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SECURITIES AND EXCHANGE COMMISSION

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

Registrant’s telephone number, including area code (734) 747-7025

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  [X] No  [   ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

      The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant on March 15, 2000 (based on the closing sale price of $25 of the Registrant’s Common Stock, as reported on the New York Stock Exchange Composite Tape on such date) was approximately $599,944,000.

      Number of shares outstanding of the Registrant’s Common Stock at March 15, 2000:

30,552,482 shares of Common Stock, par value $0.10 per share.

      Portions of the Registrant’s definitive Proxy Statement to be filed for its 2000 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.

Forward-Looking Statements

      This Form 10-K contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the market sectors in which Kaydon Corporation operates, management’s beliefs, and assumptions made by management. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “should”, “going-forward”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Business Risks”) which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

      Business Risks include increasing price and product competition by foreign and domestic competitors, including new entrants; the Company’s ability to continue to introduce competitive new products on a timely, cost-effective basis; the mix of products; the achievement of lower costs and expenses; the reliance on large customers; the cyclical nature of the markets served by the Company; the outcome of pending and future litigation and governmental proceedings; and continued availability of financing and financial resources in the amounts, at the times and on the terms required to support the Company’s future business and growth strategies. These are representative of the Business Risks that could affect the outcome of the forward-looking statements. In addition, such forward-looking statements could be affected by general industry and market conditions, including interest rate fluctuations and other Business Risks.

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Item 1.  BUSINESS

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 1994:

      Kaydon has made the following acquisitions and dispositions in the past five years:

      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. This acquisition was accounted for using the purchase method of accounting.

      On May 1, 1995, Kaydon 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 net sales of the automotive business were less than 4 percent 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 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, through its wholly-owned subsidiary, Kaydon Acquisition Corp. V, purchased the stock of Seabee Corporation (“Seabee”) for $22,753,000, net of cash acquired. Seabee, located in Hampton, Iowa, is a manufacturer of large hydraulic cylinders and alloy steel castings. This acquisition was accounted for using the purchase method of accounting.

      On February 1, 1996, Kaydon, 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 complementary to Seabee. The Benton Harbor facility was closed in the acquisition process with the equipment and customer order base being absorbed into Seabee and Victor. Victor is located in Granite Falls, Minnesota. The acquisition was accounted for using the purchase method of accounting.

      On March 11, 1997, Kaydon, through its wholly-owned subsidiary, Kaydon Acquisition Corp. V (d/b/a Seabee Corporation), purchased the assets of Gold Star Manufacturing, Inc. (“Gold Star”) for $4,449,000. Gold Star is located in Laurens, Iowa. The acquisition was accounted for using the purchase method of accounting.

      On May 29, 1997, Kaydon, through its wholly-owned subsidiary, Kaydon Acquisition VIII, Inc. purchased the assets of Great Bend Industries, Inc. (“Great Bend”) for $22,933,000. Great Bend is located in Great Bend, Kansas. Both Gold Star and Great Bend manufacture custom-designed hydraulic cylinders and complement the prior years acquisitions of Seabee and Victor. The acquisitions were accounted for using the purchase method of accounting.

      On November 30, 1999, Kaydon, through its wholly-owned subsidiary, Kaydon Acquisition X, Inc. purchased the stock of Filterdyne Filtration Systems, Inc. (“Filterdyne”) for $4,948,000, net of cash acquired. Filterdyne, located in LaGrange, Georgia, is a manufacturer of custom-designed filtration and vacuum

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      On December 3, 1999, Kaydon, through its wholly-owned subsidiary, Kaydon Acquisition IX, Inc. purchased the stock of Focal Technologies, Inc. (“Focal”) for $8,829,000, net of cash acquired. Focal, located in Halifax, Nova Scotia, Canada designs and manufactures fiber-optic, electronic data and fluid transmission devices. Focal’s broad-band expertise will expand and complement Kaydon’s slip-ring product technology for products manufactured by our Electro-Tec Corp. and I.D.M. Electronics, Ltd. subsidiaries. The acquisition was accounted for using the purchase method of accounting.

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.

      The Company operates through individual operating units which serve four key market sectors. The market sectors the Company serves have similar economic characteristics and attributes which include similar products, distribution processes and classes of customers. Generally, operating units sell products into more than one market sector. As a result, the Company aggregates its operating units into a single segment called Custom-Engineered Products.

