exhibit 4.12
(which includes the Environmental Report described in Section 6.5 herein), the
Business and the Assets are and have been operated and maintained in
substantial compliance with all applicable governmental laws, rules,
regulations, Environmental Requirements and ordinances, including, without
limitation, laws, regulations and other requirements (a) relating to pricing of
products and antitrust, and (b) imposed by action of, permits from, or
agreements with any governmental agency or authority relating to the
generation, management, handling, transportation, treatment, storage, disposal,
delivery, discharge, release or emission of any waste, pollutant or toxic,
hazardous or other substance or other action, omission or condition
affecting the environment, air, soil and water pollution, ground water
contamination, the handling, storage or release into the environment of
hazardous materials or hazardous
11
<PAGE> 16
substances, or the transportation of hazardous materials (collectively
"Environmental Laws and Regulations") and federal and state occupational safety
and health laws and regulations and the Consumer Products Safety Commission laws
and regulations; and Sellers has no notice of any failure to comply therewith,
except as set forth on Exhibit 4.12. Exhibit 4.12 lists each offsite disposal
site used by Sellers presently or used by Sellers from March 1992 with respect
to the Benton facility and from December 1994 with respect to the Victor
facility to the present. Except as set forth in Exhibit 4.12, to the best of
Sellers' knowledge, after due inquiry and investigation by qualified Sellers
representatives, all properties and equipment of Sellers have been since
December 31, 1994 and now are free of asbestos, PCB's, methylene chloride,
trichloroethylene, 1,2-transdichloroethylene, dioxins, dibenzoforans and
"extremely hazardous substances" as that term is defined in the Toxic Substance
Control Act. Phase I and Phase II studies performed by Sellers and Keynote
shall be attached as part of Exhibit 4.12.
4.13 No Burdensome Restrictions, etc. There are no judgments,
orders, writs, injunctions, or decrees to which the Assets are subject and to
which Sellers is a party, or which materially adversely affect the Assets,
except those set forth on the attached Exhibit 4.13.
4.14 Disclosure. The representations and warranties contained in
this Agreement and the information contained in the Exhibits hereto, written
documents, financial statements including the latest financial statements dated
December 31, 1995, provided by Sellers to Buyer (the "Latest Financial
Statements"), and other certificates or instruments delivered by or on behalf of
Sellers in connection with the purchase and sale of the Assets are true and
correct in all material respects and do not contain any untrue statement of a
material fact or
12
<PAGE> 17
omit to state a fact necessary to make the statements contained therein and
herein not misleading. Except as set forth in the attached Exhibit 4.14, there
is no fact known to Sellers which materially adversely affects the Assets which
has not been set forth in this Agreement or in the other documents, certificates
or instruments delivered by Sellers or on behalf of Sellers, specifically for
use in connection with the transactions contemplated by this Agreement.
4.15 Accuracy of Financial Statements. The financial statements of
Sellers provided to Buyer (including, without limitation, the Latest Financial
Statements, and Sellers' annual unaudited financial statements dated December
31, 1995) fairly present the financial condition of Sellers and the results of
its operations, as of the dates thereof and for the periods indicated therein,
in accordance with generally accepted accounting principles consistently
applied. As of the Closing Date, and except as set forth on the attached
Exhibit 4.15, Sellers shall have no liabilities of any nature required to be
reflected in financial statements under generally accepted accounting
principles that were not shown or provided for in the aggregate on the
financial statements, and all reserves set forth on the financial statements
are adequate in all material respects.
4.16 Absence of Changes. Since the date of the Latest Financial
Statements, Sellers has, and until the Closing Date shall have, operated the
Business in the ordinary and usual course, maintained the Assets in good
condition and repair, reasonable wear and use excepted, and not sold, assigned,
transferred, encumbered or otherwise disposed of, or contracted, agreed or
become bound to sell, assign, transfer, encumber or otherwise dispose
of any of the Assets, other than in the ordinary course of business, and except
as otherwise provided in this Agreement. Since such date, there has been no
material adverse change in
13
<PAGE> 18
the Business, Assets or condition, financial or otherwise, of Sellers nor, to
the best of Sellers' knowledge, has any such change threatened to occur, nor has
there been any damage, destruction or loss, other than that fully covered by
insurance, of a material nature affecting the Business, properties or financial
condition of Sellers.
4.17 Leases and Contracts. Exhibit 4.17 attached hereto includes
each lease of real or personal property and each agreement to which Sellers is
a party that involves the sum of $10,000.00 or more, including employment
agreements and collective bargaining agreements. Each such lease and agreement
(a) is valid, binding and enforceable, and (b) to the best of Sellers'
knowledge, no event has taken place which with notice or lapse of time would
constitute a breach or default, or permit termination or modification of such
lease or contract. Sellers has not received notice of any default, and, to the
best of Sellers' knowledge, Sellers is not in default in respect of any such
lease or agreement to which it is a party or by which it is bound. Exhibit
4.17 shall contain a copy of the Management Contract between Terex and Keynote.
4.18 Condition of Inventory. All inventory, materials and supplies
of Sellers are at least of merchantable quality for such items in the
Business. The inventory reserves described in the Latest Financial Statements
are adequate in all material respects.
4.19 Accounts Receivable. Except as set forth on the attached
Exhibit 4.19, all of Sellers' accounts receivables of any nature are good and
collectible at the aggregate recorded amounts thereof in the usual and ordinary
course of business and without resort to legal proceedings.
4.20 Real Property. Exhibit 4.20 includes a legal description of
all real property owned by Sellers.
14
<PAGE> 19
Sellers agree that Buyer shall have the right to utilize the Benton
Harbor Engineering Co., Inc. premises for a period of not to exceed six (6)
months following the "Closing" at no charge to allow an orderly transition of
the equipment located at that facility to Buyer's relocation. Buyer shall
provide a liaison person following Closing for a period not to exceed six weeks
to provide for an orderly transition and close down of the Benton Harbor
facility.
4.21 Insurance. Exhibit 4.21 attached hereto sets forth all
insurance carriers and policy numbers by policy period as to policies to which
Sellers has been a party or beneficiary within the past seven (7) years,
including, without limitation, worker's compensation, liability, casualty and
property insurance, and, except as identified in Exhibit 4.21, all such
policies are in full force and effect.
4.22 Labor Matters. Except as set forth on the attached Exhibit
4.22, Sellers is not subject to any labor grievances, claims of unfair labor
practices, or other material collective bargaining disputes.
4.23 Employee Benefits. Exhibit 4.23 lists all employee benefit
plans to which Sellers is a party, including all such plans as defined or
described under ERISA.
4.24 Terex Corporation Not a Party. Terex Corporation is not a
party to this Agreement and therefore makes no representations or warranties,
directly or indirectly, as to any matter contained in this Paragraph 4.
5. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants as follows:
5.1 Organization, Standing and Authority of Buyer. Buyer is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and
15
<PAGE> 20
has the corporate power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby.
5.2 Authorization; Binding Effect. The execution and delivery by
Buyer of this Agreement and the performance by Buyer of its obligations
hereunder and the consummation by Buyer of the transactions contemplated hereby
have been duly authorized by all necessary action on the part of Buyer. This
Agreement has been duly executed and delivered by a duly authorized officer of
Buyer and constitutes the valid and legally binding obligation of Buyer
enforceable against Buyer in accordance with its terms.
5.3 Assumption of Assumed Liabilities. All of the contracts,
agreements or instruments to be assumed by Buyer pursuant to this Agreement and
the Assumption Agreement are valid and binding upon Buyer, and are enforceable
against and fully performable by Buyer in accordance with their terms; and
there are no existing facts or circumstances which would prevent the full and
complete performance thereof by Buyer.
5.4 Consents, Defaults, etc.. Neither the execution, delivery or
performance by Buyer of this Agreement, nor the consummation by Buyer of the
transactions contemplated hereby (i) is prohibited by, or requires Buyer to
obtain or make any consent, authorization, approval, filing or registration
under, any law, rule or regulation, judgment, order, writ, injunction or decree
which is binding upon Buyer, or (ii) will violate any provision of, result in
any default or acceleration of any obligations under, or require any consent
under, any indenture, lease, mortgage or other agreement to which Buyer is a
party or by which Buyer is bound.
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5.5 Broker, etc.. Buyer has employed no broker, agent or other
intermediary in connection with the negotiation or consummation of this
Agreement or any of the transactions contemplated hereby.
5.6 Disclosure. The representations and warranties contained in
this Agreement and the information contained in any written documents,
financial statements and other certificates or instruments delivered by or on
behalf of Buyer in connection with the purchase of the Assets are true and
correct in all material respects and do not contain any untrue statement of a
material fact. There is no fact known to Buyer which materially adversely
affects the ability of Buyer to consummate the transactions contemplated herein
which has not been set forth in this Agreement or in the other documents,
certificates or instruments delivered by Buyer or on behalf of Buyer,
specifically for use in connection with the transactions contemplated by this
Agreement.
5.7 Financial Capability to Consummate Transactions. Buyer has,
or will have on the Closing Date, sufficient financial resources readily
available to enable Buyer to consummate the transactions contemplated in this
Agreement on the terms and conditions contained herein. There is no fact known
to Buyer which materially adversely affects the ability of Buyer to consummate
the transactions contemplated herein which has not been set forth in this
Agreement or in the other documents, certificates or instruments delivered by
Buyer or on behalf of Buyer, specifically for use in connection with the
transactions contemplated by this Agreement.
6. COVENANTS OF SELLERS
Sellers covenants and agrees with Buyer that:
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6.1 Maintenance of Assets; etc. Sellers will, through the Closing
Date, (a) maintain and keep all material Machinery and Equipment and other
Assets in as good repair, working order and condition as at present (reasonable
wear and tear excepted), (b) keep in full force and effect insurance as
necessary to fully insure the Assets, (c) perform in all material respects all
its obligations under all of its leases, contracts, commitments and
arrangements, and not amend, alter or modify, other than in the ordinary course
of business of Sellers, any provision of any lease, contract, obligation or
commitment to be assumed by Buyer, and (d) do all things reasonably necessary
to avoid any action that would render Sellers' representations and warranties
hereunder inaccurate as of the Closing Date.
6.2 Access to Information. Sellers will give to Buyer, Buyer's
accountants, counsel, employees and other representatives full access to all of
the properties, books, contracts, commitments, reports and records of Sellers
relating to the Business and Assets and will furnish Buyer all such documents,
records and information with respect to the affairs of the Business and copies
of any working papers relating to that Business as Buyer shall from time to
time reasonably request. Buyer will endeavor not to disrupt the operations of
Sellers' Business during any such investigations.
6.3 Continuing Responsibility for Environmental Matters.
(a) The following definitions shall be applicable to this
Agreement:
(i) "Contamination" shall mean all
"Chrome-Plating Contamination", "Tank Contamination",
"Transformer Contamination" and "Asbestos Contamination" as
hereinafter defined.
(ii) "Environmental Report shall mean,
collectively, the following reports that have been
prepared with respect to the Victor Property: Phase I
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Environmental Site Assessment, dated August 12, 1994, prepared
by ATEC (the "Phase I Report"); the Phase I ESA Update, dated
December 21, 1995, prepared by ATEC; the Phase II Soil Boring
and Asbestos Survey, dated September 16, 1994, prepared by ATEC
(the "Phase II(A) Report"); and Limited Subsurface Assessment,
dated December 21, 1995, prepared by ATEC (the "Phase II(B)
Report").
(iii) "Tank" means any of the underground or above
ground storage tanks (including the associated containers,
piping and other appurtenant structures or systems attached to
any of the tanks) identified in any of the Environmental
Reports.
(iv) "Tank Contamination" is any Hazardous
Material spilled, released, leaked, or otherwise discharged
from a Tank, or any Hazardous Material no longer in use as of
the Closing which must be removed from any tank for disposal,
recycling, treatment or other disposition.
(v) "Hazardous Material" means any substance:
(1) the presence of which requires
investigation, remediation or any other
response under any federal, state or local
statute, regulation, ordinance, order,
action, policy, or common law; or
(2) which is or becomes defined as
a "hazardous waste," "hazardous substance,"
"pollutant", or "contaminant" under any
federal, state, or local statute, regulation,
rule, or ordinance or amendments thereto
including, without limitation,
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the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C.
Section 9601 et seq.) and/or the Resource
Conservation and Recovery Act (42 U.S.C.
Section 6901 et seq.); or
(3) which is toxic, explosive,
corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic, or
otherwise hazardous or dangerous and is or
becomes regulated by any governmental
authority, agency, department, commission,
board, agency, or instrumentality of the
United States, the State of Minnesota or any
political subdivision thereof; or
(4) the presence of which on the
Victor Property causes or threatens to cause
a nuisance or other damage or harm upon the
Victor Property or to other properties, poses
or threatens to pose a hazard to the health
or safety of persons on or about the Victor
Property or other properties, or poses or
threatens to pose a harm to the environment
or natural resources wherever they may be
located; or
(5) the presence of which on
properties other than the Victor Property
could constitute a trespass; or
(6) without limitation, which
contains gasoline, diesel fuel, or other
petroleum hydrocarbons; or
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(7) without limitation, which
contains polychlorinated biphenyls (PCBs),
asbestos, or urea formaldehyde foam
insulation; or
(8) without limitation, radon gas;
or
(9) without limitation, asbestos or
asbestos-containing materials or lead-based
paint; or
(10) the term Hazardous Material
shall not include asbestos containing floor
tiles as identified in the Phase II(A)
Report.
(vi) "Environmental Requirements" means all
applicable present and future statutes, regulations, rules,
ordinances, codes, licenses, permits, orders, approvals,
plans, authorizations, concessions, franchises, and similar
items, of all governmental agencies, departments, commissions,
boards, bureaus, or instrumentalities of the United States,
states, and political subdivisions thereof and all applicable
judicial, administrative, and regulatory decrees, judgments,
and orders relating to the protection of human health or the
environment, including, without limitation:
(1) All requirements, including but
not limited to those pertaining to reporting,
licensing, permitting, investigation, and
remediation of emissions, discharges,
releases, or threatened releases of Hazardous
Materials, chemical substances, pollutants,
contaminants, or hazardous or toxic
substances, materials or wastes whether
solid, liquid, or
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gaseous in nature, into the air, surface
water, groundwater, or land, or relating to
the manufacture, processing, distribution,
use, treatment, storage, disposal, transport,
or handling of chemical substances,
pollutants, contaminants, or hazardous or
toxic substances, materials, or wastes,
whether solid, liquid, or gaseous in nature;
and
(2) All requirements pertaining to
the protection of the health and safety of
employees or the public.