Products

      Kaydon works closely with its customers to engineer the required solutions to their design problems. As a custom manufacturer, many diverse applications are served. 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.

      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 inch 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. 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; and ultra high-precision roller bearings for gear box applications.

      Kaydon designs and manufactures hydraulic cylinders with bores ranging from 1.25 to 24 inches and strokes up to 50 feet in length. The Company also provides both chrome plating and foundry products of both grey and ductile steel. In addition, the Company produces a line of high pressure pumps and valves, railroad wheel presses and hydraulic accumulators. The cylinders are used in manlifts, waste shredding machines, utility trucks, cranes, motion compensators, drill equipment and various construction equipment.

      Kaydon 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,

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      Kaydon’s filtration products include industrial liquid filtration systems that remove particulate and water from fuels, lubricants and hydraulic oils in applications ranging from refrigeration units to large power generation turbines; and special coalescing elements and filter housings for diesel fuel filtration in both commercial and military applications.

      Kaydon designs and manufactures 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.

      Kaydon 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. The Company also manufactures pulleys and drive components, which are complementary products.

      Kaydon 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. The Company also designs, manufactures and sells retaining rings and wave springs for various markets including heavy equipment, aircraft, military, hydraulic/pneumatic and machinery applications.

      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.

Patents and Trademarks

      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 1999, 1998 and 1997, sales to no single customer exceeded 10 percent of total sales.

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      Customers can generally be divided into four market sectors: Aerospace & Military Equipment, Replacement Parts & Exports, Special Industrial Machinery and Heavy Industrial Equipment. Sales to these market sectors for 1999, 1998 and 1997 are set forth in the following table:

Net Sales by Market Sectors

A recap of each market sector follows:

  Aerospace & Military Equipment:

      The typical end use for products sold into the Aerospace & Military Equipment market sector includes commercial and military satellite equipment, military and commercial aircraft, and radar and ordnance equipment. The value added products sold into these markets include but are not limited to aircraft jet engine shaft seals and sealing rings, radar and fire control custom bearings, helicopter and gear box assembly bearings, military vehicle fuel filter systems, aircraft landing wheel brake bearings, tank turbine engine shaft seals, military turret azimuth and elevation bearings, and slip-rings and assemblies. The economic factors which impact sales into these markets are primarily domestic aircraft and defense spending levels, including maintenance.

  Replacement Parts & Exports:

      The typical end use for products sold into the Replacement Parts & Exports market sector includes replacement parts sold to major equipment users, the United States Government and through distributors, plus all export sales. The value added products sold into these markets include but are not limited to railroad diesel replacement piston ring sets, spare bearings, filter elements and shaft seals for military equipment, distributor replacement bearings and filter elements for original equipment applications, and slip-rings and assemblies. The economic factors which impact sales into these markets are relatively stable with minor sensitivity to industrial production levels.

  Special Industrial Machinery:

      The typical end use for products sold into the Special Industrial Machinery market sector includes machine tools, material handling equipment, semiconductor manufacturing equipment, medical diagnostic equipment, large air and gas compressors and robotic equipment. The value added products sold into these markets include but are not limited to robotic manipulator bearings, gas transmission line compressor piston and sealing rings, air conditioning compressor filters, printing machine roll bearings, medical scanner bearing systems, hydraulic cylinders, diesel engine piston ring sets, slip-rings and assemblies, and hydraulic actuators for drilling platforms and rescue devices. The economic factors which impact sales into these markets are primarily domestic industrial production levels and capital spending.

  Heavy Industrial Equipment:

      The typical end use for products sold into the Heavy Industrial Equipment market sector includes construction equipment, mining equipment, forestry equipment, and oil field and power generation equipment. The value added products sold into these markets include but are not limited to hydraulic excavator swing bearings, off-road equipment hydraulic filter elements, power generation lubrication oil filter units, sealing

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Marketing

      Kaydon’s sales organization consist 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 serve as a liaison between 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.

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 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 and domestic suppliers. No significant supply problems have been encountered in recent years as relationships with suppliers have generally been good.