(vii) "Environmental Damages" means all claims,
judgments, damages, losses, penalties, fines, liabilities
(including strict liability), encumbrances, liens, costs, and
expenses of investigation and defense of any claim, whether or
not such claim is ultimately defeated, and of any good faith
settlement of judgment, of whatever kind or nature, contingent
or otherwise, matured or unmatured, foreseeable or
unforeseeable, including without limitation reasonable
attorneys' fees and disbursements and consultants' fees, any
of which are incurred at any time as a result of the existence
prior to Closing of Hazardous Materials upon, about, beneath
the Victor Property or migrating or threatening to migrate to
or from the Victor Property, or the existence of a violation
of Environmental Requirements pertaining to the Victor
Property or the operation of any business or other activities
thereon, regardless of whether the existence of such Hazardous
Material or the violation of Environmental Requirements arose
prior to Sellers' ownership or operation of the Victor
Property, and including without limitation:
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(1) Damages for personal injury, or
injury to property or natural resources
occurring upon or off of the Victor Property,
foreseeable or unforeseeable, including
without limitation, lost profits,
consequential damages, the cost of demolition
and rebuilding of any improvements on real
property, interest and penalties;
(2) Fees incurred for the services
of attorneys, consultants, contractors,
experts, and laboratories and all other costs
incurred in connection with the investigation
or remediation of such Hazardous Materials or
violation of Environmental Requirements
including, but not limited to, the
preparation of any feasibility studies or
reports or the performance of any cleanup,
remediation, removal, response, abatement,
containment, closure, restoration, or
monitoring work required by any federal,
state, or local governmental agency or
political subdivision, or reasonably
necessary to make full economic use of
Property in a manner consistent with its
current use or otherwise expended in
connection with such conditions, and
including without limitation any attorneys'
fees, costs, and expenses incurred in
enforcing this Agreement or collecting any
sums due hereunder and Sellers and Keynote
shall have the right to copies of any reports
so generated; and
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(3) Liability to any third person
or governmental agency to indemnify such
person or agency for costs expended in
connection with the items referenced in
subparagraph (2) herein;
(b) Sellers and Keynote (hereinafter collectively
referred to as "Environmental Indemnitors"), through and after the
Closing Date, at their sole cost and expense, shall undertake the
following:
(i) not less than five (5) days prior to
the Closing, provide to Buyer a list of all Hazardous
Materials or substances located at its facilities as
defined in the OSHA Toxic and Hazardous Substances
Hazard Communication Standard, 48 FR 53280, Nov. 25,
1983, as amended, and
(ii) notwithstanding the obligation of
Environmental Indemnitors to indemnify Buyer pursuant
to this Agreement, Environmental Indemnitors, at
their sole cost and expense, shall perform all
obligations set forth in Paragraphs 6.3 (c) - (i)
below; and
(iii) promptly take any and all actions to
investigate and remediate the Victor Property and/or
other properties, if necessary, which are required by
any federal, state, or local government agency or
political subdivision or which are reasonably
necessary to mitigate Environmental Damages or to
allow full economic use of the Victor Property, which
investigation and remediation are necessitated from
the presence at the Closing of the Contamination,
Hazardous Materials, or
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a violation of any Environmental Requirements. Such
actions hereunder shall include, but not be limited
to, the investigation of the environmental condition
of the Victor Property, the preparation of any
feasibility studies, reports, or remedial plans, and
the performance of any cleanup, remediation,
containment, operation, maintenance, monitoring or
restoration work, whether on or off of the Victor
Property (hereinafter referred to as "Response
Action(s)").
(c) The parties acknowledge that Buyer will retain B.A.
Liesch Associates, Inc. or such other environmental consultant as it
selects, in its sole discretion (the "Consultant"), to supervise and
manage all Response Actions to be performed by or on behalf of
Environmental Indemnitors under this Agreement. Environmental
Indemnitors shall, upon submission of invoices from the Consultant by
Buyer, promptly reimburse Buyer for all costs and expenses Buyer
incurs for services provided by the Consultant. Environmental
Indemnitors shall cooperate with the Consultant in all respects in
performing Environmental Indemnitors' obligations hereunder.
(d) Environmental Indemnitors shall promptly after the
Closing retain one or more qualified independent environmental
contractors, each of which contractors shall be subject to the prior
written approval of the Buyer (collectively the "Contractor") to
perform the following tasks:
(i) Within thirty (30) days from the date of
execution of this Agreement, Environmental Indemnitors shall
cause the Contractor to register all Tanks located on the
Victor Property with the Minnesota Pollution Control
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Agency (MPCA) and all other governmental bodies with
jurisdiction over such Tanks to the extent required by
applicable Environmental Requirements; to provide all notices
required by Minn. Stat. Section 116.48; to document, in
writing, the tightness and integrity of the Tanks; and to
identify any and all other actions that are required to bring
said Tanks, and the operation thereof, into compliance with
applicable Environmental Requirements. As soon as possible
after the Contractor has completed the tasks identified in the
preceding sentence, Environmental Indemnitors shall cause the
Contractor to complete any and all activities with respect to
the Tanks required to achieve compliance with applicable
Environmental Requirements, including without limitation,
removing and disposing of any Hazardous Materials no
longer in use in any of the Tanks, removing any of the Tanks no
longer in use (unless Buyer indicates that it intends to use
such Tanks), and repairing (or replacing to the extent repair
is not practical) any of the Tanks that cannot be demonstrated
to be tight and otherwise in compliance with applicable
Environmental Requirements.
(ii) Within thirty (30) days from the date of
execution of this Agreement, Environmental Indemnitors, in
consultation with the Consultant, shall develop a work plan,
which plan shall be subject to the prior approval of Buyer, to
investigate comprehensively any existing or potential
Contamination, including without limitation, any Tank
Contamination; any releases of Hazardous Materials from the
chemical use, storage and disposal activities identified in
the Environmental Reports; and the Transformer Contamination.
The purpose of said investigation shall be to establish the
source, extent and
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impact of, and any required response to, any existing or
potential Contamination, and to facilitate issuance of the
Voluntary Investigation and Cleanup (VIC) determinations
required by Paragraph 4 of this Agreement. Said investigation
shall, as appropriate, include but not be limited to, soil,
ground water, tank tightness and surface water testing, and
shall include a proposed schedule for completion of all
investigatory activities. Within thirty (30) days after said
work plan has been approved by Buyer, Environmental Indemnitors
shall cause the Contractor to commence the investigation
required therein, and thereafter, to promptly complete said
investigation and any other Response Actions with respect to
any contamination discovered as soon as practical to the extent
required by applicable Environmental Requirements.
(e) Environmental Indemnitors promptly shall complete any
and all necessary Response Actions with respect to all Chrome-Plating
Contamination, whether or not presently known or identified. In this
regard, Environmental Indemnitors expressly acknowledge that certain
contaminants associated with a chrome-plating process have been
discovered in the soil on the Victor Property as disclosed in the
Phase II(B) Report and that the full environmental impacts (including,
without limitation, the contaminants present, the receptors of any
contaminants, and the present and future extent of potential ground
water, surface water and additional soil contamination) associated
with this chrome-plating process have not yet been identified. The
full extent of such impacts shall be referred to in this Agreement as
the "Chrome-Plating Contamination". Without limiting the obligations
stated elsewhere in this Agreement, Environmental Indemnitors agrees
that prior to Closing
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it will advise the Minnesota Pollution Control Agency (MPCA) VIC
program of information currently available regarding the
Chrome-Plating Contamination, and that after the Closing,
Environmental Indemnitors, in accordance with the plans prepared by
the Consultant, shall cause the Contractor to comprehensively and
promptly undertake and complete all Response Actions with respect to
any and all impacts to the environment (including, without limitation,
soil, ground water and surface water contamination, whether located on
or off the Victor Property) associated with the Chrome-Plating
Contamination to the extent recommended by the VIC program. Further,
compliance with each and every groundwater standard established by the
VIC program must be documented by Environmental Indemnitors for five
(5) successive semi-annual monitoring events, using a certified
independent consultant and laboratory, approved in advance by Buyer,
with the monitoring to occur at the location of the highest
contamination observed and the most downgradient location on the
Victor Property.
(f) Environmental Indemnitors promptly after the Closing
shall abate all friable asbestos-containing material ("ACM")
identified in the Phase II(A) Report and any other friable ACM that is
present on the Victor Property at the time of the Closing ("Asbestos
Contamination"). All such abatement shall be in accordance with the
recommendations in the Phase II(A) Report and in compliance with all
applicable Environmental Requirements. All ACM abatement required
hereunder shall be completed within forty-five (45) days after the
Closing unless it is not feasible to complete said abatement in that
time period, in which case said abatement shall be completed as soon
as is practical. Any ACM abatement at the Victor Property shall
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be completed by a licensed abatement contractor and monitored by a
professional engineer or certified industrial hygienist ("Engineer"),
each of whom must be accredited under AHERA and otherwise must meet
all applicable Environmental Requirements, and must be satisfactory to
Buyer. Air monitoring shall be performed at appropriate intervals
during the ACM abatement, and the samples shall be analyzed using
appropriate analytical techniques by an AHERA accredited laboratory.
Immediately after Environmental Indemnitors has completed the ACM
abatement, it shall deliver to Buyer a clearance audit prepared by the
Engineer and in scope, form and substance satisfactory to Buyer
demonstrating that the abatement has been completed, the ACM has been
properly disposed of, and the abatement satisfies the requirements of
this Agreement.
(g) Prior to the Closing, Environmental Indemnitors shall
cause the Contractor to dispose, in accordance with all applicable
Environmental Requirements, of any "hazardous wastes," as such term is
defined in Minn. Stat. ch. 116, located on the Victor Property as of
the Closing Date, including without limitation, any such hazardous
wastes identified in any of the Environmental Reports. The Contractor
shall provide Buyer with written documentation on the Closing that all
such hazardous wastes have been removed and disposed of by
Environmental Indemnitors in accordance with applicable Environmental
Requirements.
(h) Environmental Indemnitors promptly shall address the
PCB transformer contamination identified in the Phase I Report
("Transformer Contamination"). In this regard, Environmental
Indemnitors acknowledges that certain transformers on the Victor
Property are leaking substances that may be Hazardous Materials as
described
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in the Phase I Report. Environmental Indemnitors, promptly after
Closing, shall seek to have Granite Falls Electric, the company
identified in the Phase I Report as the owner of the transformers
("Transformer Contamination"), repair said transformers and take all
necessary Response Actions regarding any Hazardous Materials released
from the transformers, as soon as practical, to the extent required by
applicable Environmental Requirements. If Granite Falls Electric does
not commence said Response Actions within sixty (60) days after the
Closing, or if Granite Falls Electric at any time does not proceed
expeditiously and diligently to complete such Response Actions, then
Environmental Indemnitors shall complete said Response Actions as soon
as practical.
(i) The parties agree as follows with respect to the
requirements of Paragraph 6.3:
(i) Environmental Indemnitors shall perform or
cause to be performed all of the obligations under this
Agreement, at its sole cost and expense, including but not
limited to all power and utility costs, and any and all taxes
or fees that may be applicable to any activities required
hereunder.
(ii) Environmental Indemnitors shall cooperate in
all respects with the Consultant, and shall promptly implement
all plans of the Consultant for the Response Actions required
by this Agreement that are prepared in accordance with the
recommendations of the MPCA VIC program, applicable
Environmental Requirements, or otherwise under the terms of
this Agreement.
(iii) Environmental Indemnitors shall proceed
continuously, diligently and expeditiously after the Closing
to complete any and all
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obligations imposed by Paragraph 6.3, and all actions taken by
Environmental Indemnitors shall be in compliance with all
applicable Environmental Requirements and shall be performed in
a good, safe and workmanlike manner;
(iv) Environmental Indemnitors shall obtain or
cause to be obtained all necessary permits, licenses,
certificates and other approvals, however defined, required in
connection with the performance of any obligations hereunder;
(v) Environmental Indemnitors shall make all
reasonable efforts to avoid any interruption of the use of the
Victor Property and any occupants thereof and visitors
thereto, and if such interruption is not avoidable,
Environmental Indemnitors shall minimize such interruption and
shall repair as soon as possible any damage to the Victor
Property occasioned by the performance of any obligation
hereunder;
(vi) Environmental Indemnitors shall maintain
reasonable insurance policies with respect to its activities
and those of its agents and representatives at any time on the
Victor Property, and shall take all necessary and appropriate
precautions for the safety of the occupants of and visitors to
the Victor Property;
(vii) Environmental Indemnitors shall keep Buyer
apprised of the progress and performance of the obligations
hereunder, including, without limitation, providing Buyer with
semi-annual reports on Environmental Indemnitors' activities
with regard to the Chrome-Plating Contamination;
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(viii) Environmental Indemnitors shall permit no
mechanics, materialmen, laborers or other lien to be made or
imposed upon the Victor Property;
(ix) Environmental Indemnitors shall provide to
Buyer copies of all notices that may be received from any
governmental agency involved in any matter subject to this
Paragraph 6.3, and any responses to such notices;
(x) Buyer shall provide reasonable access to the
Victor Property to Environmental Indemnitors and their agents
and representatives for purposes of performing the activities
required by this Paragraph 6.3, provided that Buyer shall
provide at least forty-eight (48) hours advance notice to
Environmental Indemnitors of the access requested; and
(xi) Environmental Indemnitors shall promptly
provide to Buyer copies of testing results and reports that
are generated in connection with the activities hereunder;
(xii) Promptly upon completion of any investigatory
and/or remedial activities hereunder, Environmental
Indemnitors shall permanently seal or cap all monitoring wells
and test holes to industrial standards in compliance with
applicable federal, state, and local laws and regulations;
remove all associated equipment; and restore the Victor
Property to the maximum extent possible, which shall include,
without limitation, the repair of any surface damages,
including paving, caused by such investigation or remediation
hereunder.
(xiii) Victor Power Fluid Co. ("Victor") shall
not be wound up or otherwise dissolved until after all
Response Actions required hereunder have
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been completed, and Environmental Indemnitors shall cause
Victor to execute any documents and take such other actions as
are necessary to complete the obligations under this
Agreement, including without limitation, taking such actions as
are requested by the MCPA VIC program.
6.4 Environmental Report. Sellers have arranged and paid for the
preparation and delivery to Buyer of the Environmental Reports identified in
Paragraph 6.3(a) prepared by an environmental consultant with respect to the
Victor Property in form and substance adequate to assess the environmental
condition of the Victor Property. Sellers shall certify to Buyer that, to the
best of Sellers' knowledge, after due inquiry, Sellers is not aware of any
events, facts or circumstances that would lead it to conclusions different from
those reflected in the Environmental Reports.
6.5 Employment. Sellers shall terminate the employment of each
of its employees of Benton Harbor Engineering Co., Inc. immediately prior to
the Closing. Between the date of the execution of this Agreement and the date
of Closing, Buyer is not the employer of the employees of Sellers and this
Agreement shall not be construed to make Buyer the employer of Sellers'
employees. Buyer agrees to compensate Sellers for the ordinary and reasonable
costs to accomplish the severance obligation pursuant to this paragraph not to
exceed an amount of $150,000.
7. COVENANTS OF BUYER
Buyer covenants and agrees with Sellers that:
7.1 Negative Actions. Between the date hereof and the Closing
Date, Buyer will refrain from taking any action that would render Buyer's
representations and warranties hereunder inaccurate as of the date hereof or
the Closing Date.
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7.2 Assumption of Liabilities. Buyer shall execute and deliver
to Sellers an instrument of assumption of liabilities in form reasonably
satisfactory to Sellers and its counsel pursuant to which Buyer shall agree to
assume and pay the assumed liabilities described in Section 1.2 above.