Employees

      On December 31, 1999, Kaydon employed 2,362 employees. Hourly employees at the Muskegon, Michigan facilities are represented by the International Association of Machinists and Aerospace Workers. The current collective bargaining agreement is effective until December 3, 2000. The Baltimore, Maryland hourly employees are also represented by the International Association of Machinists and Aerospace Workers. The current collective bargaining agreement is effective until December 9, 2001. Greeneville, Tennessee hourly employees are represented by the United Steelworkers of America, with the current collective bargaining agreement effective until January 3, 2004. Dexter, Michigan hourly employees are represented by the International Union United Automobile, Aerospace and Agricultural Implement Workers of America, with the current collective bargaining agreement effective until November 8, 2002. The hourly employees at Granite Falls, Minnesota are represented by the International Association of Machinists and Aerospace Workers, with the current collective bargaining agreement effective until October 15, 2000. The hourly employees at Great Bend, Kansas are represented by the International Association of Machinists and Aerospace Workers, with the current collective bargaining agreement effective until August 1, 2001. 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 level of total compensation is competitive when compared with similar jobs within the various communities in which its operations are located.

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

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Competition

      Kaydon competes with divisions of SKF Industries, Dover Corporation, Parker Hannifin Corporation, Commercial Intertech 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, hydraulic cylinders, 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.

Information About International Operations

      Information with respect to operations by geographic area appears in Item 8 of this Report in Note 11 to the Consolidated Financial Statements captioned “Business Segment Information.” 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, 1999 and indicates whether the property is owned or leased:

Item 3.  LEGAL PROCEEDINGS

      In June of 1995, the Company, along with certain former officers and directors of the Company and certain other companies and organizations, was named as a defendant in a lawsuit commenced in Bankruptcy Court in the Southern District of New York. The plaintiff was the Creditors Committee formed in connection with the Chapter 11 Bankruptcy Proceeding of Keene Corporation (“Keene”). That action, identified as the “Transactions Lawsuit”, asserted claims against the Company arising from the Company’s 1983 acquisition of certain assets of Keene, and Bairnco Corporation’s 1984 spin-off of the Company’s common stock. As originally filed, the Transactions Lawsuit alleged claims against the Company under state fraudulent conveyance laws, tort claims under successor liability law, and civil RICO claims. The Transactions Lawsuit seeks damages alleged by plaintiffs to be an amount of $700 million, plus interest and punitive damages against the defendants collectively. The RICO claims sought trebling of those damages. The claims asserted in the Transactions Lawsuit are similar to, and supplant, claims previously asserted in certain class actions brought against the Company in 1993, purportedly on behalf of certain persons with asbestos-related claims against Keene.

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      In 1997, in connection with the Bankruptcy Court’s confirmation of Keene’s Plan of Reorganization, the Keene Creditors Trust was created to, among other things, prosecute this lawsuit, and the Trustees of that Trust were substituted as the plaintiffs in place of the Keene Creditors Committee. In addition, the case was transferred from the Bankruptcy Court to the United States District Court for the Southern District of New York. Subsequently, the Company and certain other defendants filed motions to dismiss the complaint for failure to state a claim, and for summary judgment on the grounds that the fraudulent conveyance claims and certain related causes of action were barred by the statute of limitations.

      On October 13, 1998, the Court granted in part and denied in part the Company’s motion to dismiss the complaint, and denied the Company’s motion for summary judgment. With respect to the motion for summary judgment, the Court found that certain groups of asbestos claimants had claims that were not time-barred, and therefore the plaintiffs could assert claims against the Company for both actual fraudulent conveyance and constructive fraudulent conveyance. With respect to the motion to dismiss, the Court granted the Company’s motion to dismiss the fraudulent conveyance claim against it in connection with Bairnco Corporation’s 1984 spin-off of the Company’s common stock, and dismissed all the RICO claims asserted against the Company. The Court denied the Company’s motion to dismiss the successor liability claim, but noted the plaintiffs’ ability to pursue such a claim was subject to their ability to pursue a fraudulent conveyance claim.

      On October 29, 1998, the Company filed a motion for reargument of the Court’s ruling that the plaintiffs’ claims for actual and constructive fraudulent conveyance against the Company are not barred by the applicable statute of limitations. On January 5, 1999, the Court issued a decision on the Company’s motion for reargument, which granted the Company’s motion for reargument with regard to the plaintiffs’ claims for constructive fraudulent conveyance, and, with one minor exception, held those claims were barred by the applicable statute of limitations and dismissed them. However, the Court denied the Company’s motion to dismiss the actual fraudulent conveyance claims. Accordingly, as a result of the Company’s motions, the only claims remaining against the Company are plaintiffs’ claims for actual fraudulent conveyance and for successor liability. In addition, there is, on behalf of certain individual judgment creditors, a limited claim for constructive fraudulent conveyance. The Company does not believe any recovery on this limited claim will be material. The discovery stay previously in place has been lifted, and discovery is in its preliminary stages.

      In other decisions, the Court also dismissed the claims against all the individual defendants except one, and against the professional organizations that had been named as defendants in the case. However, Bairnco Corporation and its other subsidiaries and former subsidiaries remain as defendants in the case.

      Management believes it has meritorious defenses to the claims pending against it in this litigation. Accordingly, no provision has been reflected in the consolidated financial statements for any alleged damages. Management further believes that the outcome of this litigation will not have a material adverse effect on the Company’s financial position.

      Since June 1996, the Company and certain employees have received subpoenas 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 (CH-53E) in which four persons died. The grand jury requested and received documents and records, and Kaydon employee testimony relating to bearings manufactured by Kaydon and used in the Sikorsky helicopter. In addition, a “Mishap Board” led by Sikorsky Aircraft Corporation personnel alleged that product quality problems or deficiencies existed with respect to the Kaydon bearing used in the Sikorsky helicopter described above. Kaydon personnel were excluded from participation on this “Mishap Board.” However, Kaydon has independently evaluated the available evidence and refuted the “Mishap Board” findings in reports 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 and Navy personnel, reinforcing the Company’s position that the bearing quality was not the causative action in the May 9, 1996 accident. During the first half of 1997, the estates of the four deceased individuals filed civil suits against the Company. On July 6, 1998, Sikorsky filed a claim against the Company in those same civil cases claiming damages which they are alleged to have incurred following the May 9, 1996 accident. In October 1998, Kaydon’s insurance company reached settlement agreements with the estates of each plaintiff in the

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      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 will not have a material adverse effect on the Company’s financial position.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable

Market Information and Dividends

      The New York Stock Exchange is the principal market on which the Company’s Common Stock is traded under the symbol KDN . The following table indicates high and low sales prices of the Company’s Common Stock as reported on the New York Stock Exchange Composite Tape and the cash dividends declared per share for the periods indicated.

Effective with the cash dividend declared in November 1999 and paid in January 2000, Kaydon increased the quarterly cash dividends from $0.10 per share to $0.11 per share. The Company expects that its practice of paying quarterly dividends on its Common Stock will continue, although future dividends will continue to depend upon the Company’s earnings, capital requirements, financial condition and other factors.

      As of December 31, 1999, there were 1,224 holders of record of the Company’s Common Stock.

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Item 6.  SELECTED FINANCIAL DATA

      After achieving record net sales, earnings and operating cash flow for the seven previous years, 1999 proved to be a difficult year as Kaydon was negatively impacted in many of its key industrial markets including heavy construction equipment, mining equipment, offshore oil equipment, government spare parts, military, railroad and the aerospace markets. Despite the downturn in these markets served by Kaydon during 1999, the Company has continued its focus on operating and financial strategies to improve operating performance and shareholder returns. These strategies include internal and external programs to strengthen the Company’s competitive positions in key markets, including increased levels of manufacturing efficiency and customer service, new product development and market share initiatives, cost reduction initiatives, cash flow management and the acquisition of selected companies, which can enhance future growth and profitability.

      The discussion which follows should be reviewed in conjunction with the financial statements and related footnotes to assist in understanding the Company’s results of operations, its financial position, cash flows, capital structure and other relevant financial information.

Analysis of 1999 Operations Compared to 1998 Operations

      Net sales of $325.7 million in 1999 decreased 13.4 percent compared to 1998’s record net sales of $376.2 million. Kaydon’s strategic diversification of products and markets has balanced its operating risk over a broad range of industries and markets, generally moderating the cyclical impact of individual markets. During 1999, however, most of the key industrial markets served by Kaydon, including heavy construction equipment, mining equipment, offshore oil equipment, government spare parts, military, railroad and aerospace, experienced extended downturns throughout the year.

      The Company’s gross margin percentage equaled 38.6 percent in 1999, as compared to 40.4 percent achieved in 1998. The gross margin in 1999 primarily reflects the impact of lower sales volumes.