8. CONDITIONS TO OBLIGATION OF BUYER
The obligation of Buyer to consummate the transactions contemplated
hereby is subject to the satisfaction, or waiver, by Buyer, at or prior to the
Closing, of the following conditions, in the absence of the satisfaction of
which Buyer may terminate this Agreement without liability:
8.1 Accuracy of Representations and Warranties. The
representations and warranties contained herein or otherwise made by or on
behalf of Sellers in connection with this Agreement and the transactions
contemplated hereby shall have been true and correct in all material respects
on the Closing Date to the same extent as if made on the Closing Date, except
to the extent non-material changes occur in the ordinary course of Sellers'
business.
8.2 Performance by Sellers. Sellers shall have duly performed
and complied in all material respects with all terms, agreements, and
conditions required by this Agreement to be performed or complied with by
Sellers prior to or at the Closing.
8.3 Sellers' Certificate. Sellers shall have delivered to Buyer
a certificate, dated as of the Closing Date, and executed by Sellers' executive
officer, to the effect that Sellers has duly performed and complied with the
covenants and conditions set forth in Sections 8.1 and 8.2.
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8.4 Opinion of Sellers' Counsel.
(a) Buyer shall have received from Thomas Ghallagher,
Esq., counsel of Sellers and Keynote, a favorable opinion, dated as of
the Closing Date, and satisfactory in substance and form to Buyer and
its counsel, to the following effect:
(i) Standing, etc. of the Sellers. Sellers
has all requisite power and authority to own the Assets and
to perform Sellers' obligations hereunder and to consummate
the transactions contemplated hereby.
(ii) Litigation. Except as set forth on
counsel's opinion, there is no suit, action, proceeding,
investigation or inquiry pending or, to the best of such
counsel's knowledge, threatened at law or in equity or
before any governmental department, commission, board, body,
agency or instrumentality, domestic or foreign, which
materially affects or could materially affect the Business
or Assets or involves or could involve the validity or
legality of this Agreement or any action taken or to be
taken pursuant hereto, nor has any such suit, action,
proceeding, investigation or inquiry been pending within the
three years preceding the date of this Agreement.
(iii) Execution and Delivery. This Agreement has
been duly executed and delivered by Sellers and Keynote, and
constitutes the legal, valid and binding obligation of
Sellers and Keynote enforceable against Sellers and Keynote
in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency,
reorganization and other similar laws relating to or
affecting the rights of
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creditors generally, and is subject to general principles
of equity, regardless of whether such enforceability is
considered in a proceeding at law or in equity.
(iv) Consents; Defaults, Etc. To the best of
counsel's knowledge, after due inquiry, neither the
execution, delivery or performance by Sellers and Keynote of
this Agreement, nor the consummation by Sellers and Keynote
of the transactions contemplated hereby (i) is prohibited
by, or requires Sellers or Keynote to obtain or make any
consent, authorization, approval, filing or registration
under, any law, rule or regulation, or, under any judgment,
order, writ, injunction or decree which is binding upon
Sellers or Keynote, or (ii) will violate any provision of,
result in any default or acceleration of any obligations
under, result in the creation or imposition of any lien on
any of the Assets pursuant to, or require any consent (other
than consents identified in such opinion and duly obtained
prior to the Closing) under, any indenture, lease, mortgage
or other agreement to which Sellers or Keynote is a party or
is otherwise bound.
(v) Conveyance of Assets. The instruments of
conveyance, transfer and assignment executed and delivered
to Buyer have been duly executed by Sellers and are valid
and effective to vest in Buyer all of the right, title and
interest of Sellers in and to the Assets as contemplated by
the Agreement.
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8.5 Corporate Documents. Sellers shall deliver to Buyer (a) a
certificate of good standing from its state of incorporation; and (b) certified
resolutions of the Board of Directors of Sellers and Keynote authorizing this
transaction.
8.6 Instruments of Transfer. Sellers shall execute and deliver
to Buyer the instruments of transfer described in Section 3.2 above.
8.7 Examination Period. Buyer shall have completed a purchase
investigation and review of the financial statements and operations of Sellers
that shall have confirmed that all such statements and operations materially
conform to the representations and warranties contained herein. Materiality
(or material) shall be defined as an occurrence, financial or otherwise, which
adversely impacts the value of the business to the extent that a reasonably
prudent purchaser could determine that the negative impact on current or future
value was significant enough to make the purchase transaction sufficiently
different from the bargained for consideration and, therefore, warrant a
refusal to close the transaction. Any dispute that would arise concerning this
definition of materiality shall be resolved by submission to arbitration
pursuant to rules of the American Arbitration Association and shall be binding
on the parties hereto, and judgment may be entered upon such an award.
8.8 VIC Determinations.
(a) Buyer shall have obtained prior to Closing, a
no-association determination from the MPCA VIC program providing Buyer
with environmental liability protection for the Hazardous Materials
identified in the Environmental Reports, or other studies, evaluations
or assessments which may be available prior to Closing, provided that
said determination must be satisfactory to Buyer, in its sole
discretion, exercising good faith and reasonable business judgment in
its form, scope
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<PAGE> 42
and content. Environmental Indemnitors, at its own cost and expense,
shall cooperate with Buyer and perform any and all such actions as are
necessary for Buyer to obtain the above-referenced MPCA VIC
determination, including, but not limited to, performing any
investigatory actions with respect to any Contamination recommended by
the Consultant, providing additional information requested by the
MPCA, and taking any other actions requested by the VIC program.
(b) In addition to the VIC determination referenced in
subparagraph (a) above, Environmental Indemnitors, at its own cost and
expense, shall obtain from the MPCA VIC program as soon as practical
after Closing, but in no event later than January 31, 1999:
(i) a no-action letter addressed to Sellers,
Buyer and Buyer's successors and assigns, or if mutually
agreed upon by Sellers and Buyer, a certificate of
completion or other form of closure determination addressed
to said parties, from the MPCA VIC program with respect to
all Contamination, including, but not limited to, the
Chrome-Plating Contamination identified in the Phase II(B)
Report, identified on the Victor Property in connection with
the activities performed under Paragraph 2 of this
Agreement, and
(ii) a no-association determination addressed
to Buyer and its successors and assigns, or such other form
of environmental liability protection acceptable to Buyer,
in its sole discretion, using good faith and reasonable
business judgment with respect to all of such Contamination
identified on the Victor Property; provided that all VIC
determinations provided by MPCA hereunder shall be
acceptable to Buyer, in its sole
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<PAGE> 43
discretion, using good faith and reasonable business judgment
in their form, scope and content; and provided further that
Environmental Indemnitors, at their sole cost and expense,
shall promptly complete all such activities, including any
Response Actions with respect to any Hazardous Materials
requested by MPCA in order for the VIC program to issue the
determinations required under this Paragraph.
9. CONDITIONS TO OBLIGATION OF SELLERS
The obligation of Sellers to consummate the transactions contemplated
hereby is subject to the satisfaction, or waiver, by Sellers, at or prior to the
Closing, of the following conditions in the absence of the satisfaction of which
Sellers may terminate this Agreement without liability:
9.1 Accuracy of Representations. The representations and
warranties contained in this Agreement shall have been true and correct in all
material respects when made and shall be true and correct in all material
respects on the Closing Date to the same extent as if made on the Closing Date.
9.2 Performance by Buyer. Buyer shall have duly performed and
complied with all terms, agreements and conditions required by this Agreement
to be performed or complied with by it prior to or at the Closing.
9.3 Officer's Certificate. Buyer shall have delivered to
Sellers a certificate, dated as of the Closing Date and executed by an officer
of Buyer, to the effect that Buyer has duly performed and complied with the
covenants and conditions set forth in Sections 9.1 and 9.2.
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<PAGE> 44
9.4 Opinion of Buyer's Counsel. Sellers shall have received
from counsel to Buyer, a favorable opinion, dated as of the Closing Date, and
satisfactory in substance and form to Sellers and its counsel, to the following
effect:
(a) Standing etc. of the Buyer. Buyer has all
requisite power and authority to consummate the transactions
contemplated in the Agreement and to perform Buyer's obligations
contemplated therein;
(b) Consents, Defaults, etc. Neither the execution,
delivery or performance by Buyer of this Agreement, nor the
consummation by Buyer of the transactions contemplated hereby (i) is
prohibited by, or requires Buyer to obtain or make any consent,
authorization, approval, filing or registration under, any law, rule
or regulation, or, to the best of counsel's knowledge after due
inquiry, under any judgment, order, writ, injunction or decree which
is binding upon Buyer, or (ii) will violate any provision of, result
in any default or acceleration of any obligations under, result or
require any consent (other than consents identified in such opinion
and duly obtained prior to the Closing) under, any indenture, lease,
mortgage or other agreement to which Buyer is a party or is otherwise
bound;
(c) Execution and Delivery. This Agreement has been
duly executed and delivered by Buyer, and constitutes the legal, valid
and binding obligation of Buyer enforceable against Buyer in
accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization and other
similar laws relating to or affecting the rights of creditors
generally, and is subject to general principles of equity,
40
<PAGE> 45
regardless of whether such enforceability is considered in a
proceeding at law or in equity.
9.5 Corporate Documents. Buyer shall deliver to Sellers (a) a
certificate of good standing from its state of incorporation; and (b)
certified resolutions of the Board of Directors of Buyer authorizing this
transaction.
9.6 Delivery of Purchase Price. Buyer shall deliver to Sellers
the Purchase Price via wire transfer directly into an account designated by
Sellers.
10. COVENANT NOT TO COMPETE
10.1 Non-competition. In furtherance of the sale of the Assets
to Buyer, for a period of five (5) years following the Closing, Sellers and
Keynote shall not, nor permit any person or entity then controlled by Sellers
or Keynote to, directly or indirectly, engage, participate in (as a partner,
shareholder, officer, or director, employee, consultant, agent or otherwise)
any business activity which is the same as, or similar to, or competitive with,
the business conducted by Buyer utilizing the Assets anywhere in the world, nor
shall Sellers or Keynote directly or indirectly tamper with or induce any
employee, agent, salesperson, contractor, customer, supplier, manufacturer or
dealer of Buyer to leave, to stop selling to or stop buying from Buyer or
otherwise to cease dealing with Buyer. Nothing herein shall prohibit any
person or entity from owning 2% or less of a publicly traded Company which
conducts a business which could be deemed competitive with Buyer's business.
Prior to the Closing, Terex Corporation of Westport, Connecticut,
which has managed Sellers pursuant to a Management Agreement set forth on
Exhibit 4.17 agrees to enter into a Non-Competition Agreement with Buyer which
contains terms identical to those set forth in this paragraph 10.1.
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<PAGE> 46
10.2 Enforcement. The provisions of the covenant contained in
this Section 10 are severable and independent and shall be interpreted and
applied consistently with requirements of reasonableness and equity. If any
provision of the covenant contained in this Section 10 shall be held to be
invalid or otherwise unenforceable, in whole or in part, the remainder of the
provisions, or the enforceable parts thereof, shall not be affected thereby.
10.3 Injunctive Relief. Buyer, Keynote and Sellers acknowledge
that compliance by Sellers and Keynote with the covenant contained in this
Section 10 is necessary to protect the interests of Buyer and that a breach of
the covenant contained in this Section 10 will result in irreparable and
continuing damage to Buyer for which there will be no adequate remedy at law.
Sellers and Keynote hereby agree, without intending to limit the remedies
available to Buyer, that Buyer and its successors and assigns shall be entitled
to injunctive relief with respect to the covenant contained in this Section 10
in addition to such other and further relief as may be appropriate.
11. ADDITIONAL COVENANTS OF BUYER AND SELLERS
11.1 Further Assurances. After the Closing, and for no further
consideration, Sellers shall perform all other action reasonably requested by
Buyer (including without limitation the use of Sellers' best efforts) to enable
Buyer to accomplish transfer of registrations, permits, approvals and the like
as contemplated by this Agreement and shall execute, acknowledge and deliver
such assignments, transfers, consents and other documents as Buyer or its
counsel may reasonably request to vest in Buyer, and protect Buyer's right,
42
<PAGE> 47
title and interest in, and enjoyment of, the Assets intended to be assigned and
transferred to Buyer pursuant to this Agreement.
11.2 Bulk Sales Laws. Buyer waives compliance by Sellers and
Sellers waives compliance by Buyer with the provisions of any applicable bulk
sales, fraudulent conveyance or other law for the protection of creditors, and
Sellers shall indemnify and hold Buyer harmless and reimburse Buyer for, any
and all claims, liabilities or obligations (other than those assumed by Buyer
hereunder) which Buyer may suffer or incur by virtue of noncompliance by Buyer
with such applicable laws under the indemnity provisions of Section 12 herein.
11.3 Rights to Intellectual Property. Sellers shall not, at any
time after the Closing Date, use or disclose to any third party any
Intellectual Property or Processes which at such time is not generally known to
the public or recognized as standard practice, or any formulae, scientific and
technical information, manufacturing procedure, know-how, processes, trade
secrets or other confidential information transferred to Buyer pursuant to this
Agreement, without the express prior written consent of Buyer.
11.4 Use of Trade Names. Sellers agrees that Buyer may, at its
discretion, use Sellers' name and any trade names used by Sellers, or a phrase
similar thereto in connection with marketing products after the Closing Date.
Sellers further agrees that Buyer may use containers, forms and other supplies
which have Sellers' name printed thereon after the Closing Date. Sellers shall
change its name to a dissimilar name as of the Closing and
43
<PAGE> 48
shall file a certificate of amendment to its articles of incorporation as of the
Closing to effect this change.
11.5 Access and Information. For a period of three (3) years
following the Closing Date (or the period of Buyer's ownership of the Business,
if shorter), Buyer shall use reasonable efforts to retain all books, records and
other documents pertaining to the Business that are included in the Purchased
Assets and Assumed Liabilities and shall make the same available after the
Closing Date for inspection and copying by Sellers, at Sellers' expense, during
normal business hours, upon reasonable request and upon reasonable prior notice.
During such ten (10) year period, Buyer shall advise Sellers of any planned
substantial destruction of books, records and documents in writing and give
Sellers a reasonable opportunity to obtain possession thereof. Upon reasonable
request and reasonable notice, Buyer will cooperate fully with Sellers, and will
permit Sellers access to and the services of all employees of Buyer (in a manner
which will not impair the operation of the Business) reasonably necessary (i)
for preparing tax returns for periods prior to the Closing. Sellers will pay
Buyer an amount equal to the salaries or wages earned by such employees while so
assisting Sellers and all out-of-pocket expenses incurred by Buyer in allowing
Sellers to use such employees. Notwithstanding the foregoing, Buyer shall not
be liable to Sellers for any claim by Sellers that Buyer has breached this
Section 11.6 for losing any books, records or other documents.
12. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS;
INDEMNIFICATION; ETC.
12.1 Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants herein and in any Exhibit,
certificate, instrument or document
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<PAGE> 49
delivered pursuant to this Agreement shall survive both the Closing and any
investigation at any time made for or on behalf of any party hereto (i) for a
period of five (5) years after the Closing as to Sellers' representations,
warranties and covenants relating to environmental matters; provided, however,
that the parties' relative liability for a breach of any such representation,
warranty or covenant shall be as set forth in Section 12.2, and (ii) for a
period of three (3) years as to all other representations, warranties and
covenants of either party.
12.2 Indemnification by Sellers. Subject to the conditions
contained in Section 12.4 hereof, Sellers and Keynote shall, jointly and
severally, indemnify and hold Buyer (and its shareholders, directors, officers,
employees and affiliates) harmless from and against any and all claims,
liabilities (including any strict liabilities with respect to any Loss
specified under clause (iv) below), fines, penalties, losses, damages,
(excluding incidental or consequential damages such as lost profits resulting
from any disruption of operation of the Assets), costs and expenses (including
reasonable counsel fees) incurred by Buyer (i) within five (5) years from the
date of Closing with respect to environmental matters, and (ii) within three
(3) years from the date of Closing with respect to all other matters, from or
related to any of the following (hereinafter called a "Loss" or "Losses"):
(i) any breach by Sellers of any representation, warranty,
covenant, obligation or undertaking made by Sellers in or pursuant to
this Agreement;
(ii) any claim or liability not arising out of an
obligation assumed by Buyer hereunder and asserted for failure to
comply with any applicable bulk sales, fraudulent conveyance or other
laws for the protection of creditors;
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<PAGE> 50
(iii) any product liability claim or other claim for the
breach of any express or implied warranty, and any other claim of
whatever nature, and from all damages resulting therefrom, which may
be made in connection with the sale of products manufactured by
Sellers prior to the Closing Date;
(iv) any claim or liability relating to the operation of
the Business prior to the Closing Date not assumed by Buyer,
including, without limitation, liability under labor, collective
bargaining, or employment agreements and liability relating to
pension, retirement or other employee benefit plans.
12.3 Indemnification by Buyer. Subject to the conditions
contained in Section 12.4 hereof, Buyer shall indemnify and hold Sellers
harmless from and against any and all claims, liabilities, losses, damages,
costs and expenses (including reasonable counsel fees) from or related to (a)
any breach by Buyer of any representation, warranty, covenant, obligation or
undertaking made by Buyer in or pursuant to this Agreement, (b) matters arising
solely from the operation of the Business after the Closing Date, other than
liabilities retained by Sellers hereunder, and (c) any product liability claim
for injury to persons or property which may be made in connection with the sale
of products manufactured by Buyer after the Closing Date.
12.4 Environmental Indemnities.
(a) (i) Environmental Indemnitors, their
successors, assigns and guarantors, agree to indemnify,
defend, reimburse, and hold harmless Buyer, its directors,
officers, shareholders, employees, representatives, and
assigns from and against any and all Environmental Damages
arising in any manner
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<PAGE> 51
whatsoever from (a) the presence of Hazardous Materials upon,
about, or beneath the real property described in Exhibit 4.20
("Sellers' Real Property") or migrating or threatening to
migrate to or from such Sellers' Real Property, including,
but not limited to, the Contamination; (b) any violation of
any Environmental Requirements pertaining to the Sellers'
Real Property or the operation of any business or any other
activities thereon; (c) any non-performance or
violation of any obligation of Sellers and/or Environmental
Indemnitors created by Paragraphs 6.3, 6.4 and 8.8 with
respect to certain environmental matters; and (d) any breach
of any warranty or covenant or any inaccuracy of any
representation of Sellers or Environmental Indemnitors
contained in this Agreement.
(ii) This obligation shall include, but not be
limited to, the burden and expense of defending all claims,
suits, and administrative proceedings, even if such claims,
suits, or proceedings are groundless, false, or fraudulent,
and conducting all negotiations of any description, and
paying and discharging, when and as the same become due, any
and all judgments, penalties or other sums due against such
indemnified persons. Buyer, at its sole expense, may employ
additional counsel of its choice to associate with counsel
representing Environmental Indemnitors.
(iii) The obligations of Environmental
Indemnitors under this paragraph shall not be affected by
any investigation by or on behalf of Buyer, or by any
information that Buyer may have or obtain with respect
thereto.
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12.5 Indemnification Notice, etc.
(a) If any action, suit or proceeding shall be
commenced, or any claim or demand shall be asserted, in respect of
which a party entitled to indemnification pursuant to this Agreement
(the "Indemnitee") demands indemnification under this Section 12, the
party from which such indemnification is demanded under this Section
12 (the "Indemnitor") shall be notified to that effect with reasonable
promptness and shall have the right to assume entire control of its
defense (including the selection of counsel), subject to the right of
the Indemnitee to participate (with counsel of its choice) in, the
defense, compromise or settlement thereof.
(b) The fees and expenses of any counsel chosen by
Indemnitee following acceptance by Indemnitor of its indemnity
obligations shall be at the expense of the Indemnitee unless (i) the
employment of such counsel by the Indemnitee has been specifically
authorized by the Indemnitor, or (ii) the named parties to any such
action (including any impleaded parties) include both the Indemnitor
and the Indemnitee shall have been advised by its counsel that there
may be one or more good faith legal defenses available to it which are
different from or additional to those available to the Indemnitor.
(c) The Indemnitee shall cooperate fully in all
respects with the Indemnitor in any such defense, compromise or
settlement, including, without limitation, by making available all
pertinent information under its control to the Indemnitor. The
Indemnitor will not compromise or settle any such action, suit,
proceeding, claim or demand without the prior written consent of the
Indemnitee;
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provided, however, that in the event such consent is withheld, then
the liabilities of the Indemnitor shall be limited to the total sum
representing the amount of the proposed compromise or settlement and
the amount of counsel fees accumulated at the time such consent is
withheld. The Indemnitor shall not be liable for any settlement by
Indemnitee of any action, suit, proceeding, claim or demand, unless
the Indemnitee obtains the prior written consent of the Indemnitor.
13. LEASE OF VICTOR PROPERTY. At Closing, the parties shall
enter into a lease agreement, a copy of which is attached hereto as Exhibit 13,
which provides for the lease of the Victor facility for a period of three (3)
years with two three (3) year renewal options at an annual rental of One Hundred
Fourteen Thousand Four Hundred Twenty-Four Dollars ($114,424.00) per year.
Such lease shall further provide that Buyer shall purchase the Victor Property
for a purchase price equal to the assumption of the indebtedness to the SBA,
SWMI and Yellow Medicine County Bank which approximates Nine Hundred Eight
Thousand Seven Hundred Seventy-Eight Dollars ($980,778.00) upon Buyer's receipt
of all MPCA VIC determinations required by Paragraph 8.8(b) hereof, which
determinations must be satisfactory using good faith and reasonable business
judgement to Buyer, in its sole discretion, in form, scope and content and
Seller have completed the Chromium Remediation and returned the property and
buildings to their present condition.
14. TERMINATION
Either party may terminate this Agreement upon material breach by the other
party and following fifteen (15) days prior written notice and opportunity to
cure.
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15. EXPENSES
Each party hereto shall bear its own expenses, including the fees of
any attorneys, accountants or other engaged by such party, incurred in
connection with this Agreement and the transactions contemplated hereby, it
being understood that Sellers' expenses shall not be paid from the Assets.
16. NOTICES
All notices, requests, demands and other communications made hereunder
shall be in writing and shall be deemed duly given if and when delivered by
hand, with receipt duly acknowledged, or sent by registered or certified mail,
postage prepaid, as follows, or to such other address or person as any party
may designate by notice to the other party or parties hereunder:
If to Sellers and Keynote:
Victor Fluid Power Co. Benton Harbor Engineering Co., Inc.
Highway 212 2200 E. Empire Avenue, P.O. Box 367
Granite Falls, MN 56241 Benton Harbor, MI 49023-0367
With copies to:
Terex Corporation
500 Post Road East, Suite 320
Westport, Connecticut 06380
Attn: David Langevin
Attn: Thomas Ghallager
If to Buyer:
Kaydon Corporation
Arbor Shoreline Office Park
19345 US 19 North, Suite 500
Clearwater, FL 34624-3148
ATTENTION: Thomas Sorrells
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17. AMENDMENTS; TERMINATION
This Agreement cannot be changed or terminated orally and no waiver of
compliance with any provision or condition hereof and no consent provided for
herein shall be effective unless evidenced by an instrument in writing duly
executed by the proper party.
18. EFFECT OF THIS AGREEMENT; COUNTERPARTS
This Agreement (including the Exhibits hereto) sets forth the entire
understanding of the parties and supersedes any and all prior agreements,
arrangements and understandings relating to the subject matter hereof. The
section headings of this Agreement are for convenience of reference only and do
not form a part hereof and do not in any way modify, interpret or construe the
intentions of the parties. This Agreement may be executed in two or more
counterparts, and all such counterparts shall constitute one and the same
instrument.
19. GOVERNING LAW AND JURISDICTION
This Agreement has been made and entered into under the laws of the
State of Delaware and said laws shall control the interpretation thereof. The
parties hereto agree to submit to the personal jurisdiction of the courts in
the State of Delaware to address any suit, action or proceeding related to this
Agreement.
20. REMEDIES AND INDEMNITIES CUMULATIVE
The indemnities contained in this Agreement shall not be limited by
the exercise by Buyer of any rights or remedies available under the Purchase
Agreement or otherwise. The rights and indemnities in favor of Buyer hereunder
shall be cumulative and in addition to any other rights and remedies to which
Buyer may be entitled.
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21. ASSIGNMENTS; SUCCESSORS AND ASSIGNS
This Agreement may not be assigned without the written consent of the
other party, except that Buyer may assign this Agreement to a wholly-owned
subsidiary in which event Buyer shall remain liable for the obligations
incurred hereunder. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors, legal representatives
and assigns.
22. PRESS RELEASES AND ANNOUNCEMENTS
No party shall issue any press release or announcement relating to the
subject matter of this Agreement (prior to the Closing) without the prior
written approval of the other party; provided, however, that any party may make
any public disclosure it believes in good faith is required by law or
regulation (in which case the disclosing Party will advise the other party
prior to making the disclosure).
23. CONSTRUCTION
The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rule of strict
construction shall be applied against any party. Any reference to any federal,
state, local, or foreign statute or law shall be deemed also to refer to all
rules and regulations promulgated thereunder, unless the context requires
otherwise.
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IN WITNESS WHEREOF, each party hereto has executed this Agreement by
its respective duly authorized officer as of the day and year first above
written.
KAYDON ACQUISITION VII, INC.
By /s/ Stephen K. Clough
-----------------------------------
Its President
- Buyer
VICTOR FLUID POWER CO.
By /s/ Eugene Sannerud
-----------------------------------
Its President
BENTON HARBOR ENGINEERING CO., INC.
By /s/ William R. Herndon
-----------------------------------
Its President
- Sellers
KEYNOTE HOLDING CO., INC.
By /s/ Brian J. Henry
-----------------------------------
Its Vice President
KAYDON GUARANTY
Kaydon Corporation, a Delaware corporation, an owner of 100% of the
outstanding stock of Kaydon Acquisition VII, Inc., hereby guarantees the
obligations of Kaydon Acquisition VII, Inc. as set forth in this Agreement.
KAYDON CORPORATION
By /s/ Stephen K. Clough
---------------------------------
Its President
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<PAGE> 1
EXHIBIT 11
KAYDON CORPORATION
CALCULATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ------------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net Income $50,521,000 $38,203,000 $29,226,000
----------- ----------- -----------
Average common shares outstanding 16,466,000 16,619,000 16,683,000
Net common shares issuable in respect to
common stock equivalents, with a dilutive effect 83,000 122,000 43,000
----------- ----------- -----------
Total common and common share
equivalent shares 16,549,000 16,741,000 16,726,000
Primary earnings per common share $3.05 $2.28 $1.75
FULLY DILUTED EARNINGS PER SHARE:
Net Income $50,521,000 $38,203,000 $29,226,000
----------- ----------- -----------
Average common shares outstanding 16,466,000 16,619,000 16,684,000
Net common shares issuable in respect to
common stock equivalents, with a dilutive effect 95,000 133,000 50,000
----------- ----------- -----------
Total common and common share
equivalent shares 16,561,000 16,752,000 16,734,000
Fully diluted earnings per common share $3.05 $2.28 $1.75
</TABLE>
<PAGE> 1
EXHIBIT 13
FINANCIAL HISTORY
<TABLE>
<CAPTION>
Ten Year Summary 1996 1995 1994 (1) 1993 1992 (1) 1991 1990
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL STATEMENT DATA (000 omitted)
INCOME STATEMENT
Net Sales . . . . . . . . . . $290,670 229,924 204,695 184,060 183,904 160,989 169,442
Gross Profit . . . . . . . . $117,496 88,599 76,150 67,781 66,180 55,981 59,410
Operating Income . . . . . . $ 78,954 59,286 49,759 44,314 42,222 39,827 42,648
Interest Income (Expense), net $ 2,662 2,505 609 142 (1,471) (389) (1,878)
Provision for Income Taxes . $ 31,095 23,588 19,142 16,761 15,133 13,983 14,761
Net Income . . . . . . . . . $ 50,521 38,203 29,226 27,695 10,374 25,455 26,009
BALANCE SHEET
Total Assets . . . . . . . . $331,538 267,675 243,584 217,422 210,967 217,451 176,098
Plant & Equipment, net . . . $ 76,176 72,345 61,247 60,077 63,513 68,759 61,931
Working Capital . . . . . . . $119,232 91,407 85,886 71,810 56,754 59,171 62,867
Capital Employed :
Total Debt . . . . . . . $ 8,000 8,000 8,000 15,312 18,090 40,634 27,069
Stockholders' Investment . $232,056 187,905 166,570 143,840 136,076 137,501 113,757
-------- ------- ------- ------- ------- ------- -------
Capital Employed . . . . $240,056 195,905 174,570 159,152 154,166 178,135 140,826
CASH FLOW DATA
Capital Expenditures, net . . $ 9,320 7,371 6,746 5,088 6,057 11,075 5,817
Acquisition of Businesses . . $ 10,699 23,512 7,268 716 -- 42,793 --
Depreciation & Amortization . $ 11,749 11,176 10,641 10,264 11,194 9,250 8,622
Net Cash Provided by
Operating Activities . . . $ 68,225 49,487 44,176 39,237 38,382 35,153 30,072
- -------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
PROFITABILITY
Operating Margin . . . . . . 27.2% 25.8% 24.3% 24.1% 23.0% 24.7% 25.2%
Return on Net Sales . . . . . 17.4% 16.6% 14.3% 15.0% 5.6% 15.8% 15.3%
Return on Average Assets . . 16.9% 14.9% 12.7% 12.9% 4.8% 12.9% 15.8%
Return on Average Capital Employed 23.2% 20.6% 17.5% 17.7% 6.8% 16.1% 20.8%
Return on Average Stockholders'
Investment . . . . . . . . 24.1% 21.6% 18.8% 19.8% 7.6% 20.3% 25.4%
LIQUIDITY
Current Ratio . . . . . . . . 2.8 3.1 3.1 3.1 2.4 2.6 3.1
Debt to Debt - Equity Ratio . 3.3% 4.1% 4.6% 9.6% 11.7% 22.8% 19.2%
- -------------------------------------------------------------------------------------------------------------
PER SHARE DATA (2)
Earnings per Share . . . . . $ 3.05 2.28 1.75 1.60 0.59 1.47 1.51
Dividends Declared per Share $ 0.50 0.45 0.41 0.37 0.32 0.26 0.21
Book Value per Share, net of
treasury stock . . . . . $ 14.09 11.48 10.01 8.62 7.83 7.94 6.63
Market Price per Share, Annual High $49-1/4 31-1/2 25-1/4 31-3/4 26-5/8 23-7/8 18-7/8
Market Price per Share, Annual Low $29-1/4 22-3/4 19-3/4 18 19-1/2 16 13-5/8
Year End Closing Stock Price $47-1/8 30-3/8 24 20-3/4 23-1/2 22-1/8 17
- -------------------------------------------------------------------------------------------------------------
OTHER
Weighted Average Shares and Equivalents
Outstanding (000 omitted) . 16,549 16,741 16,726 17,313 17,439 17,336 17,228
Backlog of Orders on Hand (000 omitted) $117,262 101,852 88,360 84,385 83,296 93,192 93,079
Average Number of Employees . 2,216 1,805 1,703 1,661 1,731 1,441 1,638
Net Sales per Employee . . . $131,169 127,382 120,197 110,813 106,241 111,720 103,444
Number of Common Stockholders 1,415 1,487 1,615 1,742 1,929 2,010 2,199
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Ten Year Summary 1989 1988 1987
- --------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL STATEMENT DATA (000 omitted)
INCOME STATEMENT
Net Sales . . . . . . . . . . 151,238 135,029 133,473
Gross Profit . . . . . . . . 51,426 47,133 45,565
Operating Income . . . . . . 37,973 35,556 33,940
Interest Income (Expense), net (2,026) (2,506) (3,638)
Provision for Income Taxes . 13,100 12,207 12,784
Net Income . . . . . . . . . 22,847 20,843 17,119
BALANCE SHEET
Total Assets . . . . . . . . 153,949 122,425 120,193
Plant & Equipment, net . . . 64,012 48,613 49,888
Working Capital . . . . . . . 42,989 31,921 23,944
Capital Employed :
Total Debt . . . . . . . 29,815 22,457 40,371
Stockholders' Investment . 90,686 69,874 50,327
------- ------ -------
Capital Employed . . . . 120,501 92,331 90,698
CASH FLOW DATA
Capital Expenditures, net . . 9,107 4,839 3,286
Acquisition of Businesses . . 22,860 -- 5,100
Depreciation & Amortization . 7,388 6,407 6,225
Net Cash Provided by
Operating Activities . . . 25,451 23,905 30,376
- --------------------------------------------------------------------------
FINANCIAL RATIOS
PROFITABILITY
Operating Margin . . . . . . 25.1% 26.3% 25.4%
Return on Net Sales . . . . . 15.1% 15.4% 12.8%
Return on Average Assets . . 16.5% 17.2% 14.3%
Return on Average Capital Employed 22.7% 24.5% 20.5%
Return on Average Stockholders'
Investment . . . . . . . . 28.5% 34.7% 40.8%
LIQUIDITY
Current Ratio . . . . . . . . 2.6 2.3 1.8
Debt to Debt - Equity Ratio . 24.7% 24.3% 44.5%
- --------------------------------------------------------------------------
PER SHARE DATA (2)
Earnings per Share . . . . . 1.33 1.22 1.00
Dividends Declared per Share 0.16 0.11 0.05
Book Value per Share, net of
treasury stock . . . . . 5.31 4.13 3.01
Market Price per Share, Annual High 19-1/4 16-3/4 17
Market Price per Share, Annual Low 13-7/16 11-3/8 7-5/16
Year End Closing Stock Price 15-7/8 13-7/16 12-3/8
- --------------------------------------------------------------------------
OTHER
Weighted Average Shares and Equivalents
Outstanding (000 omitted) . 17,180 17,128 17,116
Backlog of Orders on Hand (000 omitted) 97,359 74,128 73,949
Average Number of Employees . 1,446 1,265 1,255
Net Sales per Employee . . . 104,591 106,742 106,353
Number of Common Stockholders 2,241 2,519 2,718
- --------------------------------------------------------------------------
</TABLE>
Notes:
(1) Financial results include the impact (net of tax) of the adoption of the
following Statements of Financial Accounting Standards:
1994 Postemployment benefits - SFAS 112 $ 2,000,000
1992 Postretirement benefits - SFAS 106 and
Income Taxes - SFAS 109 $15,244,000
(2) All per share data presented in 1992 and prior years has been restated to
reflect the two-for-one stock split effected in 1992.
14
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Net sales increased to $290,670,000 in 1996, up 26.4% from $229,924,000 in
1995. Approximately 12% of the growth was generated by the base businesses of
Kaydon while the remaining 14% is attributable to the recent acquisitions of
the three fluid power companies purchased in September 1995 and February 1996.
Virtually all of the Company's divisions contributed to the gain with the
largest percentage increases coming from the slip-ring divisions. The backlog
of unshipped orders at year end also increased to $117,262,000, up $2,793,000
from $114,469,000 in the prior quarter and $101,852,000 at the end of 1995.
Gross profit as a percentage of sales was 40.4% compared to 38.5% in 1995.
The increase is primarily attributable to operating efficiencies, increased
volume and continued cost control.
Selling and administrative expenses as a percentage of sales in 1996 was
13.3% compared to 12.7% in 1995. The increase was attributable to the increase
in goodwill amortization from the acquisition of the fluid power companies and
the increase in operating accruals.
Net interest income this year was $2,662,000 essentially flat with the
interest income of $2,505,000 in 1995. There was virtually no change year on
year since any expected increase from larger cash and securities balances was
offset by lower interest rates.
The effective tax rate of 38.1% remains essentially unchanged from 38.2% in
1995.
1995 COMPARED TO 1994
Net sales increased to $229,924,000, up 12.3% from $204,695,000 in 1994.
Internal sales growth accounted for essentially all of the growth, as the
acquisitions of DJ Molding in January and Seabee Corporation in September were
practically offset by the decrease in sales from the disposition of our
automotive operation in May. All of the Company's divisions except Filtration
contributed to the gains, with the greatest percentage improvements coming from
the domestic bearing and the U.K. split roller bearing operations. Similarly,
the backlog of unshipped orders at year end increased to $101,852,000, up
$3,791,000 from $98,061,000 in the prior quarter and $88,360,000 at the end of
1994.
Gross profit as a percentage of sales was 38.5% compared to 37.2% in 1994.
The increase is attributable to operating efficiencies related to our plant
consolidation, increased volume and continued cost control.
Selling and administrative expenses as a percentage of sales in 1995 was
12.7% compared to 12.9% in 1994. The slight decrease was attributable to
increased sales volume.
Net interest income in 1995 was $2,505,000, up $1,896,000 from $609,000 in
1994. The increase in interest income is attributable to much larger cash and
securities balances throughout 1995.
The effective tax rate of 38.2% was essentially unchanged from 38.0% in
1994.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $119,232,000 at December 31, 1996 compared to
$91,407,000 at December 31, 1995, reflecting current ratios of 2.8 and 3.1
respectively. The increase in working capital primarily reflects an increase
in cash and securities offset by higher operating accruals and the
classification of $4,000,000 of IRB debt as current. The decrease in the
current ratio is primarily attributable to the current portion of IRB debt,
redeemable in early 1997. Cash and securities account for 69.8% of net working
capital compared to 51.6% last year.
Total debt, consisting of Industrial Revenue Bonds (IRB) issued at favorable
interest rates, remained at $8,000,000. Cash and securities on hand exceed
total debt by $75,267,000 at December 31, 1996 compared to $39,159,000 at
December 31, 1995 for an increase of $36,108,000.
Operating cash flow was a record high at $68,225,000, an increase of 37.9%
from $49,487,000 in 1995. The increase is the result of both increased
earnings and strong working capital management. Working capital, excluding
cash and securities, decreased to 12.4% of sales from 19.2% last year. Net
capital expenditures were $9,320,000 and dividends were $7,906,000, resulting
in free cash flow of $50,999,000 for the year. The Company spent $10,699,000
in February on the acquisition of Victor Fluid Power Co. and Benton Harbor
Engineering Co., Inc. The Company received $7,765,000 from the exercise of
stock options and, in turn, spent $12,020,000 to repurchase treasury stock on
the open market. The Company has now purchased 1,475,046 of the 2,000,000
shares originally approved for repurchase by the Board of Directors. On
December 18, 1996, the Board of Directors approved the repurchase of an
additional 1,000,000 shares on the open market, bringing the total approved for
repurchase to 3,000,000.
Planned capital requirements for 1997 consist principally of capital
expenditures relating to plant and equipment, cash dividends to stockholders
and the potential purchase of the remaining shares of the Company's stock
approved for repurchase. Planned capital expenditures relating to environmental
issues are not expected to be material, however, such expenditures could be
influenced by the enactment of new or revised environmental regulations and
laws. It is expected that these capital requirements will be financed by
operating activities.
The Company is actively seeking potential acquisitions and, depending upon
the size and structure of such acquisitions, financing may be required.
During 1996, the Company continued its revolving credit agreement with its
banks for a credit line of $85,000,000. The Company also had in place at
December 31, 1996, short-term lines of credit of $27,000,000. No borrowings
existed under the short-term lines of credit or the revolving credit agreement
at December 31, 1996 or December 31, 1995.
15
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
OTHER
EFFECT OF FOREIGN CURRENCY TRANSLATION
A portion of the Company's sales, income and cash flows is derived from its
international operations. The financial position and the results of operations
of the Company's foreign subsidiaries (primarily Europe) are measured using
local currency of the countries in which they operate and are translated into
U.S. dollars. Accordingly, the Company's consolidated operating results and
net assets will fluctuate depending upon the strengthening or weakening of the
U.S. dollar. To date, the impact of the fluctuations of foreign currencies
relative to the U.S. dollar has not had a significant impact on the Company's
consolidated financial statements.
SUPPLEMENTAL INFORMATION ON CHANGING PRICES
The impact of inflation on the Company has been moderate over the last
several years and is believed to be consistent with that of the industry as a
whole.
ENVIRONMENTAL MATTERS
Environmental protection laws continue to affect the Company's manufacturing
operations. The Company has complied with these laws by making various capital
expenditures for pollution control equipment and through plant operational
practices. This compliance has not had, nor does the Company expect it to
have, a material effect on financial results. Of course, the Company cannot
assess the possible effect of compliance with the enactment of future
regulations and laws.
In late 1985, Kaydon entered into discussions with the Michigan Department
of Natural Resources ("MDNR") to develop a remedial cleanup plan for one of its
plant sites in Muskegon, Michigan, which is on the Environmental Protection
Agency's ("EPA") National Priority List. In 1986, Kaydon took measures
necessary to clean up the site according to the plan approved by the MDNR.
These measures included the removal and disposal of contaminated soils and the
drilling of groundwater monitoring wells, the results of which have been
continually reported to the MDNR. Management believes that it has worked with
the MDNR and EPA to the letter and spirit of the law. The site is being
evaluated to determine if further action is required. While it is impossible
to forecast the ultimate future cost, management believes, based upon eleven
years of evaluating the site, that such cost will not be material to its
operating results.
LITIGATION
The Company, together with other companies, certain former officers, and
certain former directors, has been named as a co-defendant in lawsuits filed in
federal court in New York in 1993. The suits purport to be class actions on
behalf of all persons who have unsatisfied personal injury and property damage
claims against Keene Corporation which filed for bankruptcy under Chapter 11.
The premise of the suits is that assets of Keene were transferred to Bairnco
subsidiaries, of which Kaydon was one in 1983, at less than fair value. The
suits also allege that the Company, among other named defendants, was a
successor to and alter ego of Keene. In 1994, an examiner was appointed by a
bank-ruptcy court to examine the issues at stake. On September 23, 1994, the
"Preliminary Report of the Examiner" was made public. In the report, the
examiner stated that the alleged fraudulent conveyance claims against the
Company appear to be time-barred by the statute of limitations, subject to
certain possible exceptions which the Company does not believe are significant
or factual. Although the examiner has made certain recommendations regarding a
mechanism to resolve the claims against the Company, the Court has not taken
any action related to the report. Nevertheless, in the Company's opinion, the
report reinforces management's original view that the claims will ultimately
not be sustained. Accordingly, no provision has been reflected in the
consolidated financial statements for any alleged damages. In June 1995, the
creditors' committee filed a complaint in the same bankruptcy court asserting
claims against the Company similar to those previously filed. On June 12,
1996, the District and Bankruptcy Courts for the Southern District of New York
entered an order confirming the plan of reorganization for Keene Corporation.
As a result, the so-called transactions lawsuit will be transferred from the
Bankruptcy Court for the Southern District of New York to the District Court
for that district and the stay of the transactions lawsuit was lifted, allowing
the Company and other co-defendants to present appropriate motions to the
District Court. Management believes that the outcome of this litigation will
not have a material adverse effect on the Company's financial position.
In June, 1996 the Company received a subpoena issued by the U.S. District
Court in Bridgeport, Connecticut on behalf of a grand jury investigating a May
9, 1996 accident involving a Sikorsky helicopter in which four persons died.
The grand jury has requested and received documents and records relating to a
bearing manufactured by Kaydon and used in the Sikorsky helicopter. In
addition, the Defense Logistics Agency of the Defense Contract Management
Command and a "Mishap Board" led by Sikorsky Aircraft Corporation with
participation from certain Federal agencies alleged that product quality
problems or deficiencies exist with respect to the bearing product used in the
Sikorsky helicopter described above. The Company was excluded from
participation on this "Mishap Board", however, it independently evaluated the
available evidence and refuted the "Mishap Board" findings in its report
submitted to the Navy. Subsequent incidents have occurred in the helicopter
fleet even though the bearings used were newly manufactured, inspected and
approved by Sikorsky personnel, reinforcing the Company's position that the
bearing quality was not the causative action in the May 9, 1996 accident.
Various other claims, lawsuits and environmental matters arising in the
normal course of business are pending against the Company. Management believes
that the outcome of these matters, including the Sikorsky matter referred to
above, will not have a material adverse effect on the Company's financial
position or results of operations.
16
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Kaydon Corporation:
We have audited the accompanying consolidated balance sheets of Kaydon
Corporation (a Delaware corpo-ration) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, stockholders'
investment and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company'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 Kaydon Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As explained in Note 10 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for
postemployment benefits to adopt the provisions of Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits."
/s/ Arthur Andersen LLP
Grand Rapids, Michigan,
January 17, 1997
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The consolidated financial statements of Kaydon Corporation and
subsidiaries were prepared by and are the responsibility of management. The
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and include amounts that are based
on management's best estimates and judgments.
The Company maintains systems of internal accounting controls designed to
provide reasonable assurance that all transactions are properly recorded in the
Company's books and records, that policies and procedures are adhered to, and
that assets are protected from unauthorized use. The systems of internal
accounting controls are supported by written policies and guidelines and are
complemented by the selection, training, and development of professional
financial managers.
The consolidated financial statements have been audited by the independent
public accounting firm Arthur Andersen LLP. The independent public accountants
conduct a review of internal accounting controls to the extent required by
generally accepted auditing standards and perform such tests and related
procedures as they deem necessary to arrive at an opinion on the fairness of
the financial statements.
The Audit Committee of the Board of Directors, composed solely of
directors from outside the Company, regularly meets with the independent
public accountants and management. The independent public accountants have
full and free access to the Audit Committee.
/s/ Stephen K. Clough /s/ Lawrence J. Cawley
Stephen K. Clough Lawrence J. Cawley
President and Chief Executive Officer Chairman and Chief
Financial Officer
17
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
KAYDON CORPORATION ANDSUBSIDIARIES
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,443,000 $ 4,808,000
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,824,000 42,351,000
Accounts receivable, less allowances of
$1,481,000 in 1996 and $1,257,000 in 1995 . . . . . . . . . . . . . . . . . . . 36,136,000 30,186,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,079,000 50,145,000
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,574,000 7,964,000
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,056,000 135,454,000
------------ ------------
Plant and Equipment, at cost:
Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,845,000 3,727,000
Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . 39,849,000 38,618,000
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,533,000 124,364,000
------------ ------------
180,227,000 166,709,000
Less - accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . (104,051,000) (94,364,000)
------------ ------------
76,176,000 72,345,000
------------ ------------
Cost in excess of net tangible assets of purchased businesses, net . . . . . . . . . . 53,696,000 49,909,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,610,000 9,967,000
------------ ------------
$331,538,000 $267,675,000
============ ============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,784,000 $ 8,877,000
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 --
Accrued expenses:
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,751,000 8,487,000
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,482,000 9,117,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,567,000 3,248,000
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,240,000 14,318,000
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 66,824,000 44,047,000
------------ ------------
Long-term postretirement and postemployment benefit obligations . . . . . . . . . . . . 28,658,000 27,723,000
------------ ------------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000 8,000,000
------------ ------------
Stockholders' Investment:
Preferred stock -
($.10 par value, 2,000,000 shares authorized; none issued) . . . . . . . . . . . -- --
Common stock -
($.10 par value, 98,000,000 shares authorized; 18,023,740 and
17,633,165 shares issued in 1996 and 1995) . . . . . . . . . . . . . . . . . . . 1,802,000 1,763,000
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,380,000 17,699,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243,616,000 200,953,000
Less - treasury stock, at cost;(1,557,227 and 1,263,681 shares
in 1996 and 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,633,000) (27,613,000)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . (2,109,000) (4,897,000)
------------ ------------
232,056,000 187,905,000
------------ ------------
$331,538,000 $267,675,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 6
CONSOLIDATED STATEMENTS OF INCOME
KAYDON CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . $290,670,000 $229,924,000 $204,695,000
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 173,174,000 141,325,000 128,545,000
------------ ------------ ------------
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . 117,496,000 88,599,000 76,150,000
Selling and administrative expenses . . . . . . . . . . . . . . . . 38,542,000 29,313,000 26,391,000
------------ ------------ ------------
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . 78,954,000 59,286,000 49,759,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (348,000) (345,000) (304,000)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . 3,010,000 2,850,000 913,000
------------ ------------ ------------
Income Before Income Taxes and Cumulative
Prior Year Effect of Change in Accounting Principle . . . . . . . . 81,616,000 61,791,000 50,368,000
Provision for income taxes . . . . . . . . . . . . . . . . . . . . 31,095,000 23,588,000 19,142,000
------------ ------------ ------------
Income Before Cumulative Prior Year Effect of Change in
Accounting Principle . . . . . . . . . . . . . . . . . . . . . . . 50,521,000 38,203,000 31,226,000
Cumulative Prior Year Effect of Change in
Accounting Principle for postemployment benefits,
net of income tax benefit of $1,200,000 . . . . . . . . . . . . . . -- -- (2,000,000)
------------ ------------ ------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,521,000 $ 38,203,000 $ 29,226,000
============ ============ ============
Earnings Per Share Before Cumulative Prior Year
Effect of Change in Accounting Principle . . . . . . . . . . . . . $ 3.05 $ 2.28 $ 1.87
Cumulative Prior Year Effect of Change in Accounting
Principle per share for postemployment benefits . . . . . . . . . . -- -- (0.12)
------------ ------------ ------------
Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.05 $ 2.28 $ 1.75
============ ============ ============
Dividends Per Share . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.50 $ 0.45 $ 0.41
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
KAYDON CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Cumulative
Common Paid-in Retained Treasury Translation
Stock Capital Earnings Stock Adjustment Total
---------- ----------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 . . . $1,751,000 $15,179,000 $ 148,214,000 $(15,396,000) $ (5,908,000) $143,840,000
Net income, 1994 . . . . . . -- -- 29,226,000 -- -- 29,226,000
Cash dividends declared . . . -- -- (6,840,000) -- -- (6,840,000)
Issuance of 31,525 shares
of common stock under
stock option plans . . . 3,000 583,000 -- -- -- 586,000
Purchase of 73,600 shares
of treasury stock . . . . -- -- -- (1,651,000) -- (1,651,000)
Current year translation
adjustment . . . . . . . . -- -- -- -- 1,291,000 1,291,000
Adjustment for minimum . . .
pension liability . . . . -- -- 118,000 -- -- 118,000
---------- ----------- ------------- ------------ ------------- ------------
Balance, December 31, 1994 . . . 1,754,000 15,762,000 170,718,000 (17,047,000) (4,617,000) 166,570,000
Net income, 1995 . . . . . . -- -- 38,203,000 -- -- 38,203,000
Cash dividends declared . . -- -- (7,471,000) -- -- (7,471,000)
Issuance of 92,375 shares
of common stock under
stock option plans . . . 9,000 1,937,000 -- -- -- 1,946,000
Purchase of 370,457 shares
of treasury stock . . . . -- -- -- (10,566,000) -- (10,566,000)
Current year translation
adjustment . . . . . . . . -- -- -- -- (280,000) (280,000)
Adjustment for minimum
pension liability . . . . -- -- (497,000) -- -- (497,000)
---------- ----------- ------------- ------------ ------------- ------------
Balance, December 31, 1995 . . . 1,763,000 17,699,000 200,953,000 (27,613,000) (4,897,000) 187,905,000
Net income, 1996 . . . . . . -- -- 50,521,000 -- -- 50,521,000
Cash dividends declared . . . -- -- (8,247,000) -- -- (8,247,000)
Issuance of 390,575 shares
of common stock under
stock option plans . . . . 39,000 10,681,000 -- -- -- 10,720,000
Purchase of 293,546 shares
of treasury stock . . . . -- -- -- (12,020,000) -- (12,020,000)
Current year translation
adjustment . . . . . . . . -- -- -- -- 2,788,000 2,788,000
Adjustment for minimum
pension liability . . . . -- -- 389,000 -- -- 389,000
---------- ----------- ------------- ------------ ------------- ------------
Balance, December 31, 1996 . . . $1,802,000 $ 28,380,000 $243,616,000 $(39,633,000) $ (2,109,000) $232,056,000
========== ============ ============= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
KAYDON CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . $50,521,000 $ 38,203,000 $ 29,226,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization . . . . . . . . . 11,749,000 11,176,000 10,641,000
Cumulative prior year effect of change
in accounting principle . . . . . . . . . . . -- -- 2,000,000
Deferred taxes . . . . . . . . . . . . . . . . (6,811,000) (2,773,000) (2,594,000)
Postretirement and postemployment
benefit obligations . . . . . . . . . . . . . 935,000 (389,000) 728,000
Changes in current assets and liabilities, net of
effects of acquisitions of businesses:
Accounts receivable . . . . . . . . . . . (2,524,000) 157,000 (1,097,000)
Inventories . . . . . . . . . . . . . . . 243,000 4,133,000 (483,000)
Other current assets . . . . . . . . . . . (2,386,000) 374,000 171,000
Accounts payable . . . . . . . . . . . . . (1,815,000) (1,385,000) 1,650,000
Accrued expenses . . . . . . . . . . . . 18,313,000 (9,000) 3,934,000
------------ ------------ ------------
Net cash provided by operating activities. 68,225,000 49,487,000 44,176,000
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of marketable securities . . . . . . . . . . (104,468,000) (80,478,000) (32,318,000)
Maturities of marketable securities . . . . . . . . . . 117,995,000 49,219,000 21,226,000
Additions to plant and equipment, net . . . . . . . . . (9,320,000) (7,371,000) (6,746,000)
Acquisitions of businesses, net of cash acquired . . . . (10,699,000) (23,512,000) (7,268,000)
Proceeds from sale of surplus building and
automotive operation . . . . . . . . . . . . . . . . -- 5,265,000 --
------------ ------------ ------------
Net cash used in investing activities . . . . . (6,492,000) (56,877,000) (25,106,000)
------------ ------------ ------------
Cash Flows from Financing Activities:
Principal payments of long-term debt . . . . . . . . . . -- -- (7,000,000)
Cash dividends paid . . . . . . . . . . . . . . . . . . (7,906,000) (7,336,000) (6,687,000)
Net payments under lines of credit . . . . . . . . . . . (349,000) -- (312,000)
Proceeds from issuance of common stock . . . . . . . . . 7,765,000 1,637,000 518,000
Purchase of treasury stock . . . . . . . . . . . . . . (12,020,000) (10,566,000) (1,651,000)
------------ ------------ ------------
Net cash used in financing activities . . . . . . . . . (12,510,000) (16,265,000) (15,132,000)
------------ ------------ ------------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents . . . . . . . . . . . . . . . . . . 412,000 (112,000) 109,000
------------ ------------ ------------
Net Increase / (Decrease) in Cash and Cash Equivalents . . . 49,635,000 (23,767,000) 4,047,000
Cash and Cash Equivalents - Beginning of Year . . . . . . . . 4,808,000 28,575,000 24,528,000
------------ ------------ ------------
Cash and Cash Equivalents - End of Year . . . . . . . . . . $54,443,000 $ 4,808,000 $ 28,575,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KAYDON CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Kaydon
Corporation and its wholly-owned domestic and foreign subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated.
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 expense during the
reporting period. Actual results could differ from those estimates.
DESCRIPTION OF BUSINESS:
The Company designs, manufactures and sells custom-engineered products for a
broad and diverse customer base primarily in domestic markets. The Company's
principal products include antifriction bearings, bearing systems and
components, filters and filter housings, specialty retaining rings, specialty
balls, custom rings, shaft seals, hydraulic cylinders, metal castings and
various types of slip-rings. These products are used by customers in a wide
variety of medical, instrumentation, material handling, machine tool
positioning, aerospace, defense, construction and other industrial
applications. The Company is customer-focused and concentrates on providing
cost-effective solutions for its customers through close engineering
relationships with leading manufacturers throughout the world.
CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES:
Effective January 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." In accordance with the provisions
of this statement, the Company's cash and cash equivalents and marketable
securities are considered "held-to-maturity" and are stated at amortized cost
which approximates fair market value at December 31, 1996 and 1995. Cash and
cash equivalents have maturity dates of three months or less from the date of
purchase. Marketable securities include United States Treasury Bills with
maturity dates of less than one year. Both cash equivalents and marketable
securities are high-credit quality financial instruments. The Company's
portfolio of cash and cash equivalents and marketable securities consists of
the following at December 31,:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash and cash equivalents:
Cash held in banks . . . . . . . . . . . . . $ 1,828,000 $ 4,058,000
U.S. Treasury Bills . . . . . . . . . . . . . 37,515,000 --
Other cash equivalents . . . . . . . . . . . 15,100,000 750,000
----------- -----------
54,443,000 4,808,000
Marketable securities:
U.S. Treasury Bills . . . . . . . . . . . . . 28,824,000 42,351,000
----------- -----------
Total . . . . . . . . . . . . . . . . . . . $83,267,000 $47,159,000
=========== ===========
</TABLE>
INVENTORIES:
Inventories are valued at the lower of cost or market and include
material, labor and overhead. Cost is determined using the first-in, first-out
("FIFO") method for all inventories. Inventories are summarized as follows at
December 31,:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Raw material . . . . . . . . . . . . . . . . . . . $15,146,000 $13,764,000
Work in process . . . . . . . . . . . . . . . . . . 17,300,000 13,040,000
Finished goods . . . . . . . . . . . . . . . . . . 20,633,000 23,341,000
----------- -----------
$53,079,000 $50,145,000
=========== ===========
</TABLE>
22
<PAGE> 10
- ------------------------------------------------------------------------------
PLANT AND EQUIPMENT:
Plant and equipment are stated at cost. The cost is depreciated over the
estimated useful lives of the assets using the straight-line method. Useful
lives vary among the classifications, but generally fall within the following
ranges:
<TABLE>
<S> <C>
Buildings, land improvements and
leasehold improvements . . . . . . . . . . . 10 - 40 years
Machinery and equipment . . . . . . . . . . . . 3 - 15 years
</TABLE>
Leasehold improvements are amortized over the terms of the respective leases
or over their useful lives, whichever is shorter. Renewals and betterments are
capitalized while maintenance and repairs are charged to operations in the year
incurred.
RESEARCH AND DEVELOPMENT COSTS:
Research and development costs, which are not material to the consolidated
statements of income, are expensed as incurred.
COST IN EXCESS OF NET TANGIBLE ASSETS OF PURCHASED BUSINESSES AND OTHER
LONG-LIVED ASSETS:
Cost in excess of net tangible assets of purchased businesses ("goodwill")
totaling $16,239,000 arose prior to 1971 and is not being amortized since, in
the opinion of management, there has been no diminution in value. Goodwill
acquired after 1970 is being amortized on a straight-line basis over a period
of 20 to 40 years and is stated net of accumulated amortization of $5,155,000
and $3,816,000 at December 31, 1996 and 1995, respectively. The increase in
goodwill during 1996 is primarily due to the acquisition of Victor Fluid Power
Co. and Benton Harbor Engineering Co., Inc., as discussed further in Note 12.
Effective January 1, 1996, the Company adopted the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The adoption of this Statement had no effect on the
Company's financial statements.
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful lives of goodwill and
other long-lived assets may warrant revision or that the remaining balances may
not be recoverable. When factors indicate that such costs should be evaluated
for possible impairment, the Company uses an estimate of the related business
segment's undiscounted cash flow over the remaining lives of the goodwill and
other long-lived assets to evaluate whether the costs are recoverable.
OTHER ASSETS:
Other assets include, among other items, deferred tax assets and various
intangibles which primarily include noncompete and supply agreements. Deferred
tax assets are further discussed in Note 3. The noncompete and supply
agreements and other intangibles are being amortized on a straight-line basis
ranging from 4 to 15 years. They are stated net of accumulated amortization of
$3,368,000 and $2,848,000 at December 31, 1996 and 1995, respectively.
FOREIGN CURRENCY TRANSLATION:
The financial position and results of operations of the Company's United
Kingdom and German subsidiaries are measured using the local currency as the
functional currency. Assets and liabilities are translated at the exchange
rate in effect at year end. Income statement accounts are translated at the
average rate of exchange in effect during the year. The resulting translation
adjustment is recorded as a separate component of stockholders' investment.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of financial instruments included in current assets and
current liabilities approximate fair value due to the short-term nature of
these instruments. The stated value of the Company's long-term debt reasonably
approximates fair value.
23
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
KAYDON CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
(2) EARNINGS PER SHARE
Earnings per share of common stock are based on the weighted average of
outstanding common shares and common share equivalents to the extent they are
dilutive during the three years presented (approximately 16,549,000,
16,741,000, and 16,726,000, in 1996, 1995 and 1994, respectively).
(3) INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current:
U.S. Federal . . . . . . . $33,381,000 $23,426,000 $17,909,000
State . . . . . . . . . . . 3,717,000 2,632,000 2,393,000
Foreign . . . . . . . . . . 2,061,000 132,000 1,348,000
----------- ----------- -----------
39,159,000 26,190,000 21,650,000
----------- ----------- -----------
Deferred:
U.S. Federal . . . . . . . (7,134,000) (3,088,000) (1,669,000)
State . . . . . . . . . . . (382,000) (247,000) (277,000)
Foreign . . . . . . . . . . (548,000) 733,000 (562,000)
----------- ----------- -----------
(8,064,000) (2,602,000) (2,508,000)
----------- ----------- -----------
$31,095,000 $23,588,000 $19,142,000
=========== =========== ===========
</TABLE>
In 1996, 1995 and 1994, the Company's effective tax rates were 38.1%, 38.2%,
and 38.0%, respectively, of income before income taxes and cumulative prior
year effect of change in accounting principle and differed from the U.S.
federal statutory income tax rate primarily due to the effect of state income
taxes, net of the federal tax benefit.
Cash expended for income taxes totaled $30,974,000 in 1996, $26,506,000 in
1995, and $21,261,000 in 1994.
The tax effect and type of significant temporary differences by component
which gave rise to the net deferred tax asset as of December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Postretirement and
postemployment
benefit obligations . . . . . . . $ 11,803,000 $ 11,426,000
Financial accruals and reserves
not currently deductible . . . . . . 10,120,000 5,298,000
Inventory accounting method
and basis differences . . . . . . . 6,763,000 5,702,000
Other . . . . . . . . . . . . . . . . . 1,446,000 519,000
Valuation allowance . . . . . . . . . . -- --
------------ ------------
30,132,000 22,945,000
------------ ------------
Deferred tax liabilities:
Plant and equipment basis
differences, including
depreciation and
amortization . . . . . . . . . . . . (8,148,000) (8,839,000)
Other . . . . . . . . . . . . . . . . . -- (392,000)
------------ ------------
(8,148,000) (9,231,000)
------------ ------------
$ 21,984,000 $ 13,714,000
============ ============
</TABLE>
The Company has not provided for United States income taxes on undistributed
earnings of foreign subsidiaries. Recording of deferred income taxes on these
undistributed earnings is not required as these earnings have been permanently
reinvested. The amounts subject to U.S. taxation upon remittance of these
earnings as dividends would be substantially offset by available foreign tax
credits.
(4) SHORT-TERM DEBT
The Company has short-term lines of credit with banks totaling $27,000,000
with no outstanding borrowings at December 31, 1996. The rates of interest on
the outstanding balances of each of these lines are at or slightly below the
applicable prime commercial rate (as defined in the respective agreements),
which was 8.25% at December 31, 1996. The weighted average interest rate on
borrowings outstanding during 1996 was approximately 8.0%.
24
<PAGE> 12
- ------------------------------------------------------------------------------
(5) LONG-TERM DEBT
The Company has $85,000,000 of borrowings available under its revolving
credit and term loan agreement, none of which are outstanding at December 31,
1996. The borrowing rate is defined in the agreement and is the prime
commercial rate or lower. The available interest rate at December 31, 1996 was
6.03%. Commitment fees ranging from .2% to .375% of the unused portion of
credit are charged quarterly.
The Company's long-term debt consists of Industrial Revenue Bonds ("IRB's")
at December 31, 1996 and 1995. The IRB's are due from 1997 through 1999 and
provide for monthly interest payments at a variable rate. The interest rate of
the IRB's was 4.40% at December 31, 1996.
The annual maturities for long-term debt are summarized as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1997................................................ $4,000,000
1998................................................ --
1999................................................ $4,000,000
</TABLE>
Provisions of the IRB and revolving credit agreements contain covenants
which require, among other things, the maintenance of a minimum working capital
ratio and a specified level of stockholders' investment. At December 31, 1996,
the Company was in compliance with these provisions.
Cash expended for interest on debt totaled $352,000 in 1996, $344,000 in
1995, and $306,000 in 1994.
(6) STOCK-BASED COMPENSATION
The Company has two stock option plans which include the 1993 Stock Option
Plan ("Employee Plan") and the 1993 Non-Employee Directors Plan ("Directors
Plan"). The Company's previous stock option plan, created in 1984 with a term
of ten years, was terminated in 1993. The Company accounts for these plans
under APB Opinion No. 25, under which no compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Net Income:
As reported . . . . . . . . . . . . . . . . . $50,521,000
Pro forma . . . . . . . . . . . . . . . . . . $50,021,000
Earnings Per Share:
As reported . . . . . . . . . . . . . . . . . $3.05
Pro forma . . . . . . . . . . . . . . . . . . $3.02
</TABLE>
The fair value of each option grant in the stock option plans is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for grants in 1996: risk free interest
rates ranging from 5.3% to 6.2%; expected dividend yields of 1.2%; expected
lives of 4 years; expected volatility of 29.0%. There were no options granted
in 1995.
The Company may grant options for up to 1,000,000 shares under the Employee
Plan. The Company has granted options on 489,550 shares through December 31,
1996. The Directors Plan has a maximum 100,000 shares available for grant of
which 80,000 remained available for grant at December 31, 1996. Under the
Plans, the purchase price of each option granted will not be less than fair
market value at the date of grant. Options granted become exercisable at the
rate of 25% per year, commencing one year after the date of grant and expiring
five years from the date of grant.
25
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
KAYDON CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------
A summary of stock option information is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ------------------ -------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
-------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of Year . . . . . 585,050 $20.97 678,175 $20.52 665,575 $20.04
Granted . . . . . . . . . . . . . . . . . 342,200 $39.02 - - 54,000 $23.88
Exercised . . . . . . . . . . . . . . . . (390,575) $19.88 (92,375) $17.72 (31,525) $16.41
Canceled . . . . . . . . . . . . . . . . . (10,500) $26.76 (750) $19.38 (9,875) $19.64
-------- ------ ------- ------ ------- ------
Outstanding at End of Year . . . . . . . . 526,175 $33.40 585,050 $20.97 678,175 $20.52
======== ======= =======
Exercisable at End of Year . . . . . . . . 128,915 $22.95 476,325 $20.43 424,560 $19.65
Weighted Average Fair Value
of Options Granted . . . . . . . . . . . $ 11.37 -- --
</TABLE>
Options outstanding at December 31, 1996 are as follows:
<TABLE>
<CAPTION> Weighted
Weighted Average
Average Remaining
Lowest Highest Number of Exercise Contractual
Price Price Options Price Life (years)
----- ----- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Exercise price per share:
Under $25 . . . . . . . . . . . . . . $22.00 $24.25 183,975 $22.94 2.05
Over $25 . . . . . . . . . . . . . . . $30.75 $43.50 342,200 $39.02 4.67
------ ------ ------- ------ ----
Total options . . . . . . . . . . . . $22.00 $43.50 526,175 $33.40 3.75
=======
</TABLE>
(7) SHAREHOLDERS RIGHTS PLAN
On June 21, 1995, the Board of Directors of the Company adopted a
Shareholders Rights Plan which attaches one right to each share of Kaydon
Common Stock to shareholders of record at the close of business on July 7,
1995. When the right becomes exercisable, each registered holder will be
entitled to purchase from the Company additional common stock having a value of
twice the exercise price upon payment of the exercise price. The exercise
price, subject to adjustment, is thirty dollars ($30.00) per Right. The Rights
will become exercisable eight days following a public announcement that a
person or group of affiliated or associated persons has acquired, or obtained
the right to acquire, beneficial ownership of 20% or more of the outstanding
shares of common stock (the "Stock Acquisition Date"). The Rights are not
exercisable until the Stock Acquisition Date and will expire at the close of
business on July 7, 2000, unless earlier redeemed by Kaydon.
(8) EMPLOYEE BENEFIT PLANS
The Company maintains several defined benefit pension plans which cover the
majority of all U.S. employees. Benefits paid under these plans are based
generally on employees' years of service and compensation during the final
years of employment. The Company's policy is to fund the minimum amounts
required by the Employee Retirement Income Security Act of 1974. Plan assets
consist principally of publicly traded equity and debt securities which
included 80,000 shares of Kaydon Corporation common stock at December 31, 1996
and 1995.
26
<PAGE> 14
- ------------------------------------------------------------------------------
Net pension costs includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefits
earned during the year . . . . . . . $1,347,000 $1,262,000 $1,170,000
Interest cost on projected . . . . . .
benefit obligation . . . . . . . . 2,865,000 2,637,000 2,417,000
Actual return on plan . . . . . . .
assets . . . . . . . . . . . . . . (7,162,000) (6,077,000) (1,236,000)
Net amortization and
deferral:
Amortization . . . . . . . . . . 397,000 173,000 94,000
Deferral of un-
recognized net . . . . . . . . .
(loss) gain . . . . . . . . . . 4,314,000 3,676,000 (1,137,000)
Curtailment loss . . . . . . . . . . .
(Note 14) . . . . . . . . . . . . . -- 764,000 --
----------- ---------- ----------
Net pension cost . . . . . . . . . . . $ 1,761,000 $2,435,000 $1,308,000
=========== ========== ==========
</TABLE>
The funded status of the plans as of September 30, 1996 and amounts
recognized in the accompanying consolidated balance sheet as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Plans With Plans With
Assets Accumulated
Exceeding Benefits
Accumulated Exceeding
Benefits Assets
------------- -------------
<S> <C> <C>
Accumulated present value of
benefit obligation-
Vested benefits . . . . . . . . . . . $ (15,207,000) $ (22,473,000)
Nonvested benefits . . . . . . . . . (322,000) (3,096,000)
------------- -------------
Accumulated benefit obligation . . . . . (15,529,000) (25,569,000)
Effect of projected future
salary increases . . . . . . . . . . . (4,531,000) (486,000)
------------- -------------
Projected benefit obligation . . . . . . (20,060,000) (26,055,000)
Fair value of plan assets . . . . . . . 22,568,000 19,745,000
------------- -------------
Plan assets in excess of (less than)
projected benefit obligation . . . . . 2,508,000 (6,310,000)
Unrecognized net transition
(asset) obligation . . . . . . . . . . (235,000) 260,000
Unrecognized prior service cost . . . . . (493,000) 3,504,000
Unrecognized net (gain) loss . . . . . . (2,945,000) 1,410,000
Adjustments required to recog-
nize minimum liability . . . . . . . . -- (4,607,000)
------------- --------------
Pension costs accrued as of
September 30, 1996 . . . . . . . . . . (1,165,000) (5,743,000)
Provision for fourth
quarter 1996 . . . . . . . . . . . . . (60,000) (380,000)
Contributions for fourth
quarter 1996 . . . . . . . . . . . . . -- 7,000
------------- -------------
Pension costs accrued as of
December 31, 1996 . . . . . . . . . . . $ (1,225,000) $ (6,116,000)
============= =============
</TABLE>
The funded status of the plans as of September 30, 1995 and amounts
recognized in the accompanying consolidated balance sheet as of December 31,
1995 are as follows:
<TABLE>
<CAPTION>
Plans With Plans With
Assets Accumulated
Exceeding Benefits
Accumulated Exceeding
Benefits Assets
------------- ------------
<S> <C> <C>
Accumulated present value of
benefit obligation-
Vested benefits . . . . . . . . . . . . . . . $ (13,079,000) $(18,260,000)
Nonvested benefits . . . . . . . . . . . . . (322,000) (2,739,000)
------------- ------------
Accumulated benefit obligation . . . . . . . . . (13,401,000) (20,999,000)
Effect of projected future
salary increases . . . . . . . . . . . . . . . (3,618,000) (250,000)
------------- ------------
Projected benefit obligation . . . . . . . . . . (17,019,000) (21,249,000)
Fair value of plan assets . . . . . . . . . . . 18,835,000 13,403,000
------------- ------------
Plan assets in excess of (less than)
projected benefit obligation . . . . . . . . . 1,816,000 (7,846,000)
Unrecognized net transition
(asset) obligation . . . . . . . . . . . . . . (280,000) 304,000
Unrecognized prior service cost . . . . . . . . . (528,000) 1,362,000
Unrecognized net (gain) loss . . . . . . . . . . (2,407,000) 2,064,000
Adjustments required to recog-
nize minimum liability . . . . . . . . . . . . -- (3,459,000)
------------- ------------
Pension costs accrued as of
September 30, 1995 . . . . . . . . . . . . . . (1,399,000) (7,575,000)
Provision for fourth
quarter 1995 . . . . . . . . . . . . . . . . . (102,000) (316,000)
Contributions for fourth
quarter 1995 . . . . . . . . . . . . . . . . . 515,000 3,223,000
------------- ------------
Pension costs accrued as of
December 31, 1995 . . . . . . . . . . . . . . . . $ (986,000) $ (4,668,000)
============= ============
</TABLE>
The assumptions used in the determination of net pension cost were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . 7.00-7.75% 7.00-7.75% 7.75%
Rate of salary progression . . . . . . . . . 4.50% 4.50% 4.50%
Long-term rate of return
on assets . . . . . . . . . . . . . . . . 9.00% 9.00% 9.00%
</TABLE>
The Company and its domestic subsidiaries also offer 401(k) savings plans in
which substantially all of their employees may participate. The majority of
the contributions to the plans are made by the employees.
27
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
KAYDON CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(9) OTHER POSTRETIREMENT BENEFITS
The Company provides certain retiree health care and life insurance benefits
covering the majority of U.S. salaried and hourly employees. Employees are
generally eligible for benefits upon retirement or long-term disability and
completion of a specified number of years of credited service. These benefits
are subject to cost-sharing provisions and other limitations. The Company does
not pre-fund these benefits and has the right to modify or terminate certain of
these benefits in the future.
The Company accrues for the cost of providing postretirement benefits for
medical, dental and life insurance coverage over the active service period of
the employee.
The components of net postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Service cost . . . . . . . . . . $ 670,000 $ 568,000 $ 586,000
Interest cost on accumu-
lated benefit obligation 1,667,000 1,689,000 1,848,000
Amortization of un-
recognized prior
service cost . . . . . . . . . (218,000) (311,000) (241,000)
Gain due to curtail-
ment (Note 14) . . . . . . . . -- (965,000) --
Net postretirement ---------- --------- ----------
benefit cost . . . . . . . . . $2,119,000 $ 981,000 $2,193,000
========== ========== ==========
</TABLE>
The funded status of the plans at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees . . . . . . . . . . $ (10,424,000) $ (9,750,000)
Fully eligible active plan
participants . . . . . . (184,000) (823,000)
Other active plan
participants . . . . . . (12,891,000) (11,939,000)
------------- ------------
Projected benefit
obligation . . . (23,499,000) (22,512,000)
Unrecognized prior service cost . (2,518,000) (2,392,000)
Unrecognized net gain . . . . . . (2,215,000) (2,394,000)
------------- ------------
Accrued postretirement
benefit obligation . . . . . . $ (28,232,000) $(27,298,000)
============= ============
</TABLE>
The accumulated postretirement benefit obligation ("APBO") was actuarially
determined based on assumptions regarding the discount rate and projected
future increases in postretirement benefit costs ("the healthcare cost trend
rate").
The assumptions used in the determination of the APBO and the net
postretirement benefit cost were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . 7.00-7.75% 7.00-7.75% 7.75%
Healthcare cost trend rates -
Participants under 65 years
of age. . . . . . . . . . . . . 12.00% 13.00% 14.00%
Participants 65 years of age
and over. . . . . . . . . . . . . 9.00% 9.50% 10.00%
</TABLE>
The healthcare cost trend rates for participants under the age of 65 and
participants 65 years of age and over are assumed to decrease ratably to 6% by
2002 and remain at that level thereafter. A 1% increase in the healthcare cost
trend rate would have increased the accumulated postretirement benefit
obligation at December 31, 1996 by approximately $3,064,000, and the net
postretirement benefit cost by approximately $364,000 in 1996.
(10) POSTEMPLOYMENT BENEFITS
Effective January 1, 1994, the Company adopted the provisions of SFAS No.
112, "Employers' Accounting for Postemployment Benefits." This statement
requires employers to accrue for benefits provided to former or inactive
employees after employment, but prior to retirement. For the Company, this
statement primarily applies to costs associated with disability-related
benefits. The cumulative effect of this change in accounting principle
resulted in a charge to net income of $2,000,000 in 1994.
28
<PAGE> 16
(11) LEASE COMMITMENTS
Total minimum rentals payable under operating leases that have initial or
remaining noncancellable lease terms in excess of one year as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1997 . . . . . . . . . . . . . . . . . $ 726,000
1998 . . . . . . . . . . . . . . . . . 688,000
1999 . . . . . . . . . . . . . . . . . 610,000
2000 . . . . . . . . . . . . . . . . . 456,000
2001 . . . . . . . . . . . . . . . . . 353,000
Thereafter . . . . . . . . . . . . . . 1,673,000
</TABLE>
Aggregate rental expense charged to operations was $1,272,000, $1,261,000,
and $1,351,000, in 1996, 1995 and 1994, respectively.
(12) ACQUISITIONS
On February 1, 1996, the Company purchased the assets of Victor Fluid Power
Co. ("Victor") and Benton Harbor Engineering Co., Inc. ("Benton Harbor") for
$10,699,000. Both companies manufacture hydraulic cylinders and fluid power
components and are complimentary to Seabee Corporation which was purchased in
August, 1995. The Benton Harbor facility was closed in the acquisition process
with the equipment and customer order base being absorbed into Seabee and
Victor. The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the results of operations have been included in
the 1996 consolidated financial statements since the date of acquisition.
On January 31, 1995, the Company, through its U.K. subsidiary, I.D.M.
Electronics, purchased a product line for $759,000. In addition, on August 31,
1995, the Company acquired substantially all of the common stock of Seabee
Corporation ("Seabee") for approximately $22,753,000, net of cash received.
Seabee is a manufacturer of large hydraulic cylinders and alloy steel castings
located in Hampton, Iowa. The acquisition has been accounted for using the
purchase method of accounting and, accordingly, the results of operations of
Seabee have been included in the 1995 consolidated financial statements since
the date of acquisition.
On January 28, 1994, the Company acquired certain assets and certain
liabilities of Industrial Tectonics Inc. ("ITI"), a manufacturer of specialty
balls used in measuring devices, floats, valves, ball point pens and
antifriction bearings, located in Dexter, Michigan. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
results of operations of ITI have been included in the 1994 consolidated
financial statements since the effective date of the acquisition. The cash
consideration for the acquisition, net of cash acquired, was approximately
$7,268,000.
(13) SALE OF AUTOMOTIVE OPERATION AND
SURPLUS BUILDING
On May 1, 1995, the Company sold the majority of its automotive operation
assets. The net sale proceeds of $3,476,000 approximated the book value of the
assets sold. The Company and the buyer also entered into an operating lease
for the facility in which the business was located. The sales of the
automotive business were less than 4% of the consolidated net sales for each of
1995 and 1994 with an operating income contribution percentage lower than the
rest of the Company.
During 1995, the Company also sold the surplus building resulting from the
1993 plant consolidation described in Note 14. The net sale proceeds of
$1,789,000 approximated book value.
(14) PLANT CONSOLIDATIONS
During 1995, the Company authorized and executed its production facility
realignment, completing the consolidation process started during 1993. These
actions included the asset sales described in Note 13. The movement of the
physical location for certain production did not result in the discontinuation
of any product lines. Severance and relocation expenses of approximately
$300,000 were recognized as part of the realignment. The consolidation also
resulted in a $965,000 reduction in the accrued postretirement benefit
obligation, partially offset by a $764,000 increase in accrued pension cost.
The overall effect of the plant consolidation was not significant to the
operating results or financial position of the Company.
29
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
KAYDON CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(15) CONTINGENCIES
The Company, together with other companies, certain former officers, and
certain former directors, has been named as a co-defendant in lawsuits filed in
federal court in New York in 1993. The suits purport to be class actions on
behalf of all persons who have unsatisfied personal injury and property damage
claims against Keene Corporation which filed for bankruptcy under Chapter 11.
The premise of the suits is that assets of Keene were transferred to Bairnco
subsidiaries, of which Kaydon was one in 1983, at less than fair value. The
suits also allege that the Company, among other named defendants, was a
successor to and alter ego of Keene. In 1994, an examiner was appointed by a
bankruptcy court to examine the issues at stake. On September 23, 1994, the
"Preliminary Report of the Examiner" was made public. In the report, the
examiner stated that the alleged fraudulent conveyance claims against the
Company appear to be time-barred by the statute of limitations, subject to
certain possible exceptions which the Company does not believe are significant
or factual. Although the examiner has made certain recommendations regarding a
mechanism to resolve the claims against the Company, the Court has not taken
any action related to the report. Nevertheless, in the Company's opinion, the
report reinforces management's original view that the claims will ultimately
not be sustained. Accordingly, no provision has been reflected in the
consolidated financial statements for any alleged damages. In June 1995, the
creditors' committee filed a complaint in the same bankruptcy court asserting
claims against the Company similar to those previously filed. On June 12,
1996, the District and Bankruptcy Courts for the Southern District of New York
entered an order confirming the plan of reorganization for Keene Corporation.
As a result, the so-called transactions lawsuit will be transferred from the
Bankruptcy Court for the Southern District of New York to the District Court
for that district and the stay of the transactions lawsuit was lifted, allowing
the Company and other co-defendants to present appropriate motions to the
District Court. Management believes that the outcome of this litigation will
not have a material adverse effect on the Company's financial position.
In June, 1996 the Company received a subpoena issued by the U.S. District
Court in Bridgeport, Connecticut on behalf of a grand jury investigating a May
9, 1996 accident involving a Sikorsky helicopter in which four persons died.
The grand jury has requested and received documents and records relating to a
bearing manufactured by Kaydon and used in the Sikorsky helicopter. In
addition, the Defense Logistics Agency of the Defense Contract Management
Command and a "Mishap Board" led by Sikorsky Aircraft Corporation with
participation from certain Federal agencies alleged that product quality
problems or deficiencies exist with respect to the bearing product used in the
Sikorsky helicopter described above. The Company was excluded from
participation on this "Mishap Board", however, it independently evaluated the
available evidence and refuted the "Mishap Board" findings in its report
submitted to the Navy. Subsequent incidents have occurred in the helicopter
fleet even though the bearings used were newly manufactured, inspected and
approved by Sikorsky personnel, reinforcing the Company's position that the
bearing quality was not the causative action in the May 9, 1996 accident.
Various other claims, lawsuits and environmental matters arising in the
normal course of business are pending against the Company. Management believes
that the outcome of these matters, including the Sikorsky matter referred to
above, will not have a material adverse effect on the Company's financial
position or results of operations.
30
<PAGE> 18
(16) BUSINESS SEGMENT INFORMATION
The Company operates predominately in one industry segment, the design,
manufacture and sale of custom-engineered products. During 1996, 1995 and
1994, sales to no single customer exceeded 10% of total sales. Transfers
between geographic areas represent the selling price of sales to affiliates,
which is generally based on cost plus a mark-up. Corporate assets are those
assets maintained for general purposes, principally cash, cash equivalents and
marketable securities. All other assets have been identified with domestic or
foreign operations. Information regarding the Company's operations in the
United States and Europe for 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996 United States Europe Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers . . . . . . . . . . . $ 263,491,000 $ 27,179,000 $ -- $290,670,000
Transfers between geographic areas . . . . . . . . . -- 4,621,000 (4,621,000) --
-------------- ------------ ------------ ------------
Total sales . . . . . . . . . . . . . . . . . . $ 263,491,000 $ 31,800,000 $ (4,621,000) $290,670,000
============== ============ ============ ============
Operating income . . . . . . . . . . . . . . . . . . $ 73,324,000 $ 5,713,000 $ (83,000) $ 78,954,000
Interest income, net . . . . . . . . . . . . . . . . 2,662,000
------------
Income before income taxes and cumulative prior year
effect of change in accounting principle . . . . $ 81,616,000
============
Identifiable assets . . . . . . . . . . . . . . . . $ 206,962,000 $ 40,305,000 -- $247,267,000
Corporate assets . . . . . . . . . . . . . . . . . . 84,271,000
------------
Total assets . . . . . . . . . . . . . . . . . . $331,538,000
============
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995 United States Europe Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers . . . . . . . . . . . $ 205,342,000 $ 24,582,000 $ -- $229,924,000
Transfers between geographic areas . . . . . . . . . -- 3,538,000 (3,538,000) --
-------------- ------------ ------------ ------------
Total sales . . . . . . . . . . . . . . . . . . $ 205,342,000 $28,120,000 $ (3,538,000) $229,924,000
============== ============ ============ ============
Operating income . . . . . . . . . . . . . . . . . . $ 55,178,000 $ 4,501,000 $ (393,000) $ 59,286,000
Interest income, net . . . . . . . . . . . . . . . . 2,505,000
Income before income taxes and cumulative prior year ------------
effect of change in accounting principle . . . $ 61,791,000
============
Identifiable assets . . . . . . . . . . . . . . . . $ 181,070,000 $38,376,000 -- $219,446,000
Corporate assets . . . . . . . . . . . . . . . . . . 48,229,000
------------
Total assets . . . . . . . . . . . . . . . . . $267,675,000
============
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1994 United States Europe Eliminations Consolidated
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers . . . . . . . . . . . $ 183,865,000 $ 20,830,000 $ -- $204,695,000
Transfers between geographic areas . . . . . . . . . -- 3,119,000 (3,119,000) --
-------------- ------------ ------------ ------------
Total sales . . . . . . . . . . . . . . . . . . . $ 183,865,000 $ 23,949,000 $ (3,119,000) $204,695,000
============== ============ ============ ============
Operating income . . . . . . . . . . . . . . . . . . . $ 46,733,000 $ 3,483,000 $ (457,000) $ 49,759,000
Interest income, net . . . . . . . . . . . . . . . .
609,000
------------
Income before income taxes and cumulative prior year
effect of change in accounting principle . . . $ 50,368,000
============
Identifiable assets . . . . . . . . . . . . . . . . $ 164,959,000 $ 37,810,000 -- $202,769,000
Corporate assets . . . . . . . . . . . . . . . . . . 40,815,000
------------
Total assets . . . . . . . . . . . . . . . . . $243,584,000
============
</TABLE>
31
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
KAYDON CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Quarters (amounts in thousands except per share data)
- -------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th Total
---------------- ------------- ------------- -------------- -----------------
1996 1995 1996 1995 1996 1995 1996 1995 1996 1995
-------- ------ ------ ------ ------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . $ 73,395 55,465 76,131 57,560 69,838 56,087 71,306 60,812 290,670 229,924
Gross Profit . . . . . . . . . . . . . $ 28,736 21,031 30,735 22,782 28,382 21,434 29,643 23,352 117,496 88,599
-------- ------ ------ ------ ------ ------ ------ ------ ------- -------
Net Income . . . . . . . . . . . . . . $ 12,280 9,036 13,081 9,715 12,366 9,415 12,794 10,037 50,521 38,203
======== ====== ====== ====== ====== ====== ====== ====== ======= =======
Earnings per Share. . . . . . . . . . . $ 0.74 0.54 0.79 0.58 0.75 0.56 0.77 0.60 3.05 2.28
======== ====== ====== ====== ====== ====== ====== ====== ======= =======
Market Price:
High . . . . . . . . . . . . . . . . $ 35.00 27.63 47.13 30.25 49.25 31.50 48.25 30.75 49.25 31.50
Low . . . . . . . . . . . . . . . . $ 29.25 22.75 34.50 25.38 39.50 27.38 40.00 28.00 29.25 22.75
</TABLE>
- --------------------------------------------------------------------------------
NOTES
32
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<S> <C> <C>
1. Name: Kaydon International, Inc.
Place of Incorporation: United States Virgin Islands
Date of Incorporation: July 16, 1991
2. Name: Kaydon Ring and Seal, Inc.
Place of Incorporation: Delaware
Date of Incorporation: June 30, 1986
3. Name: Kaydon S.A. de C.V.
Place of Incorporation: Nuevo Leon, United Mexican States
Date of Incorporation: April 10, 1987
4. Name: I.D.M. Electronics Ltd.
Place of Incorporation: United Kingdom
Date of Incorporation: July 1, 1957
5. Name: Electro-Tec Corp.
Place of Incorporation: Delaware
Date of Incorporation: October 27, 1967
6. Name: Cooper Roller Bearings Company Limited
Place of Incorporation: United Kingdom
Date of Incorporation: June 16, 1982
7. Name: Cooper Split Roller Bearings Corporation
Place of Incorporation: Virginia
Date of Incorporation: January 1, 1974
8. Name: Cooper Geteilte Rollenlager GmbH
Place of Incorporation: Germany
Date of Incorporation: March 19, 1974
9. Name: Industrial Tectonics Inc
Place of Incorporation: Delaware
Date of Incorporation: November 22, 1991
10. Name: Kaydon Acquisition Corp. V
(d/b/a Seabee Corporation)
Place of Incorporation: Delaware
Date of Incorporation: October 4, 1993
11. Name: Kaydon Acquisition VII, Inc.
(d/b/a Victor Fluid Power, Inc.)
Place of Incorporation: Delaware
Date of Incorporation: September 28, 1995
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kaydon Corporation:
As independent public accountants, we hereby consent to the
incorporation of our report incorporated by reference in this Form 10-K, into
the Company's previously filed Form S-8 Registration Statement Numbers 2-89399,
2-92778, 33-48762, 33-61646, 33-61648 and 333-15903.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Grand Rapids, Michigan
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 54,443
<SECURITIES> 28,824
<RECEIVABLES> 37,617
<ALLOWANCES> 1,481
<INVENTORY> 53,079
<CURRENT-ASSETS> 186,056
<PP&E> 180,227
<DEPRECIATION> 104,051
<TOTAL-ASSETS> 331,538
<CURRENT-LIABILITIES> 66,824
<BONDS> 4,000
0
0
<COMMON> 1,802
<OTHER-SE> 230,254
<TOTAL-LIABILITY-AND-EQUITY> 331,538
<SALES> 290,670
<TOTAL-REVENUES> 290,670
<CGS> 173,174
<TOTAL-COSTS> 173,174
<OTHER-EXPENSES> 38,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,662)
<INCOME-PRETAX> 81,616
<INCOME-TAX> 31,095
<INCOME-CONTINUING> 50,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,521
<EPS-PRIMARY> 3.05
<EPS-DILUTED> 3.05
</TABLE>