      Selling, general and administrative expenses as a percentage of sales increased slightly to 11.2 percent in 1999, compared to 11.1 percent for 1998. The Company’s cost reduction initiatives enabled costs to remain relatively flat proportionately to sales levels in 1999 compared to 1998.

      Consolidated operating income equaled $89.2 million during 1999, compared to $110.4 million in 1998, a decrease of 19.2 percent, with operating margins of 27.4 percent and 29.3 percent in 1999 and 1998,

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      Net income was $58.8 million, down 17.4 percent from the prior year, with return on sales at 18.0 percent. Diluted earnings per common share decreased 14.7 percent to $1.85 in 1999 based on 31.8 million weighted average common shares outstanding, compared to $2.17 in 1998 based on 32.9 million weighted average common shares outstanding.

      The effective tax rate was 37.5 percent in 1999 compared to 38.0 percent in 1998.

Analysis of 1998 Operations Compared to 1997 Operations

      Record net sales of $376.2 million in 1998 increased 14.3 percent over 1997 net sales of $329.0 million. Kaydon’s strategic diversification of products and markets has balanced its operating risk over a broad range of industries and markets, moderating the cyclical impact of individual markets. As in 1997, the results of the Company’s strategic diversification, including emphasis on niche markets, manufacturing efficiencies and market share initiatives, played an important role in 1998’s performance.

      The Company’s gross margin percentage equaled 40.4 percent in 1998, as compared to 41.7 percent achieved in 1997. The gross margin in 1998 reflects an increased proportion of sales into the Heavy Industrial Equipment market which, in general, has lower gross margins than other Kaydon markets.

      Selling, general and administrative expenses as a percentage of sales decreased to 11.1 percent in 1998, compared to 12.6 percent for 1997. The lower relative expense level was attributable to enhanced cost containment initiatives and slower spending growth to support the larger sale base.

      Consolidated operating income equaled $110.4 million during 1998, compared to $95.7 million in 1997, an increase of 15.4 percent, with operating margins of 29.3 percent and 29.1 percent in 1998 and 1997, respectively. Net interest income in 1998 was $4.4 million, up 17.3 percent from $3.8 million in 1997. The increase in interest income was the result of higher average cash balances throughout the year and a moderate increase in interest rates.

      Net income was $71.2 million, up 15.4 percent from the prior year, with return on net sales at 18.9 percent. Diluted earnings per common share increased 16.7 percent to $2.17 in 1998 based on 32.9 million weighted average common shares outstanding, compared to $1.86 in 1997 based on 33.2 million weighted average common shares outstanding.

      The 1998 effective tax rate of 38.0 percent remained unchanged from 1997.

Liquidity, Working Capital and Cash Flows

      One of the Company’s financial strategies is to maintain a relatively high level of liquidity and cash flow, which continued in 1999. Historically, Kaydon Corporation has generated significant cash flows from operating activities to fund capital expenditures, dividends and other operating requirements. Cash flow generation has been enhanced by the Company’s continuing efforts to improve operating efficiencies, cost reductions and the management of working capital requirements.

      One of the Company’s strengths is its ability to generate cash from operations in excess of requirements for capital investments and dividends.

      Free cash flow is cash from operations remaining after the Company has satisfied its capital investment initiatives to enhance manufacturing efficiencies, expand productive capacity and avail itself of other competitive opportunities. As one of its financial strategies, the Company focuses on maximizing free cash

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      In 1999 the Company again experienced strong operating cash flows as operating activities provided $73.2 million. Working capital improvements offset the loss of net income and resulted in record cash flow from operations in 1999. In 1999 the Company utilized $44.6 million, and in 1998 utilized $39.1 million to repurchase Kaydon common stock. Net capital expenditures to reduce costs, improve quality and expand productive capacity equaled $11.6 million in 1999, $25.4 million in 1998 and $12.8 million in 1997. To expand productive capacity in 1998, $13.3 million of capital spending was provided for capacity expansions through the purchase of a new bearings manufacturing plant and equipment in Mocksville, North Carolina, and the addition of capacity at existing plants in Blacksburg, Virginia and Monterrey, Mexico. The Company continues its active corporate development efforts to complement internal growth through significant investments for the plant expansions and the acquisition of additional companies to meet Kaydon’s well-disciplined criteria. Late in 1999, the Company used a portion of its significant cash resources to acquire two companies for a total of $13.8 million. These acquisitions, with combined annual sales of approximately $12.0 million will complement the Company’s existing operations. Filterdyne Filtration Systems, Inc. located in LaGrange, Georgia, is a manufacturer of custom-designed filtration and vacuum distillation systems. Filterdyne’s product lines will strengthen and complement the offerings of Kaydon’s growing family of products manufactured and sold by its Filtration division. Focal Technologies, Inc., located in Halifax, Nova Scotia, Canada, designs and manufactures fiber-optic, electronic data and fluid transmission devices. Although its products are currently focused in marine end-use markets, Focal Technologies’ broad-band expertise will expand and complement Kaydon’s slip-ring product technology for products manufactured by our Electro-Tec Corp. and I.D.M. Electronics, Ltd. subsidiaries. In 1997 the Company acquired two companies for a total of $27.4 million. Common stock dividends paid in 1999, 1998 and 1997 equaled $12.8 million, $11.8 million and $9.2 million. The Company redeemed $8.0 million of Industrial Revenue Bonds in 1997.

      The Company believes its cash flows from operations, along with its borrowing capacity and access to financial markets are adequate to fund its strategies for future growth, including working capital, expenditures for manufacturing expansion and efficiencies, selected stock repurchases, market share initiatives and corporate development activities.

      At December 31, 1999 the Company’s current ratio was 3.9 to 1 and working capital totaled $157.4 million, including $89.7 million of cash and cash equivalents. At December 31, 1998, the current ratio was 3.2 to 1 and working capital totaled $158.6 million, including cash and cash equivalents of $96.2 million.

      The Company’s working capital turnover was 2.1 times in 1999, compared to 2.4 times in 1998. Excluding cash, the working capital turnover was 4.8 times in 1999 compared to 6.0 times in 1998. The Company’s inventory turnover ratio was 3.3 times in 1999 compared to 3.5 times in 1998, while the days-sales year-end balance equaled 57 days in 1999 compared to 53 days in 1998.

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      During 1999, the Company entered into a $300.0 million revolving credit facility, which terminates in 2004. This new facility replaces the Company’s former $100.0 million credit facility. The new facility permits the Company to borrow under several different rate options. At December 31, 1999 the Company had available credit of $300.0 million under the new facility.

      The Company repurchased 1,684,151 shares of its common stock in 1999 for $44.6 million compared to 1,127,153 shares for $39.1 million in 1998. Open market repurchases of common stock in 1999 totaled 1,534,500 shares for $39.9 million. In September 1999, the Board of Directors approved an increased stock repurchase program totaling 5,000,000 shares. Of the 5,000,000 shares authorized by the Board of Directors for repurchase under the existing plan, 516,545 shares have been repurchased as of December 31, 1999.

Corporate Development

      The Company maintains an active acquisition program, which has made important contributions to the Company’s growth. In 1999, as discussed earlier in the Liquidity, Working Capital and Cash Flows section, the Company used a portion of its significant cash resources to acquire two companies for a total of $13.8 million. During the last five years, the Company acquired six businesses for $75.3 million (including the assumption of certain liabilities).

      The Company utilizes well-disciplined criteria in selecting acquisitions, including the long-term enhancement of its financial strength and shareholder value.

      The initial earnings benefit of acquisitions to the Company is less than the corresponding increase in sales since earnings are reduced by acquisition related costs such as interest and added depreciation and amortization. Generally, the anticipated earnings improvement for the Company comes from subsequent growth of acquired companies, since future incremental sales are not burdened with these fixed acquisition costs. Future earnings are also anticipated to benefit from improved operating efficiencies and cost containment programs.

Litigation

      The Company is a party to various lawsuits and other matters arising in the normal course of business that are pending. Refer to Note 10 in the Notes to Consolidated Financial Statements for further information.

Year 2000

      This Year 2000 disclosure is the most current information available and replaces all previous disclosures made by the Company in its filings with the Securities and Exchange Commission on Form 10-Q and Form 10-K, and in any previous Annual Report to shareholders.

      The Company believes that it has successfully managed the readiness of its systems with respect to the requirements for transaction processing in the Year 2000. The proprietary Company internal system was modified to be Year 2000 compliant in 1997. Review and testing of the modifications was completed during 1998. All modifications were reviewed a final time during 1999. The costs for these modifications were expensed as routine internal programming costs during the period incurred and were not material. No material additional costs were incurred by the Company during fiscal year 1999. Embedded technology in facilities systems and machinery and equipment were inventoried and assessed. Also, in accordance with the Company’s Year 2000 readiness plan, the Company assessed the Year 2000 systems readiness of its customers, vendors and suppliers and developed contingency plans as needed for those who were not expected to be Year 2000 compliant. Any costs for remediation of third party systems issues were borne by those third parties. The Company has experienced no material adverse effects related to the readiness of its systems for the Year 2000. Furthermore, any impact on the financial condition or results of operations for periods presented as a result of the advent of Year 2000 is not material.

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Forward-Looking Statements

      This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-K contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about the market sectors in which Kaydon Corporation operates, management’s beliefs, and assumptions made by management. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “should”, “going forward”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions (“Business Risks”) which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

      Business Risks include increasing price and product competition by foreign and domestic competitors, including new entrants; the Company’s ability to continue to introduce competitive new products on a timely, cost-effective basis; the mix of products; the achievement of lower costs and expenses; the reliance on large customers; the cyclical nature of the markets served by the Company; the outcome of pending and future litigation and governmental proceedings; and continued availability of financing and financial resources in the amounts, at the times and on the terms required to support the Company’s future business and growth strategies. These are representative of the Business Risks that could affect the outcome of the forward-looking statements. In addition, such forward-looking statements could be affected by general industry and market conditions, including interest rate fluctuations and other Business Risks.

      The Company is exposed to certain market risks which exist as part of its ongoing business operations including interest rates and foreign currency exchange rates. At December 31, 1999, the Company believes that the potential effect of these risks in the near term should not materially affect the Company’s financial position.

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Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Kaydon Corporation:

      We have audited the accompanying consolidated balance sheets of Kaydon Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States.

      Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of valuation and qualifying accounts is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Detroit, Michigan

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KAYDON CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these statements.

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KAYDON CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

The accompanying notes are an integral part of these statements.

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KAYDON CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

[Additional columns below]

[Continued from above table, first column(s) repeated]

							Accumulated
			Restricted				Other
			Stock				Comprehensive
			Awards				Loss				Total
Balance, December 31, 1996			$	—			$	(2,825,000	)		$	232,056,000
Net income, 1997				—				—				61,666,000
Other comprehensive income (loss), net of tax:
	Minimum pension liability, net of $426,000 tax benefit			—				688,000				688,000
	Unrealized translation adjustments			—				(1,190,000	)			(1,190,000	)
Comprehensive income
Cash dividends declared				—				—				(9,901,000	)
Issuance of 132,670 shares of common stock under stock option plans				—				—				2,290,000
Purchase of 73,591 shares of treasury stock				—				—				(2,013,000	)
Two-for-one stock split				—				—				—
Balance, December 31, 1997			$	—			$	(3,327,000	)*		$	283,596,000
Net income, 1998				—				—				71,184,000
Other comprehensive income (loss), net of tax:
	Minimum pension liability, net of ($8,000) tax			—				(15,000	)			(15,000	)
	Unrealized translation adjustments			—				861,000				861,000
Comprehensive income
Cash dividends declared				—				—				(12,048,000	)
Issuance of 285,866 shares of common stock under stock option plans				—				—				7,143,000
Purchase of 1,127,153 shares of treasury stock				—				—				(39,065,000	)
Balance, December 31, 1998			$	—			$	(2,481,000	)*		$	311,656,000
Net income, 1999				—				—				58,779,000
Other comprehensive income (loss), net of tax:
	Minimum pension liability, net of ($31,000) tax			—				(50,000	)			(50,000	)
	Unrealized translation adjustments			—				(525,000	)			(525,000	)
Comprehensive income
Cash dividends declared				—				—				(12,988,000	)
Issuance of 208,000 shares of common stock under stock option plans				—				—				4,594,000
Purchase of 1,684,151 shares of treasury stock, including restricted stock awards				(10,833,000	)			—				(44,516,000	)
Balance, December 31, 1999			$	(10,833,000	)		$	(3,056,000	)*		$	316,950,000

The accompanying notes are an integral part of these statements.

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KAYDON CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  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 expenses during the reporting period. Actual results could differ from those estimates.

  Cash and Cash Equivalents:

      The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At December 31, 1999 the Company had $86.7 million invested in prime commercial paper of several United States issuers having the highest rating given by one of the two principal rating agencies.

  Inventories:

      Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out method. Inventories are summarized as follows at December 31: