-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KXxjkRHKEiWi70P+x6DQZLybBkF54KEVDejwmo+6S+C7ugIhxlDVg0WeUrA3sDD3 pHlqEqhFHCTWvx13lhnJaw== 0000950134-96-004498.txt : 19960826 0000950134-96-004498.hdr.sgml : 19960826 ACCESSION NUMBER: 0000950134-96-004498 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19960823 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE CONSOLIDATED INDUSTRIES INC CENTRAL INDEX KEY: 0000055604 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 370364250 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-09117 FILM NUMBER: 96619506 BUSINESS ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144580028 MAIL ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE STEEL & WIRE CO DATE OF NAME CHANGE: 19710506 S-4/A 1 AMENDMENT TO FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1996 REGISTRATION NO. 333-09117 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- KEYSTONE CONSOLIDATED INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 3315 37-0364250 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification Number) organization) RALPH P. END VICE PRESIDENT AND GENERAL COUNSEL KEYSTONE CONSOLIDATED INDUSTRIES, INC. THREE LINCOLN CENTRE THREE LINCOLN CENTRE 5430 LBJ FREEWAY, SUITE 1740 5430 LBJ FREEWAY, SUITE 1740 DALLAS, TEXAS 75240-2697 DALLAS, TEXAS 75240-2697 (214) 458-0028 (214) 458-0028 (Address, including zip code, and telephone (Name, address, including zip code, and number, telephone number, including area code, of registrant's principal including area code, of agent for service) executive offices)
--------------------- Copies to: JAMES G. VETTER, JR. PETER GOLDEN GODWIN & CARLTON, P.C. FRIED, FRANK, HARRIS, SHRIVER & JACOBSON 901 MAIN STREET, SUITE 2500 ONE NEW YORK PLAZA DALLAS, TEXAS 75202-3714 NEW YORK, NEW YORK 10004
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As promptly as practicable after this Registration Statement becomes effective and the effective time of the proposed merger of a wholly owned subsidiary of Registrant with DeSoto, Inc. ("DeSoto"), as described in the Agreement and Plan of Reorganization dated as of June 26, 1996 attached as Appendix A to the Joint Proxy Statement/Prospectus forming a part of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / CALCULATION OF REGISTRATION FEE ========================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OFFERING PRICE AGGREGATE OF SECURITIES TO BE AMOUNT TO BE PER OFFERING AMOUNT OF REGISTERED REGISTERED UNIT(1) PRICE REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------- Common Stock, $1.00 par value............ 3,637,000 Shares(1) N.A.(2) $28,017,007(2) $9,661.04(3) ==========================================================================================================
(1) Represents the maximum number of shares of common stock, $1.00 par value, of Registrant issuable to stockholders of DeSoto upon consummation of the merger of a wholly-owned subsidiary of Registrant with and into DeSoto (the "Merger"). (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Section 6(b) of the Securities Act of 1933, as amended, and Rule 457(f)(1) thereunder on the basis of $5.75, the average of the high and low sale prices of common stock, $1.00 par value, of DeSoto ("DeSoto Common Stock") as reported in the consolidated reporting system for the New York Stock Exchange on August 16, 1996, and 4,872,523, the maximum number of shares of DeSoto Common Stock that may be cancelled in the Merger. (3) Includes $9,599.35 paid previously by Registrant. --------------------- THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 KEYSTONE CONSOLIDATED INDUSTRIES, INC. THREE LINCOLN CENTRE 5430 LBJ FREEWAY, SUITE 1740 DALLAS, TEXAS 75240-2697 August 23, 1996 Dear Stockholder: A special meeting of stockholders (the "Keystone Meeting") of Keystone Consolidated Industries, Inc., a Delaware corporation ("Keystone"), will be held on Friday, September 27, 1996, at 10:00 a.m., local time, at the offices of Keystone at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240-2697. At the Keystone Meeting you will be asked to consider and vote upon a proposal to approve the issuance of Keystone common stock, $1.00 par value per share ("Keystone Common Stock") pursuant to the Agreement and Plan of Reorganization dated as of June 26, 1996 (the "Reorganization Agreement"), between Keystone and DeSoto, Inc., a Delaware corporation ("DeSoto"), which provides for the merger of DeSoto with a newly formed, wholly owned subsidiary of Keystone ("Sub"), with DeSoto surviving the merger as a wholly owned subsidiary of Keystone (the "Merger"). Pursuant to the Merger, each outstanding share of DeSoto common stock, $1.00 par value per share ("DeSoto Common Stock"), and the associated rights issued pursuant to the Rights Agreement between DeSoto and Harris Trust and Savings Bank (other than shares owned by DeSoto or its subsidiaries) will be converted into the right to receive .7465 of a share (the "Exchange Ratio") of Keystone Common Stock; each outstanding share of DeSoto Series B Senior Preferred Stock, $1.00 par value per share, will be converted into the right to receive the Exchange Ratio of a share of Keystone Series A Senior Preferred Stock, no par value per share; and each outstanding option to purchase DeSoto Common Stock will be assumed by Keystone, and at the effective time of the Merger each such option will constitute an option to acquire for the same aggregate exercise price such number of shares of Keystone Common Stock as the holder would have been entitled to receive had such holder exercised such option in full immediately prior to the effective time of the Merger. Pursuant to a warrant conversion agreement, upon consummation of the Merger, one-half of the warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock ("DeSoto Warrants") will be cancelled and the remaining one-half of the DeSoto Warrants will be converted into warrants to purchase 447,900 shares of Keystone Common Stock (representing the shares of DeSoto Common Stock subject to the remaining DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price of approximately $9.38 per share (representing the exercise price of a DeSoto Warrant divided by the Exchange Ratio). The Merger is structured to qualify as a tax free reorganization pursuant to Section 368 of the Internal Revenue Code of 1986, as amended. Upon consummation of the Merger, the Keystone Board of Directors will be expanded to include William Spier and William P. Lyons, two current directors of DeSoto, in addition to the current members of the Board of Directors of Keystone. Your Board of Directors has carefully considered the terms and conditions of the proposed Merger and has determined that the issuance of Keystone Common Stock pursuant to the Reorganization Agreement is fair to, and in the best interests of, Keystone and its stockholders. In addition, the Board of Directors has received a written opinion from its financial advisor, PaineWebber Incorporated, that, as of the date hereof, the consideration to be paid by Keystone in the Merger is fair to Keystone stockholders (except for Contran Corporation and its affiliates as to whom PaineWebber Incorporated has expressed no opinion) from a financial point of view. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT AND THE MERGER AND RECOMMENDS THAT THE STOCKHOLDERS OF KEYSTONE APPROVE THE ISSUANCE OF KEYSTONE COMMON STOCK PURSUANT TO THE REORGANIZATION AGREEMENT. In the material accompanying this letter, you will find a Notice of Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be taken by Keystone stockholders at the Keystone Meeting (as well as the actions to be taken by the DeSoto stockholders at their special meeting) and a proxy. The Joint Proxy Statement/Prospectus more fully describes the proposed Merger and includes information about Keystone and DeSoto. All stockholders are cordially invited to attend the Keystone Meeting in person. However, whether or not you plan to attend the Keystone Meeting, please complete, sign, date and return your proxy in the enclosed envelope. If you attend the Keystone Meeting, you may vote in person if you wish, even though you have previously returned your proxy. It is important that your shares be represented and voted at the Keystone Meeting. Sincerely, Glenn R. Simmons Chairman of the Board and Chief Executive Officer 3 KEYSTONE CONSOLIDATED INDUSTRIES, INC. THREE LINCOLN CENTRE 5430 LBJ FREEWAY, SUITE 1740 DALLAS, TEXAS 75240-2697 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON FRIDAY, SEPTEMBER 27, 1996 TO THE STOCKHOLDERS OF KEYSTONE CONSOLIDATED INDUSTRIES, INC.: A special meeting of stockholders (the "Keystone Meeting") of Keystone Consolidated Industries, Inc., a Delaware corporation ("Keystone"), will be held on Friday, September 27, 1996, at 10:00 a.m., local time, at the offices of Keystone at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240-2697, for the following purposes: 1. To consider and vote upon a proposal to approve the issuance of Keystone common stock, $1.00 par value per share ("Keystone Common Stock"), pursuant to the Agreement and Plan of Reorganization dated as of June 26, 1996 (the "Reorganization Agreement"), between Keystone and DeSoto, Inc., a Delaware corporation ("DeSoto"), which provides for the merger of DeSoto with a newly formed, wholly owned subsidiary of Keystone ("Sub"), with DeSoto surviving the merger as a wholly owned subsidiary of Keystone (the "Merger"). Pursuant to the Merger, each outstanding share of DeSoto common stock, $1.00 par value per share ("DeSoto Common Stock"), and the associated rights issued pursuant to the Rights Agreement between DeSoto and Harris Trust and Savings Bank (other than shares owned by DeSoto or its subsidiaries) will be converted into the right to receive .7465 of a share (the "Exchange Ratio") of Keystone Common Stock; each outstanding share of DeSoto Series B Senior Preferred Stock, $1.00 par value per share, will be converted into the right to receive the Exchange Ratio of a share of Keystone Series A Senior Preferred Stock, no par value per share; and each outstanding option to purchase DeSoto Common Stock will be assumed by Keystone, and at the effective time of the Merger each such option will constitute an option to acquire for the same aggregate exercise price such number of shares of Keystone Common Stock as the holder would have been entitled to receive had such holder exercised such option in full immediately prior to the effective time of the Merger. Pursuant to a warrant conversion agreement, upon consummation of the Merger, one-half of the warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock ("DeSoto Warrants") will be cancelled and the remaining one-half of the DeSoto Warrants will be converted into warrants to purchase 447,900 shares of Keystone Common Stock (representing the shares of DeSoto Common Stock subject to the remaining DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price of approximately $9.38 per share (representing the exercise price of a DeSoto Warrant divided by the Exchange Ratio). The Merger is structured to qualify as a tax free reorganization pursuant to Section 368 of the Internal Revenue Code of 1986, as amended. 2. To transact such other business as may properly come before the Keystone Meeting or any adjournment thereof. The foregoing items of business are fully described in the Joint Proxy Statement/Prospectus accompanying this Notice. Only stockholders of record of Keystone Common Stock at the close of business on August 23, 1996 are entitled to notice of, and will be entitled to vote at, the Keystone Meeting or any adjournment thereof. Approval of the issuance of shares of Keystone Common Stock pursuant to the Reorganization Agreement requires the affirmative vote of the holders of a majority of the shares of Keystone Common Stock present in person or by proxy at the Keystone Meeting and voting. BY ORDER OF THE BOARD OF DIRECTORS Glenn R. Simmons Chairman of the Board and Chief Executive Officer Dallas, Texas August 23, 1996 TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE KEYSTONE MEETING, YOU ARE URGED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE KEYSTONE MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED. 4 DESOTO, INC. 900 EAST WASHINGTON STREET JOLIET, ILLINOIS 60433 AUGUST 23, 1996 Dear Stockholder: A special meeting of stockholders (the "DeSoto Meeting") of DeSoto, Inc., a Delaware corporation ("DeSoto"), will be held on Friday, September 27, 1996, at 10:00 a.m., local time, at the Bank of Montreal, 430 Park Avenue, 16th Floor, New York, New York. At the DeSoto Meeting you will be asked to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Reorganization dated as of June 26, 1996 (the "Reorganization Agreement"), between Keystone Consolidated Industries, Inc., a Delaware corporation ("Keystone"), and DeSoto, which provides for the merger of DeSoto with a newly formed, wholly owned subsidiary of Keystone ("Sub"), with DeSoto surviving the merger as a wholly owned subsidiary of Keystone (the "Merger"). Pursuant to the Merger, each outstanding share of DeSoto common stock, $1.00 par value per share ("DeSoto Common Stock"), and the associated rights issued pursuant to the Rights Agreement between DeSoto and Harris Trust and Savings Bank (other than shares owned by DeSoto or its subsidiaries) will be converted into the right to receive .7465 of a share (the "Exchange Ratio") of Keystone common stock, $1.00 par value per share ("Keystone Common Stock"); each outstanding share of DeSoto Series B Senior Preferred Stock, $1.00 par value per share, will be converted into the right to receive the Exchange Ratio of a share of Keystone Series A Senior Preferred Stock, no par value per share; and each outstanding option to purchase DeSoto Common Stock will be assumed by Keystone, and at the effective time of the Merger each such option will constitute an option to acquire for the same aggregate exercise price such number of shares of Keystone Common Stock as the holder would have been entitled to receive had such holder exercised such option in full immediately prior to the effective time of the Merger. Pursuant to a warrant conversion agreement, upon consummation of the Merger, one-half of the warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock ("DeSoto Warrants") will be cancelled and the remaining one-half of the DeSoto Warrants will be converted into warrants to purchase 447,900 shares of Keystone Common Stock (representing the shares of DeSoto Common Stock subject to the remaining DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price of approximately $9.38 per share (representing the exercise price of a DeSoto Warrant divided by the Exchange Ratio). The Merger is structured to qualify as a tax free reorganization pursuant to Section 368 of the Internal Revenue Code of 1986, as amended. Upon consummation of the Merger, the Keystone Board of Directors will be expanded to include William Spier, the Chairman of the Board and Chief Executive Officer of DeSoto, and William P. Lyons, another current director of DeSoto, in addition to all of the current members of the Board of Directors of Keystone. Your Board of Directors has carefully considered the terms and conditions of the proposed Merger and has determined that the Merger is fair to, and in the best interests of, DeSoto and its stockholders. In addition, the Board of Directors has received a written opinion from its financial advisor, Salomon Brothers Inc, that, as of the date hereof, the Exchange Ratio in the Merger is fair, from a financial point of view, to the holders of DeSoto Common Stock. THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE REORGANIZATION AGREEMENT AND THE MERGER AND UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF DESOTO APPROVE AND ADOPT THE REORGANIZATION AGREEMENT. In the material accompanying this letter, you will find a Notice of Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be taken by DeSoto stockholders at the DeSoto Meeting (as well as the actions to be taken by the Keystone stockholders at their special meeting) and a proxy. The Joint Proxy Statement/Prospectus more fully describes the proposed Merger and includes information about Keystone and DeSoto. All stockholders are cordially invited to attend the DeSoto Meeting in person. However, whether or not you plan to attend the DeSoto Meeting, please complete, sign, date and return your proxy in the enclosed envelope. If you attend the DeSoto Meeting, you may vote in person if you wish, even though you have previously returned your proxy. It is important that your shares be represented and voted at the DeSoto Meeting. Sincerely, William Spier Chairman of the Board and Chief Executive Officer 5 DESOTO, INC. 900 EAST WASHINGTON STREET JOLIET, ILLINOIS 60433 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON FRIDAY, SEPTEMBER 27, 1996 TO THE STOCKHOLDERS OF DESOTO, INC.: A special meeting of stockholders (the "DeSoto Meeting") of DeSoto, Inc., a Delaware corporation ("DeSoto"), will be held on Friday, September 27, 1996, at 10:00 a.m., local time, at the offices of DeSoto at the Bank of Montreal, 430 Park Avenue, 16th Floor, New York, New York, for the following purposes: 1. To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Reorganization dated as of June 26, 1996 (the "Reorganization Agreement"), between Keystone Consolidated Industries, Inc., a Delaware corporation ("Keystone"), and DeSoto, which provides for the merger of DeSoto with a newly formed, wholly owned subsidiary of Keystone ("Sub"), with DeSoto surviving the merger as a wholly owned subsidiary of Keystone (the "Merger"). Pursuant to the Merger, each outstanding share of DeSoto common stock, $1.00 par value per share ("DeSoto Common Stock"), and the associated rights issued pursuant to the Rights Agreement between DeSoto and Harris Trust and Savings Bank (other than shares owned by DeSoto or its subsidiaries) will be converted into the right to receive .7465 of a share (the "Exchange Ratio") of Keystone common stock, $1.00 par value per share ("Keystone Common Stock"); each outstanding share of DeSoto Senior Preferred Stock, $1.00 par value per share ("DeSoto Preferred Stock"), will be converted into the right to receive the Exchange Ratio of a share of Keystone Series A Senior Preferred Stock, no par value per share; and each outstanding option to purchase DeSoto Common Stock will be assumed by Keystone, and at the effective time of the Merger each such option will constitute an option to acquire for the same aggregate exercise price such number of shares of Keystone Common Stock as the holder would have been entitled to receive had such holder exercised such option in full immediately prior to the effective time of the Merger. Pursuant to a warrant conversion agreement, upon consummation of the Merger, one-half of the warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock ("DeSoto Warrants") will be cancelled and the remaining one-half of the DeSoto Warrants will be converted into warrants to purchase 447,900 shares of Keystone Common Stock (representing the shares of DeSoto Common Stock subject to the remaining DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price of approximately $9.38 per share (representing the exercise price of a DeSoto Warrant divided by the Exchange Ratio). The Merger is structured to qualify as a tax free reorganization pursuant to Section 368 of the Internal Revenue Code of 1986, as amended. 2. To transact such other business as may properly come before the DeSoto Meeting or any adjournment thereof. The foregoing items of business are fully described in the Joint Proxy Statement/Prospectus accompanying this Notice. Only stockholders of record of DeSoto Common Stock and DeSoto Preferred Stock at the close of business on August 23, 1996 are entitled to notice of, and will be entitled to vote at, the DeSoto Meeting. Approval of the Reorganization Agreement will require the affirmative vote of the holders of a majority of the outstanding shares of DeSoto Common Stock and DeSoto Preferred Stock entitled to vote thereon, voting together as a single class. BY ORDER OF THE BOARD OF DIRECTORS William Spier Chairman of the Board and Chief Executive Officer Joliet, Illinois August 23, 1996 TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE DESOTO MEETING, YOU ARE URGED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE DESOTO MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED. THE PROXY SOLICITOR FOR DESOTO: GEORGESON & COMPANY INC. CALL TOLL-FREE (800) 223-2064 6 KEYSTONE CONSOLIDATED INDUSTRIES, INC. DESOTO, INC. JOINT PROXY STATEMENT --------------------- KEYSTONE CONSOLIDATED INDUSTRIES, INC. PROSPECTUS This Joint Proxy Statement of Keystone Consolidated Industries, Inc., a Delaware corporation ("Keystone"), and DeSoto, Inc., a Delaware corporation ("DeSoto"), and this Prospectus of Keystone (the "Joint Proxy Statement/Prospectus") is being furnished to the stockholders of Keystone, in connection with the solicitation of proxies by the Keystone Board of Directors for use at the special meeting of Keystone stockholders (the "Keystone Meeting") to be held at 10:00 a.m., local time, on Friday, September 27, 1996, at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240-2697, and at any adjournments or postponements of the Keystone Meeting. This Joint Proxy Statement/Prospectus is also being furnished to the stockholders of DeSoto, in connection with the solicitation of proxies by the DeSoto Board of Directors for use at the special meeting of DeSoto stockholders (the "DeSoto Meeting") to be held at 10:00 a.m., local time, on Friday, September 27, 1996, at the Bank of Montreal, 430 Park Avenue, 16th Floor, New York, New York, and at any adjournments or postponements of the DeSoto Meeting. This Joint Proxy Statement/Prospectus constitutes the Prospectus of Keystone for use in connection with the offer and issuance of shares of Keystone common stock, $1.00 par value per share ("Keystone Common Stock"), pursuant to the merger (the "Merger") of a newly formed, wholly owned subsidiary of Keystone ("Sub") with and into DeSoto. As a result of the Merger, DeSoto will become a wholly owned subsidiary of Keystone. Upon the effectiveness of the Merger (the "Effective Time"), each outstanding share of DeSoto common stock, $1.00 par value per share ("DeSoto Common Stock") (other than shares owned by DeSoto or its subsidiaries), and the associated rights issued pursuant to the Rights Agreement between DeSoto and Harris Trust and Savings Bank, will be converted into the right to receive .7465 of a share of Keystone Common Stock (the "Exchange Ratio"); each outstanding share of DeSoto Series B Senior Preferred Stock, $1.00 par value per share ("DeSoto Preferred Stock"), will be converted into the right to receive .7465 of a share of Keystone Series A Senior Preferred Stock, no par value per share ("Keystone Preferred Stock"); and each outstanding option to purchase DeSoto Common Stock will be assumed by Keystone and converted into an option to acquire for the same aggregate exercise price such number of shares of Keystone Common Stock as the holder would have been entitled to receive had such holder exercised such option in full immediately prior to the Effective Time. Pursuant to a warrant conversion agreement, upon consummation of the Merger, one-half of the warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock ("DeSoto Warrants") will be cancelled and the remaining one-half of the DeSoto Warrants will be converted into warrants to purchase 447,900 shares of Keystone Common Stock ("Keystone Warrants") (representing the shares of DeSoto Common Stock subject to the remaining DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price of approximately $9.38 per share (representing the exercise price of a DeSoto Warrant divided by the Exchange Ratio). Based upon the number of shares of the DeSoto Common Stock, DeSoto Preferred Stock and Keystone Common Stock outstanding as of July 22, 1996, there will be an aggregate of approximately 3,500,000 shares of Keystone Common Stock issued in connection with the Merger, representing approximately thirty eight percent (38%) of the total number of shares of Keystone Common Stock to be outstanding immediately after consummation of the Merger, and 435,456 shares of Keystone Preferred Stock issued in connection with the Merger, representing one hundred percent (100%) of the total number of shares of Keystone Preferred Stock to be outstanding immediately after consummation of the Merger. Furthermore, as a result of the Merger, and as soon as practicable thereafter, Keystone will merge its defined benefit pension plans with and into the DeSoto defined benefit pension plan. See "The Merger and Related Transactions -- Actions Subsequent to the Merger -- Merger of Pension Plans." The Merger is structured to qualify as a tax free reorganization pursuant to Section 368 of the Internal Revenue Code of 1986, as amended. On August 21, 1996, the closing sales prices on the New York Stock Exchange ("NYSE") of Keystone Common Stock and DeSoto Common Stock were $9.75 and $5.75, respectively. The DeSoto Preferred Stock has not been, and the Keystone Preferred Stock is not expected to be, listed for trading on any stock exchange or quotation system. This Joint Proxy Statement/Prospectus and the accompanying forms of proxy are first being mailed to stockholders of Keystone and DeSoto on or about August 26, 1996. THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION, AND STOCKHOLDERS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO ON PAGE 21 UNDER "RISK FACTORS." THE SHARES OF KEYSTONE COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS AUGUST 23, 1996. 7 TABLE OF CONTENTS
PAGE ---- AVAILABLE INFORMATION............................................................... 2 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................... 3 SUMMARY............................................................................. 5 RISK FACTORS........................................................................ 21 THE KEYSTONE MEETING................................................................ 25 THE DESOTO MEETING.................................................................. 27 THE MERGER AND RELATED TRANSACTIONS................................................. 28 THE REORGANIZATION AGREEMENT........................................................ 42 DESCRIPTION OF KEYSTONE CAPITAL STOCK............................................... 50 INFORMATION ABOUT DESOTO............................................................ 51 CERTAIN INFORMATION ABOUT KEYSTONE.................................................. 64 COMPARISON OF RIGHTS OF STOCKHOLDERS OF KEYSTONE AND DESOTO......................... 72 EXPERTS............................................................................. 77 LEGAL MATTERS....................................................................... 77 STOCKHOLDER PROPOSALS............................................................... 77 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.............................. P-1 DESOTO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-1 APPENDICES A AGREEMENT AND PLAN OF REORGANIZATION........................................ A-CP B OPINION OF PAINEWEBBER INCORPORATED......................................... B-1 C OPINION OF SALOMON BROTHERS INC............................................. C-1 D KEYSTONE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995........................................................................ D-1 E KEYSTONE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996........................................................................ E-1
NO PERSON HAS BEEN AUTHORIZED BY KEYSTONE OR DESOTO TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY KEYSTONE OR DESOTO. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY THIS JOINT PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF. AVAILABLE INFORMATION Keystone and DeSoto are each subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). These materials can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New 2 8 York 10048. Copies of these materials can also be obtained from the Commission at prescribed rates by writing to the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, registration statements and certain other documents filed with the Commission through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's site on the Internet's World Wide Web located at http://www.sec.gov. The Registration Statement, of which this Joint Proxy Statement/Prospectus is part, and all exhibits thereto and amendments thereof, have been filed with the Commission through EDGAR. Under the rules and regulations of the Commission, the solicitation of proxies from stockholders of DeSoto to approve and adopt the Reorganization Agreement (as defined below) constitutes an offering of the Keystone Common Stock to be issued in connection with the Merger. Accordingly, Keystone has filed with the Commission a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to such offering (the "Registration Statement"). This Joint Proxy Statement/Prospectus constitutes the prospectus of Keystone that is filed as part of the Registration Statement. Other parts of the Registration Statement are omitted from this Joint Proxy Statement/Prospectus in accordance with the rules and regulations of the Commission. Copies of the Registration Statement, including the exhibits to the Registration Statement and other material that is not included herein, may be inspected, without charge, at the offices of the Commission referred to above, or obtained at prescribed rates from the Public Reference Section of the Commission at the address set forth above. The Registration Statement and other information with respect to Keystone and DeSoto are available for inspection at the library of the NYSE, 20 Broad Street, New York, New York 10005. Statements made in this Joint Proxy Statement/Prospectus concerning the contents of any contract or other documents are not necessarily complete. With respect to each contract or other document filed as an exhibit to the Registration Statement, reference is hereby made to that exhibit for a more complete description of the matter involved, and each such statement is hereby qualified in its entirety by such reference. All information contained in this Joint Proxy Statement/Prospectus relating to Keystone has been supplied by Keystone, and all information relating to DeSoto has been supplied by DeSoto. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE THIS JOINT PROXY STATEMENT/PROSPECTUS MAY INCORPORATE DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THERE WILL BE PROVIDED WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR ALL DOCUMENTS INCORPORATED BY REFERENCE HEREIN (EXCLUDING EXHIBITS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE HEREIN). SUCH REQUESTS SHOULD BE DIRECTED TO KEYSTONE CONSOLIDATED INDUSTRIES, INC., THREE LINCOLN CENTRE, 5430 LBJ FREEWAY, SUITE 1740, DALLAS, TEXAS 75240-2697, ATTENTION: RALPH P. END, VICE PRESIDENT AND GENERAL COUNSEL (TELEPHONE (214) 458-0028). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS IN ADVANCE OF THE SPECIAL MEETINGS TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES, ANY SUCH REQUEST SHOULD BE MADE BY SEPTEMBER 17, 1996. KEYSTONE INCORPORATES HEREIN BY REFERENCE KEYSTONE'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 ("1995 10-K") AND KEYSTONE'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 1996 AND JUNE 30, 1996. COPIES OF THE 1995 10-K AND KEYSTONE'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 ARE INCLUDED AS APPENDICES TO THIS JOINT PROXY STATEMENT/PROSPECTUS. All reports and definitive proxy or information statements filed by Keystone pursuant to Sections 13(a), 13(c), or 14 or 15(d) of the Exchange Act subsequent to the date of this Joint Proxy Statement/Prospectus and prior to the date of the Keystone Meeting shall be deemed incorporated by reference into this Joint Proxy Statement/Prospectus from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated herein shall be deemed to be modified or superseded for purposes of this Joint Proxy Statement/Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or 3 9 supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Joint Proxy Statement/Prospectus. The statements in this Joint Proxy Statement/Prospectus relating to matters that are not historical facts, including, but not limited to, statements found in the "Summary," "Risk Factors," "The Merger and Related Transactions," "The Reorganization Agreement," "Information About DeSoto," "Certain Information About Keystone" and "Unaudited Pro Forma Consolidated Financial Information" sections are forward looking statements that involve a number of risks and uncertainties. Factors that could cause actual future results to differ materially from those expressed in such forward looking statements include, but are not limited to, cost of raw materials, future supply and demand for Keystone and DeSoto products (including the seasonality thereof), general economic conditions, competitive products and substitute products, customer and competitor strategies, the impact of pricing and production decisions, environmental matters, government regulations and possible changes therein, and the ultimate resolution of pending litigation and possible future litigation as discussed in this Joint Proxy Statement/Prospectus, including, without limitation, the sections referenced above. 4 10 SUMMARY The following summary is qualified in its entirety by the more detailed information contained elsewhere in this Joint Proxy Statement/Prospectus and the attached Appendices. The summary does not contain a complete description of the Agreement and Plan of Reorganization, dated as of June 26, 1996, by and between Keystone and DeSoto, a copy of which is attached as Appendix A (the "Reorganization Agreement") and which is incorporated herein by reference. The Keystone stockholders and DeSoto stockholders are urged to read carefully this Joint Proxy Statement/Prospectus and the attached Appendices in their entirety. See "Risk Factors." THE COMPANIES Keystone Keystone is a diversified mini-mill manufacturer of carbon steel rod, wire and a wide range of wire products for a variety of end uses. Keystone owns and operates five (5) plants located in Illinois, Texas, Arkansas and Wisconsin. Keystone was incorporated in Delaware in 1955 and is the successor to Keystone Steel & Wire Company which was founded in 1889. Unless otherwise indicated, "Keystone" refers to Keystone and its wholly owned subsidiaries. Keystone's principal executive offices are located at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240-2697. Its telephone number is (214) 458-0028. DeSoto DeSoto manufactures household cleaning products including powdered and liquid laundry detergents. DeSoto also performs contract manufacturing and packaging of household cleaning products. DeSoto was incorporated in Delaware in 1927. Unless otherwise indicated, "DeSoto" refers to DeSoto and its wholly owned subsidiaries. DeSoto's principal executive offices and its operating facility are located at 900 East Washington Street, Joliet, Illinois 60433. Its telephone number is (815) 727-4931. Sub Sub, a Delaware corporation, will be a newly formed, wholly owned subsidiary of Keystone to be formed for the purposes of merging with and into DeSoto (the "Merger"). Prior to the Merger, Keystone will contribute the assets and liabilities of its Sherman Wire division to Sub. Sub's principal executive offices are located at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240-2697. Its telephone number is (214) 458-0028. SPECIAL MEETINGS OF STOCKHOLDERS Date; Time and Place Keystone. The Keystone Meeting will be held on Friday, September 27, 1996, at 10:00 a.m., local time, at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240-2697. DeSoto. The DeSoto Meeting will be held on Friday, September 27, 1996, at 10:00 a.m., local time, at the Bank of Montreal, 430 Park Avenue, 16th Floor, New York, New York. Purposes of the Special Meetings Keystone Meeting. At the Keystone Meeting, stockholders of Keystone as of the close of business on the Keystone Record Date (as defined below) will be asked to consider and vote upon a proposal to approve the issuance of Keystone Common Stock pursuant to the Reorganization Agreement. DeSoto Meeting. At the DeSoto Meeting, stockholders of DeSoto as of the close of business on the DeSoto Record Date (as defined below) will be asked to consider and vote upon a proposal to approve and adopt the Reorganization Agreement. 5 11 Record Dates; Shares Outstanding and Entitled to Vote Keystone. Holders of record of Keystone Common Stock at the close of business on August 23, 1996 (the "Keystone Record Date"), will be entitled to notice of and to vote at the Keystone Meeting. At the close of business on August 21, 1996, there were 5,686,424 shares of Keystone Common Stock outstanding, each of which will be entitled to one vote on each matter to be acted upon. DeSoto. Holders of record of DeSoto Common Stock and DeSoto Preferred Stock at the close of business on August 23, 1996 (the "DeSoto Record Date"), will be entitled to notice of and to vote at the DeSoto Meeting. At the close of business on August 21, 1996, there were 4,688,523 shares of DeSoto Common Stock and 583,333 shares of DeSoto Preferred Stock outstanding, each of which will be entitled to one vote on each matter to be acted upon. Shares of DeSoto Common Stock and DeSoto Preferred Stock vote together as one class on all matters submitted to stockholders. Quorum The required quorum for the transaction of business at both the Keystone Meeting and the DeSoto Meeting is a majority of the shares of Keystone Common Stock or the DeSoto Common Stock and DeSoto Preferred Stock taken together, as the case may be, issued and outstanding on the applicable record date. Abstentions and broker non-votes represented at the applicable meetings will be included in determining the number of shares present for purposes of determining the presence of a quorum. Votes Required Keystone. The approval of the issuance of the shares of Keystone Common Stock pursuant to the Reorganization Agreement requires the affirmative vote of the holders of a majority of the shares present in person or by proxy at the Keystone Meeting and voting, provided the total vote cast represents a majority of the shares entitled to vote thereon. Abstentions and broker non-votes will be included in determining the number of shares present for purposes of determining the presence of a quorum but not be counted as a vote for or against approval of the issuance of Keystone Common Stock pursuant to the Reorganization Agreement. The approval by Keystone's stockholders of the issuance of shares of Keystone Common Stock pursuant to the Reorganization Agreement is required by the rules of the NYSE governing corporations with securities listed on the NYSE. As of August 21, 1996, the directors and executive officers of Keystone and their affiliates had the right to vote an aggregate of 4,168,881 shares of Keystone Common Stock, representing approximately seventy-three percent (73%) of Keystone Common Stock outstanding. Contran Corporation ("Contran") holds directly approximately fifty six percent (56%) of the Keystone Common Stock outstanding as of August 21, 1996, and is a party to an agreement with DeSoto pursuant to which Contran has agreed to vote its shares of Keystone Common Stock in favor of the Reorganization Agreement and the transactions contemplated thereby, thus approval of the issuance of shares of Keystone Common Stock pursuant to the Reorganization Agreement is assured. DeSoto. Approval and adoption of the Reorganization Agreement requires the affirmative vote of the holders of a majority of the outstanding shares of DeSoto Common Stock and DeSoto Preferred Stock entitled to vote, voting together as one class. Abstentions and broker non-votes will have the same effect as votes against the Reorganization Agreement. As of August 21, 1996, the directors and officers of DeSoto and their affiliates had the right to vote an aggregate of 636,087 shares of DeSoto Common Stock and an aggregate of 583,333 shares of DeSoto Preferred Stock, representing approximately twenty-three percent (23%) of DeSoto voting stock outstanding as of such date. Certain entities affiliated with directors of DeSoto and a director of DeSoto collectively having the right to vote 596,989 shares of DeSoto Common Stock and 583,333 Shares of DeSoto Preferred Stock, representing approximately twenty-two percent (22%) of the combined shares of DeSoto Common Stock and DeSoto Preferred Stock outstanding as of the DeSoto Record Date, are parties to an agreement with Keystone pursuant to which they have agreed to vote their shares of DeSoto Common Stock and DeSoto Preferred Stock in favor of approval and adoption of the Reorganization Agreement. See "The Merger and Related Transactions -- Voting Agreements." Any abstentions from voting thereon may be deemed a "ratification" of the Merger under Delaware law which may provide either Keystone or DeSoto a 6 12 complete or partial defense to any subsequent stockholder challenges to the Merger. Neither Keystone nor DeSoto intends to waive any rights under Delaware law relating thereto. Effective Time of the Merger The Merger will become effective upon the filing of a Certificate of Merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware, or such later time as may be specified therein. The Certificate of Merger is expected to be filed as soon as practicable after the satisfaction or waiver of each of the conditions to consummation of the Merger, which is expected to occur as soon as practicable following receipt of stockholder approval at the Keystone and DeSoto Meetings. RECOMMENDATIONS OF THE BOARDS OF DIRECTORS Keystone Board of Directors. The Board of Directors of Keystone has unanimously approved the Reorganization Agreement and the Merger and believes the Merger is fair to, and in the best interests of, Keystone and its stockholders, and unanimously recommends that Keystone stockholders vote for the approval of the issuance of Keystone Common Stock pursuant to the Reorganization Agreement. The recommendation of the Board of Directors of Keystone is based on a number of factors described in "The Merger and Related Transactions -- Reasons for the Merger." DeSoto Board of Directors. The Board of Directors of DeSoto has unanimously approved the Reorganization Agreement and the Merger and believes the Merger is fair to, and in the best interests of, DeSoto and its stockholders, and unanimously recommends that DeSoto stockholders vote for the approval and adoption of the Reorganization Agreement. The recommendation of the Board of Directors of DeSoto is based on a number of factors described in "The Merger and Related Transactions -- Reasons for the Merger." REASONS FOR THE MERGER Keystone. In reaching its determination that the terms of the Reorganization Agreement are fair to, and in the best interests of, Keystone and its stockholders, the Board of Directors of Keystone considered a number of factors. Among those factors were the anticipated favorable effect of the Merger on Keystone's balance sheet, the anticipated favorable effects on Keystone's cash flows and pension expense following the merger of the Keystone defined benefit pension plans with and into the DeSoto defined benefit pension plan, the opinion of its financial advisor, the anticipated improved liquidity of the Keystone Common Stock after the issuance of the approximately 3,500,000 shares pursuant to the Reorganization Agreement, and the terms of the Reorganization Agreement. The reasons for the Board of Directors of Keystone approving the Reorganization Agreement are described in "The Merger and Related Transactions -- Reasons for the Merger"; and the opinion of the financial advisor to the Board of Directors is described in "The Merger and Related Transactions -- Opinion of Financial Advisors -- Opinion of PaineWebber Incorporated, Financial Advisor to Keystone." DeSoto. In reaching its determination that the terms of the Reorganization Agreement are fair to, and in the best interests of, DeSoto and its stockholders, the Board of Directors of DeSoto considered a number of factors. Among those factors were a review of the strategic alternatives available to DeSoto, a comparison of the likely values to be realized pursuant to these alternatives, the opinion of its financial advisor and the terms of the Reorganization Agreement. The reasons for the Board of Directors of DeSoto approving the Reorganization Agreement are described in "The Merger and Related Transactions -- Reasons for the Merger"; and the opinion of the financial advisor to the Board of Directors is described in "The Merger and Related Transactions -- Opinion of Financial Advisors -- Opinion of Salomon Brothers, Financial Advisor to DeSoto." OPINIONS OF FINANCIAL ADVISORS Keystone. At a meeting of the Board of Directors of Keystone held on June 13, 1996, PaineWebber Incorporated ("PaineWebber") delivered an oral opinion to the Board of Directors of Keystone, which was subsequently confirmed in a written opinion dated June 26, 1996, stating the consideration to be paid by 7 13 Keystone in the Merger is fair to Keystone stockholders (except for Contran and its affiliates as to whom PaineWebber has expressed no opinion) from a financial point of view. PaineWebber has confirmed its opinion that as of the date of this Joint Proxy Statement/Prospectus, the consideration to be paid by Keystone in the Merger is fair to Keystone stockholders (except for Contran and its affiliates) from a financial point of view. The full text of the opinion of PaineWebber which sets forth the assumptions made, matters considered and limitations on the review undertaken is attached as Appendix B to this Joint Proxy Statement/Prospectus. Keystone stockholders are urged to read the opinion in its entirety. See "The Merger and Related Transactions -- Opinions of Financial Advisors -- Opinion of PaineWebber, Financial Advisor to Keystone." DeSoto. At a meeting of the Board of Directors of DeSoto held on June 13, 1996, Salomon Brothers Inc ("Salomon Brothers") delivered an oral opinion that, as of that date, the Exchange Ratio pursuant to the terms of the Reorganization Agreement was fair to the holders of DeSoto Common Stock from a financial point of view. Salomon Brothers has confirmed its oral opinion by delivering a written opinion dated the date of this Joint Proxy Statement/Prospectus that, as of such date, the Exchange Ratio was fair to the holders of DeSoto Common Stock from a financial point of view. The full text of the written opinion of Salomon Brothers, which sets forth the assumptions made, matters considered and limitations on the review undertaken by Salomon Brothers, is attached as Appendix C to this Joint Proxy Statement/Prospectus. DeSoto stockholders are urged to read the opinion in its entirety. See "The Merger and Related Transactions -- Opinion of Financial Advisors -- Opinion of Salomon Brothers, Financial Advisor to DeSoto." THE MERGER AND RELATED TRANSACTIONS Effects of the Merger Upon consummation of the Merger, DeSoto will become a wholly owned subsidiary of Keystone; Keystone's Board of Directors will be increased from seven to nine members and Keystone's Board of Directors will elect William Spier, Chairman of the Board and Chief Executive Officer of DeSoto, and William P. Lyons, another current member of the DeSoto Board of Directors, to fill the vacancies thereby created; and as soon thereafter as practicable, Keystone's defined benefit pension plans will be merged with and into the DeSoto defined benefit pension plan. See "The Merger and Related Transactions -- Reasons for the Merger." Conversion of Shares Upon consummation of the Merger, each then outstanding share of DeSoto Common Stock and the associated rights issued pursuant to the Rights Agreement between DeSoto and Harris Trust and Savings Bank (other than shares owned by DeSoto or its subsidiaries) will automatically be converted into the right to receive the Exchange Ratio of a share of Keystone Common Stock for each outstanding share of DeSoto Common Stock. Cash will be paid in lieu of issuance of fractional shares of Keystone Common Stock. Each then outstanding share of DeSoto Preferred Stock will automatically be converted into the right to receive the Exchange Ratio of a share of Keystone Preferred Stock. Cash will be paid in lieu of issuance of fractional shares of Keystone Preferred Stock. Because the Exchange Ratio is fixed, the number of shares to be received by stockholders of DeSoto upon consummation of the Merger will remain the same, regardless of whether the market price of the Common Stock of Keystone or DeSoto increases or decreases at any time, including after the date of this Joint Proxy Statement/Prospectus and after the dates of the Keystone and DeSoto Meetings. See "The Merger and Related Transactions -- Opinions of Financial Advisors" and "Risk Factors -- Fixed Exchange Ratio." Assumption of DeSoto Options Upon consummation of the Merger, each then outstanding option to purchase DeSoto Common Stock (the "DeSoto Options") will be assumed by Keystone and converted into an option to acquire that number of shares of Keystone Common Stock equal to the number of shares of DeSoto Common Stock subject to such DeSoto Option multiplied by the Exchange Ratio. The exercise price of such DeSoto Options shall be adjusted by dividing such exercise price by the Exchange Ratio. To avoid fractional shares, the number of 8 14 shares of Keystone Common Stock subject to an assumed DeSoto Option will be rounded up to the nearest whole share. The other terms of DeSoto Options, including vesting schedules, will remain unchanged. Keystone will file a Registration Statement on Form S-8 with the Commission with respect to the issuance of Keystone Common Stock upon exercise of the assumed DeSoto Options. Keystone will apply to have the shares of Keystone Common Stock reserved for issuance upon the exercise of DeSoto Options listed on the NYSE, subject to notice of issuance. As of August 21, 1996, DeSoto Options to acquire an aggregate of approximately 184,000 shares of DeSoto Common Stock (approximately 137,000 equivalent shares of Keystone Common Stock) were issued and outstanding. Merger of Pension Plans The Reorganization Agreement provides that upon consummation of the Merger, there will be no impediments to the merger of the Keystone defined benefit pension plans with and into the DeSoto defined benefit pension plan. It is expected such merger will take place as soon as practicable after consummation of the Merger. See "The Merger Agreement and Related Transactions -- Actions Subsequent to the Merger -- Merger of Pension Plans." Voting Agreements Asgard, Ltd. (an affiliate of Anders U. Schroeder, Vice Chairman of DeSoto), Anders U. Schroeder, Parkway M&A Capital Corporation and M&A Investment Pte Ltd (entities having a business relationship with David M. Tobey, a director of DeSoto) and Coatings Group, Inc (an affiliate of William Spier, Chairman of the Board and Chief Executive Officer of DeSoto), collectively the owners of 596,989 shares of DeSoto Common Stock and all of the shares of DeSoto Preferred Stock outstanding, representing approximately twenty-two percent (22%) of DeSoto's outstanding voting stock, have entered into an agreement with Keystone; and Contran, the direct owner of 3,161,733 shares of Keystone Common Stock, representing approximately fifty-six percent (56%) of Keystone's outstanding voting stock, has entered into an agreement with DeSoto, pursuant to which agreements (the "Voting Agreements") such stockholders agreed they will (i) vote their shares in favor of approval of the issuance of Keystone Common Stock pursuant to the Reorganization Agreement in the case of Contran or approval and adoption of the Reorganization Agreement and the Merger in the case of the holders of stock of DeSoto; and (ii) not transfer any of their shares of Keystone Common Stock or DeSoto Common Stock, as the case may be, subject to certain exceptions. As a result of the voting agreement to which Contran is a party, the requisite Keystone stockholder approval for the issuance of shares of Keystone Common Stock pursuant to the Reorganization Agreement is assured. Related Agreements; Interests of Certain Persons in the Merger At the time the Reorganization Agreement was entered into, Asgard Ltd., Parkway M&A Capital Corporation and Coatings Group, Inc. (the holders of all outstanding shares of DeSoto Preferred Stock and DeSoto Warrants, collectively the "Warrant and Preferred Stockholders"), Keystone, DeSoto and Contran, entered into a stockholders agreement pursuant to which (i) Keystone agreed to assume from DeSoto certain registration rights currently held by the Warrant and Preferred Stockholders, and (ii) Keystone granted to Contran and its affiliates the same rights with respect to registration of the Keystone Common Stock held by Contran and its affiliates as Keystone had agreed to assume with respect to the Warrant and Preferred Stockholders. At the same time, the Warrant and Preferred Stockholders also entered into separate agreements with Keystone regarding the DeSoto Warrants (the "Warrant Conversion Agreement") and the DeSoto Preferred Stock (the "Preferred Stockholder Waiver and Consent Agreement") pursuant to which they agreed that (i) one-half of the currently outstanding DeSoto Warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock held by the Warrant and Preferred Stockholders will be cancelled upon consummation of the Merger, (ii) the remaining DeSoto Warrants will be converted into Keystone Warrants to purchase that number of shares of Keystone Common Stock obtained by multiplying the number of shares of DeSoto Common Stock issuable upon exercise of the remaining DeSoto Warrants by the Exchange Ratio, at an exercise price equal to the exercise price prior to the Effective Time divided by the Exchange Ratio, (iii) the right of such persons to require redemption of their DeSoto Preferred Stock 9 15 pursuant to the existing terms of such stock by reason of the consummation of the Merger will be waived, (iv) the DeSoto Preferred Stock will be converted into Keystone Preferred Stock based on the Exchange Ratio and an amount of cash equal to accrued but unpaid dividends on the DeSoto Preferred Stock (which, as of the Effective Time, will aggregate approximately $1,700,000), and (v) any appraisal rights they may have as a result of their ownership of the DeSoto Preferred Stock are waived. DeSoto has severance arrangements and policies with certain of its officers and employees, pursuant to which DeSoto will be obligated to pay to such officers and employees an aggregate of $110,000 upon consummation of the Merger and up to an additional approximately $480,000 if their employment is thereafter terminated under certain circumstances. See "The Reorganization Agreement -- Related Agreements; Interests of Certain Persons in the Merger." Upon the effective date of the Merger, William Spier, Chairman of the Board and Chief Executive Officer of DeSoto, and William P. Lyons, another current member of the Board of Directors of DeSoto, will be appointed to the Board of Directors of Keystone, joining the current seven members of the Keystone Board of Directors. Representations and Covenants Under the Reorganization Agreement, Keystone and DeSoto made a number of representations regarding their respective capital structures, operations, financial conditions and other matters. Each party agreed as to itself and its subsidiaries that until consummation of the Merger or the earlier termination of the Reorganization Agreement, it will, among other things, conduct its business and maintain its business relationships in the ordinary and usual course, and use its best efforts to consummate the Merger. DeSoto has agreed not to solicit, engage in discussions, negotiate with any person or facilitate the efforts of any person other than Keystone relating to the possible acquisition of DeSoto or any of its subsidiaries or any material portion of its or their stock or assets (any such efforts are referred to as an "Alternative Acquisition"), except that DeSoto's Board of Directors may provide information to and engage in negotiations with a third party regarding an Alternative Acquisition if (i) the Board of Directors of DeSoto receives a written proposal for an Alternative Acquisition which proposal identifies a price or range of values to be paid for the outstanding securities or substantially all of the assets of DeSoto, and, if consummated, based on the advice of DeSoto's investment bankers, the Board of Directors of DeSoto determines is financially more favorable to the stockholders of DeSoto than the terms of the Merger (a "Superior Proposal"); (ii) the Board of Directors of DeSoto determines, based on the advice of its investment bankers, that such third party is financially capable of consummating such Superior Proposal; (iii) the Board of Directors of DeSoto shall have determined, after consultation with outside legal counsel, that the fiduciary duties of the Board require DeSoto to furnish information to and negotiate with such third party; and (iv) at least two (2) business days prior thereto, Keystone shall have been notified in writing of such Superior Proposal, including all of its terms and conditions and the foregoing determination by the Board of Directors of DeSoto, and shall have been given copies of such proposal. DeSoto shall not be entitled to enter into an agreement concerning an Alternative Acquisition for a period of not less than forty-eight hours after Keystone's receipt of a copy of such proposal and certain other information. Keystone has agreed, if the Merger is consummated, to indemnify the current officers and directors of DeSoto with respect to any claim or liability arising out of or pertaining to any act or omission occurring prior to the Effective Time to the fullest extent that DeSoto could have done so on June 26, 1996. Keystone has further agreed, for a period of six (6) years following the Effective Time, to cause DeSoto to maintain indemnification and limitation of liability provisions. Keystone has also agreed to (i) provide director and officer insurance coverage, at a cost not to exceed $150,000, for the current directors and officers of DeSoto for one year after the Effective Time for claims made against such directors and officers relating to matters occurring prior to the Effective Time, and (ii) provide, after the Effective Time, director and officer insurance coverage to Keystone directors comparable to the coverage maintained by DeSoto at the Effective Time, to the extent such coverage may be obtainable at a comparable cost. See "The Reorganization Agreement -- Representations and Covenants." 10 16 Conditions to the Merger In addition to the requirement that Keystone stockholders approve the issuance of Keystone Common Stock pursuant to the Reorganization Agreement and DeSoto stockholders approve and adopt the Reorganization Agreement, the consummation of the Merger is subject to a number of other conditions which, if not satisfied or waived, would cause the Merger not to be consummated and the Reorganization Agreement to be terminated. Each party's obligation to consummate the Merger is conditioned upon, among other things, (i) the accuracy of the other party's representations, (ii) each party's performance of its obligations under the Reorganization Agreement, (iii) the absence of a material adverse change in the condition (financial or otherwise), properties, assets, liabilities, businesses, or results of operations of the other party and its subsidiaries taken as a whole, (iv) the Pension Benefit Guaranty Corporation (the "PBGC") raising Keystone's borrowing restrictions to an amount reasonably expected to enable Keystone to perform its obligations under the Reorganization Agreement, (v) availability to Keystone of sufficient financing in order to effect the Merger and to satisfy its obligations and those of the surviving corporation in the Merger, (vi) receipt of opinions of counsel in respect of certain federal income tax consequences of the Merger, (vii) receipt of opinions dated one business day before the closing of the Merger from the financial advisors to each of Keystone and DeSoto as to the fairness from a financial point of view of the consideration to be paid by Keystone and received by DeSoto stockholders, (viii) the absence of legal action preventing consummation of the Merger, and (ix) the receipt of other documents, including necessary consents of third parties (including governmental agencies). Keystone's obligation to consummate the Merger is further conditioned upon, among other things, (i) the consent by DeSoto's trade creditors to the terms of payment contemplated by the Reorganization Agreement and (ii) the resolution on terms satisfactory to Keystone of certain claims arising from DeSoto's acquisition of J.L. Prescott Company. DeSoto's obligation to consummate the Merger is further conditioned upon, among other things, (i) approval for listing on the NYSE, subject to official notice of issuance of the shares of Keystone Common Stock to be issued pursuant to the Merger and (ii) the Board of Directors of Keystone taking appropriate action to increase the number of directors comprising Keystone's full Board of Directors from seven to nine, and to cause William Spier and William P. Lyons to be directors of Keystone upon the effectiveness of the Merger. See "The Reorganization Agreement -- Conditions to the Merger." Keystone Financing Arrangements Pursuant to the Reorganization Agreement, Keystone is obligated to cause DeSoto to pay approximately $6.5 million to certain of its trade creditors who are parties to a trade composition agreement with DeSoto, as soon as practicable after the Effective Time, and an additional approximately $1.5 million to such trade creditors within one year of the Effective Time. Additionally, pursuant to the Preferred Stockholder Waiver and Consent Agreement, Keystone is obligated, at the Effective Time, to pay to the holders of the DeSoto Preferred Stock all their unpaid dividend arrearage, which will then amount to approximately $1.7 million. As a result of these and other transactions related to the Merger, Keystone will require additional funding from its primary lender. In order to obtain such additional funds, Keystone has received the PBGC's consent and Keystone's primary lender's commitment to increase Keystone's allowable borrowings by $20 million upon consummation of the Merger and the merger of the Keystone defined benefit pension plans with and into the DeSoto defined benefit pension plan. The PBGC's consent was necessary due to Keystone's prior agreements with the PBGC whereby the PBGC and Keystone agreed to certain borrowing restrictions. Regulatory Matters Consummation of the Merger is subject to the expiration or termination of the applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). Notification reports were filed by Keystone and DeSoto with the Department of Justice and the Federal Trade Commission under the HSR Act on July 22, 1996, and termination of the specified waiting period requirements of the HSR Act was granted on August 2, 1996. 11 17 Amendment of the Reorganization Agreement The Reorganization Agreement may be amended by Keystone or DeSoto at any time before or after approval of the issuance of shares in connection with the Merger or the Reorganization Agreement, as the case may be, by the stockholders of Keystone and DeSoto, except that, after such stockholder approval, no amendment may be made which by law requires the further approval of such stockholders without obtaining such approval. In the event the parties desire to enter into an amendment to the Reorganization Agreement that materially alters the terms of the Merger, the parties will circulate an amended Joint Proxy Statement/Prospectus to solicit stockholder approval. Termination of the Reorganization Agreement The Reorganization Agreement may be terminated by mutual agreement of both parties or by either party (i) as a result of a breach by the other party of a representation, warranty, covenant or agreement set forth in the Reorganization Agreement, or if any representation of the other party becomes untrue, in either case which has or can reasonably be expected to have a Material Adverse Effect (as defined in the Reorganization Agreement) and which the other party fails to cure prior to the closing of the Merger (except that no cure period is provided for a breach which by its nature cannot be cured); (ii) if the required approvals of the stockholders of Keystone or DeSoto are not obtained by reason of the failure to obtain the required vote; (iii) if all the conditions for closing the Merger are not satisfied or waived on or before December 31, 1996, other than as a result of a breach of the Reorganization Agreement by the terminating party or a breach by any of the principal stockholders or affiliates of the terminating party; or (iv) if a permanent injunction or other order by a federal or state court which would make illegal or otherwise restrain or prohibit the consummation of the Merger is issued and has become final and nonappealable. The Reorganization Agreement may be terminated by Keystone if prior to consummation of the Merger, DeSoto enters into an agreement with respect to an Alternative Acquisition. The Reorganization Agreement may be terminated by DeSoto if, prior to the consummation of the Merger, DeSoto receives a Superior Proposal and the DeSoto Board of Directors believes, after consultation with legal counsel, that its fiduciary duties require termination of the Reorganization Agreement (a "Superior Proposal Termination"). Breakup Fees The Reorganization Agreement provides for the payment of a breakup fee of $1 million (the "Breakup Fee") by DeSoto to Keystone if (i) the Reorganization Agreement is terminated by Keystone where DeSoto has entered into an agreement with respect to an Alternative Acquisition; (ii) the stockholders of DeSoto fail to approve the Merger at a time when there is pending a proposal with respect to an Alternative Acquisition; (iii) without the occurrence of a Keystone material adverse change, the Board of Directors of DeSoto shall have failed to submit the Merger to its stockholders for approval as required by, and in accordance with, the terms of the Reorganization Agreement, or (iv) there occurs a Superior Proposal Termination by DeSoto. The Breakup Fee is payable by Keystone to DeSoto if, without a DeSoto material adverse change, the Board of Directors of Keystone fails to hold a stockholders' meeting to vote on approval of the issuance of Keystone Common Stock pursuant to the Reorganization Agreement as required by, and in accordance with the terms of, the Reorganization Agreement. Payment of the Breakup Fee shall not be in lieu of damages incurred in the event of breach of the Reorganization Agreement, and neither party shall be entitled to receive the Breakup Fee if it shall have committed a material breach of the Reorganization Agreement. Certain Federal Income Tax Consequences The Merger is intended to qualify, and in the opinion of counsel to Keystone and DeSoto it will qualify, as a tax-free reorganization for federal income tax purposes, so that no gain or loss would generally be recognized by the stockholders of DeSoto on the exchange of their DeSoto Common Stock for Keystone Common Stock, except to the extent DeSoto stockholders receive cash in the exchange (i.e., cash in lieu of fractional shares) and no income, gain or loss will be recognized by Keystone or DeSoto. Consummation of the Merger is conditioned upon delivery of opinions of counsel to this effect, dated as of the closing date of the Merger. 12 18 DeSoto stockholders are urged to consult their own tax advisors as to the tax consequences of the Merger. See "The Reorganization Agreement -- Certain Federal Income Tax Matters." Accounting Treatment For financial reporting purposes, Keystone will account for the Merger by the purchase method. Appraisal Rights Both Keystone and DeSoto are incorporated in the State of Delaware, and, accordingly, are governed by the provisions of the Delaware General Corporation Law (the "DGCL"). Pursuant to Section 262 of the DGCL, the holders of DeSoto Common Stock are not entitled to appraisal rights in connection with the Merger because DeSoto Common Stock is quoted on the NYSE and such stockholders will receive as consideration in the Merger only shares of Keystone Common Stock, which shares will be listed on the NYSE upon the Effective Time, and cash in lieu of fractional shares. In addition, the Keystone stockholders are not entitled to appraisal rights under Section 262 of the DGCL because Keystone Common Stock is listed on the NYSE and, even though approval of such stockholders is required for the issuance of Keystone Common Stock in the Merger, the approval of the stockholders of Keystone is not required for the Merger itself. Pursuant to Section 262 of the DGCL, the holders of the DeSoto Preferred Stock would be entitled to appraisal rights in connection with the Merger. However, the holders of the DeSoto Preferred Stock have agreed to vote in favor of approval and adoption of the Reorganization Agreement and to waive their appraisal rights pursuant to the Preferred Stockholder Waiver and Consent Agreement. The Reorganization Agreement provides that, as a condition to consummating the Merger, all terms and conditions of the Preferred Stockholder Waiver and Consent Agreement, including such waivers, must be in full force and effect. See "The Reorganization Agreement -- Appraisal Rights." Comparison of Rights of Stockholders Upon consummation of the Merger, holders of DeSoto Common Stock will become holders of Keystone Common Stock. As a result, their rights as stockholders, which are now governed by the DGCL and DeSoto's Certificate of Incorporation and Bylaws, will be governed by the DGCL and Keystone's Certificate of Incorporation and Bylaws. Because of certain differences between (i) the provisions of DeSoto's Certificate of Incorporation and Bylaws and those of Keystone, and (ii) other rights including the anti-takeover protection afforded holders of DeSoto Common Stock by the associated preferred share purchase rights (the "Purchase Rights"), the rights of DeSoto stockholders after the Merger will be different than the rights of DeSoto stockholders before the Merger. For a discussion of various differences between the rights of stockholders of DeSoto and the rights of stockholders of Keystone, see "Comparison of Rights of Stockholders of Keystone and DeSoto." 13 19 MARKET PRICE DATA Keystone. Keystone Common Stock has been traded on the NYSE under the symbol "KES" since the common stock of Keystone and its predecessor began publicly trading in 1936. The following table sets forth the range of high and low closing sale prices reported on the NYSE for Keystone Common Stock for the periods indicated:
HIGH LOW ------ ------ Fiscal Year Ended December 31, 1994 First Quarter.................................................... $12.00 $10.00 Second Quarter................................................... 15.88 11.50 Third Quarter.................................................... 17.38 14.38 Fourth Quarter................................................... 18.00 13.63 Fiscal Year Ended December 31, 1995 First Quarter.................................................... $13.88 $13.38 Second Quarter................................................... 13.75 13.38 Third Quarter.................................................... 15.13 13.50 Fourth Quarter................................................... 15.00 11.13 Fiscal Year Ended December 31, 1996 First Quarter.................................................... $12.00 $10.00 Second Quarter................................................... 10.38 9.50 Third Quarter (through August 21, 1996).......................... 10.00 9.75
DeSoto. DeSoto Common Stock and the associated Purchase Rights are traded on the NYSE under the symbol "DSO." (The Purchase Rights do not trade separately from DeSoto Common Stock and are represented by certificates for the DeSoto Common Stock). The following table sets forth the range of high and low closing sale prices reported on the NYSE for DeSoto Common Stock for the periods indicated:
HIGH LOW ------ ------ Fiscal Year Ended December 31, 1994 First Quarter.................................................... $ 8.63 $ 6.75 Second Quarter................................................... 7.38 5.50 Third Quarter.................................................... 6.88 4.00 Fourth Quarter................................................... 5.38 3.00 Fiscal Year Ended December 31, 1995 First Quarter.................................................... $ 5.38 $ 3.00 Second Quarter................................................... 6.25 4.75 Third Quarter.................................................... 5.38 4.25 Fourth Quarter................................................... 5.38 2.75 Fiscal Year Ended December 31, 1996 First Quarter.................................................... $ 5.88 $ 3.13 Second Quarter................................................... 6.38 5.00 Third Quarter (through August 21, 1996).......................... 6.63 5.38
14 20 The following table sets forth the closing sales prices per share of Keystone Common Stock and DeSoto Common Stock on the NYSE on March 12, 1996, the last trading day before the announcement of merger discussions between Keystone and DeSoto; on June 26, 1996, the last trading day before the announcement of the signing of this Reorganization Agreement; and on August 21, 1996, the latest practicable trading day before the printing of the Joint Proxy Statement/Prospectus; and the equivalent per share prices for DeSoto Common Stock based on the Keystone Common Stock Prices:
DESOTO KEYSTONE DESOTO EQUIVALENT COMMON STOCK COMMON STOCK PRICE(1) ------------ ------------ ---------- March 12, 1996......................................... $13.38 $ 4.63 $ 9.99 June 26, 1996.......................................... 10.00 6.13 7.47 August 21, 1996........................................ 9.75 5.75 7.28
- --------------- (1) Represents the equivalent of one share of Keystone Common Stock calculated by multiplying the closing sales price per share of Keystone Common Stock by the Exchange Ratio. Stockholders are urged to obtain current quotations for the market prices of Keystone Common Stock and DeSoto Common Stock. No assurance can be given as to the market price of Keystone Common Stock or DeSoto Common Stock at the Effective Time. Because the Exchange Ratio is fixed in the Reorganization Agreement and neither Keystone nor DeSoto has the right to terminate the Reorganization Agreement based on changes in the market price of either party's stock, the market value of the shares of Keystone Common Stock that holders of DeSoto Common Stock receive in the Merger may vary significantly from the prices shown above. Neither Keystone nor DeSoto has paid a dividend on outstanding shares of Keystone Common Stock or DeSoto Common Stock, as the case may be, since at least the beginning of the fiscal year ended December 31, 1994, and neither Keystone nor DeSoto expects to pay a dividend on outstanding shares of Keystone Common Stock or DeSoto Common Stock, as the case may be, in the foreseeable future. However, the accrued dividend arrearage on the DeSoto Preferred Stock of approximately $1,700,000 will be paid as of the Effective Time. Keystone anticipates that it will pay timely dividends on the Keystone Preferred Stock. 15 21 SELECTED KEYSTONE FINANCIAL DATA The following is a summary of selected consolidated financial information of Keystone. This data has been derived in part from, and should be read in conjunction with, the consolidated financial statements of Keystone and the related notes thereto incorporated by reference in, and included as appendices to, this Joint Proxy Statement/Prospectus. Results of interim periods, which include all adjustments management considers necessary for a fair presentation thereof, are not necessarily indicative of results to be expected for the year. The pro forma income statement data illustrates the effect of certain adjustments to Keystone's historical consolidated financial statements that would result from the Merger and the immediate, subsequent merger of the defined benefit pension plans of Keystone and DeSoto as though such transactions had occurred on December 31, 1994. In addition, the pro forma income statement data also illustrates the effect of certain adjustments to DeSoto's historical consolidated financial statements that would result from reflecting the April 1996 sale of DeSoto's Union City, California business and the 1995 sales of DeSoto's Thornton and South Holland, Illinois businesses as though such transactions had occurred on December 31, 1994. The pro forma balance sheet data illustrates the effect of certain adjustments to Keystone's historical consolidated financial statements that would result from the Merger and the immediate, subsequent merger of the defined benefit pension plans of Keystone with and into DeSoto's defined benefit pension plan as though such transactions had occurred on June 30, 1996. The pro forma information is not necessarily indicative of future operations or actual results had such transactions occurred on December 31, 1994 or June 30, 1996. See "Unaudited Pro Forma Consolidated Financial Information."
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income statement data: Net sales............................... $302,132 $316,251 $345,186 $364,435 $345,657 $186,250 $170,118 Gross profit............................ 37,454 37,443 32,521 36,982 32,748 18,746 12,443 Income (loss) before income taxes....... 14,820 8,340 1,130 12,389 8,078 5,176 (542) Income (loss) from continuing operations............................ $ 9,769 $ 5,146 $ 749 $ 7,561 $ 4,887 $ 3,131 $ (327) Extraordinary items(c).................. 3,502 -- -- -- -- -- -- Cumulative effect of changes in accounting principles(a).............. -- (69,949) -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)................. $ 13,271 $(64,803) $ 749 $ 7,561 $ 4,887 $ 3,131 $ (327) ======== ======== ======== ======== ======== ======== ======== Per share data: Earnings (loss) per common and common equivalent share(b): Continuing operations................. $ 1.75 $ .92 $ .14 $ 1.35 $ .86 $ .55 $ (.06) Extraordinary items(c)................ .62 -- -- -- -- -- -- Cumulative effect of changes in accounting principles(a)............ -- (12.53) -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)................. $ 2.37 $ (11.61) $ .14 $ 1.35 $ .86 $ .55 $ (.06) ======== ======== ======== ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding......... 5,591 5,572 5,495 5,601 5,654 5,650 5,678 ======== ======== ======== ======== ======== ======== ======== Cash dividends declared................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ======== ======== ======== ======== Balance sheet data (at period end): Total assets............................ $182,077 $202,109 $206,654 $205,601 $198,822 $206,630 $194,997 Notes payable and long-term debt........ 37,290 34,485 27,190 26,054 29,945 34,037 36,294 Noncurrent accrued pension cost......... 55,462 51,638 60,102 40,470 39,222 25,600 26,650 Noncurrent accrued OPEB cost............ 3,109 93,727 96,336 98,310 97,868 97,499 97,746 Stockholders' equity (deficit).......... 27,149 (39,036) (50,908) (40,579) (37,493) (29,154) (32,229)
- --------------- (a) Relates to adoption of Statement of Financial Accounting Standards ("SFAS") No. 106 -- "Postretirement Benefits Other Than Pensions" ("OPEB") and SFAS No. 109 -- "Employers' Accounting for Income Taxes". (b) Primary and fully diluted net income (loss) per share were the same for all periods presented. (c) Extraordinary items in 1991 relate to income tax benefits resulting from utilization of loss carryforwards. Subsequent to adoption of SFAS No. 109 in 1992 such items are not classified as extraordinary items. 16 22 Pro Forma Keystone Information
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------ ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Income statement data: Net sales...................................................... $364,022 $117,738 Gross profit................................................... 38,025 14,443 Income (loss) before income taxes(c)........................... 12,913 (233) Net income (loss) available for common shares.................. 7,375 (402) Net income (loss) per Keystone common and common equivalent share....................................................... $ .79 $ (.04) Net income (loss) per equivalent present DeSoto common and common equivalent share(b).................................. .59 (.03) Weighted average common and common equivalent shares outstanding................................................. 9,348 9,244 Balance sheet data (at period end): Noncurrent prepaid pension cost................................ (a) $102,294 Total assets................................................... (a) 279,472 Notes payable and long-term debt............................... (a) 46,499 Noncurrent accrued OPEB cost................................... (a) 100,544 Redeemable preferred stock..................................... (a) 3,500 Common stockholders' equity.................................... (a) 33,522 Book value per Keystone common share........................... (a) $ 3.65 Book value per equivalent present DeSoto common share(b)....... (a) 2.72
- --------------- (a) Not required pursuant to regulations of the Commission. (b) Determined by multiplying the corresponding pro forma amounts by the Exchange Ratio. (c) Includes certain nonrecurring income of DeSoto of approximately $6.4 million in 1995 and $.7 million in the 1996 period. 17 23 SELECTED DESOTO FINANCIAL DATA The following is a summary of selected consolidated financial information of DeSoto. This summary has been derived in part from, and should be read in conjunction with, the consolidated financial statements of DeSoto and the related notes thereto appearing elsewhere in this Joint Proxy Statement/Prospectus. Results of interim periods, which include all adjustments management considers necessary for a fair presentation thereof, are not necessarily indicative of results to be expected for the year. The pro forma income statement data illustrates the effect of certain adjustments to DeSoto's historical consolidated financial statements that would result from reflecting the April 1996 sale of DeSoto's Union City, California business and the 1995 sales of DeSoto's Thornton and South Holland, Illinois businesses as though such transactions had occurred December 31, 1994. The pro forma information is not necessarily indicative of future operations or actual results had such transactions occurred at December 31, 1994. See "Unaudited Pro Forma Consolidated Financial Information."
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------------------------------------- ------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- -------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income statement data: Net sales(a)............................ $58,872 $59,799 $101,175 $87,182 $52,339 $35,241 $ 9,481 Gross profit (loss)..................... 7,704 4,306 4,866 2,382 (1,730) (574) 1,098 Income (loss) before income taxes....... (202) (3,542) (13,322) (2,284) (5,393) 2,980 (930) Income (loss) from continuing operations(b)......................... $ (402) $(2,156) $ (8,090) $(1,635) $(4,635) $ 1,875 $ (579) Cumulative effect of changes in accounting principles(c).............. -- (162) -- -- -- -- -- ------- ------- -------- ------- ------- ------- ------- Net income (loss)................. $ (402) $(2,318) $ (8,090) $(1,635) $(4,635) $ 1,875 $ (579) ======= ======= ======== ======= ======= ======= ======= Per share data: Earnings (loss) per common and common equivalent share(d): Continuing operations................. $ (.10) $ (.54) $ (1.83) $ (.42) $ (1.10) $ .37 $ (.18) Cumulative effect of changes in accounting principles(c)............ -- (.04) -- -- -- -- -- ------- ------- -------- ------- ------- ------- ------- Net income (loss)................. $ (.10) $ (.58) $ (1.83) $ (.42) $ (1.10) $ .37 $ (.18) ======= ======= ======== ======= ======= ======= ======= Weighted average common and common equivalent shares outstanding......... 4,071 4,142 4,598 4,657 4,677 4,674 4,684 ======= ======= ======== ======= ======= ======= ======= Cash dividends declared on common stock................................. $ .04 $ -- $ -- $ -- $ -- $ -- $ -- ======= ======= ======== ======= ======= ======= ======= Balance sheet data (at period end): Noncurrent prepaid pension cost......... $21,185 $27,124 $ 32,218 $39,319 $46,913 $43,065 $50,710 Total assets(a)......................... 64,559 95,634 91,957 83,112 64,968 84,448 63,643 Notes payable and long-term debt........ 10,000 8,322 7,700 8,381 -- 7,012 -- Noncurrent accrued OPEB cost............ -- 1,283 1,323 1,510 1,223 1,357 1,431 Redeemable preferred stock.............. -- 2,566 3,052 3,569 4,288 3,842 4,684 Common stockholders' equity............. 26,993 31,473 23,141 21,249 15,934 22,889 15,004
- --------------- (a) Operating results subsequent to November 1992 include revenues and results from operations of J.L. Prescott Company which was acquired on that date. In July 1995, DeSoto sold the Thornton and South Holland, Illinois businesses it had acquired from J.L. Prescott Company. (b) The loss from continuing operations included net non-operating income of $2,420,000, $1,303,000 and $6,360,000 in 1993, 1994 and 1995, respectively; provision for restructuring of operations of $1,229,000, $2,900,000 and $3,100,000 in 1992, 1993 and 1995, respectively; and $3,025,000 and $3,059,000 of other nonrecurring charges in 1993 and 1995, respectively. (c) Relates to adoption of SFAS No. 106 (OPEB) and SFAS No. 109 (income taxes). (d) Primary and fully diluted net income were the same for all periods presented. 18 24 Pro Forma DeSoto Information
SIX YEAR ENDED MONTHS ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Income statement data: Net sales.................................................. $ 18,098 $ 7,434 Gross profit............................................... 1,889 571 Income before income taxes(a).............................. 8,521 2,121 Net income available for common shares..................... 4,699 1,012 Net income per common and common equivalent share.......... $ 1.00 $ .22 Weighted average common and common equivalent shares outstanding............................................. 4,677 4,684
- --------------- (a) Includes nonrecurring income of approximately $6.4 million in 1995 and $.7 million in the 1996 period. 19 25 COMPARATIVE PER SHARE DATA
EQUIVALENT KEYSTONE DESOTO PRO FORMA PRO FORMA BOOK VALUE PER SHARE(A) KEYSTONE DESOTO COMBINED COMBINED(B) - ---------------------------------------------------- -------- ------ --------- ----------- June 30, 1996....................................... $(5.67) $ 3.20 $3.65 $2.72
EQUIVALENT NET INCOME (LOSS) PER KEYSTONE DESOTO COMMON AND COMMON PRO FORMA PRO FORMA EQUIVALENT SHARE KEYSTONE DESOTO COMBINED COMBINED - ---------------------------------------------------- -------- ------ --------- ----------- Six months ended June 30: 1996................................................ $ (.06) $ (.18) $(.04) $(.03) 1995................................................ .55 .37 (c) (c) Years Ended December 31: 1995................................................ $ .86 $(1.10) $ .79 $ .59 1994................................................ 1.35 (.42) (c) (c) 1993................................................ .14 (1.83) (c) (c)
EQUIVALENT KEYSTONE DESOTO PRO FORMA PRO FORMA CASH DIVIDENDS DECLARED PER SHARE KEYSTONE DESOTO COMBINED COMBINED - ---------------------------------------------------- -------- ------ --------- ----------- Six months ended June 30, 1996...................... $ -- $ -- $ -- $ -- Years Ended December 31: 1995................................................ $ -- $ -- $ -- $ -- 1994................................................ -- -- -- -- 1993................................................ -- -- -- --
- --------------- (a) Historical book value per share is computed by dividing common stockholders' equity by the number of shares of common stock outstanding at the end of the period. Pro forma book value per share is computed by dividing pro forma common stockholders' equity by the pro forma number of shares of common stock outstanding at the end of the period. (b) The unaudited equivalent DeSoto pro forma per share amounts are calculated by multiplying the Keystone combined pro forma per share amounts for each period by the Exchange Ratio. (c) Not required pursuant to regulations of the Commission. 20 26 RISK FACTORS Each Keystone stockholder and DeSoto stockholder should carefully consider and evaluate the following factors, among others, before voting on the matters described herein. CONTROL PERSON AND POTENTIAL CONFLICTS OF INTEREST After consummation of the Merger, Contran will beneficially own, directly and indirectly, approximately thirty-nine percent (39%) of the outstanding Keystone Common Stock and may continue to be deemed to control Keystone. As a result, the election of directors and taking of other corporate actions, including mergers, requiring the approval of Keystone stockholders after the Merger may be difficult if opposed by Contran. In addition, third parties may be discouraged from seeking to acquire Keystone without the prior agreement of Contran. Each of Contran and Keystone may be deemed to be controlled by Harold C. Simmons. Certain of the officers and directors of Keystone are also officers and directors of Contran or of entities that may be deemed to be controlled by or affiliated with Contran and/or Harold C. Simmons. In addition, from time to time, corporations that may be deemed to be controlled by or affiliated with Harold C. Simmons, including Keystone, engage in (i) intercorporate transactions with related companies, including guarantees, management and expense sharing arrangements, shared fee arrangements, joint ventures, partnerships, loans, options, advances of funds on open account, sales, leases and exchanges of assets, including securities issued by both related and unrelated parties, and (ii) common acquisition strategies, business combinations, reorganizations, recapitalizations, securities repurchases, purchases and sales (and other acquisitions and dispositions) of subsidiaries, divisions or other business units, which transactions may involve both related and unrelated parties and may include transactions which result in the acquisition by one related party of a publicly-held minority equity interest in another related party. Depending upon the business, tax and other objectives then relevant, it is possible that Keystone might be a party to one or more such transactions in the future. The foregoing relationships, transactions and agreements may create potential conflicts of interest. It is the policy of Keystone to engage in transactions with related parties on terms, in the opinion of Keystone, no less favorable to Keystone than could be obtained from unrelated parties. INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendations of the Boards of Directors of Keystone and DeSoto with respect to the Reorganization Agreement and the Merger, stockholders of Keystone and DeSoto should be aware that certain affiliates and members of management of Keystone and DeSoto have interests in the Merger in addition to the interests of holders of Keystone Common Stock and DeSoto Common Stock generally. Specifically, (i) pursuant to the Reorganization Agreement, William Spier, the Chairman of the Board and Chief Executive Officer of DeSoto, and William P. Lyons, a member of the DeSoto Board of Directors, will be elected to serve as directors of Keystone upon consummation of the Merger; (ii) pursuant to the Reorganization Agreement, DeSoto Options will be assumed by Keystone and converted into options to acquire shares of Keystone Common Stock and, prior to the Merger, the terms of the DeSoto Options will be amended to extend the period for exercise of the DeSoto Options until the second anniversary of the Effective Time; (iii) DeSoto has severance agreements which obligate DeSoto to pay certain employees and officers of DeSoto in the event of a change in control of DeSoto and upon the subsequent termination of their employment under certain circumstances; (iv) DeSoto Preferred Stock, which is held by affiliates of DeSoto, will be converted into Keystone Preferred Stock and cash in an amount equal to the accrued and unpaid dividends on the DeSoto Preferred Stock (approximately $1.7 million as of the Effective Time) will be paid to the holders of the DeSoto Preferred Stock upon consummation of the Merger; (v) pursuant to the Stockholders' Agreement entered into in connection with the Reorganization Agreement, Keystone has assumed certain registration rights previously granted by DeSoto to the Warrant and Preferred Stockholders and has granted similar registration rights to Contran and its affiliates; (vi) pursuant to the Reorganization Agreement, if the Merger is consummated, Keystone has agreed to indemnify the current officers and directors of DeSoto for any act or omission occurring prior to the Merger and has also agreed to provide director and officer insurance coverage to current officers and directors of DeSoto for one year after the Effective Time; and (vii) Harold C. Simmons, who may be deemed to control Keystone, is the sole member 21 27 of the Corporate Committee appointed by Keystone to direct the investments of the Keystone Master Pension Trust and is the sole trustee of, and the sole member of the trust investment committee for, The Combined Master Retirement Trust formed by Valhi, Inc. ("Valhi"), an affiliate of Keystone, to permit the collective investment by trusts that maintain the assets of certain employee defined benefit pension plans adopted by Valhi and related companies, including Keystone. See "The Merger and Related Transactions -- General", "The Reorganization Agreement -- Representations and Covenants; -- Related Agreements; Interests of Certain Persons in Matters Acted Upon" and "Information About DeSoto -- Stock Ownership of Management and Others." ENVIRONMENTAL LIABILITIES Keystone and DeSoto are subject to federal and state "Superfund" and other legislation that impose cleanup and remediation responsibility upon present and former owners and operators of, and persons that generated hazardous waste deposited upon, sites determined by state or federal regulators to contain hazardous waste. Keystone and DeSoto have been notified by the United States Environmental Protection Agency ("EPA") that each is a potentially responsible party under the federal "Superfund" statute for the alleged release or threat of release of hazardous waste into the environment in several instances. Most of these situations involve cleanup of landfills and disposal facilities which allegedly received hazardous waste generated by either Keystone or DeSoto. A determination that Keystone or DeSoto is wholly or partially responsible for the cleanup of hazardous waste at one or more sites under applicable laws or regulations could require large and unanticipated expenses and possible capital expenditures, which could have a material adverse effect on the respective financial conditions of Keystone and DeSoto. See Note 13 to the Keystone Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Appendix D, Note I to the DeSoto Consolidated Financial Statements for the year ended December 31, 1995, and "Information About DeSoto -- Legal Proceedings; -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." FACTORS RELATING TO KEYSTONE Competition and Other Market Factors. The carbon steel rod, wire and wire products markets served by Keystone are seasonal and highly competitive and include both domestic and foreign competitors. This degree of competition is not expected to decline in the foreseeable future as worldwide over-capacity in the steel industry continues to exist. As a result, any significant economic downturn in the domestic or worldwide economy could have a material adverse effect on Keystone's liquidity, financial condition and results of operations. Certain of Keystone's competitors have significantly greater financial and other resources than Keystone, and may have lower labor costs and/or more efficient technology, which could affect Keystone's ability to compete effectively. Scrap Steel and Other Material Costs. The principal raw material used by Keystone in steel rod production is scrap steel. The purchase of scrap steel is highly competitive and its price volatility is influenced by periodic shortages, freight costs, weather and other conditions beyond the control of Keystone. The cost of scrap steel has fluctuated significantly in the past, and may fluctuate significantly in the future, and Keystone is not always able to pass on higher scrap costs by increasing its selling prices. In addition to scrap steel, Keystone's production is dependent upon the availability of certain other materials and adequate energy supplies. Keystone's manufacturing processes consume large amounts of energy in the form of electricity and natural gas. Keystone purchases its electrical energy for its largest facility, located in Peoria, Illinois, from a regulated utility under an interruptible service contract which provides for more economical electricity rates. A significant increase in the cost, or interruption in the supply, of such materials or energy supplies could adversely affect Keystone's liquidity, financial condition and results of operations. Permits. Keystone's operations are affected by a variety of environmental laws and regulations. Many of these laws and regulations require permits to operate the facilities to which they pertain. Denial, revocation, suspension or expiration of such permits could impact the ability of the affected facility to continue operations. In addition, Keystone may be subject to increasingly stringent environmental standards in the future. 22 28 Plant Utilization and Capacity. The estimated annual capacity of Keystone's rod mill currently exceeds its estimated annual billet producing capacity by approximately 95,000 tons. As a result, Keystone has been purchasing additional billets from other suppliers to improve utilization of its rod mill. There is no assurance Keystone will continue to purchase billets or expand its billet producing capacity and thus maintain higher utilization of its rod mill. Furthermore, an economic downturn, Keystone's failure to compete effectively in its major markets, a failure of plant or equipment requiring significant capital expenditures or time to repair, or the other factors mentioned herein could result in operating the rod mill and its other facilities at lower capacity levels. Operating Results and Liquidity. Pursuant to the Reorganization Agreement, Keystone must increase its indebtedness in order to fund its obligations after the Merger, including payment of DeSoto's trade creditors. Keystone incurs significant ongoing costs for health and welfare benefits for current and retired employees and for plant and equipment and may incur relatively significant capital expenditures to upgrade its equipment over the next few years in order to avoid possible competitive disadvantages. In addition, potential liabilities under environmental laws and regulations with respect to the disposal and cleanup of wastes beyond amounts already accrued could have a material adverse effect on Keystone's liquidity, financial condition and results of operations. Provided that Keystone is able to increase its credit availability as contemplated by the Reorganization Agreement, Keystone believes its operations and credit facilities will generate sufficient cash flows to meet its anticipated operating, debt service and capital needs for the foreseeable future. This belief is based upon management's assessment of various financial and operational factors including, but not limited to, assumptions relating to product shipments, product mix and selling prices; production schedules; productivity rates; raw material, electricity, labor, employee benefits, and other fixed and variable costs; working capital changes; interest rates; repayments of long-term debt; capital expenditures; and available borrowings under Keystone's credit facilities. If one or more of these assessments proves incorrect, then such events may have a material adverse effect on Keystone's liquidity, financial condition and results of operations. See "The Reorganization Agreement -- Keystone Financing Arrangements." FIXED EXCHANGE RATIO The Exchange Ratio negotiated by Keystone and DeSoto is fixed and there exists no condition for termination of the Merger if the stock prices of either Keystone or DeSoto rise above or fall below a specified dollar amount. If such fluctuations do occur, there will be no adjustment to protect either company's stockholders who might be adversely affected by such fluctuations. DESOTO FINANCIAL CONDITION DeSoto has experienced liquidity and cash flow difficulties for a number of years and, absent consummation of the Merger, believes it will be compelled to terminate its defined benefit pension plan in order to acquire funds to pay its trade creditors and otherwise meet its obligations. Although consummation of the Merger should cause DeSoto's financial condition to improve as a result of the payment to its trade creditors and payment of its preferred dividend arrearage as contemplated by the Reorganization Agreement, there can be no assurance that DeSoto will not experience future losses from its operations and contingent liabilities, including potential liabilities under environmental laws. Any such losses would be reflected in the consolidated financial statements of Keystone for periods ending after consummation of the Merger and could reduce the financial benefits expected to be realized by Keystone and DeSoto as a result of the Merger. Sears, Roebuck and Co. ("Sears"), DeSoto's largest customer, currently accounts for over 75% of DeSoto's total sales. Sales to Sears are on open account and may be terminated at any time. The loss of Sears as a customer would have a material adverse effect on DeSoto's current business. 23 29 DIVIDENDS Keystone has not paid cash dividends on Keystone Common Stock since 1977. Further, Keystone is prohibited from paying dividends without its primary lender's consent. Except for dividends with respect to the Keystone Preferred Stock, Keystone does not anticipate paying any cash dividends in the foreseeable future. LACK OF LIQUIDITY OF KEYSTONE COMMON STOCK; PURCHASES BY SIMMONS' RELATED PARTIES The liquidity of Keystone Common Stock may be negatively affected by the relatively low number of shares held by nonaffiliates of Keystone and relatively low historical trading volumes. The "public float" of Keystone Common Stock (i.e., shares owned by nonaffiliates of Keystone) is relatively small. Approximately 69% of the outstanding Keystone Common Stock is beneficially owned by related parties of Harold C. Simmons (including Contran). See "Certain Information About Keystone -- Security Ownership of Certain Beneficial Owners." For 1996 (through August 21, 1996), the average daily trading volume of Keystone Common Stock on days that shares traded was approximately 2,300 shares or approximately 0.04% of the outstanding Keystone Common Stock. The market price of Keystone Common Stock, accordingly, may not be indicative of the market price of Keystone Common Stock in a more liquid market nor of Keystone's financial performance or business prospects. Related parties of Mr. H. Simmons (including Contran) from time to time have purchased shares of Keystone Common Stock. Since Keystone's rights offering completed in July 1988, such parties have increased their aggregate beneficial ownership from approximately 57% to 69% of the outstanding Keystone Common Stock. Such acquisitions include aggregate open-market purchases in 1995 of 87,150 shares (1.5% of the outstanding Keystone Common Stock) at an average price of approximately $13.60 per share and aggregate open-market purchases in 1996 through August 21, 1996 of 39,700 shares (0.7% of the outstanding Keystone Common Stock) at an average price of approximately $9.92 per share. Given the relatively small public float and relatively low daily trading volume of Keystone Common Stock, purchases by related parties of Mr. H. Simmons (including Contran) may have had some effect on the market price of Keystone Common Stock. Due to the factors mentioned above, the quoted market price of Keystone Common Stock should only be one factor in analyzing the value of Keystone. VOLATILITY OF MARKET PRICE OF KEYSTONE COMMON STOCK AFTER THE MERGER Even though after the Merger the number of shares of Keystone Common Stock held by nonaffiliates of Keystone will increase, the market price of Keystone Common Stock could be subject to significant price fluctuations in response to a number of factors, including those mentioned under "-- Lack of Liquidity of Keystone Common Stock; Purchases by Simmons' Related Parties," efforts, if any, to purchase or sell relatively large blocks of Keystone Common Stock, investor perceptions and general economic and other conditions. These factors may or may not relate to Keystone's financial performance or business prospects. MARKET PRICE FOR DESOTO COMMON STOCK The liquidity of DeSoto Common Stock may be negatively affected by the relatively large number of shares held by directors, officers and related entities as well as by certain persons unrelated to DeSoto and the resulting negative impact on the number of shares which are actively traded. See "Information About DeSoto -- Stock Ownership of Management and Others." As a result, trading in shares of DeSoto Common Stock may be characterized by price volatility, particularly, if efforts are made to buy or sell large amounts of such shares. In addition, current trading volumes and prices of DeSoto's Common Stock may reflect investor perceptions of the Merger. Therefore, the market price of DeSoto Common Stock may not necessarily be indicative of the market price of DeSoto Common Stock in a more liquid market or of DeSoto's financial performance or business prospects. As a result, the quoted market price of DeSoto Common Stock should only be one factor in analyzing the value of DeSoto. 24 30 SHARES ELIGIBLE FOR FUTURE SALE As a result of the Merger, it is anticipated that Keystone will issue approximately 3,500,000 shares of Keystone Common Stock, approximately 137,000 shares of Keystone Common Stock will be issuable upon the exercise of assumed DeSoto Options, and 447,900 shares of Keystone Common Stock will be issuable upon the exercise of warrants to purchase Keystone Common Stock. In general, except for shares issuable upon the exercise of such warrants whose transferability will be restricted by Rule 144 under the Securities Act, these shares will be freely tradable following the Merger, subject to certain resale restrictions for affiliates of DeSoto pursuant to Rules 144 and/or 145 under the Securities Act. See "The Merger and Related Transactions -- Affiliates' Restrictions on Sale of Keystone Common Stock." An aggregate of approximately 474,839 of the shares of Keystone Common Stock to be issued in the Merger will be beneficially owned by affiliates of DeSoto and, therefore, subject to resale restrictions. The sale of any of the foregoing shares may cause substantial fluctuations in the price of Keystone Common Stock over short time periods. ISSUANCE OF KEYSTONE PREFERRED STOCK Pursuant to the terms of the Reorganization Agreement, 435,456 shares of Keystone Preferred Stock will be issued in the Merger. In the event of a liquidation, dissolution or winding up of Keystone, no distribution will be made to holders of Keystone Common Stock until, among other things, holders of Keystone Preferred Stock have received $8.0375 per share of Keystone Preferred Stock plus all accrued but unpaid dividends thereon, whether or not earned or declared (the "Liquidation Preference"), to the date fixed for liquidation, dissolution or winding up. After payment of any unpaid accumulated dividends, the aggregate Liquidation Preference will be $3.5 million. There can be no assurance that in the event of such liquidation, dissolution or winding up of Keystone, the holders of Keystone Common Stock will receive any assets after payment of the Liquidation Preference. CERTAIN CHARTER PROVISIONS Shares of preferred stock may be issued in the future by Keystone without further stockholder approval and upon such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors of Keystone may determine. The rights of the holders of Keystone Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of Keystone. Keystone does not have any present plans to issue any shares of preferred stock other than the Keystone Preferred Stock to be issued pursuant to the Merger. THE KEYSTONE MEETING DATE, TIME AND PLACE OF MEETING The Keystone Meeting will be held on Friday, September 27, 1996 at 10:00 a.m., local time, at Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240-2697. RECORD DATE AND OUTSTANDING SHARES Only holders of record of Keystone Common Stock at the close of business on the Keystone Record Date are entitled to notice of and to vote at the Keystone Meeting. As of the close of business on August 21, 1996, there were 5,686,424 shares of Keystone Common Stock outstanding and entitled to vote, held of record by 1,049 stockholders. A majority, or 2,843,213 of these shares, present in person or represented by proxy, will constitute a quorum for the transaction of business. Each Keystone stockholder is entitled to one vote for each share of Keystone Common Stock held as of the Keystone Record Date. 25 31 VOTING OF PROXIES The Keystone proxy accompanying this Joint Proxy Statement/Prospectus is solicited on behalf of the Board of Directors of Keystone for use at the Keystone Meeting. Stockholders are requested to complete, sign and date the accompanying proxy and promptly return it in the accompanying envelope or otherwise mail it to Keystone. All proxies that are promptly executed and returned, and that are not revoked, will be voted at the Keystone Meeting in accordance with the instructions indicated on the proxies or, if no direction is indicated, to approve the issuance of shares of Keystone Common Stock pursuant to the Reorganization Agreement. Keystone's Board of Directors does not presently intend to bring any business before the Keystone Meeting other than the specific proposals referred to in this Joint Proxy Statement/Prospectus and specified in the notice of the Keystone Meeting. So far as is known to Keystone's Board of Directors, no other matters are to be brought before the Keystone Meeting. As to any business that may properly come before the Keystone Meeting, however, it is intended that proxies, in the form enclosed, will be voted in respect thereof in accordance with the judgment of the persons voting such proxies. A Keystone stockholder who has given a proxy may revoke it at any time before it is exercised at the Keystone Meeting by (i) delivering to the Secretary of Keystone (by any means, including facsimile) a written notice, bearing a date later than the proxy, stating the proxy is revoked; (ii) signing and so delivering a proxy relating to the same shares and bearing a later date prior to the vote at the Keystone Meeting; or (iii) attending the Keystone Meeting and voting in person (although attendance at the Keystone Meeting will not, by itself, revoke a proxy). VOTE REQUIRED Because the number of shares of Keystone Common Stock to be issued or reserved for issuance in connection with the Merger will exceed twenty percent (20%) of the number of shares of Keystone Common Stock outstanding prior to the Merger, approval by holders of Keystone Common Stock of the proposal to issue Keystone Common Stock pursuant to the Reorganization Agreement is required under the rules of the NYSE. Under the NYSE rules, the proposal to issue Keystone Common Stock pursuant to the Reorganization Agreement must be approved by a majority of the votes cast at the Keystone Meeting, provided the total vote cast represents a majority of the shares entitled to vote thereon. If the holders of Keystone Common Stock do not vote to approve such issuance, the Merger will not be consummated. As of August 21, 1996, the directors and executive officers of Keystone and their affiliates had the right to vote an aggregate of 4,168,881 shares of Keystone Common Stock, representing approximately seventy-three percent (73%) of Keystone Common Stock outstanding. Contran, holding directly approximately fifty six percent (56%) of the Keystone Common Stock outstanding as of August 21, 1996, is a party to an agreement with DeSoto pursuant to which Contran has agreed to vote its shares of Keystone Common Stock in favor of the Reorganization Agreement and the transactions contemplated thereby, thus insuring Keystone stockholder approval. See "The Reorganization Agreement -- Related Agreements; Interests of Certain Persons in Matters Acted Upon -- Stockholders Agreement." QUORUM; BROKER NON-VOTES The required quorum for the transaction of business at the Keystone Meeting is a majority of the shares of Keystone Common Stock issued and outstanding on the Keystone Record Date. Abstentions and broker non-votes will be included in determining the number of shares present for purposes of determining the presence of a quorum but will not be counted as a vote for or against approval of the issuance of Keystone Common Stock pursuant to the Reorganization Agreement. Approval of the Merger or the Reorganization Agreement is not required under the DGCL or Keystone's Certificate of Incorporation or its Bylaws. SOLICITATION OF PROXIES AND EXPENSES Keystone will bear the cost of the solicitation of proxies in the enclosed form from its stockholders. In addition to solicitation by mail, the directors, officers and employees of Keystone may solicit proxies from stockholders by telephone, telegram, letter, facsimile or in person. Following the initial mailing of the proxies and other soliciting materials, Keystone will request brokers, custodians, nominees and other record holders to forward copies of the proxy and other soliciting materials to persons for whom they hold shares of Keystone 26 32 Common Stock and to request authority for the exercise of proxies. In such cases, Keystone, upon the request of the record holders, will reimburse such holders for their reasonable expenses. THE DESOTO MEETING DATE, TIME AND PLACE OF MEETING The DeSoto Meeting will be held on Friday, September 27, 1996 at 10:00 a.m., local time, at the Bank of Montreal, 430 Park Avenue, 16th Floor, New York, New York. RECORD DATE AND OUTSTANDING SHARES Only holders of record of DeSoto Common Stock and DeSoto Preferred Stock at the close of business on the DeSoto Record Date are entitled to notice of and to vote at the DeSoto Meeting. As of the close of business on August 21, 1996, there were 4,688,523 shares of DeSoto Common Stock outstanding and entitled to vote, held of record by 1,691 stockholders and 583,333 shares of DeSoto Preferred Stock outstanding and entitled to vote, held of record by three stockholders. Each DeSoto stockholder is entitled to one vote for each share of DeSoto Common Stock and each share of DeSoto Preferred Stock held as of the DeSoto Record Date. VOTING OF PROXIES The DeSoto proxy accompanying this Joint Proxy Statement/Prospectus is solicited on behalf of the Board of Directors of DeSoto for use at the DeSoto Meeting. Stockholders are requested to complete, sign and date the accompanying proxy and promptly return it in the accompanying envelope or otherwise mail it to DeSoto. All proxies that are promptly executed and returned, and that are not revoked, will be voted at the DeSoto Meeting in accordance with the instructions indicated on the proxies or, if no direction is indicated, to approve and adopt the Reorganization Agreement. DeSoto's Board of Directors does not presently intend to bring any business before the DeSoto Meeting other than the specific proposals referred to in this Joint Proxy Statement/Prospectus and specified in the notice of the DeSoto Meeting. So far as is known to DeSoto's Board of Directors, no other matters are to be brought before the DeSoto Meeting. As to any business that may properly come before the DeSoto Meeting, however, it is intended that proxies, in the form enclosed, will be voted in respect thereof in accordance with the judgment of the persons voting such proxies. A DeSoto stockholder who has given a proxy may revoke it at any time before it is exercised at the DeSoto Meeting by (i) delivering to the Secretary of DeSoto (by any means, including facsimile) a written notice, bearing a date later than the proxy, stating that the proxy is revoked; (ii) signing and so delivering a proxy relating to the same shares and bearing a later date prior to the vote at the DeSoto Meeting; or (iii) attending the DeSoto Meeting and voting in person (although attendance at the DeSoto Meeting will not, by itself, revoke a proxy). VOTE REQUIRED Pursuant to DeSoto's Certificate of Incorporation and the DGCL, the Reorganization Agreement must be approved by a majority of the outstanding shares of DeSoto Common Stock and DeSoto Preferred Stock voting together as one class. If the holders of DeSoto do not vote to approve such transaction, the Merger will not be consummated. As of August 21, 1996, the directors and officers of DeSoto and their affiliates had the right to vote an aggregate of 636,087 shares of DeSoto Common Stock and all the outstanding DeSoto Preferred Stock, representing approximately twenty-three percent (23%) of all DeSoto voting stock outstanding as of such date. Certain entities affiliated with directors of DeSoto and a director of DeSoto collectively having the right to vote 596,989 shares of DeSoto Common Stock and all of the outstanding shares of DeSoto Preferred Stock, representing approximately 22% of the combined shares of DeSoto Common Stock and DeSoto Preferred Stock outstanding as of the DeSoto Record Date are parties to an agreement with Keystone pursuant to which they have agreed to vote their shares of DeSoto Common Stock and DeSoto Preferred Stock in favor of the approval and adoption of the Reorganization Agreement. 27 33 QUORUM; BROKER NON-VOTES The required quorum for the transaction of business at the DeSoto Meeting is a majority of the shares of DeSoto Common Stock and DeSoto Preferred Stock, taken together, issued and outstanding on the DeSoto Record Date. Abstentions and broker non-votes will have the same effect as votes against the Reorganization Agreement. SOLICITATION OF PROXIES AND EXPENSES DeSoto will bear the cost of the solicitation of proxies in the enclosed form from its stockholders. In addition to solicitation by mail, the directors, officers and employees of DeSoto may solicit proxies from stockholders by telephone, telegram, letter, facsimile or in person. Following the initial mailing of the proxies and other soliciting materials, DeSoto will request brokers, custodians, nominees and other record holders to forward copies of the proxy and other soliciting materials to persons for whom they hold shares of DeSoto Common Stock and to request authority for the exercise of proxies. In such cases, DeSoto, upon the request of the record holders, will reimburse such holders for their reasonable expenses. In addition, DeSoto has retained Georgeson & Co., Inc. to assist in the solicitation of proxies for a fee of approximately $10,000, plus expenses. THE MERGER AND RELATED TRANSACTIONS GENERAL The Reorganization Agreement provides for the merger of Sub with and into DeSoto, with DeSoto to be the surviving corporation of the Merger. As a consequence of the Merger, DeSoto will become a wholly owned subsidiary of Keystone. If the requisite approvals of the stockholders of DeSoto and Keystone are received, the Merger is expected to be consummated as soon as practicable after the satisfaction or waiver of each of the conditions to consummation of the Merger, which is expected to occur as soon as practicable following receipt of stockholder approval at the Keystone and DeSoto Meetings. The discussion in this Joint Proxy Statement/Prospectus of the Merger and the description of the principal terms of the Reorganization Agreement are subject to and qualified in their entirety by reference to the Reorganization Agreement, a copy of which is attached to this Joint Proxy Statement/Prospectus as Appendix A, and incorporated herein by reference. Upon consummation of the Merger, Keystone's Board of Directors will be increased from seven to nine members, and the Keystone Board of Directors will elect William Spier, the Chairman of the Board and Chief Executive Officer of DeSoto, and William P. Lyons, another current member of the Board of Directors of DeSoto, to fill the vacancies thereby created. The executive officers of Keystone will remain unchanged as a result of the Merger. The stockholders of DeSoto will become stockholders of Keystone (as described below), and their rights will be governed by Keystone's Certificate of Incorporation and Bylaws. As soon as practicable after the Merger, the Keystone defined benefit pension plans will be merged with and into the DeSoto defined benefit pension plan. Conversion of Shares Upon the consummation of the Merger, each then outstanding share of DeSoto Common Stock and DeSoto Preferred Stock, will automatically be converted into .7465 of a share of Keystone Common Stock and Keystone Preferred Stock, respectively. No fractional shares of Keystone Common Stock or will be issued in the Merger. Instead, each DeSoto stockholder who would otherwise be entitled to receive a fractional share of Keystone Common Stock will receive an amount of cash equal to the per share market value of Keystone Common Stock (based on the average of the closing sales prices of Keystone Common Stock as quoted on the NYSE during the ten trading day period ending on the closing date of the Merger) multiplied by the fraction of a share of Keystone Common Stock to which the stockholder would otherwise be entitled. Based upon the capitalization of DeSoto and Keystone as of August 21, 1996, the stockholders of DeSoto will own Keystone Common Stock representing approximately thirty-eight percent (38%) of the Keystone Common Stock outstanding immediately after consummation of the Merger and one hundred percent (100%) of the Keystone Preferred Stock outstanding immediately after consummation of the Merger. Because the Exchange Ratio is 28 34 fixed, the number of shares to be received by stockholders of DeSoto upon consummation of the Merger will remain the same, regardless of whether the market price of the Common Stock of Keystone or DeSoto increases or decreases at any time, including after the date of this Joint Proxy Statement/Prospectus and after the dates of the Keystone and DeSoto Meetings. See "The Merger and Related Transactions -- Opinions of Financial Advisors" and "Risk Factors -- Fixed Exchange Ratio." Assumption of Options and Conversion of Warrants Upon consummation of the Merger, each then outstanding DeSoto Option will be assumed by Keystone and will automatically be converted into an option to purchase the number of shares of Keystone Common Stock determined by multiplying the number of shares of DeSoto Common Stock subject to the DeSoto Option by the Exchange Ratio, at an exercise price equal to the exercise price of such DeSoto Option at the time of the Merger divided by the Exchange Ratio. To avoid fractional shares, the number of shares of Keystone Common Stock subject to an assumed DeSoto Option will be rounded up to the nearest whole share. The other terms of DeSoto Options, including vesting schedules, will remain unchanged. Keystone will file a Registration Statement on Form S-8 with the Commission with respect to the issuance of shares of Keystone Common Stock upon exercise of the assumed DeSoto Options and cause such shares, upon issuance, to be listed with the NYSE. Pursuant to the Warrant Conversion Agreement, at the Effective Time, one-half of the DeSoto Warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock will be cancelled and the remaining one-half of the DeSoto Warrants will be converted into Keystone Warrants to purchase 447,900 shares of Keystone Common Stock (representing the shares of DeSoto Common Stock subject to the remaining DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price equal to approximately $9.38 per share (representing the exercise price of the DeSoto Warrants divided by the Exchange Ratio). As of August 21, 1996, DeSoto Options to acquire approximately 184,000 shares of DeSoto Common Stock and DeSoto Warrants to acquire 1,200,000 shares of DeSoto Common Stock were outstanding. ACTIONS SUBSEQUENT TO THE MERGER Operation of DeSoto After consummation of the Merger, Keystone intends to continue to maintain DeSoto as a separate subsidiary and to operate DeSoto's Joliet manufacturing facility. Prior to the Merger, Keystone will contribute the net assets of its Sherman Wire division to Sub. Accordingly, following the Merger, DeSoto's operations will be comprised of DeSoto's Joliet operations and Keystone's Sherman Wire operations. Merger of Pension Plans Keystone intends, as soon as practicable after consummation of the Merger, to merge the Keystone defined benefit pension plans with and into the DeSoto defined benefit pension plan. Keystone believes that after such merger, it will no longer have an underfunded pension obligation. See "Unaudited Pro Forma Consolidated Financial Information." BACKGROUND OF THE MERGER On January 6, 1995, William Spier, Chairman and Chief Executive Officer of DeSoto, sent a letter to Mr. H. Simmons, Chairman and Chief Executive Officer of Contran, to determine if there was any interest on the part of Keystone in a potential transaction with DeSoto. Soon thereafter, Glenn R. Simmons, Chairman and Chief Executive Officer of Keystone and Vice Chairman of Contran, contacted Mr. Spier concerning a potential transaction. On January 11, 1995, Keystone and DeSoto executed a letter agreement, pursuant to which the parties agreed to keep confidential any information exchanged by the parties in connection with a possible transaction between Keystone and DeSoto. The parties also agreed not to propose to the other's security holders an 29 35 extraordinary transaction involving the two parties without the consent of the other company's Board of Directors. On January 17, 1995, Harold Curdy, Vice President -- Finance of Keystone, and Messrs. G. Simmons and Spier met and had preliminary discussions concerning a potential transaction. From January 18, 1995 through June 1995, the parties performed due diligence proceedings through meetings and phone conferences between the parties and their respective legal and financial advisors. On June 9, 1995, Messrs. Curdy, Robert Singer, President of Keystone, and Joseph Compofelice, an executive officer of certain companies related to Contran, met with Mr. Spier and representatives of Salomon Brothers, DeSoto's financial advisor, to discuss, among other things, terms of a potential transaction. At that meeting, as a result of Keystone's due diligence to such date, Keystone offered the following alternatives: (i) Keystone would issue 3,500,000 shares of Keystone Common Stock for DeSoto, subject to further due diligence by Keystone or (ii) Contran would sell its interest in Keystone to Mr. Spier and his affiliates at a price to be determined. On July 27, 1995, Mr. Spier, in a letter to Mr. G. Simmons, indicated the transaction to purchase Contran's interest in Keystone would not be feasible but DeSoto would be willing to accept 4,250,000 shares of Keystone Common Stock. By letter dated August 9, 1995, Keystone notified DeSoto that Keystone was no longer interested in pursuing discussions in respect of a possible merger of the two companies. There were no further formal discussions between the parties until January 18, 1996, when Messrs. G. Simmons, Singer, Spier, and Curdy met to discuss the terms of a possible merger, including the issuance of approximately 3,500,000 shares of Keystone Common Stock (the "Proposed Exchange Ratio") subject to further due diligence, receipt of fairness opinions, and approvals by the parties' respective Boards of Directors and stockholders and Keystone's primary lender. Thereafter, the parties renewed due diligence proceedings. On January 23, 1996, Messrs. G. Simmons, Curdy and Spier met to discuss terms and financial constraints on Keystone's ability to consummate the proposed merger. On February 5, 1996, Mr. Curdy and Ms. Anne Eisele, President of DeSoto, met to coordinate the due diligence process. On February 13, 1996, Messrs. Curdy, Spier and Ms. Eisele met with representatives of Keystone's primary lender to discuss possible funding for DeSoto. On March 5, 1996, Mr. Curdy met with representatives of the PBGC to discuss the proposed merger and the subsequent merger of the Keystone and DeSoto defined benefit pension plans. On March 13, 1996, Keystone and DeSoto issued press releases indicating that the parties were involved in discussions about a proposed merger at the Proposed Exchange Ratio. Thereafter, the parties continued due diligence proceedings and began negotiating the terms of the Reorganization Agreement and the related agreements. On June 13, 1996, the Board of Directors of Keystone met to consider the proposed Reorganization Agreement and the transactions contemplated thereby. At such meeting, members of Keystone's senior management, together with Keystone's legal and financial advisors, reviewed with the Keystone Board of Directors, among other things, the background of the proposed transaction, the potential benefits and risks of the transaction, including the strategic and financial rationale, analysis of the transaction and the terms of the Reorganization Agreement. PaineWebber delivered its oral opinion (confirmed in writing as of the date of the Reorganization Agreement) that the consideration to be paid by Keystone is fair, from a financial point of view, to the stockholders of Keystone (except that as to Contran and its affiliates PaineWebber did not express an opinion). See "-- Opinions of Financial Advisors -- Opinion of PaineWebber, Financial Advisor to Keystone" for a discussion of the factors considered and the analytical methods employed by PaineWebber in reaching such conclusion. The Keystone Board of Directors unanimously approved the principal terms of the Reorganization Agreement and the transactions contemplated thereby. The Keystone Board of Directors also 30 36 unanimously approved the principal terms of the Voting Agreements (including the possible acquisition of beneficial ownership of Keystone Common Stock pursuant thereto by DeSoto for purposes of Section 203 of the DGCL), the Warrant Conversion Agreement, the Preferred Stockholder Waiver and Consent Agreement, and the Stockholders' Agreement. See "The Reorganization Agreement -- Related Agreements; Interests of Certain Persons in Matters Acted Upon." On June 13, 1996, the Board of Directors of DeSoto met to consider the proposed Reorganization Agreement and the transactions contemplated thereby. At such meeting, members of DeSoto's senior management, together with DeSoto's legal and financial advisors, reviewed with the Board, among other things, the background of the proposed transaction, the potential benefits and risks of the transaction, including the strategic and financial rationale, analysis of the transaction and the terms of the Reorganization Agreement. Salomon Brothers delivered its oral opinion (confirmed in writing as of the date of the Joint Proxy Statement/Prospectus) that as of that date, the Exchange Ratio was fair, from a financial point of view, to the holders of DeSoto Common Stock. See "-- Opinions of Financial Advisors -- Opinion of Salomon Brothers, Financial Advisor to DeSoto" for a discussion of the facts considered and the analytical methods employed by Salomon Brothers in reaching such conclusion. The DeSoto Board of Directors unanimously approved the Reorganization Agreement and the transactions contemplated thereby. The DeSoto Board of Directors also unanimously approved the principal terms of the Voting Agreements and the Preferred Stockholder Waiver and Consent Agreement (including the possible acquisition by Keystone of beneficial ownership of DeSoto Common Stock and DeSoto Preferred Stock pursuant thereto for purposes of Section 203 of the DGCL). See "The Reorganization Agreement -- Related Agreements; Interests of Certain Persons in Matters Acted Upon." Following the Keystone and DeSoto Board meetings and through June 26, 1996, the Reorganization Agreement and the related agreements were finalized. Keystone and DeSoto each executed the Reorganization Agreement and related agreements on June 26, 1996, and the Reorganization Agreement was announced immediately thereafter by the issuance of press releases. The Exchange Ratio and other terms of the Merger were determined in arms-length negotiations between the management teams and the Boards of Directors of the two companies. The Exchange Ratio was determined after consideration of, among other things, the shares, options and warrants outstanding of each company, the relative trading prices of the two companies' stock over various periods of time, the companies' respective capital structures and pension funding status, historical and prospective revenues and operating profits, the respective growth rates of the two companies, the business prospects of the combined company, the relative contributions of the two companies to the business, liquidity and financial condition of the combined company and consultation with the financial advisors of the companies (who participated in discussions regarding the Exchange Ratio but did not determine or recommend the Exchange Ratio). REASONS FOR THE MERGER Keystone's Reasons for the Merger The Board of Directors has determined the terms of the Reorganization Agreement and the transactions contemplated thereby, which were established through arms-length negotiations with DeSoto, are fair to, and in the best interests of, Keystone and its stockholders. Accordingly, the Board of Directors of Keystone has unanimously approved the Reorganization Agreement and unanimously recommends the stockholders of Keystone vote FOR approval of the issuance of shares pursuant to the Reorganization Agreement. In reaching its determination, the Board of Directors consulted with Keystone's management, as well as its legal counsel and financial advisor, and considered a number of reasons and factors, including the following: (i) At June 30, 1996, Keystone's defined benefit pension plans were underfunded by approximately $33 million and the net pension liabilities adjustment in common stockholders' equity amounted to approximately $31 million. Based on Keystone's and DeSoto's balance sheets at June 30, 1996, the Merger and subsequent merger of the Keystone and DeSoto defined benefit pension plans would result in an increase of approximately $66 million in Keystone's common stockholders' equity due to the issuance of approximately 3,500,000 shares of Keystone Common Stock and the elimination of the net pension 31 37 liabilities adjustment. Additionally, the proposed merger of the pension plans would also result in the elimination of the $33 million accrued pension liability and recording of an approximate $102 million pension asset. See Note 2 to the Unaudited Pro Forma Consolidated Financial Information. (ii) The merger of the Keystone defined benefit pension plans with and into the DeSoto defined benefit pension plan should also result in lower pension contributions and pension expense than Keystone has historically experienced. The anticipated increase in cash flows due to lower pension contributions should eventually more than offset the cash payments required to be made as a result of the Merger. Likewise, it is expected the decrease in pension expense will also more than offset the increase in interest expense from the higher borrowings required to fund payments required by the Merger, thus resulting in increased earnings. See Note 2 to the Unaudited Pro Forma Consolidated Financial Information. (iii) In addition to an improved balance sheet and the anticipated favorable impact on cash flows and reduction in pension expense, Keystone's Board of Directors also believes the increased public holdings of Keystone's Common Stock, as a result of the issuance of approximately 3,500,000 shares to the DeSoto stockholders, will make Keystone Common Stock more attractive to potential investors and increase the liquidity of Keystone Common Stock. In the course of its deliberations, the Board of Directors of Keystone reviewed and considered a number of other factors relevant to the Merger with Keystone's management. In particular, the Keystone Board considered, among other things: (i) information concerning Keystone's and DeSoto's respective businesses, prospects, financial performances, liquidity, financial condition and operations; (ii) the comparative stock prices of Keystone Common Stock and DeSoto Common Stock; (iii) an analysis of the respective contributions to revenues, operating profits, net profits and cash flows of the combined companies; and (iv) a presentation by PaineWebber, including the opinion of PaineWebber that the consideration to be paid by Keystone pursuant to the Merger was fair from a financial point of view to Keystone stockholders (other than Contran and its affiliates) as well as the underlying financial analysis of PaineWebber presented in connection therewith. Following its deliberations concerning such factors and its review of the presentation and financial opinion of PaineWebber, the Board of Directors of Keystone concluded the Merger may improve the long-term prospects of the combined company for earnings growth, may increase stockholder value and was in the best interest of Keystone and its stockholders from both a financial and strategic perspective. In connection with its deliberations, the Keystone Board of Directors was aware of the potential benefits to be received in the Merger by Contran and its affiliates, as described in "Risk Factors -- Interests of Certain Persons in the Merger" and "The Reorganization Agreement -- Related Agreements; Interests of Certain Persons in Matters Acted Upon." The Board of Directors of Keystone also considered a variety of potentially negative factors in its deliberations concerning the Merger, including: (i) the possible dilutive effect of the issuance of Keystone stock in the Merger; (ii) the risk that the public market price of Keystone's stock might be adversely affected by announcement of the Merger; (iii) the costs expected to be incurred in connection with the Merger, including the transaction costs and payments required by the Merger; (iv) the risk that other benefits sought to be obtained by the Merger will not be obtained; and (v) other risks described above under "Risk Factors." In view of the wide variety of factors considered in connection with its evaluation of the proposed Merger, the Board of Directors did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors considered in reaching its determination, each of which was viewed as supportive of its conclusion that the terms of the Reorganization Agreement are fair to, and in the best interest of, Keystone and all of its stockholders. 32 38 THE KEYSTONE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT KEYSTONE STOCKHOLDERS VOTE TO APPROVE THE ISSUANCE OF KEYSTONE COMMON STOCK PURSUANT TO THE REORGANIZATION AGREEMENT. DeSoto's Reasons for the Merger The DeSoto Board of Directors has determined the terms of the Reorganization Agreement and the transactions contemplated thereby, which were established through arms-length negotiation with Keystone, are fair to, and in the best interests of, DeSoto and its stockholders. Accordingly, the Board of Directors of DeSoto has unanimously approved the Reorganization Agreement and unanimously recommends the stockholders of DeSoto vote FOR approval and adoption of the Reorganization Agreement. In reaching its determination, the Board of Directors consulted with DeSoto's management, as well as its legal counsel and financial advisor, and considered a number of reasons and factors, including the following: (i) The conclusion that the only strategic alternatives available to DeSoto were either termination of DeSoto's overfunded pension plan or a sale of DeSoto or another extraordinary corporate transaction providing value to stockholders and resolving DeSoto's liquidity problems. This conclusion resulted from the Board's ongoing review of DeSoto's past performance and future prospects. DeSoto has suffered negative cash flow from operations (excluding one time items, such as insurance settlements) for a number of years and has attempted to address the resultant cash flow and business consequences in a number of ways. In March 1992, the DeSoto Board adopted a resolution eliminating the regular quarterly dividend on DeSoto Common Stock. In the second half of 1992, DeSoto raised $3.5 million through the sale of warrants and DeSoto Preferred Stock and acquired J. L. Prescott Company, in an effort to improve its competitive position in the industry and diversify its business. The results of this acquisition were disappointing and DeSoto attempted to explore strategic alliances with other companies in its industry beginning in late 1994. These efforts focused on promoting and leveraging DeSoto's position in the industry as well as on opportunities to enable it to preserve and maximize stockholder value. No significant transactions resulted from these efforts and, in order to raise cash, DeSoto, among other things, began to dispose of certain assets in 1995 and 1996. (These dispositions are described in the business description of DeSoto under "Information About DeSoto"). At the same time, throughout 1995 and 1996, DeSoto continued to seek out opportunities to maximize stockholder value, which objectives were publicly announced in DeSoto's periodic filings with the Commission. In light of DeSoto's continuing liquidity difficulties, remaining a public company without termination of the pension plan was not viewed as a viable alternative. In that regard, DeSoto's current agreement with its trade creditors requires either consummation of the Merger or termination of the pension plan. See "Information About DeSoto -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (ii) The conclusion that the only strategic alternative identified by DeSoto management to termination of the pension plan is the Merger. This conclusion is based on the failure of discussions with a number of third parties in 1995 and 1996 to result in any viable proposal to acquire DeSoto or otherwise engage in a transaction resolving DeSoto's liquidity problems. The DeSoto Board of Directors took into account the amount of time that had transpired between the public announcement on March 13, 1996, of the terms of a possible transaction with Keystone and its June 13 meeting without any serious expression of interest from a third party regarding an alternative transaction. (iii) A comparison of the relative values likely to be realized by DeSoto stockholders pursuant to the Merger and a termination of the pension plan which resulted in the view that the Merger was likely to provide significantly greater value per share of DeSoto Common Stock in the foreseeable future. Although there is no assurance as to actual values of the consideration to be received by DeSoto stockholders pursuant to the Merger or of DeSoto Common Stock following a termination of the pension plan, a number of factors were reviewed. These included the recent trading ranges of Keystone Common Stock, the expected financial benefits of the Merger to Keystone, the high rates of taxes applicable to the surplus pension assets reverting to DeSoto upon a termination of the pension plan (which since 1990, include, in addition to federal and state income taxes, a federal excise tax of either 20% or 50% depending 33 39 upon whether, among other things, a "qualified replacement plan" receiving 25% of surplus plan assets is established), and the uncertainty relating to the business diversification opportunities for the use of excess cash generated by the pension plan termination (distribution to stockholders was not considered feasible in light of potential taxes payable by stockholders and the need to maintain reserves for contingencies). In the course of its review during 1995 and 1996 of the possibility of terminating the pension plan, the DeSoto Board of Directors determined that a reasonable rough estimate of possible ranges of values realizable through this alternative might be between $3 and $6 per share of DeSoto Common Stock depending upon values attributed to a qualified replacement plan, assumptions made regarding the satisfaction of contingent and other liabilities, and an expectation that operating losses from DeSoto's operating business would be eliminated, possibly through the termination of this business. This determination was not made with a view toward public disclosure and was viewed as inherently uncertain and subject to significant variation from actual values achievable, which may be materially higher or lower than this rough estimate. This broad range of values was compared with the value to be received pursuant to the Merger, which based on the market price of Keystone Common Stock as of June 12, 1996 of $10 per share, would be approximately $7.47 per share of DeSoto Common Stock (although the actual market value of the Keystone Common Stock to be received in the Merger will be dependent upon market conditions at the Effective Time, which may be materially different from the market price as of June 12, 1996). See "Risk Factors -- Lack of Liquidity of Keystone Common Stock; Purchase by Simmons' Related Parties." (iv) The terms of the Reorganization Agreement, including (a) provisions requiring confirmation of the opinion of Salomon Brothers as to the fairness from a financial point of view of the Exchange Ratio to holders of DeSoto Common Stock as of one day before the Effective Time; and (b) the right of DeSoto to terminate the Reorganization Agreement if it enters into an agreement relating to a superior proposal and to provide information to, and negotiate with, third parties under certain circumstances (the DeSoto Board did not view its obligation to pay the $1 million Break-up Fee to Keystone and the restrictions on its ability to discuss alternative transactions with third parties as unreasonably precluding any third party from proposing an alternative transaction). (v) The presentation of DeSoto's financial advisor, Salomon Brothers, and its oral opinion to the effect that, as of June 13, 1996, and based upon the assumptions made, matters considered and limits of review, the Exchange Ratio was fair to the holders of DeSoto Common Stock from a financial point of view. For a summary of Salomon Brothers written opinion as of the date hereof and its presentation, see "-- Opinions of Financial Advisors -- Opinion of Salomon Brothers -- Financial Advisor to DeSoto". (vi) Information relating to the financial performance, prospects and business operations of each of DeSoto and Keystone. (vii) The willingness of the Warrant and Preferred Stockholders to accept cancellation of one-half of their warrants to purchase DeSoto Common Stock in order to generate additional value for other holders of DeSoto Common Stock and facilitate the Merger. (viii) The ability of holders of DeSoto Common Stock to continue to own equity in a combined Keystone/DeSoto entity which is expected to realize substantial financial benefits as a result of the Merger in a transaction which should be non-taxable to holders of DeSoto Common Stock for federal income tax purposes. In considering the fairness of the terms of the Reorganization Agreement to the holders of DeSoto Preferred Stock, the Board of Directors of DeSoto also considered the following additional factors: (i) The agreement by all of the holders of DeSoto Preferred Stock to vote in favor of the Reorganization Agreement; and 34 40 (ii) Keystone's agreement to pay an amount of cash to such holders in an amount equal to accrued but unpaid dividends on the DeSoto Preferred Stock. In connection with its deliberations at its June 13, 1996 meeting, the DeSoto Board of Directors was aware of the potential benefits to be received in the Merger by DeSoto's officers and directors, as described under "The Reorganization Agreement -- Related Agreements; Interests of Certain Persons in Matters Acted Upon." In view of the wide variety of factors considered in connection with its evaluation of the proposed Merger, the Board of Directors did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors considered in reaching its determination, each of which was viewed as supportive of its conclusion that the terms of the Reorganization Agreement are fair to, and in the best interest of, DeSoto and its stockholders. THE DESOTO BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT DESOTO STOCKHOLDERS VOTE TO APPROVE AND ADOPT THE REORGANIZATION AGREEMENT. BOARD RECOMMENDATIONS THE BOARD OF DIRECTORS OF KEYSTONE BELIEVES THE MERGER IS FAIR TO, AND IN THE BEST INTEREST OF KEYSTONE AND ITS STOCKHOLDERS AND, THEREFORE, UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF SHARES OF KEYSTONE COMMON STOCK PURSUANT TO THE REORGANIZATION AGREEMENT. THE BOARD OF DIRECTORS OF DESOTO BELIEVES THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, DESOTO AND ITS STOCKHOLDERS AND, THEREFORE, UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT. OPINIONS OF FINANCIAL ADVISORS Opinion of PaineWebber, Financial Advisor to Keystone Keystone retained PaineWebber on May 16, 1996, to provide certain investment banking advice and services in connection with the Merger, including rendering its opinion as to the fairness, from a financial point of view to Keystone stockholders (other than Contran and its affiliates), of the consideration to be paid by Keystone in the Merger. At the June 13, 1996 meeting of the Keystone Board of Directors, representatives of PaineWebber made a presentation with respect to the Merger and rendered an oral opinion to the Keystone Board, subsequently confirmed in writing as of the date of the Reorganization Agreement, that, based upon the facts and circumstances as they existed at the time, and subject to certain assumptions, factors and limitations set forth in such opinion, the consideration to be paid by Keystone in the Merger was fair, from a financial point of view, to Keystone stockholders (other than Contran and its affiliates). No limitations were imposed by the Board upon PaineWebber with respect to the investigations made or procedures followed by it in rendering its opinion. The full text of PaineWebber's written opinion, dated June 26, 1996, which sets forth, among other things, assumptions made, matters considered and limitations on the review undertaken, is attached as Appendix B to this Joint Proxy Statement/Prospectus. Keystone stockholders are urged to read this opinion in its entirety. PaineWebber did not recommend to Keystone that any specific exchange ratios constituted the appropriate exchange ratio for the Merger. PaineWebber's opinion is directed to the Keystone Board, addresses only the fairness of the consideration to be paid by Keystone in the Merger to Keystone stockholders (other than Contran and its affiliates) from a financial point of view and does not constitute a recommendation to any Keystone stockholder as to how such stockholder should vote at the Keystone Meeting. The opinion was rendered to the Keystone Board for its consideration in determining whether to approve the Reorganization Agreement. The discussion of the opinion in this Joint Proxy Statement/Prospectus is qualified in its entirety by reference to the full text of the opinion. 35 41 In arriving at its opinion, PaineWebber, among other things: (i) reviewed, among other public information, Keystone's Annual Reports, Forms 10-K and related financial information for the five fiscal years ended December 31, 1995 and Keystone's Form 10-Q for the three months ended March 31, 1996; (ii) reviewed Keystone's projections prepared by Keystone's management; (iii) reviewed certain financial information relating to Keystone, including, earnings, cash flow, assets and liabilities statements, furnished to PaineWebber by Keystone; (iv) conducted discussions with senior management of Keystone regarding (a) the Company's operations and business prospects, (b) DeSoto's operations and business prospects and (c) certain studies prepared by Keystone and its legal and accounting advisors relating to potential off-balance sheet items; (v) considered the pro forma effect of the Merger on Keystone's cash flow and earnings per share; (vi) considered the pro form balance sheet effects of the Merger on Keystone; (vii) reviewed, among other public information, DeSoto's Annual Reports, Forms 10-K and related financial information for the five fiscal years ended December 31, 1995 and DeSoto's Form 10-Q for the three months ended March 31, 1996; (viii) conducted interviews with senior management of DeSoto, regarding DeSoto's operations, financial condition and business prospects; (ix) reviewed the Reorganization Agreement dated June 26, 1996; and (x) reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as PaineWebber deemed necessary including an assessment of regulatory, general economic, market and monetary conditions. In preparing its opinion, PaineWebber relied on the accuracy and completeness of all information that was publicly available or supplied or otherwise communicated to PaineWebber by or on behalf of Keystone and DeSoto, and PaineWebber has not assumed any responsibility to independently verify such information. PaineWebber has assumed that the projections were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of Keystone as to the future performance of Keystone. In arriving at its opinion, PaineWebber assumed that, as a result of the Merger and the follow on merger of the pension plans, Keystone's liabilities calculated in accordance with generally accepted accounting principles with respect to its pension plan will be eliminated and that certain projected obligations of Keystone to fund such liabilities will be reduced. PaineWebber has not undertaken, or caused to be taken, an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise, known or unknown) of Keystone and DeSoto and has assumed that all material liabilities (contingent or otherwise) are as set forth in Keystone's and DeSoto's respective consolidated financial statements and other provided information. PaineWebber's opinion is directed to the Board of Directors of Keystone and does not constitute a recommendation to any shareholder of Keystone as to how such shareholder should vote with respect to the issuance of Keystone Common Stock pursuant to the Reorganization Agreement. PaineWebber's opinion does not address the relative merits of the Merger and any other potential transactions or business strategies discussed by the Board of Directors of Keystone as alternatives to the Merger or the decision of the Board of Directors of Keystone to proceed with consummation of the Merger. PaineWebber assumed that there has been no material change in Keystone or DeSoto's assets, financial condition, results of operations, business or prospects since the date of the last financial statements made available to PaineWebber. PaineWebber assumed no responsibility to revise or update its opinion if there is a change in the financial condition or prospects of Keystone and DeSoto from that disclosed or projected in the information PaineWebber reviewed as set forth above or in the general, economic or market conditions. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative methods of financial analyses and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. Furthermore, in arriving at its fairness opinion, PaineWebber did not attribute any particular weight to any analysis or factor considered by it. Accordingly, PaineWebber believes that its analysis must be considered as a whole and that considering any portion of such analysis and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, PaineWebber made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Keystone and DeSoto. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be, significantly more or less favorable than as set forth 36 42 therein, and neither Keystone, DeSoto, nor PaineWebber assumes any responsibility for their accuracy. In addition, analyses relating to the value of the business do not purport to be appraisals or to reflect the prices at which businesses may actually be sold. The following is a summary of the analyses prepared by PaineWebber in connection with rendering its oral opinion to the Board of Directors of Keystone on June 13, 1996. Approach to Merger Analysis. Because Keystone expressed the view that it was undertaking the Merger primarily to eliminate the underfunding of its defined benefit pension plans, traditional forms of valuation analysis, such as comparable company analysis and comparable transaction analysis, were not considered meaningful indicators of value. Therefore, PaineWebber reviewed the fairness of the Merger through the methodologies summarized below. The financial projections of Keystone and DeSoto that were provided to PaineWebber were utilized and relied upon by PaineWebber in its analyses summarized below. Net Present Value (NPV). PaineWebber performed a 10-year net present value (NPV) analysis to determine the difference between (x) the present value of the pro forma cash flows contributed by DeSoto to Keystone, and (y) the consideration paid by Keystone in the Merger and the liabilities assumed by the surviving corporation to the Merger. For purposes of PaineWebber's analysis, and based on discussions with Keystone and DeSoto management, it was assumed that the DeSoto operating assets operate on a cash flow breakeven basis and thus have no cash flow impact. It was also assumed that the combined pro forma pension plan will terminate in year 10 following the Merger, and that after the Merger, Keystone would not be subject to any cash payments for environmental liabilities above insured and escrowed amounts. PaineWebber discounted the combined pro forma cash flows using discount rates ranging from 7% to 8%. Based on the above analysis, PaineWebber determined that the (x) present value of the pro forma cash flows contributed by DeSoto to Keystone pursuant to the Merger exceeded (y) the consideration paid by Keystone in the Merger and the liabilities assumed by the surviving corporation to the Merger by a range of between $4.8 million and $8.4 million. Pro Forma Earnings Analysis. PaineWebber performed a five-year analysis of the potential pro forma effect of the Merger on Keystone's earnings per share, assuming the Merger had been completed in 1991 and that certain actuarial assumptions for Keystone's defined benefit pension plans remained unchanged during such five-year period. Under this analysis, Keystone would have shown earnings per share accretion in each year ranging from a low of 5% in 1991 to a high of 69% in 1993. As an alternative to the Merger (but using the foregoing actuarial assumptions regarding the defined benefit pension plans), PaineWebber assumed that Keystone sold $50 million of common equity in 1991 at prices ranging from $9.25 to $11.25 per share for the purpose of reducing the underfunding in its pension account. (Keystone's stock price at January 1, 1991 was $10.25.) In all instances, the Merger, if completed in 1991, would have been more accretive on an earnings per share basis than Keystone's reported actual earnings or the presumed sale of equity. PaineWebber also performed a three-year analysis of the potential pro forma effect of the Merger on Keystone's earnings per share assuming the Merger is completed in 1996 and that certain actuarial assumptions for Keystone's defined benefit pension plans remained unchanged during such three-year period. Under this analysis, Keystone would have shown earnings per share accretion of 317%, 59% and 7% for the years ending December 31, 1996, 1997 and 1998, respectively. As an alternative to the Merger (but using the foregoing actuarial assumptions regarding the Keystone defined benefit pension plans), PaineWebber assumed that Keystone sold $40 million of common equity in 1996 at prices ranging from $8.00 to $10.00 per share for the purpose of reducing the underfunding in its pension account. In all instances, the Merger, if completed in 1996, was more accretive on an earnings per share basis than Keystone's projected earnings or the presumed sale of equity. Balance Sheet Analysis. PaineWebber reviewed the pro forma balance sheet effects of the Merger incorporating Keystone's balance sheet as of March 31, 1996 and DeSoto's projected balance sheet as of December 31, 1996. This analysis showed that Keystone's liabilities increased from $235 million to $277 million while common stockholders' equity increased from a negative $31 million to a positive $40 million. 37 43 Pursuant to a letter agreement dated May 16, 1996, between Keystone and PaineWebber, Keystone has agreed to pay PaineWebber a fee of $225,000 for rendering its opinion. In addition, Keystone has agreed to reimburse PaineWebber for its reasonable out-of-pocket expenses incurred in connection with rendering financial advisory services, including fees and disbursements of its legal counsel. This fee is payable regardless of the outcome of PaineWebber's opinions and whether or not the Merger is consummated. Keystone has agreed to indemnify PaineWebber and its directors, officers, agents, employees and controlling persons, for certain costs, expenses, losses, claims, damages and liabilities related to or arising out of its rendering of services under its engagement as financial advisor. The Board of Directors of Keystone retained PaineWebber to act as its advisor based upon PaineWebber's qualifications, experience and expertise. PaineWebber is an internationally recognized investment banking firm and, as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for corporate and other purposes. PaineWebber may actively trade the equity securities of Keystone and DeSoto for its own account and for the account of its customers and, accordingly, may at any time hold a long or short position in such securities. Opinion of Salomon Brothers, Financial Advisor to DeSoto DeSoto has retained Salomon Brothers to act as its financial advisor in connection with the Merger. At the June 13, 1996 meeting of DeSoto's Board of Directors, Salomon Brothers delivered its oral opinion to the Board of Directors of DeSoto that, as of that date, the Exchange Ratio was fair to the holders of DeSoto Common Stock from a financial point of view. On the date of this Joint Proxy Statement/Prospectus, Salomon Brothers has delivered its written opinion to the Board of Directors of DeSoto that, as of the date hereof, the Exchange Ratio was fair to the holders of DeSoto Common Stock from a financial point of view. No limitations were imposed by the Board of Directors of DeSoto upon Salomon Brothers with respect to the investigations made or the procedures followed by Salomon Brothers in rendering its opinions. The full text of the written opinion of Salomon Brothers dated as of the date of this Joint Proxy Statement/Prospectus, which sets forth the assumptions made, matters considered, and limits on the review undertaken by Salomon Brothers in rendering its opinion, is attached as Appendix C to this Joint Proxy Statement/Prospectus. DeSoto stockholders are urged to read the opinion carefully and in its entirety. Salomon Brothers' opinion addresses only the fairness of the Exchange Ratio from a financial point of view to the holders of DeSoto Common Stock as of the date of the opinion, and does not constitute a recommendation to any stockholder of DeSoto as to how such stockholder should vote at the DeSoto Meeting. The summary of the opinion of Salomon Brothers set forth in this Joint Proxy Statement/Prospectus is qualified in its entirety by reference to the full text of such opinion. In arriving at its opinions, Salomon Brothers (i) reviewed the Reorganization Agreement and its related schedules, (ii) reviewed certain publicly available business and financial information relating to Keystone and DeSoto, (iii) reviewed certain other information, including financial projections, provided to Salomon Brothers by Keystone and DeSoto, (iv) reviewed certain information relating to the defined benefit pension plans of Keystone and DeSoto, and (v) conducted due diligence discussions with members of senior management of both Keystone and DeSoto to discuss the past and current operations and financial condition and prospects of Keystone and DeSoto. Salomon Brothers also considered such other information, financial studies, analyses, investigations and financial, economic and market criteria as it deemed relevant. In connection with its review, Salomon Brothers did not assume any responsibility for independently verifying any of the foregoing information and relied on such information being complete and accurate in all material respects. With respect to the financial projections, Salomon Brothers assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Keystone and DeSoto, as the case may be, as to the future financial performance of Keystone and DeSoto, as the case may be. Salomon Brothers did not express any opinion with respect to such projections or the assumptions on which they are based, including assumptions regarding the effects of any outstanding or potential litigation, investigations, inquiries or other actions. In addition, Salomon Brothers did 38 44 not make an independent evaluation or appraisal of any of the assets of Keystone or of DeSoto, nor was it furnished with any such appraisals. Each of Salomon Brothers' opinions was necessarily based upon business, market, economic and other conditions as they existed on, and could be evaluated as of, the respective dates of such opinions, and did not address DeSoto's underlying business decision to effect the Merger. Salomon Brothers' opinions do not imply any conclusion as to the likely trading range for the Keystone Common Stock following the consummation of the Merger, which may vary depending on, among other factors, changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. In connection with its opinions, Salomon Brothers performed certain financial analyses, which were reviewed with the Board of Directors of DeSoto at its June 13, 1996 meeting. The following is a summary of these analyses. Overview of Keystone. Salomon Brothers reviewed the business of Keystone and its historical financial performance for the years 1991, 1992, 1993, 1994, and 1995 and its latest twelve months ("LTM") as of March 31, 1996, including for such periods net sales, percentage growth in net sales, cost of goods sold ("COGS"), COGS as a percentage of revenues, gross profit and gross profit margins, selling, general and administrative expenses ("SGA") and SGA as a percentage of revenues, earnings before interest, taxes, depreciation and amortization ("EBITDA"), EBITDA margins, earnings before interest and taxes ("EBIT"), EBIT margins, net income, capital expenditures, capital expenditures as a percentage of revenues and of depreciation, free cash flow (net income plus depreciation less capital expenditures), free cash flow as a percentage of revenues, total assets, and total net capitalization (stockholders' equity plus net debt). Comparison of Keystone to Selected Comparable Companies. Salomon Brothers compared Keystone to a number of wire rod producers in the United States, including GS Tech/Georgetown, North Star Steel, Raritan River Steel, American Steel & Wire (a subsidiary of Birmingham Steel), CF&I, Northwestern Steel & Wire, Cascade, Atlantic Steel, Connecticut Steel, Charter Steel, Laclede Steel and Florida Steel. Of these companies, Keystone ranked fourth in terms of wire rod capacity (after taking into account planned capacity for the other companies). Salomon Brothers also compared certain financial and stock market information relating to Keystone and five publicly traded mini-mill and rod and wire companies (the "Comparable Group"), Birmingham Steel, Insteel Industries, Laclede Steel, Northwestern Steel & Wire and Oregon Steel. This analysis indicated that, based on weekly stock price data from June 10, 1994 through June 7, 1996, Keystone Common Stock has slightly outperformed the index of the stocks of the Comparable Group over the last two years but has underperformed both the index of the Comparable Group and the Standard & Poors Industrial Average for the period from January 2, 1995 through June 10, 1996. Salomon Brothers also compared certain stock market trading statistics for Keystone and the Comparable Group), the ratio of market price to LTM earnings per share (which was 16.4x in the case of Keystone and a median of 17.8x for the Comparable Group), the ratio of market price to earnings per share for 1996 (which was 24.4x in the case of Keystone and a median of 20.4x for the Comparable Group), the ratio of market price to estimated 1997 earnings per share (which was 8.0x in the case of Keystone and a median of 8.1x for the Comparable Group), and estimated five year growth rates (which was not applicable for Keystone and a median of 11% for the Comparable Group). Salomon Brothers also reviewed certain company valuation statistics, including the ratio of "firm value" (the market value of equity plus book value of debt and minority interests plus liquidation value of preferred stock less excess cash) to LTM sales (which was 1.3x in the case of Keystone and a median of .5x for the Comparable Group), the ratio of firm value to LTM EBITDA as adjusted to reflect non-cash charges for pension and similar liabilities (which was 9.6x in the case of Keystone and a median of 10.1x for the Comparable Group), the ratio of firm value to LTM EBIT (which was 10.9x in the case of Keystone and a median of 18.1x for the Comparable Group), and the ratio of firm value as adjusted to include employee-related liabilities to LTM EBITDA after adjusting for non-cash pension and similar liabilities (which was 6.0x in the case of Keystone and a median of 7.8x for the Comparable Group). Salomon Brothers compared certain operating performance statistics, including LTM EBITDA margin (which was 6.5% for Keystone and a median of 7.5% for the Comparable Group), LTM EBIT margin (which was 2.8% for Keystone and a median of 3.6% for the Comparable Group), three-year historical sales growth (which was 0.0% for Keystone and a median of 2.7% for the Comparable Group), and three-year historical EBITDA growth (which was 11.6% for 39 45 Keystone and a median of 10.5% for the Comparable Group). Sources of earnings per share estimates were Institutional Brokers Estimate System and First Call, which are data services that monitor and publish compilations of earnings estimates produced by selected research analysts regarding companies of interest to institutional investors. Comparative Valuation Analysis. Salomon Brothers reviewed aggregate equity values which could be realized by holders of DeSoto Common Stock pursuant to the two strategic alternatives available to the Company, the Merger and termination of DeSoto's pension plan. Salomon Brothers noted that based on the market price of a share of DeSoto Common Stock on June 10, 1996 of $6.125, the market capitalization of all DeSoto Common Stock was approximately $28.7 million. As more fully described below, termination of the pension plan was estimated to produce an aggregate value of approximately $5.3 million and the Merger would, under various analyses, result in estimated aggregate values for DeSoto Common Stock of between $27 million and $35 million, based on certain assumptions. Valuation of Pension Plan Termination. Salomon Brothers calculated a net value of between approximately $5 million and $5.5 million for DeSoto Common Stock in the aggregate as a result of a termination of DeSoto's defined benefit pension plan. This calculation was based upon a number of assumptions and estimates, including the establishment of a "qualified replacement plan" to which 25% of the surplus plan assets would be transferred and to which no value was assigned in this valuation. Based upon approximately $159 million in plan assets as of March 31, 1996 and an estimated cost of $81 million purchasing annuities to satisfy plan obligations and the transfer of $19.5 million to a qualified replacement plan, approximately $58.5 million of surplus assets would revert to DeSoto on a pre-tax basis. After use of available net operating loss carryforwards of approximately $20 million and the payment of federal income taxes at an assumed rate of 35%, federal excise taxes at a rate of 20%, and state income taxes at a rate of 4%, approximately $31.8 million of the surplus reversion would remain. After application of these reversionary assets to satisfy DeSoto's creditors and to redeem the DeSoto Preferred Stock in July 1997, approximately $14.5 million would remain. Salomon Brothers then calculated a present discounted value of estimated payments DeSoto would be required to make in respect of continued negative cash flow from DeSoto's operating business and third party claims and contingent liabilities, including environmental liabilities, employing weighted average costs of capital of between 14% and 18% ranging between $9.4 million and $9.0 million. A range of aggregate equity values between $5.0 and $5.5 million resulted (or between $1.07 and $1.18 per share of DeSoto Common Stock). The assumptions employed in this analysis are not necessarily indicative of actual costs and liabilities which would result from termination of the DeSoto pension plan and, therefore, are not necessarily indicative of actual values which would be realized by the holders of DeSoto Common Stock in this situation. Merger Valuation. Salomon Brothers reviewed the values of the consideration to be paid to all holders of DeSoto Common Stock in the Merger based upon "exchange ratio," "public market," and "discounted cash flow" analyses. Exchange Ratio Analysis. Based upon a market price per share for Keystone Common Stock on June 10, 1996 of $10, the issuance of an aggregate of 3,500,000 shares of Keystone Common Stock to the holders of DeSoto Common Stock, Salomon Brothers calculated an aggregate value of $35 million for the Merger. This represented a 22% premium to the $6.125 per share market price of DeSoto Common Stock and a 560% premium to the value calculated for the pension plan termination described above ("Plan Termination Value"). Public Market Analysis. Salomon Brothers analyzed possible trading market values for shares of Keystone Common Stock following the Merger, after taking into account the merger of the pension plans of the two companies and assumed cost savings of $1 million per year. The analysis indicated that as a result of the Merger earnings per share for Keystone Common Stock would be $.87 for LTM and 1996, based upon projections of Keystone management as adjusted downward by Salomon Brothers. (This analysis indicated that the Merger would result in 41.8% earnings per share accretion for Keystone Common Stock for the LTM.) Based on a market price per share of Keystone Common Stock of $10 on June 10, 1996, the price to earnings multiple for Keystone Common Stock was approximately 16.3x for LTM earnings per share. Based on price to earnings multiples ranging from 10x to 12.5x calculated 1996 earnings per share; Salomon Brothers 40 46 calculated an aggregate common equity value for Keystone following the Merger of between $80.4 million and $100.5 million (or an implied per share price for Keystone Common Stock ranging from $8.75 to $10.93). The share of this equity value allocated to holders of DeSoto Common Stock in the Merger would be between $30.6 million and $38.3 million. This would result in a premium to DeSoto's current market capitalization ranging from 27.5% to 59.4%, and to Plan Termination Value ranging from 477.7% to 622.1%. In arriving at these estimates of possible trading values for Keystone Common Stock, Salomon Brothers advised the DeSoto Board that these estimated ranges of possible trading values were relevant only to the trading of the stock on a fully distributed basis and after adequate dissemination of financial and operating information relating to Keystone. Salomon Brothers advised that trading in Keystone Common Stock for a period following the Merger could be characterized by a redistribution of such securities among the stockholders of DeSoto immediately preceding the Merger and other investors and, accordingly, such securities may be subject to downward price pressures during this period resulting in trading prices below the estimated ranges. In addition, in connection with this presentation, Salomon Brothers advised the DeSoto Board that any estimate of trading ranges is speculative, and subject to uncertainties and contingencies, all of which are difficult to predict and beyond the control of Salomon Brothers. Therefore, the actual trading prices of the Keystone Common Stock may be outside the estimated range and will depend upon, and fluctuate with, changes in interest rates, market conditions, the condition and prospects, financial and otherwise, of Keystone and other factors which generally influence the prices of securities. Discounted Cash Flow Analysis. Salomon Brothers calculated ranges of equity value for Keystone following the Merger based upon the value, discounted to the present, of its fiscal year end five-year stream of projected cash flow and projected fiscal year 2000 terminal values based upon a range of multiples of projected fiscal year 2000 earnings before interest, taxes, and depreciation. Salomon Brothers applied discount rates ranging from 12% to 14% and multiples for terminal values ranging from 6x to 8x EBITDA. Based on this analysis, Salomon Brothers calculated a discounted cash flow value of all Keystone Common Stock ranging from $70.6 million to $119.8 million. The present value of the Keystone Common Stock to be received by holders of DeSoto Common Stock in the Merger would range from $26.8 million to $45.5 million based upon this analysis (or a range of $7.67 to $13.01 per share of DeSoto Common Stock). This analysis indicated that the premium of the discounted cash flow value to DeSoto's current market capitalization ranged from 8% to 43% and the premium to the Plan Termination Value ranged from 485% to 674%. In connection with its opinion dated as of the date of this Proxy Statement/Prospectus, Salomon Brothers reviewed the analyses used to render its June 13, 1996 oral opinion to the DeSoto Board of Directors in order to confirm that no changes had occurred which would materially impact the opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying the opinions of Salomon Brothers. In arriving at its fairness determination, Salomon Brothers considered the results of all such analyses and did not assign relative weights to any of the analyses. The analyses were prepared solely for the purpose of Salomon Brothers providing its opinions to the DeSoto Board of Directors as to the fairness from a financial point of view of the Exchange Ratio to holders of DeSoto Common Stock and do not purport to be appraisals or necessarily reflect the prices at which businesses or securities actually may be sold, which are inherently subject to uncertainty. Any estimates incorporated in the analyses performed by Salomon Brothers are not necessarily indicative of actual past or future values or results, which may be significantly more or less favorable than any such estimates. No public company utilized as a comparison is identical to Keystone or the business segment for which a comparison is being made. Accordingly, an analysis of publicly traded comparable companies is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the public trading value of the comparable companies to which they are being compared. In connection with the analyses, Salomon Brothers made, and were provided estimates and forecasts by DeSoto and Keystone management based upon, numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Keystone and DeSoto. Similarly, analyses based upon 41 47 forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by such analyses. Because such analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of DeSoto and Keystone or their respective advisors, none of Keystone, DeSoto, Salomon Brothers or any other person assumes responsibility if future results or actual values are materially different from these forecasts or assumptions. The opinions of Salomon Brothers necessarily were based on the economic, market and other conditions as in effect on, and the information made available to them as of, the dates of their opinions. The foregoing summary is qualified by reference to the written opinion of Salomon Brothers set forth in Appendix C to this Joint Proxy Statement/Prospectus. As described above, the opinions and presentation of Salomon Brothers to the DeSoto Board of Directors were only one of a number of factors taken into consideration by the DeSoto Board of Directors in making its determination to approve the Reorganization Agreement. In addition, the terms of the Merger were determined through negotiations between Keystone and DeSoto and were approved by the DeSoto Board of Directors. The decision to enter into the Reorganization Agreement and to accept the Exchange Ratio was solely that of the DeSoto Board of Directors. The Board of Directors of DeSoto selected Salomon Brothers to act as its financial advisor and render a fairness opinion because Salomon Brothers is an internationally recognized investment banking firm with substantial expertise in transactions similar to the Merger. As part of its investment banking business, Salomon Brothers regularly engages in the valuation of business and other securities in connection with mergers and acquisitions and for other purposes. With respect to Salomon Brothers' services as a financial advisor to DeSoto in connection with the Merger, DeSoto has agreed to pay Salomon Brothers a fee of $250,000, payable upon the earlier to occur of the consummation of the Merger or termination of DeSoto's pension plan. This fee is payable regardless of the outcome of Salomon Brothers' opinions and whether or not the Merger is consummated. DeSoto also has agreed to reimburse Salomon Brothers for its reasonable out-of-pocket expenses (including reasonable fees and expenses of its legal counsel) and to indemnify Salomon Brothers and certain related persons against certain liabilities, including liabilities under the federal securities laws, arising out of its engagement. In the ordinary course of its business, Salomon Brothers may actively trade in the securities of Keystone and DeSoto for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities. THE REORGANIZATION AGREEMENT REPRESENTATIONS AND COVENANTS Under the Reorganization Agreement, Keystone and DeSoto made a number of representations regarding their respective capital structures, operations, financial conditions and other matters. Each party agreed as to itself and its subsidiaries that until consummation of the Merger or the earlier termination of the Reorganization Agreement, it will, among other things, conduct its business and maintain its business relationships in the ordinary and usual course, and use its best efforts to consummate the Merger. DeSoto has agreed not to solicit, engage in discussions, negotiate with any person or facilitate the efforts of any person other than Keystone relating to an Alternative Acquisition, except that DeSoto's Board of Directors may provide information to and engage in negotiations with a third party regarding an Alternative Acquisition if (i) the Board of Directors of DeSoto receives a Superior Proposal; (ii) the Board of Directors of DeSoto determines, based on the advice of its investment bankers, that such third party is financially capable of consummating such Superior Proposal; (iii) the Board of Directors of DeSoto shall have determined, after consultation with outside legal counsel, that the fiduciary duties of the Board require DeSoto to furnish information to and negotiate with such third party; and (iv) at least two (2) business days prior thereto, Keystone shall have been notified in writing of such Superior Proposal, including all of its terms and conditions and the foregoing determination by the Board of Directors of DeSoto, and shall have been given copies of such proposal. DeSoto shall not be entitled to enter into an agreement concerning an Alternative Acquisition for a 42 48 period of not less than forty-eight hours after Keystone's receipt of a copy of such proposal and certain other information. Keystone has agreed, if the Merger is consummated, to indemnify the current officers and directors of DeSoto with respect to any claim or liability arising out of or pertaining to any act or omission occurring prior to the Effective Time to the fullest extent that DeSoto could have done so on June 26, 1996. Keystone has further agreed, for a period of six (6) years following the Effective Time, to cause DeSoto to maintain indemnification and limitation of liability provisions. Keystone has also agreed to (i) provide director and officer insurance coverage, at a cost not to exceed $150,000, for the current directors and officers of DeSoto for one year after the Effective Time for claims made against such directors and officers relating to matters occurring prior to the Effective Time, and (ii) provide, after the Effective Time, director and officer insurance coverage to Keystone directors comparable to the coverage maintained by DeSoto at the Effective Time, to the extent such coverage may be obtainable at a comparable cost. CONDITIONS TO THE MERGER In addition to the requirement that Keystone stockholders approve the issuance of Keystone Common Stock pursuant to the Reorganization Agreement and DeSoto stockholders approve and adopt the Reorganization Agreement, the consummation of the Merger is subject to a number of other conditions which, if not satisfied or waived, would cause the Merger not to be consummated and the Reorganization Agreement to be terminated. Each party's obligation to consummate the Merger is conditioned upon, among other things, (i) the accuracy of the other party's representations, (ii) each party's performance of its obligations under the Reorganization Agreement, (iii) the absence of a material adverse change in the condition (financial or otherwise), properties, assets, liabilities, businesses, or results of operations of the other party and its subsidiaries taken as a whole, (iv) the PBGC raising Keystone's borrowing restrictions to an amount reasonably expected to enable Keystone to perform its obligations under the Reorganization Agreement, (v) availability to Keystone of sufficient financing in order to effect the Merger and to satisfy its obligations and those of the surviving corporation in the Merger, (vi) receipt of opinions of counsel in respect of certain federal income tax consequences of the Merger, (vii) receipt of opinions dated one business day before the closing of the Merger from the financial advisors to each of Keystone and DeSoto as to the fairness from a financial point of view of the consideration to be paid by Keystone and received by DeSoto stockholders, (viii) the absence of legal action preventing consummation of the Merger, and (ix) the receipt of other documents, including necessary consents of third parties (including governmental agencies). Keystone's obligation to consummate the Merger is further conditioned upon, among other things, (i) the consent by DeSoto's trade creditors to the term of repayment contemplated by the Reorganization Agreement and (ii) the resolution on terms satisfactory to Keystone of certain claims arising from DeSoto's acquisition of J.L. Prescott Company. DeSoto's obligation to consummate the Merger is further conditioned upon, among other things (i) approval for listing on the NYSE, subject to official notice of issuance, of the shares of Keystone Common Stock to be issued pursuant to the Merger, and (ii) the Board of Directors of Keystone taking appropriate action to increase the number of directors comprising Keystone's full Board of Directors from seven to nine, and to cause William Spier and William P. Lyons to be directors of Keystone upon the effectiveness of the Merger. At any time on or prior to the Merger, to the extent legally allowed, Keystone or DeSoto, without approval of the stockholders of such respective companies, may waive compliance with any of the agreements or satisfaction of any of the conditions contained in the Reorganization Agreement for the benefit of that company. HSR ACT Transactions such as the Merger are reviewed by the Department of Justice and the Federal Trade Commission (the "FTC") to determine whether they comply with applicable antitrust laws. Under the provisions of the HSR Act, the Merger may not be consummated until such time as certain information has been furnished to the Department of Justice and the FTC and the specified waiting period requirements of the 43 49 HSR Act have been satisfied. Notification reports were filed by Keystone and DeSoto with the Department of Justice and the FTC under the HSR Act on July 22, 1996, and termination of the specified waiting period requirements of the HSR Act was granted on August 2, 1996. At any time before or after the Effective Time of the Merger, the Department of Justice, the FTC, state attorneys general or a private person or entity could challenge the Merger under the antitrust laws and seek, among other things, to enjoin the Merger or to cause Keystone to divest itself, in whole or in part, of DeSoto. Based on information available to them, Keystone and DeSoto believe that the Merger will not violate federal or state antitrust laws. However, there can be no assurance that a challenge to the Merger on antitrust grounds will not be made or that, if such a challenge is made, Keystone and DeSoto would prevail or would not be required to accept certain conditions, possibly including certain divestitures or hold-separate agreements in order to consummate the Merger. Keystone and DeSoto are aware of no other governmental or regulatory approvals required for consummation of the Merger, other than compliance with applicable securities and "blue sky" laws of the various states. RELATED AGREEMENTS; INTERESTS OF CERTAIN PERSONS IN MATTERS ACTED UPON In considering the recommendations of the Boards of Directors of Keystone and DeSoto with respect to the Reorganization Agreement and the Merger, stockholders of Keystone and DeSoto should be aware that certain affiliates and members of management of Keystone and DeSoto have interests in the Merger in addition to the interests of holders of Keystone Common Stock and DeSoto Common Stock generally. See "Risk Factors -- Interests of Certain Persons in the Merger." Warrant Conversion Agreement Pursuant to the Warrant Conversion Agreement, upon consummation of the Merger, one-half of the DeSoto Warrants to purchase an aggregate of 1,200,000 shares of DeSoto Common Stock will be cancelled and the remaining one-half of the DeSoto Warrants will be converted into warrants to purchase 447,900 shares of Keystone Common Stock (representing the shares of DeSoto Common Stock subject to the remaining DeSoto Warrants multiplied by the Exchange Ratio) at an exercise price of approximately $9.38 per share (representing the exercise price of a DeSoto Warrant divided by the Exchange Ratio). Preferred Stockholder Waiver and Consent Agreement The Warrant and Preferred Stockholders have entered into a Preferred Stockholder Waiver and Consent Agreement with Keystone, pursuant to which they agreed their DeSoto Preferred Stock will be converted in the Merger into Keystone Preferred Stock (at the Exchange Ratio of a share of Keystone Preferred Stock for each share of DeSoto Preferred Stock) and cash in an amount equal to accrued and unpaid dividends on the DeSoto Preferred Stock (which, as of the Effective Time, will aggregate approximately $1.7 million), and that they will waive their right to require redemption of the DeSoto Preferred Stock as a result of the consummation of the Merger. The Warrant and Preferred Stockholders have agreed to (i) waive any appraisal rights such owner may have under the DGCL as a result of the Merger, and (ii) vote their shares of DeSoto Common Stock and DeSoto Preferred Stock in favor of approval and adoption of the Reorganization Agreement. Stockholders Agreement At the time the Reorganization Agreement was entered into, Keystone, the Warrant and Preferred Stockholders, DeSoto and Contran entered into a Stockholders Agreement pursuant to which (i) Keystone agreed to assume from DeSoto certain registration rights currently held by the Warrant and Preferred Stockholders as they relate to Keystone Common Stock to be acquired by such persons in the Merger, and (ii) Keystone granted to Contran and its affiliates the same rights as Keystone had assumed with respect to the Warrant and Preferred Stockholders. These rights provide that the Warrant and Preferred Stockholders and Contran and certain of its affiliates, respectively, each will have the right to (i) require two registrations of 44 50 Keystone Common Stock held by such party on an appropriate registration statement, with the expenses for the first such registration by the respective parties being paid by Keystone, and (ii) include for resale shares of Keystone Common Stock held by such party in a registration statement prepared by Keystone, to the extent such included shares would not adversely affect any securities offering by Keystone. Keystone also agreed not to grant any party rights superior to those being granted to the parties to the Stockholders Agreement. Severance Arrangements DeSoto has agreements with four employees relating to a change in control of DeSoto, including the Merger, and severance. Pursuant to one of these agreements, Anne Eisele, President and Chief Financial Officer of DeSoto, will receive her salary, currently $160,000 annually, and continued medical, dental and insurance benefits for a period of two (2) years if, after a change of control, her employment is terminated under certain circumstances, and any such payments to Ms. Eisele would be in lieu of other severance payments. Under another of these contracts, Fred Flaxmayer, Controller and Chief Accounting Officer of DeSoto, is entitled to receive a $50,000 bonus within thirty (30) days of a change of control of DeSoto and, if his employment is terminated under certain circumstances, within one (1) year of a change of control, Mr. Flaxmayer will receive severance payments equal to nine (9) months of his annual salary of $90,000 and payments under DeSoto's normal severance policy. Two other employees of DeSoto have agreements providing for the payment of bonuses aggregating $60,000 within thirty days of a change of control of DeSoto and, if their employment is terminated under certain circumstances within one year of a change in control, severance payments aggregating approximately $70,000. Accordingly, the maximum amount payable pursuant to these four agreements is approximately $590,000. Voting Agreements The Warrant and Preferred Stockholders and Anders U. Schroeder, collectively the owners of 596,989 shares of DeSoto Common Stock and 583,333 shares of DeSoto Preferred Stock, representing approximately twenty two percent (22%) of DeSoto's outstanding voting stock, have entered into an agreement with Keystone; and Contran, the direct owner of 3,161,733 shares of Keystone Common Stock, representing approximately fifty six percent (56%) of Keystone's outstanding voting stock, has entered into an agreement with DeSoto, pursuant to which such stockholders have agreed they will (i) vote their shares in favor of approval of the issuance of shares pursuant to the Reorganization Agreement, in the case of Contran, or in favor of approval and adoption of the Reorganization Agreement, in the case of the Warrant and Preferred Stockholders and Mr. Schroeder, and (ii) not transfer any of their shares of Keystone Common Stock or DeSoto Common Stock or DeSoto Preferred Stock, as the case may be, subject to certain exceptions. Options Upon consummation of the Merger, DeSoto Options will be assumed by Keystone and converted into options to acquire shares of Keystone Common Stock, See "The Merger and Related Transactions -- General -- Assumption of Options and Conversion of Warrants." Prior to the Merger, the terms of the DeSoto Options will be amended to permit the exercise of the DeSoto Options until the second anniversary of the Effective Time. Currently, the DeSoto Options generally expire 90 days after termination of employment with DeSoto. Pursuant to the Reorganization Agreement, the converted DeSoto Options will be registered under the Securities Act on a Registration Statement on Form S-8. As of August 21, 1996, directors and officers held DeSoto Options to purchase an aggregate of 125,800 shares of DeSoto Common Stock. AMENDMENT OF THE REORGANIZATION AGREEMENT The Reorganization Agreement may be amended by Keystone or DeSoto at any time before or after approval of the issuance of shares in connection with the Merger or the Reorganization Agreement, as the case may be, by the stockholders of Keystone and DeSoto, except that, after such stockholder approval, no amendment may be made which by law requires the further approval of such stockholders without obtaining such approval. In the event the parties desire to enter into an amendment to the Reorganization Agreement 45 51 that materially alters the terms of the Merger, the parties will circulate an Amended Joint Proxy Statement/Prospectus to solicit stockholder approval. TERMINATION OF THE REORGANIZATION AGREEMENT The Reorganization Agreement may be terminated by mutual agreement of both parties or by either party (i) as a result of a breach by the other party of a representation, warranty, covenant or agreement set forth in the Reorganization Agreement, or if any representation of the other party becomes untrue, in either case which has or can reasonably be expected to have a Material Adverse Effect (as defined in the Reorganization Agreement) and which the other party fails to cure prior to the closing of the Merger (except that no cure period is provided for a breach which by its nature cannot be cured); (ii) if the required approvals of the stockholders of Keystone or DeSoto are not obtained by reason of the failure to obtain the required vote; (iii) if all the conditions for closing the Merger are not satisfied or waived on or before December 31, 1996, other than as a result of a breach of the Reorganization Agreement by the terminating party or a breach by any of the principal stockholders or affiliates of the terminating party; or (iv) if a permanent injunction or other order by a federal or state court which would make illegal or otherwise restrain or prohibit the consummation of the Merger is issued and has become final and nonappealable. The Reorganization Agreement may be terminated by Keystone if prior to consummation of the Merger, DeSoto enters into an agreement with respect to an Alternative Acquisition. The Reorganization Agreement may be terminated by DeSoto if, prior to the consummation of the Merger, DeSoto receives a Superior Proposal and there occurs a Superior Proposal Termination. BREAKUP FEES The Reorganization Agreement provides for the payment of the Breakup Fee of $1 million by DeSoto to Keystone if (i) the Reorganization Agreement is terminated by Keystone where DeSoto has entered into an agreement with respect to an Alternative Acquisition; (ii) the stockholders of DeSoto fail to approve the Merger at a time when there is pending a proposal with respect to an Alternative Acquisition; (iii) without the occurrence of a Keystone material adverse change, the Board of Directors of DeSoto shall have failed to submit the Merger to its stockholders for approval as required by, and in accordance with, the terms of the Reorganization Agreement, or (iv) there occurs a Superior Proposal Termination by DeSoto. The Breakup Fee is payable by Keystone to DeSoto if, without a DeSoto material adverse change, the Board of Directors of Keystone fails to hold a stockholders' meeting to vote on approval of the issuance of Keystone Common Stock pursuant to the Reorganization Agreement as required by, and in accordance with the terms of, the Reorganization Agreement. Payment of the Breakup Fee shall not be in lieu of damages incurred in the event of breach of the Reorganization Agreement, and neither party shall be entitled to receive the Breakup Fee if it shall have committed a material breach of the Reorganization Agreement. KEYSTONE FINANCING ARRANGEMENTS Pursuant to the Reorganization Agreement, Keystone is obligated to cause DeSoto to pay approximately $6.5 million to certain of its trade creditors who are parties to a trade composition agreement with DeSoto, as soon as practicable after the Effective Time, and an additional approximately $1.5 million to such trade creditors within one year of the Effective Time. Additionally, pursuant to the Preferred Stockholder Waiver and Consent Agreement, Keystone is obligated, at the Effective Time, to pay to the holders of the DeSoto Preferred Stock all unpaid dividend arrearage, which will then amount to approximately $1.7 million. As a result of these and other transactions related to the Merger, Keystone will require additional funding from its primary lender. In order to obtain such additional funds, Keystone has received the PBGC's consent and Keystone's primary lender's commitment to increase Keystone's allowable borrowings by $20 million upon consummation of the Merger and the merger of the Keystone defined benefit pension plans with and into the DeSoto defined benefit pension plan. The PBGC's consent was necessary due to Keystone's prior agreements with the PBGC whereby the PBGC and Keystone agreed to certain borrowing restrictions. 46 52 CERTAIN FEDERAL INCOME TAX MATTERS The following discussion summarizes the material federal income tax considerations relevant to the exchange of DeSoto Common Stock for Keystone Common Stock pursuant to the Merger. This summary is based upon opinions of counsel delivered by Fried, Frank, Harris, Shriver & Jacobson and Godwin & Carlton, P.C. which are included as Exhibits to the Registration Statement of which this Joint Proxy Statement/Prospectus is a part (the "Tax Opinions") that the Merger will qualify as a "reorganization" within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (a "Reorganization"). DeSoto stockholders should be aware this discussion does not deal with all federal income tax considerations that may be relevant to particular stockholders of DeSoto subject to special treatment under certain federal income tax laws, such as stockholders who are banks, insurance companies, tax-exempt organizations, dealers in securities, or non-United States persons, and persons who do not hold their DeSoto Common Stock as capital assets, or who acquired their shares in connection with stock options or stock purchase plans or in other compensatory transactions. In addition, the following discussion does not address the tax consequences of the Merger under foreign, state or local tax laws. ACCORDINGLY, DESOTO STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES AND THE EFFECT OF ANY PROPOSED CHANGE IN THE TAX LAWS. Subject to the limitations and qualifications referred to herein, qualification of the Merger as a Reorganization will result in the following federal income tax consequences to the DeSoto Common Stockholders: (a) No gain or loss will be recognized by holders of DeSoto Common Stock upon the receipt of Keystone Common Stock in exchange for DeSoto Common Stock pursuant to the Merger (except to the extent of cash received in lieu of a fractional share of Keystone Common Stock); (b) The aggregate tax basis of the Keystone Common Stock received by DeSoto stockholders in the Merger will be the same as the aggregate tax basis of DeSoto Common Stock surrendered in exchange therefor, less the tax basis, if any, allocated to fractional share interests; (c) The holding period of the Keystone Common Stock received by DeSoto stockholders pursuant to the Merger will include the period for which DeSoto Common Stock surrendered in exchange therefor was held, provided the DeSoto Common Stock is held by the DeSoto stockholders as a capital asset at the Effective Time; and (d) A cash payment received by a holder of DeSoto Common Stock in lieu of a fractional share will be treated as if such fractional share had been issued to such holder in the Merger and then redeemed by Keystone for the cash received. A stockholder of DeSoto receiving such cash will generally recognize gain or loss upon such payment, equal to the difference (if any) between such stockholder's basis in the fractional share and the amount of cash received. Such gain or loss will be capital gain or loss if the DeSoto Common Stock was held as a capital asset at the Effective Time, and will be long-term capital gain or loss if the DeSoto Common Stock was held for more than one (1) year. In addition, the exchange of shares pursuant to the Merger will constitute a change of ownership with respect to DeSoto, and thereafter, the future utilization of the net operating losses of DeSoto existing at the Effective Time may be limited by operation of Section 382 of the Internal Revenue Code of 1986, as amended. Neither Keystone nor DeSoto will recognize income, gain or loss as a result of the consummation of the Merger. No ruling has been or will be obtained from the Internal Revenue Service (the "IRS") in connection with the Merger. DeSoto stockholders should be aware the Tax Opinions do not bind the IRS and the IRS is 47 53 therefore not precluded from successfully asserting a contrary opinion. The Tax Opinions are also subject to certain assumptions, and are subject to the truth and accuracy of certain representations made by Keystone, DeSoto and certain stockholders of DeSoto regarding, among other things, the presence of a continuing interest in DeSoto by DeSoto stockholders through their ownership of Keystone Common Stock following the Merger. If the facts as represented are not accurate, the Merger may fail to qualify as a Reorganization. In such case, a DeSoto stockholder would recognize gain or loss equal to the fair market value of the Keystone Common Stock received, less such stockholder's basis in the DeSoto shares surrendered. The consummation of the Merger is conditioned on (i) the receipt by Keystone of a supplementary opinion of Godwin & Carlton, P.C. as of the Effective Time confirming that the Merger will qualify as a Reorganization, and (ii) the receipt by DeSoto of a supplementary opinion of Fried, Frank, Harris, Shriver & Jacobson as of the Effective Time confirming that the Merger will qualify as a Reorganization. ACCOUNTING TREATMENT For financial reporting purposes, Keystone will account for the Merger by the purchase method. AFFILIATES' RESTRICTIONS ON SALE OF KEYSTONE COMMON STOCK The approximately 3,500,000 shares of Keystone Common Stock to be issued in the Merger will have been registered under the Securities Act by a Registration Statement on Form S-4 and the Keystone Common Stock issuable upon exercise of the DeSoto Options assumed by Keystone pursuant to the Reorganization Agreement is expected to be registered under the Securities Act by a Registration Statement on Form S-8, thereby allowing those shares to be traded without restriction by all former holders of DeSoto who (i) are not deemed to be "affiliates" (as that term is defined in Rule 145 under the Securities Act) of DeSoto at the time of DeSoto Meeting, and (ii) do not become affiliates of Keystone after the Merger. The shares of Keystone Preferred Stock and the shares of Keystone Common Stock issuable upon exercise of the Keystone Warrants will not be registered under the Securities Act and the transferability of such shares will be restricted by Rule 144 under the Securities Act. DeSoto stockholders who are identified by DeSoto as its affiliates will be so advised prior to the Merger. Sales by affiliates of DeSoto prior to the Merger and affiliates of Keystone (before and after the Merger) must be made in accordance with Rules 144 or 145, or as otherwise permitted under the Securities Act. The volume limitations of Rules 144 and 145 should not impose any material limitation on any DeSoto stockholder who owns less than one percent of Keystone's outstanding Common Stock after the Merger unless, pursuant to Rule 144, such stockholder's shares are required to be aggregated with those of other stockholders. Under the Stockholders' Agreement certain affiliates of DeSoto and related entities have rights to require Keystone to register shares of Keystone Common Stock they acquire. APPRAISAL RIGHTS Both Keystone and DeSoto are incorporated in the State of Delaware, and, accordingly, are governed by the provisions of the DGCL. Pursuant to Section 262 of the DGCL, the holders of DeSoto Common Stock are not entitled to appraisal rights in connection with the Merger because DeSoto Common Stock is quoted on the NYSE and such stockholders will receive as consideration in the Merger only shares of Keystone Common Stock, which shares will be listed on the NYSE upon the closing of the Merger, and cash in lieu of fractional shares. In addition, the Keystone stockholders are not entitled to appraisal rights under Section 262 of the DGCL because Keystone Common Stock is listed on the NYSE and, even though approval of such stockholders is required for the issuance of Keystone Common Stock in the Merger, the approval of the stockholders of Keystone is not required for the Merger itself. Pursuant to Section 262 of the DGCL, the holders of the DeSoto Preferred Stock will be entitled to appraisal rights in connection with the Merger. However, the holders of the DeSoto Preferred Stock have agreed to waive their appraisal rights pursuant to the Preferred Stockholder Waiver and Consent Agreement. The Reorganization Agreement provides that, as a condition to consummating the Merger, all terms and 48 54 conditions of the Preferred Stockholder Waiver and Consent Agreement, including such waivers, must be in full force and effect. EXCHANGE OF CERTIFICATES As soon as practicable after the Effective Time of the Merger, Keystone will cause Chemical Mellon Shareholder Services, L.L.C. (the "Exchange Agent") to mail to each stockholder of record of DeSoto Common Stock a letter of transmittal with instructions to be used by such stockholder in surrendering certificates which, prior to the Merger, represented shares of DeSoto Common Stock in exchange for certificates representing shares of Keystone Common Stock. Letters of transmittal will also be available as soon as practicable after the Effective Time of the Merger at the offices of the Exchange Agent. After the Effective Time of the Merger, there will be no further registration of transfers on the stock transfer books of the Surviving Corporation of shares of DeSoto Common Stock or Preferred Stock which were outstanding immediately prior to the Effective Time of the Merger. SHARE CERTIFICATES SHOULD NOT BE SURRENDERED FOR EXCHANGE PRIOR TO APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND THE MERGER BY THE KEYSTONE AND DESOTO STOCKHOLDERS. Upon the surrender of a DeSoto Common Stock certificate to the Exchange Agent or to such other agent as may be appointed by Keystone together with a duly executed letter of transmittal, the holder of such certificate will be entitled to receive in exchange therefor the number of shares of Keystone Common Stock to which the holder of DeSoto Common Stock is entitled pursuant to the provisions of the Reorganization Agreement. In the event of a transfer of ownership of DeSoto Common Stock which is not registered in the transfer records of DeSoto, a certificate representing the appropriate number of shares of Keystone Common Stock may be issued to a transferee if the certificate representing such DeSoto Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid, along with a duly executed letter of transmittal. Until a certificate representing DeSoto Common Stock has been surrendered to the Exchange Agent, each such certificate will be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the number of shares of Keystone Common Stock to which the DeSoto stockholder is entitled under the Reorganization Agreement. Upon consummation of the Merger, every share of DeSoto Common Stock will cease to be traded on the NYSE, and there will be no further market for DeSoto Common Stock. Pursuant to the Preferred Stockholder Waiver and Consent Agreement, the holders of DeSoto Preferred Stock have agreed to tender their certificates, duly endorsed, to Keystone at the Effective Time. At such time, Keystone will deliver to such holders the Keystone Preferred Stock with a legend restricting the transferability of such stock and such holders will receive a cash payment for their fractional interests. 49 55 DESCRIPTION OF KEYSTONE CAPITAL STOCK Keystone is authorized by its Restated Certificate of Incorporation (the "Keystone Certificate") to issue 12,000,000 shares of Keystone Common Stock and 500,000 shares of preferred stock, no par value, issuable in series. Designation of Keystone Preferred Stock. Pursuant to the Reorganization Agreement, 440,000 of the 500,000 shares of preferred stock of Keystone will be designated as Series A Senior Preferred Stock. Keystone may redeem the Keystone Preferred Stock, in whole or, from time to time in part, at a cash redemption price equal to the Liquidation Preference (as defined below) (i) at any time after July 21, 1997, or (ii) at any time if a majority of the Keystone Board of Directors determines that redemption of the Keystone Preferred Stock is necessary or appropriate to facilitate the Company's acceptance of a proposal to acquire all of the Keystone Common Stock and at such time at least two-thirds of the then outstanding shares of Keystone Preferred Stock are owned by the original purchasers of such shares. Keystone must redeem the Keystone Preferred Stock at a cash redemption price equal to the Liquidation Preference, to the maximum extent legally permissible (i) on July 1, 2000; (ii) 30 days after a change of control of Keystone; or (iii) if, within ten days after the exercise of any warrants to purchase Keystone Common Stock by any of the Warrant and Preferred Stockholders, such exercising Warrant and Preferred Stockholders holding at least fifty percent (50%) of the outstanding shares of Keystone Preferred Stock request redemption at fair market value in writing, provided, however that Keystone will be required to redeem Keystone Preferred Stock only to the extent that redemption payments are equal to the aggregate cash proceeds to Keystone upon the exercise of such warrants. Liquidation Rights. In the event of a liquidation, dissolution or winding up of Keystone, no distribution will be made to holders of Keystone Common Stock until holders of Keystone Preferred Stock have received $8.0375 per share plus all accrued but unpaid dividends thereon, whether or not earned or declared (the "Liquidation Preference"), to the date fixed for liquidation dissolution or winding up. After satisfaction of the Liquidation Preference, holders of Keystone Common Stock will be entitled pro rata to all the remaining assets available for distribution to stockholders and no additional distributions will be made to the holders of Keystone Preferred Stock. Dividend Rights. Dividends are payable to holders of Keystone Preferred Stock quarterly, at the rate of eight percent (8%) of the sum of the Liquidation Preference of each share of Keystone Preferred Stock. If such dividends are in arrears for four (4) quarterly periods at any time, dividends for any subsequent quarterly periods are payable to holders of Keystone Preferred Stock at the rate of ten percent (10%) of the sum of the Liquidation Preference of each share of Keystone Preferred Stock, until the dividend arrearage exists for less than four (4) quarterly periods. Holders of Keystone Common Stock are entitled to receive dividends when, as and if declared by the Keystone Board of Directors out of funds legally available therefor. Voting Rights. Except as otherwise provided by law or the Keystone Certificate, holders of Keystone Common Stock and Keystone Preferred Stock are entitled to one vote in respect of each share of such stock on all matters voted upon by the stockholders and will vote together as one class. Holders of Keystone Common Stock and Keystone Preferred Stock are not entitled to cumulative voting in election of directors. Accordingly, the holders of a majority of the outstanding shares of Keystone Common Stock and Keystone Preferred Stock are entitled to elect all the directors. If any amount equal to the full accrued dividends for two or more quarterly dividend periods shall not have been paid to holders of any shares of Keystone Preferred Stock or any required redemption payments shall not have been paid, holders of a majority of the Keystone Preferred Stock shall have, in addition to any other voting rights, the exclusive right, voting separately as a single class, to elect two additional directors of Keystone. Miscellaneous. Holders of Keystone Common Stock and Keystone Preferred Stock are not entitled to preemptive rights. The outstanding shares of Keystone Common Stock are fully paid and non-assessable. Outstanding shares of Keystone Common Stock are listed on the NYSE. 50 56 INFORMATION ABOUT DESOTO BUSINESS DeSoto was incorporated in 1927 under the laws of Delaware. DeSoto's principal executive offices and its only remaining operating facility are located at 900 East Washington Street, Joliet, Illinois, 60433. DeSoto currently operates in one industry segment, the manufacturing and packaging of household products, primarily powdered and liquid laundry detergents. Such operations include contract manufacturing and packaging of household cleaning products. During 1996, DeSoto has operated facilities in Joliet, Illinois and Union City, California. In April 1996, DeSoto announced the sale of the domestic business and assets of its laundry detergent manufacturing and distribution operations at its Union City facility to Star Pacific, Inc. Star Pacific has subleased the Union City facility from DeSoto. In July 1995, DeSoto announced the transfer and assignment of various operations and assets involved in its former Thornton and South Holland, Illinois businesses to two separate buyers. DeSoto assigned to the buyers the rights to certain customers with respect to these businesses. Both transactions also provided for DeSoto to receive royalties and other earn-out opportunities over a three-year period in one case and over a four-year period in the other case. The initial proceeds from these transactions were utilized to reduce DeSoto's debt to its primary secured lender. For additional information, see Note O of the Notes to DeSoto's Consolidated Financial Statements for the year ended December 31, 1995. Customers. DeSoto's sales include private label sales (including control brands) and contract manufacturing. DeSoto manufactures its products on a make and ship basis and carries a minimal buffer inventory for its private label accounts; therefore, finished goods inventory levels are generally relatively nominal. Generally, DeSoto extends standard industry terms to its customers. As a result of the 1996 disposition of the Union City operations, DeSoto's current sales are primarily to Sears. DeSoto expects that, in the foreseeable future, sales to Sears will represent in excess of 75% of DeSoto's total sales. Although DeSoto has been a supplier of Sears branded home laundry products for over 30 years, sales are currently conducted on open account and Sears could terminate its relationship with DeSoto at any time. The loss of Sears as a customer would have a material adverse effect on DeSoto's current business. During 1995, DeSoto had four customers that accounted for approximately 55% of sales; Sears (20%), Kmart (10%), Procter & Gamble (13%) and Benckiser (12%). As a result of the 1995 and 1996 sales of certain businesses referred to above, Kmart, Procter & Gamble and Benckiser are no longer customers of DeSoto. In 1994, Sears (16%), Kmart (15%) and Procter & Gamble (10%) accounted for an aggregate of 41% of DeSoto's sales. In 1993, Sears (14%), Lever Brothers Company (11%) and Kmart (10%) accounted for an aggregate of 35% of DeSoto's sales. Distribution. DeSoto's private label and control label products are sold in retail stores, including mass merchants and service centers. DeSoto primarily uses its own sales force to sell its products. Products produced under contract manufacturing agreements are generally distributed under arrangements made by the purchaser. Raw Materials. The primary raw materials used in DeSoto's products include soda ash, surfactants, brighteners and packaging materials. In general, raw materials and energy supplies have been available to DeSoto in adequate quantities to meet the needs of its business and DeSoto believes raw materials and energy supplies will, in general, be available to meet its anticipated requirements for the foreseeable future. As part of its quality control program, DeSoto subjects raw materials and packaging components to quality tests upon purchase. DeSoto products are made to predetermined specifications with quality tests conducted during production. Competition. DeSoto faces significant competition in the household detergent market. DeSoto believes there are 15 major domestic producers of household detergent, of which the top five are the major national brand detergent manufacturers who account for approximately 73% of industry sales. The private label market represents approximately 3% of the household detergent market and there are also approximately ten major 51 57 second tier domestic producers, including DeSoto, that compete within this 3% portion of the market. Several of these second tier producers also participate in the contract packaging portion of the industry. DeSoto competes on the basis of price, service and product quality and believes there is a heavy emphasis on price in the marketplace. DeSoto believes it has expertise in a broad array of detergent products and offers experience in contract packaging with major companies. Research and Development. During 1996, DeSoto anticipates its expenditures on Company-sponsored research relating to the development of new products or the improvement of existing products will be less than the $218,000 expended during 1995. Patents, Licenses, Franchises and Concessions. In the opinion of DeSoto's management, no material patents, licenses, franchises or concessions are held by DeSoto. In addition, DeSoto has no licenses with foreign manufacturers. Environmental Compliance. DeSoto believes its current operating facilities are in material compliance with all presently applicable federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Capital expenditures of DeSoto attributable to compliance with such laws were not material in 1995 and DeSoto anticipates such expenditures to be not material in 1996. For additional information regarding accruals relating to environmental compliance with respect to certain of DeSoto's former operations, see Note I of the Notes to DeSoto's Consolidated Financial Statements for the year ended December 31, 1995 and "-- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Seasonality. DeSoto does not believe its business is seasonal; however, promotional activities of its customers can result in increased sales during specific time frames. Employees. DeSoto had approximately 60 employees as of June 30, 1996, of whom approximately 38 are represented by the United Paperworkers International Union, AFL-CIO and its Local 903 (the "Paperworkers Union") and the District No. 55 of the International Association of Machinists, and Aerospace Workers, AFL-CIO (the "Machinists Union"). The current collective bargaining agreements with the Paperworkers Union and the Machinists Union expire in November 1996 and August 1999, respectively. DeSoto believes its labor relations are satisfactory. PROPERTIES DeSoto's current manufacturing and warehousing operations are located in a 160,000 square foot facility in Joliet, Illinois. At June 30, 1996, approximately 61% of this facility was used for warehousing and administrative purposes. The property is well maintained and in good operating condition. In general, DeSoto believes the facility is adequate for current production as well as for a material increase in production. In 1992, DeSoto sold three of its operating facilities (buildings and land) to its defined benefit pension plan (the "DeSoto Pension Plan") and entered into 10-year leases by which DeSoto leased the facilities from the DeSoto Pension Plan. This transaction included DeSoto's facilities in Joliet, Illinois, Columbus, Georgia, and Union City, California. DeSoto ceased operations at the Columbus, Georgia plant in March 1994 and the facility has been subleased to an unrelated third party through September 30, 1997. Since April 1996, the Union City facility has also been subleased to an unrelated third party. In December 1994, DeSoto sold its operating facility (building and land) in South Holland, Illinois, to the DeSoto Pension Plan and leased it back. DeSoto ceased operations at the South Holland, Illinois facility in October 1995. For further information regarding these transactions, refer to "-- Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note C of the Notes to DeSoto's Consolidated Financial Statements for the year ended December 31, 1995. LEGAL PROCEEDINGS DeSoto has been identified by governmental regulatory authorities as one of the parties potentially responsible for the cleanup costs at a number of waste disposal sites, several of which are on the EPA Superfund priority list. In addition, damages are being claimed against DeSoto in private actions for alleged 52 58 personal injury or property damage in the case of certain other waste disposal sites. See also "-- Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note I of the Notes to DeSoto's Consolidated Financial Statements for the year ended December 31, 1995. Lundman Development Corporation v. DeSoto, Inc. DeSoto was served with a summons and complaint filed in the United States District Court for the Eastern District of Wisconsin on September 8, 1994. The complaint alleges, inter alia, that DeSoto violated the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to property DeSoto once owned in Fredonia, Wisconsin. DeSoto has denied the allegations in the complaint. Motions for summary judgment are pending, and a September 1996 trial date has been set. Ninth Avenue Remedial Group et al v. Allis-Chambers Corporation et al. DeSoto was named in a complaint filed in the United States District Court for the Northern District of Indiana on December 6, 1994. The complaint alleges DeSoto and numerous other parties are jointly and severally responsible under CERCLA for the cleanup and future cleanup of the site. Also, the EPA issued an administrative order against DeSoto under Section 106(a) of CERCLA demanding that DeSoto undertake remediation at the Ninth Avenue site. DeSoto has responded that it intends to comply with all terms of the order. The matter is in the discovery stage. United States of America v. Akzo et al. DeSoto was named in a complaint, dated March 31, 1995, and filed in the United States District Court for the Eastern District of Michigan. The complaint, filed on behalf of the EPA, alleges, inter alia, that DeSoto and four other parties are responsible under Section 107 of CERCLA for costs the EPA incurred at the Metamora Landfill site in Lapeer, Michigan. The complaint also seeks a declaration under Section 113 of CERCLA that DeSoto is liable for the EPA's future costs that may be incurred at this site. Separately, on June 13, 1996, DeSoto was served with a complaint, also filed in the United States District Court for the Eastern District of Michigan, entitled Foamseal, Inc., et al. v. The Dow Chemical Co., et al., by a group of firms seeking, inter alia, contribution from DeSoto and numerous other parties for remediation costs being incurred by the plaintiff firms at the named site. DeSoto's defense in these actions have been assumed by the company and its principal shareholder from which DeSoto purchased certain assets of the business which is alleged to be partially responsible for the alleged contamination at this site. The former owners of the company have also agreed to indemnify DeSoto with respect to the claims asserted in the complaints. DeSoto received a unilateral amended Administrative Order dated March 25, 1996, issued by the EPA under Section 106 of CERCLA, alleging DeSoto is a potentially responsible party in connection with the Marina Cliffs site in South Milwaukee, Wisconsin. DeSoto presently believes it has no liability for the claims made relating to the site. Pennsauken Solid Waste Management Authority v. State of New Jersey DEP, et al. On or about December 14, 1995, DeSoto was served with an amended complaint filed in the New Jersey Superior Court, Camden County, alleging, inter alia, that DeSoto and numerous other parties are jointly and severally responsible for the disposition of hazardous wastes at the Pennsauken Sanitary Landfill in New Jersey. An earlier complaint naming DeSoto was dismissed without prejudice. Gerling-Service Nederland, BV v. DeSoto, Inc. In 1992, a claim was filed against DeSoto in the Eastern Division of the Danish High Court by an insurance carrier to a third party, for property damage allegedly incurred when a fertilizer product manufactured by the third party, containing a chemical sold to that party by one of DeSoto's discontinued operations, allegedly caused, or promoted, a fungus infection resulting in failure of certain tomato crops in the United Kingdom. The damages alleged are approximately $1.4 million. DeSoto's defense, with a reservation of rights, has been undertaken by one of its insurance carriers. In re DeSoto, Inc. Shareholder Litigation. There are several shareholder actions pending in the Delaware courts relating to various proposals of Sutton Holding Corp. to acquire DeSoto in the period 1989 to 1991. These actions, all of which were consolidated, have not been actively pursued and it appears the case was removed from the court's calendar; however, the plaintiffs recently served a discovery request upon DeSoto. DeSoto believes these actions are not material. 53 59 DeSoto, Inc. v. Liberty Mutual Insurance Company. On August 23, 1995, DeSoto commenced an action in the United States District Court for the District of New Jersey, seeking contract and declaratory relief with respect to environmental insurance coverage that DeSoto purchased from Liberty Mutual Insurance Company. The matter is now in the pre-trial discovery. Fort Dearborn Lithograph Co. v. DeSoto, Inc. DeSoto was served with a summons and complaint on July 19, 1995, filed by Fort Dearborn Lithograph Co. in the Circuit Court of Cook County, Illinois, seeking to collect allegedly unpaid invoices for goods and services, of approximately $500,000. The final disposition of this action has been stayed, based on a payment arrangement made with this creditor. Liquid Container, L.P. v. DeSoto, Inc. DeSoto was served with a summons and complaint on December 6, 1995, filed by Liquid Container, L.P. in the Circuit Court of Cook County, Illinois, claiming breach of contract and damages relating to a transaction involving, in part, DeSoto's former blow molding operations. DeSoto has asserted a number of defenses and counterclaims. The action is in the early stages of pre-trial discovery. Rooney v. DeSoto, Inc., et al. This action was filed in 1991 in the District Court of Tarrant County, Texas, by various emergency healthcare providers against DeSoto, among others, claiming damages for alleged personal injuries purportedly related to an industrial accident involving a DeSoto employee at its former facility in Fort Worth, Texas. The case has now been set for trial in the fall of 1996. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources DeSoto continues to experience losses from operations and negative operating and financing cash flows. As part of a continuing effort to manage its accounts payable and cash flow requirements, DeSoto, as of January 1996, executed a Trade Composition Agreement (the "Trade Composition Agreement") with its trade creditors as represented by a committee of six major trade creditors and an agent for DeSoto's trade creditors (the "Trade Agent"). The Trade Composition Agreement includes a form of Standstill Agreement (the "Standstill Agreement") executed by DeSoto's trade creditors related to accounts payable existing as of September 22, 1995. Under the Standstill Agreement, if certain conditions are met, the creditors who are party to such agreement ("Qualified Trade Creditors") have agreed not to initiate litigation or other efforts to collect amounts owed to them. As part of the Trade Composition Agreement, DeSoto initiated the termination of its overfunded defined benefit pension plan to be effective upon the receipt of appropriate governmental approvals. DeSoto has agreed to pay each Qualified Trade Creditor the balance owed to that creditor, plus interest from July 1, 1996, at a rate of 8% per annum, within 10 days of receipt of the reverted excess DeSoto Pension Plan assets. The Trade Composition Agreement stipulates DeSoto may suspend efforts to terminate its defined benefit pension plan if DeSoto enters into a binding agreement for a merger, asset sale or similar transaction, involving substantially all of DeSoto's assets, if such binding agreement provides that all Qualified Trade Creditors will be paid in full. The Trade Composition Agreement provides that upon the receipt (the "Requisite Consent Amount") by the Trade Agent and DeSoto of executed Standstill Agreements from trade creditors holding at least 80% in dollar amounts of the outstanding trade claims as reflected on DeSoto's books and records (other than amounts owed to Procter & Gamble and Witco Chemical), DeSoto agreed to execute and deliver a security agreement (the "Security Agreement") granting a security interest and lien on all of DeSoto's assets to collateralize the obligations of DeSoto to the Qualified Trade Creditors. As a result of the Reorganization Agreement, DeSoto is no longer pursuing the pension plan termination. If the Merger is not consummated, DeSoto will reinstate the pension plan termination process. On or about May 9, 1996, under the Trade Composition Agreement, the Trade Agent and DeSoto received the Requisite Consent Amount and thereafter, DeSoto and the Trade Agent executed the Security Agreement. The Security Agreement provides that DeSoto may consummate the transactions contemplated by the Reorganization Agreement provided that DeSoto provides assurances reasonably satisfactory to the Trade Agent that the provisions of the Reorganization Agreement relating to payment of DeSoto's trade creditors will be satisfied. See "The Reorganization Agreement -- Keystone Financing Agreements." 54 60 As a result of its liquidity problems, DeSoto is currently operating on a cash on delivery or limited credit basis with respect to purchases of supplies and raw materials. DeSoto has been able to operate within these constraints and expects to be able to continue to do so for the foreseeable future. DeSoto currently has no outstanding secured debt or revolving credit arrangements. DeSoto also expects to fund operations in 1996 with proceeds from insurance and other settlements and spot factoring of accounts receivable. The disposition of businesses during 1995 and 1996 and the resulting shut-down of certain operating facilities are expected to reduce the cash required to fund remaining operations in the future. DeSoto reported negative operating cash flows of approximately $1.2 million during the first six months of 1996 which was primarily funded by the proceeds from the sale, in February 1996, of machinery and equipment formerly used at facilities sold in 1995. The Company has also factored certain accounts receivable from time to time to address short-term cash requirements. Proceeds of $4.3 million were received from factoring during the first six months of 1996, of which $1.3 million related to invoices due after June 30, 1996. The proceeds from the sale of DeSoto's Union City, California facility in April 1996 did not have a material impact on DeSoto's cash flows or financial position. See also "Unaudited Pro Forma Consolidated Information." Accounts receivable at June 30, 1996 decreased versus December 31, 1995, reflecting the fact there were no second quarter sales to Proctor & Gamble (due to the April 1996 sale of the Union City facility), an increase in the allowance for doubtful accounts, an offset of accounts receivable and payable relative to certain parties who were both debtors and creditors of DeSoto, and an increase in the level of factored receivables. The trade receivables are net of the factored accounts receivable as discussed above. Lower inventory levels at June 30, 1996 verses December 31, 1995 reflect DeSoto's efforts to manage its cash flow, as well as the impact of the Union City disposition discussed above. The decline in property, plant and equipment during the first six months of 1996 reflects the sale of machinery and equipment in February 1996 as discussed above and the sale of the machinery and equipment at the Union City facility in April 1996. The balance of the reduction in property, plant and equipment represents depreciation. The reduction in non-current assets during the first six months of 1996 reflects reclassification of certain amounts to current as well as a reserve against certain assets due to questions with respect to realizability. The reduction in trade payables at June 30, 1996 as compared to December 31, 1995, reflects continued cost control efforts as well as an offset of accounts receivable and payable relative to certain parties who were both debtors and creditors of DeSoto. Reserves and liabilities related to restructuring programs increased during the first six months of 1996 due to provisions for expenses related to the disposition of the Union City, California operations. Significant components of this accrual include the write-down of property, plant and equipment to net realizable value, future rental commitments on a leased warehouse and severance pay. Cash flows from operations in 1995 were a positive $1 million and included cash proceeds of $6.1 million from insurance settlements related to the cost of cleanup at certain hazardous waste sites. Cash flows from operations also reflects the impact of no longer carrying receivables or inventory related to the businesses sold during 1995. Accounts receivable at December 31, 1995, when compared to December 31, 1994, also reflects a reduction in trade accounts receivable due to the impact of reduced sales resulting in part from the business dispositions. Inventory levels have declined during the same time period due in part to lower requirements stemming from the lower sales levels as well as the continued impact of a product rationalization/inventory control program. The decline in DeSoto's property, plant and equipment during 1995 reflects the 1995 business dispositions, the sale of equipment no longer used in operations as well as the write-down to net realizable value of property, plant and equipment at DeSoto's former South Holland facility. In addition, the excess of depreciation over capital expenditures in 1995 contributed to the overall reduction in net property, plant and equipment. 55 61 The decline in other noncurrent assets during 1995 was due primarily to the third quarter write-off of approximately $3.3 million of goodwill related to the businesses sold by DeSoto during 1995. This write-off of goodwill was partially offset by a minimum long-term royalty receivable of $1.5 million recorded as part of the sale of the businesses. Reserves and liabilities related to restructuring programs increased during 1995 primarily due to provisions for expenses related to the disposition, and related shutdown, of DeSoto's South Holland facility. Significant components of this accrual include future rental payments to the DeSoto Pension Plan and future real estate taxes on the property. DeSoto has been identified by governmental regulatory authorities as one of the parties potentially responsible for the cleanup costs at a number of waste disposal sites and for certain alleged contamination. In addition, damages are being claimed against DeSoto in private actions for alleged personal injury or property damages in the case of some of the waste disposal sites. Accruals have been made for the estimated costs of DeSoto's expected resulting liability. These estimates are subject to numerous variables, the effects of which are difficult to measure, including the stage of the investigations, the nature of potential remedies, the joint and several liability with other potentially responsible parties and other issues. Accordingly, these waste site accruals represent DeSoto's best estimate of its potential exposure. It is the opinion of DeSoto's management, after evaluating the variables discussed above, as well as the anticipated time frame for remediation, that the resolution of environmental liabilities will not have a material adverse effect on DeSoto's financial position, results of operations or liquidity. Of the $2 million accrued as a current liability at June 30, 1996 for waste site cleanup, $755,000 is fully funded by a trust fund which is included in restricted short-term investments in DeSoto's balance sheet. This fund was established in 1990 as part of the sale of specific discontinued operations of DeSoto and may be accessed by DeSoto and, in certain circumstances, a certain purchaser of the discontinued operations. In 1995, DeSoto paid out approximately $2.3 million on waste site related liabilities, excluding legal and administrative costs; and of this amount, $1.1 million and $29,000 was disbursed, respectively, from the trust fund and restricted cash account discussed above. Based upon currently available information, DeSoto's management is unable to determine the timing of future payments for that portion of the waste site liability which has been classified as long-term. For additional information regarding DeSoto's waste site cleanup liability, refer to Note I of the Notes to DeSoto's Consolidated Financial Statements for the year ended December 31, 1995. Results of Operations Six Months Ended June 30, 1996 Versus Six Months Ended June 30, 1995. DeSoto's net revenues for the first six months of 1996 were $9.5 million versus $35.2 million in the comparable 1995 period. Results of operations for the 1995 six-month period include DeSoto's former Thornton and South Holland businesses which were sold in July 1995 and the Union City business sold in April 1996. The disposed businesses accounted for approximately $26.9 million of net revenues in the first six months of 1995 and $2 million of net revenues in the first six months of 1996. Excluding sales of the disposed businesses, net revenues in the first half of 1996 were $7.5 million, down 10% from $8.3 million in the first half of 1995, primarily as a result of lower sales levels to customers other than Sears. Gross profit for the 1996 six month period was $1.1 million versus a loss in 1995 of $574,000. The change in customer mix resulting from the sales of certain businesses referred to above contributed to the 1996 increase in gross profit. Sales to Sears in the first six months of 1996 were slightly higher than the same period of 1995 as volume increases in the first quarter of 1996 were largely offset by a decline in selling prices. Contract packaging revenues declined in the first six months of 1996 versus the 1995 comparable period largely due to a change in the manner of doing business with Procter & Gamble. The Procter & Gamble business in 1995 included packaging materials that had been purchased by DeSoto on behalf of Procter & Gamble. However, in 1996 the packaging materials were furnished by Procter & Gamble which resulted in a corresponding decrease in revenues and cost of sales. A temporary change in Procter & Gamble's purchasing pattern during the first quarter of 1996 resulted in increased volume and gross profit during the first six months of 1996, as compared 56 62 to the comparable 1995 period, at DeSoto's Union City facility. Sales by DeSoto to Procter & Gamble were discontinued as of April 1996 upon disposition of the Union City facility. Selling, general and administrative expenses were $2.7 million in the first six months of 1996 versus $5.7 million in the comparable 1995 period. This decrease primarily reflects the disposition of the Thornton, South Holland and Union City businesses. Nonrecurring expense in the first six months of 1996 amounted to $1.6 million and primarily reflects provisions in the first quarter of 1996 for expenses related to the disposition of the Union City facility. Significant components of the provisions include the write-down of fixed assets to net realizable value, future rental commitments on a leased warehouse and severance pay. Interest expense in the first six months of 1995 related to borrowings repaid in September 1995 when DeSoto's credit facility with its primary secured lender was terminated. Nonoperating expense for the first six months of 1996 of $1.2 million represents the provision for an allowance against certain receivables related to disposed businesses. The nonoperating income in the comparable 1995 period primarily resulted from approximately $6.1 million in insurance settlements and royalty income of $244,000 related to technology sold by DeSoto in 1990. 1995 versus 1994. Results of operations for 1995 reflect the disposition of DeSoto's Thornton and South Holland, Illinois businesses in July 1995. These businesses accounted for approximately $27.2 million of net revenues in 1995 versus $51.7 million of net revenues during 1994. Overall net revenues in 1995 decreased approximately 40% versus the prior year. Net revenues from the continuing business in 1995 (excluding the 1995 business dispositions) decreased approximately 29% from 1994. This decline can be attributed largely to a decrease in sales to two customers: Sears and Lever. Sales to Sears in 1995 were approximately $3.5 million lower than the previous year; a decrease of approximately 25%. This decline was partially attributable to promotional activity in 1994 as well as competitive pressures that had a negative impact on sales in general. Sales to Lever in 1994 included approximately $2.0 million of sales of autodish gel and concentrated fabric softener and $1.3 million of sales of fabric softener sheets. Lever transferred this business out of DeSoto during the second and third quarters of 1994 and DeSoto no longer manufactures either product. Sales to Kmart in 1995 were approximately $8.2 million lower than sales in 1994. Sales were made to Kmart as part of the businesses which were sold in July of 1995. Approximately $3.4 million of the decline in sales to Kmart occurred before the disposition of these businesses. The 1995 decline in gross profit from the 1994 level resulted from pricing pressures, changes in product and customer mix, reduced volume, increased packaging costs and unrecovered fixed costs at certain of DeSoto's operating facilities. In addition, DeSoto continued to manufacture products through October 1995 for the buyer of one of the businesses it sold in 1995. These products were sold to the buyer at prices that approximated cost. Selling, general and administrative costs declined approximately 15% in 1995 versus 1994. This decline reflects the elimination of administrative personnel subsequent to the business dispositions in 1995 as well as continued cost containment efforts. Selling, general and administrative expenses in 1994 also included the operation of DeSoto facilities in Columbus, Georgia, which closed in March 1994, and Stone Mountain, Georgia, which closed in July 1994. Nonrecurring expense in 1995 included a net loss on the sale of the Thornton and South Holland, Illinois businesses (including the write-off of related goodwill of $3.3 million) and a $3.1 million provision for costs associated with the resulting closure of operating facilities due to these dispositions. Interest expense in 1995 related to borrowings repaid in September 1995 when DeSoto's credit facility with its primary secured lender was terminated. Nonoperating income in 1995 included approximately $6.1 million from insurance settlements and approximately $244,000 of royalty income related to technology sold by DeSoto in 1990. 57 63 1994 Versus 1993. In 1994, DeSoto's net revenues decreased approximately 14% from 1993. This decrease was primarily the result of lower sales to Lever and the loss of a customer to which DeSoto made $5 million in sales during 1993. Other losses of existing business and gains of new business for the most part offset each other. The 1993 revenues also included approximately $3.1 million in sales related to a former business of DeSoto, the assets and business of which were sold in December 1993. Sales to Lever declined approximately $7 million versus 1993 as a result of Lever transferring its autodish gel business to one of Lever's own production facilities and its fabric sheet business to another company during 1994. The 1994 decline in gross profit as compared to 1993 was attributable to changes in customer and product mix. Competitive pricing pressures in the marketplace depressed pricing. New business obtained in 1994 was, in most cases, at a lower gross profit than the lost business it replaced. There was also continued pressure to participate in advertising and promotional support of various customers resulting in a negative impact on gross profit. Selling, general, and administrative costs in 1994 were reduced significantly from 1993 levels. Approximately $1.2 million of this reduction related to the fact that 1993 results included an entire year of expenses related to the former business of DeSoto which was sold in December 1993. The shutdown of DeSoto's Columbus and Stone Mountain, Georgia facilities also resulted in a reduction in selling, general and administrative costs of approximately $500,000 in 1994. The disposition of DeSoto's former headquarters facility in 1993 resulted in the elimination of approximately $750,000 in carrying costs in 1993. In 1993 there was a significant reduction in legal fees and outside professional fees resulting from the settlement of various outstanding legal matters and reflected DeSoto's continued focus on cost control and containment across all functions of DeSoto. Nonoperating income in 1994 included the settlement of arbitration related to a portion of a business sold in 1990. Other components of nonoperating income included a settlement related to fees paid for professional services and royalty income related to technology sold by DeSoto in 1990. 58 64 STOCK OWNERSHIP OF MANAGEMENT AND OTHERS The following table sets forth certain information as of July 31, 1996 (except as otherwise indicated) regarding the beneficial ownership of shares of voting stock of DeSoto held by (i) directors, (ii) each person or entity known to DeSoto who beneficially owns more than 5% of the outstanding DeSoto Common Stock or DeSoto Preferred Stock, (iii) the officers of DeSoto, and (iv) all directors and officers of DeSoto as a group. Except as otherwise indicated, each person or entity has sole voting and investment power of the shares listed. For purposes of this table, shares which are not outstanding but which are subject to DeSoto Options or DeSoto Warrants are deemed to be outstanding for purposes of computing the percentage of outstanding shares of the class owned by the holder of the DeSoto Options or DeSoto Warrants but are not deemed to be outstanding for the purpose of computing the percentage of the class owned by other persons.
COMBINED OWNERSHIP OF DESOTO AMOUNT AND COMMON AND NATURE OF APPROXIMATE AMOUNT AND PREFERRED STOCK BENEFICIAL PERCENTAGE OF NATURE OF APPROXIMATE NAME OF INDIVIDUAL OWNERSHIP OF OUTSTANDING BENEFICIAL PERCENT OF APPROXIMATE OR ENTITY DESOTO DESOTO OWNERSHIP OF OUTSTANDING PERCENT OF ALL OR NUMBER COMMON STOCK COMMON DESOTO PREFERRED DESOTO DESOTO IN GROUP (SHARES)(1) STOCK STOCK (SHARES) PREFERRED STOCK VOTING STOCK - ------------------------------- ------------ ------------- ---------------- --------------- --------------- Sutton Holding Corp.(2)........ 1,797,089(3) 30.5% 583,333(4) 100.0% 36.8%(5) William Spier.................. 809,840(6) 15.4% 259,259(7) 44.4% 18.3% Anders U. Schroeder............ 639,470(8) 12.5% 194,444(9) 33.3% 14.6% The Gabelli Group.............. 512,600(10) 10.9% 0 0 9.7% Pioneering Management Corp..... 459,400(11) 9.8% 0 0 8.7% LL Capital Partners, L.P....... 276,700(12) 5.9% 0 0 5.2% Narragansett First Fund........ 261,388(13) 5.6% 0 0 5.0% Dimensional Fund Advisors Inc.......................... 242,300(14) 5.2% 0 0 4.6% Anne E. Eisele................. 36,374(15) * 0 0 * William P. Lyons............... 30,000(16) * 0 0 * Daniel T. Carroll.............. 8,500(17) * 0 0 * David M. Tobey................. 8,000(18) * 0(19) 0 * (20) Paul E. Price.................. 5,200(21) * 0 0 * All directors and officers as a group (9 persons)............ 1,969,087(22) 32.7% 583,333 100% 38.6%(22)
- --------------- * Denotes less than 1% (1) The information under this caption is based on representations made to DeSoto by individual directors and/or filings made with the Commission. (2) Sutton Holding Corp., a New York corporation ("Sutton"), is part of a group filing a joint Schedule 13D with respect to ownership of shares of DeSoto Common Stock that includes Anders U. Schroeder, an affiliate of William Spier, and parties having a business relationship with David Tobey. Sutton is owned by Asgard Ltd. (an affiliate of Anders U. Schroeder) ("Asgard"), Parkway M&A Capital Corporation ("Parkway"), M&A Investment Pte Ltd ("M&A") (entities having a business relationship with David Tobey), and an individual having no other relationship with DeSoto. Messrs. Spier, Schroeder and Tobey are directors and officers of Sutton. Sutton's address is 101 East 52nd Street, 11th Floor, New York, New York 10022. As a result of a recent agreement, Mr. Schroeder and the affiliated entity have ceased to be a part of the group filing the joint Schedule 13D. (3) Sutton is the record owner of 100 shares of DeSoto Common Stock. The stock ownership reported in the table for Sutton also includes the stock ownership of the other parties to the Schedule 13D referred to in Note 2 as follows: Coatings Group, Inc. ("Coatings Group") beneficially owns 779,840 shares of DeSoto Common Stock, of which 246,507 shares are currently outstanding and 533,333 shares are issuable upon DeSoto Warrants beneficially owned by Coatings Group; Anders U. Schroeder and an affiliated entity beneficially own 618,970 shares of DeSoto Common Stock, of which 218,970 shares are currently outstanding and 400,000 are issuable upon the exercise of DeSoto Warrants beneficially owned by the affiliate of Mr. Schroeder (DeSoto Options granted to Mr. Schroeder pursuant to the DeSoto 1992 Stock Plan have not been included in the foregoing or in the ownership for Sutton reported in the 59 65 table); Parkway beneficially owns 350,811 shares of DeSoto Common Stock, of which 84,144 are currently outstanding and 266,667 are issuable upon exercise of DeSoto Warrants beneficially owned by Parkway; and M&A beneficially owns 47,368 shares of DeSoto Common Stock, all of which are currently outstanding. Consequently, Sutton and these related parties currently beneficially own an aggregate of 597,089 currently outstanding shares of DeSoto Common Stock and 1,200,000 shares of DeSoto Common Stock issuable upon exercise of DeSoto Warrants having an exercise price of $7.00 per share, representing the 1,797,089 shares of DeSoto Common Stock reported in the table. (DeSoto Options granted pursuant to the DeSoto 1992 Stock Plan to affiliates of any of these parties have not been included in these numbers.) (4) Parties related to Sutton own all of the shares of DeSoto Preferred Stock reported in the table. Coatings Group owns 259,259 of such shares, an affiliate of Anders U. Schroeder owns 194,444 of such shares, and Parkway owns 129,630 of such shares. (5) Represents shares of DeSoto Common Stock and DeSoto Preferred Stock currently owned by parties referred to in Note 2 and 1,200,000 shares of Common Stock issuable upon exercise of DeSoto Warrants owned by such parties as described in Note 3. (6) Mr. Spier's stock ownership includes 246,507 currently outstanding shares of DeSoto Common Stock and 533,333 shares of DeSoto Common Stock issuable upon exercise of DeSoto Warrants owned by Coatings Group, a corporation of which Mr. Spier is President and Chairman of the Board, and DeSoto Options to purchase 30,000 shares of DeSoto Common Stock which are currently exercisable and were granted pursuant to the DeSoto 1992 Stock Plan. (The Coatings Group stock ownership also has been included in the stock ownership reported for Sutton. See Note 3.) The listed shares do not include the 100 shares owned by Sutton or 100 shares held by Mr. Spier's father-in-law, as to which Mr. Spier may be deemed the beneficial owner. (7) All such shares are owned by Coatings Group. See Note 3. (8) Mr. Schroeder's stock ownership includes stock owned by Asgard. Asgard, a corporation affiliated with Mr. Schroeder, owns 218,970 currently outstanding shares of DeSoto Common Stock, 194,444 shares of DeSoto Preferred Stock and beneficially owns 400,000 shares of DeSoto Common Stock issuable upon exercise of DeSoto Warrants. (Asgard's stock ownership has been included in the stock ownership reported for Sutton. See Note 3.) Also includes DeSoto Options to purchase 20,500 shares of DeSoto Common Stock, which are currently exercisable and were granted pursuant to the De Soto 1992 Stock Plan. (9) All such shares are owned by Asgard, a corporation affiliated with Mr. Schroeder. (10) As reported by Mario J. Gabelli and various entities which he directly or indirectly controls and for which he acts as chief investment officer (the "Gabelli Group") its members include the following: Gabelli Funds, Inc. ("GFI"), GAMCO Investors, Inc. ("GAMCO"), Gabelli Securities, Inc. ("GSI"), Gabelli & Company, Inc. ("Gabelli & Company"), Gabelli Performance Partnership ("GPP"), GLI, Inc. ("GLI"), The Gabelli Associates Fund ("Gabelli Associates"), Gabelli Associates Limited ("GAL"), The Gabelli & Company, Inc. Profit Sharing Plan, Gabelli International Limited ("GIL"), Gabelli International II Limited ("GIL II"), Mario J. Gabelli ("Mr. Gabelli"), Lynch, Safety Railway and Western New Mexico. The address of Mario J. Gabelli and the Gabelli Group is c/o J. Hamilton Crawford, Jr., Gabelli Funds, Inc., One Corporate Center, Rye, New York 10580-1434. Based on information in Amendment No. 24 to Schedule 13D, dated July 9, 1996, the Gabelli Group owns its shares of DeSoto Common Stock as follows: Mario J. Gabelli, 7,500 shares; GAMCO, 498,600 shares; and GIL II, 6,500 shares. Each of the above persons or entities has sole voting and dispositive power over its shares, except that GAMCO does not have authority to vote 52,500 reported shares. (11) Based on information in a Schedule 13G, dated as of January 26, 1996. The address of Pioneering Management Corporation is 60 State Street, Boston, Massachusetts 02109. 60 66 (12) Based on information in Amendment No. 3 to Schedule 13D filed jointly by LL Capital Partners, L.P. and its general partner Lance Lessman, dated as of December 1, 1995. The address of LL Capital Partners, L.P. is 375 Park Avenue, New York, New York 10152. (13) Based on information in Amendment No. 1 to Schedule 13D, dated as of July 19, 1996. The address of Narragansett First Fund is 900 Fleet Center, Providence, Rhode Island, 02903. (14) Based on information in a Schedule 13G, dated as of February 7, 1996, filed by Dimensional Fund Advisors Inc. ("Dimensional"), a registered investment advisor, Dimensional is deemed to have beneficial ownership of 242,300 shares of DeSoto Common Stock, all of which shares are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, all of which Dimensional Fund Advisors Inc. serves as investment manager. Dimensional disclaims beneficial ownership of all such shares. (15) Includes shares of DeSoto Common Stock held in Ms. Eisele's account in the DeSoto Stock Ownership Plus Plan and DeSoto Options to purchase 30,000 shares of DeSoto Common Stock which are currently exercisable and were granted pursuant to the DeSoto 1992 Stock Plan. (16) Includes 25,000 shares of DeSoto Common Stock owned by the William P. Lyons and Co., Inc. Pension Trust, the only participant and beneficiary of which is Mr. Lyons. Also includes DeSoto Options to purchase 5,000 shares of DeSoto Common Stock, which are currently exercisable and were granted pursuant to the DeSoto 1992 Stock Plan. (17) Includes DeSoto Options to purchase 4,500 shares of DeSoto Common Stock which are currently exercisable and were granted pursuant to the DeSoto 1992 Stock Plan. (18) Includes DeSoto Options to purchase 5,000 shares of DeSoto Common Stock, which are currently exercisable and were granted pursuant to the 1992 Stock Plan. Does not include the stock ownership of Parkway and M&A. See Note 3. (19) Does not include the 129,630 shares owned by Parkway. See Note 4. (20) Does not include stock ownership of Parkway and M&A. See Note 3. (21) Includes DeSoto Options to purchase 5,000 shares of DeSoto Common Stock which are currently exercisable and were granted pursuant to the DeSoto 1992 Stock Plan. (22) Includes 1,498 shares of DeSoto Common Stock beneficially held in the DeSoto Stock Ownership Plus Plan for the account of officers. Also includes stock ownership of Sutton to the extent not otherwise included in the beneficial ownership of directors and officers, DeSoto Options held by directors and officers if exercisable within 60 days and shares issuable upon exercise of DeSoto Warrants. (Without inclusion of such Sutton stock ownership, directors and officers, as a group, would own (i) 1,570,808 shares of DeSoto Common Stock, representing approximately 27.3% of the outstanding shares of DeSoto Common Stock, (ii) 453,703 shares of DeSoto Preferred Stock, representing approximately 77.8% of all such shares, and (iii) approximately 31.9% of all voting stock.) 61 67 DESOTO DIRECTORS WHO WILL BE KEYSTONE DIRECTORS Set forth below is certain information, as of the date hereof, about William Spier and William P. Lyons, each of whom will be elected to serve as a director of Keystone upon consummation of the Merger. WILLIAM SPIER, age 61, has been a director of DeSoto since 1990 and Chairman of DeSoto since 1991. Mr. Spier has also been Chief Executive Officer of DeSoto from 1991 to January 1994 and from September 1995 to present, President and Chairman of Sutton (a corporation formed for the purpose of acquiring DeSoto) from 1989 to present, and a private investor from 1982 to present. Mr. Spier also is a director of Geotek Communications, Inc., Holmes Protection Group, Inc. and Video Lottery Technologies, Inc. WILLIAM P. LYONS, age 54, has been a director of DeSoto since 1991. Mr. Lyons has also been Chairman of JVL Corp. (a manufacturer of generic and over-the-counter pharmaceutical products) since 1992, President and Chief Executive Officer of William P. Lyons and Co., Inc. (an investment firm) since 1975 and Chairman and Chief Executive Officer of Duro Test Corp. (a manufacturer of specialty lighting products) from 1988 to 1991. Mr. Lyons also is a director of Holmes Protection Group, Inc., Lydell, Inc., and Video Lottery Technologies, Inc. The following table sets forth certain information for the years ended December 31, 1995, 1994, and 1993 concerning the compensation paid by DeSoto to William Spier. (Mr. Spier has not received cash compensation from DeSoto in 1994, 1995 or 1996.) Mr. Lyons, as a director who is not an employee of DeSoto, receives the same compensation from DeSoto as other directors who are not DeSoto employees. Directors who are not employees of DeSoto are paid an annual retainer of $6,000 and, in addition, receive $800 for each meeting of the DeSoto Board or committee thereof attended. In addition, under the terms of the DeSoto 1992 Stock Plan, each non-employee director receives an initial grant of DeSoto Options to purchase 3,000 shares of DeSoto Common Stock upon becoming a director and, thereafter, annual grants of DeSoto Options to purchase 500 shares of DeSoto Common Stock. DESOTO SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ANNUAL ------------ COMPENSATION SECURITIES ----------------- UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS(#) - -------------------------------------------------------------- ---- -------- ------------ William Spier................................................. 1995 $ -- 10,000 Chairman of the Board 1994 -- 10,000 and Chief Executive Officer 1993 123,750 10,000
Mr. Spier served as Chief Executive Officer of DeSoto until December 13, 1993, and effective as of September 1, 1995, Mr. Spier was again appointed Chief Executive Officer of DeSoto. Shown below is information with respect to DeSoto Options granted during the year ended December 31, 1995 to William Spier under the DeSoto 1992 Stock Plan, which provides, among other things, for the grant of DeSoto Options. DESOTO OPTION GRANTS IN 1995
POTENTIAL NUMBER OF PERCENTAGE REALIZABLE VALUE DESOTO OF TOTAL AT ASSUMED ANNUAL OPTIONS DESOTO RATES OF STOCK GRANTED OPTIONS PRICE APPRECIATION (IN COMMON GRANTED EXERCISE FOR OPTION TERM(B) SHARES TO EMPLOYEES PRICE EXPIRATION ------------------ (A)) IN 1995 PER SHARE DATE 5% 10% ---------- ------------ --------- ---------------- ------- ------- William Spier(c)...................... 10,000 50.0% $4.38 November 8, 2005 $27,514 $69,740
62 68 - --------------- (a) Stock appreciation rights may not be granted under the DeSoto 1992 Stock Plan. (b) Under the rules and regulations of the Commission, the potential realizable value of a grant is the product of (i) the difference between (x) the product of the per share market price of the time of grant and the sum of 1 plus the adjusted stock price appreciation rate (the assumed rates of appreciation compounded annually over the term of the options) and (y) the per share exercise price of the DeSoto Option and (ii) the number of securities underlying the grant at year-end. Assumed annual rates of stock price appreciation of 5% and 10% are specified by the Commission and are not intended to forecast possible future appreciation, if any, of the price of the shares of DeSoto Common Stock. (For example, if the price of shares of DeSoto Common Stock remained at the exercise price of the DeSoto Options, (i.e., a 0% appreciation rate), the potential realized value of the grant would be $0.) The actual performance of such shares may be significantly different from the rates specified by the Commission. (c) This grant was made as of November 8, 1995 with an exercise price equal to the market price at that time. The DeSoto Options were immediately exercisable. The following table provides certain information with respect to the number and value of unexercised options outstanding as of December 31, 1995. DECEMBER 31, 1995 DESOTO OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED DESOTO OPTIONS IN-THE-MONEY (IN COMMON SHARES) DESOTO OPTIONS AT DECEMBER 31, 1995 AT DECEMBER 31, 1995 (A) ------------------------------ ---------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- William Spier.......................................... 30,000 0 $-- $--
- --------------- (a) Calculated by determining the difference between the fair market value of the DeSoto Common Stock underlying the options on December 31, 1995 ($3.50, the closing price on the NYSE -- Composite Transactions) and the exercise price of the DeSoto Options on that date. DESOTO PENSION PLAN The compensation covered by the DeSoto Employees' Retirement Pension Plan (the "Pension Plan") and the DeSoto Salaried Employees' Pension Preservation Plan (the "Preservation Plan") is substantially the same as that reported under the "Salary" column of the Summary Compensation Table, limited, however, to $150,000 for 1995 (or such other amount provided by Section 401(a)(17) of the Internal Revenue Code). As of December 31, 1995, the estimated credited years of service of Mr. Spier was approximately five and Mr. Spier's average annual compensation during the highest five consecutive years of pay was $63,156. Thus, Mr. Spier's estimated annual benefit payable upon retirement at age 65 is $4,228. Benefits are computed on the basis of a straight life annuity and are subject to offset for Social Security benefits (although the calculation of the offset under the Salaried Pension Plan differs from the offset under the Preservation Plan). To the extent an employee's benefit as computed under the Salaried Pension Plan exceeds the limitations provided under the Code or an employee's service exceeds 35 years, the benefit will be provided under the Preservation Plan. 63 69 CERTAIN INFORMATION ABOUT KEYSTONE KEYSTONE MANAGEMENT The current directors and executive officers of Keystone are listed below.
NAME AGE TITLE ---------------------------------------- --- ---------------------------------------- Glenn R. Simmons........................ 68 Chairman of the Board and Chief Executive Officer J. Walter Tucker, Jr. .................. 70 Vice Chairman of the Board Thomas E. Barry......................... 53 Director Paul M. Bass, Jr. ...................... 60 Director David E. Connor......................... 70 Director Donald A. Sommer........................ 68 Director Richard N. Ullman....................... 62 Director Robert W. Singer........................ 59 President and Chief Operating Officer Harold M. Curdy......................... 49 Vice President -- Finance and Treasurer Bert E. Downing, Jr. ................... 40 Corporate Controller Ralph P. End............................ 58 Vice President and General Counsel Bill J. Johnson......................... 60 President, Sherman Wire Division Sandra K. Myers......................... 53 Corporate Secretary
GLENN R. SIMMONS is Chairman of the Board of Directors and Chief Executive Officer of Keystone and has served in such capacities since 1987 but has been a director of Keystone since 1986. Mr. Simmons has served as Vice Chairman of the Board of Directors of Contran since prior to 1991. Mr. Simmons has been a director of Contran and an executive officer and/or director of various companies related to Contran since prior to 1991. He is Vice Chairman of the Board of Valhi and Valcor, Inc. and a director of NL Industries, Inc. ("NL") and Tremont Corporation ("Tremont"), all of which companies may be deemed to be affiliates of Keystone. Mr. G. Simmons is also the brother of Harold C. Simmons. Mr. G. Simmons' term as a director expires at Keystone's 1999 annual meeting of stockholders. J. WALTER TUCKER, JR. is Vice Chairman of the Board of Directors of Keystone and has served in such capacity since 1987 but has been a director of Keystone since 1971. Mr. Tucker has served as a director, President, and Treasurer of Tucker & Branham, Inc., a privately owned real estate, mortgage banking and insurance firm since prior to 1991. Mr. Tucker is also a director of SunTrust Banks, Inc., Columbian Mutual Life Insurance Company and Valhi. He has also been an executive officer and/or director of various companies related to Valhi and Contran since 1982. Mr. Tucker's spouse is a first cousin of Donald A. Sommer. Mr. Tucker's term as a director expires at Keystone's 1999 annual meeting of stockholders. THOMAS E. BARRY has been a director of Keystone since 1989 and is Vice President for Executive Affairs at Southern Methodist University and has been a Professor of Marketing in the Edwin L. Cox School of Business at Southern Methodist University since prior to 1991. Mr. Barry's term as a director expires at Keystone's 1997 annual meeting of stockholders. PAUL M. BASS, JR. has been a director of Keystone since 1989 and is Vice Chairman of First Southwest Company, a privately owned investment banking firm, and has served as a director since prior to 1991. Mr. Bass is also Chairman of Richman Gordman Half Price Stores, Inc., Chairman of MorAmerica Private Equities Company, director of First Madison Bank and Chairman of the Audit Committee and director of Source Services, Inc. Mr. Bass is currently serving as a member of the Executive Committee of Zale-Lipshy University Hospital and as Chairman of the Board of Trustees of Southwestern Medical Foundation. Mr. Bass' term as a director expires at Keystone's 1998 annual meeting of stockholders. DAVID E. CONNOR has been a director of Keystone since 1992 and is President of David E. Connor and Associates, advisers to commerce and industry, in Peoria, Illinois and has served in such capacity since prior to 1991. He is a director of Cilcorp, Inc., Peoria, Illinois, and Chairman of the Board of First Midwest Bankshares, Quincy, Illinois. He is also director of Heartland Community Health Clinic, Peoria, Illinois, 64 70 Museum Trustees of America, Washington, D.C., and a trustee of Bradley University, Peoria, Illinois. Mr. Connor's term as a director expires at Keystone's 1998 annual meeting of stockholders. DONALD A. SOMMER has been a director of Keystone since 1962 and served as a Vice President of Keystone prior to his retirement in 1982. Mr. Sommer is a first cousin to the spouse of J. Walter Tucker, Jr. Mr. Sommer's term as a director expires at Keystone's 1998 annual meeting of stockholders. RICHARD N. ULLMAN has been a director of Keystone since 1992 and is President of Federal Companies, a privately held commercial warehouse and transportation company in Peoria, Illinois, and has served in such capacity since prior to 1991. He is a director of First of America Bank -- Illinois, N.A. and Cilcorp, Inc. and is also serving as director of Children's Hospital of Illinois at St. Francis, director of St. Francis Medical Center, and a trustee of Bradley University, all located in Peoria. Mr. Ullman's term as a director expires at Keystone's 1997 annual meeting of stockholders. ROBERT W. SINGER is President and Chief Operating Officer of the Company and has served in that capacity since prior to 1991. He has served as Vice President of Valhi and Contran since prior to 1991. HAROLD M. CURDY is Vice President -- Finance and Treasurer of the Company and has served in such capacities since prior to 1991. BERT E. DOWNING, JR. is Corporate Controller of the Company and has served in such capacity since December 1993. From prior to 1991 to December 1993, Mr. Downing served as Senior Manager in the Dallas office of Ernst & Young, a public accounting firm. RALPH P. END has served as Vice President and General Counsel since 1991 and as the Corporate Counsel and Assistant Secretary of the Company since prior to 1991. BILL J. JOHNSON has served as President, Sherman Wire, a division of the Company, since February 1995. Mr. Johnson served as Vice President & General Manager, Sherman Wire, since prior to 1991. SANDRA K. MYERS is Corporate Secretary of the Company and Executive Secretary of Contran and has served in both capacities since prior to 1991. All of the executive officers of Keystone serve at the pleasure of the Keystone Board of Directors. CERTAIN BUSINESS RELATIONSHIPS AND RELATED TRANSACTIONS As set forth under the caption "-- Security Ownership of Certain Beneficial Owners," Harold C. Simmons, through Contran and other entities, may be deemed to own beneficially approximately 69% of Keystone Common Stock and, therefore, may be deemed to control Keystone. Certain officers and directors of Keystone are also officers and directors of Contran or of entities that may be deemed to be controlled by or affiliated with Contran or Harold C. Simmons. Keystone and other entities that may be deemed to be controlled by or affiliated with Mr. Simmons sometimes engage in (i) intercorporate transactions with related companies, including guarantees, management and expense sharing arrangements, shared fee arrangements, joint ventures, partnerships, loans, options, advances of funds on open account, and sales, leases and exchanges of assets, including securities issued by both related and unrelated parties, and (ii) common acquisition strategies, business combinations, reorganizations, recapitalizations, securities repurchases and purchases and sales (and other acquisitions and dispositions) of subsidiaries, divisions or other business units, which transactions may involve both related and unrelated parties and may include transactions that result in the acquisition by one related party of a publicly-held minority equity interest in another related party. Depending on the business, tax and other objectives then relevant, it is possible that Keystone might be a party to one or more of such transactions in the future. In connection with these activities, Keystone may consider issuing additional equity securities or incurring additional indebtedness. Keystone's acquisition activities have in the past and may in the future include participation in the acquisition or restructuring activities conducted by other companies that may be deemed to be controlled by Harold C. Simmons. The foregoing relationships, transactions and agreements may create potential conflicts of interest. It is the policy of Keystone to engage in transactions with related parties on terms, in the opinion of Keystone, no less favorable to Keystone than could be obtained from unrelated parties. 65 71 No specific procedures are in place that govern the treatment of transactions among Keystone and its related entities, although such entities may implement specific procedures as appropriate for particular transactions. In addition, under applicable principles of law, in the absence of stockholder ratification or approval by directors who may be deemed disinterested, transactions involving contracts among companies under common control must be fair to all companies involved. Furthermore, directors and officers owe fiduciary duties of good faith and fair dealing to all stockholders of the companies for which they serve. Glenn R. Simmons, J. Walter Tucker, Jr., and Sandra K. Myers are not salaried employees of Keystone. Keystone has contracted with Contran, on a fee basis payable in quarterly installments, to provide certain administrative and other services to Keystone in addition to the services of Mr. G. Simmons and Ms. Myers, including consulting services of Contran executive officers pursuant to the Intercorporate Services Agreement between Contran and Keystone, (the "Intercorporate Services Agreement"). The fee incurred during 1995 was $500,000. Keystone compensates Tucker & Branham, Inc. for certain consulting services of Mr. Tucker on an hourly basis as his services are requested. The fees paid Tucker & Branham, Inc. during 1995 were $50,000. Certain of Keystone's property, liability and casualty insurance risks are partially insured or reinsured by a captive insurance subsidiary of Valhi. The premiums and claims paid in connection therewith were approximately $39,000 for the year ended December 31, 1995. Aircraft services were purchased from Valhi in the amount of $150,000 for the year ended December 31, 1995. In the opinion of Keystone management and the Keystone Board of Directors, the terms of the transactions described above were no less favorable to Keystone than those that could have been obtained from an unrelated entity. CERTAIN LITIGATION Harold C. Simmons, Glenn R. Simmons and certain companies related to Keystone are parties to the litigation described below. In November 1991, a purported derivative complaint was filed in the Court of Chancery of the State of Delaware, New Castle County, (Alan Russell Kahn v. Tremont Corporation, et al., No. 12339), in connection with the purchase by Tremont of 7,800,000 shares of NL Common Stock from Valhi (the "NL Stock Purchase"). In addition to Valhi, the complaint named as defendants Tremont and the members of Tremont's Board of Directors, including Glenn R. Simmons and Harold C. Simmons. The complaint alleged, among other things, that the NL Stock Purchase constituted a waste of Tremont's assets and that Tremont's Board of Directors had breached its fiduciary duties to Tremont's public stockholders. A trial on this matter was held in June 1995 and in March 1996 the court issued its opinion ruling in favor of the defendants and concluded that the NL Stock Purchase did not constitute an overreaching by Valhi, that Tremont's purchase price in the NL Stock Purchase was fair and that in all other respects the NL Stock Purchase was fair to Tremont. The plaintiffs have filed an appeal of the Court of Chancery's ruling. 66 72 SECURITY OWNERSHIP OF MANAGEMENT As of August 21, 1996, Keystone's directors, the executive officers named in the Keystone Summary Compensation Table below, and the Keystone directors and executive officers as a group, beneficially owned, as defined by the rules of the Commission, the shares of Keystone Common Stock shown in the following table.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP OF KEYSTONE PERCENT OF NAME OF BENEFICIAL OWNER COMMON STOCK(1) CLASS(2) --------------------------------------------------------- ----------------- ---------- Thomas E. Barry(3)....................................... 4,100 -- Paul M. Bass, Jr.(3)(4).................................. 6,500 -- David E. Connor(3)....................................... 4,500 -- Harold M. Curdy(3)....................................... 15,951 -- Ralph P. End(3).......................................... 3,414 -- Bill J. Johnson(3)....................................... 6,535 -- Glenn R. Simmons(3)(5)................................... 63,600 1.1% Robert W. Singer(3)...................................... 28,770 -- Donald A. Sommer(3)...................................... 32,964 -- J. Walter Tucker, Jr. ................................... 153,450 2.7% Richard N. Ullman(3)..................................... 4,500 -- All Keystone directors and executive officers as a group (13 persons)(3)(4)(5).................................. 331,788 5.8%
- --------------- (1) All beneficial ownership is sole and direct except as otherwise set forth herein. Information as to the beneficial ownership of Keystone Common Stock has either been furnished to Keystone by or on behalf of the indicated persons or is taken from reports on file with the Commission. (2) Percentage omitted if less than 1%. (3) Includes shares that such person or group could acquire upon the exercise of options exercisable within 60 days of August 21, 1996 by Messrs. Barry, Bass, Connor, Sommer and Ullman for the purchase of 4,000 shares each, and named executive officers, Messrs. Curdy, End, Johnson, Simmons and Singer, for the purchase of 3,000, 900, 2,340, 22,500, and 6,000 shares, respectively, and the Keystone directors and executive officers as a group for the purchase of 56,740 shares under Keystone's stock option plans. (4) Includes 2,500 shares of Keystone Common Stock held in discretionary accounts by First Southwest Company, a licensed broker-dealer, on behalf of certain of its clients, as to which Mr. Bass has voting and dispositive authority. Mr. Bass serves as Vice Chairman of First Southwest Company. As a result of the foregoing, Mr. Bass may be deemed to be the beneficial owner of such shares. However, Mr. Bass disclaims all such beneficial ownership. (5) Glenn R. Simmons is the brother of Harold C. Simmons. See footnote (1) to the table under "-- Security Ownership of Certain Beneficial Owners." 67 73 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth the stockholders known to Keystone to be the beneficial owners of more than 5% of the Keystone Common Stock outstanding as of the Record Date.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP OF NAME AND ADDRESS OF PERCENT BENEFICIAL OWNER KEYSTONE COMMON STOCK OF CLASS - ----------------------------------------------------------- --------------------- -------- Harold C. Simmons.......................................... 3,893,833(1)(2) 68.5% 5430 LBJ Freeway, Suite 1700 Dallas, Texas 75240 Killen Group, Inc.......................................... 337,500(3) 5.9% 1189 Lancaster Avenue Berwyn, Pennsylvania 19312
- --------------- (1) The shares of Keystone Common Stock shown as beneficially owned by Harold C. Simmons includes 3,161,733, 326,050, 250,000, 115,550 and 30,000 shares of Keystone Common Stock held by Contran, NL, The Harold Simmons Foundation, Inc. (the "Foundation"), The Contran Deferred Compensation Trust No. 2 (the "Deferred Compensation Trust") and The Combined Master Retirement Trust (the "Master Trust"), respectively. Contran and NL directly hold approximately 55.6% and 5.7%, respectively, of the outstanding Keystone Common Stock. Valhi and Tremont are the holders of approximately 55.2% and 17.7%, respectively, of the outstanding common stock of NL. Contran holds, directly or indirectly through related entities, approximately 91.3% and 44.0% of the outstanding common stock of Valhi and Tremont, respectively. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of Harold C. Simmons' children and grandchildren (together, the "Trusts"), of which Mr. Simmons is the sole trustee. As sole trustee of each of the Trusts, Mr. Simmons has the power to vote and direct the disposition of the shares of Contran stock held by each of the Trusts; however, Mr. Simmons disclaims beneficial ownership thereof. Harold C. Simmons is Chairman of the Board, President and Chief Executive Officer of Valhi and Contran and Chairman of the Board and Chief Executive Officer of certain related entities through which Contran may be deemed to control Valhi. Additionally, he is Chairman of the Board of NL and is a director of Tremont. The Master Trust holds approximately 0.5% of the outstanding shares of Keystone Common Stock. The Master Trust is a trust formed by Valhi to permit the collective investment by trusts that maintain the assets of certain employee benefit plans adopted by Valhi and related companies, including Keystone. Harold C. Simmons is sole trustee of the Master Trust and sole member of the Trust Investment Committee for the Master Trust. The trustee and members of the Trust Investment Committee for the Master Trust are selected by Valhi's board of directors. Harold C. Simmons and Glenn R. Simmons are members of Valhi's board of directors and are both participants in one or more of the employee benefit plans that invest through the Master Trust; however, both such persons disclaim beneficial ownership of the shares of Keystone Common Stock held by the Master Trust, except to the extent of their respective vested beneficial interests therein. The Foundation holds approximately 4.4% of the outstanding shares of Keystone Common Stock. The Foundation is a tax-exempt foundation organized and existing exclusively for charitable purposes. Harold C. Simmons is Chairman of the Board and Chief Executive Officer of the Foundation. The Deferred Compensation Trust holds approximately 2.0% of the outstanding shares of Keystone Common Stock. NationsBank of Texas, N.A. serves as trustee of the Deferred Compensation Trust (the "Trustee"). Contran established the Deferred Compensation Trust as an irrevocable "rabbi trust" to assist Contran in meeting certain deferred compensation obligations that it owes to Harold C. Simmons. If the Deferred Compensation Trust assets are insufficient to satisfy such obligations, Contran must satisfy the balance of such obligations. Pursuant to the terms of the Deferred Compensation Trust, 68 74 Contran (i) retains the power to vote the shares held by the Deferred Compensation Trust, (ii) shares dispositive power over such shares with the Trustee and (iii) may be deemed the indirect beneficial owner of such shares. By virtue of the holding of such offices, the stock ownership as described above and his service as trustee as described above, Harold C. Simmons may be deemed to control such entities and Mr. Simmons and such entities may be deemed to possess indirect beneficial ownership of certain shares of Keystone Common Stock held by such entities. However, Mr. Simmons disclaims such beneficial ownership of the shares of Keystone Common Stock beneficially owned, directly or indirectly, by such entities. Certain information contained in this footnote is based on information provided to Keystone by Valhi, Contran and certain of their affiliates. (2) The shares of Keystone Common Stock shown as beneficially owned by Harold C. Simmons also includes 10,500 shares of Keystone Common Stock held by Mr. H. Simmons' wife, with respect to all of which Mr. Simmons disclaims beneficial ownership. (3) Based on Amendment No. 2 to Schedule 13G dated February 14, 1996, filed by The Killen Group, Inc. (the "Killen Group") and Robert E. Killen. The Killen Group has sole power to vote 95,425 shares of Keystone Common Stock and the sole power to dispose of 335,000 shares of Keystone Common Stock. Robert E. Killen, the president and sole stockholder of the Killen Group whose address is the same as the Killen Group, has the sole power to vote and dispose of 2,500 shares of Keystone Preferred Stock. DIRECTORS' COMPENSATION Directors of Keystone who are not salaried employees of Keystone receive an annual retainer of $12,000. Such directors also receive a fee of $450 per day for each Keystone Board of Directors meeting and/or committee meeting requiring attendance in person. Directors are also reimbursed for reasonable expenses incurred in attending Keystone Board of Directors and/or committee meetings. On May 5, 1992, the Keystone stockholders approved the Keystone Consolidated Industries, Inc. 1992 Non-Employee Director Stock Option Plan ("Keystone Director Plan"), which provides that each non-employee director will be granted an option to purchase 1,000 shares of Keystone Common Stock on the third business day after Keystone issues its press release summarizing Keystone's annual financial results for the prior fiscal year. The exercise price of the options will be equal to the last reported sale price of Keystone Common Stock on the NYSE Composite Tape on the date of grant. Options granted pursuant to the Keystone Director Plan become exercisable one year after the date of grant and expire on the fifth anniversary following the date of grant. Mr. G. Simmons' services as an executive officer are made available to Keystone pursuant to the Intercorporate Services Agreement. In addition to director services, Mr. Tucker provides certain consulting services to Keystone for which Keystone pays a company related to Mr. Tucker. See "-- Certain Business Relationships and Related Transactions." 69 75 EXECUTIVE COMPENSATION The following table summarizes all compensation paid to Keystone's chief executive officer and to each of Keystone's four most highly compensated executive officers other than the chief executive officer (collectively, the "Keystone named executive officers") for services rendered in all capacities to Keystone for the years ended December 31, 1995, 1994, and 1993. KEYSTONE SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------------------ AWARDS ------------------------ RESTRICTED SECURITIES ANNUAL COMPENSATION STOCK UNDERLYING ALL OTHER ----------------------------- AWARDS OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) (#) ($)(2) - ---------------------------------------------- ---- --------- -------- ---------- ---------- ------------ Glenn R. Simmons(3) 1995 123,077 -- -- -- -- Chief Executive Officer 1994 175,000 -- -- -- -- 1993 149,596 -- -- 12,500 -- Robert W. Singer(4) 1995 170,000 62,500 -- -- 7,425 President 1994 225,000 150,000 -- -- 6,690 1993 200,000 150,000 25,625 10,000 8,994 Harold M. Curdy 1995 132,000 60,000 -- -- 7,425 Vice President -- Finance & Treasurer 1994 132,000 125,000 -- -- 6,690 1993 125,000 56,250 19,475 5,000 8,362 Ralph P. End 1995 93,000 30,000 -- -- 6,559 Vice President and General Counsel 1994 93,000 35,000 -- -- 5,762 1993 90,000 30,000 10,250 1,500 5,353 Bill J. Johnson 1995 101,642 16,716 -- -- 7,425 President -- Sherman Wire Division 1994 96,560 70,500 -- 2,100 6,642 1993 93,404 20,976 21,525 2,500 6,695
- --------------- (1) The dollar value of the reported grants of restricted Keystone Common Stock is based on the last reported sales price per share on the date of grant of Keystone Common Stock as reported by the NYSE Composite Tape. The reported shares of restricted Keystone Common Stock vest at a rate of 40% after six months from the date of award, 30% after eighteen months from the date of the award and 30% after thirty months from the date of the award. Dividends on all shares of restricted Keystone Common Stock are paid at the same time and at the same rate as dividends on unrestricted Keystone Common Stock, if declared. The total number of shares of restricted Keystone Common Stock awarded to each Keystone named executive officer and the aggregate number and value of each Keystone named executive officer's holdings of restricted Keystone Common Stock as of December 31, 1995 (at which time the market value was $11.50 per share based on the last reported sales price per share of Keystone Common Stock as reported by the NYSE Composite Tape) were as follows:
NON-VESTED SHARES OF VALUE OF NON- RESTRICTED VESTED RESTRICTED KEYSTONE COMMON KEYSTONE COMMON STOCK AS OF STOCK AS OF NAME OF EXECUTIVE OFFICER DECEMBER 31, 1995 DECEMBER 31, 1995 ------------------------------------------- ----------------- ----------------- Glenn R. Simmons........................... -- $ -- Robert W. Singer........................... 750 8,625 Harold M. Curdy............................ 550 6,325 Ralph P. End............................... 300 3,450 Bill J. Johnson............................ 600 6,900
(2) Amounts contributed by Keystone to Keystone's 401(k) Plan for the benefit of such executive officer. 70 76 (3) Glenn R. Simmons, Chairman of the Board and Chief Executive Officer of Keystone, is not a salaried employee of Keystone. The reported salary represents an allocation of his time devoted to Keystone business under the Intercorporate Services Agreement. See "-- Certain Business Relationships and Related Transactions" above. (4) The amounts shown in the table as compensation for Mr. Singer represent the full amount paid by Keystone for services rendered to Keystone during 1995, less the portion of such compensation that is either credited or reimbursed to Keystone for services Mr. Singer rendered to Valhi pursuant to the Intercorporate Services Agreement. Mr. Singer's Keystone compensation excludes $55,000 as salary and $62,500 as bonus for services rendered by Mr. Singer to Valhi during 1995. The following table sets forth certain information with respect to the Keystone named executive officers concerning unexercised Keystone stock options at December 31, 1995. No Keystone stock options or Keystone stock appreciation rights were exercised during 1995. KEYSTONE OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY KEYSTONE OPTIONS/SARS KEYSTONE OPTIONS/SARS AT FY-END(#) AT FY-END($)(2) ------------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE ----------------------------------- ----------- ---------------- ----------- ------------- Glenn R. Simmons................... 14,000 13,500 13,750 20,625 Robert W. Singer................... 4,000 6,000 11,000 16,500 Harold M. Curdy.................... 2,000 3,000 5,500 8,250 Ralph P. End....................... 600 900 1,650 2,475 Bill J. Johnson.................... 1,420 3,180 3,275 6,225
- --------------- (1) Options vest 20%, 40%, 60% and 100% on the first, second, third and fourth anniversary of the date of grant, respectively. (2) The values shown in the table are based on the $11.50 per share closing price of the Keystone Common Stock on December 31, 1995 as reported by the NYSE Composite Tape, less the exercise price of the options. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Except for Mr. Sommer who retired as Vice President of Keystone in 1982, no member of the Keystone Compensation Committee is or has been an officer or employee of Keystone or any of its subsidiaries. In 1995, no executive officer of Keystone served on the compensation committee or as a director of another entity, one of whose executive officers served on the Keystone's Compensation Committee or Board of Directors. PENSION PLAN Keystone maintains several qualified, noncontributory defined benefit plans which provide defined retirement benefits to eligible employees including executive officers. Normal retirement age under the Company's pension plans is age 65. Under the plans covering salaried employees, including officers, the defined benefit for an individual is based on a straight life annuity. An individual's monthly benefit is the sum of the following: (i) for credited service prior to January 1, 1981, the amount determined by his or her average monthly cash compensation for the five years of his or her highest earnings prior to January 1, 1981, multiplied by 1.1%, multiplied by the years of credited service, plus (ii) for each year of service between 1980 and 1989, the amount determined by the sum of 1.2% multiplied by his or her average monthly cash compensation that year up to the social security wage base and 1.75% multiplied by his or her average monthly cash compensation that year in excess of the social security wage base, plus (iii) for each year subsequent to 1989, the amount determined by 1.2% multiplied by his or her average monthly cash compensation that year, but not less than $14.00 per month. 71 77 The estimated annual benefits payable upon retirement at normal retirement age for each of the salaried Keystone named executive officers, assuming continued employment with Keystone until normal retirement age at current salary levels are: Harold M. Curdy, $46,786; Ralph P. End, $27,937; Robert W. Singer, $27,401; and Bill J. Johnson, $28,145. Glenn R. Simmons does not participate in the Keystone defined benefit pension plans. COMPARISON OF RIGHTS OF STOCKHOLDERS OF KEYSTONE AND DESOTO The rights of Keystone's stockholders are governed by its Certificate of Incorporation, its Bylaws ("Keystone Bylaws") and the laws of the State of Delaware. The rights of DeSoto stockholders are governed by its Certificate of Incorporation, its Bylaws ("DeSoto Bylaws") and the laws of the State of Delaware. After the Effective Time of the Merger, the rights of DeSoto stockholders who become Keystone stockholders will be governed by the Keystone Certificate of Incorporation, Keystone Bylaws and the laws of the State of Delaware. In most respects, the rights of Keystone stockholders and DeSoto stockholders are similar. The following is a summary of the material differences between the rights of Keystone stockholders and the rights of DeSoto stockholders under their respective Certificates of Incorporation and Bylaws. Amendment of Certificate of Incorporation and Bylaws Amendments of the Certificate of Incorporation for each of Keystone and DeSoto requires the affirmative vote of a majority of the respective outstanding shares of common stock; provided, however, that any amendment to the Certificate of Incorporation of DeSoto that adversely affects the powers, preferences or special rights of the holders of DeSoto Preferred Stock requires the affirmative vote of the holders of a majority of the Series A Junior Participating Preferred Stock of DeSoto (the "Series A Preferred"), and the affirmative vote of seventy five percent (75%) of each class or series of outstanding stock of DeSoto is required to amend certain other provisions, including those relating to classification of the Board of Directors, removal of directors only for cause, and the prohibition on the taking of action by stockholders other than at a meeting of stockholders. No shares of the Series A Preferred are outstanding. The Keystone Bylaws and Certificate of Incorporation provide that the Keystone Bylaws may be amended or repealed by the Board of Directors or by the stockholders. The DeSoto Bylaws and Certificate of Incorporation also provide that the DeSoto Bylaws may be amended or repealed by the Board of Directors or by the stockholders. Dividends and Distributions Keystone. Subject to the rights of the holders of outstanding shares of preferred stock, if any, the holders of shares of Keystone Common Stock shall be entitled to receive such dividends if as and when declared by the Board of Directors. In the event of the voluntary or involuntary liquidation of Keystone, and subject to the rights of the holders of outstanding shares of preferred stock, if any, the holders of shares of Keystone Common Stock shall be entitled to receive pro rata all of the remaining assets of Keystone available for distribution to its stockholders. No shares of Keystone preferred stock are currently outstanding. DeSoto. Subject to the rights of the holders of any series of preferred stock ranking prior and superior to the shares of DeSoto Preferred Stock, if any, the holders of DeSoto Preferred Stock shall be entitled to receive the liquidation preference of each share of DeSoto Preferred Stock. If such dividends are in arrears for four (4) quarterly periods at any time, dividends for any subsequent quarterly periods are payable to holders of DeSoto Preferred Stock at the rate of ten percent (10%) of the sum of the liquidation preference of each share of DeSoto Preferred Stock, until dividend arrearages exist for less than four (4) quarterly periods. Holders of DeSoto Common Stock are entitled to receive dividends when, as and if declared by the DeSoto Board of Directors out of funds legally available therefor. In the event of the liquidation or dissolution of DeSoto, no distribution shall be made to the holders of shares ranking junior to the DeSoto Preferred Stock unless the holders of DeSoto Preferred Stock shall have 72 78 received an amount equal to the liquidation preference to the date of such payment. In the event DeSoto does not have sufficient assets to pay the liquidation preference, the remaining assets of DeSoto shall be distributed pro rata among the holders of DeSoto Preferred Stock. Anti-Takeover Provisions Neither the Keystone Certificate of Incorporation nor Bylaws contain specific anti-takeover provisions; however, the Keystone Certificate of Incorporation authorizes the issuance of 500,000 shares of preferred stock, the rights, preferences, powers and restrictions of which may be determined by the Board of Directors without stockholder approval. Pursuant to the terms of the Merger, approximately 435,456 shares of Keystone Preferred Stock will be issued. The Board of Directors has the ability to designate a series of preferred stock with rights, preferences, powers and restrictions that would make a change in control of Keystone not approved by the Board of Directors difficult and therefore, less likely. In addition, on September 22, 1995, Keystone's Certificate of Incorporation was amended and restated to increase the authorized Keystone Common Stock from 9,000,000 to 12,000,000 shares. Shares of authorized and unissued Keystone Common Stock could be issued in one or more transactions which also would make a change in control of Keystone more difficult, and therefore less likely. Any such issuance of additional stock could have the effect of diluting the earnings per share and book value per share of outstanding shares of Keystone Common Stock, and such additional shares could be used to dilute the stock ownership or voting rights of persons seeking to obtain control of Keystone. In addition, the Board of Directors of Keystone is divided into three classes, which together with the provisions of the DGCL restricting the removal of directors described below could delay a change in a majority of the board for at least two annual meetings. Following consummation of the Merger, the provisions in the Keystone Preferred Stock requiring redemption of such stock following a change of control may also have an anti-takeover effect. See "Description of Keystone Capital Stock." DeSoto's Certificate of Incorporation authorizes 5,000,000 shares of preferred stock, the rights, preferences, powers and restrictions of which may be determined by the Board of Directors without stockholder approval. To date, DeSoto has designated 583,333 shares of preferred stock as Series B Senior Preferred Stock (defined above as "DeSoto Preferred Stock"), all of which are outstanding. The dividends payable on the DeSoto Preferred Stock, as described above under "Dividends and Distributions," as well as the required redemption of such stock upon a change in control could make a change in control of DeSoto not approved by the Board of Directors difficult and, therefore, less likely. In connection with the Rights Plan described below, DeSoto designated 200,000 shares of Series A Preferred Stock, none of which are outstanding. In addition, the Board of Directors has the ability to designate the rights, preferences, powers and restrictions of the remaining shares of authorized preferred stock that would make a change in control of DeSoto without the approval of the Board of Directors even more difficult and less likely. DeSoto's Certificate of Incorporation and Bylaws contain certain provisions which might make a change of control of DeSoto which is not approved by the Board of Directors more difficult. DeSoto's Board of Directors is divided into three classes, which, as is the case with Keystone, could delay a change in a majority of the Board. The Bylaws of DeSoto require stockholders wishing to nominate persons for election as directors to satisfy certain advance notice and disclosure requirements. DeSoto's Certificate of Incorporation contains a provision permitting removal of directors only for cause. DeSoto's Certificate of Incorporation also contains a provision that provides that certain business combination transactions (each a "Business Combination"), including mergers, of DeSoto with any person who is the beneficial owner of more than 10% of the shares of DeSoto Common Stock (a "New Substantial Stockholder") or an affiliate of such person, requires the affirmative vote of the holders of at least 75% of DeSoto's voting stock (the "Supermajority Vote"), unless (i) the Business Combination shall have been approved by three-fourths of the Whole Board (as defined below) and by a majority of the Continuing Directors (as defined below) of DeSoto (together, the "Required Approvals"), or (ii) the Price Requirement and the Procedure Requirements (as defined below) are met. "Continuing Director" is defined as any director who is unaffiliated with the New Substantial Stockholder and (i) was a director prior to the time that the New Substantial Stockholder became such, or (ii) who was designated as a Continuing Director by at least a majority of Continuing Directors (but not less than one Continuing Director) and three-fourths of the Whole Board. "Whole Board" is defined as the total number of 73 79 directors which DeSoto would have if there were no vacancies. The Price Requirement is that the consideration to be received per share of DeSoto Common Stock by holders of shares in such Business Combination be at least equal to the highest of the following: (i) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealers' fees and with appropriate adjustments for reclassifications) paid by the New Substantial Stockholder of any shares acquired by it; (ii) the highest fair market value per share at any time after the New Substantial Stockholder became such; or (iii) the highest preferential amount per share to which the holders of shares are entitled in the event of a voluntary liquidation, dissolution or winding up of DeSoto. The Procedure Requirements include the following, among others: (i) the consideration payable to stockholders must be in cash or in the same form as was previously paid by the Substantial Stockholder in its acquisition of shares; and (ii) after the New Substantial Stockholder has become such and prior to the consummation of the Business Combination, except as approved by at least a majority of the Continuing Directors and three-fourths of the Whole Board (x) there shall have been no failure to pay, at least once during each fiscal quarter of the Company, dividends on the DeSoto Common Stock at a rate per share at least equal to that paid per share during the fiscal quarter prior to the New Substantial Stockholder becoming such and (y) an increase in such quarterly rate of dividends as necessary to reflect any reclassification or similar transaction which has the effect of reducing the number of outstanding shares. This provision can be amended or repealed only by the affirmative vote of holders of at least 75% of the voting stock of DeSoto, unless such amendment or repeal is first approved by at least a majority of the Continuing Directors and three-fourths of the Whole Board. Accordingly, holders of DeSoto Common Stock who become holders of Keystone Common Stock as a result of the Merger will no longer be afforded certain protections afforded by, or be subject to, these provisions in DeSoto's Certificate of Incorporation and Bylaws. Stockholder Inspection Rights The Bylaws of Keystone and DeSoto each provide that a complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his or her name, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting. The stockholder list shall also be open to examination during the meeting by any stockholder present at the meeting. Stockholder Meetings The Bylaws of DeSoto provide that special meetings of stockholders may be called by stockholders holding in the aggregate shares representing not less than a majority of each class or series of stock issued and outstanding and entitled to vote at the meeting. Under the Keystone Bylaws, special meetings of stockholders may only be called by the Chairman of the Board, President or Board of Directors of Keystone. The Certificate of Incorporation of DeSoto prohibits the taking of stockholder action without a meeting. The Certificate of Incorporation of Keystone does not prohibit the taking of stockholder action without a meeting. Director Nominations The Keystone Bylaws currently provide for a five to nine member Board of Directors; there are currently seven members of the Board of Directors which shall be expanded to nine members effective upon consummation of the Merger. The Directors are divided into three classes, with staggered three year terms. One class of Directors shall be elected at each annual meeting of stockholders for a three year term and until his or her successor is elected and qualified. The DeSoto Bylaws provide that the number of directors shall be eleven, which number may be changed by resolution adopted by the Board of Directors. The DeSoto Board of Directors currently consists of seven members. The Directors are divided into three classes, with staggered three year terms. One class of Directors 74 80 shall be elected at each annual meeting of stockholders and each director shall hold office for a three year term and until his or her successor is duly elected and qualified. State Antitakeover Statutes Both Keystone and DeSoto are subject to Section 203 of the DGCL. Section 203 of the DGCL would prohibit a "business combination" (as defined in Section 203, generally including mergers, sales and leases of assets, issuances of securities and similar transactions) by the subject company or a subsidiary with an "interested stockholder" (as defined in Section 203, generally the beneficial owner of 15 percent or more of the subject company's voting stock) within three years after the person or entity becomes an interested stockholder, unless (i) prior to the person or entity becoming an interested stockholder, the business combination or the transaction pursuant to which such person or entity became an interested stockholder shall have been approved by the Board of Directors of the subject company, (ii) upon the consummation of the transaction in which the person or entity became an interested stockholder, the interested stockholder holds at least 85 percent of the voting stock of the subject company (excluding for purposes of determining the number of shares outstanding, shares held by persons who are both officers and directors of the subject company and shares held by certain employee benefit plans), or (iii) the business combination is approved by the Board of Directors of the subject company, and by the holders of at least two-thirds of the outstanding voting stock of the subject company, excluding shares held by the interested stockholder. Rights Plan Keystone does not have a rights plan. On February 20, 1989, DeSoto's Board of Directors declared a dividend of one Purchase Right for each outstanding share of DeSoto voting stock. The dividend was payable to holders of record of shares on March 3, 1989, and the board authorized the issuance of additional Purchase Rights for DeSoto Common Stock issued after that date. Each Purchase Right entitles the holder thereof to buy from DeSoto one one-hundredth of a share of Series A Preferred Stock at a price of $140 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment. As currently in effect, in the event that (i) any person acquires 25% or more of the outstanding shares of DeSoto voting stock (an "Acquiring Person"), (ii) DeSoto is the surviving corporation in a merger with an Acquiring Person and the shares of DeSoto voting stock are not changed or exchanged, (iii) an Acquiring Person engaged in one of a number of specified self-dealing transactions, or (iv) during such time as there is an Acquiring Person, an event occurs (including a reverse stock split) which results in such Acquiring Person's ownership interest being increased by more than 1%, each holder of a Purchase Right (other than Purchase Rights beneficially owned by the Acquiring Person, which will thereafter be void) will thereafter have the right to receive upon exercise of a Purchase Right that number of shares of DeSoto Common Stock which, at that time, would have a market value of two times the Purchase Price. In the event that DeSoto is acquired in a merger or other business combination transaction, each Purchase Right will entitle its holder to purchase, at the Purchase Price, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the Purchase Price. DeSoto is entitled to redeem the Purchase Rights at $.01 per Purchase Right at any time prior to a person becoming an Acquiring Person. The Purchase Rights will not be exercisable until the earlier of (i) the tenth day after the public announcement that a person has acquired beneficial ownership of 25% or more of the outstanding shares of DeSoto voting stock, or (ii) the tenth business day (or such later date as is determined by DeSoto's Board of Directors prior to such time as any person becomes an Acquiring Person) after the commencement of, or announcement of an intention to commence, an offer the consummation of which would result in the beneficial ownership by a person or group of 25% or more of the outstanding shares of DeSoto voting stock. The Purchase Rights are intended to deter takeovers which are not in the best interests of DeSoto and its stockholders. In connection with the Reorganization Agreement, the Board of Directors took appropriate action to assure that the execution of the Reorganization Agreement and the related agreements and the consummation of the transactions contemplated thereby will not cause the Purchase Rights to become exercisable or distributed. 75 81 Indemnification Section 145 of the DGCL provides that a corporation may, and the Keystone Bylaws provide that Keystone shall, indemnify any person made a party to an action by reason of the fact that he or she was a director, officer, employee or agent of the corporation or was serving at the request of the corporation in a similar capacity, against expenses actually and reasonably incurred by him or her in connection with such action if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action (other than an action by or in the right of the corporation), has no reasonable cause to believe his or her conduct was unlawful. Determination of indemnification shall be made by (i) the corporation's Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action or, (ii) if such a quorum is not obtainable, or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the corporation's stockholders. The DGCL provides that a corporation may, and the Keystone Bylaws provide that Keystone shall, indemnify any person made a party to an action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he or she was a director, officer, employee or agent of the corporation or was serving at the request of the corporation in a similar capacity, against expenses actually and reasonably incurred by him or her in connection with such action if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and except that no indemnification shall be made in respect of any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery, or the court in which such action was brought, shall determine that such person is entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. The DeSoto Certificate of Incorporation provides that directors, officers and certain other persons will be indemnified to the fullest extent authorized by Delaware law. The DeSoto Bylaws require DeSoto to pay all expenses incurred by a director or officer in defending any proceeding within the scope of the indemnification provisions as such expenses are incurred in advance of its final disposition, subject to certain conditions. The Keystone Bylaws contain a comparable provision regarding the advancement of expenses, except that such advancement may only be made upon receipt of an undertaking by the affected officer or director that he or she will repay such amounts advanced if it is ultimately determined that he or she was not entitled to indemnification under the Keystone Bylaws. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Keystone pursuant to the foregoing provisions, Keystone has been informed that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Election of Directors Under the Bylaws of each of Keystone and DeSoto, the Board of Directors has the right to fill any vacancy created on the Board caused by death, resignation, removal or otherwise, and newly created directorships. Under the provisions of the DGCL and the Keystone Certificate of Incorporation, any director or the entire Board of Directors of Keystone may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Under the provisions of the DGCL and the DeSoto Certificate of Incorporation, directors may be removed from office only for cause. 76 82 EXPERTS The consolidated balance sheets of Keystone at December 31, 1994 and 1995, and the related consolidated statements of operations and changes in stockholders' equity (deficit) and cash flows of Keystone for each of the three years in the period ended December 31, 1995 (including the notes thereto), incorporated by reference from Keystone's Annual Report on Form 10-K, have been audited by Coopers & Lybrand, L.L.P., independent auditors, as set forth in their report thereon appearing therein and incorporated by reference herein. Such consolidated financial statements of Keystone are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated balance sheets of DeSoto as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 included in this Joint Proxy Statement/Prospectus and elsewhere in this Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto. Reference is made to said report which includes an explanatory paragraph that describes matters impacting DeSoto's ability to continue as a going concern. Such consolidated financial statements are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. Representatives of Coopers & Lybrand, L.L.P. are expected to be present at the Keystone Meeting, and representatives of Arthur Andersen LLP are expected to be present at the DeSoto Meeting. In each case, such representatives will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions. Richard Holmes of Arthur Andersen LLP, acting as a representative of DeSoto's trade creditors, is required, pursuant to the terms of DeSoto's agreement with its trade creditors, to agree on behalf of such trade creditors to the terms of the Reorganization Agreement as such terms relate to such trade creditors. LEGAL MATTERS The validity of the shares of Keystone Common Stock offered hereby and the federal income tax consequences in connection with the Merger will be passed upon for Keystone by Godwin & Carlton, P.C. The federal income tax consequences in connection with the Merger will be passed upon for DeSoto by Fried, Frank, Harris, Shriver & Jacobson. STOCKHOLDER PROPOSALS Keystone stockholders may submit proposals on matters appropriate for stockholder action at Keystone's annual meetings, subject to regulations adopted by the Securities and Exchange Commission. Keystone presently intends to call the next annual meeting during May 1997. For such proposals to be considered for inclusion in the Proxy Statement and form of proxy relating to the 1997 annual meeting, they must be received by the Company not later than December 24, 1996. Such proposals should be addressed to Secretary, Keystone Consolidated Industries, Inc., Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240. If the Merger is not consummated, any DeSoto stockholder who intends to present a proposal at the 1996 Annual Meeting of Stockholders and have it included in DeSoto's proxy statement for that meeting must submit it to DeSoto by the close of business on the date which is 120 calendar days in advance of the first anniversary of November 27, 1995, unless the date of the 1996 Annual Meeting changes by more than 30 days from the date of the 1995 Annual Meeting, in which case proposals must be received by DeSoto a reasonable time before the release of the proxy statement. In addition, if the Merger is not consummated, a stockholder who otherwise intends to present business at the 1996 Annual Meeting must comply with the requirements set forth in DeSoto's bylaws. Among other things, to bring business before an annual meeting, a stockholder must give written notice complying with the bylaws to the Secretary of DeSoto sixty (60) days in advance of the meeting if the meeting is to be held on the first Friday of May or, if the meeting is to be held on some other date, no later than seven days following the date on which notice of the meeting is first given to stockholders. 77 83 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The accompanying unaudited pro forma Keystone financial statements set forth the pro forma Condensed Consolidated Balance Sheet of Keystone as of June 30, 1996, and the pro forma Condensed Consolidated Statements of Operations for the year ended December 31, 1995 and the six months ended June 30, 1996. These pro forma financial statements are presented to illustrate the effect of certain adjustments to the historical consolidated financial statements that result from the Merger between Keystone and DeSoto and the immediate, subsequent merger of the two companies' defined benefit pension plans under the assumptions and estimates set forth in the notes thereto. Keystone will account for the Merger by the purchase method. The accompanying unaudited pro forma DeSoto financial statements set forth the pro forma Condensed Consolidated Statements of Operations for the year ended December 31, 1995 and the six months ended June 30, 1996. These pro forma financial statements are presented to illustrate the effect of certain adjustments to the historical DeSoto consolidated financial statements that result from recording the April 1996 sale of DeSoto's Union City, California business and the 1995 sales of DeSoto's businesses in Thornton and South Holland, Illinois under the assumptions and estimates set forth in the notes thereto. The accompanying Keystone and DeSoto pro forma condensed consolidated financial statements should be read in conjunction with the respective companies' historical consolidated financial statements and notes thereto. The pro forma condensed consolidated financial statements are presented for informational purposes only and are not necessarily indicative of actual results had the foregoing transactions occurred as described in the preceding paragraphs, nor do they purport to represent results of future operations of the merged companies. P-1 84 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES INDEX OF PRO FORMA FINANCIAL INFORMATION
PAGE ---- Keystone Consolidated Industries, Inc.: Unaudited Pro Forma Condensed Consolidated Balance Sheet -- June 30, 1996........... P-3 Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet................... P-4 Unaudited Pro Forma Condensed Consolidated Statement of Operations -- Year ended December 31, 1995................................................................ P-6 Unaudited Pro Forma Condensed Consolidated Statement of Operations -- Six months ended June 30, 1996.............................................................. P-7 Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations........ P-8 DeSoto, Inc.: Unaudited Pro Forma Condensed Consolidated Statement of Operations -- Year ended December 31, 1995................................................................ P-9 Unaudited Pro Forma Condensed Consolidated Statement of Operations -- Six months ended June 30, 1996.............................................................. P-10 Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations........ P-11
P-2 85 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1996 (IN THOUSANDS) ASSETS
PRO FORMA HISTORICAL HISTORICAL --------------------- PRO FORMA KEYSTONE DESOTO NOTE 2 ADJUSTMENTS CONSOLIDATED ---------- ---------- ------ ----------- ------------ Current assets: Cash and cash equivalents................................... $ -- $ 42 $ -- $ 42 Restricted cash and short-term investments.................. -- 1,180 -- 1,180 Notes and accounts receivable............................... 40,125 2,744 -- 42,869 Inventories................................................. 26,351 355 -- 26,706 Deferred income taxes....................................... 5,066 3,180 -- 8,246 Prepaid expenses and other.................................. 190 218 -- 408 -------- -------- --------- -------- Total current assets.................................. 71,732 7,719 -- 79,451 Property, plant and equipment, net............................ 86,713 589 (c) (589) 86,713 Unrecognized net pension obligation........................... 7,517 -- (d) (7,517) -- Prepaid pension cost.......................................... -- 50,710 (c) 40,162 (d) 11,422 102,294 Deferred income taxes......................................... 21,873 -- (e) (21,873) -- Restricted investments........................................ -- 3,877 -- 3,877 Other......................................................... 6,887 748 (c) (748) (f) 250 7,137 Investment in DeSoto.......................................... 275 -- (a) 34,563 (b) 475 (c) (35,313) -- -------- -------- --------- -------- $194,997 $ 63,643 $ 20,832 $279,472 ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current long-term debt.................... $ 26,943 $ -- (b) $ 475 (f) 1,113 $ 28,531 Accounts payable............................................ 23,353 11,482 (f) (8,000) 26,835 Accrued pension cost........................................ 6,623 -- (d) (6,623) -- Accrued OPEB cost........................................... 7,776 435 -- 8,211 Other accrued liabilities................................... 19,618 10,220 (c) 590 30,428 -------- -------- --------- -------- Total current liabilities............................. 84,313 22,137 (12,445) 94,005 -------- -------- --------- -------- Noncurrent liabilities: Long-term debt.............................................. 9,351 -- (f) 8,617 17,968 Deferred income taxes....................................... -- 12,256 (c) 14,378 (d) 5,990 (e) (21,873) 10,751 Accrued pension cost........................................ 26,650 -- (d) (26,650) -- Accrued OPEB cost........................................... 97,746 1,431 (c) 1,367 100,544 Negative goodwill........................................... -- -- (c) 1,885 1,885 Other....................................................... 9,166 8,131 -- 17,297 -------- -------- --------- -------- Total noncurrent liabilities.......................... 142,913 21,818 (16,286) 148,445 -------- -------- --------- -------- Keystone mandatory redeemable preferred stock, no par value, 500,000 shares authorized, none issued (pro forma -- 435,458)........................................... -- -- (a) 4,684 (c) 296 (f) (1,480) 3,500 DeSoto mandatory redeemable preferred stock, no par value, 583,333 shares authorized, issued and outstanding (pro forma -- none).............................................. -- 4,684 (a) (4,684) -- -------- -------- --------- -------- -- 4,684 (1,184) 3,500 -------- ------- --------- -------- Common stockholders' equity (deficit): Keystone common stock, $1 par value, 12,000,000 shares authorized; 5,687,858 shares issued at stated value (pro forma -- 9,187,858)....................................... 6,413 -- (a) 3,500 9,913 DeSoto common stock......................................... -- 5,619 (c) (5,619) -- Additional paid-in capital.................................. 20,484 1,000 (a) 31,063 (c) (1,000) 51,547 Net pension liabilities adjustment.......................... (31,188) -- (d) 31,188 -- Retained earnings (accumulated deficit)..................... (27,926) 40,211 (c) (40,211) (27,926) Keystone treasury stock -- 1,134 shares..................... (12) -- -- (12) DeSoto treasury stock -- 930,751 shares (pro forma -- none)............................................ -- (31,826) (c) 31,826 -- -------- -------- --------- -------- Total stockholders' equity (deficit).................. (32,229) 15,004 50,747 33,522 -------- -------- --------- -------- $194,997 $ 63,643 $ 20,832 $279,472 ======== ======== ========= ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet. P-3 86 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1996 NOTE 1 -- BASIS OF PRESENTATION: The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996 reflects the adjustments necessary to record the Merger of Keystone and DeSoto and the immediate, subsequent merger of the two companies' defined benefit pension plans as though such transactions had occurred on June 30, 1996. The Merger is accounted for by the purchase method. NOTE 2 -- PRO FORMA ADJUSTMENTS: (a) Keystone issues 3,500,000 shares of Keystone Common Stock, at a price of $9.875 per share in exchange for the 4,688,523 outstanding shares of DeSoto Common Stock. In addition, Keystone issues 435,458 shares of Keystone Preferred Stock ($8.0375 mandatory redemption value on July 1, 2000), in exchange for the 583,333 outstanding shares of DeSoto Preferred Stock. (b) Keystone incurs $750,000 in Merger related costs, $275,000 of which had been incurred at June 30, 1996. (c) Allocate purchase price as follows.
(IN THOUSANDS) -------------- PURCHASE PRICE TO BE ALLOCATED 3,500,000 shares of Keystone common stock at $9.875 per share;................... $ 34,563 435,458 shares of Keystone preferred stock with mandatory redemption value of $8.0375 per share.............................................................. 3,500 Estimated transaction costs...................................................... 750 -------- 38,813 -------- PURCHASE PRICE ALLOCATION Historical DeSoto common equity.................................................. 15,004 Eliminate historical DeSoto preferred stock...................................... 3,204 -------- 18,208 Purchase price allocation adjustments: Adjust DeSoto pension cost to excess of pension plan assets over related projected benefit obligation.................................................. 40,162 Accrue DeSoto severance liability.............................................. (590) Adjust DeSoto OPEB liability to accumulated benefit obligation................. (1,367) Eliminate DeSoto net property, plant and equipment............................. (589) Eliminate DeSoto other noncurrent assets....................................... (748) Record related deferred tax liability, at effective federal and state rate of 39%,.......................................................................... (14,378) -------- 40,698 -------- Recorded negative goodwill................................................. $ (1,885) ========
P-4 87 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED) (d) Elimination of Keystone's additional minimum pension liability, unrecognized net pension obligation, SFAS 87 equity adjustment and related deferred income taxes and increase in the aggregate projected benefit obligation due to conforming mortality assumptions, all as a result of merging Keystone's and DeSoto's defined benefit pension plans. The merger of the pension plans results in a pro forma funded status as follows.
IMPACT OF MERGER OF HISTORICAL --------------------- -------------------- KEYSTONE/ PENSION KEYSTONE DESOTO DESOTO PLANS PRO FORMA -------- -------- --------- -------- --------- (IN THOUSANDS) Plan assets.................................. $149,282 $160,229 $ -- $ -- $309,511 Projected benefit obligation................. 192,192 69,357 -- 18,255 279,804 -------- -------- ------- -------- -------- Plan assets in excess of (exceeded by) projected benefit obligation............... (42,910 ) 90,872 -- (18,255) 29,707 Unrecognized net loss (gain) from experience different from actuarial assumptions....... 46,869 (33,280) 33,280 18,255 65,124 Unrecognized net obligation (asset).......... 7,463 (7,506) 7,506 -- 7,463 Additional minimum liability................. (44,695 ) -- -- 44,695 -- Other........................................ -- 624 (624) -- -- -------- -------- ------- -------- -------- Prepaid (accrued) pension cost............. (33,273 ) 50,710 40,162 44,695 102,294 Less current portion......................... 6,623 -- -- (6,623) -- -------- -------- ------- -------- -------- Noncurrent prepaid (accrued) pension cost..................................... $(26,650) $ 50,710 $40,162 $ 38,072 $102,294 ======== ======== ======= ======== ========
(e) Reclassification of net noncurrent deferred income taxes. (f) Keystone's term loan is restructured and increased by $8,617,000 (to a total of $20 million), at a cost of $250,000. The net term loan proceeds of $8,367,000, along with $1,113,000 of additional borrowings under Keystone's revolving credit facility, are used to fund $8 million of payments to DeSoto's trade creditors and payment of the dividend arrearage on DeSoto Preferred Stock of $1,480,000. P-5 88 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA PRO FORMA HISTORICAL DESOTO --------------------- PRO FORMA KEYSTONE NOTE 2 (A) NOTE 2 ADJUSTMENTS CONSOLIDATED --------- ---------- ------ ----------- ------------ Revenues and other income................ $ 345,924 $ 18,098 $ -- $364,022 --------- -------- ------- -------- Costs and expenses: Cost of goods sold..................... 312,909 16,209 (c) (205) (d) 966 (g) (3,882) 325,997 Selling, general and administrative.... 21,552 6,491 (b) (11) (c) (178) (d) 107 (g) (432) 27,529 Nonrecurring expense (income), net..... -- (6,360) -- (6,360) Retirement security program............ -- (6,846) (d) 2,532 (g) 4,314 -- Interest............................... 3,385 83 (e) 475 3,943 --------- -------- ------- -------- 337,846 9,577 3,686 351,109 --------- -------- ------- -------- Income before income taxes.......... 8,078 8,521 (3,686) 12,913 Provision for income taxes............... 3,191 3,315 (f) (1,475) 5,031 -------- ------- ------- -------- Net income............................... 4,887 5,206 (2,211) 7,882 Dividends on preferred stock............. -- 507 -- 507 --------- -------- ------- -------- Net income available for common shares... $ 4,887 $ 4,699 $(2,211) $ 7,375 ========= ======== ======= ======== Net income per common and common equivalent share....................... $ .86 $ .79 ========= ======== Weighted average common and common equivalent shares outstanding.......... 5,654 9,348 ========= ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. P-6 89 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA PRO FORMA HISTORICAL DESOTO ---------------------- PRO FORMA KEYSTONE NOTE 2 (A) NOTE 2 ADJUSTMENTS CONSOLIDATED ---------- ---------- ------ ----------- ------------ Revenues and other income............ $ 170,304 $ 7,434 $ -- $177,738 --------- -------- ------- -------- Costs and expenses: Cost of goods sold................. 157,675 6,863 (c) (81) (d) 483 (g) (1,645) 163,295 Selling, general and administrative.................. 11,302 2,562 (b) (5) (c) (40) (d) 54 (g) (183) 13,690 Nonrecurring expense (income), net............................. -- (676) -- (676) Retirement security program........ -- (3,436) (d) 1,608 (g) 1,828 -- Interest........................... 1,869 -- (e) (207) 1,662 --------- -------- ------- -------- 170,846 5,313 1,812 177,971 --------- -------- ------- -------- Income (loss) before income taxes......................... (542) 2,121 (1,812) (233) Provision (benefit) for income taxes.............................. (215) 826 (f) (725) (114) --------- -------- ------- -------- Net income (loss).................... (327) 1,295 (1,087) (119) Dividends on preferred stock......... -- 283 -- 283 --------- -------- ------- -------- Net income (loss) available for common shares...................... $ (327) $ 1,012 $(1,087) $ (402) ========= ======== ======= ======== Net income (loss) per common and common equivalent share............ $ (.06) $ (.04) ========= ======== Weighted average common and common equivalent shares outstanding...... 5,678 9,244 ========= ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. P-7 90 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 AND SIX MONTHS ENDED JUNE 30, 1996 NOTE 1 -- BASIS OF PRESENTATION: The Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 1995 and the six months ended June 30, 1996 have been prepared assuming the Merger of Keystone and DeSoto and the immediate, subsequent merger of the two companies' defined benefit pension plans occurred on January 1, 1995. The Merger is accounted for by the purchase method. NOTE 2 -- PRO FORMA ADJUSTMENTS: (a) Includes pro forma adjustments to reflect the effect of certain DeSoto businesses sold in 1995 and 1996 as if such sales had occurred on December 31, 1994. See DeSoto pro forma financial statements on pages P-9 to P-11. (b) Amortization of negative goodwill and deferred financing costs by the straight-line method over 20 years and 3 years, respectively. (c) Reduction in depreciation expense resulting from amortization of purchase accounting basis difference over average remaining life of two years. (d) Increase in pension expense due to conforming Keystone and DeSoto mortality assumptions and purchase accounting adjustments relating to DeSoto's defined benefit pension plan. (e) Impact on interest expense based on changes in average outstanding debt levels using weighted average interest rates of 9.9% in 1995 and 9.3% in 1996, as follows.
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1995 1996 ------------ ------------ (IN THOUSANDS) Increase (decrease) in average outstanding debt levels related to: Payment to DeSoto trade creditors................ $ 8,000 $ 10,000 Payment of DeSoto preferred stock dividends...... 1,700 1,900 Reduced defined benefit pension contributions.... (6,600) (17,300) Payment of financing and transaction costs....... 700 700 Other............................................ 900 300 -------- -------- $ 4,700 $ (4,400) ======== ========
(f) Income tax expense of pro forma adjustments (c) through (e) at assumed effective federal and state rate of 39%. (g) Reclassification. P-8 91 DESOTO, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA --------------------- PRO FORMA HISTORICAL NOTE 2 ADJUSTMENTS CONSOLIDATED ---------- ------ ----------- ------------ Revenues and other income........................... $ 52,339 (d) $ (34,241) $ 18,098 -------- --------- -------- Costs and expenses: Cost of goods sold................................ 54,069 (d) (37,860) 16,209 Selling, general and administrative............... 10,164 (b) (3,673) 6,491 Nonrecurring expense (income), net................ (201) (c) (6,159) (6,360) Retirement security program....................... (6,846) -- (6,846) Interest.......................................... 546 (a) (463) 83 -------- --------- -------- 57,732 (48,155) 9,577 -------- --------- -------- Income (loss) before income taxes.............. (5,393) 13,914 8,521 Provision (benefit) for income taxes................ (758) (f) 4,073 3,315 -------- --------- -------- Net income (loss)................................... (4,635) 9,841 5,206 Dividends on preferred stock........................ 507 -- 507 -------- --------- -------- Net income (loss) available for common shares....... $ (5,142) $ 9,841 $ 4,699 ======== ========= ======== Net income (loss) per common and common equivalent share............................................. $ (1.10) $ 1.00 ======== ======== Weighted average common and common equivalent shares outstanding....................................... 4,677 4,677 ======== ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. P-9 92 DESOTO, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA ---------------------- PRO FORMA HISTORICAL NOTE 2 ADJUSTMENTS CONSOLIDATED ---------- ------ ----------- ------------ Revenues and other income........................ $ 9,481 (d) $(2,047) $ 7,434 ------- -------- Costs and expenses: Cost of goods sold............................. 8,383 (d) (1,520) 6,863 Selling, general and administrative............ 2,718 (b) (156) 2,562 Nonrecurring expense (income), net............. 2,746 (c) (1,562) (676) (e) (1,860) Retirement security program.................... (3,436) -- (3,436) -------- ------- -------- 10,411 (5,098) 5,313 -------- ------- -------- Income (loss) before income taxes........... (930) 3,051 2,121 Provision (benefit) for income taxes............. (351) (f) 1,177 826 -------- ------- -------- Net income (loss)................................ (579) 1,874 1,295 Dividends on preferred stock..................... 283 -- 283 -------- ------- -------- Net income (loss) available for common shares.... $ (862) $ 1,874 $ 1,012 ======== ======= ======== Net income (loss) per common and common equivalent share............................... $ (.18) $ .22 Weighted average common and common equivalent ======== ======== shares outstanding............................. 4,684 4,684 ======== ========
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations. P-10 93 DESOTO, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 AND SIX MONTHS ENDED JUNE 30, 1996 NOTE 1 -- BASIS OF PRESENTATION: The Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 1995 and the six months ended June 30, 1996 have been prepared by the management of DeSoto and reflect the adjustments necessary to record the April 1996 sale of DeSoto's Union City, California business and the 1995 sales of DeSoto's businesses in Thornton and South Holland, Illinois as though such transactions had occurred on December 31, 1994. NOTE 2 -- PRO FORMA ADJUSTMENTS: (a) Sale proceeds used to reduce debt resulting in decreased interest expense. (b) Selling, general and administrative expenses decreased due to reduced sales personnel, facility expense, amortization of goodwill and corporate overhead. (c) Eliminate losses related to sale of facilities. (d) Eliminate sales and cost of sales related to the sold facilities. (e) Eliminate provision for uncollectible receivables related to the disposed operations. (f) Income tax expense calculated at an assumed rate of 39%. NOTE 3 -- NONRECURRING EXPENSE (INCOME) Pro forma nonrecurring income for the year ended December 31, 1995 and for the six months ended June 30, 1996 consists principally of insurance settlements. See "Information About DeSoto -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." P-11 94 DESOTO CONSOLIDATED FINANCIAL STATEMENTS DESOTO, INC. AND SUBSIDIARIES INDEX TO DESOTO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1995
PAGE ---- Report of Independent Public Accountants.............................................. F-2 Consolidated statements of operations................................................. F-3 Consolidated statements of stockholders' equity....................................... F-4 Consolidated balance sheets........................................................... F-5 Consolidated statements of cash flows................................................. F-6 Notes to consolidated financial statements............................................ F-7 Quarterly revenues and earnings data (1995 versus 1994)............................... F-21 SIX MONTHS ENDED JUNE 30, 1996 Consolidated condensed statements of operations....................................... F-22 Consolidated condensed balance sheets................................................. F-23 Consolidated condensed statements of cash flows....................................... F-24 Notes to consolidated condensed financial statements.................................. F-25
F-1 95 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of DeSoto, Inc. We have audited the accompanying consolidated balance sheets of DeSoto, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of DeSoto'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 audits 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 DeSoto, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements for 1995 have been prepared assuming that DeSoto will continue as a going concern. As discussed in Note B to the financial statements, DeSoto has suffered recurring losses from operations and negative operating and financing cash flows, and has contingent liabilities related to environmental matters, income taxes and the 1992 acquisition of J.L. Prescott Company, that collectively raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note B. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. ARTHUR ANDERSEN LLP Chicago, Illinois, March 25, 1996 F-2 96 DESOTO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 -------- ------- -------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) NET REVENUES................................................ $ 52,339 $87,182 $101,175 COSTS AND EXPENSES: Cost of sales............................................. 54,069 84,800 96,309 Selling, administrative and general....................... 10,164 11,889 18,794 Retirement security program............................... (6,846) (6,495) (4,753) Nonrecurring expense...................................... 6,159 -- 5,925 -------- ------- -------- TOTAL OPERATING COSTS AND EXPENSES................ 63,546 90,194 116,275 -------- ------- -------- LOSS FROM OPERATIONS........................................ (11,207) (3,012) (15,100) -------- ------- -------- OTHER CHARGES AND CREDITS: Interest expense.......................................... 546 575 642 Nonoperating expense...................................... -- -- 1,601 Nonoperating income....................................... (6,360) (1,303) (4,021) -------- ------- -------- Loss before Income Taxes.................................... (5,393) (2,284) (13,322) Benefit for Income Taxes.................................... (758) (649) (5,232) -------- ------- -------- NET LOSS.................................................... (4,635) (1,635) (8,090) Dividends on Preferred Stock................................ (507) (319) (302) -------- ------- -------- Net Loss Available for Common Shares........................ $ (5,142) $(1,954) $ (8,392) ======== ======= ======== NET LOSS PER COMMON SHARE................................... $ (1.10) $ (0.42) $ (1.83) ======== ======= ======== Average Common Shares Outstanding........................... 4,677 4,657 4,598 ======== ======= ========
See Notes to Consolidated Financial Statements F-3 97 DESOTO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK RETAINED TREASURY $1 PAR VALUE WARRANTS EARNINGS STOCK ------------ -------- -------- -------- (IN THOUSANDS OF DOLLARS) BALANCE, January 1, 1993............................ $5,619 $1,000 $ 61,722 $(36,868) Net loss.......................................... -- -- (8,090) -- Accrued dividends -- redeemable preferred stock... -- -- (302) -- Accretion of redeemable preferred stock to liquidation preference......................... -- -- (185) -- Shares issued under employee stock options........ -- -- (1,017) 1,262 ------ ------ -------- -------- BALANCE, December 31, 1993.......................... 5,619 1,000 52,128 (35,606) Net loss.......................................... -- -- (1,635) -- Accrued dividends -- redeemable preferred stock... -- -- (319) -- Accretion of redeemable preferred stock to liquidation preference......................... -- -- (198) -- Shares issued under employee stock options and other grants................................... -- -- (1,182) 1,442 ------ ------ -------- -------- BALANCE, December 31, 1994.......................... 5,619 1,000 48,794 (34,164) Net loss.......................................... -- -- (4,635) -- Accrued dividends -- redeemable preferred stock... -- -- (507) -- Accretion of redeemable preferred stock to liquidation preference......................... -- -- (212) -- Shares issued under employee stock options and other grants................................... -- -- (232) 271 ------ ------ -------- -------- BALANCE, December 31, 1995.......................... $5,619 $1,000 $ 43,208 $(33,893) ====== ====== ======== ========
See Notes to Consolidated Financial Statements F-4 98 DESOTO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------- 1995 1994 ------- ------- (IN THOUSANDS OF DOLLARS) CURRENT ASSETS: Cash........................................................................................... $ 51 $ 1,702 Restricted cash................................................................................ 29 58 Restricted short-term investments, at cost (approximates market)............................... 1,180 710 Trade accounts and notes receivable, less allowance for doubtful accounts and notes of $367 in 1995 and $1,819 in 1994...................................................................... 4,764 11,848 Inventories, net: Finished goods............................................................................... 405 4,331 Raw materials and work-in-process............................................................ 380 4,182 ------- ------- 785 8,513 Deferred income taxes.......................................................................... 2,049 3,295 Prepaid expenses and other assets.............................................................. 231 215 ------- ------- Total Current Assets................................................................... 9,089 26,341 RESTRICTED INVESTMENTS, at cost (approximates market).......................................... 3,770 4,666 PROPERTY, PLANT AND EQUIPMENT, AT COST: Land and improvements.......................................................................... -- -- Buildings and improvements..................................................................... -- 90 Machinery and equipment........................................................................ 14,440 22,783 ------- ------- 14,440 22,873 Less accumulated depreciation.................................................................. 11,830 14,905 ------- ------- 2,610 7,968 PREPAID PENSION COSTS.......................................................................... 46,913 39,319 OTHER NON-CURRENT ASSETS....................................................................... 2,586 4,818 ------- ------- TOTAL ASSETS................................................................................... $64,968 $83,112 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................................................... $14,263 $14,961 Revolving credit agreement..................................................................... -- 8,381 Waste site cleanup............................................................................. 2,025 2,522 Reserves and liabilities related to restructuring programs..................................... 3,226 1,884 Other liabilities.............................................................................. 4,500 5,725 ------- ------- Total Current Liabilities.............................................................. 24,014 33,473 WASTE SITE CLEANUP -- LONG-TERM................................................................ 5,269 6,744 DEFERRED INCOME TAXES.......................................................................... 11,461 13,392 CONTINGENCIES AND LITIGATION (Note J).......................................................... -- -- POST RETIREMENT AND POST-EMPLOYMENT BENEFITS................................................... 1,223 1,510 LONG-TERM DEFERRED GAIN........................................................................ 2,779 3,175 REDEEMABLE PREFERRED STOCK; series B senior preferred, 583,333 shares authorized, issued and outstanding, $6 per share liquidation preference............................................. 4,288 3,569 STOCKHOLDERS EQUITY: Common stock, $1 par value, 20,000,000 shares authorized; issued -- 5,619,274.................. 5,619 5,619 Warrants....................................................................................... 1,000 1,000 Retained earnings.............................................................................. 43,208 48,794 ------- ------- 49,827 55,413 Less treasury stock, at cost (940,067 shares in 1995 and 947,567 shares in 1994)............... 33,893 34,164 ------- ------- 15,934 21,249 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $64,968 $83,112 ======= =======
See Notes to Consolidated Financial Statements F-5 99 DESOTO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 ------- ------- ------- (IN THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss...................................................... $(4,635) $(1,635) $(8,090) Non-cash items: Net (gain) loss on disposal of assets -- net of deferred credit................................................... 4,177 (457) (1,434) Depreciation and amortization............................... 1,397 2,920 4,148 Pension income.............................................. (7,594) (7,101) (5,094) Deferred income taxes....................................... (685) 1,390 407 Other non-cash items........................................ 38 174 -- ------- ------- ------- Net non-cash items....................................... (2,667) (3,074) (1,973) Changes in assets and liabilities resulting from operating activities: Net (increase) decrease in trade accounts and notes receivable............................................... 5,719 (406) 5,666 Net (increase) decrease in inventories...................... 4,585 1,933 (3,195) Net decrease in other non-current assets.................... 1,344 1,102 1,237 Net increase (decrease) in other liabilities................ (2,142) (2,284) 2,930 Net increase (decrease) in accounts payable................. (698) (4,040) 2,422 Net (increase) decrease in other current assets............. (458) (185) 1,183 Net (increase) decrease in refundable income taxes.......... -- 6,697 (4,185) Other....................................................... -- 16 (1) ------- ------- ------- Net cash flows from (used in) operating activities............ 1,048 (1,876) (4,006) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of liquid laundry detergent and fabric softener sheet businesses................................ 5,305 -- -- Proceeds from sale of assets................................ 622 3,803 4,285 Additions to property, plant and equipment.................. (245) (1,021) (1,021) Net cash from waste site escrow............................. -- -- 917 ------- ------- ------- Net cash flows from investing activities...................... 5,682 2,782 4,181 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Additions (payments) under revolving credit agreement....... (8,381) 681 1,500 Proceeds from shares issued from treasury stock............. -- 70 245 Payment of mortgage loan.................................... -- -- (2,122) ------- ------- ------- Net cash flows from (used in) financing activities............ (8,381) 751 (377) ------- ------- ------- Net increase (decrease) in cash and cash equivalents.......... (1,651) 1,657 (202) Cash and cash equivalents at beginning of the year............ 1,702 45 247 ------- ------- ------- Cash and cash equivalents at the end of the year.............. $ 51 $ 1,702 $ 45 ======= ======= =======
See Notes to Consolidated Financial Statements F-6 100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF ACCOUNTING POLICIES Principles of Consolidation. The consolidated financial statements include the accounts of DeSoto and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Short-Term Investments. For purposes of the statements of cash flows, DeSoto considers all investments purchased with a maturity of three months or less to be cash equivalents. Inventories. Inventories are valued at the lower of cost or market. Cost is computed on the last-in, first-out (LIFO) method for all inventories. The cost of products includes raw materials, direct labor and operating overhead. If the first-in, first-out (FIFO) method of inventory accounting had been used for all of DeSoto's inventories, inventories would have been $1,493,000 and $1,889,000 higher than reported at December 31, 1995 and 1994, respectively. Property and Depreciation. Property is recorded at cost. Repairs and maintenance are charged to expense. Depreciation of property, plant and equipment is provided by charges to earnings based on the estimated useful lives of the assets, computed primarily on accelerated methods. Useful lives are 10-40 years for buildings and improvements and 10 years for machinery and equipment. Goodwill and Amortization. Goodwill represented the excess of cost over the fair value of net assets acquired, and was being amortized by the straight-line method over 40 years until the related businesses were sold in 1995. This goodwill was written off in 1995 as a result of the disposition of the liquid detergent and fabric softener sheet businesses in 1995. Reclassifications. Certain reclassifications have been made to the 1994 and 1993 financial statements and footnotes to conform with current year presentation. Revenue. Revenue is recognized at the time goods are shipped. Research and Development. Research and development costs are charged to expense. These charges were $218,000 in 1995, $345,000 in 1994, and $665,000 in 1993. Income Taxes. Income taxes are provided based on the liability method of accounting pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. 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 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. B. LIQUIDITY AND CAPITAL RESOURCES DeSoto's financial statements for the year ended December 31, 1995 have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. DeSoto has incurred operating losses of $11.2 million, $3.0 million, and $15.1 million in 1995, 1994 and 1993, respectively; and cash flows from operations have been $1.0 million, $(1.9) million and $(4.0) million in 1995, 1994 and 1993, respectively. Cash flows from operations in 1995, however, included the cash proceeds from insurance settlements of $6.1 million, and $10.0 million from the reduction of working capital. In addition to operating and financing cash flow losses, DeSoto continues to be party to environmental exposures as discussed in Note I, has received a notice of tax deficiencies from the IRS as discussed in Note F, and has a contingent liability related to the 1992 Prescott acquisition as discussed in Note L. Although management has used the best information available to record the estimated liabilities for these F-7 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) matters, actual outcomes could differ from recorded amounts. Additionally, the timing of cash required to satisfy these obligations could significantly impact DeSoto's cash flows in 1996. As part of DeSoto's continuing effort to manage its accounts payable and cash flow requirements, DeSoto has been negotiating a Trade Composition Agreement and a related Security Agreement with its trade creditors as represented by a committee of six major creditors of DeSoto. The proposed agreements include a standstill agreement related to accounts payable existing as of September 22, 1995. Also, as part of the proposed Trade Composition Agreement, DeSoto initiated the termination of its overfunded pension plan to be effective contingent upon the receipt of appropriate governmental approvals. For further information regarding the plan termination, refer to Note C to the Consolidated Financial Statements. Under the standstill agreement, if certain conditions are met, the creditors who sign the agreement agree not to initiate litigation or other efforts to collect amounts owed to them. DeSoto has agreed to pay each Qualified Trade Creditor (as defined) the balance owed to that creditor within 10 days of receipt of the reverted excess pension plan assets. If payment is not made by July 1, 1996, interest would accrue from that date at 8% per annum on the outstanding balance. The proposed Security Agreement would grant a security interest and lien on all of DeSoto's assets to secure the obligations of DeSoto to the Qualified Trade Creditors. The proposed Trade Composition Agreement further stipulates that DeSoto may suspend efforts to terminate its pension plan if DeSoto enters into a binding agreement for a merger, asset sale or similar transaction, involving substantially all of DeSoto's assets, which provides that all Qualified Trade Creditors will be paid in full. DeSoto and its creditors have been operating within the understanding outlined above. The actual Standstill Agreement document was circulated for signatures on March 11, 1996 and final execution of the documents has not yet been completed. DeSoto is continuing to pursue, with the assistance of its investment bankers, a possible business combination; however, there can be no assurance as to the outcome of such efforts. For further information regarding a possible business combination, refer to Note P to the Consolidated Financial Statements. C. PENSION AND EMPLOYEE INVESTMENT PLANS DeSoto's retirement security program includes a noncontributory defined benefit pension plan and an employee investment plan covering substantially all employees except certain hourly-rated employees; DeSoto also contributes to union sponsored plans. DeSoto's pension plan benefits are principally based on the employee's compensation and years of service. DeSoto's funding policy is to contribute annually at a rate that is intended to remain at a level percentage of compensation for the covered employees. DeSoto was not required to make contributions to DeSoto sponsored pension plan in 1995, 1994 and 1993 due to the plan's overfunded status. In January 1996, DeSoto announced that it had notified the Pension Benefit Guaranty Corporation of its intention to terminate the pension plan to be effective contingent upon the receipt of appropriate governmental approvals. DeSoto further intends to use 25% of the excess assets in the pension plan to fund a replacement plan and purchase an annuity contract to cover accrued plan benefits. The remaining excess plan assets will be subject to a 20% federal excise tax and federal and state income taxes. If more than 75% of the excess assets were reverted to DeSoto from the plan, such reversion would be subject to a 50% federal excise tax and federal and state income taxes. DeSoto intends to utilize the reversionary funds to satisfy, among other things, various creditor obligations and stabilize ongoing operations. As an alternative to termination of the pension plan, DeSoto is also continuing to pursue a possible business combination, in its ongoing efforts to preserve and maximize shareholder values; however, there can be no assurance as to the outcome of such efforts. For further information regarding the possible business combination, refer to Note P to the Consolidated Financial Statements. DeSoto makes contributions to the employee investment plan in cash or Company stock in an amount equal to 30% of employee deposits up to 5% of such employee's gross pay. F-8 102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The costs of the pension and employee investment plans are summarized as follows:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 -------- -------- ------- (IN THOUSANDS OF DOLLARS) Noncontributory Retirement plans: Service cost -- benefits earned during the period..... $ 527 $ 671 $ 492 Interest cost on projected benefit obligation......... 5,089 4,978 5,012 Actual return on assets -- (favorable) unfavorable.... (30,841) 3,962 (8,652) Net amortization and deferral......................... 17,803 (16,824) (2,053) -------- -------- ------- (7,422) (7,213) (5,201) Employee Investment Plan.............................. 35 84 47 Contributions to Union Sponsored Plans................ 242 313 288 -------- -------- ------- Total income from pension and employee investment plans............................................... $ (7,145) $ (6,816) $(4,866) ======== ======== =======
The change in the net amortization and deferral from 1993 to 1994 and from 1994 to 1995 was primarily due to the difference between the actual return on Plan assets, which was favorable in 1995 and unfavorable in 1994, versus the expected return on Plan assets. Under Statement of Financial Accounting Standards No. 87, the difference between the actual and expected return on assets is deferred and amortized over subsequent periods. The pension plans assets at December 31, 1995 are invested in United States Treasury Notes, corporate bonds and notes, investment partnerships, United States Treasury Securities, time deposits, commercial paper, interest rate futures, forward exchange contracts, foreign currency, certain real estate operated by DeSoto, various mutual funds invested in bonds, equity and real estate, mortgages and other short-term investments. The pension plan's funded status and amounts recognized in DeSoto's balance sheets at December 31 are presented below:
1995 1994 -------- -------- (IN THOUSANDS OF DOLLARS) Actuarial present value of vested benefit obligation........... $ 65,719 $ 57,540 ======== ======== Accumulated benefit obligation................................. $ 65,877 $ 57,702 ======== ======== Plan assets at fair value...................................... $162,017 $135,764 Actuarial present value of projected benefit obligation........ 66,832 59,471 -------- -------- Plan assets in excess of projected benefit obligation.......... 95,185 76,293 Unrecognized net gain.......................................... (40,595) (27,707) Prior service costs............................................ 2,064 2,259 Unrecognized net asset......................................... (9,741) (11,526) -------- -------- Prepaid pension cost recognized on the balance sheet........... $ 46,913 $ 39,319 ======== ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% in 1995 and 8.9% in 1994. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 5.0% in 1995 and 1994. The expected long-term rate of return on assets used in determining pension income was 8.0% in 1995 and 7.0% in 1994. In October 1992, DeSoto completed the sale of its real properties in Joliet, Illinois, Columbus, Georgia, and Union City, California, to a real property trust created by DeSoto's pension plan. This trust paid approximately $6.5 million in cash for the properties and entered into a ten-year lease of the properties to DeSoto. DeSoto's initial annualized rental obligation was $707,000. The amount paid to DeSoto by the trust F-9 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and DeSoto's annual rental obligation were based upon an independent appraisal and approved by DeSoto's Board of Directors. Effective January 1, 1994, the DeSoto Salaried Plan, Hourly Plan and J. L. Prescott Plan were merged into the DeSoto Employee Retirement Plan. This action resulted in a combination of the assets of each of these plan into one trust fund. The method of calculating benefits under each of these plans remained unchanged. In March 1994, DeSoto ceased operations at the Columbus, Georgia facility. Effective October 1, 1994, DeSoto entered into an agreement to sublease the facility for a term of three years. The subtenant makes monthly rental payments directly to the pension trust; DeSoto continues to make monthly rental payments to the pension trust for the amount by which DeSoto's initial rental obligation exceeds the subtenant's rental obligation. In December 1994, DeSoto sold its real property located in South Holland, Illinois, to the real property trust of DeSoto's pension plan. The trust paid $4,117,000 in cash for the properties and has entered into a ten-year lease of the properties to DeSoto. DeSoto's annualized rental obligation (net of receipts from subtenants) is approximately $898,000 including the South Holland facility. The amount paid to DeSoto by the trust and DeSoto's annual rental obligation were based upon an independent appraisal and approved by DeSoto's Board of Directors. D. POST RETIREMENT AND OTHER POST EMPLOYMENT BENEFITS DeSoto provides certain health care and life insurance benefits for retired employees on a contributory basis. Substantially all of DeSoto's employees, except certain hourly-rated employees, may become eligible for such benefits if they reach qualifying retirement age while working for DeSoto. Such benefits and similar benefits for active employees are administered by two outside companies whose administrative fees are based upon number of participants and claims processed. The health care program is self funded by DeSoto with purchased stop loss coverage for claims over certain levels. Life insurance benefits are funded by policies for which DeSoto pays premiums. In certain cases the participants also contribute to the premium payment. The following table presents the costs of accruing the postretirement insurance benefits in 1995, 1994, and 1993:
1995 1994 1993 ---- ---- ---- (IN THOUSANDS OF DOLLARS) Service cost -- benefits attributed to service during the period...................................................... $ 31 $ 14 $ 4 Interest cost on accumulated postretirement benefit obligation.................................................. 289 130 109 Amortization of unrecognized net loss......................... 115 7 -- ---- ---- ---- Net periodic postretirement benefit cost...................... $435 $151 $113 ==== ==== ====
The following table presents the components of DeSoto's post-retirement benefit obligation and the amount recognized in DeSoto's balance sheets at December 31,
1995 1994 ------ ------ (IN THOUSANDS OF DOLLARS) Accumulated post-retirement benefit obligation: Current retirees................................................. $2,831 $2,819 Active plan participants......................................... 373 393 ------ ------ Total.................................................... 3,204 3,212 Unrecognized net loss.............................................. 1,621 1,687 ------ ------ Accrued post-retirement liability recognized on the balance sheet............................................................ $1,583 $1,525 ====== ======
F-10 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The assumed health care cost trend rate used to measure the expected cost of benefits covered by the plan was 7% and 8% as of December 31, 1995 and 1994, respectively. The weighted average discount rate used to measure the accumulated post-retirement insurance obligation was 7.5% for 1995 and 9.0% for 1994. A one percentage point increase in the assumed health care cost trend rate for each future year would have resulted in additional obligation of $288,000 at December 31, 1995 and would have increased the aggregate service and interest cost by $29,000 in 1995. DeSoto adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" effective January 1, 1994. The impact of adoption was not material to DeSoto's financial position or results of operations. E. REVOLVING CREDIT AGREEMENT AND OTHER DEBT On November 12, 1992, in conjunction with the acquisition of J. L. Prescott Company ("Prescott"), DeSoto entered into an amended credit agreement with Harris Trust and Savings Bank and two additional banks. The agreement had originally provided for a two-year revolving credit facility of up to $20,000,000. Effective October 1, 1993, the credit facility was reduced to $15,000,000 per conditions set in the November 12, 1992 amendment. The termination date of this amended agreement was originally October 31, 1994. In March 1994, the facility was further amended setting a termination date of January 1, 1995. Effective with the March 1994 amendment, DeSoto paid $2,700,000 of the outstanding debt upon the receipt of its income tax refund for fiscal year 1993. Up to the March 1994 amendment, the revolver carried an interest rate equal to either the prime rate of Harris Trust and Savings Bank plus 1 1/4% or the IBOR rate plus 3 1/2% (as amended in the third quarter of 1993). Effective in March 1994, the interest rate became the prime rate of Harris Trust and Savings plus 2%. On December 7, 1994, DeSoto entered into a revolving credit facility with CIT. The agreement provided for up to $14,000,000 under a revolving credit facility. The funds available for borrowing were based on a formula which included specified percents of accounts receivable and inventory. The interest rate on the facility was prime plus 1 1/4%. Commitment fees under the revolving credit facility were calculated at 1/4 of one percent per annum of the average unused and available portion of the facility. The facility was collateralized by substantially all of DeSoto's assets. A portion of the line of credit was available in the form of letters of credit. As of September 30, 1995, the revolving credit agreement was terminated and DeSoto had no outstanding borrowing as of that date. Cash payments for interest were $546,000 in 1995, $575,000 in 1994 and $535,000 in 1993. F. INCOME TAXES
1995 1994 1993 ----- ----- ------- (IN THOUSANDS OF DOLLARS) The benefit for income taxes is comprised of: Federal Income Taxes: Currently Refundable..................................... $ -- $ -- $(4,808) Deferred................................................. (608) (493) 249 ----- ----- ------- Federal Income Taxes..................................... (608) (493) (4,559) State and Local Income Taxes............................. (150) (156) (673) ----- ----- ------- Total Income Tax Benefit......................... $(758) $(649) $(5,232) ===== ===== =======
Net cash refunds of income taxes were $0 in 1995, $8,742,000 in 1994 and $1,446,000 in 1993. F-11 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation of the statutory federal income tax rate to the effective tax rate is presented below:
1995 1994 1993 ----- ----- ----- Statutory Federal Income Tax Rate........................... (35.0)% (35.0)% (34.0)% Effect of: Write off of Goodwill..................................... 22.0 -- -- Effect of Tax Rate Changes on Deferred Taxes.............. (0.9) 7.6 -- State Income Taxes, Net................................... (0.9) (3.6) (3.4) E.P.A. Fine............................................... -- 0.3 0.3 Other..................................................... 0.7 2.3 (2.2) ----- ----- ----- Effective Rate.............................................. (14.1)% (28.4)% (39.3)% ===== ===== =====
The components of the net deferred income tax asset and liability were as follows:
DECEMBER 31, ------------------- 1995 1994 ------- ------- (IN THOUSANDS OF DOLLARS) Current Deferred Tax Asset: Restructuring and Cost Containment............................. $ 1,899 $ 917 Inventory...................................................... 531 1,989 Retirement Security Program.................................... 272 315 Insurance...................................................... 210 441 Valuation Reserves............................................. 144 844 Vacation Pay................................................... 137 225 Other.......................................................... (1,144) (1,436) ------- ------- Total Current Deferred Tax Asset....................... $ 2,049 $ 3,295 ======= ======= Long Term Deferred Tax Liability: Prepaid Pension................................................ $18,390 $15,570 Other Reserves................................................. 3,919 3,092 Restricted Investments......................................... 1,773 2,129 Depreciation................................................... 1,287 2,413 Net Operating Loss Carryforward................................ (7,681) (3,889) Waste Site Cleanup............................................. (2,859) (3,669) Deferred Gain -- Sale of Assets................................ (1,091) (1,255) Post Retirement Insurance...................................... (658) (624) State and Local Income Taxes................................... (459) (480) Valuation Reserves............................................. (377) (404) Other.......................................................... (783) 509 ------- ------- Total Long-Term Deferred Tax Liability................. $11,461 $13,392 ======= =======
At December 31, 1995, DeSoto had net operating loss carryforwards of approximately $22.0 million. These carryforwards expire between 2007 and 2010. DeSoto has received a Report of Tax Examination Changes from the Internal Revenue Service that proposes adjustments resulting in additional taxes due of $6.5 million and penalties of $1.4 million, as well as an unspecified amount of interest for the years 1990 through 1993. DeSoto has filed a formal appeal of the proposed adjustments. DeSoto believes that the resolution of this matter will not have a material adverse effect on DeSoto's financial position or results of operations, although the timing of cash required to settle any amounts ultimately due could have a significant impact on DeSoto's cash flows. F-12 106 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) G. LEASE COMMITMENTS DeSoto leases certain facilities and equipment under lease agreements which are classified as operating leases. These leases are for remaining periods ranging from one to ten years and in some instances include renewal provisions at the option of DeSoto. Rental expense was $1,592,000 in 1995, $1,652,000 in 1994 and $2,107,000 in 1993. RENTAL COMMITMENTS (IN THOUSANDS OF DOLLARS)
TOTAL ------ 1996.............................................. $1,267 1997.............................................. 1,263 1998.............................................. 1,101 1999.............................................. 1,098 2000.............................................. 1,098 2001-2004......................................... 2,978 ------ $8,805 ======
H. SEGMENT REPORTING DeSoto operates in one industry segment, the manufacture of detergent. DeSoto also performs contract manufacturing and packaging of detergents. DeSoto's products are sold in retail stores, including mass merchants and service centers, throughout the United States. DeSoto's revenues are derived from several customers. There are five customers which each have accounted for more than 10% of DeSoto's revenues as indicated below. DeSoto no longer does business with Kmart or Benckiser as a result of the transactions disclosed in Note O to the Consolidated Financial Statements.
% OF CONSOLIDATED NET REVENUES -------------------------- 1995 1994 1993 ---- ---- ---- Sears, Roebuck & Co........................................ 20% 16% 14% Kmart...................................................... 10% 15% 10% Procter & Gamble........................................... 13% 10% * Benckiser.................................................. 12% * * Lever Brothers............................................. * * 11%
- --------------- * Less than 10% of consolidated net sales. From time to time, DeSoto enters into manufacturing and packaging agreements with its contract packaging customers. These contracts include product specifications, production procedures and other general terms. The contracts do not obligate the customer to make any purchases. I. ENVIRONMENTAL MATTERS DeSoto has been identified by government authorities as one of the parties potentially responsible for the cleanup costs of waste disposal sites, many of which are on the U.S. EPA's Superfund priority list, and for certain alleged contamination. In addition, damages are being claimed against DeSoto in private actions for alleged personal injury or property damage in the case of certain other waste disposal sites. The waste disposal sites relate to DeSoto's discontinued operations. DeSoto's potential responsibility in connection with these sites generally depends upon, among other things, whether it, directly or through third parties, engaged in the business of waste disposal or storage, shipped waste to the sites and, in those cases in which DeSoto did so ship waste, the relative amount and/or composition of waste material attributable to DeSoto as compared to the F-13 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) waste material attributable to other solvent parties. Typically, DeSoto is one of numerous parties involved in actions or proceedings relating to these waste disposal sites and its obligations in connection with its share of cleanup and other costs extend over a number of years rather than being payable at one time. DeSoto believes that it has made adequate provisions for the costs it may incur with respect to the sites. DeSoto provides a reserve for the lower end of an estimated range of total loss from $7.3 to $21.6 million (after considering information provided by independent legal counsel). These estimates are subject to numerous variables, the effects of which are difficult to measure, including the stage of the investigations, the nature of potential remedies, the joint and several liability with other potentially responsible parties and other issues. Accordingly, the reserves represent DeSoto's best estimates of its potential exposure at this time. The reserve balance was $7.3 million as of December 31, 1995 and $9.3 million as of December 31, 1994. In 1995, DeSoto paid out approximately $2.3 million on waste site related liabilities, excluding legal and administrative costs; of this amount $1.1 million was disbursed from the trust discussed below and $29,000 was disbursed from the restricted cash account discussed below. Actual costs to be incurred in future periods may vary from the estimates. DeSoto's potential liability may be materially impacted in the future as a result of final determinations of the extent of environmental damage, the share of the cost of cleanup technology which is ultimately chosen, the extent of the cleanup required, the solvency of other potentially responsible parties, changes in law and unanticipated awards of damages for personal injury or property damages. In addition, DeSoto has not reduced its estimates of liability to reflect the possible proceeds of insurance coverage which may be applicable to these costs. DeSoto from time to time engages in discussions with insurance carriers regarding Company claims in this regard and DeSoto may pursue litigation if no satisfactory resolution of the claims is reached. DeSoto reached settlements with two insurance carriers in 1995 regarding the cost of cleanup at certain waste disposal sites. As a result of these settlements, DeSoto received proceeds in 1995 totaling approximately $6.1 million. In connection with DeSoto's acquisition of Prescott in November 1992, DeSoto assumed the cleanup obligations of Prescott under New Jersey's Environmental Cleanup and Responsibility Act ("ECRA"). Pursuant to an agreement with certain former owners of Prescott, DeSoto in 1993 received funds to offset the cost of the cleanup previously held in escrow for the benefit of Prescott. (DeSoto has placed these funds in a restricted cash account to secure its cleanup obligations.) DeSoto currently expects that these funds will fully cover the costs of cleanup required by New Jersey. The remaining liability related to this site is included in the ranges above. The remaining funds are shown on the balance sheet under the caption, restricted cash. Under the terms of the 1990 consumer paint asset purchase agreement with Sherwin-Williams, $6.0 million of the sale's proceeds were used to establish a trust fund to fund potential clean-up liabilities. The trust agreement expires on October 26, 2000, or when the trust is depleted, whichever occurs first. A portion of the trust has been set aside with respect to a specific site; the agreement governing that portion of the trust expires on October 26, 2008. DeSoto has access to the trust fund, subject to the other party's approval, for any expenses or liabilities incurred by DeSoto regarding environmental claims relating to the sites identified in the trust agreement. Sherwin-Williams has access to the trust fund, subject to the other party's approval, for any expenses or liabilities incurred as a result of DeSoto's failure to meet its obligations relating to the sites identified in the agreement. DeSoto was reimbursed $1,095,000 in 1995 and $145,000 in 1994 from the trust to cover waste site payments. The balance in the trust fund, primarily invested in United States Treasury securities and classified as a restricted investment on the balance sheet, as of December 31, 1995 was $4,524,000. Of the estimated range of total loss noted above, $2.3 to $5.0 million relate to sites which are covered by the escrow account. The accrued waste site cleanup liability that was covered by the trust at December 31, 1995 was $2,346,000 of which $755,000 was classified as current. Under the terms of the 1990 industrial coatings business purchase agreement, DeSoto had delivered to the Valspar Corporation an irrevocable standby letter of credit in the amount of $2.0 million. The letter of credit was delivered to secure DeSoto's obligation to indemnify Valspar for certain environmental matters. DeSoto reached a settlement with Valspar in 1994 under which the letter of credit was terminated. F-14 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In December 1993, DeSoto transferred approximately $9.0 million of liabilities for certain of its clean-up costs and related expenses at certain waste disposal sites to DeSoto Environmental Management, Inc. (DEMI), a subsidiary of DeSoto. DeSoto remains liable for the potential environmental clean-up costs if DEMI is unable to satisfy the obligations. The purpose of DEMI is to provide focused, strategic management of the environmental liabilities and the related clean-up costs. DeSoto and certain members of DeSoto's management and consultants are stockholders in DEMI. Refer to Note K of the Notes to Consolidated Financial Statements for further information. It is the opinion of management, after evaluating the variables discussed above as well as the anticipated time frame for remediation, that the resolution of the waste site liability will not have a material adverse effect on DeSoto's financial position, cash flows or results of operations. J. CONTINGENCIES & LITIGATION As previously reported, there are several shareholder actions still pending in the Delaware courts relating to various proposals of Sutton Holding Corp. to acquire DeSoto in the period 1989 to 1991. These actions, all of which consolidated, have not been actively pursued and it appears the case was removed from the courts calendar; however, the plaintiffs recently served a discovery request upon DeSoto. DeSoto believes that these actions are not material. See Note L to the Consolidated Financial Statements for information regarding the Contingent Value Rights ("CVR's") which were issued by DeSoto to the sellers in connection with DeSoto's acquisition of J.L. Prescott Company in November 1992. DeSoto is also a party to other litigation arising out of the ordinary conduct of its business or results of current and discontinued operations. DeSoto believes that the disposition of all such actions, individually and in the aggregate, will not have a material adverse effect on DeSoto's financial position, cash flows, or results of operations. K. RELATED PARTY TRANSACTIONS In December 1993, DeSoto completed a number of transactions involving certain of its subsidiaries and officers and directors. J.L. Prescott Company, a wholly-owned subsidiary of DeSoto, paid off a portion of intercompany obligations to DeSoto by means of the issuance of a ten-year, $9 million principal amount, promissory note. DeSoto used this note to purchase 100 shares of a non-voting class of common stock of another of its subsidiaries, DeSoto Environmental Management, Inc. ("DEMI"). (This class of common stock is entitled to 15% of the dividends or other distributions made to all classes of common stock.) As part of the sale of stock to DeSoto, DEMI assumed up to a maximum of $9 million of certain of DeSoto's possible clean-up costs and related expenses at waste disposal sites. DeSoto remains liable for these possible environmental clean-up costs if DEMI is unable to satisfy these obligations. DeSoto subsequently sold at a price of $1 per share the shares of non-voting common stock of DEMI to Anders Schroeder (Vice Chairman) (33 shares), William Spier (Chairman and Chief Executive Officer) (33 shares), Anne Eisele (President and Chief Financial Officer) (20 shares), and Irving Kagan (Special Counsel) (14 shares). Messrs. Schroeder and Spier subsequently sold 8 shares and 9 shares, respectively, of their common stock to John Phillips upon his becoming President and Chief Executive Officer in 1994. Mr. Phillips sold his shares back to Messrs. Spier and Schroeder upon his resignation in 1995. Each of these persons agreed that upon complete satisfaction of DeSoto's existing environmental clean-up liabilities or when that person ceases to be an officer, director or consultant of DeSoto, the DEMI shares held by that person would be repurchased by DeSoto at the greater of $1 per share or the per share book value of DEMI. As a general matter, the value of this DEMI stock will be dependent upon the ability of DEMI, which has no other significant business or assets, to satisfy DeSoto's existing environmental liabilities for less than $9 million, which was the approximate minimum amount included in the 1994 estimated range of environmental liability. Consequently, the holders of this DEMI stock have a direct incentive to minimize the costs of satisfying environmental liabilities. In any event, DeSoto will F-15 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) retain 85% of the savings below the 1994 estimated minimum costs and savings which do not reduce the liabilities below such estimated minimum will accrue entirely to DeSoto. This transaction was approved by a unanimous vote of all disinterested directors. In November 1992, DeSoto announced the completion of the sale of certain real properties to a trust created by DeSoto's Pension Plans. In 1993, certain of these assets were repurchased from the Pension Plans by DeSoto and then sold to an unrelated third party. In 1994, DeSoto's facility in South Holland, Illinois, was sold to the real property trust of DeSoto's Pension Plans. Refer to Note C of the Notes to Consolidated Financial Statements for further information. In July 1992, DeSoto entered into an agreement with parties related to Sutton Holding Corp. ("Sutton"), which as of December 31, 1995 and in conjunction with parties related to Sutton, owns 14% of DeSoto's outstanding common stock and approximately 23% of all of DeSoto's outstanding voting stock, providing for a cash purchase of newly issued DeSoto securities. The investment resulted in Sutton's acquiring 583,333 shares of a new series of DeSoto senior preferred stock and warrants to acquire 1.2 million shares of common stock. Refer to Note L of the Notes to Consolidated Financial Statements, for further information regarding this transaction. L. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY As of December 31, 1995, there were 5,619,274 shares of common stock issued of which 940,067 shares were held as treasury stock. DeSoto's common stock has a $1 par value per share, and there are 20,000,000 shares authorized. In July 1992, DeSoto entered into an agreement with parties related to Sutton Holding Corp. ("Sutton"), providing for a $3.5 million cash purchase of newly issued DeSoto securities. The investment resulted in Sutton's acquisition of 583,333 shares of a new series of DeSoto senior preferred stock and warrants to acquire 1.2 million shares of common stock per approval of DeSoto's stockholders at the 1993 Annual Meeting. The DeSoto senior preferred pays 8% quarterly cumulative dividends (which increase to 10% if dividends earned remain unpaid for more than one year), has one vote per share (voting with common stock as a single class), has a liquidation preference of $6.00 per share, must be redeemed by DeSoto at liquidation preference after eight years and may be redeemed at DeSoto's option after five years. The carrying amount of the preferred shares on the balance sheet represents the proceeds received upon issuance (net of related expenses) plus accretion to the redemption value of the shares in five years. The carrying value has also been increased by cumulative dividends not currently declared. The warrants have a term of six years and are exercisable at $7.00 per share of common stock. Dividends have not been paid on the preferred stock since the date of issuance. In addition, dividends may not be declared on the common stock while dividends on the preferred stock are in arrears. At December 31, 1995 unpaid dividends on the preferred totaled approximately $1,197,000. The purchase price of $3.5 million for the new securities was allocated by DeSoto, upon the advice of an independent financial advisor, as $2.5 million for the preferred stock and $1.0 million for the warrants. The valuation took into account the terms of the purchase agreement and applied customary financial analyses used in such transactions to those terms. The agreement with Sutton resulted from negotiations between Sutton and a Special Committee of DeSoto's Board of Directors comprised of persons unaffiliated with Sutton. The Special Committee was represented by independent legal counsel and received an opinion from an independent financial advisor, selected by the Committee, that the arrangements with Sutton are fair, from a financial point of view, to the stockholders of DeSoto (other than those related to Sutton). F-16 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sutton includes entities affiliated with William Spier, Chairman and Chief Executive Officer of DeSoto, and Anders Schroeder, Vice Chairman of DeSoto, and entities represented by David Tobey, a director of DeSoto. In 1992, DeSoto also amended the terms of its stockholder rights plan to permit the parties related to Sutton to increase their ownership of common shares and other voting securities to approximately 38.2% of DeSoto's outstanding voting power (whether by exercise of warrants or acquisitions of common shares in the market or otherwise). In addition, the plan was amended to permit any stockholder to acquire up to 25% of DeSoto's outstanding voting power (as compared to the previous 20% limit). As a result of the $3.5 million purchase of senior preferred stock, parties related to Sutton now hold securities representing approximately 23% of DeSoto's currently outstanding voting securities. If securities issuable upon exercise of warrants are included, parties related to Sutton would own approximately 38% of the outstanding voting power of DeSoto. In connection with the 1992 Prescott acquisition, DeSoto also issued 522,775 shares of DeSoto common stock, which were held in treasury, and agreed to make a per share payment at the end of three years equal to the difference, if any, between $12 and the highest 60-day average trading price, if lower than $12 per share, of DeSoto common stock during the second and third years following the acquisition, with a maximum obligation of $6 per share (the "Contingent Value Rights" or "CVR's"). The payment shall be subject to reduction as provided by the Agreement which governs the payment (the "Agreement"). Per the Agreement, the payment, if any, shall be made in cash to the extent not prohibited (as defined in the Agreement). Any payment not made in cash is to be made by issuance of DeSoto securities and/or DeSoto common stock in that order. As of the measurement date of the Agreement (November 12, 1995), the amount calculated as payable under the terms of the Agreement, before the deduction of amounts DeSoto believes are appropriate and permitted under the terms of the Agreement, is $1,934,000; after applying such deductions DeSoto believes it is not required to make any payment, although certain CVR holders contend otherwise, and accordingly, no obligation has been recorded related to the Agreement. DeSoto intends to vigorously defend its position in this matter, which may include additional claims by DeSoto. DeSoto has reached agreement with the holder of one-half of the outstanding CVRs which, among other things, provides that no amounts are owed by DeSoto in respect of the CVRs owned by that holder. M. STOCK OPTIONS AND STOCK GRANTS Shares of stock and stock options have been granted to certain employees, consultants, and nonemployee directors under the stock plan adopted in 1992. The options granted to employees and consultants are qualified stock options (ISO) and the options granted to non employee directors are nonqualified options. The ISO options vest equally over the three years subsequent to the first anniversary of the grant date and are exercisable for a period of 10 years from the grant date. The nonqualified options are exercisable immediately upon grant and are exercisable for a period of 10 years from the grant date. All options have been granted at the prices equal to the fair market value of the stock on the dates the options were granted. At December 31, 1995, 50,500 of the 400,000 shares of stock available for options or grants under DeSoto's stock option plan remained available for grants. Options which are terminated, lapsed or expired shall again become available for issuance under the stock option plan. F-17 111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock options have been granted and exercised as set forth below:
OUTSTANDING OPTION PRICE EXERCISABLE OPTIONS PER SHARE-RANGE OPTIONS ----------- --------------- ----------- December 31, 1993.......................... 181,500 5.875 - 10.125 83,833 Options granted.......................... 122,000 5.50 - 7.00 27,000 Options that became exercisable.......... -- 7.00 - 9.00 60,333 Options exercised........................ (10,000) 7.00 (10,000) Options lapsed and canceled.............. (29,000) 5.875 - 9.00 (19,000) December 31, 1994.......................... 264,500 5.50 - 10.125 142,166 Options granted.......................... 27,000 4.375 - 4.750 27,000 Options that became exercisable.......... -- 6.625 - 9.00 122,334 Options lapsed and cancelled............. (35,000) 6.625 - 9.00 (35,000) -------- -------- December 31, 1995.......................... 256,500 4.375 - 10.125 256,500 ======== ========
During 1994, 30,000 shares of common stock were granted to an officer of DeSoto at no cost. All granted shares vested in 1994. The average market price of the common stock at the close of business on the vesting dates in 1994 was $5.81. An additional 20,000 shares of common stock were granted to officers of DeSoto in 1994. Of those shares, 7,500 shares vested in 1995 and 5,000 shares were canceled in 1995; the remaining shares vest over the period from 1996 to 1998. The average market price of the common stock at the close of business on the vesting date in 1995 was $5.13. F-18 112 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) N. OTHER INCOME AND EXPENSE The following are components of the respective captions in the statements of operations:
1995 1994 1993 ------- ------- ------- (IN THOUSANDS OF DOLLARS) Nonrecurring expense: Provision for restructuring due to disposition of liquid laundry and fabric softener sheet businesses......................................... $ 3,100 $ -- $ -- Loss on disposition of liquid laundry detergent and fabric softener sheet businesses................... 3,059 -- -- Provision for shutdown of Columbus, Georgia Plant..... -- -- 2,000 Loss on disposition of Jean Sorelle................... -- -- 1,331 Write-down of machinery and equipment held for resale............................................. -- -- 1,194 Provision for manufacturing and product rationalization.................................... -- -- 900 Settlement of lawsuit (including plaintiff's legal fees).............................................. -- -- 369 Other................................................. -- -- 131 ------- ------- ------- Total......................................... $ 6,159 $ -- $ 5,925 ======= ======= ======= Nonoperating expense: Provision for waste site cleanup...................... $ -- $ -- $ 1,467 Other................................................. -- -- 134 ------- ------- ------- Total......................................... $ -- $ -- $ 1,601 ======= ======= ======= Nonoperating income: Insurance settlements................................. $(6,067) $ -- $ (232) Royalties............................................. (244) (222) (53) Arbitration settlement -- discontinued operations..... -- (837) -- Reimbursement of legal fees........................... -- (244) -- Sale of land and building............................. -- -- (3,235) Pension settlement -- discontinued operations......... -- -- (454) Other................................................. (49) (47) ------- ------- ------- Total......................................... $(6,360) $(1,303) $(4,021) ======= ======= =======
O. DISPOSITIONS On July 21, 1995, DeSoto announced the transfer and assignment of various operations and assets involved in its liquid detergent and fabric softener dryer sheet businesses to two separate buyers. DeSoto assigned the rights to certain customers with respect to these businesses. DeSoto also sold other assets which included certain accounts receivable, inventory and machinery and equipment. The proceeds of these transactions were utilized to reduce DeSoto's senior debt owed to CIT. Both transactions also provide for DeSoto to receive royalties and other earn-out opportunities over a three-year period in one case and over a four-year period in the other case. DeSoto recorded a net loss on the sale of the liquid detergent and fabric softener sheet businesses (including the write-off of related goodwill). DeSoto also recorded a charge of $3.1 million in the third quarter relative to costs associated with the closure of operating facilities relative to these transactions. Significant components of the charge included severance, rent, real estate taxes and amounts to reduce assets to their net realizable value. The non-recurring expense of $6,159,000 reflects the net impact of these transactions. F-19 113 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following information is provided on a pro forma basis to illustrate the effect of certain adjustments to the historical consolidated financial statements that would have resulted from the above dispositions if such transactions had occurred on January 1, 1994. The results are not necessarily indicative of actual results had the foregoing transactions occurred as described above, nor do they purport to represent results of future operations of DeSoto.
TWELVE MONTHS ENDED DECEMBER 31, --------------------- 1995 1994 ------- ------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS -- UNAUDITED) Net revenues................................................... $25,082 $35,424 ======= ======= Net earnings................................................... $ 2,682 $ 1,037 ======= ======= Net earnings per common share.................................. $ 0.47 $ 0.21 ======= =======
The following table summarizes the non-cash aspects of the sale of the liquid detergent and fabric softener sheet businesses: Net selling prices of businesses sold....................................... $6,782 Minimum royalty to be paid over a four-year period.......................... 1,477 ------ Cash received as part of the transactions................................... $5,305 ======
P. SUBSEQUENT EVENT On March 13, 1996, DeSoto announced that it was discussing a proposed merger with Keystone Consolidated Industries, Inc. which, as presently contemplated, would involve an exchange of all of DeSoto's shares of outstanding stock for 3.5 million shares of Keystone common stock, in a tax-free transaction. Merger discussions are ongoing, and are subject to mutual due diligence by the parties, the negotiation and signing of a definitive agreement, the approval of DeSoto's and Keystone's boards of directors and shareholders and Keystone's primary lender, as well as the requisite governmental review. Additionally, the prospective transaction would require a satisfactory resolution of the payout plan with DeSoto's trade creditors. The merger with Keystone would provide an alternative to the prospective termination of DeSoto's overfunded pension plan. The termination will not occur if the proposed merger is completed. Additionally, Keystone has an underfunded pension plan with certain funding waivers relating to prior years and has preliminarily discussed the possible merger with the Pension Benefit Guaranty Corporation. There can be no assurance as to the outcome of the merger discussions; or, in this connection, the resolution of DeSoto's trade creditor plan. Keystone, headquartered in Dallas, Texas, is engaged in the manufacture and distribution of fencing and wire products, carbon steel rods, industrial wire, nails and construction products. F-20 114 QUARTERLY REVENUES AND EARNINGS DATA (1995 VERSUS 1994)
1995 --------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ------- (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) Net Revenues.................................. $18,927 $16,314 $11,132 $ 5,966 $52,339 ======= ======= ======= ====== ======= Gross Profit.................................. $ (516) $ (58) $(1,093) $ (63) $(1,730) ======= ======= ======= ====== ======= Net Earnings (Loss)........................... $(1,022) $ 2,897 $(6,146) $ (364) $(4,635) ======= ======= ======= ====== ======= Net Earnings (Loss) Per Common Share.......... $ (0.24) $ 0.60 $ (1.33) $ (0.13) $ (1.10) ======= ======= ======= ====== =======
1994 --------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ------- (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS) Net Revenues.................................. $23,640 $22,286 $21,394 $19,862 $87,182 ======= ======= ======= ======= ======= Gross Profit.................................. $ 977 $ 639 $ 543 $ 223 $ 2,382 ======= ======= ======= ======= ======= Net Earnings (Loss)........................... $ 51 $ (744) $ (782) $ (160) $(1,635) ======= ======= ======= ======= ======= Net Earnings (Loss) Per Common Share.......... $ (0.01) $ (0.18) $ (0.19) $ (0.05) $ (0.42) ======= ======= ======= ======= =======
- --------------- NOTES: In the third quarter of 1995, DeSoto completed the transfer and assignment of various operations and assets involved in its liquid detergent and fabric softener dryer sheet businesses to two separate buyers. The results for the second quarter of 1995 include $6.1 million of non-operating income. The results for the fourth quarter of 1994 include $2.9 million of income from DeSoto's retirement plans. The results for the first quarter of 1994 include $1.1 million of nonoperating income. The quarterly information presented above is unaudited. F-21 115 DESOTO, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------ 1996 1995 ------- ------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) NET REVENUES.............................................................. $ 9,481 $35,241 COSTS AND EXPENSES: Cost of sales........................................................... 8,383 35,815 Selling, administrative and general..................................... 2,718 5,729 Retirement security program............................................. (3,436) (3,382) Nonrecurring expense.................................................... 1,562 -- ------- ------- TOTAL OPERATING COSTS AND EXPENSES........................................ 9,227 38,162 ------- ------- EARNINGS (LOSS) FROM OPERATIONS........................................... 254 (2,921) OTHER CHARGES AND CREDITS: Interest expense........................................................ -- 459 Nonoperating expense (income)........................................... 1,184 (6,360) ------- ------- Earnings (Loss) before Income Taxes....................................... (930) 2,980 Provision (Benefit) for Income Taxes...................................... (351) 1,105 ------- ------- NET EARNINGS (LOSS)....................................................... (579) 1,875 Dividends on Preferred Stock.............................................. (283) (168) ------- ------- Net Earnings (Loss) Available for Common Shares........................... $ (862) $ 1,707 ======= ======= NET EARNINGS (LOSS) PER COMMON SHARE...................................... $ (.18) $ .37 ======= ======= Average Common Shares Outstanding......................................... 4,684 4,674 ======= ======= Dividends Declared per Common Share....................................... -- -- ======= =======
See accompanying notes to consolidated condensed financial statements. F-22 116 DESOTO, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS ASSETS
JUNE 30, 1996 DECEMBER 31, (UNAUDITED) 1995 ----------- ------------ (IN THOUSANDS OF DOLLARS) Current Assets: Cash............................................................ $ 42 $ 51 Restricted cash................................................. -- 29 Restricted short-term investments............................... 1,180 1,180 Trade accounts and notes receivable-net......................... 2,744 4,764 Inventories -- net: Finished goods............................................... 25 405 Raw materials and work-in-process............................ 330 380 ------- -------- 355 785 Deferred income taxes........................................... 3,180 2,049 Prepaid expenses and other current assets....................... 218 231 ------- -------- Total Current Assets.................................... 7,719 9,089 Restricted Investments............................................ 3,877 3,770 Property, Plant and Equipment -- net.............................. 589 2,610 Prepaid Pension................................................... 50,710 46,913 Other Non-Current Assets.......................................... 748 2,586 ------- -------- $63,643 $ 64,968 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................................ $11,482 $ 14,263 Reserves and liabilities related to restructuring programs...... 4,242 3,226 Waste site clean-up............................................. 2,025 2,025 Other........................................................... 4,388 4,500 ------- -------- Total Current Liabilities............................... 22,137 24,014 Waste site clean-up -- long-term.................................. 5,550 5,269 Post Retirement and Post Employment Insurance..................... 1,431 1,223 Deferred Income Taxes............................................. 12,256 11,461 Long-Term Deferred Gain........................................... 2,581 2,779 Redeemable Preferred Stock........................................ 4,684 4,288 Common Stock and Other Stockholders' Equity....................... 15,004 15,934 ------- -------- $63,643 $ 64,968 ======= ========
See accompanying notes to consolidated condensed financial statements. F-23 117 DESOTO, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------- 1996 1995 ------- ------- (IN THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss).................................................... $ (579) $ 1,875 Non-cash items: Net gain on disposal of property, plant and equipment................ 636 (17) Depreciation and amortization........................................ 175 881 Pension income....................................................... (3,797) (3,746) Deferred income taxes................................................ (336) 1,107 Amortization of deferred gain........................................ (198) (198) Other non-cash items................................................. 45 38 ------- ------- Net non-cash items................................................... (3,475) (1,935) Changes in assets and liabilities resulting from operating activities: Net (increase) decrease in trade accounts and notes receivable....... 2,020 (599) Net decrease in inventories.......................................... 430 47 Net decrease in other current assets................................. 42 608 Net decrease in other non-current assets............................. 1,731 178 Net increase (decrease) in accounts payable.......................... (2,781) 1,569 Net increase (decrease) in other liabilities......................... 1,393 (1,847) Other................................................................ -- (4) ------- ------- Net cash flows from operating activities............................... (1,219) (108) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property, plant and equipment.................. 1,210 500 Additions to property, plant and equipment........................... -- (197) ------- ------- Net cash flows from investing activities............................... 1,210 303 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments under Revolving Credit Agreement.............................. -- (1,369) ------- ------- Net decrease in cash and cash equivalents.............................. (9) (1,174) Cash and cash equivalents at beginning of period....................... 51 1,702 ------- ------- Cash and cash equivalents at end of period............................. $ 42 $ 528 ======= =======
See accompanying notes to consolidated condensed financial statements. F-24 118 DESOTO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations for the periods indicated. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the full year. A. ACCOUNTING POLICIES The reader is directed to Note A of the Notes to DeSoto's Consolidated Financial Statements for the year ended December 31, 1995 included in this Joint Proxy Statement/Prospectus for details of the accounting policies followed by DeSoto. B. INCOME TAXES The provision (benefit) for income taxes is computed at the current estimated effective income tax rate for the year. C. INVENTORY VALUATION Inventory at June 30, 1996 is valued at the last-in, first-out (LIFO) method of inventory accounting. If the first-in, first-out (FIFO) method of inventory accounting had been used for all of DeSoto's inventories, inventories would have been $520,000 and $1,493,000 higher than reported at June 30, 1996 and December 31, 1995, respectively. D. ACCOUNTS RECEIVABLE During the six months ended June 30, 1996, DeSoto sold certain of its accounts receivable to fund short-term cash requirements. Proceeds of $4,291,000 were received during the six-month period of which $1,335,000 related to invoices due after June 30, 1996. The accounts receivable sold were excluded from Trade Accounts and Notes Receivable on the balance sheet as of June 30, 1996. DeSoto has retained the risk of loss in the event of nonpayment of the receivables. DeSoto does not believe, however, that there is significant risk in the collectibility of the receivables. E. DISPOSITIONS On July 21, 1995, DeSoto announced the transfer and assignment of various operations and assets involved in its liquid detergent and fabric softener dryer sheet businesses to two separate buyers. DeSoto assigned the rights to certain customers with respect to these businesses. DeSoto also sold other assets which included certain accounts receivable, inventory and machinery and equipment. The proceeds of these transactions were utilized to reduce DeSoto's senior debt owed to CIT. Both transactions also provide for DeSoto to receive royalties and other earn-out opportunities over a three-year period in one case and over a four-year period in the other case. The statement of operations for the six months ended June 30, 1995 includes the results of operations of these businesses. On April 11, 1996, DeSoto announced that it had sold the domestic business and assets of its laundry detergent manufacturing and distribution operations, at its Union City, California, plant, to Star Pacific, Inc. The buyer will continue production under a sublease of the plant from DeSoto. DeSoto will retain its international detergent business at the Union City facility, under a production arrangement with Star Pacific. A charge of $1.6 million was recorded in the 1996 first quarter related to the costs associated with the Union City disposition. This provision included the write-down of fixed assets to net realizable value, future rental commitments on a leased warehouse, and severance pay. The provision is reflected on the statement of F-25 119 DESOTO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED) operations as nonrecurring expense and the accrual is included with restructuring reserves on the balance sheet. The statement of operations for the six months ended June 30, 1995 includes the results of operations of this business. The reader is directed to the DeSoto pro forma financial statements on pages P-9 to P-11 for the pro forma effect of these business dispositions. F. NONOPERATING EXPENSE (INCOME) Nonoperating expense during the first six months of 1996 resulted primarily from a provision for uncollectible receivables related to prior operations. Nonoperating income during the first six months of 1995 included approximately $6.1 million from insurance settlements and approximately $244,000 of royalty income related to technology sold by DeSoto in 1990. G. KEYSTONE MERGER As previously reported, DeSoto, on June 27, 1996, entered into a definitive merger agreement with Keystone Consolidated Industries, Inc. The consummation of the merger is subject to certain conditions, including approval by the shareholders of both companies and Keystone's obtaining the additional financing necessary to consummate the merger. F-26 120 APPENDIX A AGREEMENT AND PLAN OF REORGANIZATION BETWEEN KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND DESOTO, INC. DATED AS OF JUNE 26, 1996 A-CP 121 TABLE OF CONTENTS
PAGE ---- 1. PLAN OF REORGANIZATION............................................................ A-1 1.1 The Merger................................................................ A-1 (a) Conversion of Shares of DSO Common Stock.............................. A-1 (b) Conversion of Shares of DSO Preferred Stock........................... A-2 (c) Adjustments for Capital Changes....................................... A-2 (d) Dissenting Shares..................................................... A-2 (e) Conversion of KCI Sub Common Stock.................................... A-2 1.2 Fractional Shares......................................................... A-2 1.3 DSO Options............................................................... A-2 (a) Conversion............................................................ A-2 (b) Registration.......................................................... A-3 1.4 Effects of the Merger..................................................... A-3 1.5 Registration on Form S-4.................................................. A-3 2. REPRESENTATIONS AND WARRANTIES OF DSO............................................. A-3 2.1 Organization; Good Standing; Qualification and Power...................... A-4 2.2 Capital Structure......................................................... A-4 (a) Stock and Options..................................................... A-4 (b) DEMI.................................................................. A-4 (c) Warrants.............................................................. A-4 (d) No Other Commitments.................................................. A-4 2.3 Authority................................................................. A-5 (a) Corporate Action...................................................... A-5 (b) No Conflict........................................................... A-5 (c) Governmental Consents................................................. A-5 2.4 SEC Documents............................................................. A-6 (a) SEC Reports........................................................... A-6 (b) Financial Statements.................................................. A-6 2.5 Information Supplied...................................................... A-6 2.6 Compliance with Applicable Law............................................ A-6 2.7 Litigation and Legal Matters.............................................. A-7 2.8 ERISA and Other Compliance................................................ A-7 2.9 Labor Matters............................................................. A-9 2.10 Absence of Undisclosed Liabilities........................................ A-10 2.11 Absence of Certain Changes or Events...................................... A-10 2.12 No Default................................................................ A-11 2.13 Certain Agreements........................................................ A-11 2.14 Taxes..................................................................... A-11 2.15 Intellectual Property..................................................... A-12 2.16 Fees and Expenses......................................................... A-12 2.17 Environmental Matters..................................................... A-13 2.18 Interested Party Transactions............................................. A-14 2.19 Contracts................................................................. A-14 2.20 Title to Properties....................................................... A-15 2.21 Insurance................................................................. A-15 2.22 Board Approval............................................................ A-15 2.23 Vote Required............................................................. A-15 2.24 Disclosure................................................................ A-15 2.25 Fairness Opinion.......................................................... A-16 2.26 Restrictions on Business Activities....................................... A-16
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PAGE ---- 2.27 DSO Rights Agreement...................................................... A-16 2.28 Propriety of Past Payments................................................ A-16 3. REPRESENTATIONS AND WARRANTIES OF KCI............................................. A-16 3.1 Organization; Good Standing; Qualification and Power...................... A-16 3.2 Capital Structure......................................................... A-16 (a) Stock and Options..................................................... A-16 (b) No Other Commitments.................................................. A-17 3.3 Authority................................................................. A-17 (a) Corporate Action...................................................... A-17 (b) No Conflict........................................................... A-17 (c) Governmental Consents................................................. A-18 3.4 SEC Documents............................................................. A-18 (a) SEC Reports........................................................... A-18 (b) Financial Statements.................................................. A-18 3.5 Information Supplied...................................................... A-18 3.6 Compliance with Applicable Law............................................ A-19 3.7 Litigation and Legal Matters.............................................. A-19 3.8 ERISA and Other Compliance................................................ A-19 3.9 Labor Matters............................................................. A-21 3.10 Absence of Undisclosed Liabilities........................................ A-22 3.11 Absence of Certain Changes or Events...................................... A-22 3.12 No Default................................................................ A-23 3.13 Certain Agreements........................................................ A-23 3.14 Taxes..................................................................... A-23 3.15 Intellectual Property..................................................... A-24 3.16 Fees and Expenses......................................................... A-24 3.17 Environmental Matters..................................................... A-24 3.18 Interested Party Transactions............................................. A-25 3.19 Contracts................................................................. A-25 3.20 Title to Properties....................................................... A-26 3.21 Insurance................................................................. A-26 3.22 Board Approval............................................................ A-26 3.23 Vote Required............................................................. A-26 3.24 Disclosure................................................................ A-26 3.25 Fairness Opinion.......................................................... A-27 3.26 Restrictions on Business Activities....................................... A-27 3.27 Propriety of Past Payments................................................ A-27 4. DSO COVENANTS..................................................................... A-27 4.1 Advice of Changes......................................................... A-27 4.2 Maintenance of Business................................................... A-27 4.3 Conduct of Business....................................................... A-27 4.4 Stockholder Approval...................................................... A-28 4.5 Prospectus/Proxy Statement................................................ A-28 4.6 Regulatory Approvals...................................................... A-28 4.7 Necessary Consents........................................................ A-28 4.8 Access to Information..................................................... A-28 4.9 Satisfaction of Conditions Precedent...................................... A-30 4.10 No Other Negotiations..................................................... A-30
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PAGE ---- 5. KCI COVENANTS..................................................................... A-31 5.1 Advice of Changes......................................................... A-31 5.2 Maintenance of Business................................................... A-31 5.3 Conduct of Business....................................................... A-31 5.4 Stockholder Approval...................................................... A-33 5.5 Prospectus/Proxy Statement................................................ A-33 5.6 Regulatory Approvals...................................................... A-33 5.7 Necessary Consents........................................................ A-33 5.8 Access to Information..................................................... A-33 5.9 Satisfaction of Conditions Precedent...................................... A-33 5.10 Listing................................................................... A-33 5.11 Nomination of Directors................................................... A-33 5.12 Executive Committee....................................................... A-34 5.13 Director and Officer Indemnification...................................... A-34 5.14 DSO Trade Debt............................................................ A-34 6. CLOSING MATTERS................................................................... A-34 6.1 The Closing............................................................... A-34 6.2 Exchange of Certificates.................................................. A-34 (a) Exchange Agent........................................................ A-34 (b) Exchange Procedures................................................... A-35 (c) Distributions with Respect to Unsurrendered Certificates.............. A-35 (d) No Further Ownership Rights to DSO Stock.............................. A-35 (e) Termination of Exchange Fund.......................................... A-36 (f) No Liability.......................................................... A-36 6.3 Assumption of Options..................................................... A-36 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF DSO........................................ A-36 7.1 Accuracy of Representations and Warranties................................ A-36 7.2 Covenants................................................................. A-36 7.3 Absence of Material Adverse Change........................................ A-36 7.4 Compliance with Law....................................................... A-36 7.5 Government Consents....................................................... A-36 7.6 The Form S-4.............................................................. A-36 7.7 Documents................................................................. A-36 7.8 Stockholder Approval...................................................... A-37 7.9 KCI Approval.............................................................. A-37 7.10 No Legal Action........................................................... A-37 7.11 Election of DSO Designees to Board of Directors of KCI.................... A-37 7.12 Tax Opinions.............................................................. A-37 7.13 Legal Opinion............................................................. A-37 7.14 Listing................................................................... A-37 7.15 PBGC...................................................................... A-37 7.16 Financing................................................................. A-37 7.17 Fairness Opinion.......................................................... A-37 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF KCI........................................ A-37 8.1 Accuracy of Representations and Warranties................................ A-37 8.2 Covenants................................................................. A-38 8.3 Absence of Material Adverse Change........................................ A-38 8.4 Compliance with Law....................................................... A-38 8.5 Government Consents....................................................... A-38 8.6 Form S-4.................................................................. A-38
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PAGE ---- 8.7 Documents................................................................. A-38 8.8 Stockholder Approval...................................................... A-38 8.9 DSO Approval.............................................................. A-38 8.10 No Legal Action........................................................... A-38 8.11 Tax Opinions.............................................................. A-38 8.12 Legal Opinion............................................................. A-39 8.13 Agreement of Warrantholders............................................... A-39 8.14 Financing................................................................. A-39 8.15 Amendment of DSO Retirement Plan.......................................... A-39 8.16 No Pending Termination.................................................... A-39 8.17 PBGC...................................................................... A-39 8.18 Approval of Change of Control............................................. A-39 8.19 Preferred Stockholders Consents........................................... A-39 8.20 Prescott Obligation....................................................... A-39 8.21 Fairness Opinion.......................................................... A-39 8.22 Lender Consent............................................................ A-39 8.23 Trade Creditor Agreement.................................................. A-39 8.24 Merger of Pension Plans................................................... A-39 9. TERMINATION OF AGREEMENT; BREAK UP FEES........................................... A-39 9.1 Termination............................................................... A-39 9.2 Notice of Termination..................................................... A-40 9.3 Effect of Termination..................................................... A-40 9.4 Breakup Fee............................................................... A-40 10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS............................. A-41 11. MISCELLANEOUS..................................................................... A-41 11.1 Governing Law............................................................. A-41 11.2 Assignment; Binding Upon Successors and Assigns........................... A-41 11.3 Severability.............................................................. A-41 11.4 Counterparts.............................................................. A-41 11.5 Other Remedies............................................................ A-41 11.6 Amendment and Waivers..................................................... A-41 11.7 Expenses.................................................................. A-41 11.8 Attorney's Fees........................................................... A-42 11.9 Notices................................................................... A-42 11.10 Construction of Agreement................................................. A-42 11.11 No Joint Venture.......................................................... A-42 11.12 Further Assurances........................................................ A-43 11.13 Absence of Third Party Beneficiary Rights................................. A-43 11.14 Public Announcement....................................................... A-43 11.15 Entire Agreement.......................................................... A-43
A-iv 125 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is entered into as of this 26th day of June, 1996, by and between KEYSTONE CONSOLIDATED INDUSTRIES, INC., a Delaware corporation ("KCI"), and DESOTO, INC., a Delaware corporation ("DSO"). RECITALS A. The parties intend that, subject to the terms and conditions of this Agreement, DSO will consolidate with a wholly owned subsidiary of KCI (the "KCI Sub") in a statutory merger (the "Merger") with DSO being the surviving corporation of the Merger (the "Surviving Corporation"), all pursuant to the terms and conditions of this Agreement and the applicable provisions of the Delaware General Corporation Law, as amended (the "Delaware Law"). Upon the effectiveness of the Merger, all the capital stock of DSO outstanding immediately prior to the Effective Time (as defined in Section 1.1) will be converted into capital stock of KCI, and KCI will assume all outstanding options to purchase shares of common stock of DSO, as provided in this Agreement. B. The Merger is intended to be treated as a tax-free reorganization pursuant to the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). C. It is the intention and desire of KCI and DSO, immediately after the Effective Time to cause a merger of the pension plans of KCI and DSO. The parties hereto hereby agree as follows: 1. PLAN OF REORGANIZATION 1.1 The Merger. Subject to the terms and conditions of this Agreement, the Merger will occur pursuant to this Agreement and in accordance with applicable provisions of the Delaware Law as follows: (a) Conversion of Shares of DSO Common Stock. Each share of DSO Common Stock, $1.00 par value, including the associated rights (the "Associated Rights") issued pursuant to the Rights Agreement (the "Rights Agreement") between DSO and Harris Trust and Savings Bank (collectively the "DSO Common Stock"), issued and outstanding immediately prior to the date and time of filing of a Certificate of Merger (the "Certificate of Merger") with the Secretary of State of Delaware (the "Effective Time") will by virtue of the Merger and at the Effective Time, and without further action on the part of any holder thereof, be converted into the right to receive .7465 of a share (the "Exchange Ratio") of validly issued, fully paid and nonassessable KCI Common Stock, $1.00 par value (the "KCI Common Stock"). Shares of DSO's capital stock held by DSO in its treasury will not be deemed outstanding for purposes of this Agreement and will not be converted into shares of KCI Common Stock, cash or any other property and will be cancelled as of the Effective Time. No holder of shares of DSO Common Stock shall have any rights as a stockholder of KCI prior to the date of issuance to such holder of a certificate or certificates representing shares of KCI Common Stock. (b) Conversion of Shares of DSO Preferred Stock. Each share of DSO Series B Senior Preferred Stock, $1.00 par value (the "DSO Preferred Stock" and collectively with the DSO Common Stock, the "DSO Stock"), issued and outstanding immediately prior to the Effective Time will by virtue of the Merger and at the Effective Time, and without further action on the part of any holder thereof, be converted into the right to receive the Exchange Ratio of a share of validly issued, fully paid and nonassessable KCI Series A Senior Preferred Stock, no par value, as contemplated by the Preferred Stockholder Waiver and Consent Agreement of even date herewith (the "KCI Preferred Stock" and collectively with the KCI Common Stock, the "KCI Stock"). No holder of shares of DSO Preferred Stock shall have any rights as a stockholder of KCI prior to the date of issuance to such holder of a certificate or certificates representing shares of KCI Preferred Stock. A-1 126 (c) Adjustments for Capital Changes. If, prior to the Effective Time, DSO or KCI recapitalizes through a subdivision of its outstanding shares into a greater number of shares, or a combination of its outstanding shares into a lesser number of shares, or reorganizes, reclassifies or otherwise changes its outstanding shares into the same or a different number of shares of other classes, or declares a dividend on its outstanding shares payable in shares of its capital stock or securities convertible into shares of its capital stock, then the Exchange Ratio, as applicable, will be adjusted appropriately so as to maintain the relative proportionate interests of the holders of the shares of DSO Stock and the holders of the shares of KCI Stock. (d) Dissenting Shares. Holders of shares of DSO Common Stock who dissent from the Merger are not entitled to rights of appraisal under Section 262 of the Delaware Law by virtue of Section 262(b)(1) of the Delaware Law. (e) Conversion of KCI Sub Common Stock. Each share of common stock of KCI Sub issued and outstanding immediately prior to the Effective Time will by virtue of the Merger and at the Effective Time, and without further action on the part of any holder hereof, be converted into one share of validly issued, fully paid and nonassessable common stock of the Surviving Corporation. 1.2 Fractional Shares. No fractional shares of KCI Common Stock will be issued in connection with the Merger, but in lieu thereof each holder of DSO Common Stock who would otherwise be entitled to receive a fraction of a share of KCI Common Stock will receive from the Exchange Agent (as defined in Section 6.2), at such time as such holder shall receive a certificate representing shares of KCI Common Stock as contemplated by Section 6.2, an amount of cash equal to the per share market value of KCI Common Stock (based on the average of the closing sale prices of KCI Common Stock during the ten (10) trading day period ending on the Closing Date (as defined in Section 6.1) as reported in the Wall Street Journal) multiplied by the fraction of a share of KCI Common Stock to which such holder would otherwise have been entitled. The fractional interests of each DSO stockholder will be aggregated so that no DSO stockholder will receive cash in an amount equal to or greater than the value of one full share of KCI Common Stock (other than those holding shares as nominees or in similar capacity, in which case, each interest of a beneficial owner shall be aggregated separately). KCI shall provide sufficient funds to the Exchange Agent to make the payments contemplated by this Section 1.2. 1.3 DSO Options. (a) Conversion. At the Effective Time, each of the then outstanding options to purchase DSO Common Stock (the "DSO Options") will by virtue of the Merger, and without any further action on the part of any holder thereof, be converted into an option to purchase that number of shares of KCI Common Stock determined by multiplying the number of shares of DSO Common Stock subject to such DSO Option at the Effective Time by the Exchange Ratio, at an exercise price per share of KCI Common Stock equal to the exercise price per share of such DSO Option immediately prior to the Effective Time divided by the Exchange Ratio and rounded up to the nearest whole cent (provided, however, in the case of any DSO Options to which Section 421 of the Code applies by reason of its qualification under Section 422 or Section 423 of the Code, the option price, the number of shares purchasable pursuant to such DSO Options and the terms and conditions of exercise of such DSO Options shall be determined in order to comply with Section 424 of the Code). If the foregoing calculation results in an assumed DSO Option being exercisable for a fraction of a share of KCI Common Stock, then the number of shares of KCI Common Stock subject to such option will be rounded up to the nearest whole number of shares. The term, exercisability, vesting schedule, status as an "incentive stock option" under Section 422 of the Code, if applicable, and all other terms and conditions of the DSO Options shall be as set forth in the DSO Disclosure Schedule (as defined in Article 2). Continuous employment with DSO or any of the DSO Subsidiaries (as defined in Section 2.1) will be credited to an optionee of DSO for purposes of determining the number of shares of KCI Common Stock subject to exercise under DSO Options converted into options to purchase KCI Common Stock (the "KCI Converted Options"). Each A-2 127 KCI Converted Option shall otherwise be subject to the terms and conditions as were applicable to such converted DSO Option under the applicable DSO Plan (as defined in Section 2.2). (b) Registration. To the extent a registration statement on Form S-8 is available, KCI will cause the KCI Common Stock issuable upon exercise of the KCI Converted Options to be registered on Form S-8 promulgated by the Securities and Exchange Commission (the "SEC") as soon as practicable after the Effective Time and will use its best efforts to maintain the effectiveness of such registration statement or registration statements for so long as the KCI Converted Options shall remain outstanding. With respect to those individuals who subsequent to the Merger will be subject to the reporting requirements under Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), KCI shall administer, to the extent reasonably practicable, the DSO Plans (as defined in Section 2.2(a)) assumed pursuant to the Merger and this Section 1.3 in a manner that complies with the rules promulgated by the SEC under the Exchange Act. KCI will reserve a sufficient number of shares of KCI Common Stock for issuance upon exercise of the KCI Converted Options. 1.4 Effects of the Merger. At the Effective Time, the Certificate of Merger shall be filed as contemplated by Section 1.1(a), the effect of which shall be as follows: (a) each share of KCI Common Stock outstanding immediately prior to the Effective Time will continue to be an identical outstanding share of KCI Common Stock; (b) each share of DSO Stock and each DSO Option outstanding immediately prior to the Effective Time will be converted as provided in Sections 1.1, 1.2 and 1.3 hereof; (c) each share of KCI Sub Common Stock outstanding immediately prior to the Effective Time will be converted as provided in Section 1.1(e) hereof; (d) the Certificate of Incorporation, Bylaws, directors and officers of the Surviving Corporation will be as provided in the Certificate of Merger; and (e) the Merger will, from and after the Effective Time, have all of the effects provided by applicable law, including, without limitation, the Delaware Law. 1.5 Registration on Form S-4. The KCI Stock to be issued in the Merger shall be registered under the Securities Act of 1933, as amended (the "Securities Act"), on a Form S-4 registration statement promulgated by the SEC (the "Form S-4"). As promptly as practicable after the date of this Agreement, KCI and DSO shall prepare and file with the SEC the Form S-4, together with the prospectus/joint proxy statement to be included therein (the "Prospectus/Proxy Statement") and any other documents required by the Securities Act or the Exchange Act, in connection with the Merger. Each of KCI and DSO shall use its best efforts to respond promptly to any comments of the SEC and to have the Form S-4 declared effective under the Securities Act as promptly as practicable after such filing and to cause the Prospectus/Proxy Statement to be mailed to each company's stockholders at the earliest practicable time. Each party shall as promptly as practicable furnish to the other party all information concerning such party and its stockholders as may be reasonably required in connection with any action contemplated by this Section 1.5. The Prospectus/Proxy Statement and Form S-4 shall comply in all material respects with all applicable requirements of law. Each of KCI and DSO will notify the other promptly of the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff for amendments or supplements to the Form S-4 or the Prospectus/Proxy Statement or for additional information and will supply the other with copies of all correspondence with the SEC or its staff with respect to the Form S-4, the Prospectus/Proxy Statement or any amendments or supplements thereto. Whenever any event occurs which should be set forth in an amendment or supplement to the Form S-4 or the Prospectus/Proxy Statement, KCI or DSO, as the case may be, shall promptly inform the other of such occurrence and cooperate in filing as promptly as practicable with the SEC or its staff, and/or mailing to stockholders of KCI and DSO, such amendment or supplement. 2. REPRESENTATIONS AND WARRANTIES OF DSO Except as set forth in a schedule dated the date of this Agreement and delivered by DSO to KCI concurrently herewith (the "DSO Disclosure Schedule") or as disclosed in the Recent DSO SEC Documents (as defined in Section 2.4), DSO represents and warrants to KCI as set forth below. In this Agreement, any reference to any event, change or effect being "material" with respect to any entity or A-3 128 group of entities means any material event, change or effect related to the condition (financial or otherwise), properties, assets, liabilities, businesses, operations, results of operations or prospects of such entity or group of entities taken as a whole. In this Agreement, the term "Material Adverse Effect" used in connection with a party or any of such party's subsidiaries means any event, change or effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, businesses, operations, results of operations or prospects of such party and its subsidiaries, taken as a whole. 2.1 Organization; Good Standing; Qualification and Power. DSO and each of its subsidiaries, including corporations, partnerships, trusts or any other type of entity (the "DSO Subsidiaries") is duly organized, validly existing and in good standing under the laws of the state of its incorporation or organization, has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary or where the failure to so qualify would not have a Material Adverse Effect. The DSO Disclosure Schedule sets forth a complete and correct list of the DSO Subsidiaries. DSO has made available to KCI or its counsel complete and correct copies of the Certificates or Articles of Incorporation and Bylaws of DSO and each of the DSO Subsidiaries, in each case as amended to the date of this Agreement. 2.2 Capital Structure. (a) Stock and Options. The authorized capital stock of DSO consists of 20,000,000 shares of DSO Common Stock, and 583,333 shares of DSO Preferred Stock. At the close of business on June 17, 1996, 4,688,523 shares of DSO Common Stock were issued and outstanding, 583,333 shares of DSO Preferred Stock were issued and outstanding, 930,751 shares of DSO Common Stock were held by DSO in its treasury, and 120,500 shares of DSO Common Stock were reserved for issuance upon the exercise of the outstanding DSO Options. All outstanding shares of DSO Stock are validly issued, fully paid and nonassessable and not subject to preemptive rights. All outstanding shares of DSO Common Stock, including treasury shares, and all shares reserved for issuance have been listed on the New York Stock Exchange (the "NYSE"). All outstanding shares of the capital stock of each of the DSO Subsidiaries are validly issued, fully paid and nonassessable and are owned by DSO or one of the DSO Subsidiaries free and clear of any liens, security interests, pledges, agreements, claims, charges or encumbrances . DSO has made available to KCI, a true and correct copy of its 1992 Stock Plan and the DeSoto Stock Ownership Plus Plan (collectively, the "DSO Plans"), and a complete and correct list of each DSO Option outstanding as of the date hereof, including the name of the holder of each such DSO Option, the DSO Plan pursuant to which each such DSO Option was issued, the security and number of shares covered by each such DSO Option, the per share exercise price of each such DSO Option and the vesting schedule applicable to each such DSO Option. (b) DEMI. As of the date hereof, the authorized capital stock of DeSoto Environmental Management, Inc. ("DEMI") consists of one hundred (100) shares of Class A Common Stock, one hundred (100) shares of Class B Common Stock, and one hundred (100) shares of preferred stock. At the close of business on June 12, 1996, one (1) share of Class A Common Stock was held by DSO, one hundred (100) shares of Class B Common Stock were held by directors and officers of DSO as set forth on the Disclosure Schedule, and no shares of preferred stock were outstanding. (c) Warrants. As of the date hereof warrants to purchase an aggregate of 1,200,000 shares of DSO Common Stock (the "DSO Warrants") were outstanding. As of the date hereof, 1,200,000 shares of DSO Common Stock were reserved for issuance upon exercise of the DSO Warrants. (d) No Other Commitments. Except for the DSO Options, the DSO Warrants and the Contingent Value Rights issued in connection with the acquisition of J.L. Prescott Company, there are no options, warrants, calls, rights, commitments, conversion rights or agreements of any character to which DSO or any of the DSO Subsidiaries is a party or by which DSO or any of the DSO Subsidiaries is bound, obligating DSO or any of the DSO Subsidiaries to issue, deliver or sell, A-4 129 or cause to be issued, delivered or sold, any shares of capital stock of DSO or any of the DSO Subsidiaries or securities convertible into or exchangeable for shares of capital stock of DSO or any of the DSO Subsidiaries, or obligating DSO or any of the DSO Subsidiaries to grant, extend or enter into any such option, warrant, call, right, commitment, conversion right or agreement. Except for the parties affiliated with Sutton Holding Corp. who have previously filed a Schedule 13-D with respect to DSO, there are no voting trusts or other agreements or understandings to which DSO or any DSO Subsidiary is a party or, as of the date hereof, of which DSO has knowledge, with respect to the voting of the capital stock of DSO or any of the DSO Subsidiaries. 2.3 Authority. (a) Corporate Action. DSO has the requisite corporate power and authority to enter into this Agreement and, subject to approval of this Agreement and the Merger by the stockholders of DSO, to perform its obligations hereunder and to consummate the Merger and the other transactions contemplated by this Agreement. The execution and delivery of this Agreement by DSO and, subject to approval of this Agreement and the Merger by the stockholders of DSO, the consummation by DSO of the Merger and the other transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of DSO. This Agreement has been duly executed and delivered by DSO, and this Agreement is a valid and binding obligation of DSO, enforceable in accordance with its terms, except that such enforceability may be subject to (i) bankruptcy, insolvency, reorganization or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. (b) No Conflict. Subject to approval of this Agreement and the Merger by the stockholders of DSO, neither the execution, delivery and performance of this Agreement or the Certificate of Merger, nor the consummation of the transactions contemplated hereby or thereby, nor compliance with the provisions hereof or thereof will conflict with, or result in any violation of, or cause a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, amendment, cancellation or acceleration of any obligation contained in, or the loss of any benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of DSO or any of the DSO Subsidiaries under any term, condition or provision of (i) the Certificates or Articles of Incorporation or Bylaws of DSO or any of the DSO Subsidiaries or (ii) any agreement, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to DSO or any of the DSO Subsidiaries or their respective properties or assets, other than any such conflicts, violations, defaults, losses, liens, security interests, charges, or encumbrances which, individually or in the aggregate, would not have a Material Adverse Effect. (c) Governmental Consents. No consent, approval or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (each a "Governmental Entity"), is required to be obtained by DSO or any of the DSO Subsidiaries in connection with the execution and delivery of this Agreement or the Certificate of Merger or the consummation of the transaction contemplated hereby or thereby except for (i) the filing with the SEC of (A) the Form S-4, (B) the Prospectus/Proxy Statement relating to the meeting of the stockholders of DSO (the "DSO Stockholders Meeting") to be held with respect to the approval by DSO's stockholders of this Agreement and the Merger, and (C) such reports and information under the Exchange Act and the rules and regulations promulgated by the SEC thereunder, as may be required in connection with this Agreement and the transactions contemplated hereby; (ii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with relevant authorities of other states in which DSO is qualified to do business; (iii) such filings, authorizations, orders and approvals as may be required under state "control share acquisition," "anti-takeover" or other similar statutes and regulations (collectively, the "State Anti-Takeover Laws"); (iv) such filings, authorizations, orders and approvals as may be required under foreign laws, state securities laws and the rules of the NYSE; (v) such filings and notifications as may be necessary under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"); and A-5 130 (vi) such consents, approvals, etc. the failure of DSO to so obtain would not prevent or delay the consummation of the Merger or otherwise prevent DSO from performing its obligations under this Agreement and would not reasonably be expected to have a Material Adverse Effect. 2.4 SEC Documents. (a) SEC Reports. DSO has made available to KCI or its counsel complete and correct copies of each report, schedule, registration statement and definitive proxy statement filed by DSO with the SEC on or after January 1, 1991 (the "DSO SEC Documents"), which are all the documents (other than preliminary material) that DSO was required to file with the SEC on or after such date. As of their respective dates or, in the case of registration statements, their effective dates (and if amended or superseded by a filing prior to the date of this Agreement, then also on the date of such filing), none of the DSO SEC Documents (including all exhibits and schedules thereto and documents incorporated by reference herein) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and the DSO SEC Documents were timely filed and complied when filed, in form and content, in all material respects with the then applicable requirements of the Securities Act or the Exchange Act, including the timeliness of the filing as the case may be, and the rules and regulations promulgated by the SEC thereunder. DSO has filed all documents and agreements which were required to be filed as exhibits to the DSO SEC Documents. For purposes hereof, "Recent DSO SEC Documents" shall mean the most recent annual report on Form 10-K of DSO, together with the most recent quarterly report on Form 10-Q of DSO for any quarter subsequent to the annual period covered by such Form 10-K, together with any current reports on Form 8-K filed by DSO subsequent to such most recent Form 10-Q. (b) Financial Statements. The financial statements of DSO included in the DSO SEC Documents complied as to form in all material respects with the then applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved or at the applicable dates (except as may have been indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q promulgated by the SEC) and fairly present (subject, in the case of the unaudited statements, to normal, year-end audit adjustments) the consolidated financial position of DSO and its consolidated DSO Subsidiaries as at the respective dates thereof and the consolidated results of their operations and cash flows for the respective periods then ended. 2.5 Information Supplied. None of the information supplied or to be supplied by DSO for inclusion or incorporation by reference in the Form S-4 and Prospectus/Proxy Statement will, at the time the Form S-4 is declared effective, at the date the Prospectus/Proxy Statement is mailed to the stockholders of DSO and at the time of the KCI and DSO Stockholders Meetings, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. The material to be supplied by DSO in respect of the Form S-4 and the Prospectus/Proxy Statement will comply as to form in all material respects with the provisions of the Securities Act, Exchange Act, and the rules and regulations promulgated by the SEC thereunder. 2.6 Compliance with Applicable Law. The businesses of DSO and the DSO Subsidiaries are not being conducted in violation of any law, ordinance, regulation, rule or order of any Governmental Entity where such violation would have a Material Adverse Effect. Except as disclosed in the Recent DSO SEC Documents filed prior to the date of this Agreement or where such notification would not reasonably be expected to result in a Material Adverse Effect, DSO has not been notified by any Governmental Entity that any investigation or review with respect to DSO or any of the DSO Subsidiaries is pending or threatened, nor has any Governmental Entity notified DSO of its intention to conduct the same. DSO and each of the DSO Subsidiaries have all permits, licenses and franchises from Governmental Entities A-6 131 required to conduct their businesses as now being conducted, except for those the absence of which would not have a Material Adverse Effect. 2.7 Litigation and Legal Matters. There is no suit, action, arbitration, demand, claim or proceeding pending or threatened against DSO or any of the DSO Subsidiaries, or any of their officers, directors, employees or agents involving, affecting or relating to any assets, operations or properties of DSO or the DSO Subsidiaries, or any DSO Employee Plans (as defined in Section 2.8), nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against DSO or any of the DSO Subsidiaries that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. DSO has made available to KCI or its counsel complete and correct copies of all correspondence prepared by its counsel for DSO's auditors in connection with the last five (5) completed audits of DSO's financial statements and any such correspondence since the date of the last such audit. 2.8 ERISA and Other Compliance. (a) DSO has made available to KCI a list of all employees of DSO and of any DSO Subsidiary, and their salaries as of the date of this Agreement. DSO has made available to KCI (i) a copy of each "employee benefit plan," as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and (ii) a copy of all other written or formal plans or agreements involving direct or indirect compensation or benefits (including any employment agreements entered into by DSO or any of the DSO Subsidiaries, but excluding workers' compensation, unemployment compensation and other government-mandated programs) currently maintained, contributed to or entered into by DSO or any of the DSO Subsidiaries under which DSO or any of the DSO Subsidiaries or any ERISA Affiliate (as defined below) thereof has any present or future obligation or liability (collectively, the "DSO Employee Plans"). For purposes of this Agreement, "ERISA Affiliate" shall mean any entity which is a member of (A) a "controlled group of corporations," as defined in Section 414(b) of the Code, (B) a group of entities under "common control," as defined in Section 414(c) of the Code, or (C) an "affiliated service group," as defined in Section 414(c) of the Code, or treasury regulations promulgated under Section 414(o) of the Code, any of which includes DSO or any of the DSO Subsidiaries. Copies of all DSO Employee Plans (and, if applicable, related trust agreements) and all amendments thereto and all summary plan descriptions, other than plans which are multi-employer plans within the meaning of Title IV of ERISA, have been made available to KCI or its counsel, together with the three (3) most recent annual reports (Forms 5500) prepared in connection with any such DSO Employee Plan. Each DSO Pension Plan (as defined below) operates in accordance with the reporting and disclosure requirements imposed under ERISA and the Code except for such noncompliance which would not have a Material Adverse Effect. Copies of all DSO Employee Plans which individually or collectively would constitute an "employee pension benefit plan," as defined in Section 3(2) of ERISA (collectively, the "DSO Pension Plans"), have been made available to KCI. Except for funding waivers which have been obtained, all contributions due from DSO or any of the DSO Subsidiaries through March 31, 1996 with respect to any of the DSO Employee Plans have been made as required under ERISA or have been accrued in accordance with generally accepted accounting principles on DSO's or any such DSO Subsidiary's financial statements as of March 31, 1996. Each DSO Employee Plan has been maintained since May 19, 1991 in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including, without limitation, ERISA and the Code, which are applicable to such DSO Employee Plans except for such noncompliance which would not have a Material Adverse Effect, and all such plans which are DSO Pension Plans are fully funded on a termination basis. (b) No DSO Pension Plan constitutes, or has since May 19, 1991 constituted, a "multiemployer plan," as defined in Section 3(37) of ERISA. No DSO Pension Plans other than the DeSoto Employees' Retirement Plan which is the result of the merger of the DeSoto Hourly Employees' Pension Plan and the J.L. Prescott Company Employees' Retirement Plan into the DeSoto Salaried Employees' Pension Plan, effective January 1, 1994, all of which together currently constitute the A-7 132 DeSoto Employees' Retirement Plan (the "DSO Retirement Plan") are subject to Title IV of ERISA. To the best of the knowledge of the officers of DSO, no "prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any DSO Employee Plan which is covered by Title I of ERISA which would result in a material liability to DSO and the DSO Subsidiaries taken as a whole, excluding transactions effected pursuant to a statutory or administrative exemption. To the best of the knowledge of the officers of DSO, nothing done or omitted to be done and no transaction or holding of any asset under or in connection with any DSO Employee Plan has or will make DSO or any officer or director of DSO subject to any material liability under Title I of ERISA or liable for any material tax or penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or Section 502 of ERISA. No DSO Pension Plan is liable for any federal, state or local taxes other than unrelated business taxable income as defined in Section 512 of the Code. (c) To the best of the knowledge of the officers of DSO, each DSO 401(a) Plan is qualified under Section 401(a) of the Code and has been so qualified during the period from May 19, 1991 to date, and the trust forming a part thereof is exempt from tax pursuant to Section 501(c) of the Code. Each DSO 401(a) Plan operates in accordance with its terms and, to DSO's knowledge, there exists no fact which would adversely affect its qualified status. Except for pending requests for favorable determination letters on qualification filed with the Internal Revenue Service (the "IRS") on March 29, 1995 for the DSO Retirement Plan and the DeSoto Stock Ownership Plan, no DSO 401(a) Plan is currently under investigation, audit or review by the IRS, nor is such action contemplated, and the IRS has not asserted that any DSO Pension Plan is not qualified under Section 401(a) of the Code or that any trust established under a DSO Pension Plan is not exempt under Section 501(a) of the Code. (d) With respect to each DSO Pension Plan which is a defined benefit plan under Section 414(j) of the Code and each defined contribution plan under Section 414(i) of the Code: (i) no liability to the Pension Benefit Guaranty Corporation (the "PBGC") under Sections 406-4064 of ERISA has been incurred by DSO or the DSO Subsidiaries since May 19, 1991 and all premiums due and owing to the PBGC have been timely paid; (ii) the PBGC has notified neither DSO, any of the DSO Subsidiaries nor any DSO Pension Plan of the commencement of proceedings under Section 4042 of ERISA to terminate any such plan; (iii) since May 19, 1991 no event has occurred, or to DSO's knowledge is threatened or is about to occur which would constitute a reportable event within the meaning of Section 4043(c) of ERISA for which reporting has not been made; (iv) no DSO Pension Plan has any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code for which a waiver has not been obtained); and (v) no withdrawal liability has been incurred with respect to any DSO Pension Plan which is a multi-employer plan. (e) DSO has made available to KCI a list of each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' benefits, vacation benefits, severance benefits, disability benefits, death benefits, hospitalization benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock purchases, phantom stock, stock appreciation rights or other forms of incentive compensation or post-retirement insurance, compensation or benefits for employees, consultants or directors which (i) is not a DSO Employee Plan, (ii) is entered into, maintained or contributed to, as the case may be, by DSO or any of the DSO Subsidiaries and (iii) covers any employee or former employee of DSO or any of the DSO Subsidiaries. Such contracts, plans and arrangements as are described in this Section 2.8(e) are A-8 133 herein referred to collectively as the "DSO Benefit Arrangements." To DSO's knowledge, each DSO Benefit Arrangement has been maintained since May 19, 1991 in material compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such DSO Benefit Arrangement, is not currently under investigation, audit or review by the IRS or any other federal or state agency and no such actions are contemplated or under consideration, has no liability for any federal, state, local or foreign taxes and has no claim subject to dispute or litigation. DSO has made available to KCI or its counsel a complete and correct copy or description of each DSO Benefit Arrangement. (f) There has been no amendment to, written interpretation by or announcement (whether or not written) by DSO or any of the DSO Subsidiaries relating to, or change in employee participation or coverage under, any DSO Employee Plan or DSO Benefit Arrangement that would increase materially the expense of maintaining such DSO Employee Plan or DSO Benefit Arrangement above the level of the expense incurred in respect thereof from the fiscal year ended December 31, 1995. (g) DSO has provided, or will have provided prior to the Effective Time, to individuals entitled thereto all required notices and coverage pursuant to Section 4980B of the Code and the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), with respect to any "qualifying event" (as defined in Section 4980B(f)(3) of the Code) occurring prior to and including the Effective Time, and, to DSO's knowledge, no material tax payable on account of Section 4980B of the Code has been incurred with respect to any current or former employees (or their beneficiaries) of DSO or any of the DSO Subsidiaries. (h) No benefit payable or which may become payable by DSO or any of the DSO Subsidiaries pursuant to any DSO Employee Plan or any DSO Benefit Arrangement or as a result of or arising under this Agreement shall constitute an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code) which is subject to the imposition of an excise tax under Section 4999 of the Code or which would not be deductible by reasons of Section 280G of the Code. (i) No DSO Retirement Plan is the subject of any investigation, audit or inquiry by the United States Department of Labor or the PBGC and, at the Effective Time, all items on the Disclosure Schedule with respect to this Section 2.8(i) shall not be required to remain on the Disclosure Schedule in order to make this representation true and correct. 2.9 Labor Matters. (a) DSO and each of the DSO Subsidiaries has paid or made provision for the payment of all salaries, accrued wages and accrued vacation pay in the ordinary course of business and has complied in all material respects with all applicable laws, agreements, rules and regulations relating to the employment of labor, including those relating to wages, hours, collective bargaining and the payment and withholding of taxes, and has withheld and paid to the appropriate governmental authority, or is holding for payment not yet due to such authority, all amounts required by law or agreement to be withheld from the wages or salaries of its employees. (b) Neither DSO nor any of the DSO Subsidiaries is a party to any (i) outstanding employment agreements or contracts with officers or employees that are not terminable at will, or that provide for the payment of any bonus or commission, (ii) agreement, policy or practice that requires it to pay termination or severance pay to any employees (other than as required by law), (iii) collective bargaining agreement or other labor union contract applicable to persons employed by DSO or any DSO Subsidiary, nor, to the knowledge of DSO are there any activities or proceedings of any labor union to organize any such employees. DSO and the DSO Subsidiaries have made available to KCI complete and correct copies of all such agreements (the "Employment and Labor Agreements"). Neither DSO nor any of the DSO Subsidiaries has breached or otherwise failed to comply with any provisions of any of the Employment and Labor Agreement, and there are no grievances outstanding thereunder which would have a Material Adverse Effect. A-9 134 (c) With respect to DSO and the DSO Subsidiaries, (i) there is no unfair labor practice, charge or complaint pending before the National Labor Relations Board (the "NLRB"), (ii) there is no labor strike, material slowdown or material work stoppage or lockout actually pending or threatened against or affecting DSO or the DSO Subsidiaries, and neither DSO nor any of the DSO Subsidiaries has experienced any strike, material slowdown or material work stoppage, lockout or other collective labor action by or with respect to employees of DSO or the DSO Subsidiaries, (iii) there is no representation, claim or petition pending before the NLRB or a similar agency and no question concerning representation exists relating to the employees of DSO or the DSO Subsidiaries, (iv) there are no charges with respect to or relating to DSO or DSO Subsidiaries pending before the Equal Employment Opportunity Commission or any state, local, or foreign agency responsible for the prevention of unlawful employment practices, (v) neither DSO nor any of the DSO Subsidiaries has received formal notice from any federal, state, local or foreign agency responsible for the enforcement of labor or employment laws of an intention to conduct an investigation of DSO or the DSO Subsidiaries and no such investigation is in progress and (vi) the consents of the unions that are parties to any Employment and Labor Agreements are not required to complete the transactions contemplated by this Agreement. (d) Neither DSO nor any of the DSO Subsidiaries has caused any "plant closing" or "mass layoff" as such actions are defined in the Worker Adjustment and Retraining Notification Act, as codified at 29 U.S.C. sec.sec. 2101-2109, and the regulations promulgated thereunder, where DSO or the DSO Subsidiaries have failed to comply with the provisions of such act. 2.10 Absence of Undisclosed Liabilities. Except as and to the extent reflected, reserved against or otherwise disclosed in DSO's consolidated balance sheet (including the notes thereto) at December 31, 1995 (the "DSO Balance Sheet Date"), as disclosed in the Recent DSO SEC Documents or otherwise disclosed pursuant to this Agreement, neither DSO nor any of the DSO Subsidiaries had, at December 31, 1995, any liabilities or obligations of any nature (matured or unmatured, fixed or contingent) which would have a Material Adverse Effect on DSO. All reserves established by DSO and set forth in the consolidated balance sheet of DSO (including the notes thereto) at December 31, 1995 (the "DSO Balance Sheet") were reasonably adequate as required by generally accepted accounting principles. 2.11 Absence of Certain Changes or Events. Since the DSO Balance Sheet Date (and other than in compliance with Section 4.3) there has not occurred: (a) any change in the condition (financial or otherwise), properties, assets, liabilities, businesses, operations or results of operations of DSO and the DSO Subsidiaries, that constitutes or could reasonably be expected to result in a Material Adverse Effect; (b) any amendments or changes in the Certificate of Incorporation or Bylaws of DSO; (c) any damage, destruction or loss, whether covered by insurance or not, that constitutes or could reasonably be expected to result in a Material Adverse Effect; (d) any redemption, repurchase or other acquisition of shares of DSO Stock by DSO, or any declarations, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to DSO Stock; (e) any increase in or modification of the compensation or benefits payable or to become payable by DSO to any of its directors or employees, except pursuant to agreements or arrangements existing as of the DSO Balance Sheet Date; (f) any increase in or modification of any bonus, pension, insurance, DSO Employee Plan or DSO Benefit Arrangement (including, but not limited to, the granting of stock options, restricted stock awards or stock appreciation rights) made to, for or with any of its employees, other than pursuant to agreements or arrangements existing as of the DSO Balance Sheet Date; (g) any acquisition or sale of a material amount of property or assets of DSO, other than in the ordinary course of business consistent with past practice; A-10 135 (h) any alteration in any term of any outstanding security of DSO; (i) any (A) incurrence, assumption or guarantee by DSO of any debt for borrowed money or other obligation; (B) issuance or sale of any security convertible into or exchangeable for debt securities of DSO; or (C) issuance or sale of options or other rights to acquire from DSO, directly or indirectly, debt securities of DSO or any securities convertible into or exchangeable for any such debt securities; (j) any creation or assumption by DSO of any mortgage, pledge, security interest, lien or other encumbrance on any asset, except as would not have a Material Adverse Effect; (k) any making of any loan, advance or capital contribution to or investment in any person (as defined in Section 2.18) other than (i) travel loans or advances made in the ordinary course of business of DSO, (ii) other loans and advances in an aggregate amount which does not exceed $25,000 outstanding at any time and (iii) purchases on the open market of liquid, publicly traded securities; (l) any entering into or amendment, relinquishment, termination or non-renewal by DSO of any contract, lease transaction, commitment or other right or obligation other than in the ordinary course of business, except as would not have a Material Adverse Effect; (m) any transfer or grant of a right of any Intellectual Property Rights (as defined in Section 2.15 below) of DSO, other than those transferred or granted in the ordinary course of business; or (n) any agreement or arrangement made by DSO to take any action which, if taken prior to the date hereof, would have made any representation or warranty set forth in this Agreement untrue or incorrect as of the date when made unless otherwise disclosed. 2.12 No Default. Neither DSO nor any of the DSO Subsidiaries is in default under, and there exists no event, condition or occurrence which, after notice or lapse of time, or both, would constitute such a default by DSO or any of the DSO Subsidiaries under, any contract or agreement to which DSO or any of the DSO Subsidiaries is a party and which would, if terminated or modified, have, insofar as can reasonably be foreseen, a Material Adverse Effect. 2.13 Certain Agreements. Other than the DSO Options, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of DSO or any of the DSO Subsidiaries from DSO or any of the DSO Subsidiaries, under any DSO Employee Plan, DSO Benefit Arrangement or otherwise, (ii) increase any benefit otherwise payable under any DSO Employee Plan, DSO Benefit Arrangement or otherwise or (iii) result in the acceleration of the time of payment or vesting of any such benefits. 2.14 Taxes. (a) DSO and each of the DSO Subsidiaries have (i) duly and timely filed with the appropriate governmental authorities all Tax Returns (as defined in subsection (c) below) required to be filed by it, and has not filed for an extension to file any Tax Returns and such Tax Returns are true, complete and correct in all material respects, and (ii) duly paid in full or made adequate provision for the payment of all Taxes (as defined in subsection (b) below) shown to be due on such Tax Returns. Tax Returns referred to in clause (i) hereinabove have been examined by the IRS or the appropriate governmental authority through the returns for the year ending December 31, 1990 or the period of assessment of the Taxes in respect of which such Tax Returns were required to be filed has expired, all deficiencies asserted or assessments made as a result of such examination have been paid in full and no proceeding or examination by or in front of the relevant governmental authority in connection with the examination of any of the Tax Returns referred to in clause (i) hereinabove is currently pending. No claim has been made in writing to them by any authority in a jurisdiction where they do not file a Tax Return that they are or may be subject to Tax in such jurisdiction. No waivers of A-11 136 statutes of limitations have been given by or requested in writing to them with respect to any Taxes. They have not agreed to any extension of time with respect to any Tax deficiency. The liabilities and reserves for Taxes reflected in the DSO Balance Sheet as of March 31, 1996 will be adequate to cover all Taxes for all periods ending on or prior to such date, except for the payment of such Taxes which, alone or in the aggregate, would not have a Material Adverse Effect on them, and there are no liens for Taxes upon any property or asset of DSO or DSO Subsidiaries, except for liens for Taxes not yet due. There are no unresolved issues of law or fact arising out of a notice of deficiency, proposed deficiency or assessment from the IRS or any other governmental taxing authority with respect to their Taxes which, if decided adversely, singly or in the aggregate, would have a Material Adverse Effect on them. They are not parties to any agreement providing for the allocation or sharing of Taxes with any entity. They have not, with regard to any asset or property held, acquired or to be acquired by them, filed a consent to the application of Section 341(f) of the Code. They have withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party, except for such taxes which, alone or in the aggregate, would not have a Material Adverse Effect on them. No Tax is required to be withheld by them pursuant to Section 1445 of the Code as a result of the transfer contemplated by this Agreement. As a result of the Merger, they will not be obligated to make a payment to any individual that would be a "parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future. (b) For purposes of this Agreement, the term "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, excise, property, sales, withholdings, social security, occupation, use, service, service use, license, payroll, franchise, transfer and recording taxes, fees and charges, imposed by the United States or any state, local or foreign government or subdivision or agency thereof whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, fines, penalties or additional amounts attributable to or imposed with respect to any such taxes, charges, fees, levies or other assessments. (c) For purposes of this Agreement, the term "Tax Return" shall mean any return, report or other document or information required to be supplied to a taxing authority in connection with Taxes. 2.15 Intellectual Property. DSO and the DSO Subsidiaries own, or have the right to use, sell or license all material Intellectual Property Rights (as defined below) necessary or required for the conduct of their respective businesses as presently conducted and such rights to use, sell or license are reasonably sufficient for such conduct of their respective businesses. To DSO's knowledge, neither DSO nor any DSO Subsidiary is infringing or otherwise violating Intellectual Property Rights of any person, which infringement or violation would subject DSO or any DSO Subsidiary to a liability which, individually or in the aggregate, would have a Material Adverse Effect. No claim has been made or, to DSO's knowledge, threatened against DSO or any DSO Subsidiary alleging any such violation which will have a Material Adverse Effect. As used herein, the term "Intellectual Property Rights" shall mean all worldwide industrial and intellectual property rights, including, without limitation, patents, patent applications, patent rights, trademarks, trademark applications, trade names, service marks, service mark applications, copyrights, copyright applications, franchises, licenses, inventories, know-how, trade secrets, customer lists, proprietary processes and formulae, all source and object codes, algorithms, architecture, structures, display screens, layouts, inventions, development tools and all documentation and media constituting, describing or relating to the above, including, without limitation, manuals, memoranda, and records. 2.16 Fees and Expenses. Except for Salomon Brothers, Inc., neither DSO nor any of the DSO Subsidiaries has paid or become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated by this Agreement. A-12 137 2.17 Environmental Matters. (a) DSO and the DSO Subsidiaries have duly complied with, and the real property, equipment, businesses, operations and assets of each are in compliance with, the provisions of the Comprehensive Environmental Response Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Toxic Substances Control Act, the Safe Drinking Water Act, the Pollution Prevention Act of 1990, the National Environmental Policy Act and any other law, statute, ordinance or regulation relating to the protection of the public health and/or the environment, whether promulgated by the United States, any state, municipality and/or other governmental body, each as amended (hereinafter collectively referred to as "Environmental Laws"), except where any such failures to comply, when taken in the aggregate, will not have a Material Adverse Effect. (b) To the best of the knowledge of DSO, with respect to DSO and the DSO Subsidiaries, there are no conditions presently existing which may reasonably be expected to lead to: (i) responsibilities or liability, or an assertion thereunder by any governmental entity or private person, pursuant to any Environmental Law the subject of which is the management and disposal of toxic or hazardous substances or wastes (intended hereby and hereafter to include any and all such materials listed in any foreign, federal, state or local law, statute, code or ordinance and all rules and regulations promulgated thereunder, as hazardous or potentially hazardous and, if not so listed, asbestos, lead and petroleum) or (ii) tort claims based on an action or inaction of DSO or any of the DSO Subsidiaries relating to the management and disposal of toxic or hazardous substances or wastes prior to the Effective Time, except where any such failures to comply, when taken in the aggregate, will not have a Material Adverse Effect. (c) DSO and the DSO Subsidiaries have been issued, will maintain until the Effective Time and will cause to remain in effect immediately thereafter, all required foreign, federal, state and local permits, licenses, certificates and approvals relating to (i) air emissions, (ii) discharges to surface water or ground water, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes and (vi) any other environmental, health or safety matters, except where any such failures to comply, when taken in the aggregate, will not have a Material Adverse Effect. (d) DSO and the DSO Subsidiaries have neither received notice of, nor know of, nor have any reason to suspect, any fact(s) which might constitute violation(s) of any Environmental Laws which remain uncured, except where the failure to cure any such violation(s), when taken in the aggregate, will not have a Material Adverse Effect. (e) To the best of the knowledge of DSO, with respect to DSO and the DSO Subsidiaries, there has been, no emission, spill, release or discharge in violation of Environmental Laws, whether on real property, adjacent sites or at any other location or disposal site, into or upon (i) the air, (ii) soils or improvements, (iii) surface water or ground water, or (iv) the sewer, septic system or waste treatment, storage or disposal system servicing real property, of any toxic or hazardous substances or wastes used, stored, generated, treated or disposed at or from the real property (any of which events is hereafter referred to as a "Hazardous Discharge"), which, when taken in the aggregate, will have a Material Adverse Effect. To the best of the knowledge of DSO, there is not located on the real property used by DSO and the DSO Subsidiaries toxic or hazardous substances or wastes in violation of Environmental Laws, which, when taken in the aggregate, will have a Material Adverse Effect. (f) With respect to DSO and the DSO Subsidiaries, there has been no complaint, order, directive, claim, citation or notice received from any governmental authority or any other person or entity with respect to (i) air emissions, (ii) spills, releases or discharges to soil or any improvements located thereon, surface water, ground water or the sewer, septic system or waste treatment, storage or disposal systems servicing the real property and the business conducted thereon, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or A-13 138 disposal of toxic or hazardous substances or wastes or (vi) other environmental, health or safety matters affecting DSO or any DSO Subsidiary, the real property used by DSO and the DSO Subsidiaries, any improvements located thereon or the business conducted thereon (any of which is hereafter referred to as an "Environmental Complaint") which, when taken in the aggregate, will result in a Material Adverse Effect. (g) With respect to DSO and the DSO Subsidiaries, there has been no lien asserted or created by any foreign, federal, state or local authority upon any or all of the assets, equipment, real property or other facilities of DSO and the DSO Subsidiaries by reason of a Hazardous Discharge or Environmental Complaint initiated or occurring prior to the Effective Time, except any which, when taken in the aggregate, will not have a Material Adverse Effect. (h) For the purposes of this Section 2.17, the term "DSO and DSO Subsidiaries" shall also mean subsidiaries or other properties previously owned or operated by DSO or a DSO Subsidiary, either directly or indirectly, which would create liability for DSO or the DSO Subsidiary by virtue of their prior ownership. (i) DSO has made available to KCI all environmental studies and reports pertaining or relating in any way to the real property or equipment owned, occupied or leased by DSO or the DSO Subsidiaries or otherwise relating or pertaining to the business, operations or assets of DSO and the DSO Subsidiaries. 2.18 Interested Party Transactions. (a) As of the date hereof, neither DSO nor any of the DSO Subsidiaries is a party to any oral or written (i) consulting or similar agreement with any present or former director, officer or employee or any entity controlled by any such person not terminable on thirty days' or less notice involving the payment of more than $100,000 per annum, (ii) agreement with any executive officer or other key employee, the benefits of which are contingent or the terms of which are materially altered, upon the occurrence of a transaction involving it of the nature contemplated by this Agreement, (iii) agreement with respect to any executive officer or other key employee of it providing any term of employment or compensation guarantee extending for a period longer than one year or for the payment in excess of $100,000 per annum, or (iv) except for the DSO Options, agreement or plan, including any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of the transactions contemplated by this Agreement. (b) Neither DSO nor any of the DSO Subsidiaries is indebted for money borrowed, either directly or indirectly from any of its officers, directors, or any Affiliate (as defined below) in any amount whatsoever, nor are any of its officers, directors, or Affiliates indebted for money borrowed from it; nor are there any transactions of a continuing nature between it and any of its officers, directors, or Affiliates (other than the regular employment of such persons) which will continue beyond the Effective Time, including, without limitation, use of its assets for personal benefit with or without adequate compensation. For the purpose of this Agreement, the term "Affiliate" shall mean any person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified. As used in the foregoing definition, the term (i) "control" shall mean the power through the ownership of voting securities, contract or otherwise to direct the affairs of another person and (ii) "person" shall mean an individual, firm, trust, association, corporation, partnership, government (whether federal, state, local or other political subdivision, or any agency or bureau of any of them) or other entity. 2.19 Contracts. (a) Neither DSO nor any of the DSO Subsidiaries is a party to any contracts, agreements, commitments and other instruments (whether oral or written), other than current insurance policies, A-14 139 that (i) involve an expenditure by such party or require the performance of services or delivery of goods to, by, through, on behalf of or for the benefit of such party, which in each case, relates to a contract, commitment or instrument that requires payments in excess of $25,000 per year and (ii) involve an obligation for the performance of services or delivery of goods by such party that cannot, or in reasonable probability will not be performed within thirty days from the dates as of which these representations are made, except for arrangements for the manufacture or supply of products and for the purchase or sale of merchandise or services entered into the ordinary course of business. (b) All of the material contracts, agreements, commitments and other instruments that either DSO or any of the DSO Subsidiaries is a party to, or by which any of them is bound, are valid and binding upon such party and the other parties thereto and are in full force and effect and enforceable in accordance with their terms, and neither such party nor any other party to any such contract, agreement, commitment or other instrument has breached any provision thereof, and no event has occurred, in each case, which, with the lapse of time or action by a third party, could result in a default under the terms thereof which, alone or in the aggregate, would have a Material Adverse Effect, and there are no existing facts or circumstances which would prevent such party's contracts and agreements for the sale of goods from maturing in due course into fully collectible accounts receivable, except where such failure would have a Material Adverse Effect. 2.20 Title to Properties. DSO and the DSO Subsidiaries have good and marketable title to all of their real and other properties and assets, tangible and intangible, as reflected in the DSO Balance Sheet, except as since sold or otherwise disposed of in the ordinary course of business, free and clear of all claims and encumbrances other than (i) specifically disclosed in the DSO Balance Sheet, (ii) any liens for taxes not yet due and payable or being contested, and (iii) such imperfections of title, covenants, restrictions, easements and encumbrances, if any, as do not materially detract from the value or materially interfere with the present use of any of the properties or otherwise materially impair the business operations or the financial condition of DSO and the DSO Subsidiaries taken as a whole. 2.21 Insurance. DSO and the DSO Subsidiaries have insurance covering casualty, fire, liability, worker's compensation and disability (the "DSO Policies") providing coverage and having limitations and deductibles that are customary for a business of the type operated by them and sufficient for compliance in all material respects with all requirements of law and of all agreements to which DSO and the DSO Subsidiaries are a party, and such DSO Policies will be in full force and effect for all periods up to and including the Effective Time, and no notice of cancellation or termination has been received with respect to any of the DSO Policies. There are no pending claims under or relating to any of the DSO Policies, which, individually or in the aggregate, would have a Material Adverse Effect. 2.22 Board Approval. The Board of Directors of DSO has, as of the date hereof, unanimously (i) approved this Agreement and the Merger, (ii) approved the Voting Agreement between DSO and Contran Corporation, (iii) determined that the Merger is in the best interests of the stockholders of DSO and is on terms that are fair to such stockholders and (iv) resolved to recommend that the stockholders of DSO approve this Agreement and the Merger. 2.23 Vote Required. Except as required by applicable law, the affirmative vote of holders of a majority of the outstanding shares of DSO Stock voting as a single class is the only vote of the holders of any class or series of DSO's capital stock necessary to approve this Agreement and the Merger. 2.24 Disclosure. No representation or warranty made by DSO in this Agreement, nor any document, written information, statement, financial statement, certificate or exhibit prepared and furnished or to be prepared and furnished by DSO or its representatives pursuant hereto or in connection with the transactions contemplated hereby, when taken together, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements or facts contained herein or therein, not misleading in light of the circumstances under which they are furnished. A-15 140 2.25 Fairness Opinion. DSO's Board of Directors has received a written opinion from Salomon Brothers, Inc. that as of the date hereof the Exchange Ratio is fair to DSO's stockholders from a financial point of view. 2.26 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon DSO or any of the DSO Subsidiaries that has or could reasonably be expected to have the effect of prohibiting or impairing any business practice of DSO or any of the DSO Subsidiaries, any acquisition of property by DSO or any of the DSO Subsidiaries or the conduct of business by DSO or any of the DSO Subsidiaries as currently conducted, which would have a Material Adverse Effect. 2.27 DSO Rights Agreement. The Rights Agreement, dated as of February 20, 1989, between the Company and Harris Trust & Savings Bank, as amended (the "Rights Agreement"), shall be amended so as to provide (i) that the execution of the Merger Agreement and the consummation of the transactions contemplated thereby shall not cause any of the rights (as defined in the Rights Agreement) to become exercisable in accordance with the terms of the Rights Agreement, and (ii) that the Rights Agreement shall terminate at the Effective Time. 2.28 Propriety of Past Payments. No funds or assets of DSO or any of the DSO Subsidiaries have been used for an illegal purpose, nor have any unrecorded funds or assets of DSO or the DSO Subsidiaries been established for any purposes. No accumulation or use of DSO's or the DSO Subsidiaries' corporate funds or assets has been made without being properly accounted for in their respective books and records and all payments by or on behalf of DSO or the DSO Subsidiaries have been duly and properly recorded and accounted for in their respective books and records. No false or artificial entry has been made in the books and records of DSO or the DSO Subsidiaries for any reason (except in the case of unaudited financial statements, for year-end adjustments). No payment has been made by or on behalf of DSO or the DSO Subsidiaries with the understanding that any part of such payment is to be used for any purpose other than that described in the document supporting such payment, and neither DSO nor any of the DSO Subsidiaries has made, directly or indirectly, any illegal contributions to any political party or candidate, either domestic or foreign. Neither the IRS nor any other federal, state, local or foreign government agency or entity has initiated or threatened any investigation of any payment made by DSO or the DSO Subsidiaries of, or alleged to be of, the type described in this Section 2.28. 3. REPRESENTATIONS AND WARRANTIES OF KCI Except as set forth in a schedule dated the date of this Agreement and delivered by KCI to DSO concurrently herewith (the "KCI Disclosure Schedule") or as disclosed in the Recent KCI SEC Documents (as defined in Section 3.4), KCI represents and warrants to DSO as set forth below. 3.1 Organization; Good Standing; Qualification and Power. KCI and each of its subsidiaries, including corporations, partnerships, trusts or any other type of entity (the "KCI Subsidiaries") is duly organized, validly existing and in good standing under the laws of the state of its incorporation or organization, has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification necessary or where the failure to so qualify would not have a Material Adverse Effect. The KCI Disclosure Schedule sets forth a complete and correct list of the KCI Subsidiaries. KCI has made available to DSO or its counsel complete and correct copies of the Certificates or Articles of Incorporation and Bylaws of KCI and each of the KCI Subsidiaries, in each case as amended to the date of this Agreement. 3.2 Capital Structure. (a) Stock and Options. The authorized capital stock of KCI consists of 12,000,000 shares of KCI Common Stock, and 500,000 shares of preferred stock, no par value. At the close of business on June 17, 1996, 5,688,558 shares of KCI Common Stock were issued and outstanding, no shares of A-16 141 KCI Preferred Stock were issued and outstanding, 1,134 shares of KCI Common Stock were held by KCI in its treasury, and 348,100 shares of KCI Common Stock were reserved for issuance upon the exercise of outstanding options to purchase KCI Common Stock (the "KCI Options"). All outstanding shares of KCI Stock are validly issued, fully paid and nonassessable and not subject to preemptive rights. All outstanding shares of the capital stock of each of the KCI Subsidiaries are validly issued, fully paid and nonassessable and are owned by KCI or one of the KCI Subsidiaries free and clear of any liens, security interests, pledges, agreements, claims, charges or encumbrances. KCI has made available to DSO, a true and correct copy of the Keystone Consolidated Industries, Inc. 1992 Incentive Compensation Plan and the Keystone Consolidated Industries, Inc. 1992 Non-Employee Director Stock Option Plan (collectively, the "KCI Plans"), and a complete and correct list of each KCI Option outstanding as of the date hereof, including the name of the holder of each such KCI Option, the KCI Plan pursuant to which each such KCI Option was issued, the security and number of shares covered by each such KCI Option, the per share exercise price of each such KCI Option and the vesting schedule applicable to each such KCI Option. (b) No Other Commitments. Except for the KCI Options, there are no options, warrants, calls, rights, commitments, conversion rights or agreements of any character to which KCI or any of the KCI Subsidiaries is a party or by which KCI or any of the KCI Subsidiaries is bound, obligating KCI or any of the KCI Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, any shares of capital stock of KCI or any of the KCI Subsidiaries or securities convertible into or exchangeable for shares of capital stock of KCI or any of the KCI Subsidiaries, or obligating KCI or any of the KCI Subsidiaries to grant, extend or enter into any such option, warrant, call, right, commitment, conversion right or agreement. There are no voting trusts or other agreements or understandings to which KCI is a party or, as of the date hereof, of which KCI has knowledge, with respect to the voting of the capital stock of KCI or any of the KCI Subsidiaries. 3.3 Authority. (a) Corporate Action. KCI has the requisite corporate power and authority to enter into this Agreement and, subject to approval of this Agreement and the Merger by the stockholders of KCI, to perform its obligations hereunder and to consummate the Merger and the other transactions contemplated by this Agreement. The execution and delivery of this Agreement by KCI and, subject to approval of this Agreement and the Merger by the stockholders of KCI, the consummation by KCI of the Merger and the other transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of KCI. This Agreement has been duly executed and delivered by KCI, and this Agreement is a valid and binding obligation of KCI, enforceable in accordance with its terms, except that such enforceability may be subject to (i) bankruptcy, insolvency, reorganization or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. (b) No Conflict. Subject to approval of this Agreement and the Merger by the stockholders of KCI, neither the execution, delivery and performance of this Agreement or the Certificate of Merger, nor the consummation of the transactions contemplated hereby or thereby, nor compliance with the provisions hereof or thereof will conflict with, or result in any violation of, or cause a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, amendment, cancellation or acceleration of any obligation contained in, or the loss of any material benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the material properties or assets of KCI or any of the KCI Subsidiaries under any term, condition or provision of (i) the Certificates or Articles of Incorporation or Bylaws of KCI or any of the KCI Subsidiaries or (ii) any material agreement, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to KCI or any of the KCI Subsidiaries or their respective properties or assets, other than any such conflicts, violations, defaults, losses, liens, security interests, charges, or encumbrances which, individually or in the aggregate, would not have a Material Adverse Effect. A-17 142 (c) Governmental Consents. No consent, approval or authorization of, or registration, declaration or filing with any Governmental Entity is required to be obtained by KCI or any of the KCI Subsidiaries in connection with the execution and delivery of this Agreement or the Certificate of Merger or the consummation of the transaction contemplated hereby or thereby except for (i) the filing with the SEC of (A) the Form S-4 and the declaration of its effectiveness, (B) the Prospectus/Proxy Statement relating to the meeting of the stockholders of KCI (the "KCI Stockholders Meeting") to be held with respect to the approval by KCI's stockholders of this Agreement and the Merger, (C) the filing contemplated by Section 1.3(b) hereof, and (D) such reports and information under the Exchange Act and the rules and regulations promulgated by the SEC thereunder, as may be required in connection with this Agreement and the transactions contemplated hereby; (ii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with relevant authorities of other states in which KCI is qualified to do business; (iii) such filings, authorizations, orders and approvals as may be required under the State Anti-Takeover Laws; (iv) such filings, authorizations, orders and approvals as may be required under foreign laws, state securities laws and the rules of the NYSE; (v) such filings and notifications as may be necessary under the HSR Act; and (vi) where the failure to obtain such consents, approvals, etc. would not prevent or delay the consummation of the Merger or otherwise prevent KCI from performing its obligations under this Agreement and would not reasonably be expected to have a Material Adverse Effect. 3.4 SEC Documents. (a) SEC Reports. KCI has made available to DSO or its counsel complete and correct copies of each report, schedule, registration statement and definitive proxy statement filed by KCI with the SEC on or after January 1, 1991 (the "KCI SEC Documents"), which are all the documents (other than preliminary material) that KCI was required to file with the SEC on or after such date. As of their respective dates or, in the case of registration statements, their effective dates (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), none of the KCI SEC Documents (including all exhibits and schedules thereto and documents incorporated by reference herein) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and the KCI SEC Documents complied when filed in all material respects with the then applicable requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations promulgated by the SEC thereunder. KCI has filed all documents and agreements which were required to be filed as exhibits to the KCI SEC Documents. For purposes hereof, "Recent KCI SEC Documents" shall mean the most recent annual report on Form 10-K of KCI, together with the most recent quarterly report on Form 10-Q of KCI for any quarter subsequent to the annual period covered by such Form 10-K, together with any current reports on Form 8-K filed by KCI subsequent to such most recent Form 10-Q. (b) Financial Statements. The financial statements of KCI included in the KCI SEC Documents complied as to form in all material respects with the then applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may have been indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-Q promulgated by the SEC) and fairly present (subject, in the case of the unaudited statements, to normal, year-end audit adjustments) the consolidated financial position of KCI and its consolidated KCI Subsidiaries as at the respective dates thereof and the consolidated results of their operations and cash flows for the respective periods then ended. 3.5 Information Supplied. None of the information supplied or to be supplied by KCI for inclusion or incorporation by reference in the Form S-4 and Prospectus/Proxy Statement will, at the time the Form S-4 is declared effective, at the date the Prospectus/Proxy Statement is mailed to the stockholders A-18 143 of KCI and at the time of the KCI Stockholders Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. The material to be supplied by KCI in respect of the Prospectus/Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations promulgated by the SEC thereunder. 3.6 Compliance with Applicable Law. The businesses of KCI and the KCI Subsidiaries are not being conducted in violation of any law, ordinance, regulation, rule or order of any Governmental Entity where such violation would have a Material Adverse Effect. Except as disclosed in the KCI SEC Documents filed prior to the date of this Agreement or where such notification would not reasonably be expected to result in a Material Adverse Effect, KCI has not been notified by any Governmental Entity that any investigation or review with respect to KCI or any of the KCI Subsidiaries is pending or threatened, nor has any Governmental Entity notified KCI of its intention to conduct the same. KCI and the KCI Subsidiaries have all material permits, licenses and franchises from Governmental Entities required to conduct their businesses as now being conducted, except for those whose absence would not have a Material Adverse Effect. 3.7 Litigation and Legal Matters. There is no suit, action, arbitration, demand, claim or proceeding pending or threatened against KCI or any of the KCI Subsidiaries, or any of their officers, directors, employees or agents involving, affecting or relating to any assets, operations or properties of KCI or the KCI Subsidiaries, or any KCI Employee Plans (as defined in Section 3.8), nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against KCI or any of the KCI Subsidiaries that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. KCI has made available to DSO or its counsel complete and correct copies of all correspondence prepared by its counsel for KCI's auditors in connection with the last five (5) completed audits of KCI's financial statements and any such correspondence since the date of the last such audit. 3.8 ERISA and Other Compliance. (a) KCI has made available to DSO a list of all employees of KCI and of any KCI Subsidiary, and their salaries as of the date of this Agreement. KCI has made available to DSO (i) a copy of each "employee benefit plan," as defined in Section 3(3) of ERISA, and (ii) a copy of all other written or formal plans or agreements involving direct or indirect compensation or benefits (including any employment agreements entered into by KCI or any of the KCI Subsidiaries, but excluding workers' compensation, unemployment compensation and other government-mandated programs) currently maintained, contributed to or entered into by KCI or any of the KCI Subsidiaries under which KCI or any of the KCI Subsidiaries or any ERISA Affiliate thereof has any present or future obligation or liability (collectively, the "KCI Employee Plans"). Copies of all KCI Employee Plans (and, if applicable, related trust agreements), all amendments thereto and all summary plan descriptions, other than plans which are multiemployer plans within the meaning of Title IV of ERISA, have been made available to DSO or its counsel, together with the three (3) most recent annual reports (Forms 5500) prepared in connection with any such KCI Employee Plans. Each KCI Pension Plan (as defined below) operates in accordance with the reporting and disclosure requirements imposed under ERISA and the Code except for such noncompliance which would not have a Material Adverse Effect. Copies of all KCI Employee Plans which individually or collectively would constitute an "employee pension benefit plan," as defined in Section 3(2) of ERISA (collectively, the "KCI Pension Plans"), have been made available to DSO. Except for funding waivers which have been obtained, all contributions due from KCI or any of the KCI Subsidiaries through March 31, 1996 with respect to any of the KCI Employee Plans have been made as required under ERISA or have been accrued in accordance with generally accepted accounting principles on KCI's or any such KCI Subsidiary's financial statements as of March 31, 1996. Each KCI Employee Plan has been maintained since May 19, 1991 in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and A-19 144 regulations, including, without limitation, ERISA and the Code, which are applicable to such KCI Employee Plans except for such noncompliance which would not have a Material Adverse Effect. (b) No KCI Pension Plan constitutes, or has since May 19, 1991 constituted, a "multiemployer plan," as defined in Section 3(37) of ERISA. No KCI Pension Plans other than the Keystone-Bartonville Pension Plan, the Keystone Steel & Wire Company Pension Plan and the Sherman Wire Pension Plan (collectively, the "KCI Retirement Plans") are subject to Title IV of ERISA. No "prohibited transaction," as defined in Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any KCI Employee Plan which is covered by Title I of ERISA which would result in a material liability to KCI and the KCI Subsidiaries taken as a whole, excluding transactions effected pursuant to a statutory or administrative exemption. To the best of the knowledge of the officers of KCI, nothing done or omitted to be done and no transaction or holding of any asset under or in connection with any KCI Employee Plan has or will make KCI or any officer or director of KCI subject to any material liability under Title I of ERISA or liable for any material tax or penalty pursuant to Sections 4972, 4975, 4976 or 4979 of the Code or Section 502 of ERISA. No KCI Pension Plan is liable for any federal, state or local taxes other than unrelated business taxable income as defined in Section 512 of the Code. (c) To the best knowledge of the officers of KCI, each KCI 401(a) Plan is qualified under Section 401(a) of the Code and has been so qualified during the period from May 19, 1991 to date, and the trust forming a part thereof is exempt from tax pursuant to Section 501(c) of the Code. Each KCI 401(a) Plan operates in accordance with its terms and, to KCI's knowledge, there exists no fact which would adversely affect its qualified status. No KCI 401(a) Plan is currently under investigation, audit or review by the IRS, nor is such action contemplated and the IRS has not asserted that any KCI Pension Plan is not qualified under Section 401(a) of the Code or that any trust established under a KCI Pension Plan is not exempt under Section 501(a) of the Code. (d) With respect to each KCI Pension Plan which is a defined benefit plan under Section 414(j) of the Code and each defined contribution plan under Section 414(i) of the Code: (i) no liability to the PBGC under Sections 406 - 4064 of ERISA has been incurred by KCI or the KCI Subsidiaries since May 19, 1991 and all premiums due and owing to the PBGC have been timely paid; (ii) the PBGC has notified neither KCI, any of the KCI Subsidiaries nor any KCI Pension Plan of the commencement of proceedings under Section 4042 of ERISA to terminate any such plan; (iii) since May 19, 1991, no event has occurred, or to KCI's knowledge is threatened or is about to occur which would constitute a reportable event within the meaning of Section 4043(c) of ERISA for which reporting has not been made; and (iv) no KCI Pension Plan has any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code for which a waiver has not been obtained). (e) KCI has made available to DSO a list of each employment, severance or other similar contract, arrangement or policy and each plan or arrangement (written or oral) providing for insurance coverage (including any self-insured arrangements), workers' benefits, vacation benefits, severance benefits, disability benefits, death benefits, hospitalization benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, stock purchases, phantom stock, stock appreciation rights or other forms of incentive compensation or post-retirement insurance, compensation or benefits for employees, consultants or directors which (i) is not a KCI Employee Plan, (ii) is entered into, maintained or contributed to, as the case may be, by KCI or any of the KCI Subsidiaries and (iii) covers any employee or former employee of KCI or any of the KCI Subsidiaries. Such contracts, plans and arrangements as are described in this Section 3.8(e) are herein referred to collectively as the "KCI Benefit Arrangements". To KCI's knowledge, each KCI Benefit Arrangement has been maintained since May 19, 1991 in material compliance with its terms A-20 145 and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such KCI Benefit Arrangement, is not currently under investigation, audit or review by the IRS or any other federal or state agency and no such actions are contemplated or under consideration, has no liability for any federal, state, local or foreign taxes and has no claim subject to dispute or litigation. KCI has made available to DSO or its counsel a complete and correct copy or description of each KCI Benefit Arrangement. (f) There has been no amendment to, written interpretation by or announcement (whether or not written) by KCI or any of the KCI Subsidiaries relating to, or change in employee participation or coverage under, any KCI Employee Plan or KCI Benefit Arrangement that would increase materially the expense of maintaining such KCI Employee Plan or KCI Benefit Arrangement above the level of the expense incurred in respect thereof from the fiscal year ended December 31, 1995. (g) KCI has provided, or will have provided prior to the Effective Time, to individuals entitled thereto all required notices and coverage pursuant to Section 4980B of the Code and COBRA, with respect to any "qualifying event" (as defined in Section 4980B(f)(3) of the Code) occurring prior to and including the Effective Time, and no material tax payable on account of Section 4980B of the Code has been incurred with respect to any current or former employees (or their beneficiaries) of KCI or any of the KCI Subsidiaries. (h) No benefit payable or which may become payable by KCI or any of the KCI Subsidiaries pursuant to any KCI Employee Plan or any KCI Benefit Arrangement or as a result of or arising under this Agreement shall constitute an "excess parachute payment" (as defined in Section 280G(b)(1) of the Code) which is subject to the imposition of an excise tax under Section 4999 of the Code or which would not be deductible by reasons of Section 280G of the Code. 3.9 Labor Matters. (a) KCI and each of the KCI Subsidiaries has paid or made provision for the payment of all salaries and accrued wages in the ordinary course of business and has complied in all material respects with all applicable laws, agreements, rules and regulations relating to the employment of labor, including those relating to wages, hours, collective bargaining and the payment and withholding of taxes, and has withheld and paid to the appropriate governmental authority, or is holding for payment not yet due to such authority, all amounts required by law or agreement to be withheld from the wages or salaries of its employees. (b) Neither KCI nor any of the KCI Subsidiaries is a party to any (i) outstanding employment agreements or contracts with officers or employees that are not terminable at will, or that provide for the payment of any bonus or commission, (ii) agreement, policy or practice that requires it to pay termination or severance pay to any employees (other than as required by law), (iii) collective bargaining agreement or other labor union contract applicable to persons employed by KCI or any KCI Subsidiary, nor, to the knowledge of KCI, are there any activities or proceedings of any labor union to organize any such employees. KCI and the KCI Subsidiaries have made available to DSO complete and correct copies of all such agreements (the "KCI Employment and Labor Agreements"). Neither KCI nor any of the KCI Subsidiaries has breached or otherwise failed to comply with any provisions of any KCI Employment and Labor Agreement, and there are no grievances outstanding which will have a Material Adverse Effect. (c) With respect to KCI and the KCI Subsidiaries, (i) there is no unfair labor practice, charge or complaint pending before the NLRB, (ii) there is no labor strike, material slowdown or material work stoppage or lockout actually pending or threatened against or affecting KCI or the KCI Subsidiaries, and neither KCI nor any of the KCI Subsidiaries has experienced any strike, material slowdown or material work stoppage, lockout or other collective labor action by or with respect to employees of KCI or the KCI Subsidiaries, (iii) there is no representation, claim or petition pending before the NLRB or a similar agency and no question concerning representation exists relating to the employees of KCI or the KCI Subsidiaries, (iv) there are no charges with respect to or relating to A-21 146 KCI or KCI Subsidiaries pending before the Equal Employment Opportunity Commission or any state, local, or foreign agency responsible for the prevention of unlawful employment practices, (v) neither KCI nor any of the KCI Subsidiaries has received formal notice from any federal, state, local or foreign agency responsible for the enforcement of labor or employment laws of an intention to conduct an investigation of KCI or the KCI Subsidiaries and no such investigation is in progress and (vi) the consents of the unions that are parties to any Employment and Labor Agreements are not required to complete the transactions contemplated by this Agreement. (d) Neither KCI nor any of the KCI Subsidiaries has caused any "plant closing" or "mass layoff" as such actions are defined in the Worker Adjustment and Retraining Notification Act, as codified at 29 U.S.C. sec.sec. 2101-2109, and the regulations promulgated thereunder, where KCI or the KCI Subsidiaries have failed to comply with the provisions of such act. 3.10 Absence of Undisclosed Liabilities. Except as and to the extent reflected, reserved against or otherwise disclosed in KCI's consolidated balance sheet (including the notes thereto) at December 31, 1995 (the "KCI Balance Sheet Date"), as disclosed in the Recent KCI SEC Documents or otherwise disclosed pursuant to this Agreement, neither KCI nor any of the KCI Subsidiaries had, at December 31, 1995, any liabilities or obligations of any nature (matured or unmatured, fixed or contingent) which would have a Material Adverse Effect on KCI. All reserves established by KCI and set forth at the December 31, 1995 consolidated balance sheet of KCI (including the notes thereto) (the "KCI Balance Sheet") were reasonably adequate as required by generally accepted accounting principles. 3.11 Absence of Certain Changes or Events. Since the KCI Balance Sheet Date (and other than in compliance with Section 5.3) there has not occurred: (a) any change in the condition (financial or otherwise), properties, assets, liabilities, businesses, operations or results of operations of KCI and the KCI Subsidiaries, that constitutes or could reasonably be expected to result in a Material Adverse Effect; (b) any amendments or changes in the Certificate of Incorporation or Bylaws of KCI; (c) any damage, destruction or loss, whether covered by insurance or not, that constitutes or could reasonably be expected to result in a Material Adverse Effect; (d) any redemption, repurchase or other acquisition of shares of KCI Stock by KCI, or any declarations, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to KCI Stock; (e) any material increase in or modification of the compensation or benefits payable or to become payable by KCI to any of its directors or employees, except in the ordinary course of business consistent with past practice or pursuant to agreements or arrangements existing as of the KCI Balance Sheet Date; (f) any material increase in or modification of any bonus, pension, insurance, KCI Employee Plan or KCI Benefit Arrangement (including, but not limited to, the granting of stock options, restricted stock awards or stock appreciation rights) made to, for or with any of its employees, other than in the ordinary course of business consistent with past practice or pursuant to agreements or arrangements existing as of the KCI Balance Sheet Date; (g) any acquisition or sale of a material amount of property or assets of KCI, other than in the ordinary course of business consistent with past practice; (h) any alteration in any term of any outstanding security of KCI; (i) any (A) incurrence, assumption or guarantee by KCI of any debt for borrowed money or other obligation; (B) issuance or sale of any security convertible into or exchangeable for debt securities of KCI; or (C) issuance or sale of options or other rights to acquire from KCI, directly or indirectly, debt securities of DSO or any securities convertible into or exchangeable for any such debt securities; A-22 147 (j) any creation or assumption by KCI of any mortgage, pledge, security interest, lien or other encumbrance on any asset, except as would not have a Material Adverse Effect; (k) any making of any loan, advance or capital contribution to or investment in any person (as defined in Section 3.18) other than (i) travel loans or advances made in the ordinary course of business of KCI, (ii) other loans and advances in an aggregate amount which does not exceed $25,000 outstanding at any time and (iii) purchases on the open market of liquid, publicly traded securities; (l) any entering into or amendment, relinquishment, termination or non-renewal by KCI of any contract, lease transaction, commitment or other right or obligation other than in the ordinary course of business, except as would not have a Material Adverse Effect; (m) any transfer or grant of a right under KCI's Intellectual Property Rights, other than those transferred or granted in the ordinary course of business; or (n) any agreement or arrangement made by KCI to take any action which, if taken prior to the date hereof, would have made any representation or warranty set forth in this Agreement untrue or incorrect as of the date when made unless otherwise disclosed. 3.12 No Default. Neither KCI nor any of the KCI Subsidiaries is in default under, and there exists no event, condition or occurrence which, after notice or lapse of time, or both, would constitute such a default by KCI or any of the KCI Subsidiaries under, any contract or agreement to which KCI or any of the KCI Subsidiaries is a party and which would, if terminated or modified, have, insofar as can reasonably be foreseen, a Material Adverse Effect. 3.13 Certain Agreements. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of KCI or any of the KCI Subsidiaries from KCI or any of the KCI Subsidiaries, under any KCI Employee Plan, KCI Benefit Arrangement or otherwise, (ii) increase any benefit otherwise payable under any KCI Employee Plan, KCI Benefit Arrangement or otherwise or (iii) result in the acceleration of the time of payment or vesting of any such benefits. 3.14 Taxes. KCI and each of the KCI Subsidiaries have (i) duly and timely filed with the appropriate governmental authorities all Tax Returns (as defined in Section 2.14(c)) required to be filed by it, and has not filed for an extension to file any Tax Returns and such Tax Returns are true, complete and correct in all material respects, and (ii) duly paid in full or made adequate provision for the payment of all Taxes (as defined in Section 2.14(b)) shown to be due on such Tax Returns. Tax Returns referred to in clause (i) hereinabove have been examined by the IRS or the appropriate governmental authority through the returns for the year ending December 31, 1990 or the period of assessment of the Taxes in respect of which such Tax Returns were required to be filed has expired, all deficiencies asserted or assessments made as a result of such examination have been paid in full and no proceeding or examination by or in front of the relevant governmental authority in connection with the examination of any of the Tax Returns referred to in clause (i) hereinabove is currently pending. No claim has been made in writing to them by any authority in a jurisdiction where they do not file a Tax Return that they are or may be subject to Tax in such jurisdiction. No waivers of statutes of limitations have been given by or requested in writing to them with respect to any Taxes. They have not agreed to any extension of time with respect to any Tax deficiency. The liabilities and reserves for Taxes reflected in the KCI Balance Sheet as of March 31, 1996 will be adequate to cover all Taxes for all periods ending on or prior to such date, except for the payment of such Taxes which, alone or in the aggregate, would not have a Material Adverse Effect on them, and there are no liens for Taxes upon any property or asset of KCI or KCI Subsidiaries, except for liens for Taxes not yet due. There are no unresolved issues of law or fact arising out of a notice of deficiency, proposed deficiency or assessment from the IRS or any other governmental taxing authority with respect to their Taxes which, if decided adversely, singly or in the aggregate, would have a Material Adverse Effect on them. They are not parties to any agreement providing for the A-23 148 allocation or sharing of Taxes with any entity. They have not, with regard to any asset or property held, acquired or to be acquired by them, filed a consent to the application of Section 341(f) of the Code. They have withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party, except for such taxes which, alone or in the aggregate, would not have a Material Adverse Effect on them. No Tax is required to be withheld by them pursuant to Section 1445 of the Code as a result of the transfer contemplated by this Agreement. As a result of the Merger, they will not be obligated to make a payment to any individual that would be a "parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future. 3.15 Intellectual Property. KCI and the KCI Subsidiaries own, or have the right to use, sell or license all material Intellectual Property Rights necessary or required for the conduct of their respective businesses as presently conducted and such rights to use, sell or license are reasonably sufficient for such conduct of their respective businesses. To KCI's knowledge, neither KCI nor any KCI Subsidiary is infringing or otherwise violating Intellectual Property Rights of any person, which infringement or violation would subject KCI or any KCI Subsidiary to a liability which, individually or in the aggregate, would have a Material Adverse Effect. No claim has been made or to KCI's knowledge, threatened against KCI or any KCI Subsidiary alleging any such violation which will have a Material Adverse Effect. 3.16 Fees and Expenses. Except for PaineWebber Incorporated, neither KCI nor any of the KCI Subsidiaries has paid or become obligated to pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated by this Agreement. 3.17 Environmental Matters. (a) KCI and the KCI Subsidiaries have duly complied with, and the real property, equipment, businesses, operations and assets of each are in compliance with, the Environmental Laws, except where any such failures to comply, when taken in the aggregate, will not have a Material Adverse Effect. (b) To the best of the knowledge of KCI, with respect to KCI and the KCI Subsidiaries, there are no conditions presently existing which may reasonably be expected to lead to: (i) responsibilities or liability, or an assertion thereunder by any governmental entity or private person, pursuant to any Environmental Law the subject of which is the management and disposal of toxic or hazardous substances or wastes (intended hereby and hereafter to include any and all such materials listed in any foreign, federal, state or local law, statute, code or ordinance and all rules and regulations promulgated thereunder, as hazardous or potentially hazardous and, if not so listed, asbestos, lead and petroleum) or (ii) tort claims based on an action or inaction of KCI or any of the KCI Subsidiaries relating to the management and disposal of toxic or hazardous substances or wastes prior to the Effective Time, except where any such failures to comply, when taken in the aggregate, will not have a Material Adverse Effect. (c) KCI and the KCI Subsidiaries have been issued, will maintain until the Effective Time and will cause to remain in effect immediately thereafter, all required foreign, federal, state and local permits, licenses, certificates and approvals relating to (i) air emissions, (ii) discharges to surface water or ground water, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes and (vi) any other environmental, health or safety matters, except where any such failures to comply, when taken in the aggregate, will not have a Material Adverse Effect. (d) KCI and the KCI Subsidiaries have neither received notice of, nor know of, nor have any reason to suspect, any fact(s) which might constitute violation(s) of any Environmental Laws which remain uncured or where failure to cure any such violations, when taken in the aggregate, will not have a Material Adverse Effect. A-24 149 (e) To the best of the knowledge of KCI, with respect to KCI and the KCI Subsidiaries, there has been no Hazardous Discharge which, when taken in the aggregate, will have a Material Adverse Effect. To KCI's knowledge, there is not located on the real property used by KCI and the KCI Subsidiaries toxic or hazardous substances or wastes in violation of Environmental Laws, which, when taken in the aggregate, will have a Material Adverse Effect. To the best of the knowledge of KCI, there is not located on the real property used by KCI and the KCI Subsidiaries toxic or hazardous substances or wastes in violation of Environmental Laws, which, when taken in the aggregate, will have a Material Adverse Effect. (f) With respect to KCI and the KCI Subsidiaries, there has been no Environmental Complaints which, when taken in the aggregate, would result in a Material Adverse Effect. (g) With respect to KCI and the KCI Subsidiaries, there has been no lien asserted or created by any foreign, federal, state or local authority upon any or all of the assets, equipment, real property or other facilities of KCI and the KCI Subsidiaries by reason of a Hazardous Discharge or Environmental Complaint initiated or occurring prior to the Effective Time, except any which, when taken in the aggregate, would not have a Material Adverse Effect. (h) For the purposes of this Section 3.17, the term "KCI and KCI Subsidiaries" shall also mean subsidiaries or other properties previously owned or operated by KCI or a KCI Subsidiary, either directly or indirectly, which would create liability for KCI or the KCI Subsidiary by virtue of their prior ownership. (i) KCI has made available to DSO all environmental studies and reports pertaining or relating in any way to the real property or equipment owned, occupied or leased by KCI or the KCI Subsidiaries or otherwise relating or pertaining to the business, operations or assets of KCI and the KCI Subsidiaries. 3.18 Interested Party Transactions. (a) As of the date hereof, neither KCI nor any of the KCI Subsidiaries is a party to any oral or written (i) consulting or similar agreement with any present or former director, officer or employee or any entity controlled by any such person not terminable on thirty days' or less notice involving the payment of more than $100,000 per annum, (ii) agreement with any executive officer or other key employee, the benefits of which are contingent or the terms of which are materially altered, upon the occurrence of a transaction involving it of the nature contemplated by this Agreement, (iii) agreement with respect to any executive officer or other key employee of it providing any term of employment or compensation guarantee extending for a period longer than one year or for the payment in excess of $100,000 per annum, or (iv) except for the KCI Options, agreement or plan, including any stock option plan, stock appreciation right plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of the transactions contemplated by this Agreement. (b) Neither KCI nor any of the KCI Subsidiaries is indebted for money borrowed, either directly or indirectly from any of its officers, directors, or any Affiliate in any amount whatsoever, nor are any of its officers, directors, or Affiliates indebted for money borrowed from it; nor are there any transactions of a continuing nature between it and any of its officers, directors, or Affiliates (other than the regular employment of such persons) which will continue beyond the Effective Time, including, without limitation, use of its assets for personal benefit with or without adequate compensation. 3.19 Contracts. (a) Neither KCI nor any of the KCI Subsidiaries is a party to any contracts, agreements, commitments and other instruments (whether oral or written) that (i) involve an expenditure by A-25 150 such party or require the performance of services or delivery of goods to, by, through, on behalf of or for the benefit of such party, which in each case, relates to a contract, commitment or instrument that requires payments in excess of $25,000 per year and (ii) involve an obligation for the performance of services or delivery of goods by such party that cannot, or in reasonable probability will not be performed within thirty days from the dates as of which these representations are made, except for arrangements for the manufacture or supply of products and for the purchase or sale of merchandise or services entered into the ordinary course of business. (b) All of the material contracts, agreements, commitments and other instruments that either KCI or any of the KCI Subsidiaries is a party to, or by which any of them is bound, are valid and binding upon such party and the other parties thereto and are in full force and effect and enforceable in accordance with their terms, and neither such party nor any other party to any such contract, agreement, commitment or other instrument has breached any provision of, and no event has occurred, in each case, which, with the lapse of time or action by a third party, could result in a default under the terms thereof which, alone or in the aggregate, would have a Material Adverse Effect, and, there are no existing facts or circumstances which would prevent such party's contracts and agreements for the sale of goods from maturing in due course into fully collectible accounts receivable, except where failure to do so would have a Material Adverse Effect. 3.20 Title to Properties. KCI and the KCI Subsidiaries have good title to all of their real and other properties and assets, tangible and intangible, as reflected in the KCI Balance Sheet, except as since sold or otherwise disposed of in the ordinary course of business, free and clear of all claims and encumbrances other than (i) specifically disclosed in the KCI Balance Sheet, (ii) any liens for taxes not yet due and payable or being contested, and (iii) such imperfections of title, covenants, restrictions, easements and encumbrances, if any, as do not materially detract from the value or materially interfere with the present use of any of the properties or otherwise materially impair the business operations or the financial condition of KCI and the KCI Subsidiaries taken as a whole. 3.21 Insurance. KCI and the KCI Subsidiaries have insurance covering casualty, fire, liability, worker's compensation and disability (the "KCI Policies") providing coverage and having limitations and deductibles that are customary for a business of the type operated by them and sufficient for compliance in all material respects with all requirements of law and of all agreements to which KCI and the KCI Subsidiaries are a party, and such KCI Policies will be in full force and effect for all periods up to and including the Effective Time, and no notice of cancellation or termination has been received with respect to any of the KCI Policies. There are no pending claims under or relating to any of the KCI Policies which individually or in the aggregate, have a Material Adverse Effect. 3.22 Board Approval. The Board of Directors of KCI has, as of the date hereof, unanimously (i) approved this Agreement and the Merger, (ii) approved the Voting Agreement among KCI, Coatings Group, Inc., Anders U. Schroeder, Asgard Ltd., Parkway M & A Capital Corporation and M&A Investment Pte Ltd., (iii) determined that the Merger is in the best interests of the stockholders of KCI and is on terms that are fair to such stockholders and (iv) resolved to recommend that the stockholders of KCI approve this Agreement and the Merger. 3.23 Vote Required. The affirmative vote of holders of a majority of the outstanding shares of KCI Common Stock is the only vote of the holders of any class or series of KCI's capital stock necessary to approve this Agreement and the Merger. 3.24 Disclosure. No representation or warranty made by KCI in this Agreement, nor any document, written information, statement, financial statement, certificate or exhibit prepared and furnished or to be prepared and furnished by KCI or its representatives pursuant hereto or in connection with the transactions contemplated hereby, when taken together, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements or facts contained herein or therein, not misleading in light of the circumstances under which they are furnished. A-26 151 3.25 Fairness Opinion. KCI's Board of Directors has received a written opinion from PaineWebber Incorporated that as of the date hereof the Exchange Ratio is fair to KCI's stockholders from a financial point of view. 3.26 Restrictions on Business Activities. There is no agreement, judgment, injunction, order or decree binding upon KCI or any of the KCI Subsidiaries that has or could reasonably be expected to have the effect of prohibiting or impairing any business practice of KCI or any of the KCI Subsidiaries, any acquisition of property by KCI or any of the KCI Subsidiaries or the conduct of business by KCI or any of the KCI Subsidiaries as currently conducted, which would have a Material Adverse Effect. 3.27 Propriety of Past Payments. No funds or assets of KCI or any of the KCI Subsidiaries have been used for an illegal purpose, nor have any unrecorded funds or assets of KCI or the KCI Subsidiaries been established for any purposes. No accumulation or use of KCI's or the KCI Subsidiaries' corporate funds or assets has been made without being properly accounted for in their respective books and records and all payments by or on behalf of KCI or the KCI Subsidiaries have been duly and properly recorded and accounted for in their respective books and records. No false or artificial entry has been made in the books and records of KCI or the KCI Subsidiaries for any reason (except in the case of unaudited financial statements, for year-ended adjustments). No payment has been made by or on behalf of KCI or the KCI Subsidiaries with the understanding that any part of such payment is to be used for any purpose other than that described in the document supporting such payment, and neither KCI nor any of the KCI Subsidiaries has made, directly or indirectly, any illegal contributions to any political party or candidate, either domestic or foreign. Neither the IRS nor any other federal, state, local or foreign government agency or entity has initiated or threatened any investigation of any payment made by KCI or the KCI Subsidiaries of, or alleged to be of, the type described in this Section 3.27. 4. DSO COVENANTS 4.1 Advice of Changes. During the period from the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, DSO will as soon as possible advise KCI in writing (a) of any event occurring subsequent to the date of this Agreement that would render any representation or warranty of DSO contained in this Agreement, if made on or as of the date of such event or the Effective Time, untrue or inaccurate in any material respect, (b) of any event or occurrence resulting in or which may reasonably be expected to result in, a Material Adverse Effect on DSO or (c) of any breach by DSO of any covenant or agreement contained in this Agreement. To ensure compliance with this Section 4.1, DSO shall deliver to KCI as soon as reasonably practicable after the end of each monthly accounting period ending after the date of this Agreement and before the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, an unaudited consolidated balance sheet, statement of operations and statement of cash flows for DSO, which financial statements shall be prepared in the ordinary course of business, in accordance with DSO's books and records and generally accepted accounting principles and shall fairly present the consolidated financial position of DSO as of their respective dates and the results of DSO's operations for the periods then ended. 4.2 Maintenance of Business. During the period from the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, DSO will use its diligent commercial efforts to carry on and preserve its business and its relationships with customers, suppliers, employees and others in substantially the same manner as it has prior to the date hereof. If DSO becomes aware of any material deterioration in the relationship with any material customer, material supplier or key employee, it will promptly bring such information to the attention of KCI. 4.3 Conduct of Business. Except as may be necessary to consummate the transactions contemplated hereby, during the period from the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, DSO will continue to conduct its A-27 152 business and maintain its business relationships in the ordinary and usual course and neither DSO nor any DSO Subsidiary will, without the prior written consent of KCI: (a) borrow any money except for amounts that are not in the aggregate material to the financial condition of DSO and the DSO Subsidiaries, taken as a whole; (b) enter into any material transaction not in the ordinary course of its business; (c) encumber or permit to be encumbered any of its assets except in the ordinary course of its business or with respect to liens which are not material or relate to unpaid taxes; (d) dispose of any of its assets except in the ordinary course of business; (e) enter into any material lease or contract for the purchase or sale or license of any property, real or personal, except in the ordinary course of business; (f) fail to maintain its equipment and other assets in good working condition and repair, and in all material respects, in accordance with the standards it has maintained to the date of this Agreement, subject only to ordinary wear and tear; (g) pay (or make any oral or written commitments or representations to pay) any bonus, increased salary or special remuneration to any officer, employee or consultant (except for normal salary increases consistent with past practices, not to exceed ten percent (10%) per year pursuant to existing arrangements previously disclosed to KCI on the DSO Disclosure Schedule) or enter into or vary the terms of any employment, consulting or severance agreement with any such person, pay any severance or termination pay (other than payments made in accordance with plans or agreements existing on the date hereof), grant any stock option (except for normal grants to newly hired or current employees consistent with past practices and annual grants of options granted to non-employee directors required by the terms of the DSO 1992 Stock Plan) or issue any restricted stock, or enter into or modify any agreement or plan or increase benefits of the type described in Section 2.8; provided that DSO shall be entitled to pay annual bonuses and to make changes to compensation (i) in the ordinary course of business consistent with past practices or (ii) with prior written notice to KCI in the event that such changes are required, in the good faith judgment of DSO and after consultation with KCI, to retain its key employees following the Effective Time; (h) change accounting methods; (i) declare, set aside or pay any cash or stock dividend or other distribution in respect of capital stock, or redeem or otherwise acquire any of its capital stock (other than pursuant to arrangements with terminated employees or consultants in the ordinary course of business consistent with past practice); (j) amend or terminate any contract, agreement or license to which it is a party except those amended or terminated in the ordinary course of its business, consistent with past practice, and which are not material in amount or effect; (k) lend any amount to any person or entity, other than (i) advances for travel and expenses which are incurred in the ordinary course of business consistent with past practice, not material in amount and documented by receipts for the claimed amounts, or (ii) any loans pursuant to any DSO Section 401(a) Plan; (l) guarantee or act as a surety for any obligation except for obligations in amounts that are not material; (m) issue or sell any shares of its capital stock of any class (except upon the exercise of a bona fide option or warrant currently outstanding or permitted to be granted under Section 4.3(g)), or any other of its securities, or issue or create any warrants, obligations, subscriptions, options (except as expressly permitted under Section 4.3(g)), convertible securities or other commitments to issue shares of capital stock, or accelerate the vesting of any outstanding option or other security; A-28 153 (n) split or combine the outstanding shares of its capital stock of any class or enter into any recapitalization or agreement affecting the number of rights of outstanding shares of its capital stock of any class or affecting any other of its securities; (o) merge, consolidate or reorganize with, or acquire any entity (other than such transaction that would not be material and that would not impair or affect the timing of the Merger) or adopt a plan of liquidation or dissolution; (p) amend its Certificate of Incorporation or Bylaws; (q) license any DSO Intellectual Property Rights except in the ordinary course of business; (r) agree to any audit assessment by any tax authority; (s) change any insurance coverage, voluntarily allow any insurance coverage to lapse, or issue any certificates of insurance; or (t) agree to do, or permit any DSO Subsidiary to do or agree to do, or enter into negotiations with respect to any of the things described in the preceding clauses in this Section 4.3. 4.4 Stockholder Approval. Without regard to the recommendation contemplated by this Section 4.4, DSO will call the DSO Stockholders Meeting to be held as soon as possible after the Form S-4 shall have been declared effective by the SEC to submit this Agreement, the Merger and related matters for the consideration and approval of the DSO stockholders. Such approval will be recommended by DSO's Board of Directors subject to the fiduciary obligations of its directors. Such meeting will be called, held and conducted, and any proxies will be solicited, in compliance with applicable securities laws. 4.5 Prospectus/Proxy Statement. DSO will mail to its stockholders in a timely manner at least twenty (20) business days prior to the meeting, for the purpose of considering and voting upon the Merger at the DSO Stockholders Meeting, the Prospectus/Proxy Statement in the Form S-4. DSO will as soon as possible provide all information relating to DSO, its business or operations necessary for inclusion in the Prospectus/Proxy Statement to satisfy all requirements of applicable state and federal securities laws. DSO shall be solely responsible for any statement, information or omission in the Prospectus/Proxy Statement relating to it or its Affiliates based upon written information furnished by it. DSO will not provide or publish to its stockholders any material concerning it or its Affiliates that violates the Securities Act or the Exchange Act with respect to the transactions contemplated hereby. 4.6 Regulatory Approvals. DSO will promptly execute and file or join in the execution and filing of, any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be reasonably required, or which KCI may reasonably request, in connection with the consummation of the transactions contemplated by this Agreement. DSO will use its best efforts to obtain promptly all such authorizations, approvals and consents. Without limiting the generality of the foregoing, as promptly as practicable after the execution of this Agreement, DSO shall file with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "DOJ"), a pre-merger notification report under the HSR Act. 4.7 Necessary Consents. During the term of this Agreement, DSO will use its best efforts to obtain such written consents and take such other actions as may be necessary or appropriate in addition to those set forth in Section 4.6 to allow the consummation of the transactions contemplated hereby and to allow the Surviving Corporation to carry on DSO's business after the Effective Time. 4.8 Access to Information. DSO will allow KCI and its agents reasonable access to the files, books, records and offices of DSO and each DSO Subsidiary, including, without limitation, any and all information relating to DSO's taxes, commitments, contracts, leases, licenses and real, personal and intangible property and financial condition. DSO will cause its accountants to cooperate with KCI and its agents in making available to KCI all financial information reasonably requested, including, without limitation, the right to examine all working papers pertaining to all tax returns and financial statements prepared or audited by such accountants. A-29 154 4.9 Satisfaction of Conditions Precedent. During the term of this Agreement, DSO will use its best efforts to satisfy or cause to be satisfied all the conditions precedent that are set forth in Article 8, and DSO will use its best efforts to cause the Merger and the other transactions contemplated by this Agreement to be consummated. 4.10 No Other Negotiations. From and after the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, DSO and the DSO Subsidiaries shall not, and shall direct and use its best efforts to cause its officers, directors and agents not to (a) solicit, engage in discussions or negotiate with any person (whether such discussions or negotiations are initiated by DSO or otherwise) or take any other action intended or designed to facilitate the efforts of any person, other than KCI, relating to a possible Alternative Acquisition (as defined below), (b) provide information with respect to DSO or any of the DSO Subsidiaries to any person, other than KCI, relating to a possible Alternative Acquisition by any person, other than KCI, (c) enter into an agreement with any person, other than KCI, providing for a possible Alternative Acquisition or (d) except as contemplated by this Section 4.10 or as required by applicable law (including the exercise of the fiduciary duties of the DSO Board of Directors), make or authorize any statement, recommendation or solicitation in support of any possible Alternative Acquisition by any person, other than by KCI. Notwithstanding the foregoing, the restrictions set forth in this Agreement shall not prevent the Board of Directors of DSO (or its agents pursuant to its instructions) from taking the following actions: (a) furnishing information concerning DSO and its business, properties and assets to any third party and (b) entering into discussions with such third party concerning an Alternative Acquisition, provided that all of the following events shall have occurred: (i) such third party has made a written proposal to the Board of Directors of DSO to consummate an Alternative Acquisition which proposal identifies a price or range of values to be paid for the outstanding securities or substantially all of the assets of DSO, and if consummated, based on the advice of DSO's investment bankers, the Board of Directors of DSO has determined such Alternative Acquisition to be financially more favorable to the stockholders of DSO than the terms of the Merger (a "Superior Proposal"); (ii) DSO's Board of Directors has determined, based on the advice of its investment bankers, that such third party is financially capable of consummating such Superior Proposal; (iii) the Board of Directors of DSO shall have determined, after consultation with its outside legal counsel, that the fiduciary duties of the Board of Directors require DSO to furnish information to and negotiate with such third party; and (iv) at least two (2) business days prior thereto, KCI shall have been notified in writing of such Superior Proposal, including all of its terms and conditions, and shall have been given copies of such proposal and KCI shall have been notified of the determinations made by the DSO Board of Directors pursuant to clauses (i), (ii) and (iii) of this paragraph. Notwithstanding the foregoing, DSO shall not provide any non-public information to such third party unless (A) it provides such information to KCI simultaneously or as promptly as practicable thereafter and (B) DSO has notified KCI in advance of any such proposed disclosure of non-public information to any such third party, with a description of the information proposed to be disclosed. In addition to the foregoing, DSO shall not accept or enter into any agreement concerning an Alternative Acquisition for a period of not less than forty-eight (48) hours after KCI's receipt of a copy of such proposal of an Alternative Acquisition. Upon compliance with the foregoing, DSO shall be entitled to enter into an agreement with such third-party concerning an Alternative Acquisition provided that DSO shall immediately make or cause to be made payment in full to KCI of the Breakup Fee as defined in Section 9.4 below. If DSO or any of the DSO Subsidiaries receives any unsolicited offer, inquiry or proposal to enter into discussions or negotiations relating to an Alternative Acquisition, DSO shall immediately notify KCI thereof, including information as to the identity of the party making any such offer, inquiry or proposal and the specific terms of such offer, inquiry or proposal, as the case may be. DSO shall be entitled to provide copies of this Section 4.10 to third parties who, on an entirely unsolicited basis after the date hereof, contact DSO concerning an Alternative Acquisition; provided that KCI shall concurrently be notified of such contact and the delivery of such copy. A-30 155 For purposes of this Agreement, "Alternative Acquisition" shall mean any of the following (other than transactions between KCI and DSO contemplated hereby): (i) any merger, consolidation, share exchange, business combination, or other similar transaction involving DSO or the DSO Subsidiaries; (ii) any sale, exchange, transfer or other disposition of 20% or more of the assets of DSO or the DSO Subsidiaries, taken as a whole, in a single transaction or series of related transactions, (iii) any sale of or tender offer or exchange offer for 20% or more of the outstanding shares of capital stock of DSO or the filing of a registration statement under the Securities Act in connection therewith; (iv) any person acquiring beneficial ownership or the right to acquire beneficial ownership of, or any "group" (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) having been formed for the purpose of effecting an Alternative Acquisition which beneficially owns, or has the right to acquire beneficial ownership of, 20% or more of the then outstanding shares of capital stock of DSO; or (v) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing with respect to DSO or the DSO Subsidiaries. 5. KCI COVENANTS 5.1 Advice of Changes. During the period from the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, KCI will as soon as possible advise DSO in writing (a) of any event occurring subsequent to the date of this Agreement that would render any representation or warranty of KCI contained in this Agreement, if made on or as of the date of such event or the Effective Time, untrue or inaccurate in any material respect, (b) of any Material Adverse Effect on KCI or (c) of any breach by KCI of any covenant or agreement contained in this Agreement. To ensure compliance with this Section 5.1, KCI shall deliver to DSO as soon as reasonably practicable after the end of each monthly accounting period ending after the date of this Agreement and before the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, an unaudited consolidated balance sheet, statement of operations and statement of cash flows for KCI, which financial statements shall be prepared in the ordinary course of business, in accordance with KCI's books and records and generally accepted accounting principles and shall fairly present the consolidated financial position of KCI as of their respective dates and the results of KCI's operations for the periods then ended. 5.2 Maintenance of Business. During the period from the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, KCI will use its diligent commercial efforts to carry on and preserve its business and its relationships with customers, suppliers, employees and others in substantially the same manner as it has prior to the date hereof. If KCI becomes aware of any material deterioration in the relationship with any material customer, material supplier or key employee, it will promptly bring such information to the attention of DSO. 5.3 Conduct of Business. Except as may be necessary to consummate the transactions contemplated hereby, during the period from the date of this Agreement until the earlier of the Effective Time or the termination of this Agreement in accordance with its terms, KCI will continue to conduct its business and maintain its business relationships in the ordinary and usual course and neither KCI nor any KCI Subsidiary will, without the prior written consent of DSO: (a) borrow any money except for amounts that are not in the aggregate material to the financial condition of KCI and the KCI Subsidiaries, taken as a whole; (b) enter into any material transaction not in the ordinary course of its business; (c) encumber or permit to be encumbered any of its assets except in the ordinary course of its business or with respect to liens which are not material or relate to unpaid taxes; (d) dispose of any of its assets except in the ordinary course of business; (e) enter into any material lease or contract for the purchase or sale or license of any property, real or personal, except in the ordinary course of business; A-31 156 (f) fail to maintain its equipment and other assets in good working condition and repair, and accordingly, in all material respects, to the standards it has maintained to the date of this Agreement, subject only to ordinary wear and tear; (g) pay (or make any oral or written commitments or representations to pay) any bonus, increased salary or special remuneration to any officer, employee or consultant (except for normal salary increases consistent with past practices and not to exceed ten percent (10%) per year pursuant to existing arrangements previously disclosed to DSO on the KCI Disclosure Schedule) or enter into or vary the terms of any employment, consulting or severance agreement with any such person, pay any severance or termination pay (other than payments made in accordance with plans or agreements existing on the date hereof), grant any stock option (except for normal grants to newly hired or current employees consistent with past practices and grants of options granted to non- employee directors required by the terms of the KCI 1992 Incentive Compensation Plan) or issue any restricted stock, or enter into or modify any agreement or plan or increase benefits of the type described in Section 3.8; provided that KCI shall be entitled to pay annual bonuses and to make changes to compensation (i) in the ordinary course of business consistent with past practices or (ii) with prior written notice to DSO in the event that such changes are required, in the good faith judgment of KCI and after consultation with DSO, to retain its key employees following the Effective Time; (h) change accounting methods; (i) declare, set aside or pay any cash or stock dividend or other distribution in respect of capital stock, or redeem or otherwise acquire any of its capital stock (other than pursuant to arrangements with terminated employees or consultants in the ordinary course of business consistent with past practice); (j) amend or terminate any contract, agreement or license to which it is a party except those amended or terminated in the ordinary course of its business, consistent with past practice, and which are not material in amount or effect; (k) lend any amount to any person or entity, other than (i) advances for travel and expenses which are incurred in the ordinary course of business consistent with past practice, not material in amount and documented by receipts for the claimed amounts, or (ii) any loans pursuant to any KCI Section 401(a) Plan; (l) guarantee or act as a surety for any obligation except for obligations in amounts that are not material; (m) issue or sell any shares of its capital stock of any class (except upon the exercise of a bona fide option or warrant currently outstanding or permitted to be granted under Section 5.3(g)), or any other of its securities, or issue or create any warrants, obligations, subscriptions, options (except as expressly permitted under Section 5.3(g)), convertible securities or other commitments to issue shares of capital stock, or accelerate the vesting of any outstanding option or other security; (n) split or combine the outstanding shares of its capital stock of any class or enter into any recapitalization or agreement affecting the number of rights of outstanding shares of its capital stock of any class or affecting any other of its securities; (o) merge, consolidate or reorganize with, or acquire any entity (other than such transaction that would not be material and that would not impair or affect the timing of the Merger) or adopt a plan of liquidation or dissolution; (p) amend its Certificate of Incorporation or Bylaws; (q) license any KCI Intellectual Property Rights except in the ordinary course of business; (r) agree to any audit assessment by any tax authority; A-32 157 (s) change any insurance coverage, voluntarily allow any insurance coverage to lapse, or issue any certificates of insurance; or (t) agree to do, or permit any KCI Subsidiary to do or agree to do, or enter into negotiations with respect to any of the things described in the preceding clauses in this Section 5.3. 5.4 Stockholder Approval. Without regard to the recommendation contemplated by this Section 5.4, KCI will call the KCI Stockholders Meeting to be held as soon as possible after the Form S-4 shall have been declared effective by the SEC to submit this Agreement, the Merger and related matters for the consideration and approval of the KCI stockholders. Such approval will be recommended by KCI's Board of Directors subject to the fiduciary obligations of its directors. Such meeting will be called, held and conducted, and any proxies will be solicited, in compliance with applicable securities laws. 5.5 Prospectus/Proxy Statement. KCI will mail to its stockholders in a timely manner at least twenty (20) business days prior to the meeting, for the purpose of considering and voting upon the Merger at the KCI Stockholders Meeting, the Prospectus/Proxy Statement in the Form S-4. KCI will as promptly as soon as possible provide all information relating to KCI, its business or operations necessary for inclusion in the Prospectus/Proxy Statement to satisfy all requirements of applicable state and federal securities laws. KCI shall be solely responsible for any statement, information or omission in the Prospectus/Proxy Statement relating to it or its Affiliates based upon written information furnished by it. KCI will not provide or publish to its stockholders any material concerning it or its Affiliates that violates the Securities Act or the Exchange Act with respect to the transactions contemplated hereby. 5.6 Regulatory Approvals. KCI will promptly execute and file or join in the execution and filing, of any application or other document that may be necessary in order to obtain the authorization, approval or consent of any governmental body, federal, state, local or foreign, which may be reasonably required, or which DSO may reasonably request, in connection with the consummation of the transactions contemplated by this Agreement. KCI will use its best efforts to promptly obtain all such authorizations, approvals and consents. Without limiting the generality of the foregoing, as promptly as practicable after the execution of this Agreement, KCI shall file with the FTC and the Antitrust Division of the DOJ a pre-merger notification report under the HSR Act. 5.7 Necessary Consents. During the term of this Agreement, KCI will use its best efforts to obtain such written consents and take such other actions as may be necessary or appropriate in addition to those set forth in Section 5.6 to allow the consummation of the transactions contemplated hereby and to allow the Surviving Corporation to carry on KCI's business after the Effective Time. 5.8 Access to Information. KCI will allow DSO and its agents reasonable access to the files, books, records and offices of KCI and each KCI Subsidiary, including, without limitation, any and all information relating to KCI's taxes, commitments, contracts, leases, licenses and real, personal and intangible property and financial condition. KCI will cause its accountants to cooperate with DSO and its agents in making available to DSO all financial information reasonably requested, including, without limitation, the right to examine all working papers pertaining to all tax returns and financial statements prepared or audited by such accountants. 5.9 Satisfaction of Conditions Precedent. During the term of this Agreement, KCI will use its best efforts to satisfy or cause to be satisfied all the conditions precedent that are set forth in Article 7, and KCI will use its best efforts to cause the Merger and the other transactions contemplated by this Agreement to be consummated. 5.10 Listing. KCI will use its best efforts to cause as promptly as reasonably practicable the shares of KCI Common Stock to be issued pursuant to the Merger to be listed upon the Effective Time with the NYSE, subject to official notice of issuance. 5.11 Nomination of Directors. The Board of Directors of KCI shall take all necessary action to increase the KCI Board of Directors to nine members as of the Effective Time and to cause the two persons named by DSO at the Effective Time to be appointed to the Board of Directors of KCI with one A-33 158 DSO designee to be appointed to the class of directors serving until the KCI Annual Meeting of Shareholders in 1999 and the other in the class serving until the KCI Annual Meeting in 1997, at which KCI agrees to use its best efforts to renominate such person to serve until the KCI Annual Meeting in 2000. 5.12 Executive Committee. The Board of Directors of KCI shall take all necessary steps as of the Effective Time, to create an Executive Committee of the Board of Directors with three members, and to cause one director, named by DSO at the Effective Time, to be appointed to such committee. 5.13 Director and Officer Indemnification. From and after the Effective Time, KCI shall indemnify, defend and hold harmless the current officers and directors of DSO and DSO Subsidiaries against all losses, claims, damages and liability in respect of acts or omissions occurring at or prior to the Effective Time to the fullest extent that DSO or such DSO Subsidiary would have been permitted under applicable law and the Certificates or Articles of Incorporation and Bylaws of DSO or DSO Subsidiary in effect on the date hereof to indemnify such person. For at least six years after the Effective Time, KCI shall cause the Surviving Corporation to keep in effect provisions in its Certificate or Article of Incorporation and Bylaws providing for limitation of director and officer liability and indemnification of such persons to the fullest extent. KCI shall reimburse all expenses including reasonable attorney's fees, incurred by any person to enforce successfully the obligations of KCI under this Section. The provisions of this Section 5.13 shall survive consummation of the Merger and are expressly intended to benefit current directors and officers of DSO. After the Effective Time, KCI shall cause the Surviving Corporation to purchase insurance covering the directors and officers of DSO for claims made within one year after the Effective Time against such directors and officers relating to claims arising prior to the Effective Time. KCI shall not be obligated to pay more than $150,000 for such insurance. From and after the Effective Time, KCI shall purchase insurance covering the directors and officers of KCI, with coverage limits comparable to such insurance carried by DSO prior to the Effective Time, if in the sole discretion of KCI, such insurance may be purchased at prices comparable to that paid by DSO. 5.14 DSO Trade Debt. KCI shall cause the Surviving Corporation to provide for the approximately $9,922,017 (plus interest accruing after July 1, 1996) owing as of the date hereof by DeSoto to its trade creditors pursuant to the Trade Composition Agreement and related Security Agreement (the "Trade Debt"), in the following amounts: (i) eighty percent (80%) of the Trade Debt as promptly as reasonably practicable after the Effective Time, and (ii) twenty percent (20%) of the Trade Debt no later than one (1) year after the Effective Time. 6. CLOSING MATTERS 6.1 The Closing. Subject to the termination of this Agreement as provided in Article 9 below, the Closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Godwin & Carlton, P.C., 901 Main Street, Suite 2500, Dallas, Texas 75202 on a date (the "Closing Date") and at a time to be mutually agreed upon by the parties, which date shall be no later than the third business day after all conditions to Closing set forth herein shall have been satisfied or waived, unless another place, time and date is mutually selected by DSO and KCI. Concurrently with the Closing, the Certificate of Merger will be filed in the office of Secretary of State of the State of Delaware. As soon as practicable thereafter, the Certificate of Merger will be recorded in the Office of Recorder of the Delaware county or counties in which the parties to the Certificate of Merger maintain their respective registered offices. 6.2 Exchange of Certificates. (a) Exchange Agent. Prior to the Closing Date, KCI shall select a bank or trust company reasonably acceptable to DSO to act as exchange agent (the "Exchange Agent") in the Merger. Promptly after the Effective Time, KCI shall deposit with the Exchange Agent, for the benefit of the holders of shares of DSO Common Stock, for exchange in accordance with this Agreement and the Certificate of Merger, certificates representing the shares of KCI Common Stock (such shares of KCI Common Stock, together with any dividends or distributions with respect thereto pursuant to A-34 159 Section 6.2(c), being hereinafter referred to as the "Exchange Fund") issuable pursuant to this Agreement and the Certificate of Merger in exchange for outstanding shares of DSO Common Stock. The Exchange Agent shall not be entitled to vote or exercise any right of ownership with respect to the KCI Common Stock held by it from time to time hereunder. (b) Exchange Procedures. As soon as practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time represented issued and outstanding shares of DSO Common Stock (collectively, the "Certificates"), (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as DSO and KCI may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing KCI Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent, together with a duly executed letter of transmittal and such other documents as may be reasonably required by the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole shares of KCI Common Stock which such holder has the right to receive pursuant to the provisions of this Agreement and the Certificate of Merger, and the Certificate so surrendered shall forthwith be cancelled. In the event of a transfer of ownership of shares of DSO Common Stock which is not registered on the transfer records of DSO, a certificate representing the proper number of shares of KCI Common Stock may be issued to a transferee if the Certificate representing such KCI Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 6.2 and the Certificate of Merger, each Certificate shall be deemed, on and after the Effective Time, to represent only the right to receive upon such surrender the certificate representing shares of KCI Common Stock and cash in lieu of any fractional shares of KCI Common Stock as contemplated by Section 1.2, the Certificate of Merger and the Delaware Law. (c) Distributions with Respect to Unsurrendered Certificates. No dividends or other distributions declared or made after the Effective Time with respect to KCI Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of KCI Common Stock represented thereby and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 1.2 or the Certificate of Merger until a new certificate for KCI Common Stock is issued in exchange for such Certificate. Subject to the effect of applicable laws, after the issuance of a certificate for KCI Common Stock in exchange for a Certificate, there shall be paid to the record holder of such new certificate representing whole shares of KCI Common Stock issued in exchange therefor, without interest, (i) at the time of such issuance, the amount of any cash payable in lieu of a fractional share of KCI Common Stock to which such holder is entitled pursuant to Section 1.2 and the Certificate of Merger and the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of KCI Common Stock and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of KCI Common Stock. (d) No Further Ownership Rights to DSO Stock. All shares of KCI Stock issued upon the surrender for exchange of shares of DSO Stock in accordance with the terms of this Agreement and the Certificate of Merger (including any cash paid pursuant to Section 1.2) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of DSO Stock, and after the Effective Time there shall be no further registration of any transfer on the stock transfer books of the Surviving Corporation of the shares of DSO Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to KCI for any reason, they shall be cancelled and exchanged as provided in this Section 6.2 and the Certificate of Merger. A-35 160 (e) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the former stockholders of DSO for six (6) months after the Effective Time shall be delivered to KCI, upon demand, and any former stockholders of DSO who have not theretofore complied with this Section 6.2 and the Certificate of Merger shall thereafter look only to KCI for payment of their claim for KCI Stock, any cash in lieu of fractional shares of KCI Stock and any dividends or distributions with respect to KCI Stock. (f) No Liability. Neither the Exchange Agent, KCI nor DSO shall be liable to any holder of shares of DSO Stock or KCI Stock, as the case may be, for Exchange Funds or stock delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 6.3 Assumption of Options. Promptly after the Effective Time, KCI will notify in writing each holder of a KCI Converted Option of the assumption of such option by KCI, the number of shares of KCI Common Stock that are then subject to such option, and the exercise price of such option, as determined pursuant to this Agreement. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF DSO The obligations of DSO hereunder are subject to the fulfillment or satisfaction on or before the Closing Date, of each of the following conditions (any one or more of which may be waived by DSO, but only in a writing signed by DSO): 7.1 Accuracy of Representations and Warranties. The representations and warranties of KCI set forth in Article 3 (as qualified by the KCI Disclosure Schedule and the Recent KCI SEC Documents) shall be true and accurate in every respect on and as of the Closing Date with the same force and effect as if they had been made at the Closing except to the extent the failure of such representations and warranties to be true and accurate in such respects has not had and could not reasonably be expected to have a Material Adverse Effect, and DSO shall receive a certificate to such effect executed by KCI's Chief Financial Officer. 7.2 Covenants. KCI shall have performed and complied in all material respects with all of its covenants required to be performed by it under this Agreement on or before the Closing, and DSO shall receive a certificate to such effect signed by KCI's Chief Financial Officer. 7.3 Absence of Material Adverse Change. From the date of this Agreement through the Effective Time, there shall not have been any material adverse change in the condition (financial or otherwise), properties, assets, liabilities, businesses, operations or results of operations of KCI and the KCI Subsidiaries, taken as a whole (a "KCI Material Adverse Change"). 7.4 Compliance with Law. There shall be no order, decree or ruling by any governmental agency or written threat thereof, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which would prohibit or render illegal the transactions contemplated by this Agreement. 7.5 Government Consents. There shall have been obtained on or before the Closing such material permits or authorizations, and there shall have been taken such other action, as may be required to consummate the Merger by any regulatory authority having jurisdiction over the parties and the actions herein proposed to be taken, including but not limited to requirements under applicable federal and state securities laws and the compliance with, and expiration of any applicable waiting period under, the HSR Act. 7.6 The Form S-4. The Form S-4 shall have become effective under the Securities Act and shall not be the subject of any stop-order or proceedings seeking a stop-order and the Prospectus/Proxy Statement shall on the Closing not be subject to any proceedings commenced or threatened by the SEC. 7.7 Documents. DSO shall have received all written consents, assignments, waivers, authorizations or other certificates reasonably deemed necessary by DSO's legal counsel to provide for the continuation in full force and effect of any and all material contracts and leases of KCI and for KCI to consummate A-36 161 the transactions contemplated hereby except when the failure to receive such consents, assignments, waivers, authorizations or certificates would not constitute a KCI Material Adverse Change. 7.8 Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by the DSO stockholders in accordance with the rules of the NYSE, applicable law and DSO's Certificate of Incorporation and Bylaws. 7.9 KCI Approval. This Agreement, the Merger and the issuance of KCI Common Stock in connection with the Merger shall have been approved by the KCI stockholders in accordance with the rules of the NYSE, applicable law and KCI's Certificate of Incorporation and Bylaws. 7.10 No Legal Action. No temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any federal or state court and remain in effect, nor shall any proceeding initiated by the U.S. Government seeking any of the foregoing be pending. 7.11 Election of DSO Designees to Board of Directors of KCI. The Board of Directors of KCI shall have taken appropriate action to cause the number of directors comprising the full Board of Directors of KCI at the Effective Time to be increased from seven to nine persons, and the two persons named by DSO at the Effective Time shall be added as additional Directors effective upon the Effective Time. 7.12 Tax Opinions. DSO shall have received two opinions of Fried, Frank, Harris, Shriver & Jacobson (or such other counsel selected by DSO) in form and substance reasonably satisfactory to it, based, in each case, upon representation letters dated on or about the dates of such opinions from persons reasonably requested to provide such letters and such other facts and representations as counsel may reasonably deem relevant, to the effect that the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368 of the Code, the first of which shall be dated on or about the date that is two business days prior to the date of the Joint Proxy Statement/Prospectus and the second of which shall be dated as of the Effective Time. 7.13 Legal Opinion. DSO shall have received from counsel to KCI an opinion reasonably acceptable to DSO. 7.14 Listing. The shares of KCI Common Stock to be issued in the Merger and upon exercise of the Warrants shall have been approved for listing on the NYSE, subject to official notice of issuance. 7.15 PBGC. Prior to the Effective Time (i) KCI shall have discussed with the PBGC the merger of the DSO Retirement Plans and the KCI Retirement Plans, and the assets thereof, and (ii) the PBGC will have raised KCI's borrowing restrictions to an amount reasonably expected to enable KCI to perform its obligations under this Agreement. 7.16 Financing. KCI shall have available reasonably sufficient sources of financing in order to effect the Merger and to satisfy its obligations and those of the Surviving Corporation. 7.17 Fairness Opinion. DSO shall have received an opinion of Salomon Brothers, Inc. confirming, as of one business day before the Effective Time, that the Exchange Ratio is fair to the holders of DSO Common Stock from a financial point of view. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF KCI The obligations of KCI hereunder are subject to the fulfillment or satisfaction on or before the Closing, of each of the following conditions (any one or more of which may be waived by KCI, but only in a writing signed by KCI): 8.1 Accuracy of Representations and Warranties. The representations and warranties of DSO set forth in Article 2 (as qualified by the DSO Disclosure Schedule and the Recent DSO SEC Documents) shall be true and accurate in every respect on and as of the Closing Date with the same force and effect as if they had been made at the Closing except to the extent the failure of such representations and warranties to be true and accurate in such respects had not had and could not reasonably be expected to A-37 162 have a Material Adverse Effect (except that any breach of this Section 8.1 shall be deemed to have a Material Adverse Effect with respect to any untruth or inaccuracy contained in Section 2.8(i)), and KCI shall receive a certificate to such effect executed by DSO's Chief Financial Officer. 8.2 Covenants. DSO shall have performed and complied in all material respects with all of its covenants required to be performed by it under this Agreement on or before the Closing, and KCI shall receive a certificate to such effect signed by DSO's Chief Financial Officer. 8.3 Absence of Material Adverse Change. From the date of this Agreement through the Effective Time, there shall not have been any material adverse change in the condition (financial or otherwise), properties, assets, liabilities, businesses, operations or results of operations of DSO and DSO Subsidiaries, taken as a whole (a "DSO Material Adverse Change"). 8.4 Compliance with Law. There shall be no order, decree or ruling by any governmental agency or written threat thereof, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which would prohibit or render illegal the transactions contemplated by this Agreement. 8.5 Government Consents. There shall have been obtained on or before the Closing such material permits or authorizations, and there shall have been taken such other action, as may be required to consummate the Merger by any regulatory authority having jurisdiction over the parties and the actions herein proposed to be taken, including but not limited to requirements under applicable federal and state securities laws and the compliance with, and expiration of any applicable waiting period under, the HSR Act. 8.6 Form S-4. The Form S-4 shall have become effective under the Securities Act and shall not be the subject of any stop-order or proceedings seeking a stop-order and the Prospectus/Proxy Statement shall on the Closing not be subject to any proceedings commenced or threatened by the SEC. 8.7 Documents. KCI shall have received all written consents, assignments, waivers, authorizations or other certificates reasonably deemed necessary by KCI's legal counsel to provide for the continuation in full force and effect of any and all material contracts and leases of DSO and for DSO to consummate the transactions contemplated hereby except when the failure to receive such consents, assignments, waivers, authorizations, or certificates would not constitute a DSO Material Adverse Change. 8.8 Stockholder Approval. This Agreement, the Merger and the issuance of KCI Common Stock in connection with the Merger shall have been approved by the KCI stockholders in accordance with the rules of the NYSE, applicable law and KCI's Certificate of Incorporation and Bylaws. 8.9 DSO Approval. This Agreement and the Merger shall have been approved and adopted by the DSO stockholders in accordance with the rules of the NYSE, applicable law and DSO's Certificate of Incorporation and Bylaws. 8.10 No Legal Action. No temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any federal or state court and remain in effect, nor shall any proceeding initiated by the U.S. Government seeking any of the foregoing be pending. 8.11 Tax Opinions. KCI shall have received two opinions of Godwin & Carlton, P.C. (or such other counsel selected by KCI) in form and substance reasonably satisfactory to it, based, in each case, upon representation letters dated on or about the dates of such opinions from persons reasonably requested to provide such letters and such other facts and representations as counsel may reasonably deem relevant, to the effect that the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368 of the Code, the first of which shall be dated on or about the date that is two business days prior to the date of the Joint Proxy Statement/Prospectus and the second of which shall be dated as of the Effective Time. A-38 163 8.12 Legal Opinion. KCI shall have received from counsel to DSO, an opinion reasonably acceptable to KCI. 8.13 Agreement of Warrantholders. The Warrant Conversion Agreement of even date herewith between each holder of DSO Warrants and KCI shall be in full force and effect and the holders of the DSO Warrants shall have complied with all of their obligations under such Warrant Conversion Agreement. 8.14 Financing. KCI shall have available reasonably sufficient sources of financing in order to effect the Merger and to satisfy its obligations and those of the Surviving Corporation. 8.15 Amendment of DSO Retirement Plan. DSO shall have amended the DSO Retirement Plan effective immediately prior to the Effective Time to the reasonable satisfaction of KCI, in order to remove all restrictions in the DSO Retirement Plan, other than those required by ERISA, regarding (a) reductions or changes in benefit formulas thereunder, (b) the merger of the DSO Retirement Plan into another plan or the merger of another plan into the DSO Retirement Plan, (c) the reversion of plan assets thereof, and (d) the allocation of plan assets upon plan termination, including without limitation, any such restrictions in Section 10.3(e), Section 10.4 or Section 11.4 of the DSO Retirement Plan. 8.16 No Pending Termination. The DSO Retirement Plan shall not have been terminated. 8.17 PBGC. Prior to the Effective Time (i) KCI shall have discussed with the PBGC the merger of the DSO Retirement Plans and the KCI Retirement Plans, and the assets thereof, and (ii) the PBGC will have raised KCI's borrowing restrictions to an amount reasonably expected to enable KCI to perform its obligations under this Agreement. 8.18 Approval of Change of Control. Prior to the Effective Time, DSO and its Board of Directors shall make the approval and nomination described in Section 10.4 of the DSO Retirement Plan. 8.19 Preferred Stockholders Consents. The Preferred Stockholder Waiver and Consent Agreement of even date herewith between KCI and the holders of the DSO Preferred Stock shall be in full force and effect and the holders of the DSO Preferred Stock shall have complied with all of their obligations under such Preferred Stockholder Waiver and Consent Agreement. 8.20 Prescott Obligation. DSO's payment obligation in respect of its purchase of J.L. Prescott Company shall be resolved on terms satisfactory to KCI in its sole discretion. 8.21 Fairness Opinion. KCI shall have received an opinion of PaineWebber Incorporated confirming, as of one business day before the Effective Time, that the Exchange Ratio is fair to the holders of KCI Common Stock from a financial point of view. 8.22 Lender Consent. KCI shall have received a consent of its secured lender to the transactions contemplated by this Agreement. 8.23 Trade Creditor Agreement. DSO's trade creditors shall have consented to the terms of repayment contemplated by Section 5.14 hereof. 8.24 Merger of Pension Plans. All regulatory action shall have been taken in order to effect, and no impediments shall exist to prohibit, the merger of the DSO Pension Plans and the KCI Pension Plans, in a manner satisfactory to KCI, at the Effective Time. 9. TERMINATION OF AGREEMENT; BREAK UP FEES 9.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Merger by the stockholders of KCI or DSO: (a) by mutual agreement of DSO and KCI; (b) by DSO, if (i) there has been a breach by KCI of any representation, warranty, covenant or agreement set forth in this Agreement on the part of KCI, or if any representation or warranty of A-39 164 KCI shall have become untrue, in either case which has or can reasonably be expected to have a Material Adverse Effect and which KCI fails to cure prior to the Closing (except that no cure period shall be provided for a breach by KCI which by its nature cannot be cured),(ii) DSO shall have received a Superior Proposal and DSO's Board of Directors believes, after consultation with legal counsel, that its fiduciary duties require termination of this Agreement, or (iii) KCI shall not have received a nonbinding commitment letter from a lending institution with respect to the matters contemplated by Sections 7.16 and 8.14 hereof, before the Form S-4 shall be declared effective by the SEC. (c) by KCI, if (i) there has been a breach by DSO of any representation, warranty, covenant or agreement set forth in this Agreement on the part of DSO, or if any representation or warranty of DSO shall have become untrue, in either case which has or can reasonably be expected to have a Material Adverse Effect and which DSO fails to cure prior to the Closing (except that no cure period shall be provided for a breach by DSO which by its nature cannot be cured) or (ii) DSO shall have entered into an agreement with respect to an Alternative Acquisition; (d) by either party if the required approvals of the stockholders of DSO or KCI shall not have been obtained by reason of the failure to obtain the required vote; (e) by either party, if all the conditions to its obligations for Closing the Merger shall not have been satisfied or waived on or before the Final Date (as defined below) other than as a result of a breach of this Agreement by the terminating party; or (f) by either party, if a permanent injunction or other order by any federal or state court which would make illegal or otherwise restrain or prohibit the consummation of the Merger shall have been issued and shall have become final and nonappealable. As used herein, the "Final Date" shall be December 31, 1996. 9.2 Notice of Termination. Any termination of this Agreement under Section 9.1 above will be effective by the delivery of written notice pursuant to Section 11.9 of the terminating party to the other party hereto. 9.3 Effect of Termination. In the case of any termination of this Agreement as provided in this Article 9, this Agreement shall be of no further force and effect (except as provided in Section 9.4 and Article 11) and nothing herein shall relieve any party from liability for any breach of this Agreement. No termination of this Agreement shall affect the obligations contained in the pre-existing confidentiality agreements between DSO and KCI (the "Confidentiality Agreements") which will survive termination of this Agreement in accordance with their terms. 9.4 Breakup Fee. (a) Upon the occurrence of any of the following events, DSO shall immediately make payment or cause payment to be made to KCI (by wire transfer or cashier's check) of a breakup fee in the amount of $1,000,000 (the "Breakup Fee"): (i) this Agreement is terminated by KCI pursuant to Section 9.1(c)(ii); (ii) the Merger shall be submitted to a vote of the DSO stockholders as required hereunder, and the stockholders of DSO shall have failed to approve the Merger by a requisite vote required for such approval where at the time of such vote there is pending a proposal with respect to an Alternative Acquisition; (iii) without the occurrence of a KCI Material Adverse Change, the Board of Directors of DSO shall have failed to submit the Merger to its stockholders for approval as required by, and in accordance with, the terms of this Agreement; or (iv) DSO shall have terminated this Agreement pursuant to Section 9.1(b)(ii). Notwithstanding the foregoing, the fee payable under this Section 9.4(a) shall not be payable if, prior to the above-referenced occurrence, there shall be an event giving rise to KCI's payment obligation under Section 9.4(b). (b) If without the occurrence of a DSO Material Adverse Change, the Board of Directors of KCI shall fail to submit the Merger to its stockholders for approval as required by, and in accordance with, the terms of this Agreement, KCI shall immediately make payment or cause payment to be A-40 165 made to DSO (by wire transfer or cashier's check) the Breakup Fee. Notwithstanding the foregoing, the fee payable under this Section 9.4(b) shall not be payable if, prior to the above-referenced occurrence, there shall be an event giving rise to DSO's payment obligation under Section 9.4(a). (c) Neither party shall be entitled to receive the Breakup Fee hereunder if it shall have committed a material breach of this Agreement. 10. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All representations, warranties and covenants of the parties contained in this Agreement will remain operative and in full force and effect, regardless of any investigation made by or on behalf of the parties to this Agreement, until the earlier of the termination of this Agreement or the Closing Date, whereupon such representations, warranties and covenants will expire (except for covenants that by their terms survive for a longer period). 11. MISCELLANEOUS. 11.1 Governing Law. The internal laws of the State of Delaware (irrespective of its choice of law principles) will govern the validity of this Agreement, the construction of its terms and the interpretation and enforcement of the rights and duties of the parties hereto. 11.2 Assignment; Binding Upon Successors and Assigns. Neither party hereto may assign any of its rights or obligations hereunder without the prior written consent of the other party hereto. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.3 Severability. If any provision of this Agreement, or the application thereof, will for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the greatest extent possible, the economic, business and other purposes of the void or unenforceable provisions. 11.4 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. This Agreement will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of all the parties reflected hereon as signatories. 11.5 Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law on such party, and the exercise of any one remedy will not preclude the exercise of any other. 11.6 Amendment and Waivers. Any term or provision of this Agreement may be amended only in a writing signed by the party to be bound thereby. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be benefitted thereby. The waiver by a party of any breach hereof or default in the performance hereof will not be deemed to constitute a waiver of any other default or any succeeding breach or default. The Agreement may be amended by the parties hereto at any time before or after approval of the DSO stockholders or the KCI stockholders, but, after such approval, no amendment will be made which by applicable law requires the further approval of the DSO stockholders or the KCI stockholders without obtaining such further approval. 11.7 Expenses. Each party will bear its respective expenses and legal fees incurred with respect to this Agreement, and the transactions contemplated hereby. A-41 166 11.8 Attorney's Fees. Should suit be brought to enforce or interpret any part of this Agreement, the prevailing party will be entitled to recover, as an element of the costs of suit and not as damages, reasonable attorney's fees to be fixed by the court (including without limitation, costs, expenses and fees on any appeal). 11.9 Notices. All notices and other communications pursuant to this Agreement shall be in writing and deemed to be sufficient if contained in a written instrument and shall be deemed given if delivered personally, telecopied, sent by nationally-recognized overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to DSO to: DeSoto, Inc. 2101 E. 52nd St., 11th Floor New York, NY 10022 Attention: William Spier Telecopier: (212) 644-0499 With a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Attention: Peter Golden Telecopier: (212) 859-8586 And if to KCI: Keystone Consolidated Industries, Inc. Three Lincoln Centre 5430 LBJ Freeway, Suite 1740 Dallas, Texas 75240 Attention: Glenn R. Simmons Telecopier: (214) 458-8108 With a copy to: Godwin & Carlton, P.C. 901 Main Street, Suite 2500 Dallas, Texas 75202 Attention: James G. Vetter, Jr. Telecopier: (214) 760-7332 All such notices and other communications shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of a telecopy, when the party sending such copy shall have confirmed receipt of the communication, (c) in the case of delivery by nationally-recognized overnight courier, on the business day following dispatch, and (d) in the case of mailing, on the third business day following such mailing. 11.10 Construction of Agreement. This Agreement has been negotiated by the respective parties hereto and their attorneys and the language hereof will not be construed for or against either party. A reference to a Section or an Exhibit will mean a Section in, or Exhibit to, this Agreement unless otherwise explicitly set forth. The titles and headings herein are for convenience purposes only and will not in any manner limit the construction of this Agreement which will be considered as a whole. 11.11 No Joint Venture. Nothing contained in this Agreement will be deemed or construed as creating a joint venture or partnership between any of the parties hereto. No party is by virtue of this Agreement authorized as an agent, employee or legal representative of any other party. No party will have the power to control the activities and operations of any other. The status of the parties hereto is, and at all times, will continue to be, that of independent contractors with respect to each other. No party will have any power or authority to bind or commit any other. No party will hold itself out as having any authority or relationship in contravention of this Section. A-42 167 11.12 Further Assurances. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. 11.13 Absence of Third Party Beneficiary Rights. No provisions of this Agreement are intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, stockholder, partner or any party hereto or any other person or entity. 11.14 Public Announcement. Upon execution of this Agreement, KCI and DSO promptly will issue a joint press release approved by both parties announcing the Merger. Thereafter, KCI or DSO may issue such press releases, and make such other disclosure regarding the Merger, after consultation with the other party, as it determines are required under applicable securities laws or NYSE rules after consultation with legal counsel. 11.15 Entire Agreement. This Agreement and the exhibits hereto constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto other than the Confidentiality Agreements, which shall remain in full force and effect. The express terms hereof control and supersede any course of performance or usage of trade inconsistent with any of the terms hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement and Plan of Reorganization as of the date first above written. KEYSTONE CONSOLIDATED INDUSTRIES, INC. DESOTO, INC. By: /s/ GLENN R. SIMMONS By: /s/ WILLIAM SPIER ----------------------------------- ------------------------------- Glenn R. Simmons William Spier Chief Executive Officer Chief Executive Officer A-43 168 APPENDIX B OPINION OF PAINEWEBBER INCORPORATED 169 [PAINEWEBBER LETTERHEAD] June 26, 1996 Board of Directors Keystone Consolidated Industries, Inc. Three Lincoln Centre 5430 LBJ Freeway, Suite 1700 Dallas, Texas 75240 Gentlemen: Keystone Consolidated Industries, Inc. ("Keystone" or the "Company") has entered into an Agreement and Plan of Reorganization (the "Agreement") with DeSoto, Inc. ("DeSoto"). Pursuant to the Agreement, DeSoto will consolidate with a wholly-owned subsidiary of Keystone (the "Merger"). Upon the effectiveness of the Merger, all common stock of DeSoto, par value $1.00 per share and Associated Rights issued pursuant to a Rights Agreement between DeSoto and Harris Trust and Savings Bank will convert into the right to receive 0.7465 shares of common stock of Keystone (the "Exchange Ratio"). All outstanding DeSoto options will be converted into options to purchase Keystone common stock with the amount of options and exercise price to be determined by the Exchange Ratio. In addition, each share of DeSoto Series B Preferred Stock, $1.00 par value (the "DeSoto Preferred Stock"), will be converted into the right to receive the Exchange Ratio of shares of preferred stock issued by Keystone with substantially similar terms and conditions as the DeSoto Preferred Stock. Accrued interest on the DeSoto Preferred Stock will be paid by Keystone on the closing date. You have asked us whether or not, in our opinion, the proposed consideration to be paid by Keystone pursuant to the Merger is fair to Keystone stockholders, other than Contran Corporation and its affiliates, from a financial point of view. In arriving at the opinion set forth below, we have, among other things: (1) Reviewed, among other public information, Keystone's Annual Reports, Forms 10-K and related financial information for the five fiscal years ended December 31, 1995 and Keystone's Form 10-Q for the three months ended March 31, 1996; B-1 170 (2) Reviewed Keystone's financial projections dated May 3, 1996 prepared by Keystone's management; (3) Reviewed certain financial information relating to Keystone, including, earnings, cash flow, assets and liabilities statements, furnished to us by Keystone; (4) Conducted discussions with senior management of Keystone regarding (i) the Company's operations and business prospects, (ii) DeSoto's operations and business prospects and (iii) certain studies prepared by Keystone and its legal and accounting advisors relating to potential off-balance sheet items; (5) Considered the pro forma effect of the Merger on Keystone's cash flow and earnings per share; (6) Considered the pro forma balance sheet effects of the Merger on Keystone; (7) Reviewed, among other public information, DeSoto's Annual Reports, Forms 10-K and related financial information for the five fiscal years ended December 31, 1995 and DeSoto's Form 10-Q for the three months ended March 31, 1996; (8) Conducted interviews with senior management of DeSoto, regarding DeSoto's operations, financial condition and business prospects; (9) Reviewed the Agreement dated June 26, 1996; and (10) Reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as we deemed necessary including our assessment of regulatory, general economic, market and monetary conditions. In preparing our opinion, we have relied on the accuracy and completeness of all information that was publicly available or supplied or otherwise communicated to us by or on behalf of Keystone and DeSoto, and we have not assumed any responsibility to independently verify such information. We have assumed that the financial forecasts examined by us were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of Keystone as to the future performance of Keystone. In arriving at our opinion, we have assumed that, as a result of the Merger and the follow on merger of the pension plans, Keystone's liabilities calculated in accordance with generally accepted accounting principles with respect to its pension plan will be eliminated and that certain projected obligations of Keystone to fund such liabilities will be reduced. We have not undertaken, or caused to be taken, an independent evaluation B-2 171 or appraisal of the assets or liabilities (contingent or otherwise) of Keystone or DeSoto and have assumed that all material liabilities (contingent or otherwise, known or unknown) of Keystone and DeSoto are as set forth in Keystone's and DeSoto's respective consolidated financial statements and other provided information. Our opinion is directed to the Board of Directors of Keystone and does not constitute a recommendation to any shareholder of Keystone as to how any such shareholder should vote with respect to the Merger. This opinion does not address the relative merits of the Merger and any other potential transactions or business strategies discussed by the Board of Directors of Keystone as alternatives to the Merger or the decision of the Board of Directors of Keystone to proceed with the Merger. This opinion has been prepared solely for the use of the Board of Directors of Keystone and shall not be reproduced, summarized, described or referred to, or given to any other person or otherwise made public without the prior written consent of PaineWebber Incorporated; provided, however, that this letter may be reproduced in full in the Proxy Statement. In the ordinary course of our business, we may trade the securities of Keystone and DeSoto for our own account and for the accounts of our customers and, accordingly, may at any time hold long or short positions in such securities. On the basis of, and subject to the foregoing, we are of the opinion that the proposed consideration to be paid by Keystone pursuant to the Merger is fair to Keystone stockholders, other than Contran Corporation and its affiliates, from a financial point of view. Very truly yours, PAINEWEBBER INCORPORATED /s/ PAINEWEBBER INCORPORATED ----------------------------------- B-3 172 APPENDIX C OPINION OF SALOMON BROTHERS INC 173 [SALOMON BROTHERS LETTERHEAD] August 23, 1996 Board of Directors DeSoto, Inc. 101 East 52nd Street, 11th Floor New York, NY 10022 Members of the Board: You have requested our opinion as investment bankers as to the fairness, from a financial point of view, to the holders of common stock with a par value of $1.00 per share (the "Common Stock") of DeSoto, Inc. (the "Company") of the exchange ratio in the proposed merger (the "Merger") of the Company with Keystone Consolidated Industries, Inc. ("Keystone") pursuant to the Agreement and Plan of Reorganization dated as of June 26, 1996, between Keystone and the Company (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, each then issued and outstanding share of Common Stock not owned directly or indirectly by Keystone or the Company will be converted into 0.7465 of a share of common stock of Keystone (the "Exchange Ratio"). You have informed us that the Merger is intended to qualify as a tax-free reorganization for federal income tax purposes and to be accounted for as a purchase of the Company. In arriving at our opinion, we have considered, and if appropriate, reviewed and analyzed, among other things, the following (i) a draft of the Merger Agreement dated as of June 26, 1996, and have assumed that the final form of such agreement will not vary in any regard that is material to our analysis; (ii) certain publicly available business and financial information concerning the Company and Keystone; (iii) certain internal information, including financial projections, concerning the businesses and operations of the Company and Keystone that were prepared by management of the Company and Keystone, respectively; (iv) the historical and current market for the equity securities of the Company, Keystone and certain other companies that we believe to be comparable in certain respects to the Company and Keystone, including the current and historical relationships between the trading levels of the Company's Common Stock and Keystone's common stock; (v) the nature and terms of certain other acquisition transactions that we believe to be reasonably comparable or relevant; and (vi) information relating to the pension plans of the Company and Keystone. We have also had due diligence discussions with certain officers and employees of the Company and Keystone to discuss the foregoing, including the past and current business operations, financial condition and prospects of the Company and Keystone as well as other matters we 174 DeSoto, Inc. August 23, 1996 Page 2 believe relevant to our inquiry. We have also taken into account our assessment of general economic, market and financial conditions and our knowledge of the rod and wire industry, as well as our experience in connection with similar transactions and securities valuation generally. We have also considered such other information, financial studies, analyses, investigations and financial, economic, market and trading criteria which we deemed relevant to our inquiry. In our review and analysis and in arriving at our opinion, we have assumed and relied upon the accuracy and completeness of all of the financial, pension plan and other information provided to us or publicly available and have not assumed responsibility for verifying any of such information. With respect to the Company's and Keystone's financial projections, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the Company's or Keystone's management as to the future financial performance of the Company and Keystone, and we express no opinion with respect to such projections for the assumptions on which they are based. With respect to information relating to the Company's and Keystone's pension plans, we have relied upon information provided to us by the Company's and Keystone's management and accountants, and from the Company's actuaries and pension plan consultants. We have not made or obtained any independent evaluations or appraisals of any of the pension plans, assets (including properties and facilities) or liabilities of the Company or Keystone. Our opinion is necessarily based upon business, market, economic and other conditions as they exist on, and can be evaluated as of, the date hereof, and we assume no responsibility to update or revise our opinion based upon circumstances or events occurring after the date hereof. Our opinion does not address the Company's underlying business decision to effect the Merger or constitute a recommendation to any holder of Common Stock of the Company as to how such holder should vote with respect to the Merger. Our opinion as expressed below does not imply any conclusion as to the likely trading range for the common stock of Keystone following the consummation of the Merger, which may vary depending upon, among other factors, changes in interest rates, dividend rates, market conditions, general economic conditions and other factors that generally influence the price of securities. The Company has not requested us to solicit, and we have not solicited, other third party indications of interest or proposals to acquire all or any part of the Company. For purposes of rendering our opinion we have assumed, in all respects material to our analysis, that the representations and warranties of each party contained in the Merger Agreement are true and correct, that each party will perform all of the covenants and agreements required to be performed by it under the Merger Agreement and that all conditions to the consummation of the Merger will be satisfied without waiver thereof. We have also assumed that all material governmental, regulatory or other consents and approvals will be obtained and that in the course of obtaining any 175 DeSoto, Inc. August 23, 1996 Page 3 such necessary approvals, as contemplated by the Merger Agreement, no restrictions will be imposed or waivers made that would have any material adverse effect on the contemplated benefits of the Merger. We have not acted as the financial advisor to the Company in connection with the Merger and will receive fees from the Company solely related to our services in connection with this opinion, and such fees are contingent upon consummation of the Merger or termination of the Company's pension plan, whichever event occurs first. We have from time to time provided investment banking and related services to the Company, for which we have received customary fees. We will continue to maintain a relationship with certain principals of the Company and may provide them investment banking and other related services. In the ordinary course of our business, we may actively trade the debt and equity securities of the Company and Keystone for our own account and for the accounts of customers and, accordingly, may at any time hold a long or short position in such securities. This letter, and our opinion expressed herein, is not to be quoted, summarized or referred to, in whole or in part, without our prior written consent. Notwithstanding the foregoing, this opinion may be included or referred to in any registration statement or proxy statement sent to the shareholders of the Company and Keystone with respect to the Merger. Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Exchange Ratio in the Merger is fair, from a financial point of view, to the holders of Common Stock. Very truly yours, /s/ SALOMON BROTHERS INC SALOMON BROTHERS INC 176 APPENDIX D KEYSTONE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 INCORPORATED BY REFERENCE (FILE NO. 1-3919) [TO BE DELIVERED WITH JOINT PROXY STATEMENT/PROSPECTUS] 177 APPENDIX E KEYSTONE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996 INCORPORATED BY REFERENCE (FILE NO. 1-3919) [TO BE DELIVERED WITH JOINT PROXY STATEMENT/PROSPECTUS] 178 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of DGCL provides that, to the extent a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding, whether civil, criminal, administrative or investigative or in defense of any claim, issue, or matter therein (hereinafter a "Proceeding"), by reason of the fact that he is or was a director, officer, employee or agent of a corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise (collectively an "Agent" of the corporation), he shall be indemnified against expenses (including attorney's fees) actually and reasonably incurred by him in connection therewith. Section 145 also provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened Proceeding by reason of the fact that he is or was an Agent of the corporation, against expenses (including attorney's fees), judgment, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interest of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; provided, however, that in an action by or in the right of the corporation, the corporation may not indemnify such person in respect of any claim, issue, or matter as to which he is adjudged to be liable to the corporation unless, and only to the extent that, the Court of Chancery or the court in which such proceeding was brought determines that, despite the adjudication of liability but in view of all the circumstances of the case, such person is reasonably entitled to indemnity. Article V of the Bylaws of Registrant provides with respect to the indemnification of directors and officers that the Registrant shall indemnify to the same extent currently permitted by Section 145 of the DGCL, each person that such Section grants the Registrant power to indemnify. Article Eleventh of the Certificate of Incorporation of the Registrant provides that no director shall be personally liable to the corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except with respect to (1) a breach of the director's duty of loyalty to the corporation or its stockholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) liability under Section 174 of the DGCL, or (4) a transaction from which the director derived an improper personal benefit. Article Eleventh further provides that the liability of the corporation's directors to the corporation or its stockholders will be limited to the fullest extent permitted by Section 102(b)(7) of the DGCL, as amended from time to time. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. II-1 179 ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------------------- ------------------------------------------------------------------------ 2.1 -- Agreement and Plan of Reorganization, dated as of June 26, 1996, between Registrant and DeSoto, Inc. ("DeSoto") (the Agreement and Plan of Reorganization") (included as Appendix A to the Joint Proxy Statement/Prospectus which forms a part of the Registration Statement (the "Proxy Statement")). 5.1 -- Opinion of Godwin & Carlton, P.C. 8.1 -- Opinion of Godwin & Carlton, P.C. with respect to certain federal income tax aspects attendant to the Merger. 8.2 -- Opinion of Fried, Frank, Harris, Shriver & Jacobson with respect to certain federal income tax aspects attendant to the Merger. 9.1* -- Voting Agreement between Contran Corporation and DeSoto, dated June 26, 1996. 10.1 -- Amended and Restated Revolving Loan and Security Agreement dated as of December 29, 1995 between the Registrant and Congress Financial Corporation (Central). (Incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.2 -- Term Loan and Security Agreement between the Registrant and Congress Financial Corporation (Central) dated December 30, 1993. (Incorporated by reference to Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.3 -- Intercorporate Services Agreement between Registrant and Contran Corporation dated as of January 1, 1996. 10.5* -- Registrant's 1995 Incentive Compensation Plan. 10.6* -- Registrant's 1992 Non-Employee Director Stock Option Plan. 10.7* -- Preferred Stockholder Waiver and Consent Agreement between Registrant, Coatings Group, Inc., Asgard, Ltd. and Parkway M&A Capital Corporation, dated June 26, 1996 (collectively, the "Sutton Entities"). 10.8* -- Voting Agreement by and among the Registrant, the Sutton Entities and Anders U. Schroeder dated June 26, 1996. 10.9* -- Warrant Conversion Agreement between the Sutton Entities and Registrant, dated June 26, 1996. 10.10* -- Stockholders Agreement by and among Registrant, the Sutton Entities, DeSoto and Contran Corporation, dated June 26, 1996. 10.11 -- DeSoto Salaried Employees' Pension Preservation Plan. 10.12 -- Form of DeSoto Employees Retirement Plan. 10.13 -- Plan and Agreement of Merger, dated as of August 21, 1992, by and among DeSoto, DeSoto Subsidiary One Corp. and J.L. Prescott Company. 10.14 -- Stock Redemption Agreement, dated as of August 21, 1992, by and among Narragansett/Prescott, Inc., DeSoto, Inc., and Matthew Carroll. 10.15 -- Letter Agreement, dated as of August 21, 1992, by and between Narragansett/Prescott, Inc. and DeSoto. 10.16 -- Stockholders Agreement, dated as of August 21, 1992, by and between Narragansett/Prescott, Inc. and DeSoto.
II-2 180
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - -------------------- ------------------------------------------------------------------------ 10.17 -- Real Estate Sale Contract, dated as of December 1, 1994, between DeSoto as Seller, and John M. Gillen, not personally but as Trustee of the DeSoto, Inc. Pension Plans Real Property Trust under Trust Agreement, dated October 1, 1992 (the "Trustee"), as Purchaser. 10.18 -- Industrial Building Lease, dated December 7, 1994, between Trustee as Landlord and DeSoto as Tenant relating to the property at 16750 South Vincennes Road, South Holland, Illinois. 10.19 -- Letter Agreement, dated August 6, 1993, between DeSoto, Inc. and John Gillen, Trustee of The DeSoto Pension Plans Real Property Trust, dated August 6, 1993. 10.20* -- Severance Agreement between DeSoto and Anne E. Eisele, President and Chief Financial Officer of DeSoto, as amended dated March 12, 1996. 10.21* -- Severance Agreement between DeSoto and Fred J. Flaxmayer, Controller and Chief Accounting Officer of DeSoto as amended dated March 12, 1996. 10.22* -- Trade Composition Agreement by and among DeSoto, Rock-Tenn Company, Veratec, Inc., Owens-Illinois, Inc., Stepan Company, Glenn Corporation, Vista Chemical Company and Richard Holmes, as agent dated as of January 16, 1996. 10.23* -- Security Agreement between DeSoto and Richard Holmes, as Agent dated as of July 18, 1996. 13.1 -- Registrant's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1996. (Incorporated by Reference -- File No. 1-3919). 23.1 -- Consent of Coopers & Lybrand, L.L.P. 23.2 -- Consent of Arthur Andersen LLP 23.3 -- Consent of Godwin & Carlton, P.C. (included in Exhibits 5.1 and 8.1). 23.4 -- Consent of Fried, Frank, Harris, Shriver & Jacobson (Included in Exhibit 8.2). 23.5 -- Consent of PaineWebber Incorporated ("PaineWebber") (Included in Appendix B to the Joint Proxy Statement/Prospectus). 23.6 -- Consent of Salomon Brothers Inc. 99.1 -- Form of Proxy to be used by Registrant. 99.2 -- Form of Proxy to be used by DeSoto. 99.3 -- Opinion of PaineWebber (Incorporated by reference to Appendix B to the Joint Proxy Statement/Prospectus). 99.4 -- Opinion of Salomon Brothers Inc (Incorporated by reference to Appendix C to the Joint Proxy Statement/Prospectus).
- --------------- * Previously filed II-3 181 ITEM 22. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment to the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questions whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (c) The undersigned Registrant hereby undertakes to respond to requests for information that are incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. II-4 182 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on the 22nd day of August, 1996. KEYSTONE CONSOLIDATED INDUSTRIES, INC. By: /s/ GLENN R. SIMMONS ---------------------------------- Glenn R. Simmons, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------ ---------------- * Chairman of the Board, Chief August 22, 1996 - --------------------------------------------- Executive Officer and Glenn R. Simmons Director (Principal Executive Officer) * President and Chief Operating August 22, 1996 - --------------------------------------------- Officer Robert W. Singer * Vice President -- Finance and August 22, 1996 - --------------------------------------------- Treasurer (Principal Harold M. Curdy Financial Officer) * Corporate Controller August 22, 1996 - --------------------------------------------- (Principal Accounting Bert E. Downing, Jr. Officer) * Director August 22, 1996 - --------------------------------------------- Thomas E. Barry * Director August 22, 1996 - --------------------------------------------- Paul M. Bass, Jr. * Director August 22, 1996 - --------------------------------------------- David E. Connor * Director August 22, 1996 - --------------------------------------------- Donald A. Sommer * Vice Chairman of the Board and August 22, 1996 - --------------------------------------------- Director J. Walter Tucker, Jr. * Director August 22, 1996 - --------------------------------------------- Richard N. Ullman *By: /s/ RALPH P. END --------------------------------- Ralph P. End, Attorney In Fact
II-5 183 KEYSTONE CONSOLIDATED INDUSTRIES, INC. INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ---------- ------------------------------------------------------------------------ 2.1 -- Agreement and Plan of Reorganization, dated as of June 26, 1996, between Registrant and DeSoto, Inc. ("DeSoto") (the Agreement and Plan of Reorganization") (included as Appendix A to the Joint Proxy Statement/Prospectus which forms a part of the Registration Statement (the "Proxy Statement")). 5.1 -- Opinion of Godwin & Carlton, P.C. 8.1 -- Opinion of Godwin & Carlton, P.C. with respect to certain federal income tax aspects attendant to the Merger. 8.2 -- Opinion of Fried, Frank, Harris, Shriver & Jacobson with respect to certain federal income tax aspects attendant to the Merger. 9.1* -- Voting Agreement between Contran Corporation and DeSoto, dated June 26, 1996. 10.1 -- Amended and Restated Revolving Loan and Security Agreement dated as of December 29, 1995 between the Registrant and Congress Financial Corporation (Central). (Incorporated by reference to Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.2 -- Term Loan and Security Agreement between the Registrant and Congress Financial Corporation (Central) dated December 30, 1993. (Incorporated by reference to Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.) 10.3 -- Intercorporate Services Agreement between Registrant and Contran Corporation dated as of January 1, 1996. 10.5* -- Registrant's 1995 Incentive Compensation Plan 10.6* -- Registrant's 1992 Non-Employee Director Stock Option Plan 10.7* -- Preferred Stockholder Waiver and Consent Agreement between Registrant, Coatings Group, Inc., Asgard, Ltd. and Parkway M&A Capital Corporation, dated June 26, 1996 (collectively, the "Sutton Entities"). 10.8* -- Voting Agreement by and among the Registrant, the Sutton Entities and Anders U. Schroeder dated June 26, 1996. 10.9* -- Warrant Conversion Agreement between the Sutton Entities and Registrant, dated June 26, 1996. 10.10* -- Stockholders Agreement by and among Registrant, the Sutton Entities, DeSoto and Contran Corporation, dated June 26, 1996. 10.11 -- DeSoto Salaried Employees' Pension Preservation Plan. 10.12 -- Form of DeSoto Employees Retirement Plan. 10.13 -- Plan and Agreement of Merger, dated as of August 21, 1992, by and among DeSoto, DeSoto Subsidiary One Corp. and J.L. Prescott Company. 10.14 -- Stock Redemption Agreement, dated as of August 21, 1992, by and among Narragansett/Prescott, Inc., DeSoto, Inc., and Matthew Carroll. 10.15 -- Letter Agreement, dated as of August 21, 1992, by and between Narragansett/Prescott, Inc. and DeSoto. 10.16 -- Stockholders Agreement, dated as of August 21, 1992, by and between Narragansett/Prescott, Inc. and DeSoto.
184
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ---------- ------------------------------------------------------------------------ 10.17 -- Real Estate Sale Contract, dated as of December 1, 1994, between DeSoto as Seller, and John M. Gillen, not personally but as Trustee of the DeSoto, Inc. Pension Plans Real Property Trust under Trust Agreement, dated October 1, 1992 (the "Trustee"), as Purchaser. 10.18 -- Industrial Building Lease, dated December 7, 1994, between Trustee as Landlord and DeSoto as Tenant relating to the property at 16750 South Vincennes Road, South Holland, Illinois. 10.19 -- Letter Agreement, dated August 6, 1993, between DeSoto, Inc. and John Gillen, Trustee of The DeSoto Pension Plans Real Property Trust, dated August 6, 1993. 10.20* -- Severance Agreement between DeSoto and Anne E. Eisele, President and Chief Financial Officer of DeSoto, as amended dated March 12, 1996. 10.21* -- Severance Agreement between DeSoto and Fred J. Flaxmayer, Controller and Chief Accounting Officer of DeSoto, Inc., as amended dated March 12, 1996. 10.22* -- Trade Composition Agreement by and among DeSoto, Rock-Tenn Company, Veratec, Inc., Owens-Illinois, Inc., Stepan Company, Glenn Corporation, Vista Chemical Company and Richard Holmes, as agent dated as of January 16, 1996. 10.23* -- Security Agreement between DeSoto and Richard Holmes, as Agent, dated as of July 18, 1996 13.1 -- Registrant's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1996. (Incorporated by Reference -- File No. 1-3919). 23.1 -- Consent of Coopers & Lybrand, L.L.P. 23.2 -- Consent of Arthur Andersen LLP 23.3 -- Consent of Godwin & Carlton, P.C. (included in Exhibits 5.1 and 8.1). 23.4 -- Consent of Fried, Frank, Harris, Shriver & Jacobson (Included in Exhibit 8.2). 23.5 -- Consent of PaineWebber Incorporated ("PaineWebber") (Included in Appendix B to the Joint Proxy Statement/Prospectus). 23.6 -- Consent of Salomon Brothers Inc. 99.1 -- Form of Proxy to be used by Registrant. 99.2 -- Form of Proxy to be used by DeSoto. 99.3 -- Opinion of PaineWebber (Incorporated by reference to Appendix B to the Joint Proxy Statement/Prospectus). 99.4 -- Opinion of Salomon Brothers Inc (Incorporated by reference to Appendix C to the Joint Proxy Statement/Prospectus).
- --------------- * Previously Filed EX-5.1 2 OPINION OF GODWIN & CARLTON, PC 1 EXHIBIT 5.1 [On Godwin & Carlton, P.C. Letterhead] August 22, 1996 Keystone Consolidated Industries, Inc. Three Lincoln Centre 5430 LBJ Freeway, Suite 1740 Dallas, Texas 75240-2697 Ladies and Gentlemen: We refer to the registration statement on Form S-4 (the "Registration Statement") filed by Keystone Consolidated Industries, Inc. (the "Company"), a Delaware corporation, with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), relating to the registration of 3,637,000 shares of common stock, par value $1.00 per share, of the Company (the "Keystone Common Stock"), issuable in connection with the merger (the "Merger") of a wholly owned subsidiary of the Company, with and into DeSoto, Inc., ("DeSoto") a Delaware corporation, all as set forth in the Agreement and Plan of Reorganization dated June 26, 1996 between the Company and DeSoto (the "Merger Agreement"). We have acted as counsel for the Company in connection with the transaction contemplated by the Merger Agreement, in such capacity are familiar with the details of said transaction and have examined such records, documents and questions of law, and have satisfied ourselves as to such matters of fact, as we have considered relevant and necessary as a basis for this opinion. Based on the foregoing, we are of the opinion that the Keystone Common Stock to be issued in the Merger will be legally issued, fully paid and nonassessable when (a) the Registration Statement shall have become effective under the Securities Act; and (b) certificates representing such Keystone Common Stock shall have been duly executed, countersigned and registered and duly delivered in accordance with the Merger Agreement. We do not find it necessary for purposes of this opinion to cover, and accordingly express no opinion as to, the application of the securities or blue sky laws of the various states to the issuance of Keystone Common Stock in the Merger. The opinions herein are limited to the laws of the State of Texas, and we do not express any opinion concerning any laws other than the laws of the State of Texas, the corporate laws of the State of Delaware and the Federal laws of the United States of America, and we express no opinion as to the effect on the matters covered by this opinion of the laws of any other jurisdiction. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to all references to us included in or made a part of the Registration Statement. Very truly yours, GODWIN & CARLTON, P.C. By: /s/ Godwin & Carlton, P.C. -------------------------- Godwin & Carlton, P.C. EX-8.1 3 OPINION OF GODWIN & CARLTON 1 EXHIBIT 8.1 [On Godwin & Carlton, P.C. Letterhead] August 22, 1996 Keystone Consolidated Industries, Inc. Three Lincoln Centre 5430 LBJ Freeway, Suite 1740 Dallas, Texas 75240-2697 Ladies and Gentlemen: You have requested our opinion regarding certain federal income tax consequences of the proposed merger (the "Merger") of a direct, wholly owned subsidiary of Keystone Consolidated Industries, Inc. ("Keystone") with and into DeSoto, Inc. ("DeSoto"), pursuant to an Agreement and Plan of Reorganization dated as of June 26, 1996 between Keystone and DeSoto (the "Merger Agreement"). We have acted as counsel for Keystone and Sub in connection with the transaction contemplated by the Merger Agreement and in such capacity are familiar with the details of said transaction. The following opinion is based on our review of the Merger Agreement, the Registration Statement on Form S-4 (File No. 333-0917) and the preliminary from of Proxy Statement/Prospectus with respect to the Merger as filed with the Securities and Exchange Commission on July 30, 1996 (the "Registration Statement"), and such other materials and documents as we have deemed appropriate. In rendering our opinion, we have assumed that the Merger will be consummated as described in the Merger Agreement and the Registration Statement, that the facts, representations, and warranties set forth in the Merger Agreement and the Registration Statement are accurate, and that the covenants, conditions, and obligations set forth in the Merger Agreement have been and will be fulfilled. We have also relied on and assumed the accuracy and fulfillment of the representations and covenants contained in certificates that have been provided to us by you and by DeSoto. Capitalized terms not otherwise defined herein shall have the same meanings as they have for purposes of the Registration Statement. On the basis of the foregoing, we are of the opinion, based on existing law and regulations, that the Merger will constitute a reorganization for federal income tax purposes within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended. 2 Keystone Consolidated Industries, Inc. August 22, 1996 Page 2 Attorneys involved in the preparation of this opinion are admitted to practice law in the State of Texas and we do not purport to be experts on, or to express any opinion herein concerning, any law other than the laws of the State of Texas and the federal laws of the United States of America. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to all references to us included in or made a part of the Registration Statement. Very truly yours, GODWIN & CARLTON, P.C. By: /s/ Godwin & Carlton, P.C. ------------------------------ Godwin & Carlton, P.C. EX-8.2 4 OPINION OF FRIED, FRANK, HARRIS, SHRIVER & JACOBSN 1 EXHIBIT 8.2 212-859-8171 (FAX: 212-859-8588) August 23, 1996 DeSoto, Inc. 900 East Washington Street Joliet, Illinois 60433 RE: Federal Income Tax Consequences of Merger of a Keystone Consolidated Industries, Inc. Subsidiary into DeSoto, Inc. Gentlemen: You have requested our opinion as to certain federal income tax consequences of the proposed merger (the "Merger") of a wholly-owned subsidiary ("Sub") of Keystone Consolidated Industries, Inc. ("Keystone"), into DeSoto, Inc. ("DeSoto"), pursuant to which DeSoto will become a wholly-owned subsidiary of Keystone. In reaching the opinions expressed below, we have reviewed and relied on (i) the Agreement and Plan of Reorganization, dated as of June 26, 1996, between Keystone and DeSoto (the "Merger Agreement"), and (ii) certain representations made by Keystone, DeSoto and certain stockholders of DeSoto. Based upon and subject to the foregoing, and assuming that the Merger and related transactions take place in accordance with all the terms of the Merger Agreement, it is our opinion that the Merger will constitute a reorganization for federal income tax purposes within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended. The opinion expressed herein is solely for your benefit and the benefit of holders of outstanding DeSoto common stock and may not be relied on in any manner or for any purpose by any other person or entity. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement on Form S-4 and to the reference to this firm under the caption "The Reorganization Agreement - Certain Federal Income Tax Matters" in the Joint Proxy Statement/Prospectus included as part of the Registration Statement. Very truly yours, FRIED, FRANK, HARRIS, SHRIVER & JACOBSON By: /s/Lee S. Parker ------------------------------------- Lee S. Parker EX-10.3 5 INTERCORPORATE SERVICES AGREEMENT 1 EXHIBIT 10.3 INTERCORPORATE SERVICES AGREEMENT This INTERCORPORATE SERVICES AGREEMENT (the "AGREEMENT"), effective as of January 1, 1996, amends and supersedes that certain Intercorporate Services Agreement effective as of January 1, 1995 between CONTRAN CORPORATION, a Delaware corporation ("CONTRAN"), and KEYSTONE CONSOLIDATED INDUSTRIES, INC., a Delaware corporation ("RECIPIENT"). RECITALS A. Employees and agents of Contran and affiliates of Contran, including Harold C. Simmons, perform management, financial and administrative functions for Recipient without direct compensation from Recipient. B. Recipient does not separately maintain the full internal capability to perform all necessary management, financial and administrative functions that Recipient requires. C. The cost of maintaining the additional personnel by Recipient necessary to perform the functions provided for by this Agreement would exceed the fee set forth in SECTION 3 of this Agreement and that the terms of this Agreement are no less favorable to Recipient than could otherwise be obtained from a third party for comparable services. D. Recipient desires to continue receiving the management, financial and administrative services presently provided by Contran and affiliates of Contran and Contran is willing to continue to provide such services under the terms of this Agreement. AGREEMENT For and in consideration of the mutual premises, representations and covenants herein contained, the parties hereto mutually agree as follows: SECTION 1. SERVICES TO BE PROVIDED. Contran agrees to make available to Recipient, upon request, the following services (the "SERVICES") to be rendered by the internal staff of Contran and affiliates of Contran: (a) Consultation and assistance in the development and implementation of Recipient's corporate business strategies, plans and objectives; (b) Consultation and assistance in management and conduct of corporate affairs and corporate governance consistent with the charter and bylaws of Recipient; (c) Consultation and assistance in maintenance of financial records and controls, including preparation and review of periodic financial statements and reports to be filed with public and regulatory entities and those required to be prepared for financial institutions or pursuant to indentures and credit agreements; 2 (d) Consultation and assistance in cash management and in arranging financing necessary to implement the business plans of Recipient; (e) Consultation and assistance in tax management and administration, including, without limitation, preparation and filing of tax returns, tax reporting, examinations by government authorities and tax planning; (f) Consultation and assistance in performing internal audit and control functions; (g) Consultation and assistance with respect to insurance and risk management; (h) Consultation and assistance with respect to employee benefit plans and incentive compensation arrangements; and (i) Such other services as may be requested by Recipient from time to time. SECTION 2. MISCELLANEOUS SERVICES. It is the intent of the parties hereto that Contran provide only the Services requested by Recipient in connection with routine management, financial and administrative functions related to the ongoing operations of Recipient and not with respect to special projects, including corporate investments, acquisitions and divestitures. The parties hereto contemplate that the Services rendered in connection with the conduct of Recipient's business will be on a scale compared to that existing on the effective date of this Agreement, adjusted for internal corporate growth or contraction, but not for major corporate acquisitions or divestitures, and that adjustments may be required to the terms of this Agreement in the event of such major corporate acquisitions, divestitures or special projects. Recipient will continue to bear all other costs required for outside services including, but not limited to, the outside services of attorneys, auditors, trustees, consultants, transfer agents and registrars, and it is expressly understood that Contran assumes no liability for any expenses or services other than those stated in SECTION 1. In addition to the fee paid to Contran by Recipient for the Services provided pursuant to this Agreement, Recipient will pay to Contran the amount of out-of-pocket costs incurred by Contran in rendering such Services. SECTION 3. FEE FOR SERVICES. Recipient agrees to pay to Contran $116,250.00 quarterly, commencing as of January 1, 1996, pursuant to this Agreement. SECTION 4. ORIGINAL TERM. Subject to the provisions of SECTION 5 hereof, the original term of this Agreement shall be from January 1, 1996 to December 31, 1996. SECTION 5. EXTENSIONS. This Agreement shall be extended on a quarter-to-quarter basis after the expiration of its original term unless written notification is given by Contran or Recipient thirty (30) days in advance of the first day of each successive quarter or unless it is superseded by a subsequent written agreement of the parties hereto. SECTION 6. LIMITATION OF LIABILITY. In providing its Services hereunder, Contran shall -2- 3 have a duty to act, and to cause its agents to act, in a reasonably prudent manner, but neither Contran nor any officer, director, employee or agent of Contran or its affiliates shall be liable to Recipient for any error of judgment or mistake of law or for any loss incurred by Recipient in connection with the matter to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the part of Contran. SECTION 7. INDEMNIFICATION OF CONTRAN BY RECIPIENT. Recipient shall indemnify and hold harmless Contran, its affiliates and their respective officers, directors and employees from and against any and all losses, liabilities, claims, damages, costs and expenses (including attorneys' fees and other expenses of litigation) to which such party may become subject arising out of the Services provided by Contran to Recipient hereunder, provided that such indemnity shall not protect any person against any liability to which such person would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence on the part of such person. SECTION 8. FURTHER ASSURANCES. Each of the parties will make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions, as the other party may reasonably request and as may reasonably be required in order to effectuate the purposes of this Agreement and to carry out the terms hereof. SECTION 9. NOTICES. All communications hereunder shall be in writing and shall be addressed, if intended for Contran, to Three Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240, Attention: President, or such other address as it shall have furnished to Recipient in writing, and if intended for Recipient, to Three Lincoln Centre, 5430 LBJ Freeway, Suite 1740, Dallas, Texas 75240, Attention: Chairman of the Board, or such other address as it shall have furnished to Contran in writing. SECTION 10. AMENDMENT AND MODIFICATION. Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated other than by agreement in writing signed by the parties hereto. SECTION 11. SUCCESSOR AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Contran and Recipient and their respective successors and assigns, except that neither party may assign its rights under this Agreement without the prior written consent of the other party. SECTION 12. GOVERNING LAW. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Texas. -3- 4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. CONTRAN CORPORATION By: --------------------------------------- Steven L. Watson Vice President KEYSTONE CONSOLIDATED INDUSTRIES, INC. By: --------------------------------------- Glenn R. Simmons Chairman of the Board and Chief Executive Officer EX-10.11 6 DE SOTO SALERIED EMPLOYEES' PENSION PRSRVTION PLAN 1 EXHIBIT 10.11 DESOTO SALARIED EMPLOYEES' PENSION PRESERVATION PLAN (effective as of December 13, 1985) 2 DESOTO SALARIED EMPLOYEES' PENSION PRESERVATION PLAN SECTION 1. - ESTABLISHMENT OF THE PLAN 1.1 Establishment of the Plan. DeSoto, Inc. hereby establishes a supplemental retirement plan for certain of its eligible employees to be known as the "DESOTO SALARIED EMPLOYEES' PENSION PRESERVATION PLAN" ("Plan"), effective as to employees whose employment terminates after December 13, 1985. SECTION 2. - DEFINITIONS 2.1 Definitions. Whenever used in the Plan, the following terms shall have the meanings set forth below unless the context clearly indicates otherwise: (a) "Company" means DeSoto, Inc. (b) "Employee" means any employee of an Employer who is eligible to participate and who is participating in the Pension Plan. (c) "Employer" The Company and any of its subsidiaries which is authorized by the Board to adopt and which does adopt the Plan. (d) "Pension Plan" means the DeSoto Salaried Employees' Pension Plan. (e) "Retirement Committee" means the Retirement Committee appointed by the Board of Directors of the Company in accordance with applicable provisions of the Pension Plan. 2.2 Number and Gender. Except when otherwise indicated by the context, the definition of any term herein in the singular may also include the plural and the masculine may also include the feminine. -2- 3 SECTION 3. - BENEFITS 3.1 Eligibility for Benefits. An Employee of the Company who, on or after completing 10 "Years of Employment" under the Pension Plan, terminates employment for any reason and is eligible for and elects retirement or vested benefits under the Pension Plan, shall be eligible to receive a benefit under the Plan. For this purpose, an Employee who is receiving disability benefit payments on the later of his 65th birthday or the date benefits under an insured long-term disability program maintained by the Company end shall be deemed to have terminated employment on such date. 3.2 Normal Retirement Benefit. An Employee eligible for benefits hereunder who terminates employment for a reason other than death on or after age 65 shall receive a monthly benefit for life beginning on the first day of the month following his month of retirement in an amount equal to (a) 1-2/3% of his "Average Compensation" multiplied by his total years of "Service" less 1-2/3% of his "Primary Social Security Benefit" multiplied by his total years of "Service" (not to exceed 50% of his "Primary Social Security Benefits"), reduced by (b) the monthly benefit for life payable pursuant to section 5.1 or 5.3 of the Pension Plan as reduced in accordance with section 6.1 of the Pension Plan. For this purpose, the terms "Average Compensation", "Primary Social Security Benefit", and "Service" shall be defined in accordance with the applicable provisions of the Pension Plan. -3- 4 3.3 Early Retirement Benefit. An Employee eligible for benefits hereunder pursuant to Section 3.1 who terminates employment for a reason other than death prior to age 65 shall be entitled to receive a monthly benefit determined, except as otherwise provided in this Section 3.3, as for retirement on or after age 65 but considering only "Service" and "Average Compensation" prior to actual retirement or termination of employment. An eligible Employee may elect benefit payments beginning on the first day of any month following the later of (i) his termination of employment, or (ii) his 55th birthday, in which event the benefit determined pursuant to Section 3.2 shall be reduced by an amount equal to 1/2 of 1% of the benefit that would otherwise be payable at age 65 multiplied by the number of months between the commencement of payments and the end of the month in which the Employee will attain age 65. 3.4 Survivor's Benefit. If any Employee dies while in the employ of the Company or while he is receiving disability payments under an insured long-term disability program maintained by the Company, and if he has at least one "Year of Employment" under the Pension Plan, a survivor's benefit may be paid subject to the provisions of this Section 3.4. The survivor's benefit payable hereunder shall be a monthly benefit equal to (a) the monthly benefit calculated pursuant to Section 5.9 of the Pension Plan without regard to the limitations imposed by Section 6 of the Pension Plan, less (b) the aggregate survivor's benefit payable pursuant to Section 5.8 and 5.9 of the Pension Plan as reduced in accordance with section 6.1 of the Pension Plan. If -4- 5 on the date of death, any person qualifies as a Dependent Spouse or Dependent Child, such benefits shall commence on the first day of the month following or coincident with the date of death and shall continue thereafter monthly for the period during which any person so qualifies. If at any time a spouse qualifies for payments hereunder, payments shall be made to such spouse to the exclusion of any dependent children. If at any time more than one child qualifies, the benefits shall be divided equally among them. The term "Dependent Spouse" shall mean (a) in the case of an Employee who dies after attaining age 55 and completing 10 "Years of Employment" within the meaning of the Pension Plan, the spouse of said Employee, and (b) in the case of an Employee who dies prior to attaining age 55 and completing 10 Years of Employment within the meaning of the Pension Plan, the spouse of said Employee who is residing with the Employee at the date of his death, whose annual income in any of the three calendar years immediately preceding the date of death was less than that of the Employee, and who has not remarried. The term "Dependent Child" shall have the same meaning as in the Federal Social Security Act in effect on the date of the Employee's death. The survivor benefit hereunder shall be paid and administered under applicable rules of the Pension Plan. SECTION 4. - FORM OF BENEFIT 4.1 Normal Form. The normal form of payment of a benefit under the Plan, other than a survivor's benefit, shall be a single-life annuity, payable monthly, beginning on the date benefit payments commence under the Pension Plan. -5- 6 4.2 Optional Forms. Upon the written request of an Employee or former Employee who is eligible to receive benefits under the Plan, filed with and approved by the Retirement Committee in accordance with rules governing such requests, the benefit to which such Employee or former Employee is entitled under section 3.2 or 3.3 shall be payable under any one of the "Optional Forms of Benefits" specified in section 5.7 of the Pension Plan. Each of these forms of payment shall be payable monthly and shall be the actuarial equivalent of the normal form of benefit, determined in accordance with the applicable provisions of the Pension Plan. In the event an Employee does not file a written request as above provided, benefits under the Plan shall be paid in the same optional form as is used to pay benefits under the Pension Plan. SECTION 5. - ADMINISTRATION 5.1 Administration. The Retirement Committee shall be charged with the administration and interpretation of the Plan, but may delegate the administrative duties hereunder to such persons as it determines. The Retirement Committee may adopt such rules as may be necessary or appropriate for the proper administration of the Plan. To the extent that such rules are not adopted, applicable rules relating to the administration of the Retirement Plan shall govern. The decision of the Retirement Committee in all matters involving the interpretation and application of the Plan shall be final. -6- 7 5.2 Funding of the Plan. Benefits under the Plan shall be paid out of the general assets of the Company, and no trust or other separate fund shall be established for funding of the Plan. 5.3 Non-alienation. No benefit payable at any time under the Plan shall be subject in any manner to alienation, sale, transfer, assignment, pledge, attachment, garnishment or encumbrance of any kind, and shall not be subject to or reached by any legal or equitable process (including execution, garnishment, attachment, pledge, bankruptcy or obligation for alimony or child support payments) in satisfaction of any debt, liability or obligation, prior to receipt. Any attempt to alienate, sell, transfer, assign, pledge, or otherwise encumber any such benefit, whether presently or thereafter payable, shall be void. 5.4 Distributions Payable to Incompetents. If any person entitled to a distribution under the Plan shall be under legal disability, or in the sole judgment of the Retirement Committee, shall otherwise be unable to apply such distribution to his own best interest and advantage, the Retirement Committee in the exercise of its discretion, may direct all or any portion of such distribution to be made in any one or more of the following ways: (a) Directly to such person; (b) To his legal guardian or conservator; or (c) To his spouse or to any other person, to be expended for his benefit. The decision of the Retirement Committee will, in each case, be final and binding upon all persons, and neither the Retirement Committee nor the Company shall not be obliged to see to the -7- 8 proper application or expenditure of any distribution so made. Any payment made pursuant to the power herein conferred shall operate as a complete discharge of all obligations under the Plan as to such distribution. 5.5 Amendment and Termination. The Company reserves the right to amend, modify, terminate or partially terminate the Plan at any time by action of its Board of Directors. 5.6 Applicable Law. The Plan and all rights hereunder shall be governed, construed and administered in accordance with the laws of the State of Illinois. DESOTO, INC. By [ILLEGIBLE] ----------------------------------- Chairman of the Board and President -8- 9 [METROPOLITAN LIFE LETTERHEAD] Ms. Dan Zacharski DeSoto, Inc. 1700 S. Mt. Prospect Road Des Plaines, IL 60017 Re: GAC 12078 - Additional lives Dear Dan: As we discussed, the cost of the additional 2 lives is $265,000 payable July 1, 1991. This covers the following benefits:
Monthly Name S.S. # D.O.B. Amount Form Spouse S.S. # D.O.B. - ---------------------------------------------------------------------------------------------------------------- Misser, R.R. ###-##-#### 7/3/30 1899.71 50% J&S Jacqueline ###-##-#### 3/31/33 - ---------------------------------------------------------------------------------------------------------------- Kersch, R.S. ###-##-#### 4/30/28 126.35 50% J&S Marilyn ###-##-#### 3/16/29 - ----------------------------------------------------------------------------------------------------------------
I should also note the following points: 1. We will be making payments beginning July 1, 1991 on both Misser and Kersch. 2. An interest adjustment will be made if DeSoto wishes to pay earlier or later than July 1, 1991. If you have any questions on the above, please give me a call at (212) 578-8109. Sincerely, JON ABOUAF - ---------------------- Jon Abouaf Non Par Associate May 31, 1991 cc: Bob Lynch, Daisy Serrano 10 reasonable adjustments to reflect medical care cost-inflation and changes in Medicare coverages. (c) If, at the date of Termination of Employment the Executive is fifty-five (55) or more years old and has been employed by the Company for ten (10) or more years, the Executive shall continue to be provided by the Company after the close of the Payment Period a life insurance benefit equal to fifty percent (50%) of the Executive's Annual Base Compensation. such life insurance benefit shall be provided by the Company without charge to the Executive and shall remain in effect during the life of the Executive. The Executive shall designate the beneficiary of such life insurance benefit and may change such designation from time to time. 2. In the event of a Termination of Employment the Executive may, at any time during the Payment Period, engage an outplacement firm for individual outplacement services. The Company shall promptly pay the full cost of such engagement up to an amount which does not exceed fifteen percent (15%) of the Executive's Annual Base Compensation and Annual Bonus. In addition, the Company shall promptly reimburse the Executive for the Executive's income tax liability resulting from such payment by the Company or, at the election of the Company, promptly provide to the Executive an opinion of outside legal counsel, upon which the Executive is entitled to rely, clearly opining that such payment by the Company is not taxable income to the Executive. For purposes of the tax reimbursement the Executive shall be deemed to pay all applicable income taxes at their highest marginal rates. 3. In the event of a Termination of Employment after the Executive has earned twenty (20) years of Service under the DeSoto Salaried Employee's Pension Plan (the "Pension Plan"), the Executive shall receive retirement benefits in accordance with the Pension Plan. In the event of a Termination of Employment prior to the date the Executive has earned twenty (20) years of Service under the Pension Plan, in addition to benefits payable to the Executive pursuant to the Pension Plan, the Executive shall be entitled to receive supplemental retirement benefits from the Company equal in value to the difference between (a) the benefits to which the Executive would have been entitled under the Pension Plan assuming twenty (20) years of earned Service or such lesser number of years of earned Service as the Executive would have earned by continuing employment with the Company until Retirement Age (in either case at an assumed annual salary for each year of assumed Service following the date of the Termination of Employment equal to the Executive's Annual Base Compensation plus the Executive's Annual Bonus) and (b) the benefits which the Executive is entitled to receive under the Pension Plan. Any supplemental -3- 11 retirement benefits payable by the Company shall be payable to the same extent and in the same form as, and commencing on the date on which, benefit payments commence under the Pension Plan (including payment pursuant to any option thereunder, including early retirement, payment elections, and beneficiary designations). 4. For the purposes of this Agreement, a Change in Control shall occur at such time as: (a) Any person (as hereinafter defined in Paragraph 6(f)) becomes a Beneficial Owner (as hereinafter defined in Paragraph 6(c)), directly or indirectly, of shares of the Company's voting stock (as hereinafter defined in Paragraph 6(c)) representing at least thirty-five percent (35%) or more of the Company's issued and outstanding voting stock; (b) One-third or more of the membership of the Board consists of members not nominated for membership by the Company or the Board; or (c) The sale, assignment, or transfer by the Company of one-half or more of the fixed assets of the Company or the assets serving as the basis for one-half or more of the operating earnings of the Company, as disclosed in the Company's financial statements, in a transaction or related series of transactions, except any such sales to affiliates of the Company; the termination by the Company of its business and liquidation of its assets; or the merger, consolidation or reorganization of the Company with or into any other corporation or corporations other than its affiliates or the Company's engagement in any other similar business combination or reorganization. 5. For the purposes of this Agreement, a Termination of Employment shall occur when, prior to the Executive reaching Retirement Age, the Executive's employment with the Company is terminated within twenty-four (24) months following a Change in Control (i) by the Company for any reason, including disability or incapacity, or (ii) by the Executive "for cause," which "cause" shall be deemed to exist upon the occurrence of any one of the following events: (a) the Company requests the Executive's resignation or retirement (other than retirement upon reaching Retirement Age); -4- EX-10.12 7 DE SOTO EMPLOYEES RETIREMENT PLAN 1 EXHIBIT 10.12 DESOTO EMPLOYEES RETIREMENT PLAN (As amended and restated effective January 1, 1994) 2 TABLE OF CONTENTS
Page ---- SECTION 1 ESTABLISHMENT AND PURPOSE OF PLAN 1.1 Establishment and Purpose . . . . . . . . . . . . . . . . . . . . 1 1.2 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2 DEFINITIONS 2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Gender and Number . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 3 CONTRIBUTIONS 3.1 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.2 Employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 4 RETIREMENT DATES 4.1 Eligibility for Retirement . . . . . . . . . . . . . . . . . . . . 10 4.2 Disability Retirement . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 5 RETIREMENT BENEFITS 5.1 Normal Retirement Benefits . . . . . . . . . . . . . . . . . . . . 12 5.2 Early Retirement Benefits . . . . . . . . . . . . . . . . . . . . 14 5.3 Postponed Retirement Benefit . . . . . . . . . . . . . . . . . . . 16 5.4 Vested Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.5 Benefit in Joint and Survivor and Optional Forms . . . . . . . . . 17 5.6 Revocation of Benefit in Normal Form . . . . . . . . . . . . . . . 18 5.7 Optional Forms of Benefits . . . . . . . . . . . . . . . . . . . . 19 5.8 Statutory Survivor's Benefit . . . . . . . . . . . . . . . . . . . 20 5.9 Survivor's Benefit . . . . . . . . . . . . . . . . . . . . . . . . 21 5.10 Lump Sum Payments . . . . . . . . . . . . . . . . . . . . . . . . 22 5.11 Earned Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 24 5.12 Additional Benefits for Former Participants in DeSoto Hourly Employees' Pension Plan and/or Former Hourly Employees . . . . . . . . . . . . . . . . . . . . . . . . 24 5.13 Actuarial Equivalence . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 6 LIMITATIONS ON BENEFITS 6.1 Limitations on Benefits . . . . . . . . . . . . . . . . . . . . . 26 6.2 Benefits in Event of Termination . . . . . . . . . . . . . . . . . 30
i 3
Page ---- SECTION 7 DESIGNATION OF BENEFICIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 8 MISCELLANEOUS PROVISIONS 8.1 Required Information to be Furnished . . . . . . . . . . . . . . . 33 8.2 Benefits Payable to Incompetents . . . . . . . . . . . . . . . . . 33 8.3 Nonassignability . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.4 Employment Rights . . . . . . . . . . . . . . . . . . . . . . . . 34 8.5 Other Rights and Liabilities . . . . . . . . . . . . . . . . . . . 34 8.6 Mailing of Benefits . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 9 ADMINISTRATION 9.1 Company Powers . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.2 Retirement Committee . . . . . . . . . . . . . . . . . . . . . . . 36 9.3 Expenses of Administration . . . . . . . . . . . . . . . . . . . . 37 SECTION 10 AMENDMENT AND TERMINATION 10.1 Right to Amend or Terminate . . . . . . . . . . . . . . . . . . . 37 10.2 Qualification Under the Internal Revenue Code . . . . . . . . . . 38 10.3 Distribution on Termination . . . . . . . . . . . . . . . . . . . 38 10.4 Change in Control of Company . . . . . . . . . . . . . . . . . . . 41 10.5 Security Required Upon Adoption of Plan Amendment . . . . . . . . 42 SECTION 11 THE TRUST 11.1 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 11.2 Benefits Supported Only by Trust . . . . . . . . . . . . . . . . . 44 11.3 Trust Applicable Only to Payment of Benefits . . . . . . . . . . . 44 11.4 Transfer, Merger or Consolidation . . . . . . . . . . . . . . . . 44 SECTION 12 CLAIMS REVIEW PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ii 4
Page ---- SECTION 13 APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SUPPLEMENT ONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 APPENDIX B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 APPENDIX C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
iii 5 DESOTO EMPLOYEES RETIREMENT PLAN (As amended and restated effective January 1, 1994) SECTION 1 ESTABLISHMENT AND PURPOSE OF PLAN 1.1 Establishment and Purpose. DeSoto, Inc. established the DeSoto Salaried Employees' Pension Plan, effective January 1, 1972, to provide an income for certain of its employees upon their retirement. The plan was last amended and restated effective January 1, 1984 in order to comply with various amendments to the Internal Revenue Code of 1954, as amended. The restated plan was further amended and restated effective January 1, 1987, in order to comply with the Internal Revenue Code of 1986, as amended ("Code"). Effective January 1, 1994, the Company merged the DeSoto Hourly Employees' Pension Plan and the J.L. Prescott Company Employees' Retirement Plan into the DeSoto Salaried Employees' Pension Plan (the "Plan"). Due to the merger and in order to comply with recent legislation applicable to qualified retirement plans, the Plan is hereby amended and restated as of the merger date. Except as otherwise provided herein, the provisions of the Plan as set forth herein shall apply only to an Employee who terminates employment with the Employer on or after January 1, 1994. Benefits provided to former employees who terminated employment prior to January 1, 1994, if any, shall be determined under the terms of the applicable plan as in effect on the date of termination. 1.2 Name. The Plan, as herein amended and restated and as it may be amended hereafter, shall be known as the "DeSoto Employees Retirement Plan." 6 SECTION 2 DEFINITIONS 2.1 Definitions. Wherever used in the Plan, the following terms shall have the meanings set forth below unless the context clearly indicates otherwise: (a) Appendix A: Appendix A, which relates to the transfer of funds from, and the guaranty of benefits earned as of December 31, 1971, under the Grays Harbor Chair & Mfg. Company Pension Plan (hereinafter called "Grays Harbor Plan"), the Royal Incorporated Pension Plan and Trust (hereinafter called the "Royal Plan"), and the Kerns Company Retirement Annuity Plan (hereinafter called the "Kerns Plan") to this Plan. Said Appendix A is attached hereto and forms a part of this Plan. (b) Appendix B: Appendix B, which relates to the transfer of funds from, and the guaranty of benefits earned as of December 31, 1971 under the Pension Plan for Hourly Employees of the Artcraft Fixtures Division of Special Products Company of Tennessee, Inc. (hereinafter called "Artcraft Plan") to this Plan. Said Appendix B is attached hereto and forms a part of this Plan. (c) Average Compensation: The average, computed on a monthly basis and resulting in the highest average, of Compensation received by an Employee for those five consecutive years (or period of employment with an Employer, if less than five years) of the fifteen consecutive calendar years ending with the calendar year in which he terminates employment. For purposes of this computation, Compensation shall be annualized with appropriate adjustment for any item of Compensation paid within such final year where the annualization of such item would result in a distortion of his average Compensation. (d) Board: The Board of Directors of the Company. (e) Company: DeSoto, Inc., a Delaware corporation. (f) Compensation: The compensation paid to an employee by an Employer during his Years of Employment as shown on 2 7 his Form W-2 statement for each year, including commissions, bonuses, vacation pay, overtime pay, and employee before and aftertax deposits under the DeSoto Stock Ownership Plan, but excluding income arising from stock options, severance allowances, retirement, profit sharing, or stock ownership benefits (including benefits under this Plan), hospitalization or surgical benefits, prizes and awards, expense allowances, moving and relocation expenses and retainers. Notwithstanding anything herein to the contrary, in the case of a Prescott Employee, compensation shall exclude overtime, commissions and discretionary non-formula bonuses. For Years of Employment, and portions thereof, beginning after December 31, 1988, and before January 1, 1994, compensation in excess of $200,000 shall be disregarded. Such amount shall be adjusted at the same time and in such manner as permitted under Code Section 415(d). Further, for Years of Employment, and portions thereof, beginning after December 31, 1993, compensation in excess of $150,000 shall be disregarded. Such amount shall be adjusted at the same time and in the same manner as permitted under Code Section 401(a)(17)(B). (g) Covered Compensation: The average of the Taxable Wage Bases in effect for each calendar year in the thirty-five (35) year period ending with the last day of the calendar year in which the Employee attains Social Security Retirement Age. No increase in Covered Compensation shall decrease an Employee's monthly benefit under the Plan. In determining an Employee's Covered Compensation for a calendar year, the Taxable Wage Base in effect for any subsequent calendar year will be assumed to be the same as the Taxable Wage Base in effect as of the beginning of the calendar year for which the determination is being made. An Employee's Covered Compensation for any plan year after attainment of Social Security Retirement Age shall be the Employee's Covered Compensation for the plan year during which the Employee attained 3 8 Social Security Retirement Age. An Employee's Covered Compensation shall be automatically adjusted for each plan year. (h) Employer: The Company and any of its subsidiaries which is authorized by the Board to adopt and which does adopt the Plan. (i) Hour of Service: means -- (1) Each hour for which an employee is paid, or entitled to payment, for the performance of duties for an Employer. These hours shall be credited to the employee for the computation period in which the duties are performed; (2) Each hour for which an employee is paid, or entitled to payment, by an Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship is terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military leave or leave of absence; (3) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by an Employer. The same hours shall not be credited both under paragraph (1) or (2), as the case may be, and under this paragraph (3). These hours shall be credited to the employee for the computation period or periods to which the award, agreement or payment is made. Solely for purposes of determining whether an Employee has a break in service each hour, based on the number of hours per week that the Employee would have normally worked, or a pro rata portion thereof, during which an Employee is absent from work (i) by reason of the pregnancy of the Employee, (ii) by reason of the birth of a child of the Employee, (iii) by reason of the placement of a child with the Employee, or (iv) due to the caring of a child, placement or adoption of the child by the Employee. Not more than 501 Hours of Service shall be credited to any Employee under this paragraph for any one occurrence. Such hours shall be credited to the computation period during which the event occurs to the extent 4 9 necessary to prevent a break in service, and to the extent not so necessary, to the next following computation period. Hours under paragraphs (1), (2) and (3) hereof shall be credited in accordance with section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference. (j) Hourly Employee: Any employee of an Employer, excluding Prescott Employees and leased employees, as defined in Code Section 414(n), whose Compensation is determined other than on the basis of a regular salary without regard to hours worked; provided that (1) the employee is in a participating unit as so designated by the Board, and (ii) a person employed by an Employer prior to January 1, 1983 shall not be deemed to be an Employee for any period prior to that date if he did not qualify as an Employee under the Plan as in effect on December 31, 1982 (collectively with Salaried Employees and Prescott Employees, "Employees"). (k) Plan Year: The fiscal year of the Company as it may be changed from time to time. The fiscal year is currently the calendar year. (l) Prescott Employee: Any Employee of an Employer, excluding leased employees, as defined in Code Section 414(n), who were participants in the J.L. Prescott Company Employees, Retirement Plan on December 31, 1993; provided that the employee is in a participating unit as so designated by the Board (collectively with Hourly Employees and Salaried Employees, "Employees"). (m) Salaried Employee: Any employee of an Employer, excluding. Prescott Employees and leased employees, as defined in Code Section 414(n), whose Compensation is determined on the basis of a regular salary without regard to hours worked, including clerical and administrative employees however compensated; provided, however, that (i) the employee is in a participating unit as so designated by the Board, and (ii) a person employed by an Employer prior to January 1, 1983 shall not be deemed to be a 5 10 Salaried Employee for any period prior to that date if he did not qualify as a Salaried Employee under the Plan as in effect on December 31, 1982 (collectively with Hourly Employees and Prescott Employees, "Employees"). (n) Primary Social Security Benefit: The monthly amount available to the Employee at Social Security Retirement Age (or upon actual retirement, if later) under the provisions of Title II of the Social Security Act in effect at the time of his termination of employment, without regard to any increase in the wage base or benefit levels that take effect after the date of termination of employment, provided that (1), if an Employee retires prior to Social Security Retirement Age, his Primary Social Security Benefit shall be estimated by assuming that he will have no earnings that would be treated as earnings under the Social Security Act after he terminates employment, or (2), if an Employee retires because of Disability and qualifies for a Disability Insurance Benefit under the Social Security Act, his Primary Social Security Benefit shall be the monthly amount payable as a Disability Insurance Benefit. If record of an Employee's Compensation for any years prior to termination of employment or Retirement are not reasonably accessible from the records of the Employer, then for the purposes of calculating a Primary Social Security Benefit hereunder, the amount of Compensation for any given year shall be assumed. The assumed Compensation for any given year shall be equal to the Employee's Compensation in the earliest calendar year for which Compensation records are available, reduced on a compounded basis by 6% for each year that the year in question precedes the earliest year for which Compensation records are available. In lieu of such assumed Compensation, actual wages shall be used if, within the time period described below, an Employee furnishes the Retirement Committee with an accurate record of his actual wages. The Retirement Committee shall notify an Employee of his right to 6 11 provide the Retirement Committee with an accurate record of his actual wages and the Employee shall have 180 days from the later of his termination of employment or the date of such Retirement Committee notification, to furnish the accurate record of his actual wages. The Retirement Committee may adopt rules which do not conflict with the previous provisions of the subsection, but which govern the computation of a Primary Social Security Benefit hereunder, and the fact that an Employee does not actually receive such amount from the Social Security Administration because of failure to apply or continuance of work, or for any other reason, shall be disregarded. (o) Service: An Employee's total Years of Employment with an Employer after December 31, 1971 (or, in the case of an Employee in a unit designated by the Board, the Employee's total Years of Employment with an Employer after December 31, 1969), reduced by (1) Years of Employment during which the Employee was not an Employee hereunder, and (2) Years of Employment credited under subparagraph 2 of the second paragraph of section 2.1(s) below except as specifically provided otherwise in Section 4.2(b), such period to be determined in accordance with reasonable standards and policies applied on a uniform and nondiscriminatory basis. (p) Social Security Retirement Age: The retirement age under Section 216(l) of the Social Security Act, applied as if the early retirement age under Section 216(1)(2) of such Act were age 62. Accordingly, the Social Security Retirement Age is 65 for an Employee attaining age 62 before January 1, 2000 (i.e., born before January 1, 1938), 66 for an Employee age 62 after December 31, 1999 and before January 1, 2017 (i.e., born after December 31, 1937, but before January 1, 1955), and 67 for an Employee attaining age 62 after December 31, 2016 (i.e., born after December 31, 1954). 7 12 (q) Taxable Wage Base: The amount equal to one twelfth of the contribution and benefit base in effect under Section 230 of the Social Security Act at the beginning of the calendar year. (r) Trust: DeSoto Salaried Employees' Pension Trust established January 14, 1972, and amended and restated effective January 1, 1976, as amended. (s) Years of Employment: With respect to employment prior to January 1, 1983, Years of Employment shall be determined in accordance with the Plan as in effect on December 31, 1982. With respect to employment beginning after December 31, 1982, Years of Employment shall mean the period, measured in years and fractions thereof to completed days, beginning on the later of January 1, 1983 and the date the Employee first completes an Hour of Service, and ending on the date the Employee separates from service. Subsequent to December 31, 1982, an Employee shall be deemed to separate from service, for purposes of the Plan, upon the earlier of -- (1) the date the Employee terminates employment with all Employers, and (2) the first anniversary of the first day of a period in which said Employee remains absent from service (with or without pay) for any reason other than termination of employment; provided, however, that this paragraph shall not apply to an Employee during a period in which the Employee (i) is receiving disability payments under an insured long-term disability program maintained by an Employer, or (ii) is on an approved leave of absence granted by an Employer in accordance with the Employer's established personnel policy applied on a uniform and nondiscriminatory basis so long as the Employee resumes active employment with an Employer at the expiration of such leave or dies prior to the expiration of such leave. 8 13 However, regardless of the above, if an Employee who separates from service is reemployed within one year of the date of separation from service, the separation shall be disregarded and his Years of Employment will be deemed to include the period between the Employee's separation from service and his reemployment commencement date. In addition, in the case of a reemployed Employee who did not have a nonforfeitable right to a benefit immediately prior to his separation from service, Years of Employment occurring prior to said separation shall not be taken into account if the period between his initial separation from service and his reemployment commencement date (i) equals or exceeds his prior Years of Employment, and (ii) is at least five years in duration. 2.2 Gender and Number. Except as otherwise indicated by the context, masculine terminology shall include the feminine and the singular shall include the plural. SECTION 3 CONTRIBUTIONS 3.1 Employees. Employees shall not make any contributions under the Plan. 3.2 Employers. The Company and the other Employers intend, subject to the right of amendment and permanent discontinuance as hereinafter provided, to make such contributions to the Trust as will be required to provide for the benefits under the Plan as they come due. The Employers' contribution for each year shall be paid by the Employers into the Trust as soon as practicable after the amount thereof has been determined but not later than the time prescribed for filing its federal income tax return, including extensions thereof; provided, however, that a contribution made by an Employer by a mistake of fact may be returned to that Employer within one year of the date of payment. 9 14 SECTION 4 RETIREMENT DATES 4.1 Eligibility for Retirement. An Employee may retire at his applicable Retirement Date. Normal retirement age shall be any time after the attainment of age 65 and completion of 5 Years of Employment, but an Employee may retire at any time after attaining age 55 and completing 10 Years of Employment; provided, however, that for purposes of the Plan, an Employee who attains age 70-1/2 shall be deemed to have retired on his Postponed Retirement Date not later than April 1 following the close of such year. The Normal, Early or Postponed Retirement Date is the first day of the month coincident with or next following the date on which the Employee attains 65 and completes 5 Years of Employment or the date he actually retires upon attaining age 55 and completing 10 Years of Employment or subsequent thereto, as the case may be. 4.2 Disability Retirement. (a) An Hourly Employee or Salaried Employee who is receiving disability payments under an insured long-term disability program maintained by an Employer at his Normal Retirement Date shall be eligible to retire on such date. (b) A Prescott Employee shall be eligible for a Disability Retirement Pension if his employment is terminated by reason of disability prior to his Normal Retirement Date, provided that (1) he is then age 50 or over and has completed 10 or more Years of Employment and (2) he is eligible for disability benefits under the Social Security Act. Such date shall be known as his Disability Retirement Date. A Prescott Employee shall commence to receive his Disability Retirement Pension commencing on his Normal Retirement Date. For purposes of this subsection Disability shall be defined as entitlement to disability benefits under Title II of the Social Security Act. 10 15 Notwithstanding any other provision of this Section, no Prescott Employee shall qualify for a Disability Retirement Pension if the Employer determines on the basis of a medical examination that his disability results from: (a) chronic alcoholism, (b) addiction to narcotics, (c) an injury suffered while engaged in a felonious or criminal act or enterprise, or (d) service in the armed forces of the United States which entitles the Prescott Employee to a veteran's disability pension; but this provision shall not prevent the Prescott Employee from qualifying for a pension under another provision of the Plan. Disability shall be considered to have ended and entitlement to a Disability Retirement Pension shall cease if, prior to his Normal Retirement Date, the Prescott Employee (a) is reemployed by the Employer, or (b) engages in any substantially gainful activity, except for such employment as is found by the Committee to be for the primary purpose of rehabilitation or not incompatible with a finding of total and permanent disability. If entitlement to a Disability Retirement Pension ceases in accordance with provisions of this paragraph for a reason other than reemployment by the Employer, such a Prescott Employee shall not be prevented from qualifying for a pension under another provision of the Plan based on his Service and Compensation prior to Disability Retirement. If a Prescott Employee becomes entitled to a Disability Retirement Pension and such Disability terminates and he returns to active employment with the Employer, the period of such Disability shall be considered as Service and Years of Employment and his Average Compensation for each plan year during such period shall be deemed to be the same as his Compensation during the 12 month period ending with the date of termination of his employment by reason of Disability. 11 16 SECTION 5 RETIREMENT BENEFITS 5.1 Normal Retirement Benefits. An Employee who retires as of his Normal Retirement Date shall, subject to the provisions of Section 5.5 through 5.7, be entitled to receive a monthly benefit, commencing at his Normal Retirement Date and payable thereafter for life, of an amount equal to: (a) for a Salaried Employee, the greater of: (i) his accrued benefit as of December 31, 1988; or (ii) 1 and 2/3% of his Average Compensation multiplied by his total years of Service while a Salaried Employee (not in excess of 35 years) reduced by the Social Security Allowance. The Social Security Allowance shall be equal to one-half of one percent for each year of Service up to 35 years, multiplied by the lesser of: (1) The Participant's Social Security Final Average Compensation, or (2) The Participant's Covered Compensation as defined in Section 401(l)(5)(E) of the Internal Revenue Code. In the event the Social Security Allowance applies to a Participant more than 5 years prior to his Social Security Normal Retirement Age, but on or after age 55, the Social Security Allowance shall be reduced at the rate of 1/30 for each year in excess of 5 years up to 10 years and, to the extent necessary, by an actuarial equivalent reduction for additional years in excess of 10. Social Security Final Average Compensation means the average of the Participant's Earnings 12 17 over the three consecutive completed Plan Years preceding his current date of retirement, date of termination of employment, date of death or the date of the termination of the Plan, but excluding compensation in any such year in excess of the Social Security Taxable Wage Base. Social Security Normal Retirement Age is the earliest age at which the Employee is entitled to receive unreduced old age benefits from Social Security. Social Security Taxable Wage Base means the amount of wages from which Social Security Taxes are required to be withheld in accordance with the Federal Insurance Contributions Act, or any successor act, regulation, or ruling pertaining thereto, which is in effect at the beginning of the Plan Year. (b) For an Hourly Employee, 1% of his Average Compensation multiplied by his total years of Service while an Hourly Employee. The monthly benefit for Hourly Employees under this Section 5.1 shall not be less than $50 nor shall it be less than the benefit to which the Hourly Employee would have been entitled had he retired on the Early Retirement Date at which his benefit would have been the greatest. (c) Except as otherwise provided in Section 5.12, for an Employee who has transferred from an Hourly Employee to a Salaried Employee, the sum of the benefits calculated under (a) and (b) above. (d) For a Prescott Employee, the greater of: (i) $15.00 multiplied by his years of Service, but not in excess of 40 years; or 13 18 (ii) 3/4% of the Prescott Employee's Compensation up to Covered Compensation plus 1-1/4% of the Prescott Employee's Average Compensation in excess of Covered Compensation, all multiplied by his years of Service, but not in excess of 35 years; or (iii) 1-1/4% of the Prescott Employee's Average Compensation (without regard to the limitation on Compensation described in Section 2.1(f)) as of December 31, 1988 multiplied by his years of Service to December 31, 1988, but not in excess of 40 years, reduced by 1-1/4% of his monthly Primary Social Security Benefit, multiplied by his years of Service to December 31, 1988, but not in excess of 40 years. Notwithstanding any other provision of this Plan, the benefit payable under this Plan to a Prescott Employee shall not be less than the amount determined in accordance with the provisions of the J. L. Prescott Company Employees' Retirement Plan in effect on December 31, 1988, based on the Prescott Employee's Average Compensation, Service and Primary Social Security Benefit determined as of December 31, 1988. 5.2 Early Retirement Benefits. An Employee who retires as of an Early Retirement Date shall be entitled to receive a monthly benefit determined, except as otherwise provided in this Section 5.2, as for retirement at his Normal Retirement Date but considering only Service and Compensation prior to actual retirement. The monthly benefit payable under the Plan to any such retired Employee may, upon the written request of the Employee, commence at actual 14 19 retirement or at any time thereafter, but not later than his Normal Retirement Date, and shall be payable thereafter for life. If benefit payments for an Hourly Employee or a Salaried Employee begin prior to attainment of age 62, the amount of the benefit shall be reduced by an amount equal to 1/2 of 1% of the benefit which would otherwise be payable at age 62, multiplied by the number of months between the commencement of payments and the end of the month in which the Employee would attain age 62 and, for Salaried Employees, then further reduced by the Social Security Allowance. Provided, however, that solely for purposes of determining the early commencement reduction, 5 years shall be added to the actual age of all employees (or such lesser number of years as is necessary to increase the age of such employee to age 62) who are described in any one of the four following clauses: (a) An individual who terminates employment between October 1, 1989 and December 31, 1989 as a result of the restructuring of the Company after attaining age 55 with at least 10 years of service. (b) An individual who is employed at the Company's "Packaging Product Line" who, prior to December 31, 1989, (i) was notified that he or she was in a group of employees who was being terminated due to the restructuring of the Company, (ii) continued in employment beyond December 31, 1989 at the request of the Company, and (iii) had attained age 55 with at least 10 or more years of service on or before the date he or she terminated employment with the Company. (c) An individual who is employed at the Company's "Appliance and Paper Group" who (i) was notified prior to December 31, 1989 that his or her employment would be terminated unless the individual chose to relocate to the Company's Columbus, Ohio plant, (ii) indicated that he or she would not relocate, (iii) continued in employment beyond December 31, 1989 at the request of the Company, and (iv) had attained age 55 with at least 10 years of 15 20 service on the date the individual terminated employment with the Company. (d) An individual who (i) was employed at the Company's Chicago Heights Resin plant ("Plant") immediately prior to his or her termination of employment with the Company, (ii) terminated employment with the Company after attaining age 55 with at least 10 years of service due to the sale of the Plant, and (iii) is notified by the "ultimate purchaser" of the Plant no more than 30 days after the Company sells the Plant to the intermediate purchaser that his or her employment with the ultimate purchaser is being terminated. For this purpose, the term "intermediate purchaser" shall refer to that corporation which purchases the Plant from the Company, and the term "ultimate purchaser" shall refer to that corporation which purchases the Plant from the intermediate purchaser. If benefit payments for a Prescott Employee begin prior to the Prescott Employee's Normal Retirement Date, the amount of the benefit shall be reduced by 3/10 of 1% for each of the first 60 months plus 5/10 of 1% for each month in excess of 60 by which the commencement date of the benefit preceded his Normal Retirement Date. 5.3 Postponed Retirement Benefit. An Employee who retires as of a Postponed Retirement Date shall be entitled to receive a monthly benefit commencing on his Postponed Retirement Date and payable thereafter for life, determined as for retirement at his Normal Retirement Date but considering Service and Compensation to his Postponed Retirement Date; provided, however, that in no event shall said benefit be less than the benefit to which the Employee would have been entitled had he retired on his Normal Retirement Date. 5.4 Vested Benefits. In the event an Employee terminates his employment other than for retirement, death or disability after completing five years of Employment, he shall be entitled to 16 21 receive a monthly benefit, determined under Section 5.1 but considering only Service and Compensation prior to actual termination of employment and, for Hourly Employees, not taking into account the minimum monthly benefit provisions of the last sentence of Section 5.1(b), such benefit to be payable commencing at his Early Retirement Date or such later date on which application therefor is made, and shall be payable thereafter for life. Provided further, that if benefit payments begin prior to attainment of age 65, the amount of the benefit for a Prescott Employee shall be reduced as provided for Prescott Employees in Section 5.2 and the amount of the benefit for an Hourly Employee or a Salaried Employee shall be reduced by an amount equal to 1/2 of 1% of the benefit which would otherwise be payable at age 65 multiplied by the number of months between the commencement of payments and the end of the month in which the Employee would attain age 65 and, for Salaried Employees, then further reduced by the Social Security Allowance. 5.5 Benefit in Joint and Survivor and Optional Forms. Notwithstanding any other provisions of Section 5, if an Employee or former Employee eligible to receive pension benefits pursuant to Section 5.1, 5.2, 5.3 or 5.4 is legally married on the date benefit payments are to commence, his benefit shall be paid in the form of a joint and survivor annuity, as described below, with his spouse as the contingent beneficiary; provided, however, that: (a) an Employee or former Employee who would normally receive his benefit in the joint and survivor form may elect, as provided for in Sections 5.6 and 5.7, to have his pension benefit paid to him in the form specified in Section 5.1, 5.2, 5.3 or 5.4, as applicable, and all Employees and former Employees may elect, as provided for in Sections 5.6 and 5.7, to have pension benefits paid in any one of the optional forms provided for in Section 5.7. 17 22 (b) no amount shall be payable to an Employee's spouse under this Section 5.5 unless said spouse presents evidence satisfactory to the Retirement Committee that she was legally married to the Employee throughout the one-year period ending on the earlier of the date said Employee's death and the date said Employee's annuity payments commenced. For purposes of this Plan, the term joint and survivor annuity means a reduced annuity payable for the life of the former Employee with a survivor annuity payable for the life of the spouse who is his contingent beneficiary which is equal to one-half of the amount of the monthly reduced annuity payable during the life of the former Employee, and which together are Actuarially Equivalent to a single life annuity for the life of the former Employee determined in accordance with the applicable provisions of this Section 5. 5.6 Revocation of Benefit in Normal Form. Not less than 270 days immediately prior to the date on which an Employee's or former Employee's benefits are to commence, the Company shall provide him with a written explanation of the terms and conditions of the normal form of annuity payable to him, and the effect of an election by said Employee or former Employee to have benefits paid to him as specified in Section 5.1, 5.2, 5.3, 5.4 or 5.5, if applicable, or in any one of the optional forms provided for in Section 5.7. Thereafter, an Employee or former Employee whose benefits would otherwise be payable in the normal form may elect at any time prior to the 90 days preceding the date his annuity payments are to commence, to have his benefits paid to him in the form specified in Section 5.1, 5.2, 5.3 or 5.4, if applicable, or in any one of the optional forms provided for in Section 5.7. Any election under this section shall be made in writing and on such forms as the Company shall determined; provided, however, that an election by a married Employee or former Employee made after 18 23 December 31, 1984, to receive benefits in a form other than the joint and survivor form specified in Section 5.5 shall only be effective if it is consented to in writing by the individual's spouse, and such spouse's consent acknowledges the effect of such election and is either notarized or made in the presence of a representative of an Employer, unless the Retirement Committee finds that said spouse cannot be located, or unless such other circumstances as the Secretary of the Treasury may by regulations prescribe. 5.7 Optional Forms of Benefits. The Actuarial Equivalent Value of a benefit otherwise described in Section 5.1, 5.2, 5.3 or 5.4 may, at the election of the Employee, retired Employee or terminated Employee made pursuant to Section 5.6, be paid in any one of the following forms: (a) As a reduced benefit for the life of the Employee, retired Employee or terminated Employee, and in the event of his death before receiving 120 monthly payments, the same reduced benefit shall be paid to his designated beneficiary for the balance of such 120 month period; or (b) As a joint and survivor option with his spouse or other designated beneficiary, under which the Employee, retired Employee or terminated Employee shall receive a reduced pension payable for his life, with payments continuing during the lifetime of his spouse or other designated beneficiary in that percentage of such reduced amount - - 100%, 75%, or 50% thereof -- as he shall elect, such payment to the Employee, retired Employee, or terminated Employee to commence not later than the date the normal benefit under Section 5.1 would commence. If an Employee elects a joint and survivor option under (b) above with a designated beneficiary other than his spouse, the present value of the benefits payable to the Employee must be more than 50% of the present value of the total benefits payable to the Employee and the designated beneficiary. 19 24 An Employee may elect or revoke an option under this Section 5.7 without the approval of the Retirement Committee if his election or revocation is filed in writing not more than 360 days and not less than 90 days prior to his retirement date, but no such election or revocation shall be effective if the Employee dies, from other than accidental causes, within 30 days after such election or revocation. The Retirement Committee shall establish such other rules of uniform application dealing with elections under this Section 5.7 as may be necessary, including rules similar to those adopted under Section 5.6 requiring the written consent of the Employee's or former Employee's spouse to elections and revocations of elections by married Employees and former employees. 5.8 Statutory Survivor's Benefit. In the event an Employee or former Employee dies while eligible for coverage for benefits provided under this Section 5.8, as determined below, a survivor annuity shall be paid to his spouse for life, subject to the further provisions of this Section 5.8. A survivor's benefit payable to a spouse hereunder shall commence on the first day of the month coincident with or next following the later of the Employee or former Employee's death, and the date the Employee or former Employee would have attained age 55, and shall consist of a benefit payable monthly to the spouse which is equal to the monthly amount that would have been payable to the spouse in the joint and survivor annuity form under Section 5.5, (i) based upon the eligible Employee or former Employees's Compensation and years of Service to date of death, and (ii) assuming that the Employee or former Employee survived to the benefit commencement date determined above and commenced receipt of benefits on that date. However, regardless of the above, no amount shall be payable to an Employee's or former Employee's spouse in accordance with this section until said spouse presents evidence 20 25 satisfactory to the Company that she was legally married to the Employee or former Employee throughout the one-year period immediately preceding said Employee's or former Employee's date of death, and further provided that no amount hereunder shall be payable to a spouse for any month for which such spouse is eligible to receive a Survivor's Benefit pursuant to Section 5.9. An Employee or former Employee is covered under a statutory survivor's benefit, as described above, if, on his date of death, he was vested in benefits payable under the Plan, and either -- (A) he died prior to termination of employment but after either (i) attaining age 55, or (ii) August 23, 1984, or (B) he died after termination of employment but prior to the date benefit payments to him commenced, provided that either (i) he terminated employment on or after his 55th birthday, or (ii) he terminated employment after December 31, 1975 and died after August 23, 1984. 5.9 Survivor's Benefit. If an Hourly Employee or Salaried Employee dies while in the employ of an Employer or while he is receiving disability payments under an insured long-term disability program maintained by an Employer, and if he has at least one Year of Employment, a survivor's benefit may be paid subject to the provisions of this Section 5.9. The Survivor's Benefit shall be a monthly benefit equal to the amount which the survivor would have received if the Hourly Employee or Salaried Employee were to receive a 50% joint and survivor annuity under Section 5.5 determined, in the case of an Hourly Employee or Salaried Employee who died prior to attaining age 65, an if said Hourly Employee or Salaried Employee had attained age 65 on the date of his death, based on his Compensation to date of death and years of Service he would have had to age 65, and in the case of an Hourly Employee or Salaried Employee who dies after having attained age 65, based on his Compensation and years of Service to date of death; provided, 21 26 however, that the benefit to any Dependent Child shall be reduced by an amount equal to any benefit received by the spouse pursuant to Section 5.8. If on the date of death, any person qualifies as a Dependent Spouse or Dependent Child, such benefits shall commence from the first day of the month following or coincident with the date of death and shall continue thereafter monthly for the period during which any person so qualifies. If at any time a spouse qualifies for payments hereunder, payments shall be made to such spouse to the exclusion of any dependent children. If at any time more than one child qualifies, the benefits shall be divided equally among them. The term "Dependent Spouse" shall mean (a) in the case of an Hourly Employee or Salaried Employee who dies after attaining age 55 and completing 10 years of Employment, the spouse of said Hourly Employee or Salaried Employee, and (b) in the case of an Hourly Employee or Salaried Employee who dies prior to attaining age 55 and completing 10 years of Employment, the spouse of said Hourly Employee or Salaried Employee who is residing with the Hourly Employee or Salaried Employee at the date of his death, whose annual income in any of the three calendar years immediately preceding the date of death was less than that of the Hourly Employee or Salaried Employee, and who has not remarried. The term "Dependent Child" shall have the same meaning as in the Federal Social Security Act in effect on the date of the Hourly Employee or Salaried Employee's death. 5.10 Lump Sum Payments. If the present actuarial value of any benefits otherwise payable under this Section 5 and any other defined benefit plans maintained by an Employer in $3,000 or less, such amount shall be paid in a single lump sum. If the present actuarial value of such benefits is over $3,500 but the actual benefits will be $500 or less per year, the present actuarial value of such benefits shall be paid in a single lump sum provided that the Employee or his beneficiary consents in writing to such payment. In the event of any lump sum payment pursuant to this 22 27 Section 5.10, Years of Employment prior to such payment shall not constitute years of Service in determining any future benefits under the Plan in the event of reemployment. This paragraph applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this paragraph, a distributee may elect, at the time and in the manner prescribed by the Retirement Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this paragraph, the following terms shall have the following meaning: (1) Eligible Rollover Distribution. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee or the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (2) Eligible Retirement Plan. An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible 23 28 rollover distribution to the surviving spouse, an eligible retirement plan in an individual retirement account or individual retirement annuity. (3) Distributee. A distributee includes an Employee or former employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (4) Direct Rollover. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (a) the Retirement Committee clearly informs the Employee that the Employee has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution and, if applicable, a particular distribution option, and (b) the Employee, after receiving the notice, affirmatively elects a distribution. 5.11 Earned Benefits. A Salaried Employee who on December 31, 1971 was a participant in the Grays Harbor Plan, Royal Plan or Kerns Plan shall, in addition to benefits otherwise payable under the Plan, be entitled to receive the benefits provided for in the Appendix A. 5.12 Additional Benefits for Former Participants in DeSoto Hourly Employees' Pension Plan and/or Former Hourly Employees. If a former participant in the DeSoto Hourly Employees' Pension Plan ("Hourly Plan") and/or former Hourly Employee who has become a 24 29 Salaried Employee retires or terminates employment while a Salaried Employee, in addition to benefits otherwise payable under the Plan based upon Service as a Salaried Employee, he shall be entitled to receive a benefit determined under Section 5.1(a) based solely upon his service under the Hourly Plan and/or as an Hourly Employee reduced by the benefit payable under the Hourly Plan and/or under Section 5.1(b). 5.13 Actuarial Equivalence. (a) The Actuarial Equivalent Value means the benefit or benefits, or payment or payments, which is of equal value as of the date of determination to the benefits for which they are to be substituted. Equivalence of value, except as specifically provided above and in paragraph (b) below, shall be determined by actuarial calculations based on interest rates, mortality tables, and other actuarial assumptions used by the Pension Benefit Guaranty Corporation (PBGC), as of the first date of the calendar year that includes the computation date, for determining the present value of an immediate annuity (assuming a male participant and a male beneficiary), under a terminating, trusteeship by the Pension Benefit Guaranty Corporation. (b) In the case of the 10 years certain and life annuity and in the case of the joint and survivor annuity forms of benefit set forth below, if the beneficiary to receive the survivor annuity is the Participant's spouse or a non-spouse whose age is within 10 years of age of the Participant, the equivalence of value shall be computed using the following actuarial adjustment factors: - 10 years certain and life annuity -- 91%; - 50% joint and survivor annuity -- 90% (Participant), 45% (Beneficiary) - 75% joint and survivor annuity -- 80% (Participant), 60% (Beneficiary) - 100% joint and survivor annuity -- 75% (Participant), 75% (Beneficiary).
25 30 In the case of a joint and survivor annuity in any of the forms set forth above where the beneficiary to receive the surviving annuity is a non-spouse whose age is not within 10 years of the age of the Participant, the equivalence of value shall be computed using the following actuarial assumptions: Interest - 8% Mortality Table - UP-84 (c) Notwithstanding anything being to the contrary, equivalence of value for Prescott Employees shall, except as provided below, be based on the tables set forth in Appendix C to the Plan. However, with respect to any lump sum payment that may be payable to a Prescott Employee under this Plan, the Actuarial Equivalent lump sum value for payments made in any Plan Year shall be based on the interest rate which would be used (as of the beginning of the plan year) by the Pension Benefit Guaranty Corporation for purposes of valuing immediate and deferred annuities on a plan termination and the Group Annuity Mortality Table for 1965 weighted to reflect an employee population composed of 70% male and 30% female. SECTION 6 LIMITATIONS ON BENEFITS 6.1 Limitations on Benefits. Notwithstanding any other provisions of this Plan to the contrary, the annual benefit provided under the Plan and any other "defined benefit plan" maintained by an Employer or any affiliate of an Employer for any Employee or former Employee for any calendar year, which shall be the limitation year, shall in no event exceed the lesser of (a) or (b) below: (a) An amount equal to the lesser of paragraph (1) or (2) below: 26 31 (1) Defined Benefit Plan Limitation. Whichever is applicable of subparagraph (A) or (B)-- (A) $90,000 (as adjusted as permitted under Code Section 415(d)) payable commencing at or after age 65; or the smaller equivalent value thereof, if payments begin before age 65; (B) the larger equivalent value of $90,000 (as adjusted as permitted under Code Section 415(d)) if payments begin after the Participant's Normal Retirement Age. Equivalent value calculations for purposes of this Section 6.1 shall be made using a 5 percent interest assumption and the mortality assumption specified in Section 5.15. (2) An amount equal to 10 percent of the annual average of the highest three consecutive calendar years of compensation paid to the Employee or former Employee by the Employer or affiliate during the Employee's active participation in the defined benefit plan; multiplied by the number of the Employee's Years of Employment, not to exceed ten years. The amount in paragraph (1) above shall be automatically adjusted annually for each Employee and former Employee whose retirement benefit payments have not commenced, but not before each year in which an adjustment takes effect, for increases in the cost of living in accordance with regulations prescribed by the Secretary of the Treasury. Provided, however, that the limitation under this subsection (a) for any person who was an Employee on December 31, 1982 shall not be lower than the amount of such Employee's accrued benefit, not to exceed $136,425, under the defined benefit plan as of December 31, 1982. (b) Dual Plan Limitation. If an Employee or former Employee is also a participant in any defined contribution plan of the Employer or an affiliate, and if the sum of the individual's defined benefit plan fraction and defined contribution plan 27 32 fraction for any year exceeds one, an amount of annual benefit hereunder shall be reduced to the extent necessary to reduce such sum to one. (c) Applicable Terms. For purposes of Computing the limitations under this Section 6.1-- (1) "Annual benefit" means an Employee's or former Employee's retirement or vested benefit computed under Section 5.1, 5-2, 5.3 or 5.4 of the Plan, expressed as-- (A) 50 percent joint and survivor annuity form of payment, for any married Employee or former Employee if the automatic election under Section 5.5 applies to such Employee or former Employee; or (B) a straight life annuity form of payment, for any other Employee or former Employee. (2) "The defined benefit plan" means this Plan and all other defined benefit plans of the Employers and each affiliate of an Employer, considered as one plan; except that after the limitations have been determined, any reduction in benefits in the defined benefit plan will be made in this Plan first and in all other defined benefit plans next. (3) "Any defined contribution plan" of an Employer means all defined contribution plans of the Employers or an affiliate of an Employer considered as one plan (and it is intended to reduce the annual benefit under any defined benefit plan to the extent possible, if necessary to prevent the sum of the fractions in subsection (b) above from exceeding one, before reducing annual additions under any defined contribution plan). (4) "Defined benefit plan fraction" for any year is a fraction-- (A) the numerator of which is the projected annual benefit of the Employee or former Employee under the defined benefit plan determined as of the close of the year, and 28 33 (B) the denominator of which is the lesser of-- (i) 1.25, multiplied by $90,000 (as adjusted for cost-of-living increases) for such year, or (ii) 1.4, multiplied by the amount which may be taken into account under subsection (a)(2) above (as adjusted for cost-of-living increases) with respect to the Employee or former Employee under the defined benefit plan for such year. (5) "The defined contribution plan fraction" for any year is a fraction-- (A) the numerator of which is the sum of the annual additions to the Employee's or former Employee's account as of the close of the year (reduced, if applicable, in accordance with regulations issued pursuant to Section 235(g)(3) of the Tax Equity and Fiscal Responsibility Act of 1982), and (B) the denominator of which is the sum of the lesser of the following amounts determined for such year and for each prior year of service with the Employers and affiliates-- (i) 1.25, multiplied by the dollar limitation in effect under Code Section 415(c)(1)(A) for each year, or (ii) 1.4, multiplied by the amount which may be taken into account under Code Section 415(c)(1)(B) with respect to the Employees under such plan for such year. The denominator of the defined contribution plan fraction shall be multiplied by the "transition fraction" (as defined in Code Section 415(e)(6)(B)), if the Retirement Committee has so elected. (6) For this purpose "annual additions" shall mean the sum of-- 29 34 (A) the aggregate of the Employer's contribution made for the account for an Employee or former Employee under all defined contribution plans for the year, and the Employee's before tax contributions under section 401(k) of the Code to all defined contribution plans for the year, and (B) the Employee's or former Employee's deposits or other after-tax contributions to such defined contribution plan for the year; and (C) forfeitures allocated to the Employee or former Employee under the defined contribution plan for the year; and (D) contributions allocated on the Employee or former Employee's behalf to any individual medical account under Code Sections 401(h)(6) and 419A(d). 6.2 Benefits in Event of Termination. The provisions of this Section 6.2 shall apply only in respect of retirement benefits payable under the Plan to or on account of the 25 highest paid Employees of each Employer, determined as of the effective date, who are covered hereunder and whose monthly retirement benefits under the Plan, upon normal retirement, will exceed $125, and will so apply only if the Plan is terminated or if benefits of any said 25 highest paid Employees become payable before ten years after the effective date or if the Plan is terminated any time thereafter and the full current cost of the Plan for the ten years then ended have not then been funded, and shall apply notwithstanding any other distribution provisions under this Plan. If the Plan should at any time be adopted by a subsidiary of the Company, the restrictions of this Section 6.2 shall apply to the benefits payable to the Employees of such Employer-subsidiary as if the date of adoption were the effective date. If the Plan should at any time be amended so as to substantially increase the benefits payable hereunder, the restrictions of this Section 6.2 shall apply to the increased benefits as if the date of amendment were the Effective Date. 30 35 If, at any time during which this limitation applies, the Plan is terminated or the full current costs thereof are not met, the retirement benefits payable to or on account of an Employee to whom the provisions of this Section 6.2 are applicable shall not exceed the retirement benefit which could be provided from the contributions of the Employer with respect to him, if such contributions did not exceed the larger of the following amounts: (i) $20,000 or (ii) 20% of the average annual Compensation of such Employee for the 5 calendar years immediately preceding retirement which is not in excess of $50,000, multiplied by the number of years elapsed since the effective date and the first to occur of (a) the date of the termination of the Plan, (b) the date a retirement benefit becomes payable to any one of said 25 highest paid Employees, or (c) the date a retirement benefit becomes payable to any one of said 25 highest paid Employees when the full current costs of the Plan have not then been funded. In the event the restrictions of this Section 6.2 are applicable, that portion of the asset value of the Trust arising from contributions made under the Plan to the extent that such contributions are subject to the limitations specified herein, will be apportioned and distributed to the other Employees not so restricted, in accordance with the provisions of Section 11.4. As long as this Plan has not been terminated and its full current costs have been met, the provisions of this Section 6.2 shall not restrict the payments of full retirement or termination benefits to a retired or terminated Employee. SECTION 7 DESIGNATION OF BENEFICIARIES Beneficiaries. Each Employee, retired Employee or terminated Employee shall designate upon such forms as may be provided for that purpose a beneficiary or beneficiaries who may receive the benefits, if any, payable under the Plan after his death (other than the benefits described in Section 5.7(b) hereof, as to which 31 36 separate designations shall be made). An Employee, retired Employee, or terminated Employee may, on the forms provided for this purpose, change or revoke his beneficiary or beneficiaries. The designation, change, or revocation of a beneficiary or beneficiaries shall not be effective for any purpose unless and until it has been received by the Retirement Committee during the Employee's, retired Employee's, or terminated Employee's lifetime. However, regardless of the above, the designation change or revocation by a married Employee, retired Employee or terminated Employee of a beneficiary other than that person's spouse which is made after December 31, 1984 shall not be effective unless such designation, change or revocation is consented to in writing by the individual's spouse with such consent being made in accordance with rules and regulations of the Retirement Committee similar to those for spousal consents under Section 5.6. In the event that an Employee, retired Employee, or terminated Employee does not designate a beneficiary or beneficiaries in the manner above provided, or if for any reason such designation shall be legally ineffective or revoked, or if such beneficiary or beneficiaries predecease him or should die prior to payment of the benefits payable under the Plan after his death, then the Trustees shall distribute the benefits, if any, then payable to the then surviving members of the following classes of persons, with preference for classes in the order listed, in equal shares among class members should there be more than one class member then living: (a) spouse; (b) children (including children by adoption); (c) parents (including adopting parents); (d) brothers and sisters (including brothers and sisters of the half blood and brothers and sisters by adoption); and (e) the executor or administrator of the Employee's or retired Employee's or terminated Employee's estate. 32 37 SECTION 8 MISCELLANEOUS PROVISIONS 8.1 Required Information to be Furnished. Each Employee, former Employee and beneficiary shall furnish to the Retirement Committee such information as the Retirement Committee considers necessary or desirable for the purpose of administering the Plan and regardless of any Plan provision to the contrary, the payment of benefits hereunder is conditioned upon the furnishing of such information. Each Employee and former Employee will submit proof of his age (and, in the case of a joint and survivor option, proof of the age of the spouse or other designated beneficiary) to the Retirement Committee at such time as it may be required. The Retirement Committee will, if such proof of age is not submitted as required, use as conclusive evidence thereof such information as is deemed by it to be reliable, regardless of the source of such information. Any adjustment required by reason of lack of proof or the misstatement of the age of any person entitled to benefits hereunder will be in such manner as the Retirement Committee deems equitable. Any notice or information which may be required according to the Plan or any rule established by the Retirement Committee pursuant to the terms of the Plan shall be deemed to be furnished if addressed and either delivered in person or mailed, postage fully prepaid, to the Retirement Committee, c/o DeSoto, Inc., 16750 South Vincennes Road, South Holland, Illinois 60473. 8.2 Benefits Payable to Incompetents. If any person entitled to benefit payments hereunder shall be under a legal disability or, in the sole judgment of the Retirement Committee, shall otherwise be unable to apply such payments to his own best interest and advantage, the Retirement Committee, in the exercise of its discretion, may direct all or any portion of such benefit payments to be made in any one or more of the following ways: (a) Directly to such person; (b) To his legal guardian or conservator, or 33 38 (c) To his spouse or to any other person, to be expended for his benefit. The decision of the Retirement Committee will, in each case, be final and binding upon all persons, and the Retirement Committee shall not be obliged to see to the proper application or expenditure of any payments so made. Any payment made pursuant to the power herein conferred upon the Retirement Committee shall operate as a complete discharge of all obligations under the Plan as to such benefit payments. 8.3 Nonassignability. It is a condition of the Plan to which all rights of any person shall be subject, that payments hereunder shall be made only to those persons entitled thereto under the terms of this Plan, and no right or interest in the Plan or Trust shall be transferable or assignable; such right or interest may not be anticipated, charged or encumbered, and shall not be subject to or reached by any legal or equitable process (including execution, garnishment, attachment, pledge or bankruptcy) in satisfaction of any debt, liability or obligation, prior to its receipt, including any liability or obligation for alimony, separate maintenance or child support payments; provided, however, that nothing herein shall be deemed to preclude the Plan from complying with an order which the Retirement Committee determines to be a qualified domestic relations order" within the meaning of Section 401(a)(13)(b) of the Code. 8.4 Employment Rights. This Plan shall not be construed to create a contract of employment between an Employer and any Employee, or to create a right in any Employee to be continued in the employment of an Employer, or to limit an Employer's right to discharge any Employee with or without cause. 8.5 Other Rights and Liabilities. No employee shall have any right to, or interest in, any part of the assets held under the Plan upon termination of employment or otherwise, except as provided under the Plan and then only to the extent of the benefits payable to such Employee from the Trust. All payments of benefits 34 39 provided for in the Plan shall be made solely out of the Trust, and neither the Company nor any other Employer nor the Retirement Committee nor any Trustee shall in any manner be liable therefor. Neither the Company nor any other Employer nor the Retirement Committee nor any Trustee in any manner guarantees that the Trust will not depreciate, or sustain losses, or otherwise be reduced. 8.6 Mailing of Benefits. Each person entitled to benefits hereunder shall file with the Retirement Committee in writing his complete mailing address and each change of mailing address, and any check representing payment hereunder and any communication addressed to an Employee, a retired Employee, a terminated Employee or to any other person at his last address so filed, or if no such address has been filed, then at his last address indicated on the records of the Employer, shall be deemed to have been received by such person for all purposes of the Plan, and neither the Retirement Committee, nor the Company, nor the Trustees shall be obliged to search for or ascertain the location of any person. If in the judgment of the Retirement Committee there is any doubt that benefits are being received by the person entitled thereto, the Retirement Committee may hold such benefits for the benefit of such person. SECTION 9 ADMINISTRATION 9.1 Company Powers. The Company shall be the Plan Administrator of the Plan and shall be responsible for the administration of the Plan and shall exercise such powers as may be necessary to carry out its provisions. The Company may make supplementary rules and regulations for the administration of the Plan and shall have the exclusive right to decide questions of interpretation or to resolve ambiguities. All interpretations, determinations and decisions of the Company shall be final, conclusive and binding upon all persons having or claiming any interest under the Plan. 35 40 9.2 Retirement Committee. All the powers and rights of the Company, subject to such restrictions, limitations, and conditions as may be imposed by the Board, shall be exercised by a Retirement Committee, consisting of one or more persons appointed by resolution of the Board, and which Retirement Committee shall be a Named Fiduciary for purposes of ERISA. Each member of the Retirement Committee shall continue in office until he resigns or in discharged by a resolution of the Board. A majority of the members of the Retirement Committee in office shall constitute a quorum for the transaction of business. All resolutions or other actions taken by the Retirement Committee at any meeting shall be by vote of a majority of those persons present at such meeting. The Retirement Committee shall perform all of the duties and may exercise all of the powers specifically granted to it in the Plan and those powers delegated to it by the Company. The Retirement Committee shall adopt or cause to be prepared all actuarial tables and computations which shall be necessary or desirable to carry out the terms of the Plan, and shall be authorized to change such tables as such changes may become necessary or desirable in the judgment of the Retirement Committee. The Retirement Committee shall maintain or cause to be maintained such records and accounts as may be necessary or desirable in connection with the management and operation of the Plan. In the conduct of its affairs, the Retirement Committee may employ counsel (who may be counsel to the Company) and such clerical, medical and actuarial services as are necessary or desirable. The Retirement Committee shall have the right, from time to time, to delegate in writing to any individual member of the Retirement Committee or to any other person or persons, subject to such terms, conditions and restrictions as they may prescribe, such of their rights, powers, authorities, discretions and duties hereunder, except those dealing with interpretation of the 36 41 provisions of the Plan, as they shall determine; and all actions taken by any such person or persons pursuant to and in accordance with any such delegations shall be effective and binding upon all parties to the same extent as though taken by the Retirement Committee. The members of the Retirement Committee shall discharge their duties with respect to the Plan solely in the interests of the participants and beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, but no member shall be personally liable upon any contract, agreement, bond or other instrument made or executed by him or on his behalf as a member of the Retirement Committee; nor for any mistake of judgment made by him or any other member of the Retirement Committee; nor for any loss unless resulting from his own gross negligence or willful misconduct; and no member shall be liable for the neglect, omissions or wrongdoing of any other member or members, or of the agents, employees or counsel of the Retirement Committee. 9.3 Expenses of Administration. The Employers will pay all expenses incurred in the administration of the Plan, including expenses and fees of the Trustees, if any, except that, if not so paid, such expenses and fees shall be paid from the Trust. SECTION 10 AMENDMENT AND TERMINATION 10.1 Right to Amend or Terminate. The Company expects the Plan to be permanent, but since future conditions affecting the Company cannot be anticipated or foreseen, subject to the provisions of Section 10.4, the Company must necessarily and does hereby reserve the right to amend, modify or terminate the Plan, including without limitation of the foregoing the right to reduce or discontinue contributions at any time by the action of the Board. 37 42 However, no such amendment shall cause any reduction in the Accrued Benefit of any Participant (except to the extent permitted under Code Section 412(c)(8)). 10.2 Qualification Under the Internal Revenue Code. It is intended that the Plan shall qualify and hereafter continue to qualify under the Code and ERISA, and that all contributions made under the Plan shall be deductible for federal income tax purposes under section 404 of the Code. Without limiting the generality of the provisions of Section 10.1 hereof, the Company reserves the right at all times to modify or amend the Plan in any respect whatsoever in order to meet the requirements of the Code or ERISA as now in effect or as hereafter amended. 10.3 Distribution on Termination. It is the intention of the Company to continue the Plan and make contributions each year, but subject to the provisions of Section 10.4, the Company by resolution of the Board may, for any reason, temporarily suspend or permanently discontinue contributions, or reduce such contributions below amounts deemed sufficient under the provisions hereof. Subject to the provisions of Section 10.4, the Plan may be terminated at any time by the Board subject to and in accordance with all applicable provisions of law, and shall be terminated in case the Company permanently discontinues contributions as provided in the paragraph above or (except where, in the case of the merger or consolidation of the Company with or into another corporation, or the transfer of substantially all of the assets and business of the Company to another corporation, the resulting or acquiring corporation, as the case may be, elects, with the consent of the Company, within a period of six months after the effective date of any such event to continue the Plan with respect to the transferred Employees) if the Company ceases to exist. In the event of termination or partial termination of the Plan for any reason, payment of retirement benefits shall forthwith ease and a valuation of the assets of the Trust shall be 38 43 made as soon as possible. Upon completion of such valuation and after payment of all expenses, if any, that are not paid by the Employers, the assets of the Trust then held under the Plan shall be allocated in accordance with Section 4044 of ERISA to the extent such assets are available to provide, after all expenses of administration or liquidation, Plan benefits in the following manner and order: (a) First, to provide retirement benefits equal to the smallest benefit which could be provided under the Plan based on the provisions of the Plan as in effect during the five year period ending on the termination date of the Plan for each person who was receiving benefit payments, and each person who was eligible to begin receiving benefits, as of the beginning of the three year period ending on the termination date, without reference to the order in which such persons became or could have become entitled to receive such benefits. (b) Second, if any assets of the Trust remain after the application of subsection (a) above, to provide all or that part of the retirement benefit guaranteed under Section 4022 of ERISA arrived at by determining the smallest benefit which could be provided under the Plan based on the provisions of the Plan as in effect during the five-year period ending on the termination date for those persons specified in subsection (a) hereof. (c) Third, to provide those benefits not provided by application of subsections (a) and (b) above which would be provided under the Plan in effect five years prior to the termination date, and then to provide such benefits which would be provided under each successive amendment of the Plan. If assets are insufficient to provide such benefits at any step in the foregoing manner of distribution, distribution shall be pro rata based upon present value of each person's benefit as of the termination date. 39 44 (d) Fourth, to provide all other benefits accrued under the Plan, in the order of priority described in subsection (c) above. (e) Except as otherwise provided in the second sentence of this Subsection 10.3(e) or any other provision of the Plan, if any assets of the Trust remain, they may revert to the Company, provided that there are no other groups of Employees remaining in the Plan. However, regardless of the first sentence of this subsection 10.3(e), upon the termination of the Plan at any time during the five-year period following a "Change in Control" of the Company as defined in Section 10.4, if any assets of the Trust remain, in lieu of the reversion to the Company provided for above, such assets shall be applied to provide additional lump sum benefits to Employees and former Employees who are employed by an Employer on the date of such termination. The lump sum benefit to be paid to each such Employee and former Employee shall be determined by multiplying the remaining assets of the Trust by a fraction the numerator of which is the equivalent actuarial value, based on the factors for actuarial equivalence contained in Section 5.15, of the benefit such Employee or former Employee is eligible to receive under the preceding subsections of this Section 10.3, and the denominator of which is the aggregate of the equivalent actuarial values, based on the actuarial factors of the benefits all such Employees and former Employees are eligible to receive under the preceding subsections of this Section 10.3. Notwithstanding the foregoing, in the event the Plan terminates, or there is a spinoff of part of the Plan (in excess of the 3 percent of the Plan assets permitted under regulation Section 1.414(1)-1(n)(2)), within five years following the date of any merger of another plan into the Plan (the "Merger Date"), and if the sum of the assets in the Plan after such merger was less than the sum of the present value of the accrued benefits (whether or not vested) of both the Plan and such other plan on a termina- 40 45 tion basis on the Merger Date, then a special schedule of benefits shall be created from the necessary (as identified by an enrolled actuary) data maintained by the Company and shall be inserted in and modify the allocation priorities set forth above in this Section 10.3 at the time of such termination or spinoff, in accordance with regulation Sections 1.414(l)-1(e) through (j). If Plan assets available for allocation under subsection (a) or (b) above are insufficient to satisfy in full the retirement benefits of all persons described in that subsection, such assets shall be allocated pro rata among such persons on the basis of the present value as of the termination date of their respective benefits described in that subsection. The retirement benefits to be provided by the allocations as provided in this Section 10.3 shall be fully vested and nonforfeitable as of the termination date for distribution to the persons entitled thereto, and distribution may be implemented through the continuance of the trust fund, or by purchase of nontransferable annuity contracts, or by a combination thereof. The Company may direct that any or all of such benefits to be provided by such allocations may be computed on an actuarial basis and distributed as an actuarially equivalent immediate cash payment. 10.4 Change in Control of Company. In the event there is a "Change in Control" of the Company, as defined below, the following subsections of this Section 10.4 shall apply regardless of any provisions of the Plan to the contrary. (a) The Plan may not be terminated or partially terminated by the Board or otherwise at any time during the five-year period beginning on the date of a Change in Control. (b) Provisions of the Plan under which Employees accrue benefits, and provisions of the Plan under which optional forms of benefit and the actuarial value thereof are determined, cannot be amended to reduce such benefit accruals, or to modify or 41 46 eliminate an optional form of benefit or reduce the value thereof, at any time during the five-year period beginning on the date of a Change in Control. (c) Subsections 10.3(e) and 10.4(a), (b), (c), and (d), and Section 11.4 cannot be amended by the Board or otherwise in any way which would limit or reduce the effect of said section and subsections. (d) For purposes of this Section 10.4, a "Change in Control, shall be deemed to have occurred at such time as (1) without the prior approval of two-thirds of the Whole Board and a majority of the Continuing Directors (but not less than one Continuing Director), any New Substantial Stockholder becomes a Beneficial Owner directly or indirectly, of 35 percent or more of the voting power of the Voting Stock of the Company; or (2) one-third or more of the Board consists of members not nominated for membership by the Company or the Board. The meanings of the capitalized terms used in, and any determinations or computations made pursuant to, this subsection 10.4(d) shall be as set forth in Article Sixth of the Certificate of Incorporation of the Company, except that, for purposes of this section 10.4(d), a person shall be considered a Beneficial Owner of Voting Stock which such person has a proxy (other than a proxy solicited by or on behalf of the Company or the Board) to vote for the election of the Company. 10.5 Security Required Upon Adoption of Plan Amendment. In the event the Plan adopts an amendment which would increase current liability under the Plan for a plan year in which such amendment takes effect and the funded current liability percentage of the Plan (for the plan year) is less than 60 percent, including the amount of the unfunded current liability under the Plan attributable to such amendment, the Employer shall provide security to the Plan or if such security is not provided then such amendment shall not be effective. 42 47 The security required under this Section 10.5 shall consist of (a) a bond issued by a corporate surety company that is an acceptable surety for purposes of ERISA Section 412; (b) cash, or United States obligations which mature in 3 years or less, held in escrow by a bank or similar financial institution or (c) such other form of security as is satisfactory to the Secretary of the Treasury and the parties involved. The amount of the security shall be the excess of the lesser of (a) the amount of additional Plan assets which would be necessary to increase the funded current liability percentage under the Plan to 60 percent, including the amount of the unfunded current liability under the Plan attributable to the Plan amendment and any other Plan amendments adopted after December 22, 1987 and before such Plan amendment, or (b) the amount of the increase in current liability under the Plan attributable to the Plan amendment over $10,000,000. The security shall be released (and any amounts thereunder shall be refunded together with any interest accrued thereon) at the end of the first plan year which ends after the security is provided and for which the funded current liability percentage under the Plan is not less than 60 percent. For purposes of this Section 10.5, the terms "current liability", "funded current liability percentage", and "unfunded current liability" shall have the meanings given such terms in Code Section 412(1), except that in computing unfunded current liability any unamortized portion of the unfunded old liability amount as of the close of the plan year shall not be taken into account. SECTION 11 THE TRUST 11.1 Trust. The trust shall be comprised of all of the assets held for the purposes of the Plan, including therein all contributions hereto and the earnings thereon and increments 43 48 thereto. The Trust will be invested and administered by the Trustees in accordance with the terms of the Trust agreement. The Trustees shall be a Named Fiduciary of the Plan and shall establish a funding policy for the Trust. 11.2 Benefits Supported Only by Trust. Any person having any claim under the Plan will look solely to the assets of the Trust for satisfaction. In no event will the Company or any other Employer, or any of their officers, members of their Boards of Directors, members of the Retirement Committee, or the Trustees or successor Trustees be liable in their individual capacities to any person whomsoever under the provisions of the Plan or the Trust Agreement. 11.3 Trust Applicable Only to Payment of Benefits. The assets of the Trust will be used and applied in accordance with the provisions of the Plan to provide the benefits thereof, and no part of the corpus or income of the Trust will be used for, or diverted to, purposes other than for the exclusive benefit of the Employees, retired Employees, terminated Employees and other persons entitled to benefits hereunder, except to the extent provided in Sections 9.3 and 10.3(e) hereof. 11.4 Transfer, Merger or Consolidation. If an Employer shall sell or otherwise transfer any of its assets to another person or entity, and in connection therewith any Employees of such Employer shall become employees of such other person or entity, the Company in its discretion, may direct the Trustee to pay such amount or transfer such assets from the Trust as the Company may determine to a trustee or trustees of one or more trusts which are qualified trusts as described in section 401(a) of the Code established by such other person or entity for the purpose of providing pensions for the former Employees, or to a life insurance company or companies under a contract or contracts entered into by such other person or entity for such purpose. The Plan may not merge or consolidate with, or transfer its assets or liabilities to, any other plan unless each Employee 44 49 would (if the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit the Employee would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). In addition, no other plan may transfer its assets or liabilities to the Plan during the five-year period beginning on the date of a "Change in Control," as defined in Section 10.4, unless each Employee in the Plan would (if the Plan had then terminated) receive a benefit immediately following the transfer which is equal to or greater than the benefit the Employee would have been entitled to receive immediately before the transfer (if the plan had then terminated.) For purposes of this Section 11.4, the benefit an Employee would have been entitled to receive immediately before or after a merger, consolidation or transfer (if the Plan had then terminated) shall be determined in accordance with the applicable provisions of Section 10.3, including, but not limited to, subsection 10.3(e), if applicable. SECTION 12 CLAIMS REVIEW PROCEDURE Claims Review Procedure. A Participant or beneficiary shall make all claims for benefits under the Plan in writing addressed to the Retirement Committee at the address of the Company. Each claim shall be reviewed by the Retirement Committee within a reasonable time after it is submitted, but in no event longer than 90 days after it is received by the Retirement Committee. If a claim is wholly or partially denied, the claimant shall be sent written notice of such fact within 14 days of the denial. The denial notice, which shall be written in a manner calculated to be understood by the claimant, shall contain (i) the specific reason or reasons for the denial, (ii) specific reference to pertinent Plan and Trust provisions on which the denial is based, (iii) a description of any additional material information necessary for 45 50 the claimant to perfect his claim and an explanation of why such material or information is necessary, and (iv) an explanation of the Plan's claim review procedure. Within 60 days after receipt by the claimant of written notice of the denial, the claimant or his duly authorized representative may appeal such denial by filing a written application for review with the Chairman of the Board of Directors of the Company. Such application shall be addressed to the Chairman at the address of the Company, and may include a statement of the issues and other comments. Each such application shall state the grounds upon which the claimant seeks to have the claim reviewed. The claimant or his representative shall have access to all pertinent documents relative to the claim for the purpose of preparing the application. The Chairman of the Board shall then review the decision and notify the claimant in writing of the results of the redetermination within 60 days of receipt of the application for review, which decision shall be in writing, written in a manner calculated to be understood by the claimant and include specific reasons for the decision and specific reference to the pertinent Plan and Trust provisions on which the decision is based. The 60 day period for the decision of the Chairman of the Board may be extended if specific circumstances require an extension of time for processing, in which case the decision shall be rendered as soon as possible, but not later than 120 days after receipt of the application for review. SECTION 13 APPLICABLE LAW Applicable Law. Since the Company's principal office and the Trustee's domicile are in the State of Illinois, and since it is contemplated that the situs of administration of the Plan and Trust will continue in such State, all rights under the Plan and Trust shall be governed, construed and administered in accordance with the laws of the State of Illinois to the extent such laws are not superseded pursuant to the provisions of Section 514 of ERISA. 46 51 IN WITNESS WHEREOF, the Company has caused this instrument to be signed and the Company corporate seal to be affixed by its duly authorized officers have hereunto set their hands and seals as of this 30th day of December, 1993. DeSOTO, INC. By: [ILLEGIBLE] ----------------------------- (Corporate Seal) ATTEST: [ILLEGIBLE] ---------------------------- Secretary 47 52 SUPPLEMENT ONE (Effective as of January 1, 1987) to the DeSOTO SALARIED EMPLOYEES' PENSION PLAN TOP HEAVY AND RELATED PROVISIONS 1.1 Application of Top-Heavy Provisions. (a) Single Plan Determination. Except as provided in subsection (b) (2), if as of a Determination Date the sum of the amount of the Section 416 Benefit of Key Employees and the beneficiaries of deceased Key Employees exceeds 60 percent of the amount of the Section 416 Benefit of all Employees, and beneficiaries other than former Key Employees, the Plan is top-heavy and the provisions of this Supplement shall become applicable. (b) Aggregation Group Determination. (1) If as of a Determination Date this Plan is part of an Aggregation Group which is top-heavy, the provisions of this Supplement shall become applicable. Top-heaviness for purposes of this subsection shall be determined with respect to the Aggregation Group in the same manner as described in subsection (a). (2) If this Plan is top-heavy under subsection (a), but the Aggregation Group is not top-heavy, this Supplement shall not be applicable. (c) Calculations. The Retirement Committee shall have responsibility to make all calculations to determine whether this Plan is top-heavy. (d) Effective Date. This Supplement shall be effective with respect to any plan years beginning on and after January 1, 1987. 1.2 Special Terms. For purposes of this Supplement, the following terms shall have the following meanings: (a) "Aggregation Group" means collectively this Plan and all other plans maintained by the Company and its Affiliates which cover a Key Employee and any other plan which enables a plan covering a Key Employee to meet the requirements of Code sections 401(a)(4) or 410. In addition, at the election of the Retirement Committee, the Aggregation Group may be expanded to include any other qualified plan maintained by the Employers or an affiliate if 48 53 such Aggregation Group meets the requirements of Code sections 401(a)(4) and 410. (b) "Compensation" means an Employee's earnings received from the Employer and affiliates reportable for federal withholding purposes for the calendar year. (c) "Determination Date" means the last day of the plan year immediately preceding the plan year for which top-heaviness is to be determined, or in the case of the first plan year of a new plan, the last day of such plan year. (d) "Key Employee" means an Employee who for the plan year containing the Determination Date or any of the four preceding plan years is-- (1) an officer of an Employer or an affiliate whose annual Compensation is greater than 50 percent of the amount in effect under Code Section 415(b)(1)(A) for such plan year; provided, however, that no more than the lesser of-- (A) 50 Employees, or (B) the greater of (i) three Employees or (ii) 10 percent of all Employees, shall be treated as officers, and such officers shall be those with the highest annual Compensation in the five-year period; (2) one of the ten Employees having annual Compensation from the Employer for such plan year greater than the dollar limit specified in Code section 415(c)(1)(A), and owning (or considered as owning pursuant to Code section 318) both more than a one-half of 1 percent interest and one of the ten largest interests in the Employer or affiliate. (3) a 5 percent owner of an Employer or affiliate; or (4) a 1 percent owner of an Employer or affiliate having an annual Compensation of more than $150,000. Key Employee shall also include a beneficiary of a deceased Key Employee. Ownership shall be determined in accordance with Code section 416(i)(1)(B) and (C). For purposes of paragraph (2), if two Employees have the same ownership interest in an Employer or affiliate, the Employee having the greater annual Compensation from an Employer or affiliate shall be treated as having a larger interest. 49 54 (e) "Section 416 Benefit" means the sum of-- (1) the present value of the accrued benefit credited as of a Determination Date to an Employee, former Employee or beneficiary under the Plan and any other qualified defined benefit plan which is part of an Aggregation Group; (2) the amount credited to an Employee's, former Employee's beneficiary's account under a qualified defined contribution plan which is part of an Aggregation Group; and (3) the amount of distributions to the Employee, former Employee or beneficiary during the five-year period ending on the Determination Date other than a distribution which is a tax-free rollover contribution (or similar transfer) that in not initiated by said person or that is contributed to a plan which is maintained by an Employer or affiliate; reduced by-- (4) the amount of rollover contributions (or similar transfer) and earnings thereon credited as of a Determination Date under the Plan or a plan forming part of an Aggregation Group which is attributable to a rollover contribution (or similar transfer) initiated by the Employee or former Employee and derived from a plan not maintained by an Employer or affiliate. The present value of the accrued benefits shall be determined as of the most recent valuation date used for purposes of Code section 412 which is within the 12-month period ending on the Determination Date. The accrued benefit of an Employee shall be determined as if the Employee terminated service as of such valuation date. Reasonable interest rate and mortality assumptions shall be used to compute the present value of the accrued benefits. The account or accrued benefit of an Employee or former Employee who was a Key Employee and who subsequently meets none of the conditions of subsection (d) above for the plan year containing the Determination Date and the preceding four plan years is not a Section 416 Benefit and shall be excluded from all computations under this Supplement. Furthermore, if an Employee or former Employee has not received any compensation from the Employer or affiliates (other than benefits under the Plan) during the five-year period ending on the Determination Date, any accrued benefit for such person (and any account of such Member) shall not be taken into account in determining top-heaviness under this Supplement. 1.3 Vesting Requirements. If the Plan is determined to be top-heavy with respect to a Plan Year under the provisions of section 1.1, then an Employee's or former Employee's interest in 50 55 the accrued benefit shall vest in accordance with the following schedule:
Years of Vesting Employment Percentage - ---------- ---------- Less than 2 0% 2 20% 3 40% 4 60% 5 or more 100%
The foregoing vesting provision shall not apply to an Employee or former Employee who does not have an Hour of Service after the Plan becomes top-heavy. If in a subsequent plan year the Plan is no longer top-heavy, the vesting provisions that were in effect prior to the time the Plan became top-heavy shall be reinstated; provided, however, that any portion of an Employee's or former Employee's accrued benefit which was vested prior to the time the Plan was no longer top-heavy shall remain vested, and provided further, that an Employee or former Employee who has at least three Years of Employment at the start of such plan Year shall have the option of remaining under the vesting schedule in effect while the Plan was top-heavy. 1.4 Minimum Benefit. (a) Minimum Accrual Formula. If the Plan is determined to be top-heavy under the provisions of section 1.1 with respect to a plan year, the accrued benefit, when expressed as an Annual Retirement Benefit (as defined below), of an Employee or former Employee who is not a Key Employee shall not be less than the difference between (1) and (2) where-- (1) is the product of-- (A) the number of years of Top-Heavy Service (as defined below); and (B) 2 percent of the Employee's or former Employee's average Compensation during the period of the five consecutive years of Top-Heavy Service during which the individual had the greatest aggregate Compensation; but such product shall not exceed 20 percent of the average Compensation; and (2) is the amount of the Annual Retirement Benefit that would be provided by the Employee or former Employee's account balance attributable to Employer contributions under a 51 56 defined contribution plan which is included in an Aggregation Group. (b) Definitions. (1) Annual Retirement Benefit means a benefit payable annually in the form of a single life annuity and which commences at age 65. If the benefit is payable in another form or commences at another time, the amount described in subsection (a) above shall be adjusted on an equivalent basis. Preretirement death benefits shall not cause a reduction in the amount of the benefit. (2) A year of Top-Heavy Service shall be credited for each year of Credited Service which is credited with respect to a plan year in which the Plan is top-heavy. 1.5 Limit on Annual Compensation Taken into Account. If this Plan is determined to be top-heavy under section 1.1 above, the annual Compensation of each Employee that may be taken into account under the Plan shall not exceed the first $200,000 (as adjusted by the Secretary of the Treasury under Code section 416(d)). 1.6 Limit on Annual Additions: Combined Plan Limit. (a) General. If this Plan is determined to be topheavy under section 1.1 above, Section 6.1(c)(4)(B)(i) and 6.1(c)(5)(B)(i) of the Plan shall be applied by substituting "1.0" for "1.25" in each place it appears. The transitional rule of Code section 415(e)(6)(B)(i) shall be applied by substituting "$41,500" for "$51,875". (b) Exception. Subsection (a) shall not be applicable if (1) section 1.3 above is applied by substituting "4 percent" for "3 percent", and (2) this Plan would not be top-heavy if "90 percent" is substituted for "60 percent" in section 1.1(a) above. (c) Transitional Rule. If, but for this subsection (c), subsection (a) would begin to apply with respect to the Plan, the application of subsection (a) shall be suspended with respect to an Employee so long as there are-- (1) no Employer contributions, forfeitures, or voluntary nondeductible contributions allocated to such Employee, and 52 57 (2) no accruals under a qualified defined benefit plan for such Employee. 53 58 APPENDIX A The provisions of this Appendix A shall be applicable to certain Salaried Employees who were participants in the Grays Harbor Plan (hereinafter called "Grays Harbor Participants"), the Royal Plan (hereinafter called "Royal Participants") and the Kerns Plan (hereinafter called "Kerns Participants"). Said Grays Harbor Participants, Royal Participants and Kerns Participants shall, in addition to benefits otherwise payable under the Plan, be entitled to receive the benefits provided for in this Appendix A. Such benefits earned under said Grays Harbor Plan, Royal Plan and Kerns Plan as of December 31, 1971 shall be fully vested as of January 1, 1972 in said Grays Harbor Participants, Royal Participants and Kerns Participants. 1. Benefits for Grays Harbor Participants. Each Grays Harbor Participant shall, commencing on the first day of the month coincident with or next following the date on which said Grays Harbor Participant attains age 65, be entitled to receive, whether or not he is a Salaried Employee at that time, a monthly benefit payable thereafter for life of the amount set forth opposite his name on Schedule 1 of this Appendix A. A Grays Harbor Participant who terminates his employment with the Company prior to attaining age 65 shall have the right to elect to receive, in lieu of benefits payable at age 65, a monthly benefit, commencing the first day of the month coincident with or next following the later of the date said Grays Harbor Participant attains age 55 or terminates his employment and payable thereafter for life, of the amount set forth opposite his name of Schedule 1 of this Appendix A reduced in accordance with the principles of Section 5.2. 2. Benefits for Royal Participants. Each Royal Participant shall, commencing on the first day of the month coincident with or next following the date on which said Royal Participant attains age 65, be entitled to receive, whether or not he is a Salaried Employee at that time, a monthly benefit payable thereafter for life, but not less than for 60 payments, of the amount set forth opposite his name in Column I of Schedule 2 of this Appendix A. A Royal Participant shall have the right to elect to receive at age 65, in lieu of monthly benefits, a single lump sum of the amount set forth opposite his name in Column II of Schedule 2 of this Appendix A. If a Royal Participant terminates his employment with the Company prior to attaining age 65, he shall have the right to elect to receive, in lieu of monthly or lump sum benefits payable at age 65, either (a) a single lump sum in an amount equal to the amount set forth opposite his name in Column III of Schedule 2 of this Appendix A plus interest from January 1, 1972 to his termination of employment at the effective rate sufficient to accumulate at age 65 the lump sum amount in Column II of Schedule 2 of this Appendix A over the period between January 1, 1972 and 54 59 the date he will attain age 65, or (b) a monthly benefit, commencing the first day of the month coincident with or next following the later of the date said Royal Participant attains age 55 or terminates his employment and payable thereafter for life, of the amount set forth opposite his name in Column I of Schedule 2 of this Appendix A reduced in accordance with the principles of Section 5.2. If a Royal Participant dies prior to attaining age 65, his beneficiary or beneficiaries shall receive a single lump sum payment of the amount the Participant would have been entitled to receive as a single lump sum payment under the preceding sentence had he terminated his employment immediately prior to his death. 3. Benefits for Kerns Participants. Each Kerns Participant shall, commencing on the first day of the month coincident with or next following the date on which said Kerns Participant attains age 65, be entitled to receive, whether or not he is a Salaried Employee at that time, a monthly benefit payable thereafter for life, but not less than for 60 payments, of the amount set forth opposite his name in Column I of Schedule 3 of this Appendix A. A Kerns Participant shall have the right to elect to receive at age 65, in lieu of monthly benefits, a single lump sum of the amount set forth opposite his name in Column II of Schedule 3 of this Appendix A. If a Kerns Participant terminates his employment with the Company prior to attaining age 65, he shall have the right to elect to receive, in lieu of monthly or lump sum benefits payable at age 65, either (a) a single lump sum in an amount equal to the amount set forth opposite his name in Column III of Schedule 3 of this Appendix A plus interest from January 1, 1972 to his termination of employment at the effective rate sufficient to accumulate at age 65 the lump amount in Column II of Schedule 3 of this Appendix A over the period between January 1, 1972 and the date he will attain age 65, or (b) a monthly benefit, commencing the first day of the month coincident with or next following the later of the date said Kerns Participant attains age 55 or terminates his employment and payable thereafter for life, of the amount set forth opposite his name in Column I of Schedule 3 of this Appendix A reduced in accordance with the principles of Section 5.2. If a Kerns Participant dies prior to attaining age 65, his beneficiary or beneficiaries shall receive a single lump sum payment of the amount the Participant would have been entitled to receive as a single lump sum payment under the preceding sentence had he terminated his employment immediately prior to his death. 4. Optional Forms of Benefits. Any optional form of benefit available under Section 5.7 shall, at the election of a Grays Harbor Participant, Royal Participant or Kerns Participant, be available for benefits under this Appendix A on an actuarial equivalent basis. 55 60 5. Designation of Beneficiary. Each Royal Participant and Kerns Participant shall, in accordance with the rules of Section 7.1, designate a beneficiary or beneficiaries who may receive the benefits payable under this Appendix A after his death. 6. Termination. The earned benefits under this Appendix A shall be provided by Policy GR 2126A of the Traveler's Insurance Company. In the event of termination of the Plan for any reason, the provisions of Section 10.3 shall not apply to said Policy. 7. Consistency with the Plan. All provisions of the Plan not inconsistent with this Appendix A shall apply to Grays Harbor Participants, Royal Participants and Kerns Participants and to the benefits provided for in this Appendix A and, unless the context clearly indicates contrary, any term or phrase used or defined in the Plan shall have a similar meaning for purposes of this Appendix A. 56 61 APPENDIX A SCHEDULE 1 BENEFITS FOR GRAY HARBOR PARTICIPANTS Grays Harbor Monthly Participant Benefit ------------ ------- Clarence Holm $367.88 Victor Nieznalski 235.69 Cecile Nicholas 122.17 57 62 APPENDIX A SCHEDULE 2 BENEFITS FOR ROYAL PARTICIPANTS
Column I Column III Column II Royal Age at Monthly Lump Sum Lump Sum at Participant 1/1/72 Benefit at 1/1/72 Age 65 - ---------------------------------------------------------------------------- R. Hines 54 $128.95 $13,114.86 $13,704.12 - ---------------------------------------------------------------------------- P. Hickey 62 376.87 38,802.29 40,338.23 - ---------------------------------------------------------------------------- W. Dailey 61 292.46 28,180.82 31,114.07 - ---------------------------------------------------------------------------- A. Leo 60 197.46 19,168.45 20,206.70 - ---------------------------------------------------------------------------- F. Barresi 60 261.34 22,296.90 27,715.62 - ---------------------------------------------------------------------------- R. Smith 60 94.71 9,457.80 10,089.07 - ---------------------------------------------------------------------------- M. O'Keefe 59 109.10 10,205.21 11,618.25 - ---------------------------------------------------------------------------- R. Ziegler 58 91.76 7,416.45 9,530.96 - ---------------------------------------------------------------------------- A. Dangelas 58 40.73 3,670.73 4,326.01 - ---------------------------------------------------------------------------- H. Langlais 58 156.05 12,160.69 16,797.70 - ---------------------------------------------------------------------------- N. Deboer 57 108.58 9,423.79 11,544.41 - ---------------------------------------------------------------------------- J. Jacomino 56 280.76 23,824.34 28,851.90 - ---------------------------------------------------------------------------- A. Moore 56 160.80 11,244.73 16,598.25 - ---------------------------------------------------------------------------- M. Acosta 56 138.33 11,121.42 14,342.66 - ---------------------------------------------------------------------------- H. Waller 56 94.92 6,980.83 10,677.63 - ---------------------------------------------------------------------------- I. Radnai 55 32.90 1,889.39 3,370.62 - ---------------------------------------------------------------------------- P. Hansard 55 107.89 5,754.41 11,404.06 - ---------------------------------------------------------------------------- T. Benham 53 87.71 6,722.06 8,858.18 - ---------------------------------------------------------------------------- J. Parker 53 71.84 5,496.24 8,186.57 - ---------------------------------------------------------------------------- W. Botelho 52 66.30 3,228.80 6,681.90 - ---------------------------------------------------------------------------- R. Arthur 52 48.29 3,585.96 5,043.68 - ---------------------------------------------------------------------------- L. Costa 52 123.67 7,202.80 12,974.51 - ---------------------------------------------------------------------------- T. Jacomino 52 96.77 5,979.10 10,243.36 - ----------------------------------------------------------------------------
58 63 APPENDIX A SCHEDULE 2 BENEFITS FOR ROYAL PARTICIPANTS
Column I Column III Column II Royal Age at Monthly Lump Sum Lump Sum at Participant 1/1/72 Benefit at 1/1/72 Age 65 - ---------------------------------------------------------------------------- D. Beck 51 $ 67.34 $ 4,596.44 $ 6,953.42 - ---------------------------------------------------------------------------- H. Dyer 51 58.69 2,156.16 6,169.38 - ---------------------------------------------------------------------------- R. Grime 50 84.36 7,347.63 9,749.13 - ---------------------------------------------------------------------------- S. Fuzesi 50 186.81 13,697.35 18,815.78 - ---------------------------------------------------------------------------- G. St. Martin 50 174.23 9,708.59 17,627.14 - ---------------------------------------------------------------------------- F. Bertonci 50 59.36 3,580.50 6,032.38 - ---------------------------------------------------------------------------- R. Gilbert 50 94.09 6,386.26 9,647.53 - ---------------------------------------------------------------------------- C. Powers 49 59.37 2,778.65 6,210.81 - ---------------------------------------------------------------------------- A. Talbot 49 119.89 5,893.67 12,598.07 - ---------------------------------------------------------------------------- L. Manning 48 25.52 1,087.47 2,995.35 - ---------------------------------------------------------------------------- P. Lappin 48 72.33 4,602.52 7,716.12 - ---------------------------------------------------------------------------- T. Kawasaki 48 44.74 2,972.35 5,251.13 - ---------------------------------------------------------------------------- T. Bailey 48 101.55 6,237.05 10,930.36 - ---------------------------------------------------------------------------- H. Weatherly 47 320.84 21,299.36 33,671.41 - ---------------------------------------------------------------------------- W. Lentz 46 126.51 6,833.86 13,651.05 - ---------------------------------------------------------------------------- F. Broome 46 55.68 2,277.09 6,171.14 - ---------------------------------------------------------------------------- W. Swafford 46 43.40 2,459.31 4,853.25 - ---------------------------------------------------------------------------- R. Caron 45 44.94 2,792.76 5,052.18 - ---------------------------------------------------------------------------- G. Tipton 45 91.19 4,600.41 10,343.53 - ---------------------------------------------------------------------------- J. Foley 44 36.55 2,199.07 4,069.57 - ---------------------------------------------------------------------------- L. Northcut 44 69.04 3,656.62 7,825.39 - ---------------------------------------------------------------------------- W. Howington 44 16.24 925.25 1,848.99 - ---------------------------------------------------------------------------- D. Foster 43 27.62 1,801.73 3,167.15 - ---------------------------------------------------------------------------- N. Sherman 43 32.75 1,825.37 3,823.03 - ----------------------------------------------------------------------------
59 64 APPENDIX A SCHEDULE 2 BENEFITS FOR ROYAL PARTICIPANTS
Column I Column III Column II Royal Age at Monthly Lump Sum Lump Sum at Participant 1/1/72 Benefit at 1/1/72 Age 65 - ---------------------------------------------------------------------------- E. West 43 $18.91 $1,262.33 $ 2,207.44 - ---------------------------------------------------------------------------- E. Burn 43 33.09 1,277.66 3,922.22 - ---------------------------------------------------------------------------- A. Spivey 42 28.92 1,354.64 3,413.49 - ---------------------------------------------------------------------------- W. Grider 41 42.81 726.99 5,106.31 - ---------------------------------------------------------------------------- C. Mello 41 88.97 2,592.93 10,851.63 - ---------------------------------------------------------------------------- J. Furtado 41 28.04 604.87 3,512.81 - ---------------------------------------------------------------------------- J. Norris 40 29.87 1,034.02 3,646.90 - ---------------------------------------------------------------------------- L. Desrache 40 25.35 1,657.66 3,164.86 - ---------------------------------------------------------------------------- T. Reed 40 25.05 1,163.71 3,183.73 - ---------------------------------------------------------------------------- K. Mock 39 51.14 2,497.13 6,294.75 - ---------------------------------------------------------------------------- C. Niles, Jr. 39 29.82 590.26 3,719.96 - ---------------------------------------------------------------------------- C. Thomas 39 26.55 1,497.91 3,525.48 - ---------------------------------------------------------------------------- C. Brown 38 24.31 1,280.44 3,055.60 - ---------------------------------------------------------------------------- G. Collins 37 24.00 1,203.55 3,040.32 - ---------------------------------------------------------------------------- A. Pacheco 34 10.40 373.05 1,319.62 - ---------------------------------------------------------------------------- R. Pereira 33 26.39 738.21 3,241.20 - ---------------------------------------------------------------------------- F. Texeria 33 11.89 478.29 1,460.30 - ---------------------------------------------------------------------------- H. Santos 33 16.67 603.53 2,084.25 - ---------------------------------------------------------------------------- W. Hudson 32 5.32 250.58 664.14 - ---------------------------------------------------------------------------- P. Brock 31 27.37 722.96 3,368.02 - ---------------------------------------------------------------------------- J. Anderson 30 8.64 378.23 1,067.08 - ---------------------------------------------------------------------------- F. Owen 29 10.49 461.76 1,282.98 - ----------------------------------------------------------------------------
60 65 APPENDIX A SCHEDULE 2 BENEFITS FOR ROYAL PARTICIPANTS
Column I Column III Column II Royal Age at Monthly Lump Sum Lump Sum at Participant 1/1/72 Benefit at 1/1/72 Age 65 - ---------------------------------------------------------------------------- R. Johnson 26 $ 2.88 $ 106.92 $ 349.49 - ---------------------------------------------------------------------------- B. Sturgill 61 47.26 3,332.96 5,644.34 - ---------------------------------------------------------------------------- R. Brown 54 33.23 1,833.00 3,792.68 - ---------------------------------------------------------------------------- I. Rapoza 53 48.88 3,347.81 5,654.01 - ---------------------------------------------------------------------------- V. Urban 52 41.15 2,854.44 4,782.14 - ---------------------------------------------------------------------------- R. Lindgren 51 11.33 349.33 1,463.99 - ---------------------------------------------------------------------------- T. Lorenz 50 49.67 3,278.17 5,566.38 - ---------------------------------------------------------------------------- M. Chism 50 85.54 6,321.18 9,715.42 - ---------------------------------------------------------------------------- M. Prophate 49 30.90 2,084.52 3,505.20 - ---------------------------------------------------------------------------- J. Rachlin 49 9.84 427.13 1,126.23 - ---------------------------------------------------------------------------- S. McLenden 49 28.90 2,144.59 3,427.91 - ---------------------------------------------------------------------------- L. Massey 48 13.80 1,066.02 1,641.67 - ---------------------------------------------------------------------------- E. Winkler 47 26.50 1,691.38 3,533.92 - ---------------------------------------------------------------------------- H. Cummings 46 20.51 1,315.31 2,473.00 - ---------------------------------------------------------------------------- L. Guay 45 21.53 1,447.11 2,670.08 - ---------------------------------------------------------------------------- B. Durham 43 11.19 586.79 1,483.22 - ---------------------------------------------------------------------------- B. Price 42 18.77 1,221.52 2,507.49 - ---------------------------------------------------------------------------- J. Campbell 41 9.61 514.79 1,333.52 - ---------------------------------------------------------------------------- P. Larkin 35 7.74 383.06 1,089.07 - ---------------------------------------------------------------------------- M. Goyette 34 9.13 510.08 1,254.18 - ---------------------------------------------------------------------------- E. Ufers 33 6.83 298.70 929.26 - ---------------------------------------------------------------------------- L. Thorn 26 2.66 129.61 370.00 - ---------------------------------------------------------------------------- B. Plourde 26 3.40 146.02 475.15 - ----------------------------------------------------------------------------
61 66 APPENDIX A SCHEDULE 2 BENEFITS FOR ROYAL PARTICIPANTS
Column I Column III Column II Royal Age at Monthly Lump Sum Lump Sum at Participant 1/1/72 Benefit at 1/1/72 Age 65 - ---------------------------------------------------------------------------- J. Souza 23 $ 1.17 $ 27.61 $ 162.28 - ---------------------------------------------------------------------------- H. Burdette 52 28.82 1,208.59 2,930.61 - ----------------------------------------------------------------------------
62 67 APPENDIX A SCHEDULE 3 BENEFITS FOR KERNS PARTICIPANTS
Column I Column III Column II Kerns Age at Monthly Lump Sum Lump Sum at Participant 1/1/72 Benefit at 1/1/72 Age 65 - ---------------------------------------------------------------------------- R. Holden 64 $386.14 $37,529.64 $41,962.75 - ---------------------------------------------------------------------------- R. Peterson 63 155.07 14,114.24 16,873.79 - ---------------------------------------------------------------------------- H. Fromong 62 402.72 34,328.93 41,593.77 - ---------------------------------------------------------------------------- T. Eady 56 299.99 18,452.88 30,965.84 - ---------------------------------------------------------------------------- S. Morser 56 77.98 4,796.67 8,085.29 - ---------------------------------------------------------------------------- R. Porter 55 49.69 2,875.50 5,159.38 - ---------------------------------------------------------------------------- E. Begrin 54 128.46 7,028.60 13,127.81 - ---------------------------------------------------------------------------- D. Chapman 52 260.02 13,074.52 30,631.31 - ---------------------------------------------------------------------------- J. Frank 52 44.97 2,199.67 4,655.18 - ---------------------------------------------------------------------------- J. Chrustic 51 184.47 8,531.39 19,218.80 - ---------------------------------------------------------------------------- D. Downey 50 97.96 4,283.27 10,179.68 - ---------------------------------------------------------------------------- P. Shiffer 49 170.76 7,188.39 18,185.23 - ---------------------------------------------------------------------------- A. Luther 46 82.12 3,077.59 8,861.14 - ---------------------------------------------------------------------------- J. Stephen 46 19.14 717.31 2,111.90 - ---------------------------------------------------------------------------- J. Theisen 45 86.36 3,111.72 9,368.23 - ---------------------------------------------------------------------------- W. Hollingsworth 43 35.11 1,196.13 3,990.26 - ---------------------------------------------------------------------------- E. Bacho 40 54.22 1,689.91 6,679.14 - ---------------------------------------------------------------------------- C. Lyons 40 16.54 515.53 2,037.57 - ---------------------------------------------------------------------------- J. Cason 37 8.31 219.87 1,029.54 - ---------------------------------------------------------------------------- J. McDonald 37 3.23 85.47 401.96 - ---------------------------------------------------------------------------- P. Beland 33 6.10 129.74 755.95 - ---------------------------------------------------------------------------- J. Libal 33 13.19 280.61 1,649.76 - ---------------------------------------------------------------------------- N. Neil 26 5.88 85.31 716.69 - ---------------------------------------------------------------------------- B. Smith 58 23.61 1,821.55 2,746.35 - ---------------------------------------------------------------------------- J. Olson 53 32.75 1,884.76 3,831.72 - ----------------------------------------------------------------------------
63 68 APPENDIX B The provisions of this Appendix B shall be applicable to certain Hourly Employees who were prior to January 1, 1972 participants in, and certain former Hourly Employees were receiving benefits under, the Artcraft Plan (hereinafter called "Artcraft Participants" and "Former Artcraft Participants"). Said Artcraft Participants and Former Artcraft Participants shall, in addition to benefits otherwise payable under the Plan, be entitled to receive the benefits provided for in this Appendix B. Such benefits earned under said Artcraft Plan as of December 31, 1971 shall be fully vested as of January 1, 1972 in said Participants. 1. Benefits for Former Artcraft Participants. Each Former Artcraft Participant shall be entitled to receive a monthly benefit payable for life of the amount set forth opposite his name on Schedule 1 of this Appendix B. 2. Benefits for Artcraft Participants. Each Artcraft Participant shall, commencing on the first day of the month coincident with or next following the date on which said Artcraft Participant attains age 65, be entitled to receive, whether or not he is an Hourly Employee at that time, a monthly benefit payable thereafter for life of the amount set forth opposite his name on Schedule 2 of this Appendix B. An Artcraft Participant who terminates his employment with the Company prior to attaining age 65 shall have the right to elect to receive, in lieu of benefits payable at age 65, a monthly benefit, commencing the first day of 64 69 the month coincident with or next following the later of the date said Artcraft Participant attains age 55 or terminates his employment and payable thereafter for life, of the amount set forth opposite his name on Schedule 2 of this Appendix B reduced in accordance with the principles of Section 5.2. 3. Optional Forms of Benefits. Any optional form of benefit available under Section 5.7 shall, at the election of an Artcraft Participant, be available for benefits under this Appendix B on an actuarial equivalent basis. 4. Termination. The earned benefits under this Appendix B shall be provided by Policy GR 2126 of the Traveler's Insurance Company. In the event of termination of the Plan for any reason, the provisions of Section 10.3 shall not apply to said Policy. 5. Consistency with the Plan. All provisions of the Plan not inconsistent with this Appendix B shall apply to the Participants, and to the benefits provided for in this Appendix B and, unless the context clearly indicates contrary, any term or phrase used or defined in the Plan shall have a similar meaning for purposes of this Appendix B. 65 70 APPENDIX B SCHEDULE I BENEFITS FOR FORMER ARTCRAFT PARTICIPANTS
Former Artcraft Monthly Participant Benefit - --------------- ------- Georgiana Botelho $22.01 Lauretta Ouellette 21.79 Jeannette Charette 12.20 Nelson R. Tripp 10.80 Alice Ouellette 22.80 James F. Rogers 22.10 Irene Lemay 20.40
66 71 APPENDIX B SCHEDULE 2 BENEFITS FOR ARTCRAFT PARTICIPANTS
Artcraft Monthly Participant Benefit - ----------- ------- Manuel Albergaria $ 9.40 Edward Allen 24.00 E. Alves 2.40 I. Almeida 2.40 Virginia Amaral 5.00 P. Ambrose 2.40 R. Andrade 2.40 Robert Angelini 5.20 C. Antaya 2.40 Hector Anataya 22.20 Ivo Araujo 5.00 Antone Arruda 4.00 L. Arruda 2.40 Albert Aspden 24.00 E. Aubin 2.40 John Azevedo 24.00 Roland Banville 17.80 Honorato Barbosa 24.00 Maria Barbosa 5.40 George Barboza 24.00 Leo Barre 24.00 Rene Bernier 24.00 A. Bettencourt 2.40 E. Beliveau 2.40 Howard Blackburn 9.40 Annette Bliss 20.80 Margaret Booth 24.00 Jane Borges 4.40 S. Botelho 2.40 A. Brady 2.40 Mary Branco 4.20 Edith Brooks 24.00 Amelia Brown 24.00 E. Brush 2.40 Doris Burke 17.80 Grace Burton 21.80 S. Cabral 2.40 D. Colon 2.40 Benoit Canuel 11.80 Leona Canuel 9.20 Mary Isabel Capeto 18.60
67 72 APPENDIX B SCHEDULE 2 BENEFITS FOR ARTCRAFT PARTICIPANTS
Artcraft Monthly Participant Benefit - ----------- ------- Leo Coppinger 17.60 Amos Carreiro 24.00 Brian Carroll 9.40 John Carvalho, Jr. 24.00 L. Carvalho 2.40 Antonio Chaves 24.00 Irene Coderre 24.00 William Collard 17.80 L. Connearney 2.40 M. Cordeiro 2.40 M. Cordeiro 2.40 C. Correia 2.40 Evelyn Correia 24.00 Ramona Correia 24.00 Richard Correia 13.60 D. Costa 2.40 Robert Coupe 24.00 Annette Couture 24.00 P. Couto 2.40 C. Dagwan 2.40 Dennis Daigle 10.00 William DeMarco 17.00 L. DeMello 2.40 Rita DeMille 21.80 Frank DeNardo 24.00 G. Desrosiers 2.40 Warren Dewhurst 9.40 Norman Dextradeur 24.00 John Dias 24.00 Aileen Dixon 9.80 George Donald 6.40 Leo Dostou 16.20 B. Douthit, Jr. 2.40 Norma Dube 17.80 V. Dubois 2.40 Leo J. Dufault 24.00 J. Dyer 2.40 William Eddy 16.00 Phyllis Erwin 9.40 John Estrella, Jr. 8.80 Manuel Farias 6.60
68 73 APPENDIX B SCHEDULE 2 BENEFITS FOR ARTCRAFT PARTICIPANTS
Artcraft Monthly Participant Benefit - ----------- ------- Albertina Ferreiral 8.60 J. Ferreira 2.40 Manuel Ferreira, Jr. 18.20 Edgar Ferris 24.00 Louis Fillippi 24.00 Hilda Foila 24.00 P. Foley 2.40 D. Fournier 2.40 P. Fournier 2.40 Manuel Franco 18.60 Anthony Freitas 24.00 Alfred Furtado 24.00 Anna Furtado 16.20 Manuel Furtado 24.00 Sophie Furze 19.80 Mary Gallant 24.00 M. Gannon 2.40 Armand Garand 24.00 Louise Gaspar 9.40 Theresa Gaudreau 24.00 D. Giasson 2.40 J. Golenski 2.40 D. Gouette 2.40 Catherine Grandfield 24.00 Leonard Greenhalgh 6.40 Michael Griffin 8.80 Joseph Guay 24.00 Nassip Habib 24.00 William Halpen 24.00 N. Hamell 2.40 Russell Heap 24.00 Stephen Hebert 8.45 Paul Heraux 3.80 Horst Hetzler 24.00 Doris Ironfield 6.20 Mitchell Jezak 4.20 William Joaquim, Jr. 6.00 R. Johnson 2.40 Margaret Kennedy 24.00 T. Klek 2.40
69 74 APPENDIX B SCHEDULE 2 BENEFITS FOR ARTCRAFT PARTICIPANTS
Artcraft Monthly Participant Benefit - ----------- ------- Thomas Krupa 24.00 Evelyn Kupiec 13.20 James Kuttner 3.80 Ruth Lackey 18.60 Albert Lafex 6.40 Henry R. Langlais 24.00 David Lariviere 5.80 Rene Lavinge 24.00 Donald Leduc 5.40 Blanche Levesque 24.00 Hilda Levesque 4.60 Lucy Lester 9.60 M. Lima 2.40 John Linhares 24.00 Joseph Linhares 24.00 M. Loiselle 2.40 A. Machado 2.40 Margaret Marchand 24.00 David Martin 13.20 R. Martin 2.40 Joseph Mauricio 9.20 Richard Maynard 24.00 C. Medeiros 2.40 Henry Medeiros 5.20 C. Mello 2.40 M. Mello 2.40 P. Mello 2.40 Robert Mello 13.80 D. Michaud 2.40 Mary Miranda 24.00 Madeline Monteiro 5.20 L. Morgan 2.40 L. Morris 2.40 M. Morrissette 2.40 Leonard McMullen 6.60 Edmond Neves 24.00 Manuel Nunes, Jr. 24.00 John O'Gara 24.00 I. Ojemaye 2.40 Rose Oliveira 24.00 J. Ortiz 2.40
70 75 APPENDIX B SCHEDULE 2 BENEFITS FOR ARTCRAFT PARTICIPANTS
Artcraft Monthly Participant Benefit - ----------- ------- D. Pacheco 2.40 Manuel Pacheco 24.00 J. Paiva 2.40 Virgil Paradise 24.00 Dorothy Pavao 24.00 William Pavao 21.00 Leon Pelletier 24.00 Normand Pelletier 24.00 P. Pelletier 2.40 Claire Peloquin 4.40 Jordan Pereira 10.00 Louis Pereira 2.40 R. Perreault 2.40 M. Perry 2.40 Raymond J. Perry 6.00 Alphonso Petrasso 24.00 Irene Petrasso 24.00 Valeda Picard 24.00 Manuel Pimental 4.40 R. Pineau 2.40 Albert Potvin 24.00 Sylvia Powell 4.60 S. Price 2.40 Matthew Przybycien 24.00 Robert Rachel 13.00 Arthur Ramos 24.00 L. Rapoza 2.40 Louis Raposa 24.00 Michael Ray 3.80 M. Rego 2.40 James Richard, Jr. 3.60 Michael R. Rioux 9.40 William Roberts 24.00 Mary Russell 24.00 Edward Ryan 21.20 Joseph Saccone 24.00 Walter Sanocki 24.00 Stella Senuick 21.80 E. Silvia 2.40 Henry Silvia 24.00 Joseph Silvia 3.60
71 76 APPENDIX B SCHEDULE 2 BENEFITS FOR ARTCRAFT PARTICIPANTS
Artcraft Monthly Participant Benefit - ----------- ------- Nancy Silvia 5.40 Julia Smith 21.20 M. Smith 2.40 J. Smyka 2.40 D. Soares 2.40 Judith Solomon 9.20 Edward Souza 24.00 George Souza 24.00 Barbara Stone 9.00 John Szydlowski 24.00 Milton Tobiasz 7.00 Paul Talbot 7.40 J. Tavares 2.40 J. Teixeira 2.40 Richard Texeira 10.20 Rene Thibault 24.00 Roger Thibeault 10.60 A. Torres 2.40 Barbara Travassos 17.80 Dudley Trott 4.60 Joseph Valiquette 4.60 R. Vanasse 2.40 A. Velez 2.40 Louis Vieira, Jr. 24.00 Manuel Vieira 6.60 Hilda Vioak 4.20 B. Whipp 2.40 Walter Wojciechowski 19.80 Bertha Yelle 16.20 -----
72 77 APPENDIX C ACTUARIALLY EQUIVALENT CERTAIN PERIOD AND LIFE CONVERSION FACTORS (Applicable to Both Male and Female Participants) CERTAIN PERIOD (YEARS) ROUNDED AGE -------------------------------------------------------- OF PARTICIPANT 5 10 15 20 - ---------------------------------------------------------------------------- 55 .9938 .9761 .9485 .9128 - ---------------------------------------------------------------------------- 56 .9932 .9736 .9432 .9042 - ---------------------------------------------------------------------------- 57 .9924 .9707 .9372 .8945 - ---------------------------------------------------------------------------- 58 .9916 .9675 .9305 .8841 - ---------------------------------------------------------------------------- 59 .9906 .9638 .9230 .8726 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 60 .9895 .9596 .9145 .8600 - ---------------------------------------------------------------------------- 61 .9883 .9549 .9053 .8452 - ---------------------------------------------------------------------------- 62 .9868 .9495 .8948 .8312 - ---------------------------------------------------------------------------- 63 .9851 .9434 .8832 .8150 - ---------------------------------------------------------------------------- 64 .9831 .9365 .8704 .7976 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 65 .9808 .9286 .8563 .7791 - ---------------------------------------------------------------------------- 66 .9782 .9199 .8409 .7595 - ---------------------------------------------------------------------------- 67 .9753 .9101 .8243 .7391 - ---------------------------------------------------------------------------- 68 .9720 .8992 .8063 .7178 - ---------------------------------------------------------------------------- 69 .9682 .8868 .7869 .6955 - ---------------------------------------------------------------------------- 73 78 APPENDIX C 100% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 55 56 57 58 59 60 61 62 63 64 - ------------------------------------------------------------------------------------------------------------------------------ 35 .7433 .7294 .7151 .7003 .6850 .6694 .6532 .6367 .6197 .6024 - ------------------------------------------------------------------------------------------------------------------------------ 36 .7475 .7337 .7193 .7045 .6893 .6735 .6574 .6408 .6238 .6064 - ------------------------------------------------------------------------------------------------------------------------------ 37 .7520 .7381 .7238 .7090 .6937 .6779 .6617 .6451 .6280 .6106 - ------------------------------------------------------------------------------------------------------------------------------ 38 .7566 .7427 .7284 .7136 .6983 .6825 .6662 .6495 .6324 .6149 - ------------------------------------------------------------------------------------------------------------------------------ 39 .7613 .7475 .7332 .7184 .7031 .6873 .6710 .6542 .6370 .6195 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 40 .7663 .7525 .7382 .7234 .7081 .6922 .6759 .6591 .6419 .6243 - ------------------------------------------------------------------------------------------------------------------------------ 41 .7714 .7576 .7434 .7286 .7133 .6974 .6811 .6642 .6470 .6293 - ------------------------------------------------------------------------------------------------------------------------------ 42 .7767 .7630 .7487 .7340 .7186 .7028 .6865 .6696 .6523 .6345 - ------------------------------------------------------------------------------------------------------------------------------ 43 .7821 .7685 .7543 .7395 .7243 .7084 .6920 .6752 .6578 .6400 - ------------------------------------------------------------------------------------------------------------------------------ 44 .7877 .7741 .7600 .7453 .7301 .7142 .6979 .6810 .6636 .6457 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 45 .7934 .7799 .7659 .7513 .7361 .7203 .7039 .6870 .6696 .6517 - ------------------------------------------------------------------------------------------------------------------------------ 46 .7993 .7859 .7720 .7574 .7423 .7265 .7102 .6933 .6758 .6579 - ------------------------------------------------------------------------------------------------------------------------------ 47 .8053 .7921 .7782 .7638 .7487 .7330 .7167 .6998 .6823 .6644 - ------------------------------------------------------------------------------------------------------------------------------ 48 .8115 .7984 .7846 .7703 .7553 .7397 .7234 .7065 .6891 .6711 - ------------------------------------------------------------------------------------------------------------------------------ 49 .8177 .8048 .7912 .7770 .7621 .7466 .7304 .7135 .6961 .6781 - ------------------------------------------------------------------------------------------------------------------------------
74 79 APPENDIX C 100% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 55 56 57 58 59 60 61 62 63 64 - ------------------------------------------------------------------------------------------------------------------------------ 50 .8241 .8113 .7979 .7838 .7691 .7537 .7375 .7208 .7034 .6854 - ------------------------------------------------------------------------------------------------------------------------------ 51 .8305 .8180 .8048 .7909 .7762 .7609 .7449 .7282 .7109 .6929 - ------------------------------------------------------------------------------------------------------------------------------ 52 .8370 .8247 .8117 .7980 .7836 .7684 .7525 .7359 .7187 .7008 - ------------------------------------------------------------------------------------------------------------------------------ 53 .8436 .8315 .8188 .8053 .7911 .7761 .7603 .7439 .7267 .7089 - ------------------------------------------------------------------------------------------------------------------------------ 54 .8502 .8384 .8259 .8127 .7987 .7839 .7683 .7520 .7350 .7172 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 55 .8569 .8454 .8332 .8202 .8064 .7919 .7765 .7604 .7435 .7258 - ------------------------------------------------------------------------------------------------------------------------------ 56 .8635 .8524 .8405 .8278 .8143 .8000 .7849 .7689 .7522 .7347 - ------------------------------------------------------------------------------------------------------------------------------ 57 .8702 .8594 .8478 .8354 .8222 .8082 .7934 .7777 .7612 .7439 - ------------------------------------------------------------------------------------------------------------------------------ 58 .8768 .8663 .8551 .8431 .8302 .8165 .8020 .7866 .7703 .7532 - ------------------------------------------------------------------------------------------------------------------------------ 59 .8833 .8733 .8624 .8508 .8383 .8249 .8107 .7956 .7796 .7627 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 60 .8898 .8801 .8697 .8584 .8463 .8333 .8195 .8047 .7890 .7724 - ------------------------------------------------------------------------------------------------------------------------------ 61 .8962 .8869 .8769 .8660 .8543 .8418 .8283 .8139 .7985 .7873 - ------------------------------------------------------------------------------------------------------------------------------ 62 .9024 .8936 .8840 .8735 .8623 .8502 .8371 .8231 .8081 .7923 - ------------------------------------------------------------------------------------------------------------------------------ 63 .9085 .9001 .8909 .8810 .8702 .8585 .8459 .8323 .8178 .8023 - ------------------------------------------------------------------------------------------------------------------------------ 64 .9145 .9065 .8978 .8883 .8779 .8667 .8546 .8415 .8274 .8124 - ------------------------------------------------------------------------------------------------------------------------------
75 80 APPENDIX C 100% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 55 56 57 58 59 60 61 62 63 64 - ------------------------------------------------------------------------------------------------------------------------------ 65 .9203 .9127 .9044 .8954 .8856 .8749 .8632 .8506 .8370 .8225 - ------------------------------------------------------------------------------------------------------------------------------ 66 .9259 .9187 .9109 .9024 .8930 .8828 .8717 .8596 .8466 .8325 - ------------------------------------------------------------------------------------------------------------------------------ 67 .9313 .9246 .9172 .9092 .9003 .8907 .8801 .8685 .8560 .8425 - ------------------------------------------------------------------------------------------------------------------------------ 68 .9364 .9302 .9233 .9157 .9074 .8983 .8882 .8773 .8653 .8524 - ------------------------------------------------------------------------------------------------------------------------------ 69 .9414 .9356 .9292 .9221 .9143 .9057 .8962 .8858 .8745 .8621 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 70 .9462 .9408 .9348 .9282 .9209 .9128 .9039 .8941 .8834 .8717 - ------------------------------------------------------------------------------------------------------------------------------ 71 .9506 .9457 .9401 .9340 .9272 .9197 .9113 .9021 .8920 .8809 - ------------------------------------------------------------------------------------------------------------------------------ 72 .9549 .9503 .9452 .9395 .9332 .9262 .9184 .9098 .9003 .8899 - ------------------------------------------------------------------------------------------------------------------------------ 73 .9588 .9546 .9499 .9446 .9388 .9323 .9251 .9171 .9082 .8984 - ------------------------------------------------------------------------------------------------------------------------------ 74 .9625 .9586 .9543 .9495 .9441 .9381 .9314 .9240 .9157 .9065 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 75 .9659 .9623 .9584 .9540 .9490 .9435 .9373 .9304 .9227 .9142 - ------------------------------------------------------------------------------------------------------------------------------ 76 .9690 .9658 .9622 .9582 .9536 .9486 .9429 .9365 .9294 .9214 - ------------------------------------------------------------------------------------------------------------------------------ 77 .9720 .9690 .9657 .9620 .9579 .9533 .9480 .9422 .9356 .9282 - ------------------------------------------------------------------------------------------------------------------------------ 78 .9746 .9720 .9690 .9656 .9619 .9576 .9528 .9474 .9414 .9346 - ------------------------------------------------------------------------------------------------------------------------------ 79 .9771 .9747 .9720 .9689 .9655 .9616 .9573 .9523 .9468 .9405 - ------------------------------------------------------------------------------------------------------------------------------
76 81 APPENDIX C 100% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 55 56 57 58 59 60 61 62 63 64 - ------------------------------------------------------------------------------------------------------------------------------ 80 .9793 .9772 .9747 .9719 .9688 .9653 .9613 .9568 .9518 .9460 - ------------------------------------------------------------------------------------------------------------------------------ 81 .9814 .9794 .9772 .9747 .9719 .9687 .9651 .9610 .9563 .9511 - ------------------------------------------------------------------------------------------------------------------------------ 82 .9833 .9815 .9795 .9772 .9747 .9718 .9685 .9648 .9606 .9558 - ------------------------------------------------------------------------------------------------------------------------------ 83 .9850 .9834 .9816 .9795 .9773 .9747 .9717 .9683 .9645 .9601 - ------------------------------------------------------------------------------------------------------------------------------ 84 .9865 .9851 .9835 .9817 .9796 .9772 .9746 .9715 .9680 .9641 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 85 .9879 .9867 .9852 .9836 .9817 .9796 .9772 .9745 .9713 .9677 - ------------------------------------------------------------------------------------------------------------------------------ 86 .9892 .9881 .9868 .9853 .9837 .9818 .9796 .9771 .9743 .9711 - ------------------------------------------------------------------------------------------------------------------------------ 87 .9904 .9894 .9882 .9869 .9854 .9838 .9818 .9796 .9771 .9742 - ------------------------------------------------------------------------------------------------------------------------------ 88 .9915 .9906 .9895 .9884 .9870 .9855 .9838 .9818 .9795 .9769 - ------------------------------------------------------------------------------------------------------------------------------ 89 .9924 .9916 .9907 .9897 .9885 .9872 .9856 .9838 .9818 .9795 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 90 .9933 .9926 .9918 .9908 .9898 .9886 .9872 .9857 .9838 .9818 - ------------------------------------------------------------------------------------------------------------------------------ 91 .9941 .9934 .9927 .9919 .9910 .9899 .9887 .9873 .9857 .9838 - ------------------------------------------------------------------------------------------------------------------------------ 92 .9948 .9942 .9936 .9929 .9920 .9911 .9900 .9888 .9874 .9857 - ------------------------------------------------------------------------------------------------------------------------------ 93 .9954 .9949 .9944 .9937 .9930 .9922 .9913 .9902 .9889 .9875 - ------------------------------------------------------------------------------------------------------------------------------ 94 .9960 .9956 .9951 .9945 .9939 .9932 .9924 .9914 .9903 .9890 - ------------------------------------------------------------------------------------------------------------------------------
77 82 APPENDIX C 100% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 65 66 67 68 69 70 71 72 73 74 - ------------------------------------------------------------------------------------------------------------------------------ 35 .5848 .5670 .5490 .5308 .5124 .4937 .4749 .4561 .4375 .4192 - ------------------------------------------------------------------------------------------------------------------------------ 36 .5887 .5708 .5527 .5344 .5159 .4971 .4782 .4593 .4406 .4221 - ------------------------------------------------------------------------------------------------------------------------------ 37 .5928 .5748 .5566 .5382 .5196 .5007 .4817 .4627 .4439 .4253 - ------------------------------------------------------------------------------------------------------------------------------ 38 .5971 .5790 .5607 .5423 .5235 .5045 .4854 .4663 .4473 .4286 - ------------------------------------------------------------------------------------------------------------------------------ 39 .6016 .5834 .5650 .5465 .5276 .5085 .4893 .4700 .4510 .4321 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 40 .6063 .5880 .5696 .5509 .5320 .5127 .4933 .4740 .4548 .4358 - ------------------------------------------------------------------------------------------------------------------------------ 41 .6112 .5929 .5743 .5556 .5365 .5172 .4976 .4782 .4588 .4397 - ------------------------------------------------------------------------------------------------------------------------------ 42 .6164 .5980 .5793 .5605 .5413 .5218 .5022 .4825 .4631 .4438 - ------------------------------------------------------------------------------------------------------------------------------ 43 .6218 .6033 .5846 .5656 .5463 .5267 .5069 .4872 .4675 .4481 - ------------------------------------------------------------------------------------------------------------------------------ 44 .6274 .6089 .5900 .5710 .5516 .5319 .5119 .4920 .4722 .4526 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 45 .6334 .6147 .5958 .5766 .5571 .5372 .5172 .4971 .4772 .4574 - ------------------------------------------------------------------------------------------------------------------------------ 46 .6395 .6208 .6018 .5825 .5629 .5429 .5227 .5025 .4824 .4625 - ------------------------------------------------------------------------------------------------------------------------------ 47 .6459 .6272 .6081 .5887 .5690 .5489 .5285 .5081 .4879 .4678 - ------------------------------------------------------------------------------------------------------------------------------ 48 .6526 .6338 .6146 .5952 .5753 .5551 .5346 .5141 .4936 .4734 - ------------------------------------------------------------------------------------------------------------------------------ 49 .6596 .6407 .6215 .6019 .5820 .5616 .5410 .5203 .4997 .4792 - ------------------------------------------------------------------------------------------------------------------------------
78 83 APPENDIX C 100% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 65 66 67 68 69 70 71 72 73 74 - ------------------------------------------------------------------------------------------------------------------------------ 50 .6669 .6480 .6287 .6090 .5890 .5685 .5477 .5268 .5061 .4854 - ------------------------------------------------------------------------------------------------------------------------------ 51 .6744 .6555 .6361 .6164 .5963 .5757 .5547 .5337 .5128 .4919 - ------------------------------------------------------------------------------------------------------------------------------ 52 .6823 .6633 .6439 .6242 .6039 .5832 .5621 .5410 .5198 .4988 - ------------------------------------------------------------------------------------------------------------------------------ 53 .6904 .6715 .6521 .6322 .6119 .5911 .5699 .5486 .5273 .5061 - ------------------------------------------------------------------------------------------------------------------------------ 54 .6988 .6799 .6605 .6407 .6203 .5993 .5780 .5566 .5351 .5137 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 55 .7076 .6887 .6693 .6494 .6290 .6080 .5866 .5649 .5433 .5217 - ------------------------------------------------------------------------------------------------------------------------------ 56 .7165 .6977 .6784 .6586 .6381 .6170 .5955 .5738 .5520 .5302 - ------------------------------------------------------------------------------------------------------------------------------ 57 .7258 .7071 .6879 .6680 .6476 .6265 .6048 .5830 .5611 .5391 - ------------------------------------------------------------------------------------------------------------------------------ 58 .7353 .7168 .6976 .6779 .6574 .6363 .6146 .5927 .5706 .5485 - ------------------------------------------------------------------------------------------------------------------------------ 59 .7451 .7267 .7077 .6880 .6676 .6465 .6248 .6028 .5806 .5583 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 60 .7551 .7369 .7180 .6985 .6782 .6571 .6354 .6133 .5910 .5686 - ------------------------------------------------------------------------------------------------------------------------------ 61 .7652 .7473 .7287 .7093 .6891 .6681 .6464 .6243 .6019 .5794 - ------------------------------------------------------------------------------------------------------------------------------ 62 .7755 .7579 .7395 .7203 .7003 .6794 .6578 .6357 .6133 .5907 - ------------------------------------------------------------------------------------------------------------------------------ 63 .7859 .7686 .7505 .7316 .7118 .6911 .6695 .6475 .6251 .6024 - ------------------------------------------------------------------------------------------------------------------------------ 64 .7964 .7795 .7618 .7432 .7236 .7031 .6817 .6597 .6373 .6146 - ------------------------------------------------------------------------------------------------------------------------------
79 84 APPENDIX C 100% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 65 66 67 68 69 70 71 72 73 74 - ------------------------------------------------------------------------------------------------------------------------------ 65 .8069 .7905 .7731 .7549 .7356 .7153 .6941 .6723 .6500 .6273 - ------------------------------------------------------------------------------------------------------------------------------ 66 .8175 .8015 .7846 .7667 .7478 .7279 .7069 .6853 .6631 .6405 - ------------------------------------------------------------------------------------------------------------------------------ 67 .8280 .8125 .7961 .7787 .7602 .7406 .7200 .6986 .6766 .6541 - ------------------------------------------------------------------------------------------------------------------------------ 68 .8384 .8235 .8076 .7907 .7727 .7535 .7332 .7122 .6904 .6681 - ------------------------------------------------------------------------------------------------------------------------------ 69 .8488 .8344 .8191 .8028 .7853 .7666 .7467 .7260 .7046 .6825 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 70 .8589 .8452 .8305 .8148 .7979 .7797 .7604 .7401 .7190 .6972 - ------------------------------------------------------------------------------------------------------------------------------ 71 .8689 .8558 .8418 .8267 .8104 .7928 .7740 .7542 .7336 .7122 - ------------------------------------------------------------------------------------------------------------------------------ 72 .8784 .8660 .8527 .8383 .8226 .8057 .7875 .7683 .7481 .7272 - ------------------------------------------------------------------------------------------------------------------------------ 73 .8876 .8759 .8633 .8495 .8346 .8183 .8008 .7822 .7626 .7421 - ------------------------------------------------------------------------------------------------------------------------------ 74 .8964 .8854 .8734 .8604 .8462 .8306 .8138 .7958 .7769 .7570 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 75 .9047 .8944 .8831 .8709 .8574 .8426 .8264 .8092 .7909 .7716 - ------------------------------------------------------------------------------------------------------------------------------ 76 .9126 .9030 .8924 .8809 .8681 .8541 .8387 .8222 .8046 .7860 - ------------------------------------------------------------------------------------------------------------------------------ 77 .9201 .9111 .9012 .8904 .8784 .8652 .8506 .8348 .8180 .8001 - ------------------------------------------------------------------------------------------------------------------------------ 78 .9271 .9187 .9095 .8994 .8882 .8757 .8619 .8470 .8309 .8138 - ------------------------------------------------------------------------------------------------------------------------------ 79 .9336 .9259 .9174 .9079 .8975 .8857 .8728 .8586 .8434 .8270 - ------------------------------------------------------------------------------------------------------------------------------
80 85 APPENDIX C 100% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 65 66 67 68 69 70 71 72 73 74 - ------------------------------------------------------------------------------------------------------------------------------ 80 .9396 .9325 .9246 .9159 .9062 .8952 .8830 .8697 .8553 .8397 - ------------------------------------------------------------------------------------------------------------------------------ 81 .9452 .9387 .9314 .9234 .9143 .9041 .8927 .8802 .8666 .8519 - ------------------------------------------------------------------------------------------------------------------------------ 82 .9504 .9444 .9378 .9303 .9220 .9125 .9019 .8902 .8774 .8635 - ------------------------------------------------------------------------------------------------------------------------------ 83 .9552 .9497 .9436 .9368 .9291 .9204 .9105 .8996 .8876 .8746 - ------------------------------------------------------------------------------------------------------------------------------ 84 .9596 .9546 .9491 .9428 .9358 .9277 .9186 .9084 .8973 .8851 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 85 .9637 .9592 .9541 .9484 .9419 .9345 .9261 .9167 .9064 .8950 - ------------------------------------------------------------------------------------------------------------------------------ 86 .9674 .9633 .9587 .9536 .9477 .9409 .9332 .9245 .9149 .9043 - ------------------------------------------------------------------------------------------------------------------------------ 87 .9709 .9671 .9630 .9583 .9530 .9468 .9397 .9318 .9229 .9132 - ------------------------------------------------------------------------------------------------------------------------------ 88 .9740 .9706 .9669 .9627 .9578 .9522 .9458 .9385 .9304 .9214 - ------------------------------------------------------------------------------------------------------------------------------ 89 .9768 .9738 .9704 .9666 .9623 .9572 .9513 .9447 .9373 .9290 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 90 .9794 .9767 .9737 .9703 .9663 .9618 .9564 .9504 .9437 .9361 - ------------------------------------------------------------------------------------------------------------------------------ 91 .9817 .9793 .9766 .9736 .9700 .9659 .9611 .9557 .9496 .9427 - ------------------------------------------------------------------------------------------------------------------------------ 92 .9838 .9817 .9793 .9766 .9734 .9698 .9654 .9605 .9550 .9488 - ------------------------------------------------------------------------------------------------------------------------------ 93 .9858 .9839 .9818 .9794 .9766 .9733 .9694 .9651 .9601 .9545 - ------------------------------------------------------------------------------------------------------------------------------ 94 .9876 .9859 .9840 .9819 .9795 .9765 .9731 .9692 .9648 .9598 - ------------------------------------------------------------------------------------------------------------------------------
81 86 APPENDIX C 50% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 55 56 57 58 59 60 61 62 63 64 - ------------------------------------------------------------------------------------------------------------------------------ 35 .8527 .8435 .8339 .8237 .8131 .8019 .7902 .7780 .7652 .7519 - ------------------------------------------------------------------------------------------------------------------------------ 36 .8555 .8464 .8368 .8267 .8161 .8049 .7933 .7811 .7683 .7550 - ------------------------------------------------------------------------------------------------------------------------------ 37 .8584 .8493 .8397 .8297 .8191 .8080 .7964 .7842 .7715 .7582 - ------------------------------------------------------------------------------------------------------------------------------ 38 .8614 .8524 .8429 .8328 .8223 .8113 .7997 .7875 .7748 .7615 - ------------------------------------------------------------------------------------------------------------------------------ 39 .8645 .8555 .8461 .8361 .8256 .8146 .8031 .7910 .7783 .7650 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 40 .8677 .8588 .8494 .8395 .8291 .8181 .8066 .7945 .7819 .7687 - ------------------------------------------------------------------------------------------------------------------------------ 41 .8709 .8621 .8528 .8430 .8326 .8217 .8103 .7983 .7856 .7725 - ------------------------------------------------------------------------------------------------------------------------------ 42 .8743 .8655 .8563 .8466 .8363 .8255 .8141 .8021 .7895 .7764 - ------------------------------------------------------------------------------------------------------------------------------ 43 .8777 .8691 .8599 .8503 .8401 .8293 .8180 .8061 .7936 .7805 - ------------------------------------------------------------------------------------------------------------------------------ 44 .8812 .8727 .8636 .8541 .8440 .8333 .8221 .8102 .7978 .7847 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 45 .8848 .8764 .8674 .8580 .8480 .8374 .8262 .8145 .8021 .7891 - ------------------------------------------------------------------------------------------------------------------------------ 46 .8885 .8801 .8713 .8620 .8521 .8416 .8305 .8189 .8066 .7936 - ------------------------------------------------------------------------------------------------------------------------------ 47 .8922 .8840 .8753 .8661 .8563 .8459 .8350 .8234 .8112 .7983 - ------------------------------------------------------------------------------------------------------------------------------ 48 .8959 .8879 .8793 .8702 .8606 .8504 .8395 .8280 .8159 .8032 - ------------------------------------------------------------------------------------------------------------------------------ 49 .8997 .8918 .8834 .8745 .8650 .8549 .8442 .8328 .8208 .8082 - ------------------------------------------------------------------------------------------------------------------------------
82 87 APPENDIX C 50% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 55 56 57 58 59 60 61 62 63 64 - ------------------------------------------------------------------------------------------------------------------------------ 50 .9035 .8958 .8876 .8788 .8695 .8595 .8489 .8377 .8259 .8133 - ------------------------------------------------------------------------------------------------------------------------------ 51 .9074 .8999 .8918 .8832 .8740 .8642 .8538 .8427 .8310 .8186 - ------------------------------------------------------------------------------------------------------------------------------ 52 .9113 .9039 .8961 .8877 .8787 .8690 .8588 .8479 .8363 .8241 - ------------------------------------------------------------------------------------------------------------------------------ 53 .9152 .9080 .9004 .8921 .8833 .8739 .8639 .8531 .8417 .8296 - ------------------------------------------------------------------------------------------------------------------------------ 54 .9191 .9121 .9047 .8967 .8881 .8789 .8690 .8585 .8472 .8353 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 55 .9229 .9162 .9090 .9012 .8928 .8839 .8742 .8639 .8529 .8411 - ------------------------------------------------------------------------------------------------------------------------------ 56 .9268 .9203 .9133 .9058 .8976 .8889 .8795 .8694 .8586 .8471 - ------------------------------------------------------------------------------------------------------------------------------ 57 .9306 .9244 .9176 .9103 .9024 .8939 .8848 .8749 .8644 .8531 - ------------------------------------------------------------------------------------------------------------------------------ 58 .9344 .9284 .9219 .9149 .9072 .8990 .8901 .8805 .8702 .8592 - ------------------------------------------------------------------------------------------------------------------------------ 59 .9381 .9323 .9261 .9194 .9120 .9041 .8955 .8862 .8761 .8654 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 60 .9417 .9362 .9303 .9238 .9168 .9091 .9008 .8918 .8821 .8716 - ------------------------------------------------------------------------------------------------------------------------------ 61 .9453 .9401 .9344 .9282 .9214 .9141 .9061 .8974 .8880 .8779 - ------------------------------------------------------------------------------------------------------------------------------ 62 .9487 .9438 .9384 .9325 .9261 .9190 .9113 .9030 .8939 .8841 - ------------------------------------------------------------------------------------------------------------------------------ 63 .9521 .9474 .9423 .9367 .9306 .9239 .9165 .9085 .8998 .8903 - ------------------------------------------------------------------------------------------------------------------------------ 64 .9553 .9509 .9461 .9408 .9350 .9286 .9216 .9139 .9056 .8965 - ------------------------------------------------------------------------------------------------------------------------------
83 88 APPENDIX C 50% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 55 56 57 58 59 60 61 62 63 64 - ------------------------------------------------------------------------------------------------------------------------------ 65 .9585 .9544 .9498 .9488 .9393 .9333 .9266 .9193 .9113 .9026 - ------------------------------------------------------------------------------------------------------------------------------ 66 .9615 .9576 .9534 .9487 .9435 .9378 .9315 .9245 .9169 .9086 - ------------------------------------------------------------------------------------------------------------------------------ 67 .9644 .9608 .9568 .9524 .9476 .9422 .9362 .9296 .9224 .9145 - ------------------------------------------------------------------------------------------------------------------------------ 68 .9672 .9638 .9601 .9560 .9515 .9464 .9408 .9346 .9278 .9203 - ------------------------------------------------------------------------------------------------------------------------------ 69 .9698 .9667 .9633 .9595 .9552 .9505 .9453 .9395 .9330 .9260 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 70 .9723 .9695 .9663 .9628 .9588 .9544 .9495 .9441 .9381 .9314 - ------------------------------------------------------------------------------------------------------------------------------ 71 .9747 .9721 .9691 .9659 .9622 .9582 .9536 .9486 .9429 .9367 - ------------------------------------------------------------------------------------------------------------------------------ 72 .9769 .9745 .9718 .9688 .9654 .9617 .9575 .9528 .9475 .9417 - ------------------------------------------------------------------------------------------------------------------------------ 73 .9790 .9768 .9743 .9715 .9684 .9650 .9611 .9567 .9519 .9465 - ------------------------------------------------------------------------------------------------------------------------------ 74 .9809 .9789 .9766 .9741 .9713 .9681 .9645 .9605 .9560 .9510 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 75 .9826 .9808 .9788 .9764 .9739 .9709 .9677 .9640 .9598 .9552 - ------------------------------------------------------------------------------------------------------------------------------ 76 .9843 .9826 .9807 .9786 .9763 .9736 .9706 .9672 .9634 .9591 - ------------------------------------------------------------------------------------------------------------------------------ 77 .9858 .9843 .9826 .9807 .9785 .9761 .9733 .9702 .9667 .9628 - ------------------------------------------------------------------------------------------------------------------------------ 78 .9872 .9858 .9842 .9825 .9806 .9784 .9758 .9730 .9698 .9662 - ------------------------------------------------------------------------------------------------------------------------------ 79 .9884 .9872 .9858 .9842 .9824 .9804 .9782 .9756 .9727 .9694 - ------------------------------------------------------------------------------------------------------------------------------
84 89 APPENDIX C 50% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 55 56 57 58 59 60 61 62 63 64 - ------------------------------------------------------------------------------------------------------------------------------ 80 .9896 .9884 .9872 .9858 .9842 .9824 .9803 .9779 .9753 .9723 - ------------------------------------------------------------------------------------------------------------------------------ 81 .9906 .9896 .9885 .9872 .9857 .9841 .9822 .9801 .9777 .9749 - ------------------------------------------------------------------------------------------------------------------------------ 82 .9916 .9907 .9896 .9885 .9872 .9857 .9840 .9821 .9799 .9774 - ------------------------------------------------------------------------------------------------------------------------------ 83 .9924 .9916 .9907 .9897 .9885 .9872 .9856 .9839 .9819 .9797 - ------------------------------------------------------------------------------------------------------------------------------ 84 .9932 .9925 .9917 .9907 .9897 .9885 .9871 .9856 .9838 .9817 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 85 .9939 .9933 .9926 .9917 .9908 .9897 .9885 .9871 .9855 .9836 - ------------------------------------------------------------------------------------------------------------------------------ 86 .9946 .9940 .9934 .9926 .9918 .9908 .9897 .9884 .9870 .9853 - ------------------------------------------------------------------------------------------------------------------------------ 87 .9952 .9947 .9941 .9934 .9927 .9918 .9908 .9897 .9884 .9869 - ------------------------------------------------------------------------------------------------------------------------------ 88 .9957 .9953 .9947 .9941 .9935 .9927 .9918 .9908 .9897 .9883 - ------------------------------------------------------------------------------------------------------------------------------ 89 .9962 .9958 .9953 .9948 .9942 .9935 .9928 .9919 .9908 .9896 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 90 .9966 .9963 .9959 .9954 .9949 .9943 .9936 .9928 .9919 .9908 - ------------------------------------------------------------------------------------------------------------------------------ 91 .9970 .9967 .9963 .9959 .9955 .9949 .9943 .9936 .9928 .9918 - ------------------------------------------------------------------------------------------------------------------------------ 92 .9974 .9971 .9968 .9964 .9960 .9955 .9950 .9944 .9936 .9928 - ------------------------------------------------------------------------------------------------------------------------------ 93 .9977 .9974 .9972 .9969 .9965 .9961 .9956 .9951 .9944 .9937 - ------------------------------------------------------------------------------------------------------------------------------ 94 .9980 .9978 .9975 .9973 .9969 .9966 .9962 .9957 .9951 .9945 - ------------------------------------------------------------------------------------------------------------------------------
85 90 APPENDIX C 50% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 65 66 67 68 69 70 71 72 73 74 - ------------------------------------------------------------------------------------------------------------------------------ 35 .7380 .7237 .7088 .6935 .6776 .6610 .6440 .6265 .6087 .5907 - ------------------------------------------------------------------------------------------------------------------------------ 36 .7411 .7268 .7119 .6966 .6807 .6641 .6470 .6295 .6117 .5937 - ------------------------------------------------------------------------------------------------------------------------------ 37 .7444 .7300 .7152 .6998 .6839 .6673 .6502 .6327 .6149 .5968 - ------------------------------------------------------------------------------------------------------------------------------ 38 .7477 .7334 .7185 .7032 .6873 .6707 .6535 .6360 .6182 .6000 - ------------------------------------------------------------------------------------------------------------------------------ 39 .7512 .7369 .7221 .7067 .6908 .6742 .6571 .6395 .6216 .6035 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 40 .7549 .7406 .7258 .7104 .6945 .6779 .6607 .6431 .6252 .6070 - ------------------------------------------------------------------------------------------------------------------------------ 41 .7587 .7444 .7296 .7143 .6984 .6818 .6646 .6470 .6290 .6108 - ------------------------------------------------------------------------------------------------------------------------------ 42 .7627 .7484 .7336 .7183 .7024 .6858 .6686 .6510 .6330 .6147 - ------------------------------------------------------------------------------------------------------------------------------ 43 .7668 .7526 .7378 .7225 .7066 .6900 .6728 .6551 .6372 .6189 - ------------------------------------------------------------------------------------------------------------------------------ 44 .7711 .7569 .7422 .7269 .7110 .6944 .6772 .6595 .6415 .6232 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 45 .7755 .7614 .7467 .7314 .7156 .6990 .6818 .6641 .6461 .6277 - ------------------------------------------------------------------------------------------------------------------------------ 46 .7801 .7660 .7514 .7362 .7203 .7037 .6865 .6689 .6508 .6324 - ------------------------------------------------------------------------------------------------------------------------------ 47 .7849 .7709 .7563 .7411 .7253 .7087 .6915 .6738 .6558 .6374 - ------------------------------------------------------------------------------------------------------------------------------ 48 .7898 .7759 .7613 .7462 .7304 .7139 .6967 .6790 .6610 .6435 - ------------------------------------------------------------------------------------------------------------------------------ 49 .7949 .7810 .7666 .7515 .7358 .7193 .7021 .6845 .6664 .6479 - ------------------------------------------------------------------------------------------------------------------------------
86 91 APPENDIX C 50% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 65 66 67 68 69 70 71 72 73 74 - ------------------------------------------------------------------------------------------------------------------------------ 50 .8002 .7864 .7720 .7570 .7413 .7249 .7077 .6901 .6720 .6536 - ------------------------------------------------------------------------------------------------------------------------------ 51 .8056 .7919 .7776 .7627 .7471 .7307 .7136 .6960 .6779 .6595 - ------------------------------------------------------------------------------------------------------------------------------ 52 .8111 .7976 .7834 .7686 .7531 .7367 .7197 .7021 .6841 .6656 - ------------------------------------------------------------------------------------------------------------------------------ 53 .8169 .8034 .7894 .7747 .7592 .7430 .7260 .7085 .6905 .6720 - ------------------------------------------------------------------------------------------------------------------------------ 54 .8227 .8095 .7956 .7810 .7656 .7495 .7326 .7151 .6971 .6787 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 55 .8287 .8156 .8019 .7875 .7723 .7562 .7394 .7220 .7041 .6857 - ------------------------------------------------------------------------------------------------------------------------------ 56 .8349 .8220 .8084 .7941 .7791 .7632 .7465 .7292 .7113 .6930 - ------------------------------------------------------------------------------------------------------------------------------ 57 .8411 .8284 .8151 .8010 .7861 .7703 .7538 .7366 .7188 .7005 - ------------------------------------------------------------------------------------------------------------------------------ 58 .8475 .8350 .8219 .8080 .7933 .7777 .7613 .7442 .7266 .7084 - ------------------------------------------------------------------------------------------------------------------------------ 59 .8539 .8417 .8288 .8152 .8007 .7853 .7691 .7522 .7346 .7165 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 60 .8604 .8485 .8359 .8225 .8082 .7931 .7770 .7603 .7429 .7250 - ------------------------------------------------------------------------------------------------------------------------------ 61 .8670 .8554 .8430 .8299 .8159 .8010 .7852 .7687 .7515 .7337 - ------------------------------------------------------------------------------------------------------------------------------ 62 .8736 .8623 .8502 .8374 .8238 .8091 .7936 .7773 .7603 .7427 - ------------------------------------------------------------------------------------------------------------------------------ 63 .8801 .8692 .8575 .8450 .8317 .8173 .8021 .7860 .7693 .7519 - ------------------------------------------------------------------------------------------------------------------------------ 64 .8867 .8761 .8648 .8527 .8396 .8257 .8107 .7950 .7785 .7613 - ------------------------------------------------------------------------------------------------------------------------------
87 92 APPENDIX C 50% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 65 66 67 68 69 70 71 72 73 74 - ------------------------------------------------------------------------------------------------------------------------------ 65 .8932 .8830 .8720 .8603 .8477 .8341 .8195 .8040 .7879 .7710 - ------------------------------------------------------------------------------------------------------------------------------ 66 .8996 .8898 .8793 .8680 .8557 .8425 .8283 .8132 .7974 .7808 - ------------------------------------------------------------------------------------------------------------------------------ 67 .9059 .8965 .8865 .8756 .8638 .8510 .8372 .8225 .8071 .7909 - ------------------------------------------------------------------------------------------------------------------------------ 68 .9121 .9032 .8936 .8831 .8718 .8594 .8461 .8319 .8169 .8010 - ------------------------------------------------------------------------------------------------------------------------------ 69 .9182 .9097 .9006 .8906 .8797 .8679 .8550 .8413 .8267 .8113 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 70 .9241 .9161 .9074 .8980 .8876 .8762 .8639 .8506 .8365 .8216 - ------------------------------------------------------------------------------------------------------------------------------ 71 .9298 .9223 .9141 .9051 .8953 .8844 .8726 .8599 .8463 .8319 - ------------------------------------------------------------------------------------------------------------------------------ 72 .9353 .9282 .9205 .9120 .9027 .8924 .8811 .8690 .8559 .8420 - ------------------------------------------------------------------------------------------------------------------------------ 73 .9405 .9339 .9266 .9186 .9098 .9001 .8894 .8778 .8653 .8520 - ------------------------------------------------------------------------------------------------------------------------------ 74 .9454 .9392 .9324 .9250 .9167 .9075 .8973 .8863 .8744 .8617 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 75 .9500 .9443 .9379 .9310 .9232 .9146 .9050 .8945 .8832 .8711 - ------------------------------------------------------------------------------------------------------------------------------ 76 .9543 .9490 .9432 .9367 .9294 .9213 .9123 .9024 .8917 .8802 - ------------------------------------------------------------------------------------------------------------------------------ 77 .9584 .9535 .9481 .9420 .9353 .9277 .9192 .9100 .8999 .8890 - ------------------------------------------------------------------------------------------------------------------------------ 78 .9622 .9576 .9526 .9471 .9408 .9337 .9258 .9172 .9077 .8973 - ------------------------------------------------------------------------------------------------------------------------------ 79 .9656 .9615 .9569 .9518 .9460 .9394 .9321 .9239 .9150 .9053 - ------------------------------------------------------------------------------------------------------------------------------
88 93 APPENDIX C 50% CONTINGENT ANNUITY FACTORS
NEAR AGE NEAR AGE OF PRIMARY ANNUITANT CONTINGENT ------------------------------------------------------------------------------------------------------------- ANNUITANT 65 66 67 68 69 70 71 72 73 74 - ------------------------------------------------------------------------------------------------------------------------------ 80 .9689 .9651 .9608 .9561 .9508 .9447 .9397 .9303 .9220 .9129 - ------------------------------------------------------------------------------------------------------------------------------ 81 .9718 .9684 .9645 .9602 .9553 .9497 .9433 .9363 .9285 .9200 - ------------------------------------------------------------------------------------------------------------------------------ 82 .9746 .9714 .9679 .9639 .9594 .9543 .9484 .9419 .9347 .9268 - ------------------------------------------------------------------------------------------------------------------------------ 83 .9771 .9742 .9710 .9674 .9633 .9585 .9531 .9471 .9405 .9331 - ------------------------------------------------------------------------------------------------------------------------------ 84 .9794 .9768 .9739 .9706 .9668 .9625 .9576 .9520 .9459 .9390 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 85 .9815 .9792 .9765 .9735 .9701 .9662 .9616 .9566 .9509 .9446 - ------------------------------------------------------------------------------------------------------------------------------ 86 .9834 .9813 .9789 .9762 .9731 .9695 .9654 .9608 .9556 .9498 - ------------------------------------------------------------------------------------------------------------------------------ 87 .9852 .9833 .9811 .9787 .9759 .9727 .9689 .9647 .9599 .9546 - ------------------------------------------------------------------------------------------------------------------------------ 88 .9868 .9851 .9832 .9810 .9785 .9755 .9721 .9683 .9639 .9591 - ------------------------------------------------------------------------------------------------------------------------------ 89 .9883 .9867 .9850 .9830 .9808 .9781 .9751 .9716 .9676 .9632 - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 90 .9896 .9882 .9867 .9849 .9829 .9805 .9777 .9746 .9710 .9670 - ------------------------------------------------------------------------------------------------------------------------------ 91 .9908 .9895 .9882 .9866 .9848 .9827 .9802 .9773 .9741 .9705 - ------------------------------------------------------------------------------------------------------------------------------ 92 .9919 .9908 .9895 .9882 .9865 .9846 .9824 .9799 .9770 .9737 - ------------------------------------------------------------------------------------------------------------------------------ 93 .9928 .9919 .9908 .9896 .9882 .9865 .9845 .9822 .9796 .9767 - ------------------------------------------------------------------------------------------------------------------------------ 94 .9937 .9929 .9919 .9909 .9896 .9881 .9864 .9844 .9821 .9795 - ------------------------------------------------------------------------------------------------------------------------------
89 94 AMENDMENT NO. 1 TO THE DESOTO EMPLOYEES RETIREMENT PLAN This Amendment No. 1 to the DeSoto Employees Retirement Plan is made this ____ day of ________, 1996 by DeSoto, Inc. (the "Employer"), a Delaware corporation. R E C I T A L S Effective January 1, 1972, the Employer originally established the DeSoto Employees Retirement Plan (the "Plan"), formerly known as the DeSoto Salaried Employees' Pension Plan. The Plan was last amended and restated effective January 1, 1994 as a result of the merger of the DeSoto Hourly Employees' Pension Plan and the J.L. Prescott Company Pension Plan into the DeSoto Salaried Employees' Pension Plan, intending that it continue to qualify under the applicable provisions of the Internal Revenue Code. The Employer, pursuant to the powers reserved to it in the Plan hereby adopts this Amendment No. 1 to the Plan effective as of the date set forth herein. AMENDMENT Section 5.1 of the Plan is hereby amended, effective as to retirements and terminations of employment occurring on or after January 1, 1996, to read as follows: 5.1 Normal Retirement Benefits. An Employee who retires as of his Normal Retirement Date shall, subject to the provisions of Section 5.5 through 5.7, be entitled to receive a monthly benefit, commencing at his Normal Retirement Date and payable thereafter for life, of an amount equal to: (a) for a Salaried Employee or a Prescott Employee the greater of: (i) his accrued benefit as of December 31, 1995; or (ii) 1 and 2/3% of his Average Compensation multiplied by his total years of Service while a Salaried Employee or a Prescott Employee (not in excess of thirty-five (35) years) reduced by the Social Security Allowance. The Social Security Allowance shall 1 95 be equal to one-half of one percent for each year of Service up to thirty-five (35) years, multiplied by the lesser of: (1) The Participant's social Security Final Average Compensation, or (2) The Participant's Covered Compensation as defined in Section 401(l)(5)(E) of the Internal Revenue Code. In the event the Social Security Allowance applies to a Participant more than five (5) years prior to his Social Security Normal Retirement Age, but on or after age fifty-five (55), the Social Security Allowance shall be reduced at the rate of 1/30 for each year in excess of five (5) years up to ten (10) years and, to the extent necessary, by an actuarial equivalent reduction for additional years in excess of ten (10). Social Security Final Average Compensation means the average of the Participant's Earnings over the three (3) consecutive completed Plan Years preceding his current date of retirement, date of termination of employment, date of death or the date of the termination of the Plan, but excluding compensation in any such year in excess of the Social Security Taxable Wage Base. Social Security Normal Retirement Age is the earliest age at which the Employee is entitled to receive unreduced old age benefits from Social Security. Social Security Taxable Wage Base means the amount of wages from which Social Security Taxes are required to be withheld in accordance with the Federal Insurance Contributions Act, or any successor act, regulation, or ruling pertaining thereto, which is in effect at the beginning of the Plan Year. (b) For an Hourly Employee, 1% of his Average Compensation multiplied by his total years of Service while an Hourly Employee. The monthly benefit for Hourly Employees under this Section 5.1 shall not be less than $50 nor shall it be less than the benefit to which the Hourly Employee would have been entitled had he retired on the Early Retirement Date at which his benefit would have been the greatest. 2 96 (c) Except as otherwise provided in Section 5.12, for an Employee who has transferred from an Hourly Employee to a Salaried Employee, the sum of the benefits calculated under (a) and (b) above. IN WITNESS WHEREOF, DeSoto, Inc. has caused this agreement to be executed upon the signatures of its duly qualified officers who have hereto set their hands as of the date first set forth above. DESOTO, INC. ATTEST: By: ----------------------------------- Its: - ------------------------------ ------------------------------- Secretary 3 97 AMENDMENT NO. 2 TO THE DESOTO EMPLOYEES RETIREMENT PLAN This Amendment No. 2 to the DeSoto Employees Retirement Plan is made this ____ day of ________________, 1996 by DeSoto, Inc. (the "Employer"), a Delaware corporation. R E C I T A L S Effective January 1, 1972, the Employer originally established the DeSoto Employees Retirement Plan (the "Plan"), formerly known as the DeSoto Salaried Employees' Pension Plan. The Plan was last amended and restated effective January 1, 1994 as a result of the merger of the DeSoto Hourly Employees' Pension Plan and the J.L. Prescott Company Pension Plan into the DeSoto Salaried Employees' Pension Plan, intending that it continue to qualify under the applicable provisions of the Internal Revenue Code. The Employer, pursuant to the powers reserved to it in the Plan hereby adopts this Amendment No. 2 to the Plan effective as of January 31, 1996. AMENDMENT 1. Section 5.1 of the Plan is hereby amended, effective January 31, 1996, by adding the following sentence at the end thereof; with said sentence to read as follows: Provided, however, that notwithstanding anything in this Plan to the contrary, all benefits accruals hereunder shall close on January 31, 1996, and benefits hereunder shall be frozen as of said date. 2. The first sentence of Subsection 10.3(e) of the Plan is hereby amended effective January 31, 1996, to read as follows: (e) Except as otherwise provided in the second sentence of this Subsection 10.3(e) or any other provision of the Plan, if any assets of the Trust remain, they may revert to the Company or all or a portion of the remaining assets may be transferred to a qualified replacement plan as defined in Internal Revenue Code Section 4980(d), in the sole discretion of the Company, provided that there are no other groups of Employees remaining in the Plan. 1 98 IN WITNESS WHEREOF, DeSoto, Inc. has caused this agreement to be executed upon the signatures of its duly qualified officers who have hereto set their hands as of the date first set forth above. DESOTO, INC. ATTEST: By: ----------------------------------- Its: - ------------------------------ ------------------------------- Secretary 2 99 PROPOSED RESOLUTIONS OF THE BOARD OF DIRECTORS OF DESOTO, INC. WHEREAS, DeSoto, Inc. (the "Company") maintains the DeSoto Employees' Retirement Plan (the "Retirement Plan") for the benefit of those of its employees who are eligible to participate therein; and WHEREAS, the Retirement Plan was last amended and restated effective January 1, 1994, as a result of the merger of the DeSoto Hourly Employees' Retirement Plan and the J.L. Prescott Company Pension Plan into the DeSoto Salaried Employees' Pension Plan; and WHEREAS, this Board of Directors desires to amend the benefit formula under the Retirement Plan as applicable to its active Prescott Employees; WHEREAS, an Amendment No. 1 to the Retirement Plan has been prepared to effectuate the foregoing resolution; NOW, THEREFORE, BE IT RESOLVED, that the Retirement Plan be and is hereby amended, effective as to retirements and terminations of employment occurring on or after January 1, 1996, by the adoption of Amendment No.1, as previously circulated among the Members of this Board of Directors, with such Amendment No.1 to be incorporated herein and made a part hereof by reference; FURTHER RESOLVED, that the appropriate officers of the Company be and are each hereby authorized and directed to take any and all actions that shall be deemed necessary or desirable, with the advise of counsel, to implement and effectuate the foregoing resolutions, including but not limited to the adoption of any amendments to the Retirement Plan required in order to obtain any necessary or desirable government approvals. * * * * * * * * 1 100 PROPOSED RESOLUTIONS OF THE BOARD OF DIRECTORS OF DESOTO, INC. WHEREAS, DeSoto, Inc. (the "Company") maintains the DeSoto Employees' Retirement Plan (the "Retirement Plan") for the benefit of those of its employees who are eligible to participate therein; and WHEREAS, the Retirement Plan was last amended and restated effective January 1, 1994, as a result of the merger of the DeSoto Hourly Employees' Retirement Plan and the J.L. Prescott Company Pension Plan into the DeSoto Salaried Employees' Pension Plan; and WHEREAS, this Board of Directors believes it to be in the best interests of the Company and its employees to cease benefit accruals under the Retirement Plan for all employees effective January 31, 1996; and WHEREAS, this Board of Directors also believes it to be in the best interests of the Company and its employees to terminate the Retirement Plan as of April 15, 1996; and WHEREAS, an Amendment No. 2 to the Retirement Plan has been prepared to effectuate the foregoing resolutions; and WHEREAS, this Board of Directors believes it to be in the best interests of the Company and its employees to establish a defined contribution plan which qualifies as a qualified replacement plan as defined in Section 4980(d) of the Internal Revenue Code of 1986, as amended; NOW, THEREFORE, BE IT RESOLVED, that the Retirement Plan be and is hereby amended, effective January 31, 1996, by the adoption of Amendment No. 2, as previously circulated among the Members of this Board of Directors, with such Amendment No. 2 to be incorporated herein and made a part hereof by reference; FURTHER RESOLVED, that the Retirement Plan be and is hereby terminated, effective April 15, 1996, contingent upon receipt of all necessary or desirable government approvals, and also upon the further contingency that any excise or similar tax payable by the Company with respect to any assets that are reverted to the Company from the Retirement Plan shall not exceed 20% of the amount so reverted to the Company; FURTHER RESOLVED, that appropriate corporate officers be and are each authorized and directed to adopt a defined contribution plan, effective April 15, 1996 or on such later date as of which the termination of the Retirement Plan becomes effective, which qualifies as a qualified replacement plan as defined in Internal 1 101 Revenue Code Section 4980(d) (the "Replacement Plan") which shall contain such terms as shall be approved by the Chairman of the Board of the Company; FURTHER RESOLVED, that following the completion of the termination of the Retirement Plan and the adoption of the Replacement Plan, 25% of the assets in the Retirement Plan remaining after payment of all vested accrued benefits shall be transferred to the Replacement Plan and any remaining Retirement Plan assets shall be distributed to the Company; FURTHER RESOLVED, that the appropriate officers of the Company be and are each hereby authorized and directed to take any and all actions that shall be deemed necessary or desirable, with the advise of counsel, to implement and effectuate the foregoing resolutions, including but not limited to the adoption of any amendments to the Retirement Plan required in order to obtain any necessary or desirable government approvals. * * * * * * * * 2 102 AMENDMENT DESOTO SALARIED EMPLOYEES' PENSION TRUST Pursuant to the Resolution of the Board of Directors of DeSoto, Inc. adopted on October 1, 1992, the DeSoto Salaried Employees' Pension Trust is hereby amended effective November 4th, 1992 as follows: The following subsection (j) is added at the end of section 5.2: (j) The Trustees may invest all, or any part, of the assets of the Trust in interests in a trust fund that has been or shall be created and maintained for the collective investments of funds of trusts for employee benefit plans (qualified under sections 401 and 501 of the Internal Revenue Code). IN WITNESS WHEREOF, DeSoto, Inc. has caused this amendment to be duly executed by the proper officers thereof this 4th day of November __, 1992. DeSOTO, INC. By: [ILLEGIBLE] ----------------------------------- ATTEST: /s/ ANNE E. EISELE - ------------------------------ 103 PROPOSED RESOLUTION BOARD OF DIRECTORS DeSOTO, INC. WHEREAS, the Corporation is the plan sponsor of the DeSoto Salaried Employees' Pension Plan and Trust, the DeSoto Hourly Employees' Pension Plan and Trust and the DeSoto Stock Ownership Plus Plan and Trust ("Plans" and "Trusts", respectively); and WHEREAS, the Trustees of the above plans desire to retain certain investment management and custodial services in connection with the operation of the Plans and Trusts; and WHEREAS, it is advisable to adopt certain amendments to each of the Trusts to govern the investment of those assets of each Trust which are being invested by the parties retained for this purpose; NOW, THEREFORE, BE IT RESOLVED, that Section 5.3 of the DeSoto Stock Ownership Plus Trust ("DSOP Trust") and Section 5.2 of each of the DeSoto Salaried Employees' Pension Trust ("Pension Trust") and the DeSoto Hourly Employees' Pension Trust ("Hourly Trust") be and are each hereby amended to add a new subsection (i) to the DSOP Trust immediately following subsection (h) thereof, and a new subsection (j) to the Salaried Trust and the Hourly Trust immediately following subsection (i) of each of them, with each new subsection to read as follows: Notwithstanding any other provision hereof, all or any part of the assets of the Trust may be transferred to and invested in any collective investment trust then qualified for tax-exemption under Section 401(a) of the Internal Revenue Code of 1986, as amended, which is then maintained by the bank or trust company then acting as a trustee, agent for the Trustees hereunder, or as an investment manager. The provisions of the document governing such collective investment trust, as amended from time to time, shall govern any investment therein and are hereby made a part of this Trust Agreement. FURTHER RESOLVED, that Section 9 of each of the Trusts be and is hereby amended to read as follows: 9.1 The Trustees may in their discretion appoint an investment committee composed of such individuals as they shall designate, who shall hold office during the pleasure of the Trustees. The Committee shall have all of the powers, authorities and discretions vested in the Trustees 104 under the provisions of Section 5, subject to such restrictions, limitations, and conditions as may be prescribed from time to time by the Trustees. The members of the Committee may adopt such resolutions as they deem appropriate for the purpose of governing themselves in the conduct of the business of the Committee, subject, however, to such rules and regulations, if any, prescribed in that regard by the Trustees. The Committee shall periodically and whenever required by the Trustees to submit to the Trustees reports of the Committee's actions. 9.2 Notwithstanding any other provision hereof, the Trustees (a named fiduciary with respect to the control and management of the assets of the Trust) may direct the segregation of all or any portion of the assets of the Trust into one or more accounts to be known as Investment Manager Accounts, and if they do so, shall also appoint one or more investment managers to manage the portion or portions of the assets of the Trust so segregated. Any investment manager so appointed shall be an "investment manager" as that term is defined in Section 3(38) of the Employee Retirement Security Act of 1974, as amended ("ERISA"). Concurrently with its acceptance of its appointment hereunder, an investment manager shall acknowledge in writing to the Trustees that it is a "fiduciary" as that term is defined in Section 3(21)(A) of ERISA and that it has received a copy of this Trust Agreement. With respect to any assets held in an Investment Manager Account, and subject to the terms of this Trust Agreement, the investment manager shall have the power, without prior consultation with the Trustees, to manage, acquire or dispose of any asset held in such Account, and to direct the Trustees with respect to the acquisition, retention, disposition or management of such assets. The investment manager may be authorized to retain the physical custody or indicia of ownership of any assets held in an Investment Manager Account. The Trustees shall follow all directions of the investment manager regarding the Account, and shall not be liable to the Company or to any participant in or beneficiary of the Trust for so doing or for failing to take any action in the absence of directions from the investment manager. The Trustees shall not be liable for any act or omission of an investment manager, or be under any obligation to invest, review or otherwise manage 105 any asset of the Trust Fund which is held in an Investment Manager Account. Notwithstanding the foregoing, the Trustees shall not be relieved of any liability imposed upon them by ERISA. Directions of an investment manager to the Trustees shall be in writing or may be made orally and confirmed in writing as soon as practicable thereafter. Pending receipt of directions from an investment manager for any Account, any cash received by the Trustees from time to time for such Account may be retained by the Trustees in cash. The Trustees are authorized and directed to pay from the Trust all fees, charges and expenses incurred in the operation and administration of any Investment Manager Account to the extent they are not paid by the Company. 106 [DESOTO, INC. LETTERHEAD] February 4, 1992 Ian Kopelman Shefsky & Froelich Ltd. 444 K. Michigan Ave., Suite 2300 Chicago, IL 60611 Dear Ian: At the September 1991 Board Meeting the Board passed a resolution regarding investment managers and use of bank pooled investment funds. As I recall, you provided the language. I wanted to officially notify you of the change, so that any actions required at your end could be taken care of. I have attached a copy of the change for your information. In addition, at the December 10, 1991 meeting the Board changed the membership of the Salaried and Hourly Employees Pension Trust Retirement Committee to two people. The plan document had called for three people. Unfortunately I don't have any specific verbiage which was adopted. Please let me know if any additional information or any other action on our part is required. Regards, /s/ ANNE E. EISELE Anne E. Eisele AEE/ds Attach. cc: Mark Renfro 107 9.2 The Trustees (a named fiduciary with respect to the control and management of the assets of the Trust) may, in their complete discretion appoint one or more "Investment Managers" to hold and manage any portion of the assets of the Trust. Upon appointment, the Trustees shall transfer to each such Investment Manager such portion of the assets of the Trust as the Trustees shall determine. With respect to that portion of the assets of the Trust to be held by an Investment Manager, the Trustees shall delegate to the Investment Manager, pursuant to a written agreement with the Investment Manager, such of its powers and duties as set forth in Section 5 as the Trustees shall determine. Such written agreement, by which the Investment Manager shall acknowledge that it is a fiduciary with respect to the Plan, shall set forth the duties and responsibilities of the Investment Manager and shall form a part of this Trust for as long as any portion of the assets of the Trust is held and managed by the Investment Manager. For purposes of this Section 9.2, each Investment Manager must be either (i) an investment adviser registered as such under the Investment Adviser Act of 1940, or (ii) a bank as defined in said Act, or (iii) an insurance company qualified to perform services in connection with the management, acquisition, or disposition of any assets of an employee benefit plan under the laws of more than one state. 108 DESOTO SALARIED EMPLOYEES' PENSION TRUST (As amended and restated effective January 1, 1976) THIS TRUST AGREEMENT made January 14, 1972 by and between DeSOTO, INC., a Delaware corporation ("Company"), and the then acting Trustees under this agreement ("Trustees"), as amended and restated, effective January 1, 1976, in order to comply with the Employee Retirement Income Security Act of 1974 ("ERISA"), WITNESSETH: WHEREAS, the Company has established a pension plan, known as the "DeSOTO SALARIED EMPLOYEES' PENSION PLAN" (hereinafter referred to as the "Plan"), for certain of its employees, a copy of said Plan, as it may be amended from time to time, shall be identified by the Secretary of the Company and filed with the Trustees; and WHEREAS, the Company desires to continue the trust established to implement and carry out the provisions of the Plan, and this trust has been designated by the Company as a part of the Plan intended to meet the requirements of Section 401(a) of the Internal Revenue Code of 1954, as amended ("Code"), and ERISA; and WHEREAS, the contribution of the Company and any other Employers under the Plan will be placed in this trust for the exclusive benefit of the Employees and their beneficiaries; 109 NOW, THEREFORE, the Company and the Trustees do hereby mutually declare and agree, as follows: SECTION 1. GENERAL 1.1 The Company hereby continues the previously created and established trust known as the "DeSOTO SALARIED EMPLOYEES' PENSION TRUST" (hereinafter called "Trust"). 1.2 The Trust shall constitute a single trust fund to carry out the purpose of the Plan. All property, monies and assets transferred, delivered, or contributed to the Trust, together with the earnings, profits and increments thereon, without distinction between principal and income, shall constitute the Trust. 1.3 The Plan shall be administered as therein provided, and the Trustees shall have no duties in respect of the administration of the Plan except as specifically provided therein. SECTION 2. THE TRUSTEES 2.1 The Trust shall be under the management of the Trustees, to be determined and appointed by the Board of Directors of the Company. A majority of the Trustees shall be officers, directors or employees of the Company. Any Trustee may be removed by the Board at any time, with or without cause. Any Trustee may resign at any time by giving written notice of such resignation to the other Trustees of the Trust and the Secretary of the Company. The Board may at any time increase or reduce the number of Trustees. Only the Board shall have the right to fill -2A- 110 vacancies occurring among the Trustees. The Board shall determine the amount of compensation, if any, to be paid to the Trustees, or any of them. 2.2 The Trustees may adopt such resolutions as they desire for the purpose of regulating themselves in the performance and discharge of their powers and duties as such Trustees. Any resolution or other action to which all the Trustees then in office shall assent in writing or which shall be approved by the affirmative vote of a majority of the Trustees then in office at any meeting of Trustees shall be deemed to have been duly authorized on behalf of the Trustees. 2.3 The Trustees shall appoint a Chairman from their number, and shall appoint a Secretary and a Treasurer, who may but need not be Trustees. The Trustees may also appoint such other officers and assistant officers as they may deem desirable. The Chairman, Secretary, and Treasurer, and any other officers or assistants, appointed by the Trustees, shall hold office during the pleasure of the Trustees and shall have and perform such powers and duties as shall be prescribed from time to time by the Trustees. The Trustees shall have the right, from time to time, to delegate in writing to any individual Trustee or to any other person or persons, subject to such terms, conditions and restrictions as they may prescribe, such of their rights, powers, authorities, discretions and duties hereunder, except those dealing with interpretation of the provisions of the Trust, as they shall determine; and all actions taken by any such person -2B- 111 or persons pursuant to and in accordance with any such delegations shall be effective and binding upon all parties to the same extent as though taken by the Trustees. The Trustees may likewise from time to time employ such clerical help, accountants, investment consultants attorneys (who may be counsel to the Company) and other individuals, all as the Trustees deem advisable. The compensation to be paid to individuals appointed or employed by the Trustees as aforesaid shall be fixed by the Trustees, except that any such individual who is a Trustee shall receive no compensation other than that determined for him as such Trustee by the Board. SECTION 3. CONTRIBUTIONS TO THE TRUST 3.1 The Company and any other Employer will, from time to time, make contributions to the Trust. The Trustees hereunder shall be accountable to the Company and any other Employer under the Plan for all contributions made as aforesaid, but the Trustees shall have no duty to see that the contributions comply with the provisions of the Plan, nor shall the Trustees be obliged to collect any contributions from the Company or any other Employer, or otherwise see that monies or property are paid according to the provisions of the Plan. SECTION 4. PAYMENTS FROM THE TRUST 4.1 The Trust shall be held only for the benefit of those Employees, retired Employees, terminated Employees, or beneficiaries who have rights and interests therein according to the terms of the Plan. Payments of benefits under the Plan to such -2C- 112 persons shall be made solely from the Trust, in such manner, at such times, and in such amounts as the Company may in writing direct the Trustees. The Trustees shall be fully protected in making payments out of the Trust in accordance with such written directions and shall have no responsibility to see to the application of such payments, or to ascertain whether such directions comply with the terms of the Plan and shall not be liable for any payment made by them in good faith. 4.2 If any payment or distribution directed to be paid from the Trust is returned unclaimed, the Trustees shall notify the Company of that fact and shall dispose of such payments as the Company shall direct. The Trustees shall have no obligation to search for or ascertain the whereabouts of any payee or distributee of benefits from the Trust. SECTION 5. THE TRUST 5.1 The Trust shall be held by the Trustees in trust and dealt with in accordance with the provisions of this Agreement. 5.2 With respect to the Trust, the Trustees shall have the following powers, authorities and rights in addition to those vested in them elsewhere in this Agreement or by law: (a) The Trustees shall from time to time by resolution designate one or more banks in which monies of the Trust shall be deposited, and likewise the individuals authorized to sign, for and in the name of the Trust, checks and other orders for the -2D- 113 payment of money drawn against the Trust's accounts with such banks. (b) The Trustees are authorized and empowered in their discretion to invest and reinvest any part of the assets of the Trust in, and to buy and sell, shares of stock, debentures, bonds, mortgages, promissory notes, real estate, real estate improvements, group annuity (and other forms of insurance company) contracts, leaseholds or any income producing properties or securities, real or personal, within or without the State of Illinois, including such securities issued by or property owned by the Company. The Trustees are to have as wide a latitude in the selection and making of such investments as if they, as individuals, were the absolute owners thereof, and are not to be restricted to the investments for trustees as prescribed by the statutes or law of the State of Illinois or of any other jurisdiction. The Trustees shall not maintain the indicia of ownership of any asset of the Trust outside the jurisdiction of the district courts of the United States. (c) The Trustees are also authorized and empowered in their discretion, but not by way of limitation, to lease, sell, exchange, convey, transfer or dispose -2E- 114 of, and also to grant options with respect to, any property, whether real or personals, at any time held by them, for cash or upon credit or partly for cash and partly upon credit, as the Trustees may deem best, and no person dealing with the Trustees shall be bound to see to the application of the purchase money or to inquire into the validity, expediency or propriety of any such sale or other disposition; to make such warranties, representations and indemnifications in connection with the sale or other disposition of any securities owned by the Trust, for the benefit of the issuer of such securities, the purchasers thereof, and any underwriters and securities dealers involved in such sale or other disposition, all to the extent and under such terms and conditions as the Trustees with advice of counsel shall deem to be appropriate under the circumstances; to compromise, compound and settle any debt or obligation due to or from them as Trustees, and to reduce the rate of interest on, to extend or otherwise modify, or to foreclose upon default or otherwise enforce any such obligation; to vote in person or by proxy on any stocks, bonds or other securities held by them; to exercise any options appurtenant to any stocks, bonds or other securities for the -2F- 115 conversion thereof into other stocks, bonds, or securities, or to exercise any rights to subscribe for additional stocks, bonds or other securities, and to make any and all necessary payments therefor; to join in, or to dissent from and to oppose, the reorganization, recapitalization, consolidation, liquidation, sale or merger of corporations or properties in which they may be interested as Trustees upon such terms and conditions as they may deem wise; and to maker execute, acknowledge and deliver or to cause to be made, executed, acknowledged and delivered on their behalf, any and all deeds, leases, assignments, proxies, powers of attorney and instruments whatsoever. (d) The Trustees may borrow money for the purpose of the Trust, upon such terms and conditions as the Trustees shall from time to time determine, and pledge or mortgage securities or other assets owned by the Trust as security for the payment thereof. (e) Certificates of stock or other assets held or owned by the Trust may be issued in the name of the Trustees, or in the name of such nominee or nominees as the Trustees may from time to time designate. Upon the death, resignation, removal or disability of any such nominee, the certifi- -2G- 116 cates of stock or other assets may be transferred to the Trustees, or to any other nominee or nominees as the Trustees designate. The Trustees shall from time to time by resolution designate the individuals who shall be authorized to sign, on behalf of the Trustees, instruments of assignment or transfer for the purpose of assigning and transferring certificates of stock or other assets held in the name of the Trustees. (f) The Trustees shall from time to time by resolution designate the individuals who shall be authorized to sign, on their behalf, written orders to the nominee or nominees in whose name or names certificates of stock or other assets owned by the Trust are issued, instructing such nominee or nominees to execute instruments of assignment or transfer for the purpose of assigning or transferring such stock certificates or other assets. No stock certificates or other assets issued in the name of the Trustees shall be assigned or transferred unless the instrument of assignment or transfer is signed on behalf of the Trustees in accordance with the provisions of resolutions adopted by the Trustees, as aforesaid. No stock certificates or other assets owned by the Trust and held in the name of any nominee or nominees, -2H- 117 shall be assigned or transferred except pursuant to written orders signed on behalf of the Trustees in accordance with resolutions adopted by the Trustees, as aforesaid; but such nominee or nominees shall in each case promptly comply with all such written orders when so signed. (g) The Trustees may begin, maintain or defend any litigation necessary in connection with the administration of the Plan or this Trust, except that the Trustees shall not be obligated or required to do so unless they have been indemnified to their satisfaction against all expenses and liabilities sustained or anticipated by them by reason thereof. (h) If payment of any distribution hereunder shall give rise to any liability for estate, inheritance, income or other tax, charge or assessment, which, in the Trustees' opinion, they shall or may be required to pay, the Trustees shall have full power and authority to pay such tax, charge or assessment out of any monies or other property in their hands for the account of the person whose interest hereunder is liable for such tax, but the Trustees shall give the Company notice of their intention to make such payments as far in advance as may be practicable. If the Company requests -2I- 118 the Trustees to defer making payment of such tax, charge or assessment, the Trustees shall be indemnified to their satisfaction in the premises. The Company or the Trustees or either, before making payment of any distribution, may require such release or other documents from any lawful taxing authority and may require such indemnity from the intended payee as they respectively consider necessary for their protection. (i) The Trustees may retain any funds or property subject to any dispute without liability for payment of interest, or decline to make payment or delivery thereof until final adjudication is made by a court of competent jurisdiction. SECTION 6. PAYMENT OF EXPENSES 6.1 All reasonable costs, charges, and expenses incurred by the Trustees in connection with the administration of this Trust, including such reasonable compensation to the Trustees as may be agreed upon in writing from time to time between the Company and the Trustees, shall be paid from the Trust, unless paid by the Company. The Trustees shall pay such expenses relative to the administration of the Plan as may be directed in writing by the Company and shall be fully protected in making any such payments. All taxes of any and all kinds whatsoever that may be levied or assessed under existing or future laws upon the Trust or the income thereof shall be paid from the Trust. -2J- 119 SECTION 7. ACCOUNTS 7.1 The Trustees shall maintain accurate and detailed records and accounts of all investments, receipts disbursements, and other transactions hereunder, and all accounts, books and records relating thereto shall be open at all reasonable times to inspection and audit by such person or persons as the Company may designate. 7.2 The Trustees shall submit to the auditors for the Company and to the actuaries for the Plan such valuations, reports or other information as they may reasonably require under the terms of the Plan. 7.3 The Trustees shall establish and maintain for operational and accounting purposes such other accounts or records as the Company may, from time to time, consider necessary. 7.4 In no event shall the maintenance of an account or record by the Trustees designated as the account of an Employee, retired Employee, terminated Employee, or beneficiary mean that such person shall have any interest in any specific asset of the Trust from which he may be entitled to receive benefits. SECTION 8. PROTECTION OF THE TRUSTEES 8.1 The Trustees shall not be obligated to inquire as to whether or not any payee of funds or any distributee of benefits designated by the Company is entitled thereto or as to whether any payment, allocation or distribution directed or authorized by the Company is proper, or within the terms of the -2K- 120 Plan, or has been computed properly as to the amount or manner of making the same, and shall be accountable only to the Company for any payment, allocation or distribution made by the Trustees in good faith on the order or direction of the Company. The Trustees shall not be liable or responsible for any payment made by them in good faith. 8.2 Any action which may be taken by the Company under this Agreement shall be by resolution of its Board of Directors or by the Retirement Committee under the Plan as such Committee is constituted or by any other representative authorized to act by resolution of the Board of Directors. The Trustees shall not recognize or take notice of the appointment of any representative of the Company unless and until the Company notifies the Trustees in writing of such appointment and the extent of such representative's authority. The Trustees may assume that such appointment and authority continue in effect until they receive written notice to the contrary from the Company. Any action taken or omitted to be taken by the Trustees by authority of any representative of the Company within the scope of his authority shall be as effective for all purposes hereof as if such action or nonaction had been authorized by the Company. The Company, the Retirement Committee, any representative of the Company, and the Trustees shall each be fully protected in acting and relying upon notices described in this paragraph. 8.3 The Trustees shall have no power, authority or duty in respect of the determination of rights and interests of -2L- 121 any persons in and to the Trust or under the Plan or to question or examine into the determination of any right or interest. 8.4 The Trustees and the members of the Investment Committee shall not be personally liable to any person for any obligation or liability incurred on behalf of the Trust, but each such person shall look solely to the assets of the Trust for satisfaction of such obligations or liability. Moreover, the Trustees and the members of the Investment Committee shall not be personally liable for any loss which may result by reason of any investment or loan made by them in good faith on behalf of the Trust, or for any act or failure on their part to act, made or omitted to be done in good faith. 8.5 Each Trustee, each officer, or member of the Investment Committee and each person who shall serve at the request of the Trustees as a director or officer of a corporation in which the Trust owns shares of capital stock or of which it is a creditor, including, in each instance, a former Trustee, director, committee member, or officer and the heirs, legatees, devisees and personal representatives of a deceased Trustee, committee member, director or officer, shall be indemnified by the Company against expenses (including attorneys' fees and any amounts paid in settlement) actually or necessarily incurred by them in connection with the defense of any action, suit or proceeding (including any appeal therein) in which they or any of them are made parties or a party by reason of being or having been Trustees, officers or members of the Investment Committee or -2M- 122 a director or officer of any such corporation, except in relation to matters as to which any such Trustee, director, officers, committee member, or former Trustee, director committee member, or officer shall be adjudged in such action, suit or proceeding to be liable for dereliction or misconduct in the performance of his duties as such Trustee, director, committee member or officer. 8.6 No Employer shall have any responsibility or liability whatsoever with reference to the management or conduct of the business of the Trust for any act or failure to act on the part of any Trustee. The Employers, however, shall hold the Trustees harmless from good faith reliance on personnel and compensation information received from the Employers, or any of them. 8.7 The Company intends that the Trust, the terms of which are herein restated, shall continue to qualify under Section 401(a) of the Code and also meet the requirements of ERISA, and until advised to the contrary, the Trustees may assume that the Trust is so qualified. SECTION 9. INVESTMENT COMMITTEE 9.1 The Trustees may in their discretion appoint an investment committee composed of such individuals as they shall designate, all of whom may, but need not be, either Trustees or "investment managers" as defined by Section 3(38) of ERISA, who shall hold office during the pleasure of the Trustees. The Committee shall have all of the powers, authorities and discre- -2N- 123 tions vested in the Trustees under the provisions of Section 5, subject to such restrictions, limitations and conditions as may be prescribed from time to time by the Trustees. The members of the Committee may adopt such resolutions as they deem appropriate for the purpose of governing themselves in the conduct of the business of the Committee, subject, however, to such rules and regulations, if any, prescribed in that regard by the Trustees. The Committee shall periodically and whenever required by the Trustees submit to the Trustees reports of the Committee's actions. SECTION 10. TRANSFERS, MERGERS AND CONSOLIDATIONS 10.1 The Trust may not merge with, consolidate with or transfer assets or liabilities to any other plan unless each Participant would receive a benefit immediately after the merger, consolidation or transfer (if the other plan then terminated) which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the Plan had then terminated). SECTION 11. TERMINATION 11.1 Upon termination of the Plan, the Trustees shall first reserve such reasonable amounts as they may deem necessary to provide for the payment of any expenses then or thereafter chargeable to the Trust. The balance of the Trust, together with any amounts reserved by the Trustees in accordance with the preceding sentence which prove to be excessive, shall be liquidated and distributed by the Trustees as directed by the Company -2O- 124 in writing. The Trustees shall have no responsibility to see that such distribution is proper and within the terms of the Plan. Such liquidation and distribution may be implemented through the continuance of this Trust, the execution of a new trust agreement, by the purchase of annuity contracts for persons entitled to distributions, or in any other appropriate manner, as the Company may direct in writing. The Company or any other Employer shall have no beneficial interest in the Fund during its continuance or upon termination of the Trust, except that any balance remaining in the Trust, after satisfaction of all fixed and contingent liabilities, may revert to the Company or any other Employer entitled thereto. 11.2 Upon termination of the Trust, the Trustees shall continue to have all of the powers provided in this Agreement as are necessary or desirable for the orderly liquidation and distribution of the Trust. SECTION 12. AMENDMENT 12.1 This Agreement may be amended by action of the Board of Directors of the Company at any time and from time to time. The Directors shall promptly notify the Trustees of any such amendment; provided, however, that no such amendment shall vest in the Company or any other Employer any right, title or interest in or to the assets of the Trust Fund or allow any part of the Trust Fund to be used for, or diverted to, purposes other than for the exclusive benefit of Participants and their beneficiaries, within the meaning of Section 401 of the Code and ERISA, -2P- 125 provided, further, that the rights, duties or responsibilities of the Trustees shall not be substantially changed without their written consent. SECTION 13. NONASSIGNABILITY 13.1 It is a condition of the Plan to which all rights of any person shall be subject, that payments hereunder shall be made only to those persons entitled thereto under the terms of this Plan, and no right or interest in the Plan or Trust shall be transferable or assignable; such right or interest may not be anticipated, charged or encumbered, and shall not be subject to or reached by any legal or equitable process (including execution, garnishment, attachment, pledge or bankruptcy) in satisfaction of any debt, liability or obligation, prior to its receipt, including any liability or obligation for alimony, separate maintenance or child support payments. SECTION 14. APPLICABLE LAW 14.1 Since the Company's principal office and the Trustees' domicile are in the State of Illinois, and since it is contemplated that the situs of administration of the Plan and Trust will continue in such State, all rights under the Plan and Trust shall be governed, construed and administered in accordance with the laws of the State of Illinois to the extent such law is not superseded pursuant to the provisions of Section 514 of ERISA. -2Q- 126 SECTION 15. COUNTERPARTS 15.1 This Agreement may be executed in any number of counterparts, each of which shall be considered as an original, and no other counterparts need be produced. -2R- EX-10.13 8 PLAN AND AGREEMENT OF MERGER 1 EXHIBIT 10.13 3174m/8472L PLAN AND AGREEMENT OF MERGER PLAN AND AGREEMENT OF MERGER, dated as of August 21, 1992 (this "Agreement"), by and among DeSoto, Inc., a Delaware corporation ("DeSoto"), DeSoto Subsidiary One Corp., a New Jersey corporation and a direct wholly-owned subsidiary of DeSoto ("Newco"), and J.L. Prescott Company, a New Jersey corporation (the "Company"). W I T N E S S E T H WHEREAS, the respective Boards of Directors of the Company, DeSoto and Newco have each adopted resolutions approving this Agreement and the Merger (as defined in Section 1.01) and providing that Newco merge with the Company pursuant to this Agreement and the applicable provisions of the New Jersey Business Corporation Act, as amended (the "BCA"). NOW, THEREFORE, in consideration of the premises and of the mutual agreements hereinafter contained, the parties hereto do hereby agree as follows: ARTICLE I THE MERGER 1.01 Merger. Upon the terms and subject to the conditions set forth in this Agreement, at the Effective Time (as defined in Section 1.03), the Company will be merged with and into Newco (the "Merger") in accordance with the BCA. Following the Merger, Newco shall continue as the surviving corporation under the laws of the State of New Jersey, except that Newco shall change its name to "J.L. Prescott Company" as described in Section 1.05 (Newco, following the Merger, shall sometimes be referred to herein as the "Surviving Corporation"), and the separate corporate existence of the Company shall cease. The Company shall, upon Newco's request, execute an amendment or supplement to this Agreement to provide for a merger, on terms otherwise consistent with this Agreement, of the Company with and into any other direct or indirect wholly-owned subsidiary of DeSoto, with such other 2 subsidiary of DeSoto as the Surviving Corporation, or of Newco or such other subsidiary of DeSoto with and into the Company, with the Company as the Surviving Corporation. 1.02 Closing. Upon the terms and subject to the conditions set forth in this Agreement, the closing of the Merger (the "Closing") shall take place as soon as practicable after all the conditions set forth in Article V hereof have been satisfied or, to the extent permitted hereunder, waived, provided that such satisfaction or waiver shall have occurred within the period specified in Section 6.01(b). The Closing will take place at 10:00 a.m. local time at the offices of Fried, Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004, or at such other time and/or place as the parties hereto may agree. The date on which the Closing occurs is herein referred to as the "Closing Date." 1.03 Effective Time. The Merger shall be effected as soon as practicable on or after the Closing Date by filing a Certificate of Merger with the Office of the Secretary of State of the State of New Jersey, which shall be filed promptly on or after the Closing Date (but in no event later than one business day after the Closing Date), and the Merger shall, in accordance with Section 14A:10-4.1 of the BCA, become effective immediately at the time of such filing (the "Effective Time"). 1.04 Effect of Merger. The Merger shall have the effects set forth in Section 14A:10-6 of the BCA and, from and after the Effective Time, the Surviving Corporation shall possess all the assets, rights, privileges, powers, immunities, purposes and franchises and be liable for all the obligations and liabilities of the Company and Newco, all as provided under the BCA. 1.05 Certificate of Incorporation and By-Laws. The Certificate of Incorporation (as amended as described in the next sentence) and the By-laws of Newco in effect immediately prior to the Effective Time shall be the Certificate of Incorporation and By-laws of the Surviving Corporation at the Effective Time. Article FIRST of the Certificate of Incorporation of Newco shall be amended at the Effective Time to read in its entirety as follows: "FIRST: The name of the Corporation is J.L. Prescott Company." 1.06 Directors and Officers. The directors of Newco and the officers of the Company, each as of immediately prior to the Effective Time, shall be the initial directors and officers of the Surviving Corporation at the Effective Time, respectively, in each case until the earlier of their 2 3 resignation or removal or until their respective successors are duly elected and qualified. 1.07 Conversion of Shares. At the Effective Time, by virtue of the Merger and without any action on the part of DeSoto, Newco, the Company or any holder of shares of common stock, par value $.01 per share (collectively, the "Shareholders"), of the Company (the "Shares"): (a) each Share issued and outstanding immediately prior to the Effective Time (other than Shares cancelled and retired pursuant to Section 1.07(b)) shall be converted into the right to receive certificates representing (i) that number (the "Conversion Number") of validly issued, fully paid and nonassessable shares of common stock, par value $1 per share, of DeSoto ("DeSoto Common Stock") obtained by dividing (x) 522,775 (as adjusted pursuant to Section 1.08) by (y) the number of Shares issued and outstanding immediately prior to the Effective Time (other than Shares cancelled and retired pursuant to Section 1.07(b)), (ii) if DeSoto's Preferred Share Purchase Rights have not terminated, expired or been redeemed prior to the Effective Time, a distribution of a number of Preferred Share Purchase Rights in accordance with the terms thereof equal to the Conversion Number and (iii) that number of contingent value rights in the form set forth on Exhibit A (the "CVRs") equal to the Conversion Number; provided, however, that until surrendered in accordance with the provisions of Section 1.10, each stock certificate which immediately prior to the Effective Time represented Shares (each, a "Certificate") (other than Certificates representing Shares cancelled and retired pursuant to Section 1.07(b)), shall represent for all purposes only the right to receive the consideration set forth in this Section 1.07(a), without interest thereon or other rights in respect thereof; and in further consideration of the Merger, DeSoto agrees to assume at the Effective Time the obligation of Parent (as defined in Section 2.03) with respect to the payment to Parent's minority stockholder following redemption and cancellation of Parent's stock held by such minority stockholder as set forth in the redemption agreement dated as of the date hereof among Parent, such minority stockholder and DeSoto; (b) each Share held in the treasury of the Company immediately prior to the Effective Time shall be cancelled and retired and cease to exist and no payment shall be made with respect thereto; and (c) each share of common stock of Newco issued and outstanding immediately prior to the Effective Time shall be converted into and exchangeable for one validly issued, 3 4 fully paid and nonassessable share of the common stock of the Surviving Corporation. 1.08 Adjustments. If at any time during the period between the date of this Agreement and the Effective Time any change in the outstanding shares of DeSoto Common Stock shall occur, including by reason of any reclassification, recapitalization, stock split or combination, exchange or readjustment of or any other like change in such shares, or any stock dividend thereon with a record date during such period, the Conversion Number shall be appropriately adjusted as if the Effective Time had occurred immediately prior to such change. 1.09 Payment for Shares. (a) From and after the Effective Time, upon surrender to the Surviving Corporation of a Certificate, duly executed, and any other documents reasonably requested by DeSoto to evidence properly the surrender of the Certificate in exchange for the consideration set forth in Section 1.07 (including without limitation the documents referred to in Section 1.09(c)), the holder of such Certificate shall be entitled to receive in exchange therefor the consideration set forth in Section 1.07, and such Certificate shall forthwith be cancelled. If payment is to be made to a person other than the person in whose name the Certificate surrendered is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of the Certificate surrendered or establish to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Without limiting the generality of the foregoing, subsequent to the Effective Time, unless and until an outstanding Certificate is surrendered in accordance with this Section 1.09, (i) no dividends or distributions of any kind payable to the holders of record of DeSoto Common Stock after the Effective Time shall be paid by DeSoto to the holder of such an outstanding Certificate and (ii) no such holder shall have a right to receive such dividends or distributions. Upon the surrender and exchange of such an outstanding Certificate, the holder shall be paid, without interest, the amount of any dividends or distributions which theretofore would have become payable between the Effective Time and the date of such surrender or exchange with respect to the shares of DeSoto Common Stock evidenced by such Certificate as if the surrender or exchange had occurred at the Effective Time. (b) After the Effective Time, there shall be no transfers of the Shares which were outstanding immediately 4 5 prior to the Effective Time on the stock transfer books of the Surviving Corporation. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they shall be cancelled and exchanged for the consideration provided in Section 1.07 in accordance with the procedures set forth in this Section 1.09. (c) As a condition to payment to a Shareholder of the consideration set forth in Section 1.07, such Shareholder (i) shall have delivered to DeSoto an affidavit pursuant to Section 1.1445-2(b)(2) of the United States Treasury Regulations which (A) states that such Shareholder is not a nonresident alien (or in the case of an entity, is not a "foreign person") for purposes of United States income taxation, (B) sets forth such Shareholder's taxpayer identification number and home address (or in the case of an entity, its office address), and (C) is duly signed under penalties of perjury, and (ii) shall have delivered to DeSoto an accurate and complete signed original of Internal Revenue Service Form W-9 (or successor form) indicating that such Shareholder is entitled to receive payments under this Agreement without any deduction or withholding of any federal income Taxes (as defined in Section 2.15). If a Shareholder does not deliver such form, DeSoto is entitled to withhold from any payments any amounts required by applicable law to be withheld. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to each of DeSoto and Newco as follows: 2.01 Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey and has all requisite corporate power and authority to carry on its business as it is now being conducted and to own, use and lease its assets and properties. The Company is duly qualified and licensed as a foreign corporation to do business, and is in good standing (and has paid all relevant franchise or analogous taxes due prior to the date hereof), in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified or in good standing, individually or in the aggregate, would not have (and would not reasonably be expected to have) a material adverse effect on the business, financial condition, assets, liabilities, properties or results 5 6 of operations of the Company (a "Company Material Adverse Effect"). True and complete copies of the Certificate of Incorporation and By-laws of the Company have previously been delivered to DeSoto. 2.02 Authority Relative to This Agreement; Required Vote. The Company has all requisite corporate power to enter into this Agreement and to carry out its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly approved and authorized by the Board of Directors of Company and by the Shareholders, and no other corporate proceeding is necessary to approve or authorize this Agreement or any of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against it in accordance with its terms, except that such enforceability (i) may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors' rights generally and (ii) is subject to general principles of equity. 2.03 Capitalization. The authorized capital stock of the Company consists of 1,250,000 Shares, of which 815,278 Shares are issued and outstanding. Narrangansett/Prescott, Inc., a Delaware corporation ("Parent"), is the registered owner of all the issued and outstanding Shares. No Shares are held in the Company's treasury. All the issued and outstanding Shares are validly issued, fully paid and nonassessable and free of preemptive rights. Except (x) as set forth above in this Section 2.03 or (y) for such interests as are set forth on Schedule 2.03 and are "out of the money" with respect to the holder thereof or will be cancelled prior to the Effective Time at no cost to the Company or the Surviving Corporation, there are no shares of capital stock of the Company authorized, issued or outstanding or reserved for issuance, and there are no outstanding subscriptions, options, warrants, rights, contingent value rights, stock-based or stock-related awards or convertible or exchangeable securities or other agreements or commitments to which the Company is a party or by which the Company may be bound of any character relating to, or obligating the Company to sell, issue, grant, award, transfer or otherwise dispose of, or to redeem, repurchase or otherwise acquire, any shares of capital stock or other securities of the Company (including, without limitation, any agreement or commitment obligating the Company to make any payment, issue any security or take other action with respect to any third party or pursuant to any employee compensation arrangement based on any valuation or transaction price of, or change of majority ownership in, the Shares), other than this Agreement. 6 7 Except as set forth on Schedule 2.03, there are no voting trusts, proxies or other agreements or understandings to which the Company is a party with respect to the voting of capital stock of the Company. 2.04 Subsidiaries and Portfolio Interests. Except as set forth on Schedule 2.04, the Company does not directly or indirectly own any voting or equity interest in any corporation, partnership, joint venture or other business association or entity or other Person (as defined in Section 7.05). Except as set forth on Schedule 2.04, the interests of the Company in such Persons are owned free and clear of all liens, options, claims, security interests or other encumbrances (including, without limitation, rights of first refusal or similar rights) (collectively, "Encumbrances"). The Company has no subsidiary (as defined in Section 7.05). 2.05 Financial Statements; Projections. (a) Schedule 2.05 sets forth copies of the balance sheets of the Company at December 31, 1990, 1989 and 1988 (collectively, the "Audited Balance Sheets"), and the related statements of income, retained earnings and cash flows for the years (or, in the case of the December 31, 1988 Audited Balance Sheet, the nine-month period) then ended, including the notes thereto, audited by Ernst & Young, together, in each case, with a copy of the report of Ernst & Young (collectively, the "Audited Financial Statements"). Also set forth on Schedule 2.05 is the unaudited balance sheet of the Company at May 31, 1992 (the "May 31, 1992 Unaudited Balance Sheet") and the related unaudited statements of income, retained earnings and cash flows for the five-month period then ended (collectively, the "Unaudited Financial Statements"). The Audited Financial Statements and the Unaudited Financial Statements (i) are in accordance with books and records of the Company and (ii) fairly present in all material respects the net assets, financial position and results of operations of the Company as at the respective dates and for the respective periods referred to therein in conformity with generally accepted accounting principles ("GAAP"), uniformly applied on a basis consistent with that of prior years or periods, except that the Unaudited Financial Statements do not contain a complete set of notes and are subject to normal year-end adjustments of a type and in amounts consistent with adjustments in prior years. The books of account and other financial and corporate records of the Company are complete and correct in all material respects. (b) The Company has provided to DeSoto its forecasts and projections of the Company's operations, financial condition and financial performance dated as of June 16, 1992. All forecasts and projections of the Company's 7 8 operations, financial condition and financial performance provided by the Company to DeSoto were at the time prepared believed by the Company's senior management to be reasonable and are the same forecasts and projections as were then being used in the Company's internal business plans and budgets at the time provided to DeSoto. 2.06 Undisclosed Liabilities; Absence of Certain Charges. (a) Except as disclosed on Schedule 2.06(a), other schedules to this Agreement or elsewhere in this Agreement, the Company is not subject to any debts, liabilities or obligations, whether known or unknown, asserted or unasserted, accrued, absolute, contingent or otherwise and whether due or to become due ("Liabilities") which, singly or in the aggregate, have (or would reasonably be expected to have) a Company Material Adverse Effect, other than (i) to the extent reflected, reserved against or otherwise disclosed in the May 31, 1992 Unaudited Balance Sheet, (ii) Liabilities incurred by the Company in connection with this Agreement or any of the transactions contemplated hereby or any other transaction with DeSoto and (iii) Liabilities arising since May 31, 1992 in the ordinary course of the Company's business consistent (in amount and kind) with past practice (but, in any event, excluding liabilities relating to violations of law, Litigation (as defined in Section 2.13), or environmental matters). (b) Except as set forth on the Schedules to this Agreement, since May 31, 1992, the Company has not: (i)(A) suffered any loss or casualty which has (or would reasonably be expected to have) a Company Material Adverse Effect, whether or not covered by insurance or (B) suffered any material adverse change in its financial condition or operating results other than on account of its continuing cash flow difficulties; (ii) incurred or discharged any Liability or entered into any transaction except in the ordinary course of the Company's business and except for Liabilities and transactions that, individually or in the aggregate, do not have (and would not reasonably be expected to have) a Company Material Adverse Effect; (iii) applied its cash and cash equivalents other than in the day-to-day operations of its business or in the ordinary course of business; 8 9 (iv) modified, amended, terminated, transferred or waived any material right under any material contract or other agreement of the type required to be set forth on any Schedule hereto, except in the ordinary course of the Company's business consistent with past practice; (v) made any changes in its accounting methods or practices or made any changes in depreciation or amortization policies or rates adopted by it other than as may be required by GAAP; (vi) made any loan or advance to any of its affiliates (as defined in Section 7.05) or any of its or their respective directors, officers, employees or other representatives, or, otherwise than in the ordinary course of business consistent with past practice, made any other loan or advance; (vii) except for inventory or equipment disposed of or acquired in the ordinary course of business, sold, abandoned, transferred, leased, licensed or made any other disposition of any of its material properties or assets or acquired any capital stock or business of any other Person; (viii) with respect to any Employee whose annual base compensation exceeds $50,000, or any group or unit of Employees as a whole (irrespective of wage rate), entered into, amended or terminated any employment, consulting, collective bargaining, severance, termination, retirement or indemnification agreement, contract, policy, plan, practice or arrangement (other than the hiring or dismissal of at-will employees in the ordinary course of business consistent with past practice), or granted any increase in the compensation payable or to become payable by the Company to any current or former director, officer, employee or consultant of the Company (or a former subsidiary or division of the Company) (an "Employee"), or paid any bonus, fee or other compensation to any Employee other than in the ordinary course of business consistent (in amount and kind) with past practice, or entered into, or increased the amounts payable or to become payable by the Company with respect to any Employee pursuant to, any agreement or employee benefit plan or arrangement; (ix) terminated or failed to renew, or received any written notice of dispute or threat to 9 10 terminate or fail to renew (that, in any case, was not subsequently withdrawn), any material commitment or other agreement to which it is or was a party; (x) made any declaration of, or set aside or paid, any dividend or other distribution (whether in cash, stock or property) with respect to the capital stock of the Company; or (xi) entered into any agreement, arrangement or other understanding to do any of the foregoing. 2.07 Compliance with Laws; Permits. Except as set forth on Schedule 2.07 and except for such matters as are represented or warranted in Section 2.19 or as otherwise disclosed on Schedule 2.19 ("Environmental Matters"), the Company is in compliance in all material respects with all federal, state, local and foreign orders, judgments, injunctions, writs, decrees, laws, statutes, ordinances, rules and regulations by any Governmental Entity (as defined below) (collectively, "Laws") applicable to its business as currently conducted or properties, except where noncompliance, individually or in the aggregate, does not have (and would not reasonably be expected to have) a Company Material Adverse Effect. Except as set forth on Schedule 2.07 and except with respect to Environmental Matters, the Company has not received any written notice of any alleged violation of Law applicable to the Company since January 1, 1990. Except as set forth on Schedule 2.07, the Company has all governmental permits, licenses, orders and authorizations from, and has made all required governmental registrations with (collectively, "Permits"), federal, state and local courts, governmental agencies and regulatory or administrative authorities and instrumentalities, foreign and domestic (each, a "Governmental Entity"), required for the conduct of its business as presently conducted and the ownership, lease or operation of its properties, except where the absence thereof, individually or in the aggregate, does not have (and would not reasonably be expected to have) a Company Material Adverse Effect. All material Permits held by the Company are valid and in full force and effect, and the Company has duly performed and is in compliance with all such Permits in all material respects. No event has occurred with respect to the Company's Permits which allows, or after notice or lapse of time or both would allow, the suspension, limitation, revocation or termination thereof, and no terminations thereof or proceedings to suspend, limit, revoke or terminate any Permit have been to the Company's knowledge threatened, except for any such impairments, terminations and (if adversely determined) proceedings as, singly or in the aggregate, do not have (and would not 10 11 reasonably be expected to have) a Company Material Adverse Effect. 2.08 Consents; No Violations. Assuming the accuracy of the representations and warranties contained in Section 3.10, except as set forth on Schedule 2.08, neither the execution, delivery or performance of the Agreement by the Company nor the consummation of any of the transactions contemplated hereby will (a) conflict with, or result in a breach or a violation of, any provision of the Certificate of Incorporation or By-laws of the Company; (b) assuming compliance with the matters set forth in clause (c) of this Section 2.08, constitute, with or without the passage of time or the giving of notice or both, a breach, violation or default, create a lien, or give rise to any right of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration, under (i) any Law or Permit, or (ii) any note, bond, mortgage, indenture, lease, agreement or other instrument of the Company, or to which it or any of its properties is subject, except, with respect to the matters set forth in clause (ii), for breaches, violations, defaults, liens, or rights of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration, singly or in the aggregate, which would not have (and would not reasonably be expected to have) a Company Material Adverse Effect or materially adversely affect the ability of the Company to consummate any of the transactions contemplated hereby; or (c) require any consent, approval or authorization of, notification to, filing with, or exemption or waiver by, any Governmental Entity on the part of the Company other than (i) the filing of a Certificate of Merger in accordance with the BCA, (ii) the receipt of an amended administrative consent order or clean-up plan approval letter for the Company's former New Jersey sites currently subject to an administrative consent order and, if necessary, an administrative consent order or letter of non-applicability (or de minimis exemption) with respect to the Company's New Jersey warehouse (collectively, the "ECRA ACO's") from the New Jersey Department of Environmental Protection under the New Jersey Environmental Cleanup Responsibility Act, N.J.S.A. Section 13:lK-6 et seq. ("ECRA"), and (iii) consents, approvals, authorizations, notifications, filings, exemptions or waivers which, if not obtained or made would not, singly or in the aggregate, have a Company Material Adverse Effect or materially adversely affect the ability of the Company to consummate any of the transactions contemplated hereby. 2.09 Commitments. (a) Schedule 2.09(a) sets forth a list of each contract, agreement or other binding arrangement 11 12 to which the Company is a party or by or to which it or any of its properties may be bound or subject (collectively, the "Commitments") (i) which provides for future payments thereunder of more than $100,000 per year, including, without limitation, all such (A) Commitments for capital expenditures, (B) manufacturing, marketing, distribution, dealer, override, commission, rebating, fee-sharing, minimum requirements or sales agency Commitments, (C) guarantees of third party obligations, and (D) Commitments for the sale or purchase of any assets other than in the ordinary course of business, but excluding purchase orders or other Commitments for the purchase of raw materials, components or supplies and sales orders or other Commitments for the sale of finished goods; (ii) which restricts the kinds of businesses in which the Company may engage or the geographical area in which it may conduct its business, or the type of information which it may disclose (other than non-disclosure agreements with customers relating to the sale, marketing or manufacture of goods); (iii) which is an indenture, mortgage, loan agreement, promissory note, or similar obligation to repay money borrowed in excess of $50,000 on an individual basis; (iv) which is a Commitment to provide funds or a line of credit for or to make any investment (in the form of a loan, advance, capital contribution or otherwise) to or in any Person (other than advances to Employees for their expenses in the ordinary course of business); (v) which provides for employment (other than oral agreements for employment at-will at annual salary less than $50,000), consulting, compensation (including, without limitation, benefits), loan, severance or indemnification agreements with any Employee or any labor union or other association representing any Employee; (vi) which provides for indemnification by the Company of any party (other than an Employee); (vii) which contain product warranties which are still by their terms effective in respect of products manufactured, sold, distributed or marketed at any time by the Company; (viii) with any Governmental Entity, including without limitation, the United States Department of Defense and any United States military service; (ix) which require the Company to purchase its powdered detergent requirements which Commitments are not cancellable within 90 days' or less notice without penalty; (x) which relate to or affect any of the business, assets or properties of the Company or by which any purchaser thereof may be bound (unless of the type not required to be disclosed pursuant to any of clauses (i) through (ix) of this sentence), except for Commitments of a type described in clauses (i) through (ix) of this sentence (A) which are cancellable by the Company on 90 days' or less notice without any penalty or other financial obligation to the Company involving payments in the aggregate of less than $100,000 in respect of any such cancellation or (B) which involve annual 12 13 aggregate payments of $100,000 or less, and, in either case, are not material to the business or financial condition of the Company; and (xi) which are currently in negotiation and which if entered into would be required to be listed on Schedule 2.09(a) or to be written on any other Schedule hereto. (b) Except as disclosed on Schedule 2.09(b), all of the Commitments referred to in the preceding paragraph 2.09(a) are valid, binding, in full force and effect and enforceable against the Company in accordance with their terms except that enforceability (i) may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors' rights generally and (ii) is subject to general principles of equity. Except as set forth on Schedule 2.09(b), (i) there is no breach, violation or default by the Company and no event (including the execution or delivery of this Agreement, the consummation of the transactions contemplated hereby or the performance of the covenants and agreements provided herein) which, with notice or lapse of time or both, would constitute a breach, violation or default by the Company, or give rise to any contingencies, liquidated damages, penalties or rights of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration under, any Commitment listed on Schedule 2.09(a), except for breaches, violations and defaults, or contingencies, liquidated damages, penalties or rights of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration which, singly or in the aggregate, do not and will not have a Company Material Adverse Effect, (ii) to the Company's knowledge, no other party to any of the Commitments listed on Schedule 2.09(a) is in material arrears in respect of the performance or satisfaction of the terms and conditions on its part to be performed or satisfied under any of such Commitments and (iii) no material waiver or material indulgence has been granted by any of the parties to any of the Commitments listed on Schedule 2.09(a). 2.10 Real Estate. The Company does not directly or beneficially own or operate any real property other than the land owned of record by the Company and the improvements located thereon (the "Owned Real Property") and the premises subject of leaseholds held by the Company (the "Leased Real Property"), in each case, described on Schedule 2.10 (the annual rental, termination date and renewal term given in the case of each lease) (the Owned Real Property and the Leased Real Property being, collectively, the "Real Property"). The Company does not use, operate, lease, sublease, license or otherwise have the right to use or operate any real property (except for (i) public warehouse space the annual aggregate 13 14 rental of which does not exceed $60,000 and (ii) the Real Property) and, except as set forth on Schedule 2.10, is not the lessor (or sublessor) of any real property. 2.11 Title to Properties. (a) The Company has good, marketable and, in the case of the Owned Real Property, insurable, title to all of its properties and assets, tangible and intangible, including, without limitation, (i) all of the assets reflected on the May 31, 1992 Unaudited Balance Sheet (other than those subject to capital leases), (ii) the properties described in Sections 2.10, 2.12 and 2.14 which the Company purports to own, and (iii) all other properties or assets of any kind used or held for use by the Company which the Company purports to own, in each case free and clear of any and all Encumbrances or exceptions to title, except for (p) Encumbrances set forth in the December 31, 1990 Audited Balance Sheet (including any notes with respect thereto); (q) properties (other than Owned Real Property) sold, consumed or otherwise disposed of, or subject to purchase or sales orders or conditional sale arrangements, in the ordinary course of business consistent with past practice; (r) Encumbrances set forth on Schedule 2.11(a); (s) Encumbrances securing taxes not yet due or being contested in good faith by appropriate proceedings for which adequate reserves or accruals have been provided in the May 31, 1992 Unaudited Balance Sheet; and (t) Encumbrances which do not, individually or in the aggregate, materially detract from the value of such property, materially interfere with the present use, occupancy or operation of such property or otherwise materially impair the business operations of the Company or have a Company Material Adverse Effect. (b) The leases pursuant to which the Company leases any real or personal property are (i) valid and binding on the Company and (ii), to the best knowledge of the Company, valid and binding on all respective parties to such leases in accordance with their respective terms. Except as disclosed in Schedule 2.11(b) with respect to past due payments of rent aggregating not more than $138,548 (all of which rental payments have been accrued on the May 31, 1992 Unaudited Balance Sheet or reflected in the projections referred to in Section 2.05(b)), there are not under such leases any existing breaches, defaults, events of default by the Company or events which with notice or lapse of time or both would constitute a breach, default or event of default by the Company, nor does the Company know, nor has the Company received notice of, or a counterparty made a claim to the Company with respect to, any breach or default, the consequences of which, individually or in the aggregate, would have or would reasonably be expected to have a Company Material Adverse Effect. Except as set forth in 14 15 Schedule 2.11(b), none of the rights of the Company under any such leases is subject to termination or modification as a result of the transactions contemplated hereby, except where such modification or termination, singly or in the aggregate, would not have (and would not reasonably be expected to have) a Company Material Adverse Effect. (c) Except as set forth on Schedule 2.11(c), the assets, rights, and properties owned, licensed or leased by the Company constitute all of the assets, rights, and properties used or held for use by the Company or reasonably necessary to the operations of the Company as currently conducted. 2.12 Tangible Property. Except as set forth on Schedule 2.12, the buildings, facilities, machinery, equipment, furniture, leasehold and other improvements, fixtures, vehicles, structures, any related capitalized items and other tangible property material to the business operations or financial condition of the Company (the "Tangible Property") are in reasonable operating condition and repair (normal wear and tear excepted), free (in the case of buildings or structures located on the Owned Real Property) of any material structural or engineering defects, are subject to continued repair and replacement in accordance with past practice, and are suitable for their current use. Except as set forth on Schedule 2.12, since March 31, 1988 there has not been any significant interruption of the operations of the Company due to inadequate maintenance of the Tangible Property. 2.13 Litigation and Orders. Except as set forth on Schedule 2.13, (a) there are no actions, suits or legal, administrative or arbitral proceedings, charges or investigations (collectively, "Litigation") pending or, to the knowledge of the Company, threatened against, affecting or involving the Company or any of its rights or properties which, if decided adversely to the Company, would have (or would reasonably be expected to have) a Company Material Adverse Effect, or which seek to enjoin or obtain damages in respect of any of the transactions contemplated hereby; and (b) there is no judgment, decree, injunction, rule or order of any Governmental Entity (collectively, "Orders" and, Orders together with Litigation being referred to herein as "Claims") outstanding against the Company. The Company does not have any Liability under any Litigation brought or threatened by, or Order in respect of, any Person who, prior to Parent's acquisition of the Company in 1988, had any equity or participating interest in the Company (other than possible legal expenses in connection therewith). 15 16 2.14 Patents, Trademarks and Copyrights. Schedule 2.14 sets forth a list of all patents, trademarks, trade names, service marks, copyright registrations, and applications therefor now or heretofore used or presently proposed to be used in and material to the business of the Company, other than any such Intellectual Properties (as defined below) which have not been used by the Company since March 31, 1988. Except as disclosed on Schedule 2.14, (a) the Company owns or possesses licenses or other valid rights to use (without the making of any payment to others or the obligation to grant rights to others in exchange) all patents, trademarks, trade names, service marks, copyright registrations, know-how and other proprietary information ("Intellectual Properties") reasonably necessary to the conduct of its business as presently being conducted, except when the failure to have such licenses or rights, singly or in the aggregate, would not have (and would not reasonably be expected to have) a Company Material Adverse Effect; (b) the conduct of the business of the Company as now conducted does not and will not infringe or conflict with any Intellectual Properties of others; (c) the Company is not aware of any use of any Intellectual Properties owned by or licensed to the Company that is now being made, except by the Company or by any Person duly licensed to use the same; and (d) no infringement by others of any Intellectual Properties owned by or licensed by or to the Company is known to the Company. The consummation of the transactions contemplated hereby will not alter or impair the rights and interests of the Surviving Corporation in any of the items listed on Schedule 2.14, and the Surviving Corporation will have the same rights and interests in such items at and after the Effective Time as the Company will have immediately prior to the Effective Time. 2.15 Taxes. The Company has filed on or prior to the date hereof, and will file on or prior to the Closing Date, all material federal, state and local income and other tax returns required to be filed by Law at such time. All such tax returns were true, complete and correct in all material respects and filed on a timely basis. The Company has paid all taxes of any nature whatsoever (including estimated taxes and withholding taxes), with any related penalties, interest and liabilities (any of the foregoing being referred to herein as a "Tax") that are shown as due on the aforementioned filings and all other Taxes claimed or asserted by any taxing authority to be due from the Company for the periods covered by such tax returns (except for those being contested in good faith and set forth in Schedule 2.15 and for which adequate reserves have been provided in the May 31, 1992 Unaudited Balance Sheet). Except as set forth in Schedule 2.15, the Company is not a party to any agreement providing for the transfer of Tax benefits to or from any Person or any agreements or arrangements relating to 16 17 allocating or sharing of Taxes. All Taxes for which the Company may be liable for periods ending on or prior to May 31, 1992 have been paid, accrued or reserved for on its books and records, and all Taxes for which the Company may be liable for periods ending on or after June 1, 1992 and on or prior to the Closing Date will be paid, accrued or reserved for on its books and records, except those which, individually or in the aggregate, would not have (and would not reasonably be expected to have) a Company Material Adverse Effect. Notwithstanding the foregoing, the May 31, 1992 Unaudited Balance Sheet includes as an asset a certain Purchase Money Note issued by 510 Ryerson Road, Inc. in the amount of $2,320,000, the collection of which will give rise to a section 1231 gain of approximately $1,700,000 for tax purposes, but such Unaudited Balance Sheet does not contain any accrual or reserve for Taxes related to such section 1231 gain since the Company's net operating loss carryforwards at December 31, 1991 and its current year operating losses would more than offset such gain should the Purchase Money Note be collected prior to the Effective Time. The Company will not be subject to any income Tax or similar Tax based upon the Company's operations or activities subsequent to May 31, 1992 up to and including the Closing Date which would exceed $25,000 in the aggregate. Except as set forth on Schedule 2.15, there are no claims or assessments pending against the Company for any alleged deficiency in Tax which pending claims or assessments involve amounts singly or in the aggregate in excess of $25,000. There is, and there will be, neither any material reduction or impairment of Tax benefits (including the tax basis of assets), other than the reduction or elimination of net operating loss carryforwards, available to the Company and a reduction in the tax basis of the Company's assets by no more than $1,400,000, nor any taxable income (after application of net operating loss carryforwards) resulting from or in respect of any forgiveness, cancellation or modification of any indebtedness of the Company on or before the Effective Date, including in connection with the restructuring entered into contemporaneously herewith (the "Bank Debt Restructuring") of the Company's revolving line of credit arrangement, which arrangement is referred to in note 5 to the December 31, 1990 Audited Financial Statements (the "Prescott Credit Agreement"), and the guaranty and pledge of Parent related thereto and in connection with the capital contribution to the Company referred to in Section 5.02(f). The Company will not be subject to any transfer, gains, sales or similar Taxes as a result of the Merger. Except as provided in Schedule 2.15, since March 31, 1988 the Company has not been included in any group of corporations filing a consolidated, combined or unitary return for federal, state or local Tax purposes. 17 18 2.16 Insurance. Schedule 2.16 sets forth a list of all policies or binders of fire, casualty, liability, product liability, worker's compensation, vehicular and other insurance held by or on behalf of the Company, including the amounts of such insurance and annual premiums with respect thereto. Such policies and binders are valid and binding in accordance with their terms and are in full force and effect. Except as disclosed on Schedule 2.16, the Company is not in material default with respect to any provision contained in any such policy or binder nor has it failed to give any notice or present to the insurer any material claim covered under any such policy or binder in due and timely fashion. Except for claims set forth on Schedule 2.16, there are no material outstanding unpaid or denied claims under any such policy or binder, and the Company has not received any written notice of cancellation or non-renewal of any such policy or binder. Except as set forth on Schedule 2.16, the Company has not received any written notice from any of its insurance carriers that any insurance premiums will be materially increased in the future or that any insurance coverage listed on Schedule 2.16 will not be available in the future on substantially the same terms as now in effect. Except as would not have a Company Material Adverse Effect, the consummation of the Merger will not result in the cancellation of insurance coverage disclosed on Schedule 2.16 following the Effective Time but prior to the expiration of such policies. 2.17 Employee Matters Generally. (a) Schedule 2.17 lists each Company Benefit Plan. Except as set forth in Schedule 2.17, each Qualified Plan is and since its inception has been qualified under Section 401(a) of the Code and is the subject of a favorable determination letter issued by the Internal Revenue Service (which has not revoked or threatened to revoke such letter) regarding the qualified status of the plan. The merger of the pension plan covering unionized New Jersey Employees with the pension plan covering salaried Employees has been completed and the merger was done in accordance with all applicable Law and did not and will not adversely affect the qualified status of either plan. The Company has made an application to the Internal Revenue Service requesting a determination as to the qualification of the combined plan resulting from said plan merger. (b) The Company has complied in all material respects with and performed all contractual obligations and all obligations under Law required to be performed by it under or with respect to any of the Company Benefit Plans or any related trust agreement or insurance contract. All contributions and other payments required to be made by the Company to any Company Benefit Plan prior to the date hereof have been made. 18 19 No Defined Benefit Plan listed in Schedule 2.17 has any accumulated funding deficiency whether or not waived. There is no bonus, commission, fee or other incentive compensation payable to any Employee (including, without limitation, any amounts actually or contingently payable under the bonus arrangements described in Note 13 to the December 31, 1990 Audited Balance Sheet, all of which arrangements are "out of the money" with respect to the beneficiary or holder thereof or will be cancelled prior to the Effective Time at no cost to the Company or the Surviving Corporation) other than for which adequate accruals or reserves have been provided in the May 31, 1992 Unaudited Balance Sheet. There is no Claim pending or, to the knowledge of the Company, threatened or anticipated (other than routine claims for benefits) against or relating to any Company Benefit Plan or against the assets of any Company Benefit Plan. Except as set forth in Schedule 2.17, the Company has not communicated generally to Employees regarding any material future increases of benefit levels (or creations of material new benefits) with respect to any Company Benefit Plan beyond those reflected in the Company Benefit Plans. (c) No "reportable event" within the meaning of Section 4043 of ERISA as to which the Pension Benefit Guaranty Corporation ("PBGC") has not by regulation waived the notice requirement of Section 4043(c) of ERISA has occurred with respect to any Defined Benefit Plan, other than the merger of the Company's pension plan for New Jersey union Employees with the Company's pension plan for salaried Employees. Except as set forth in Schedule 2.17, the Company has not participated in or had an obligation to contribute to any Multiemployer Plan, or incurred or been notified of any withdrawal liability in respect of any Company Benefit Plan. In the event the Company were to withdraw as of the Effective Time from any Multiemployer Plan to which it contributes, it would not incur any withdrawal liability in excess of $25,000. (d) No event or transaction (including, without limitation, any "prohibited transaction" within the meaning of Section 4975 of the Code or Section 406 of ERISA) has occurred with respect to which the Company, directly or indirectly (through any indemnification agreement or otherwise), is (or would reasonably be expected to be) subject to any Liability or Tax under Section 409 of ERISA, Section 502(i) of ERISA, Title IV of ERISA or Sections 4972, 4975, 4976, 4977, 4979 or 4980B of the Code. (e) No transaction contemplated by this Agreement will (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Company Benefit Plan, trust funding a Company Benefit Plan 19 20 or agreement with any Employee that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in compensation or benefits or obligation to fund benefits with respect to any Person or obligation to employ any Person or (ii) result in Liability to the PBGC under Title IV of ERISA. Each Company Benefit Plan can be amended, terminated or otherwise discontinued after the Closing in accordance with its terms, without Liability to the Company, DeSoto or any of their respective affiliates, except for potential funding liability arising under Section 412 of the Code and Title IV of ERISA, which as of April 24, 1992 did not exceed $600,000. (f) No payment or benefit which will or may be made by the Company or Parent, will be characterized as an "excess parachute payment" within the meaning of Section 28OG of the Code. (g) No employer securities, employer real property or other employer property is included in the assets of any Company Benefit Plan. (h) The Company does not have and, absent the Merger, will not have any Liability by reason of its being a member during the five year period preceding the Closing and ending on the Closing Date of any group of organizations described in Section 414(b), (c), (m) or (o) of the Code and regulations promulgated thereunder of which any corporation, Person or other member maintained, contributed to or has been liable to contribute to any Defined Benefit Plan or Multiemployer Plan or failed to comply with the requirements of Sections 4980B or 162(k) (prior to its repeal) of the Code. (i) Except as set forth on Schedule 2.17, the Company does not maintain or contribute to any Company Benefit Plan which provides, and does not have any Liability to provide, severance or life insurance, medical or other employee welfare benefits to any Employee (or his beneficiary) upon such Employee's retirement or termination of employment, except as may be required by Law, and the Company has never represented, promised or contracted to any Employee of the Company that such Employee would be provided with severance, life insurance, medical or other employee welfare benefits upon his retirement or termination of employment, except to the extent required by Law. The average annual potential liability of the Company under Retiree Medical Plan A and Retiree Medical Plan B, in the aggregate, for the years 1992, 1993, 1994, and 1995 will not exceed $265,000. 20 21 (j) No work stoppage or labor strike against the Company is pending or, to the knowledge of the Company, threatened. Except as set forth on Schedule 2.17, the Company is not involved in or, to the knowledge of the Company, threatened with, any labor dispute, grievance, or Claim relating to labor, safety or discrimination matters involving any Employee, including, without limitation, charges of unfair labor practices or discrimination complaints, which, if adversely determined, individually or in the aggregate, would have (or would reasonably be expected to have) a Company Material Adverse Effect. The Company has not violated any state labor Law other than violations which would not have a Company Material Adverse Effect, or engaged in any unfair labor practices within the meaning of the National Labor Relations Act. For purposes of this Section 2.17, (i) "Code" means the Internal Revenue Code of 1986, as amended, (ii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, (iii) "Plan" means any bonus, incentive compensation, deferred compensation, pension, profit sharing, retirement, stock purchase, stock option, stock ownership, stock appreciation rights, phantom stock, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health, accident, disability, workmen's compensation or other insurance, severance, separation or other employee benefit plan, practice, policy or arrangement of any kind, including, but not limited to, any "employee benefit plan" within the meaning of Section 3(3) of ERISA; (iv) "Company Benefit Plan" means any employee pension benefit plan and any material Plan (other than a multiemployer plan within the meaning of Section 3(37) of ERISA) established by the Company or to which Parent or the Company contributes or has contributed (including Plans not now maintained by the Company or to which the Company does not now contribute, but with respect to which the Company has or may have any liability); (v) "Qualified Plan" means each Company Benefit Plan intended to qualify under Section 401 of the Code; (vi) "Defined Benefit Plan" means each Company Benefit Plan which is subject to Part 3 of Title I of ERISA, Section 412 of the Code or Title IV of ERISA; and (vii) "Multiemployer Plan" means any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA. 2.18 Customers. To the Company's knowledge, except as disclosed on Schedule 2.18, since May 31, 1992, there has not been any termination, cancellation or limitation of, or any material modification or change in, the business relationships of the Company with any material customer of the Company. Subject to obtaining the consents set forth on Schedule 2.18, none of the transactions contemplated hereby will give rise to 21 22 the right of any customer of the Company to terminate, modify, cancel, prepay, suspend, limit, revoke or accelerate any arrangement it has with the Company. The Company has no knowledge of any threatened adverse change by a material customer in respect of its relationship with the Company as a result of the transactions contemplated hereby. 2.19 Environmental Matters. (a) Except as set forth on Schedule 2.19(a), (i) the Company is and has conducted its business in substantial compliance with all Laws and Permits relating to pollution, contamination, protection of the environment, human and occupational safety or health or sanitation, including matters relating to emissions, discharges, disseminations, releases or threatened releases of hazardous or toxic materials, substances or wastes into the air, surface water, groundwater, soil, land surface or subsurface, buildings or facilities or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of hazardous or toxic materials, substances or wastes ("Environmental Laws" and Environmental Permits") except where the failure to so comply, individually or in the aggregate, would not have (and would not reasonably be expected to have) a Company Material Adverse Effect and (ii) the Company has not received any notice of any failure of the Company to comply in any material respect with any Environmental Law or the requirements of any Environmental Permit or that it is or may be a potentially responsible party at any waste disposal site. The Company does not, and the Surviving Corporation will not, have actual or potential clean-up, compliance or remediation costs, Claims, damages or expenses arising out of the Company's non-compliance with the Environmental Laws or the Environmental Permits prior to the Closing Date, and the Company has no Liability in respect of waste site remediation or relating to toxic or hazardous materials, substances or wastes, except for such costs, Claims, damages, expenses and Liabilities which can in the aggregate be fully satisfied from amounts reasonably available to the Company or the Surviving Corporation after the date hereof under (I) the Environmental Provisions (as defined below), (II) additional monies which may be paid by the former owners of the Company upon any settlement of existing disputes described in Schedule 2.19(b) or, if settlement is not reached, which are paid pursuant to the Environmental Provisions, (III) after tax net proceeds of the $2,320,000 Purchase Money Note issued by 510 Ryerson Road, Inc., to the order of the Company in connection with the sale of the Company's former Lincoln Park facility or the fair market value (based on a sale in the short term) of any collateral securing such note and as to ownership of which is acquired by the Surviving Corporation or DeSoto, (IV) after tax net proceeds of the $1 million Mortgage Note 22 23 issued by Noah Realty Corp. to the Company in connection with the sale of the Company's former 27 Eighth Street facility or the fair market value (based on a sale in the short term) of any collateral securing such note and as to ownership of which is acquired by the Surviving Corporation or DeSoto, (V) any amounts recovered from the Company's insurance carriers under policies in effect prior to the Effective Time on account of costs incurred by the Company, DeSoto or the Surviving Corporation in respect of liabilities under Cleanup Plans, Environmental Laws or Environmental Permits, and (VI) any amounts recovered from the Company's former landlord at the warehouse facility at 100 Eighth Street on account of costs incurred by the Company, DeSoto or the Surviving Corporation in respect of environmental clean-up or remediation obligations, Environmental Laws or Environmental Permits (it being agreed that the amounts referred to in Items II through VI shall be measured after deducting any reasonable costs of collection, including reasonable legal costs incurred by the Company, DeSoto or the Surviving Corporation after May 31, 1992, and that, for purposes of determining amounts at the Maturity Date of the CVR (as defined therein), the value of the notes referred to in III and IV (if then outstanding) shall be determined in good faith by a majority of the Board of Directors of DeSoto at the Maturity Date) (DeSoto agrees to take reasonable action in light of its business judgment to collect amounts pursuant to the arrangements described in (I) through (VI); however, it is further agreed that DeSoto shall have no obligation to take action to recover amounts due under any of the foregoing if in good faith DeSoto concludes that its reasonable business judgment (after taking into account the expected benefits and costs of such action, without regard to the existence of the CVR and DeSoto's rights thereunder) does not justify such action, which judgment shall be conclusive). (b) Each of the arrangements for an environmental escrow fund provided by, and the Agreement to be Bound entered into by, the former owners of the Company and the letters of credit and surety bonds, all of which are referred to in Note 12 to the December 31, 1990 Audited Financial Statements, together with Article XV of that certain merger agreement pursuant to which Parent acquired the Company in 1988 (collectively, the "Environmental Provisions"), contains a valid and binding obligation of the parties thereto enforceable against them in accordance with its terms, except to the extent that such enforceability (i) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditor's rights generally and (ii) is subject to general principles of equity. The Company has taken all steps reasonably necessary to be taken to date to perfect and maintain its rights under the Environmental Provisions and 23 24 neither the execution, delivery nor performance of any of this Agreement nor the consummation of any of the transactions contemplated hereby will vitiate the Company's rights thereunder, and immediately following the Effective Time such rights will continue in full force and effect. Upon consummation of the Merger, the Surviving Corporation will be entitled to all benefits and rights of the Company under the Environmental Provisions. The Company has, pursuant to Schedule 2.19(b), disclosed certain disputes regarding the foregoing and, after the Effective Time, DeSoto agrees to be responsible for the reasonable legal expenses in connection therewith. 2.20 Affiliate Transactions. Except as set forth in Schedule 2.20 and except for employment relationships between the Company and Employees, (i) there are no Liabilities or Commitments or other arrangements between the Company and any affiliate of the Company, (ii) no affiliate of the Company provides or causes to be provided any assets, services or facilities to the Company, (iii) the Company does not provide or cause to be provided any assets, services or facilities to any affiliate of the Company except in the ordinary course of business on an arms-length basis and (iv) to the Company's knowledge, no affiliate of the Company will, on or after the Closing, have any cause of action or other claim whatsoever against, or owe any amount to, the Company, except for claims in the ordinary course of business such as for accrued salary, bonus, commissions, and vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements existing on the date hereof which have been disclosed to DeSoto in the other Schedules hereto. Except as set forth on Schedule 2.20, there are no consulting, employment, fee or other compensation arrangements with any directors or affiliates of the Company who are not current full-time employees of the Company. 2.21 Expenses; Brokers and Finders. Except as set forth in the first sentence of Section 7.10, all expenses incurred by Parent or the Company in connection with this Agreement and the Merger are to be the responsibility of and borne by Parent. The Company has not employed any broker or finder or incurred any Liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby or any other transaction relating to a sale or recapitalization of the Company for which adequate reserves are not reflected on the May 31, 1992 Unaudited Balance Sheet. 2.22 Illinois Responsible Property Transfer Act. Either the Illinois Responsible Property Transfer Act, S.H.A. 24 25 ch. 30, Sections 901-07 (the "Illinois Act") does not apply to this Agreement or any of the transactions contemplated hereby or, to the extent the Illinois Act does or may be deemed to so apply, the Company has executed and delivered to DeSoto such disclosure documents as may be required by the Illinois Act. 2.23 Accuracy of Information: Full Disclosure. All documents delivered to DeSoto by or on behalf of the Company in connection with this agreement are complete and authentic in all material respects. No representation or warranty of the Company contained in this Agreement or in any Schedule hereto or in any certificate or related document delivered to DeSoto or any of its affiliates pursuant hereto or in connection herewith contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements made, in the context in which made, not materially false or misleading. The senior management of the Company has no knowledge of any fact that has not been disclosed to DeSoto that has (or would reasonably be expected to have) a Company Material Adverse Effect, or that would reasonably be expected to impair the ability of the Company to perform this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF DESOTO AND NEWCO Each of DeSoto and Newco represents and warrants to the Company as follows: 3.01 Organization. Each of DeSoto and Newco is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as it is now being conducted and to own, use and lease its assets and properties. Each of DeSoto and Newco is duly qualified and licensed as a foreign corporation to do business, and is in good standing (and has paid all relevant franchise or analogous taxes due prior to the date hereof), in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified or in good standing, individually or in the aggregate, would not have (and would not reasonably be expected to have) a material adverse effect on the business, financial condition, assets, liabilities, properties or results of operations of DeSoto and its subsidiaries taken as a whole (a "DeSoto material Adverse Effect"). True and complete copies of the Certificate of Incorporation and By-laws of each of DeSoto and Newco have previously been delivered to Parent. 25 26 3.02 Authority Relative to This Agreement; Required Vote. Each of DeSoto and Newco has all requisite corporate power to enter into this Agreement and to issue the CVRs and to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and the CVRs and the consummation of the transactions contemplated hereby have been duly approved and authorized by the respective Boards of Directors of DeSoto and Newco and by DeSoto as the sole shareholder of Newco, and no other corporate proceedings on the part of DeSoto or Newco are necessary to approve or authorize this Agreement, the issuance of the consideration provided in Section 1.07(a) or any of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of DeSoto and Newco and constitutes a valid and binding obligation of each of DeSoto and Newco, enforceable against each of them in accordance with its terms, and the CVRS, when issued, will have been duly and validly executed and delivered by DeSoto and will constitute a valid and binding obligation of it, enforceable against DeSoto in accordance with their terms, except that such enforceability, in each case, (i) may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) is subject to general principles of equity. 3.03 Capitalization. The authorized capital stock of DeSoto consists of 20,000,000 shares of DeSoto Common Stock and 5,000,000 shares of preferred stock, par value $1 per share ("Preferred Stock"). As of the date hereof, 4,070,932 shares of DeSoto Common Stock are issued and outstanding, all of which are validly issued, fully paid and nonassessable and free of preemptive rights. DeSoto has entered into an agreement providing for the issuance of up to 583,333 shares of Series B Senior Preferred Stock and warrants ("Warrants") to purchase an aggregate of 1,350,000 shares of DeSoto Common Stock at a price of $7.00 per share (or, under certain circumstances, shares of Senior C Junior Participating Preferred Stock at a price of $6.50 per share), of which a portion of such securities have been issued in accordance with such agreement. A stock option and restricted stock plan was approved by DeSoto stockholders at the annual meeting of stockholders held on May 27, 1992 authorizing the issuance of up to 400,000 shares of DeSoto Common Stock in respect of options and stock awards granted by DeSoto pursuant to the plan and options to purchase 18,000 shares of DeSoto Common Stock have been issued to non-employee directors in accordance with the terms of the plan and, pursuant to the employment agreements referred to in Section 5.01(b) hereof, DeSoto has committed to grant options. All of the outstanding shares of 26 27 capital stock of Newco are owned by DeSoto, are validly issued, fully paid and nonassessable, and are owned free and clear of any Encumbrance or any preemptive rights. Except as set forth above in this Section 3.03 or in Section 3.04, there are no shares of capital stock of DeSoto authorized, issued or outstanding or reserved for issuance, and there are no outstanding subscriptions, options, warrants, rights, contingent value rights, stock-based or stock-related awards or convertible or exchangeable securities or other agreements or commitments to which DeSoto or Newco is a party or by which DeSoto or Newco may be bound of any character relating to, or obligating DeSoto or Newco to sell, issue, grant, award, transfer or otherwise dispose of, or to redeem, repurchase or otherwise acquire, any shares of capital stock or other securities of DeSoto (including, without limitation, any agreement or commitment obligating DeSoto to enter into any employee compensation arrangement based on any valuation or transaction price of, or change of majority ownership in, shares of DeSoto Common Stock), other than (i) this Agreement, (ii) the employment agreements referred to in Section 5.01(b) and (iii) Preferred Share Purchase Rights associated with the DeSoto Common Stock. There are no voting trusts, proxies or other agreements or understandings to which DeSoto or Newco is a party with respect to the voting of capital stock of Desoto. 3.04 DeSoto Common Stock. The shares of DeSoto Common Stock to be issued at the Effective Time in payment of the consideration provided in Section 1.07, and any shares of DeSoto Common Stock issued pursuant to the CVRs, will, in each case upon their issuance, be duly and validly issued, fully paid and nonassessable, will vest in the recipients thereof valid title to such DeSoto Common Stock free and clear of all Encumbrances (other than those Encumbrances created by any such recipients) and will not be issued in violation of any preemptive rights. A sufficient number of shares of DeSoto Common Stock have been reserved for the issuance contemplated by clause (a)(i) of Section 1.07. 3.05 SEC Filings. DeSoto has delivered to Parent (i) DeSoto's annual reports on Form 10-K for each of the fiscal years ended December 31, 1988, 1989, 1990 and 1991 (the "10-K's"), (ii) its quarterly reports on Form 10-Q for each of its fiscal quarters ended on or after December 31, 1988 (the "10-Q's"), (iii) its proxy or information statements relating to meetings of DeSoto's stockholders since December 31, 1988, and (iv) all of its other reports, statements, schedules and registration statements and other filings required under the Securities Act or the Exchange Act (as such terms are defined below), to be filed with the Securities and Exchange Commission ("SEC") since December 31, 1990 (the filings referred to in 27 28 clauses (i) through (iv) above, which have been delivered to Parent on or prior to the date hereof, being hereinafter referred to as the "SEC Filings"). DeSoto has filed with the SEC all reports, statements and other filings required of it under the Securities Act and the Exchange Act since December 31, 1990, except where the failure to do so does not have (and would not reasonably be expected to have) a DeSoto Material Adverse Effect. As of its filing date, each SEC Filing complied as to form in all material respects with the requirements of the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "Securities Act"), or the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange Act"), as applicable, and did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. 3.06 Financial Statements. (a) The audited financial statements of DeSoto included in each of the 10-K's, and the unaudited financial statements of DeSoto included in each of the 10-Q's, fairly present, in each case, in all material respects, in conformity with GAAP applied on a consistent basis (except as may be indicated in the notes thereto), the financial position of DeSoto as of the dates thereof and its results of operations and cash flows for the periods then ended, except that each such unaudited financial statement is or was subject to normal year-end adjustments which would not have a DeSoto Material Adverse Effect. (b) DeSoto has provided to the Company its most recent forecasts and projections of DeSoto's operations, financial condition and financial performance. All forecasts and projections of DeSoto's operations, financial condition and financial performance provided by DeSoto to the Company were at the time prepared believed by DeSoto senior management to be reasonable and are the same forecasts and projections as were then being used in DeSoto's internal business plans and budgets at the time provided to the Company. 3.07 Absence of Certain Changes. Except as permitted or contemplated by this Agreement, since December 31, 1991, neither DeSoto nor Newco has (i) suffered any change, event or series of changes or events which has or would reasonably be expected to have a DeSoto Material Adverse Effect, whether or not covered by insurance or (ii) incurred or discharged any Liability or entered into any transaction except in the ordinary course of business and except for Liabilities and transactions that, individually or in the aggregate, do not have (and would not reasonably be expected to have) a DeSoto Material Adverse Effect. 28 29 3.08 Compliance with Laws; Permits. Each of DeSoto and Newco is in compliance with all Laws applicable to its business or properties and all Permits from all Governmental Entities required for the conduct Of its business presently conducted and the ownership, lease or operation of its properties, except where noncompliance, individually or in the aggregate, does not have (and would not reasonably be expected to have) a DeSoto Material Adverse Effect. DeSoto has all such Permits, and all such Permits are in full force and effect, except where the absence thereof, individually or in the aggregate, does not result (and would not reasonably be expected to result) in a DeSoto Material Adverse Effect. Except as set forth in the SEC Filings, DeSoto has not received any notice of any alleged violations of Law applicable to DeSoto which if determined adversely, individually or in the aggregate, would have (or would reasonably be expected to have) a DeSoto Material Adverse Effect. 3.09 Title to Assets. Each of DeSoto and Newco has good, marketable (and, in the case of owned real property, insurable) title to all of the assets and properties which it purports to own (including those reflected on the balance sheet as of December 31, 1991 included in the 10-K for the year then ended (the "1991 10-K"), except for assets and properties sold, consumed or otherwise disposed of in the ordinary course of business consistent with past practice since December 31, 1991) and which are material to the business, financial condition, assets or results of operations of DeSoto and its subsidiaries taken as a whole, free and clear of Encumbrances, except (a) Encumbrances reflected in the balance sheet as of December 31, 1991 included in the 1991 10-K; (b) properties subject to purchase or sales orders or conditional sale arrangements entered into in the ordinary course of business consistent with past practice; (c) Encumbrances securing taxes not yet due or being contested in good faith by appropriate proceedings; and (d) Encumbrances which do not, individually or in the aggregate, materially detract from the value of such property, materially interfere with the use, occupancy or operation of such property as currently used or otherwise materially impair the business operations of DeSoto or Newco or have a DeSoto Material Adverse Effect. 3.10 Consents; No Violation. (a) Assuming the accuracy of the representations and warranties contained in Section 2.08, no consent, approval or authorization of, notification to, filing with, or exemption or waiver by, any Governmental Entity, is required on the part of DeSoto or Newco in connection with the execution, delivery and performance by DeSoto or Newco of this Agreement or the CVR, other than (i) pursuant to the Exchange Act, (ii) in connection with the 29 30 Company's application for the ECRA ACO, (iii) the filing of a Certificate of Merger in accordance with the BCA, (iv) as required by self regulatory organizations relating to the securities of DeSoto and (v) consents, approvals, authorizations, notifications, filings, exemptions or waivers which, if not obtained or made would not, singly or in the aggregate, have a DeSoto Material Adverse Effect or materially adversely affect the ability of DeSoto or Newco to consummate any of the transactions contemplated hereby. (b) Neither the execution, delivery or performance of this Agreement or the CVR by DeSoto or Newco nor the consummation of any of the transactions contemplated hereby will at the Effective Time (x) conflict with, or result in any breach or violation of, any provision of the Certificate of Incorporation or the by-laws of DeSoto or Newco; (y) assuming compliance with the matters referred to in Section 3.10(a), constitute, with or without the passage of time or the giving of notice, or both, a breach, violation or default, create a lien, or give rise to any contingencies, liquidated damages, penalties or rights of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration, under (i) any Law or Permit, or (ii) any note, bond, mortgage, indenture, lease, agreement or other instrument of DeSoto or Newco, or to which they or any of them or any of their properties is subject, except, with respect to the matters set forth in clause (ii), for breaches, violations, defaults, liens, or contingencies, liquidated damages, penalties or rights of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration which would not, singly or in the aggregate, have a DeSoto Material Adverse Effect or materially adversely affect the ability of DeSoto or Newco to consummate any of the transactions contemplated hereby, except that performance by DeSoto of this Agreement and the CVR and the arrangements providing for the Bank Debt Restructuring is not currently permitted by the Credit Agreement, dated as of February 6, 1991 (the "DeSoto Credit Agreement"), among DeSoto, Harris Trust and Savings Bank, Continental Bank N.A. and Old Kent Bank -- Chicago and, in any event, DeSoto will seek to refinance or amend the DeSoto Credit Agreement in connection with the Financing (as defined in Section 5.02(b)). 3.11 Brokers and Finders. DeSoto and Newco have not employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated hereby. 3.12 Newco. Newco is a newly-formed Delaware corporation and has nominal assets. Newco has had no business 30 31 operations since it was organized other than in connection with the transactions contemplated hereby. 3.13 Material Customers. To DeSoto's knowledge, the 1991 10-K accurately reflects the status of DeSoto's business relationships with its material customers and there have been no material adverse changes in such business relationships since the date of the 1991 10-K. 3.14 Environmental. Except as set forth in the 1991 10-K, as of the date hereof DeSoto is not subject to any Liabilities (including clean-up, compliance or remediation costs, Claims, damages or expenses) in respect of Environmental Laws or Environmental Permits other than such Liabilities which, singly or in the aggregate do not have (and would not reasonably be expected to have) a DeSoto Material Adverse Effect. Except as set forth in the 1991 10-K, DeSoto is and has conducted its business in substantial compliance with all Environmental Laws and Environmental Permits except where the failure to so comply, individually or in the aggregate, would not have (and would not reasonably be expected to have) a DeSoto Material Adverse Effect. 3.15 Litigation. Except as set forth in the 1991 10-K (including the settlement described in Item 3(i) thereof), the recently filed product warranty action previously described to the Company, and for matters which are covered by insurance, there is no Litigation pending or, to DeSoto's knowledge, threatened against, affecting or involving DeSoto or any of its rights or properties which would reasonably be expected to have a DeSoto Material Adverse Effect. 3.16 Pension Plans. As of December 31, 1991, the approximate fair market value of the combined assets of the DeSoto Hourly Employees' Pension Plan and the DeSoto Salaried Employees' Pension Plan (the "DeSoto Plans") exceeded combined projected benefit obligations by $66,977,000, the projected benefit obligations having been calculated in accordance with FASB Statement 87 using an 8.5% weighted average discount rate. The material terms of the settlement described in Item 3, paragraph (i) to the 1991 10-K have been accurately disclosed therein and the consequences of which have been previously described to the Company. Since December 31, 1991 there has not been a material decrease in the amount by which the approximate fair market value of the combined assets of the DeSoto Plans exceeds combined projected benefit obligations (after taking into account the effect of such settlement). There is no provision in the DeSoto Plans or in any legally binding documents (other than the DeSoto Credit Agreement, which requires DeSoto to apply all or a portion of 31 32 distributable excess assets in the repayment of indebtedness thereunder) to which DeSoto is a party which, under existing facts or circumstances, would prevent DeSoto from terminating the DeSoto Plans and recovering any excess assets after reserves necessary to satisfy benefit liabilities after termination and payment of required taxes. Except for the Litigation disclosed in the 1991 10-K and the settlement described therein, there is no Order which has, or Litigation pending (or, to DeSoto's knowledge, threatened) which would reasonably be expected to have, a material adverse effect on the DeSoto Plans or their assets. ARTICLE IV COVENANTS 4.01 Filings, Consents and Arrangements. DeSoto, Newco and the Company shall (a) use their best efforts to make promptly any submissions, notifications or filings under the HSR Act which the Company or DeSoto determines should be made, in each case, with respect to this Agreement and the transactions contemplated hereby and (b) cooperate with each other and use (i) their best efforts in promptly determining whether any other submissions, notifications or filings are required to be or should be made or whether any consents, approvals, permits, authorizations, exemptions or waivers are required to be or should be obtained under any other Law (including ECRA) or from other parties to Commitments material to the Company's business in connection with the consummation of any of the transactions contemplated hereby and (ii) their reasonable efforts in promptly making any such submissions, notifications or filings, furnishing information required in connection therewith and seeking timely to obtain any such consents, approvals, permits, authorizations, exemptions or waivers. 4.02 Best Efforts; Further Assurances. Subject to the terms and conditions in this Agreement, each of the parties hereto shall use its best efforts to take promptly, or cause to be taken, all actions and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective the transactions contemplated hereby (it being agreed that from and after the Closing, in the event the Secretary of State of the State of New Jersey shall not have accepted and declared effective the Certificate of Merger filed pursuant to Section 1.03, each of DeSoto and Newco shall have full power and authority to execute, in the name and on behalf of the Company, any and all amendments to such Certificate of Merger that are consistent with the terms of the 32 33 Merger and this Agreement and necessary for it to be so accepted and declared effective). Each of the parties hereto shall provide all reasonable assistance to, and shall cooperate with, each other to bring about the consummation of the Merger in accordance with the terms and conditions of this Agreement. Notwithstanding the foregoing, nothing herein shall impose upon DeSoto any obligation to accept terms of the Financing which are not acceptable to it in its sole discretion. At any time or from time to time after the Effective Time, the parties hereto, at the request of any other and at such other party's expense, shall execute and deliver any further instruments or documents and take all such further action as such other may reasonably request in order to evidence the consummation of the transactions contemplated hereby. 4.03 Notice. (a) Each party shall give prompt written notice to each of the other parties hereto of (i) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty of such party contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date hereof to the Effective Time or that will or would be likely to result in the failure to satisfy any of the conditions specified in Article V, and (ii) any failure of such party to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder. (b) From time to time after the date hereof and prior to the Effective Time, DeSoto shall provide all information reasonably requested by the Company, relating to the Financing and the negotiations with respect thereto. 4.04 No Solicitation of Transactions. The Company will not, and each will cause its employees, representatives, investment bankers, consultants, advisors, agents or affiliates not to, directly or indirectly, (a) initiate contact with, solicit or encourage submission of any inquiries, proposals or offers by, or (b) participate in any discussions or negotiations with, or disclose any information concerning the Company to, or afford any access to the properties, books or records of the Company to, or otherwise assist, facilitate or encourage, any Person (other than DeSoto, Newco, their respective employees, consultants, affiliates, agents and representatives and those of DeSoto's and the Company's lenders in connection with the transactions contemplated hereby) in connection with any possible proposal (an "Acquisition Proposal") regarding a sale or acquisition of any of the capital stock or any other equity interest in the Company, or a merger, consolidation or business combination involving the 33 34 Company, or the liquidation or reorganization of the Company, or a sale of all or (other than in the ordinary course of business consistent with past practice) any portion of the assets of the Company or any similar transaction. The Company hereby represents that as of the date hereof it has ceased any and all existing activities, discussions or negotiations with any parties (other than DeSoto and Newco and the Company's lenders in connection with the transactions contemplated hereby) conducted heretofore with respect to any of the foregoing. The Company will (i) notify DeSoto immediately if any inquiry or proposal is made or any such information or access is requested in connection with an Acquisition Proposal or potential Acquisition Proposal and (ii) immediately communicate to DeSoto the terms and conditions of any such Acquisition Proposal or potential Acquisition Proposal or inquiry and the identity of the offeror or potential offeror. 4.05 Conduct of Business. (a) Except as may be otherwise contemplated by this Agreement or required by any preexisting Commitment or except as DeSoto may otherwise consent to in writing (and subject to the provisions of paragraph (b) of this Section 4.05 which if inconsistent with this paragraph (a) shall supersede this paragraph (a)), from the date hereof and prior to the Closing, the Company shall, with no less diligence and effort than would be applied in the absence of this Agreement, (i) in all material respects, operate its business only in the ordinary course of business; (ii) use its reasonable efforts to preserve intact its business organization; (iii) maintain its properties, machinery and equipment in sufficient operating condition and repair to enable it to operate its business in all material respects in the manner in which its business is currently operated, except for maintenance required by reason of fire, flood, earthquake or other acts of God and except that the Company shall have no obligation to make capital expenditures other than as described on Schedule 4.05(a); (iv) continue all its material existing insurance policies (or comparable insurance) in full force and effect; (v) use its reasonable efforts to keep available until the Closing the services of its present Employees and agents (as a group) and notify DeSoto promptly of all terminations known to the Company whether pending, threatened or effective, of any such officers or key employees; and (vi) use its reasonable efforts to preserve its relationship with its material suppliers, customers, licensors and licensees and others having material business dealings with the Company such that its business will not be materially impaired. (b) Without limiting the generality of the foregoing, and except as may be otherwise contemplated by this Agreement or required by any pre-existing Commitment or except 34 35 as DeSoto may otherwise consent to in writing, from the date hereof and prior to the Closing, the Company shall not (i) issue, deliver, sell, dispose of, pledge or otherwise encumber, or authorize the issuance, sale, disposition or pledge or other Encumbrance of, any additional shares of capital stock of any class, (ii) redeem, purchase or otherwise acquire any of its outstanding securities, (iii) split, combine, subdivide or reclassify any shares of its capital stock or declare, set aside for payment or pay any dividend, or make any other actual, constructive or deemed distribution in respect of any shares of its capital stock, (iv) grant any increases in the compensation of any of its Employees, except in the ordinary course of business in accordance with its customary practices, (v) pay any pension, retirement allowance or other employee benefit in excess of $10,000 which is not required or contemplated by any of the existing Company Benefit Plans, (vi) enter into any new or amend any existing employment or severance agreement with any officer or director of the Company or any Employee whose base annual compensation from the Company is $50,000 or greater (other than in accordance with a letter from the Company dated July 17, 1992 delivered to DeSoto prior to the date hereof), (vii) become obligated under a new pension plan, welfare plan, multiemployer plan, severance plan, material benefit arrangement, or similar material plan or arrangement which was not in existence on the date hereof or materially amend any such existing plan or arrangement, (viii) except as set forth on Schedule 4.05(b), adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company, (ix) except as set forth on Schedule 4.05(b), make any acquisition or disposition of assets or securities outside the ordinary course of business, (x) adopt any amendments to its certificate of incorporation or by-laws or alter its corporate structure, (xi) incur any new indebtedness for borrowed money or newly guarantee any such indebtedness except for the endorsement of checks in the ordinary course of business, and not amend, breach or circumvent the Company's agreement as of the date hereof with the banks (being Fleet National Bank, Barclays Bank PLC and The Bank of Nova Scotia) under the Prescott Credit Agreement providing for the Bank Debt Restructuring or to make any payments (other than payments in respect of reasonable fees and expenses of counsel to the banks required to be paid by the Company and extension fees, if any, payable by the Company pursuant to such agreement providing for the Bank Debt Restructuring) to such banks except to the extent such payments reduce on a dollar-for-dollar basis any obligation to repay bank debt upon consummation of the Merger as contemplated by the Bank Debt Restructuring, (xii) make any change in any method of accounting or accounting practice other than as required by Law or GAAP, including the method of determining reserves, increase or decrease reserves or write off or write 35 36 down any asset or properties of the Company, (xiii) fail to maintain normal current assets consistent with operating the business of the Company in the ordinary course of business, (xiv) defer the payment of accounts payable, accelerate the collection of accounts receivable or fail to replenish inventory, except, in each case, in the ordinary course of business (it being acknowledged and agreed that DeSoto shall not unreasonably withhold its consent with respect to matters subject of this clause), (xv) except as set forth on Schedule 4.05(b), make any capital expenditures or commitments for additions to plant, property or equipment constituting capital assets in an aggregate amount exceeding $25,000 (it being acknowledged and agreed that DeSoto shall not unreasonably withhold its consent with respect to matters subject of this clause), (xvi) except as set forth on Schedule 4.05(b), make any tax election or settle or compromise any liability for Taxes either not in accordance with prior practice or which would have or would reasonably be expected to have a Company Material Adverse Effect, (xvii) take or permit any action which would make any representation or warranty of the Company herein untrue or incorrect in any material respect, (xviii) authorize by corporate action, or publicly announce an intention to do, any of the foregoing, or enter into any legally binding Commitment to do any of the foregoing. (c) In connection with the continuing operation of the business of the Company between the date of this Agreement and the Effective Time, the Company shall use all reasonable best efforts to consult in good faith on a regular and frequent basis with representatives of DeSoto to report material operational developments and the general status of ongoing operations. The Company acknowledges that any such consultation shall not constitute a waiver by DeSoto of any rights it may have under this Agreement and that DeSoto shall have no liability or responsibility for any actions of the Company or any of its respective Employees with respect to matters which are the subject of such consultations. (d) From the date hereof until the Effective Time, DeSoto (i) shall not declare, set aside for payment or pay any dividend or distribution, or make any other actual, constructive or deemed distribution, with respect to DeSoto Common Stock nor shall it redeem, repurchase or otherwise acquire any shares of DeSoto Common Stock (it being acknowledged and agreed, however, that DeSoto may redeem the Preferred Share Purchase Rights associated with the DeSoto Common Stock if the Board of Directors of DeSoto in the exercise of its fiduciary duties determines it is necessary or an Order require it or the DeSoto Board of Directors to do so) and (ii) shall not acquire any new businesses or operations 36 37 (whether by the purchase of assets or stock), other than in connection with one possible transaction previously discussed with representatives of Parent. 4.06 Access and Information. (a) From the date hereof until the Effective Time, the Company shall, and shall cause its officers, directors, employees and agents to, afford to DeSoto and its officers, directors, employees, counsel, accountants, advisors, representatives, consultants and agents and those of DeSoto's lenders full access to the officers, employees, agents, properties, offices and other facilities, and to the books, records (including, without limitation, tax returns and work papers of the Company's independent auditors) and Commitments of the Company, and shall furnish DeSoto and such others all financial, operating, technical and other data and information which DeSoto or its lenders, through their respective officers, employees or agents, may from time to time reasonably request. The Company shall permit DeSoto's consultants to engage in such activities, including drilling or other sampling techniques, at DeSoto's sole expense, on its properties as are reasonably necessary in connection with an "environmental audit" so long as they do not unreasonably interfere with the normal business operations of the Company and such properties are restored to the reasonable satisfaction of the Company. The Company will use its reasonable efforts to obtain access to three New Jersey properties which the Company no longer owns in order for DeSoto and its representatives to conduct a "walk through" or "Phase 1" environmental review of such properties. DeSoto and Newco will treat, and will cause their sources of financing and their respective accountants, counsel and other representatives and Persons described in the first sentence of this paragraph to treat, confidentially all non-public information, whether written or oral, concerning the Company furnished to DeSoto or Newco in connection with the transactions contemplated by this Agreement and not disclose such information to any other Person without the Company's prior written consent, subject to the requirements of Law and the provisions of this Agreement, and upon termination of this Agreement and the Company's written request, DeSoto shall deliver to the Company or destroy all such information in written or tangible form without retaining any copies, summaries, analyses or extracts thereof. (b) From the date hereof until the Effective Time, DeSoto shall, and shall cause its officers, directors, employees and agents to, afford to the Company and its officers, directors, employees, counsel, accountants, advisors, representatives, consultants and agents full access to the officers, employees, agents, properties, offices and other facilities, and to the books, records (including, without 37 38 limitation, tax returns and work papers of DeSoto's independent auditors) and Commitments of DeSoto, and shall furnish the Company and such others all financial, operating, technical and other data and information which the Company, through its officers, employees or agents, may from time to time reasonably request. The Company will treat, and will cause its accountants, counsel and other representatives and Persons described in the foregoing sentence to treat, confidentially all non-public information, whether written or oral, concerning DeSoto furnished to the Company in connection with the transactions contemplated by this Agreement and not disclose such information to any other Person without DeSoto's prior written consent, subject to the requirements of Law and the provisions of this Agreement, and upon termination of this Agreement and DeSoto's written request, the Company shall deliver to DeSoto or destroy all such information in written or tangible form without retaining any copies, summaries, analyses or extracts thereof. 4.07 Termination of Affiliate Relationships. At the Closing, the Company will terminate any existing agreement with any affiliate thereof (other than (i) those entered into as part of or arising out of an employment or former employment relationship with the Company on an arms'-length basis, (ii) agreements with DeSoto or any affiliate of DeSoto and (iii) as otherwise set forth in Schedule 4.07), without liability of either party to the other. ARTICLE V CONDITIONS 5.01 Conditions to the Obligations of all Parties. The obligations of the parties hereto to consummate the Merger shall be subject to the satisfaction (or waiver by each of the parties hereto) at or prior to the Effective Time of each of the following conditions: (a) No statute, rule or regulation, order or injunction of any Governmental Entity shall be in effect which prohibits any party hereto from consummating the transactions contemplated hereby, or which makes the consummation of the transactions contemplated hereby illegal or otherwise materially restricts or prohibits consummation of the Merger. (b) The employment agreements between DeSoto and each of the individuals listed on Schedule 5.01(b) (as they may be amended by the parties thereto through the Closing Date) shall be in full force and effect. 38 39 (c) The Company shall have received the ECRA ACO's in form and substance reasonably satisfactory to DeSoto and the Company. (d) The Bank Debt Restructuring shall have been consummated in accordance with the terms thereof and in connection therewith the Company's outstanding indebtedness under the Prescott Credit Agreement shall have been reduced to an aggregate amount not exceeding $10,000,000, which amount shall be payable immediately following effectiveness of the merger (and the $250,000 letter of credit from one of Prescott's banks in favor of a surety in connection with ECRA shall have been cancelled and returned to such bank). (e) The Company shall have obtained the consent to the Merger from the surety bonding the Company's undertakings to the New Jersey Department of Environmental Protection and Energy ("NJDEPE"), the material terms of which surety bond are set forth on Schedule 5.01(e), and DeSoto shall have replaced such surety bond with a bond, letter of credit or similar instrument acceptable to NJDEPE (or, alternatively, DeSoto shall have delivered a back-up bond, letter of credit similar investment acceptable to such surety). (f) The Company shall have obtained the consent of the third party specified in Schedule 5.01(f) to the assignment to, and the assumption by, the Surviving Corporation of the contract referred to in such Schedule, if such consent is necessary to effect such assignment and assumption. 5.02 Conditions to the Obligations of DeSoto and Newco. The obligations of DeSoto and Newco to consummate the Merger shall be subject to the satisfaction (or waiver by DeSoto and Newco) at or prior to the Effective Time of each of the following conditions: (a) The Company shall have complied in all material respects with each of its agreements and covenants contained herein to be performed at or prior to the Effective Time, and each of the representations and warranties of the Company contained herein shall be true in all material respects on the date hereof, and as of the Effective Time shall be true in all material respects with the same effect as though made on and as of the Effective Time, except to the extent that such representations and warranties were made as of a specified date and as to such representations and warranties the same shall continue on the Effective Time to have been true in all material respects as of the specified date. DeSoto shall have received a certificate of the Company, dated as of the Closing Date and signed by an officer of the Company certifying as to the fulfillment of the condition set forth in this Section 5.02(a). 39 40 (b) The proceeds of financing, on terms satisfactory to DeSoto in its sole discretion and in an aggregate amount which, when added to the cash and cash equivalents held by DeSoto and the Company at the Effective Time, will be in an aggregate principal amount sufficient to satisfy the approximate sum of (x) the repayment of the Company's indebtedness to banks, other financial institutions, lenders and factors (as such indebtedness may be then reduced by the Bank Debt Restructuring), (y) the working capital needs of DeSoto and the Surviving Corporation on a combined basis (including the refinancing of the DeSoto Credit Agreement) and (z) all fees and expenses incurred in connection with, and the refinancing of any indebtedness which may be accelerated by, the transactions contemplated hereby and by the Bank Debt Restructuring (the "Financing"), shall have been received by DeSoto or the Surviving Corporation in cash or immediately available funds or all conditions to the drawdown of funds under definitive arrangements providing for the Financing shall have been satisfied or waived. (c) Certificates representing all Shares issued and outstanding immediately prior to the Effective Time shall have been delivered to DeSoto, duly endorsed in blank for transfer or accompanied by duly executed stock powers assigning all such Shares in blank (it being agreed that the holders of such Shares immediately prior to the Effective Time shall bear the cost of any documentary or stamp taxes payable in respect of the transactions contemplated hereby). (d) Except as set forth on Schedule 5.02(d), each current or former employee of Parent and each Employee shall have repaid all promissory notes payable by or on behalf of him to the Company, and he shall have repaid any additional amounts owed to the Company in respect of advances or draws taken by him to the extent they exceed the amount of his accrued salary and bonuses and reasonable travel and entertainment expenses incurred in the ordinary course of business, calculated as of the Closing Date. (e) There shall not have been any action threatened or taken, or any statute, rule, regulation, order, decree or judgment promulgated, enacted, entered, enforced or deemed applicable, by any Governmental Entity that seeks (i) to require the divestiture by DeSoto or the Company or any of their respective affiliates of any business, assets or property of the Company or to impose any material limitation on the ability of any of them to conduct their respective businesses and own such business, assets or properties or (ii) to impose any material limitations on the ability of DeSoto or any of its affiliates effectively to control in any respect the business or operations of the Company or DeSoto or any of its affiliates. 40 41 (f) DeSoto shall have received evidence reasonably satisfactory to it to the effect that (1) the subordinated note of the Company referred to in note 5 to the December 31, 1990 Audited Financial Statements shall have been contributed to the capital of the Company and (2) there shall not exist any indebtedness of the Company to any beneficial owner of stock of the Company. (g) The Company shall have obtained, and evidenced reasonably satisfactorily to DeSoto, each of the consents set forth on Schedule 2.18. 5.03 Conditions to the Obligations of the Company. The obligations of the Company to consummate the Merger shall be subject to the satisfaction (or waiver by the Company) at or prior to the Effective Time of each of the following conditions: (a) Each of DeSoto and Newco shall have complied in all material respects with each of its agreements and covenants contained herein to be performed at or prior to the Effective Time, and each of the representations and warranties of each of DeSoto and Newco contained herein shall be true in all material respects on the date hereof, and as of the Effective Time shall be true in all material respects with the same effect as though made on and as of the Effective Time, except to the extent that such representations and warranties were made as of a specified date and as to such representations and warranties the same shall continue on the Effective Time to have been true in all material respects as of the specified date. The Company shall have received a certificate of each DeSoto and Newco, dated as of the Closing Date and signed by an officer of DeSoto or Newco, as applicable, certifying as to the fulfillment of the condition set forth in this Section 5.03(a). (b) Certificates representing the consideration provided in Section 1.07(a) (other than Preferred Share Purchase Rights, unless they are generally held in certificated form by the holders of DeSoto Common Stock on the Closing Date) shall have been delivered. ARTICLE VI TERMINATION PRIOR TO THE EFFECTIVE TIME 6.01 Termination. This Agreement may be terminated and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time: 41 42 (a) By mutual written consent duly authorized by the respective Boards of Directors of the parties hereto; (b) By either DeSoto or the Company, in writing, without liability to the terminating party on account of such termination (provided the terminating party is not otherwise in default or in breach of this Agreement), if the Merger shall not have been consummated within 60 days after the. date of this Agreement (the "Initial Termination Date"), provided that the Initial Termination Date shall automatically be extended to 90 days after the date of this Agreement if on the Initial Termination Date the condition set forth in Sections 5.01(c), 5.01(e) or 5.02(b) has not been satisfied or waived and DeSoto is not in default or breach of this Agreement and is otherwise pursuing the Merger in good faith; (c) By either DeSoto or the Company, if the consummation of the Merger shall be prohibited by any order, decree or injunction of any Governmental Entity; (d) By DeSoto within 30 days after the date hereof, if DeSoto is not satisfied in its sole discretion with the results of its due diligence investigation of Parent and the Company, including meetings with officers of Parent and the Company (it being understood that such due diligence investigation shall not affect the condition set forth in Section 5.02(a) nor shall it or any prior due diligence investigation lessen any reduction in any amount payable under the CVRs for breach of any representations, warranties, covenants or agreements of the Company in this Agreement); (e) By the Company (provided it is not otherwise in default or breach of this Agreement), if any of the conditions specified in Sections 5.01 and 5.03 has not been met or waived by the Company at such time as such condition can no longer be satisfied; (f) By DeSoto or Newco (provided it is not otherwise in default or breach of this Agreement), if any of the conditions specified in Sections 5.01 and 5.02 has not been met or waived by DeSoto or Newco at such time as such condition can no longer be satisfied; (g) By the Company, if the average of the daily closing sale price per share of DeSoto Common Stock as reported in The Wall Street Journal for any ten consecutive trading days after the date hereof shall be less than $4.00; provided that the termination of this Agreement pursuant to this Section 6.01(g) shall only be available for the three business days immediately following any such ten consecutive trading days; 42 43 (h) By the Company, if DeSoto shall not have delivered to the Company within 30 days of the date hereof a written non-binding proposal with respect to the Financing from such sources of credit as DeSoto may in its sole discretion solicit accompanied by a letter from DeSoto stating that DeSoto believes such proposal provides the basis for a reasonable expectation that the Financing will be available on terms acceptable to DeSoto; or (i) By DeSoto or the Company if the banks under the Prescott Credit Agreement shall have repudiated, withdrawn or terminated or breached in a material respect the agreement as of the date hereof providing for the Bank Debt Restructuring or such agreement shall otherwise have terminated prior to consummation of the Bank Debt Restructuring, or any of such banks shall have commenced any Litigation or other action or steps to pursue contractual or other remedies in respect of any default under the Prescott Credit Agreement. 6.02 Effect on Obligations. Termination of this Agreement pursuant to this Article VI shall terminate all obligations of the parties hereunder, except for the obligations under the last sentence of Section 4.06(a) and the last sentence of Section 4.06(b); Provided, however, that termination pursuant to Section 6.01 (b), (e) or (f) shall not relieve the defaulting or breaching party from any liability to any other party hereto. ARTICLE VII MISCELLANEOUS 7.01 Survival. The representations and warranties made by the Company herein and in any certificate or other writing delivered pursuant hereto and the covenants and agreements made by the Company in Section 4.05 shall survive until the Maturity Date (as defined in the CVRs); Provided, however, that the representations and warranties made by the Company in Section 2.15 shall survive until the expiration of the applicable statutes of limitation. The other representations and warranties and the covenants and agreements contained herein shall not survive the Effective Time, except for those covenants and agreements contained in Article I, the covenants contained in the last parenthetical in Section 2.19(a), the last sentence of Section 2.19(b), and the last sentence of Section 4.02 and, as provided in the preceding sentence, those covenants and agreements made by the Company in Section 4.05. If the Effective Time shall occur, the sole and exclusive remedy of DeSoto for any breach of a representation, 43 44 warranty, covenant or agreement made by the Company herein (absent bad faith or fraud) shall be pursuant to the CVR Value Reduction (as defined in the CVR). 7.02 Entire Agreement. This Agreement (including all Schedules and Exhibits hereto) constitute the sole understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements among the parties with respect to the subject matter hereof and thereof. 7.03 Assignment. This Agreement shall inure to the benefit of and be binding upon solely the parties hereto and their respective successors and permitted assigns. Newco shall have the right to assign to one or more direct or indirect wholly-owned subsidiaries of DeSoto any and all rights and obligations of Newco under this Agreement, including, without limitation, the right to substitute in its place such affiliate as one of the constituent corporations in the Merger (and, if Newco elects to make such an assignment, the parties agree to execute an appropriate amendment to this Agreement to reflect such substitution). Newco may not otherwise assign this Agreement or any of its rights hereunder without the prior written consent of the Company. Neither DeSoto nor the Company shall have the right to assign any or all of its rights and obligations under this Agreement and any such purported assignment shall be null and void and of no force and effect, except that Parent has the right to direct DeSoto to issue up to 50% of the shares of DeSoto Common Stock and CVRs issuable pursuant to Section 1.07(a) directly to the banks party to the Prescott Credit Agreement if such banks simultaneously with such issuance execute, as if an original party thereto, the "Stockholders Agreement" between DeSoto and Parent dated as of the date hereof and shall be bound thereby in all respects in the same manner as Parent. 7.04 Counterparts. This Agreement may be executed in counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument. 7.05 Construction. The headings of the Articles, Sections and paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. All section and article references are to this Agreement, unless otherwise expressly provided. As used in this Agreement, (a) "hereof", "hereunder', "herein" and words of like import shall be deemed to refer to this Agreement in its entirety and not just a particular section of this Agreement, (b) unless the context otherwise requires, words in the singular number or in 44 45 the plural number shall each include the singular number or the plural number, words of the masculine gender shall include the feminine and neuter, and, when the sense so indicates, words of the neuter gender shall refer to any gender, (c) "Person" shall mean and include an individual, a partnership, a joint venture, a corporation or trust, an unincorporated organization, a group or a government or a Governmental Entity, (d) "affiliate" shall mean any Person directly or indirectly controlling, controlled by or under common control with the Person of which it is an affiliate, (e) "subsidiary" means any affiliate of a Person who under GAAP would be required to consolidate such affiliate's financial statements in its own financial statements and (f) "the ordinary course of business" with respect to the Company and "the ordinary course of the Company's business" and words of like import in each case shall take into account the current financial (including cash flow) condition and difficulties of the Company and the impact of such condition and difficulties on its business relationships and practices, including its need from time to time to manage its cash flow and levels of inventory pursuant to its reasonable business judgment employed in a manner to maintain its existence as a going business concern in the lines and markets of business currently pursued. 7.06 Modification and Waiver. No amendment, modification or alteration of the terms or provisions of this Agreement shall be binding unless the same shall be in writing and duly executed by DeSoto and the Company; provided, however, that any of the terms or provisions of this Agreement may be waived in writing at any time by the party which is entitled to the benefits of such waived terms or provisions. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar). No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 7.07 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 7.08 Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in 45 46 accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at Law or in equity. 7.09 Public Announcements. Prior to the Closing, none of the parties hereto (or any of their respective officers, directors or employees) shall make any public statements, including, without limitation, any press releases, with respect to this Agreement, the Financing or the Bank Debt Restructuring or any of the transactions contemplated hereby or thereby, except as may be required by Law (in which case, the nature of the statement shall be described to the other party prior to dissemination to the public) or as agreed to by the parties hereto. 7.10 Expenses. If the Effective Time shall occur, the reasonable legal, accounting and tax advice expenses of Parent and the Company incurred in connection with this Agreement, the Merger, and the redemption of Parent's minority stockholder shall, be borne by DeSoto in accordance with DeSoto's existing policies and practices regarding the fees and expenses of its own legal counsel and other outside advisors and subject to receipt of documentary evidence reasonably satisfactory to DeSoto of such legal and other expenses, and all reasonable costs and expenses of Parent and the Company in connection with the Financing and the Bank Debt Restructuring shall be borne by the Company and assumed by the Surviving Corporation subject to the same requirements as to documentation and DeSoto's existing polices and practices. Nothing herein is intended to create liability of Parent for any expenses it is not otherwise liable for. Except as otherwise explicitly set forth herein, if the Closing does not occur each of parties hereto shall pay all costs and expenses incurred prior to the Closing by it or on its behalf in connection with this Agreement, the Financing and the Bank Debt Restructuring and the transactions contemplated hereby and thereby, including, without limiting the generality of the foregoing, fees and expenses of its own financial consultants, accountants and counsel. 7.11 Notices. Any notice, request, instruction or other document to be given hereunder (a "Notice") by any party hereto to any other party shall be dated and in writing and delivered personally, sent by a recognized overnight delivery service with charges prepaid, sent by registered or certified mail with postage prepaid, or sent by facsimile transmission: 46 47 if to DeSoto to: DeSoto, Inc. 1471 Business Center Drive Suite 800 Mt. Prospect, Illinois 60056 Facsimile: (708) 391-9043 Confirmation: (708) 391-9000 Attention: William Spier with a copy to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004 Facsimile: (212) 741-1526 Confirmation: (212) 820-8000 Attention: Peter Golden if to Newco, to it c/o DeSoto at the address and with a copy as set forth for DeSoto above if to the Company to: J.L. Prescott Company c/o Narragansett Capital, Inc. Manufacturing Group One Turks Head Place Suite 1550 Providence, Rhode Island 02903 Facsimile: (401) 751-455-0076 Confirmation: (401) 751-8110 Attention: Arthur D. Little with a copy to: Edwards & Angell 2700 Hospital Trust Tower Providence, Rhode Island 02903 Facsimile: (401) 276-6611 Confirmation: (401) 274-9200 Attention: Christopher D. Graham or at such other address for a party as shall be specified by like Notice. Any Notice which is delivered in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party, except that any Notice delivered by facsimile transmission shall be deemed to have been given upon confirmation of transmission; provided that Notice so delivered is promptly followed by duplicate 47 48 Notice to that same party sent by recognized overnight delivery service with charges prepaid, or by registered or certified mail, postage prepaid. 7.12 Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New Jersey applicable to agreements made and to be performed wholly within such jurisdiction. 48 49 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed on its behalf as of the date first above written. DESOTO, INC. By:/s/ WILLIAM SPIER -------------------------------- Name: William Spier Title: Chairman and Chief Executive Officer Attest: /s/ DAMIAN GRECO - ------------------------------ Name: Damian Greco Title: Assistant Secretary DESOTO SUBSIDIARY ONE CORP. By:/s/ WILLIAM SPIER -------------------------------- Name: William Spier Title: President Attest: /s/ DAMIAN GRECO - ------------------------------ Name: Damian Greco Title: Secretary J.L. PRESCOTT COMPANY By:/s/ ARTHUR D. LITTLE -------------------------------- Name: Arthur D. Little Title: Chief Executive Officer Attest: /s/ CHRISTOPHER D. GRAHAM - ------------------------------ Name: Christopher D. Graham Title: Secretary 49 50 3175m/8473L Exhibit A THE RIGHTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN LIMITATIONS ON TRANSFER. ANY ATTEMPTED TRANSFER, SALE, PLEDGE, HYPOTHECATION, CREATION OF AN ENCUMBRANCE OR ANY OTHER MANNER OF DISPOSITION OF THE RIGHTS OR ANY INTEREST OR PARTICIPATION THEREIN IN VIOLATION OF THE TERMS SET FORTH HEREIN SHALL BE WITHOUT FORCE AND EFFECT. THE RIGHTS EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. * * * * CONTINGENT VALUE RIGHT DESOTO, INC. No. ________ Certificate for ______ Contingent Value Rights This certifies that _____________________ , or registered permitted assigns, is the registered holder of the number of Contingent Value Rights ("CVRs") set forth above. Each CVR entitles the CVR Holder (as defined below), subject to the provisions contained herein, to a contingent payment from DeSoto, Inc., a corporation organized under the laws of the State of Delaware ("DeSoto"), in an amount, if any, determined pursuant to the provisions set forth herein. The CVRs represented hereby are being issued on the terms and pursuant to the conditions set forth herein as well as in the Merger Agreement, to all of which terms and conditions the holder of this CVR Certificate consents by acceptance hereof. Copies of the Merger Agreement can be obtained by contacting DeSoto. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Merger Agreement. Certain capitalized terms are defined below in paragraph (k). (a) Contingent Value Right Payment. DeSoto shall determine, as of the Maturity Date, the amount by which the Target Price exceeds the Highest Price, which excess amount (if any) shall be subject to reduction as provided in paragraph 51 (f) (the "CVR Value"); provided, however, that in no event shall the CVR Value exceed $6.00 (as it may be adjusted pursuant to paragraph (e)(i)) (the "Maximum CVR Value"). If the applicable Highest Price is equal to, or greater than, the Target Price, then the CVR Value shall be zero and DeSoto shall have no payment obligation in respect of any CVR. Upon compliance by a CVR Holder with the exercise procedures set forth herein, a CVR Holder shall be entitled to a payment of an amount equal to that portion of the CVR Value multiplied by the number of CVRs held by such CVR Holder on the Maturity Date (the "CVR Payment"). DeSoto shall make any CVR Payment in cash if and to the maximum extent not prohibited by a Prohibition. If the CVR Payment cannot be fully made in cash because of a Prohibition, to the extent the CVR Payment has not been made in cash, DeSoto shall make that portion of the CVR Payment which cannot be made in cash by means of the issuance of DeSoto Securities, if and to the maximum extent not prohibited by a Prohibition, in an aggregate principal amount equal to that portion of the CVR Payment which cannot be made in cash, and if the CVR Payment cannot be fully made in cash or DeSoto Securities because of a Prohibition, to the extent the CVR Payment has not been made in cash or DeSoto Securities, DeSoto shall make that portion of the CVR Payment which cannot be made in cash or DeSoto Securities by means of the delivery of shares of DeSoto Common Stock, which shall be deemed to have a per share value equal to the Moving Average Price for the thirtieth Trading Day immediately preceding the date such payment is made; provided, however, that if the CVR Payment cannot be fully made in cash, then the CVR Representative shall, on behalf and for the account of each CVR Holder, have the right to elect whether all CVR Holders receive either DeSoto Securities or DeSoto Common Stock to the extent the CVR Payment has not been made in cash; and further provided that, in any event, regardless of the value of shares of DeSoto Common Stock, upon the delivery of an aggregate number of shares of DeSoto Common Stock to all CVR Holders in connection with the making of CVR Payments which equals the number of shares by which 22.0% of the total number of shares of DeSoto Common Stock issued and outstanding immediately following the Effective Time exceeds the total number of DeSoto Merger Shares (in each case appropriately adjusted to reflect any subdivisions, combinations, recapitalizations or reclassifications of, or dividends paid in, shares of DeSoto Common Stock subsequent to the Effective Time), the CVR Payment shall be deemed to have been fully paid and satisfied and DeSoto shall have no further payment or other obligation in respect of any CVR. Cash, DeSoto Securities and DeSoto Common Stock shall be paid pro rata to CVR Holders based on the number of CVRs registered in the name of each CVR Holder, except where cash payment is necessary to avoid the issuance of fractional 2 52 shares of DeSoto Common Stock. If DeSoto cannot make all or part of a CVR Payment because of a Prohibition or the inability to issue shares of DeSoto Common Stock, CVR Payments shall be made pro rata to the extent permitted. Upon the lapse of a Prohibition or the ability to issue shares of DeSoto Common Stock, additional payments shall be made pro rata to the extent permitted until the CVR Payments have been fully paid and satisfied in the manner and with the priority contemplated by the foregoing payment methods. Any CVR Payment shall be paid by DeSoto as promptly as possible after the Maturity Date and compliance by a CVR Holder with the exercise procedures set forth herein. (b) Nontransferability. No transfer of CVRs (other than by descent or devise) may be made without the prior written consent of DeSoto except (x) to any of the Initial Holders if DeSoto is first provided (i) an unqualified opinion of counsel reasonably satisfactory to it that such transfer is in compliance with the registration provisions of the Securities Act or the exemptions thereto and (ii) a representation from such recipient that it is holding the CVRs for investment without a view toward distribution and that it will comply with the restrictions set forth herein or (y) to DeSoto. By accepting a CVR, each CVR Holder agrees not to pledge, hypothecate, or otherwise encumber the CVR or to attempt to sell, transfer or dispose of the CVR or any interest therein except as permitted hereunder or, in the case of any Bank, pursuant to the purchase option granted to Narragansett First Fund in connection with the Bank Debt Restructuring. Any transfer of CVRs (and all rights thereunder) in violation of the restrictions set forth herein shall be null and void. DeSoto may require presentment of the CVR Certificate(s) evidencing the CVR(s) purportedly transferred and such contemporaneous evidence of the nature of any such transfer as it shall deem appropriate in order to update the registry of CVR Holders. DeSoto will maintain a registry of the CVR Holders; such registry shall be revised upon written request of any CVR Holder (or its legal representative, heir or successor) to reflect any permitted transfers of CVRs. Prior to the time of due presentment of a CVR Certificate and other evidence for registration of transfer, DeSoto may treat the Person in whose name such CVR Certificate is registered as the owner thereof for all purposes, and DeSoto shall not be affected by notice to the contrary. (c) Exercise of Contingent Value Rights. To obtain a CVR Payment, a CVR Holder must deliver to DeSoto its CVR Certificate duly endorsed in blank. DeSoto may require that each CVR Holder execute and deliver a transmittal letter, in a form acceptable to DeSoto, specifying such CVR Holder's 3 53 number of CVRs, permitted and non-permitted transfers of CVRs, and such other information as may be necessary or desirable to determine the number of CVRs which such CVR Holder is entitled to exercise. It any such exercise is reasonably determined by DeSoto to be defective, DeSoto shall promptly so notify the CVR Holder, together with an explanation of such defect. No later than one week prior to the Maturity Date, DeSoto shall mail or otherwise deliver written instructions to the CVR Holders concerning the place and means of delivering CVRs for the CVR Payment. If DeSoto cannot make all or part of a CVR Payment because of a Prohibition or the inability to issue shares of DeSoto Common Stock, DeSoto shall so state in the instructions and shall on a semiannual basis thereafter notify the CVR Holders of the continued existence of such Prohibition or inability until the lapse thereof. No CVR shall be exercisable and no CVR Payment shall be made in respect of any CVR unless the CVR Certificate with respect to such CVR shall have been received by DeSoto within 270 days immediately after the Maturity Date (or, if later, after DeSoto's notice of the lapse of any Prohibition applicable to DeSoto's ability to make the CVR Payment or the inability to issue shares of DeSoto Common Stock). (d) Termination Notice. In the event that DeSoto determines that no amount is payable with respect to the CVRs on the Maturity Date, DeSoto shall mail or otherwise deliver to each CVR Holder written notice of such determination (the "Termination Notice"). In the event no amount is payable, all CVRs shall terminate and become null and void as of such date, and the CVR Holders shall have no further rights with respect thereto. The failure to give a Termination Notice or any defect therein shall not affect the operation of the preceding sentence. (e) Antidilution. (i) In the event DeSoto shall at any time after the Effective Time and prior to the Maturity Date (A) declare a dividend on the outstanding shares of DeSoto Common Stock payable in shares of DeSoto Common Stock, (B) subdivide the outstanding DeSoto Common Stock or (C) combine the outstanding DeSoto Common Stock into a smaller number of shares, (x) the number of CVRs associated with each CVR Certificate then outstanding, or issued or delivered thereafter, shall be proportionately adjusted by multiplying each CVR previously outstanding by a fraction (the "Applicable Fraction"), the numerator of which shall be the total number of shares of DeSoto Common Stock outstanding immediately following the occurrence of the event and the denominator of which shall be the total number of shares of DeSoto Common Stock outstanding immediately prior to the occurrence of such event, and (y) the Target Price and the Maximum CVR Value shall be 4 54 proportionately adjusted by multiplying it by the inverse of the Applicable Fraction. Appropriate adjustments in the calculation of the number of CVRs associated with outstanding CVR Certificates and the Target Price shall be made to reflect other changes in the capital stock of DeSoto (i.e., recapitalizations and reclassifications) made after the Effective Time. All adjustments contemplated by this subparagraph (i) shall be subject to the approval of DeSoto's Board of Directors. Whenever any event of the type described above occurs, DeSoto shall: (i) promptly prepare a certificate setting forth such adjustments and a brief statement of the facts accounting for such adjustments; (ii) promptly file with the CVR Representative a copy of such certificate; and (iii) mail a brief summary thereof to each CVR Holder. Such adjustments, absent manifest error, shall be final and binding on DeSoto, the CVR Representative and the CVR Holders. All references herein to DeSoto Common Stock shall, after the occurrence of such an event, be deemed to be references to any common equity security of DeSoto (or its successor) which may thereupon be acquired by exercise of the CVRs. (ii) In the event DeSoto agrees to merge or consolidate with any other Person or sell or convey all or substantially all of its assets to any Person pursuant to a transaction or series of transactions in which the holders of DeSoto Common Stock shall receive equity securities of the continuing or successor corporation or the acquiring Person (or a combination of equity securities and other property) in exchange for shares of DeSoto Common Stock, DeSoto shall cause the continuing or successor corporation or the Person which acquires by sale or conveyance all or substantially all the assets of DeSoto to assume expressly the due and punctual payment of the CVRs, according to their tenor (except that for these purposes all references to DeSoto Common Stock herein shall, with respect to any time from or after the date of such exchange, be deemed to mean the equity security issued in such exchange for DeSoto Common Stock and the Moving Average Price shall be proportionately adjusted by multiplying it by the exchange ratio per share of DeSoto Common Stock employed in such exchange), and the due and punctual performance and observance of all of the covenants and conditions to be performed or observed by DeSoto with respect to the CVRs. In case of any such consolidation, merger, sale or conveyance, and following such an assumption by the continuing or successor corporation or acquiring Person, such continuing or successor corporation or acquiring Person shall succeed to and be substituted for DeSoto, with the same effect as if it had been named herein. Moreover, in such event, such changes in phraseology and form (but not in substance) may be made in the CVRs thereafter to be issued as may be appropriate. In the 5 55 event of any such sale or conveyance (other than a conveyance by way of lease) DeSoto or any successor corporation which shall theretofore have become such in the manner described in this subparagraph (ii) shall be discharged from all obligations and covenants under the CVRs and may be liquidated and dissolved. (iii) In the event DeSoto agrees to merge or consolidate with any other Person or sell or convey all or substantially all of its assets to any Person pursuant to a transaction or a series of transactions in which the holders of DeSoto Common Stock shall receive solely cash or non-equity securities in exchange for shares of DeSoto Common Stock, DeSoto shall cause the continuing or successor corporation or the Person which acquires by sale or conveyance all or substantially all the assets of DeSoto to redeem concurrently with such merger, consolidation or sale all of the outstanding CVRs for cash at a redemption price equal to the amount, if any, by which (i) the Discounted Target Price in effect at the time such merger, consolidation or sale is consummated exceeds (ii) the sum of the consideration payable in such transaction for each share of DeSoto Common Stock then outstanding and the CVR Value Reduction; provided, however, that in no event shall the redemption price exceed the Maximum CVR Value. In the event of any such sale or conveyance (other than a conveyance by way of lease) DeSoto or any successor corporation which shall theretofore have become such in the manner described in this subparagraph (iii) shall be discharged from all obligations and covenants under the CVRs and may be liquidated and dissolved. (f) CVR Value Reduction. The CVR Value shall be reduced (but not below zero) by an amount (the "CVR Value Reduction") equal to the sum of (i) all Distributions on Common Stock plus (ii) the quotient obtained by dividing (A) the sum of any and all "Prospective Losses" (as defined below), losses, damages, judgments, fines, Taxes, penalties, amounts paid in settlement, costs and expenses (including interest which may be imposed in connection therewith and court costs and reasonable fees and disbursements of counsel, consultants and other experts) (collectively, "Losses") which are sustained or incurred by DeSoto (or the Surviving Corporation), its directors and officers or any successor or assign of any of the foregoing Persons (each, an "Injured Party") on or before the Maturity Date and arising out of or resulting from (x) the breach of any of the representations or warranties made by the Company in the Merger Agreement or in any certificate or other writing delivered pursuant thereto, (y) the failure of the 6 56 Company to comply with any of the covenants or agreements of the Company contained in the Merger Agreement or in any certificate or other writing delivered pursuant thereto or (z) any Liability of the Company arising out of facts existing or events occurring prior to the Effective Time (whether or not disclosed by the Company or Parent) to the extent not reflected or reserved for in the May 31, 1992 Unaudited Balance Sheet or in the projected financial statements dated as of June 16, 1992 provided to DeSoto by the Company or, if a greater amount, to the extent exceeding any specific dollar amount included in a representation of the Company in the text of the Merger Agreement (but not a disclosure schedule thereto) as to such Liability or any other Liability of similar type or character (except, as to any of the foregoing, to the extent that (1) DeSoto or the Surviving Corporation has not suffered a Loss in respect thereof by reason of the availability of insurance policies purchased by the Company prior to the date hereof or the arrangements intended to provide funds to satisfy environmental liabilities described in Section 2.19(a)(I) through (VI) of the Merger Agreement, (2) DeSoto or the Surviving Corporation suffered a Loss in connection with any Commitment or any lease of Leased Real Property with respect to which the Company is past due on payments due thereunder, if and so long as such past due payments and any penalties relating thereto are fully accrued on the May 31, 1992 Unaudited Balance Sheet or otherwise reflected in said financial projections and are disclosed in the disclosure schedules to the Merger Agreement and such Loss arose out of the Surviving Corporation's failure to pay such past due amounts within 75 days after the Effective Time (but not excepting Losses resulting from the assertion of remedies by the other parties to such Commitments or leases which are available prior to, and are not eliminated by, such payment), (3) a Liability is incurred by the Company which is not reflected or accrued on the May 31, 1992 Unaudited Balance Sheet or otherwise reflected in said financial projections on account of severance arrangements or any other actions of the Company approved in writing by DeSoto prior to the Effective Time, (4) DeSoto or the Surviving Corporation has suffered a Loss solely by reason of legal expenses incurred in connection with the matters referred to in the last sentence of Section 2.13, by reason of the covenant contained in the last parenthetical in Section 2.19(a) or costs of collection deducted from the amounts collected from the arrangements referred to in Section 2.19(a) pursuant to such Section, solely by reason of the cancellation of a possible supply arrangement regarding powdered detergent with a third party (to the extent such Losses do not exceed $140,000), or solely by reason of capital expenditures or commitments not in excess of the amounts as set forth in the written plan dated July 28, 1992 7 57 and previously delivered to DeSoto, (5) DeSoto or the Surviving Corporation has suffered a Loss or has achieved results inconsistent with the Company's projected financial statements as a result of the failure to obtain any consent from Lever Bros. to the transactions contemplated by the Merger Agreement, (6) DeSoto or the Surviving Corporation has suffered a Loss in connection with any obligation to remove tanks from the former Passaic facility of the Company at a cost of no more than $50,000 and which, to the extent it reduces amounts available pursuant to the arrangements described in Section 2.19(a) is deducted from such amounts for all purposes, and only to the extent no out-of-pocket expenditure is required, (7) a Liability is incurred by the Company for extension fees payable pursuant to the agreement among the Banks, the Company and Parent providing for the Bank Debt Restructuring, or (8) any tax is payable in respect of amounts received pursuant to the notes referred to in Section 2.19(a), Items (III) and (IV), and which is taken into account in calculating under such Section net after tax proceeds from such notes), but excluding Liabilities incurred in the ordinary course of business since May 31, 1992 excepted from the representation contained in Section 2.06(a) of the Merger Agreement by (B) 550,000. (As used herein, the term "Prospective Losses" means amounts with respect to which DeSoto may, consistent with generally accepted accounting practice, accrue, establish reserves or disclose in its financial statements or the notes thereto or the minimum amounts which the Board of Directors of DeSoto has determined in good faith, based on the advice of counsel, are highly likely to be paid in respect of Liabilities or claims.) In computing the CVR Value Reduction, the CVR Value shall not be reduced by any amount in respect of Losses unless the aggregate amount of Losses exceeds $175,000 (the "Deductible"), in which event the Deductible shall be subtracted from the aggregate amount of Losses in the calculation of the quotient referred to in clause (ii) of the preceding sentence. In the event that any Injured Party shall sustain or incur any Losses in respect of which a CVR Value Reduction may be sought pursuant to this paragraph (f), DeSoto shall provide written notice (a "Claim Notice") to the CVR Representative stating the nature and basis of such Losses reasonably promptly following the awareness of DeSoto senior management of the sustaining or incurrence of such Losses. In the case of Losses arising by reason of any third party Claims, the Claim Notice shall be given within 45 days of the filing or other written assertion of any Claim against the Injured Party, but the failure of DeSoto so to notify the CVR Representative shall not affect the determination of any CVR Value Reduction in respect of Losses arising out of or resulting from such third party Claims. DeSoto shall provide to the CVR Representative on request all information and documentation reasonably necessary to support and verify any Losses which DeSoto believes will give rise to a CVR Value Reduction hereunder and shall give the CVR Representative reasonable access to all books, records and 8 58 personnel in the possession or under the control of DeSoto which would have bearing on such CVR Value Reduction. Within 90 days of the Maturity Date (or, if applicable, on the date of any earlier redemption of any CVRs), DeSoto shall mail or otherwise deliver notice to the CVR Representative setting forth in reasonable detail all matters giving rise to a CVR Value Reduction. Any proposed CVR Value Reduction shall be conclusive and binding upon DeSoto and all CVR Holders unless, within 30 days after delivery to the CVR Representative of the written notice pursuant to the foregoing sentence, the CVR Representative shall deliver to DeSoto a written statement of specific objections thereto (which objections may be made only as to the matters described in clause (ii)(A)). If any differences with respect to the matters described in clause (ii)(A) are resolved by agreement of DeSoto and the CVR representative within 45 days after delivery of the statement of objections to DeSoto (the "Resolution Period"), then such agreement shall be conclusive and binding upon DeSoto, the CVR Representative and all CVR Holders. If any differences with respect to the matters described in clause (ii)(A) are not resolved by agreement of DeSoto and the CVR Representative within the Resolution Period, such differences shall be submitted by DeSoto or the CVR Representative to the American Arbitration Association for the appointment of an arbitrator to resolve the dispute. The decision of the arbitrator shall be set forth in a written report delivered to DeSoto and the CVR Representative, and shall be conclusive and binding upon DeSoto, the CVR Representative and all CVR Holders. Any such dispute shall be settled by arbitration in the state of Illinois in accordance with the rules of the American Arbitration Association then in effect, and judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereover. DeSoto and the CVR Representative shall each be responsible for one-half of the fees and expenses of the arbitrator and each such party shall be responsible for its own fees and expenses relating to the arbitration; provided, however, that if the arbitrator shall determine that DeSoto or the CVR Representative shall have acted in bad faith in such dispute, the fees and expenses of the arbitrator and the reasonable fees and expenses of both parties to the arbitration shall be borne by the party so determined to have acted in bad faith; and provided, further that, if the CVR Value is determined in accordance with the provisions hereof to be a positive number, (I) the CVR Value shall then be reduced to the extent the amount obtained by dividing the total foregoing fees and expenses for which the CVR Representative is responsible but which it has not paid (the "Representative's Share") by the total number of DeSoto Merger Shares does not exceed the CVR Value and (II) the CVR Representative shall remain responsible for the Representative's Share to the extent it is not reflected in such reduction of the CVR Value. 9 59 (g) Optional Redemption By DeSoto. Prior to the Maturity Date, DeSoto may, at its option, at any time and from time to time, redeem all or a portion of the outstanding CVRs for cash at a redemption price equal to the amount, if any, by which (i) the Discounted Target Price as of the date of redemption exceeds (ii) the sum of the Highest Price and the CVR Value Reduction; provided, however, that (x) in the event the date of redemption is prior to the first anniversary of the Effective Time, the redemption price shall equal the sum of (1) the then present value of $6.00 as of the Maturity Date (discounted in the same manner as the Target Price is discounted in the definition of "Discounted Target Price") and (2) the CVR Value Reduction, and (y) in no event shall the redemption price exceed the Maximum CVR Value. If less than all outstanding CVRs are redeemed, CVRs shall be redeemed pro rata based on the number of CVRs registered in the name of each CVR Holder. Immediately upon public announcement by DeSoto or notice to the CVR Representative of the redemption, the redeemed CVRs shall represent only the right to receive the redemption price. As promptly as practicable after so announcing or noticing a redemption and in any event not later than 30 days thereafter, DeSoto shall mail or otherwise deliver to each CVR Holder written notice of redemption stating the redemption date (which shall be no later than 30 days after such announcement unless a Prohibition commences after the announcement, in which event such redemption shall be rescinded automatically and shall be of no effect), the redemption price and, if less than all outstanding CVRs are to be redeemed, the identification of the particular CVRs to be redeemed, and instructions as to the place and means of surrendering CVRs in exchange for the redemption price. CVR Holders shall have no right to require the redemption of any CVR, subject to paragraphs (e)(iii) and (j). (h) No Interest. No interest shall accrue on any amounts payable on the CVRs to any CVR Holder. (i) Determinations by DeSoto. All determinations to be made by DeSoto with respect to the CVRs (other than those to which the CVR Representative may object as provided in paragraph (f), which shall be conclusively determined in accordance with paragraph (f)) shall be determined by the DeSoto Board of Directors in good faith and its sole business judgment, and all Board Determinations shall, in each case (absent manifest error), be final and binding upon DeSoto, Parent and the CVR Holders. (j) Preferred Stock Repurchases. DeSoto shall not redeem, repurchase or otherwise acquire any shares of its Series B Senior Preferred Stock at any time prior to the first 10 60 anniversary of the Effective Time or at any time that any payment obligation under DeSoto Securities issued in respect of a CVR Payment has not been paid (whether or not prohibited by a Prohibition); provided, however, that the foregoing restrictions shall not apply if the Board of Directors of DeSoto in the exercise of its fiduciary duties determines it is necessary to facilitate or is otherwise required in connection with a merger or consolidation of DeSoto, a sale of all or substantially all of DeSoto's assets or an issuance of voting securities of DeSoto to a Person who, after such issuance, shall control in excess of 50% of all DeSoto voting securities, in which acquisition transaction the CVRs or the DeSoto Securities will be fully paid in cash in connection with such transaction in accordance with their terms. (k) Certain Definitions. As used herein: "Authorized Newspaper" means The Wall Street Journal (Eastern Edition), or if The Wall Street Journal (Eastern Edition) shall cease to be published or if the publication or general circulation of The Wall Street Journal (Eastern Edition) shall be suspended for whatever reason, such other English language newspaper as is selected by DeSoto of general circulation in The City of New York, New York. "Bank" means any of the banks under the Prescott Credit Agreement, being Fleet National Bank, Barclays Bank PLC and The Bank of Nova Scotia. "Board Determination" means a determination which shall be made by DeSoto's Board of Directors in good faith (which in so doing may rely on advice from DeSoto's independent accountants, financial advisors and/or legal counsel) that the payment of the CVR Payment in cash and/or DeSoto Securities would materially threaten DeSoto's financial viability or have a DeSoto Material Adverse Effect. "CVR Certificate" means this certificate or any other certificate delivered to a CVR Holder following the Effective Time which evidences the number of CVRs issued to such CVR Holder pursuant to the provisions hereof and, if such CVR Holder is the initial holder of such CVRs, pursuant to the Merger Agreement or in connection with the Bank Debt Restructuring. "CVR Holder" means any registered holder of any CVRs on the Maturity Date who obtained such CVRs in connection with the Merger or in connection with the Bank Debt Restructuring or pursuant to a registered transfer of such CVRs permitted hereby. 11 61 "CVR Representative" shall be the "Stockholder Representative" under the Stockholder Agreement dated the date hereof between DeSoto and Narragansett/Prescott, Inc. "Daily Closing Price" means, on a per share basis for DeSoto Common Stock for each Trading Day on which shares of DeSoto Common Stock are registered under the Exchange Act: (A) if shares of DeSoto Common Stock are listed or admitted to trading on any securities exchange, the closing price, regular way, on such day on the principal securities exchange on which such shares are traded; (B) if shares of DeSoto Common Stock are not then listed or admitted to trading on any securities exchange, the last reported sale price on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by DeSoto; and (C) if the shares of DeSoto Common Stock are not then listed or admitted to trading on any securities exchange and no such reported sale price or bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported in the Authorized Newspaper or, if not so reported, then the last price as of such date at which a transaction in shares of DeSoto Common Stock occurred between a willing buyer and a willing seller which DeSoto determines in good faith is based on reliable sources and is indicative of a market price. The Daily Closing Price for each date during the period beginning with the first Trading Day following the announcement by DeSoto of (x) a dividend or distribution on DeSoto Common Stock payable in shares of DeSoto Common Stock or securities convertible into shares of DeSoto Common Stock or any cash dividend (other than a regular quarterly dividend) or (y) any subdivision, combination or reclassification of DeSoto Common Stock, and ending with the last Trading Day before DeSoto Common Stock trades ex-dividend with respect to such dividend or distribution, or ending with the record date for such subdivision, combination or reclassification, as the case may be, shall be properly adjusted to take into account ex-dividend trading (therefore, for purposes of the calculation of Highest Price in the case of such a cash dividend actually paid prior to the end of the measurement period herein specified for such calculation of Highest Price, the amount of such dividend shall be subtracted from the Daily Closing Price for each Trading Day from the first Trading Day after announcement of the dividend until the first Trading Day when DeSoto Common Stock trades ex-dividend). In addition, with respect to repurchases of DeSoto Common Stock, the Daily Closing Price during a specified measurement period beginning with the first Trading Day following the announcement by DeSoto of its intention to repurchase DeSoto Common Stock and ending with the last Trading Day on which any such repurchases are made shall be decreased 12 62 by the Per Share Deemed Distribution in respect of such repurchases. "DeSoto Merger Shares" means shares of DeSoto Common Stock issued (i) in the Merger or (ii) to the Banks in connection with the Bank Debt Restructuring. "DeSoto Securities" means any general unsecured debt security issued by DeSoto pursuant to the CVRs that shall (i) bear interest at an annual rate of 3% over the prime rate announced by Citibank, N.A. from time to time until the second anniversary of its issuance, which annual rate shall increase prospectively by one percentage point on the day immediately following such second anniversary and on each such day immediately following subsequent anniversaries so long as any DeSoto Securities are outstanding, (ii) require that the foregoing interest shall be payable quarterly in arrears to the extent not prohibited by any Prohibition and otherwise payable at such time as first permitted by Prohibitions, (iii) mature upon the later to occur of the anniversary of its issuance and the shortest maturity date allowable for indebtedness that DeSoto is permitted to incur under Prohibitions in effect at the time of issuance, and (iii) possess such other features as are mutually acceptable to DeSoto and the CVR Representative. "Discounted Target Price" means, with respect to any redemption of the CVRS, the present value of the Target Price as of the date specified herein, which shall be determined by discounting the Target Price by a yield computed from linear interpolation from the yields as of such specified date of those United States Treasury constant maturities series having a period as close as practicable to the period from such date to the Maturity Date, as published in the Federal Reserve Statistical Release H.15 (519) first issued following the announcement of such redemption that contains information with respect to such specified date; Provided, however, that if the period between such specified date and the Maturity Date is less than 90 days, the Discounted Target Price shall equal the Target Price. "Distributions on Common Stock" means all cash dividends declared after the Effective Time and paid on a share of DeSoto Common Stock (other than regular quarterly cash dividends) and the Fair Market Value of all distributions of securities (other than CVRS, DeSoto Securities or DeSoto Common Stock), cash or property made in respect of a share of DeSoto Common Stock on or after the Effective Time and on or before the Maturity Date (the Fair Market Value of any such securities or property shall be determined, as of the time of the distribution by an Independent Financial Expert if one shall 13 63 have been retained by DeSoto or DeSoto's Board of Directors in connection with such distribution for purposes other than solely the determination contemplated hereby and otherwise by DeSoto's Board of Directors, and shall include the value of subsequent distributions, dividends and interest payments in respect of such distributed security or property). Distributions on Common Stock shall also include the quotient obtained by dividing (A) the aggregate cash amounts and the aggregate Fair Market Value of any non-cash consideration paid by DeSoto in connection with the purchase or other acquisition of shares of DeSoto Common Stock at any time after the Effective Time and on or before the Maturity Date pursuant to any privately negotiated transactions, open market purchases or tender or exchange offer in which CVR Holders have had an opportunity to participate (with any necessary consent from DeSoto to waive provisions of the Stockholders Agreement which would otherwise prevent such participation) on a basis equivalent (including the same price and percent of stock to be acquired) to that offered to all other holders of DeSoto Common Shares who are presented with such opportunity by (B) the total number of shares of DeSoto Common Stock outstanding at the time of such purchase or acquisition (such quotient being referred to as the "Per Share Deemed Distribution"). Appropriate adjustments in the calculation of Distributions on Common Stock hereunder shall be made to reflect stock dividends, stock splits, recapitalizations and other changes in the DeSoto Common Stock made after the Effective Time. "Fair Market Value" means, with respect to any property, the value as determined by the Independent Financial Expert or DeSoto (as applicable) reasonably and in good faith to be the probable price that would be paid by a willing buyer to an unrelated willing seller on an arm's length basis, and with respect to any security, the value of such security as determined by the Independent Financial Expert or DeSoto (as applicable) reasonably and in good faith to be the probable market trading price of such security on a fully distributed basis and subject to normal trading activity. "Highest Price" means: (I) as used in paragraph (a), the greater of (x) the highest of the Moving Average Prices calculated for each day from the date which is 60 Trading Days immediately after the first anniversary of the Closing Date until the Maturity Date, and 14 64 (y) the price per share of DeSoto Common Stock determined by an Independent Financial Expert as of any date from or after the first anniversary of the Closing Date but not later than the Maturity Date on which date the shares of DeSoto Common Stock are not registered under the Exchange Act, using one or more valuation methods that the Independent Financial Expert, in its best professional judgment, determines to be most appropriate; and (II) as used in paragraph (g) with respect to an optional redemption by DeSoto permitted by such paragraph, the greater of (x) the highest of the Moving Average Prices calculated for each day from the date which is 60 Trading Days immediately after the first anniversary of the Closing Date until the date of announcement of such redemption, and (y) the price per share of DeSoto Common Stock determined by an Independent Financial Expert as of any date from or after the first anniversary of the Closing Date but not later than the date of announcement of such redemption on which date the shares of DeSoto Common Stock are not registered under the Exchange Act, using one or more valuation methods that the Independent Financial Expert, in its best professional judgment, determines to be most appropriate. "Independent Financial Expert" means an independent investment banking firm or financial consultant chosen by DeSoto that does not (and whose directors, officers and affiliates do not) have a direct or indirect financial interest in DeSoto or any of its affiliates and that, at the time it is called upon to give independent financial advice to DeSoto, is not (and none of whose directors, officers or affiliates is) a director or officer of DeSoto or any of its affiliates, and which is reasonably acceptable to the CVR Representative. "Initial Holder" means a CVR Holder who is Parent, Narragansett First Fund, a liquidating trust of Narragansett First Fund (the sole trustee of which, who shall have sole voting and dispositive power with respect to the property of such trust, shall be Narragansett Management 15 65 Partners or a bank or other institutional trustee which in the regular course of business provides trust services to its customers) or any of the Banks. "Maturity Date" means the third anniversary of the Effective Time. "Merger Agreement" means the Plan and Agreement of Merger, dated as of July 20, 1992, by and among DeSoto, Inc., DeSoto Subsidiary One Corp. and J.L. Prescott, Co. "Moving Average Price" as of a date means the average Daily Closing Price for the 60 consecutive Trading Days immediately preceding and including that date. "Prohibition" means, with respect to any contemplated or proposed action or statement, (i) any relevant Board Determination or (ii) any relevant limitation, prohibition, Encumbrance or penalty imposed by or under (x) any agreement, instrument, note, indenture or similar arrangement with an unaffiliated third party by which DeSoto or any of its subsidiaries is a party or by which any of their properties may be subject as of the date of such contemplated or proposed action or statement and the breach of which would have or would reasonably be expected to have a DeSoto Material Adverse Effect (after taking into account cross-default or cross-acceleration provisions of other such agreements, instruments, notes, indentures and similar arrangements) and for which a waiver cannot reasonably be obtained or (y) any Law. "Target Price" shall be $12.00 as adjusted pursuant to the Antidilution provisions set forth in paragraph (e). "Trading Day" means any day on which the New York Stock Exchange is open for trading. (l) Governing Law. This Contingent Value Right shall be governed by and construed in accordance with the laws of the State of Delaware applicable to instruments made and entirely to be performed in such State. (m) Amendments; Waivers. Any or all of the provisions of the CVRs may be amended or cancelled only by a written instrument signed by (i) DeSoto and (ii) the CVR Holders who shall own in the aggregate not less than 66% of all CVRs outstanding at the time such instrument is signed. Each CVR Holder shall be bound by any amendment authorized by this paragraph (m) (including, without limitation, any amendment (i) to the definition of CVR Payment, CVR Value, CVR Value 16 66 Reduction, Daily Closing Price, DeSoto Securities, Discounted Target Price, Distributions on Common Stock, Fair Market Value, Highest Price, Maturity Date, Moving Average Price or Target Price, (ii) to paragraph (e), (iii) to this paragraph (m), or (iv) which adversely affects the rights of the CVR Holders hereunder), whether or not such CVR Holder shall have consented thereto. Any of the terms or provisions of the CVRs may be waived (either generally or in a particular instance and either retroactively or prospectively) only in writing at any time by each of the parties which is entitled to the benefits of such waived terms or provisions. No waiver of any of the provisions of the CVRs shall be deemed to or shall constitute a waiver of any other provision thereof (whether or not similar). No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. IN WITNESS WHEREOF, DeSoto has caused this instrument to be duly executed. Dated: DESOTO, INC. By: ------------------------------- Authorized Signature Attest: ------------------------- Authorized Signature 17 EX-10.14 9 STOCK REDEMPTION AGREEMENT 1 EXHIBIT 10.14 STOCK REDEMPTION AGREEMENT STOCK REDEMPTION AGREEMENT dated as of August 21, 1992 by and among NARRAGANSETT/PRESCOTT, INC., a Delaware corporation ("Narragansett"), DESOTO, INC., a Delaware corporation ("DeSoto"), and MATTHEW T. CARROLL ("Stockholder"). WITNESSETH: WHEREAS, Stockholder is the owner of $34,722 shares of the Common Stock, $.01 par value per share, of Narragansett (the "Redemption Stock"); WHEREAS, Narragansett is the owner of all of the issued and outstanding capital stock of J. L. Prescott Company, a New Jersey corporation ("Prescott"); WHEREAS, Prescott, DeSoto and DeSoto Subsidiary One Corp. ("Newco"), a New Jersey corporation and wholly-owned subsidiary of DeSoto, have entered into a Plan and Agreement of Merger (the "Merger Agreement") dated the date hereof whereby Prescott shall merge with Newco (the "Merger"); and WHEREAS, (i) Narragansett desires to redeem, and Stockholder desires to sell to Narragansett, the Redemption Stock and (ii) DeSoto desires to assume any and all of Narragansett's obligations hereunder, all as hereinafter set forth and in both instances, assuming and immediately following the consummation of the Merger. NOW THEREFORE, in consideration of the mutual promises contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Subject to (i) the consummation of the Merger pursuant to the terms and conditions of the Merger Agreement and (ii) the terms and conditions set forth herein, Stockholder shall sell, assign, convey and deliver the Redemption Stock to Narragansett and Narragansett shall redeem the Redemption Stock, on the Closing Date (as defined herein). Simultaneously with Stockholder's execution hereof, Stockholder has delivered to Narragansett stock certificate(s) representing the Redemption Stock, accompanied by a stock power duly endorsed in blank (the "Escrow Documents"), to be held by Narragansett in escrow and to be distributed as follows: (i) if the Closing (as defined herein) occurs, the Escrow Documents shall immediately be released and delivered to Narragansett for its sole and exclusive benefit; and (ii) if this Agreement is terminated due to a Termination Event (as defined herein), the Escrow Documents shall immediately be released and delivered to Stockholder for his sole and exclusive benefit. 2 2. The aggregate redemption price for the Redemption Stock shall be an amount equal to $265,000 and shall be payable as follows: $100,000 on the Closing Date and $55,000 on each of the first three (3) anniversaries of the Closing Date. Each payment set forth in this Section 2 shall be considered to include the payment of interest, compounded annually, at a rate equal to the "applicable Federal short term rate" as determined under Section 1274(d) of the Internal Revenue Code of 1986, as amended, on unpaid amounts. 3. The closing of the redemption of the Redemption Stock provided for herein (the "Closing") shall take place immediately following the Effective Time (as defined in the Merger Agreement) or at such other time and date as may hereafter be mutually agreed upon in writing by the parties (such time and date of Closing being hereinafter called the "Closing Date"). This Agreement shall terminate and no party hereto shall have any obligations hereunder (other than the obligation of Narragansett to return the Escrow Documents to Stockholder as contemplated by Section 1 hereof) if (i) the Merger Agreement is terminated pursuant to the terms thereof or (ii) the Merger is not consummated for any reason whatsoever on or prior to March 31, 1993 (any of the events described in clauses (i) or (ii) shall be referred to herein as a "Termination Event"). 4. Subject to the terms and conditions herein contained, at the Closing, the Stockholder shall deliver to Narragansett stock certificate(s) representing the Redemption Stock, accompanied by a properly executed stock power(s) duly endorsed in blank and the release described below. It is understood that such delivery of certificates and stock powers is intended to be made by the delivery of the Escrow Documents to Narragansett from the escrow described herein, and that immediately following the Effective Time, Narragansett shall deliver, and is hereby irrevocably authorized to deliver, the Escrow Documents as provided in Section 1 hereof. 5. Immediately following the Effective Time, without any further action required by the parties hereto, DeSoto shall assume, and shall be liable and responsible for, as additional consideration pursuant to the Merger Agreement, any and all of Narragansett's obligations set forth in Section 2 hereof as if DeSoto was originally bound thereby. DeSoto and Stockholder hereby acknowledge and agree that upon consummation of the Closing, neither of such parties shall have any recourse whatsoever to Narragansett, and each hereby waives any recourse whatsoever to Narragansett and unconditionally releases Narragansett from any and all obligations, with respect to this Agreement and the transactions contemplated hereby, and that any default by DeSoto with regard to the assumed payment obligations set forth in Section 2 hereof shall not give -2- 3 Stockholder any right, claim or cause of action to seek relief from Narragansett and/or any of its directors, officers, employees, agents or stockholders. 6. Stockholder, Narragansett and Narragansett First Fund ("NFF") hereby agree that, as to the Stockholder only, the Letter Agreement (the "Letter Agreement") dated March 31, 1988 by Narragansett and NFF in favor of the stockholders of Narragansett relating to registration rights, shall, without further notice or action by any party, be terminated and of no further force or effect effective as of the Closing Date following the redemption contemplated herein. In addition, the Stockholder and Narragansett hereby agree that the Stockholders Agreement dated March 31, 1988 among Narragansett and its stockholders (the "Stockholders Agreement") with respect to the Stockholder, shall, without further notice or action by any party, be terminated and of no further force or effect effective as of the Closing Date following the redemption contemplated herein. 7. Stockholder represents and warrants to Narragansett as follows: (a) Stockholder is the sole record and beneficial owner of the Redemption Stock, has good, marketable and indefeasible title to such Redemption Stock, and has the absolute right and power to deliver such Redemption Stock pursuant to this Agreement, free and clear of all claims, security interests, liens, pledges, charges, escrows, options, proxies, rights of first refusal, or any other encumbrances of any kind, other than as set forth in the Stockholders Agreement and the Letter Agreement. (b) The stock certificate(s) registered in the name of Stockholder delivered into escrow on the date hereof represents all of the capital stock of Narragansett owned by Stockholder. (c) Stockholder has received a final copy of the Merger Agreement and hereby acknowledges that pursuant to the terms thereof and certain other documents to be entered into by Prescott in connection therewith, (i) Narragansett is entitled to receive, as the sole Stockholder of Prescott, for its own account, 261,387.5 shares of common stock of DeSoto which shall be unregistered but subject to certain registration rights and 261,387.5 contingent value rights and (ii) Prescott's senior lenders shall be entitled to receive, upon the direction of Narragansett following the Bank Debt Restructuring (as defined in the Merger -3- 4 Agreement), 261,387.5 shares of DeSoto common stock and 261,387.5 contingent value rights. Stockholder understands that by entering into this Agreement and upon the consummation of the transactions contemplated hereby, Stockholder shall have no right of any kind as a stockholder of Narragansett to any of the shares of DeSoto common stock or contingent value rights to be received by Narragansett in connection with the Merger, or by any of Prescott's senior lenders in connection with the Bank Debt Restructuring. Stockholder further acknowledges that he has elected to bargain for the liquidity of his investment in Narragansett as contemplated by this Agreement rather than a continued investment as a stockholder of Narragansett in the DeSoto common stock and contingent value rights to be delivered to Narragansett pursuant to the Merger Agreement and that Narragansett has agreed to provide such liquidity at Stockholder's request and to Narragansett's detriment. (d) Narragansett has made available to Stockholder, prior to the date hereof, the opportunity to ask questions of and receive answers from representatives of Narragansett concerning the terms and conditions of the Merger, and to obtain any information relative to the financial data and business of Narragansett and DeSoto as of the date hereof and as contemplated following the Closing Date. (e) Stockholder's knowledge and experience in financial and business matters and his status as a stockholder of Narragansett and President of Prescott, Narragansett's sole asset, are such that Stockholder has been able to evaluate the merits of selling the Redemption Stock to Narragansett and has determined that it is a suitable transaction for him. 8. At the Closing, Stockholder shall execute a release substantially in the form attached hereto as Exhibit A. 9. Miscellaneous. (a) Notices. All notices given hereunder shall be in writing and shall be delivered personally or sent by prepaid registered or certified mail, return receipt requested, addressed as follows: If to Narragansett: Narragansett/Prescott, Inc. c/o Narragansett Capital, Inc. Manufacturing Group One Turks Head Place Suite 1550 Providence, RI 02903 Attention: Arthur D. Little -4- 5 with a copy to: Edwards & Angell 2700 Hospital Trust Tower Providence, RI 02903 Attention: Christopher D. Graham If to Stockholder: Matthew T. Carroll 26 West 465 Huntergate Road St. Charles, IL 60175 with a copy to: Rudnick & Wolfe Suite 1800 203 North LaSalle Street Chicago, IL 60601 Attention: Stephen A. Landsman If to DeSoto: DeSoto, Inc. 1471 Business Center Drive Suite 800 Mt. Prospect, IL 60056 Attention: William Spier with a copy to: Fried, Frank, Harris, Shriver & Jacobson 1 New York Plaza New York, NY 10004 Attention: Peter S. Golden (b) Confidential. This Agreement is confidential and shall not be made public by any party hereto except as required by law or if necessary in order to enforce this Agreement. (c) Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. (d) Assignment; Survival of Representations. This Agreement shall be binding upon the parties hereto and their respective heirs, executors, administrators, personal -5- 6 representatives, successors and assigns; provided, however that Stockholder shall not make any assignment of Stockholder's rights under this Agreement and that Narragansett may assign its obligations hereunder to DeSoto. All agreements, representations and warranties made herein or in connection herewith shall survive the execution and delivery of this Agreement. (e) Expenses. All legal and other expenses incurred in connection with the negotiation, preparation and execution of this Agreement shall be paid by the respective parties hereto. (f) No Waiver; Cumulative Remedies. The parties to this Agreement will not be deemed as a consequence of any act, delay, failure, omission, forbearance or other indulgences granted from time to time by any of them to have waived, or to be estopped from exercising, any of their rights or remedies under this Agreement. Any waiver, modification, amendment, change, termination or rescission of this Agreement shall be effective only if in writing and signed by all of the parties hereto. No single or partial exercise by any party to this Agreement of any right or remedy will preclude any other or further exercise thereof or preclude the exercise of any other right or remedy. Except as set forth herein, the remedies of the parties provided for in this Agreement shall be cumulative and shall not preclude the assertion by any party of any other rights such party may have under applicable law or otherwise. (g) Governing Law. This Agreement and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with and governed by the laws of the State of Delaware. (h) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. (i) Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties in respect of the subject matter hereof and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof. (j) Equitable Relief. The parties hereto agree and declare that legal remedies may be inadequate to enforce the provisions of this Agreement and that equitable relief, including specific performance and injunctive relief, may be used to enforce such provisions. -6- 7 (j) ACKNOWLEDGEMENT. STOCKHOLDER HEREBY ACKNOWLEDGES THAT IT HAS READ AND FULLY UNDERSTANDS THIS AGREEMENT AND HAS CONSULTED WITH AN ATTORNEY OF HIS CHOICE REGARDING THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. NARRAGANSETT/PRESCOTT, INC. By /s/ Arthur D. Little ------------------------------------ Chairman DESOTO, INC. By /s/ William Spier ------------------------------------ Chairman and Chief Executive Officer /s/ Matthew Carroll ---------------------------------------- Matthew Carroll Agreed and accepted to insofar as its interests may appear in Paragraph 6 hereof: NARRAGANSETT FIRST FUND By: Narragansett Management Partners, its General Partner By /s/ Arthur D. Little ----------------------------- Arthur D. Little -7- 8 EXHIBIT A RELEASE To all to whom these presents shall come or may concern, know that Matthew T. Carroll ("Releasor") for good and valuable consideration received from Narragansett/Prescott, Inc. ("NPI"), a Delaware corporation, and Narragansett First Fund (collectively, "Releasee"), including the release by NPI of Releasor from non-competition covenants in that certain Stockholders' Agreement as described in the Stock Redemption Agreement defined below, the receipt whereof is hereby acknowledged, hereby releases and discharges the Releasee and Releasee's shareholders, partners, directors, officers, employees, successors and assigns from any and all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands whatsoever ("Claims"), in law, admiralty or equity, whether known or unknown, which against such persons the Releasor and/or Releasor's heirs, executors, administrators, successors and assigns ever had, now have or hereafter can, shall or may have, for, upon, or by reason of any matter, cause or things whatsoever from the beginning of the world to the day of the date of this Release; including, but not limited to, any and all Claims relating to (i) Releasor's employment by J.L. Prescott Company ("Prescott"), a wholly-owned subsidiary of NPI, (ii) Releasor's appointment as an officer of Prescott, (iii) Releasor's status as an equity holder of NPI and as a former equity holder of Prescott, and (iv) any Claims by Releasor arising out of the Stock Redemption Agreement (the "Stock Redemption Agreement") dated August 21, 1992 among Releasor, NPI and DeSoto, Inc. ("DeSoto"), provided, however, that the release contained in this clause (iv) shall not in any way constitute a release of DeSoto of its obligations under the Stock Redemption Agreement. Whenever the text hereof requires, the use of singular number shall include the appropriate plural number as the text of the within instrument may require. This Release may not be changed orally. IN WITNESS WHEREOF, the Releasor has executed this Release on this _____ day of_______, 1992. ------------------------------------- Matthew T. Carroll 9 IN PRESENCE OF: STATE OF ------------------------- COUNTY OF ------------------------ In ___________________________, on the ____ day of ______________, 1992, before me personally appeared Matthew T. Carroll, to me known and known by me to be the person executing the foregoing instrument and he acknowledged said instrument by him executed to be his free act and deed. --------------------------------------- Notary Public My commission expires: -2- EX-10.15 10 LETTER - REF. TO PLAN & AGREEMENT OF MERGER 1 EXHIBIT 10.15 NARRAGANSETT FIRST FUND One Turks Head Place Suite 1550 Providence, Rhode Island 02903 August 21, 1992 DeSoto, Inc. 1471 Business Center Drive Suite 800 Mt. Prospect, Illinois 60056 Narragansett/Prescott, Inc. One Turks Head Place Suite 1550 Providence, Rhode Island 02903 Gentlemen: Reference is made to the Plan and Agreement of Merger entered into on the date hereof by and among DeSoto, Inc., DeSoto Subsidiary One Corp. and J.L. Prescott Company (the "Merger Agreement"). Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Merger Agreement. Section 5.02(f) of the Merger Agreement provides that the obligation of DeSoto and Newco to consummate the Merger is subject to the prior contribution to the capital of the Company of a subordinated note of the Company which is referred to in note 5 to the December 31, 1990 Audited Financial Statements (the "Subordinated Note"). This will confirm that Narragansett First Fund ("NFF") is the sole holder of the Subordinated Note. NFF hereby agrees that, upon the satisfaction or waiver of each of the conditions contained in Article V of the Merger Agreement (other than Sections 5.02(c), 5.02(f) and 5.03(b)), including, but 2 DeSoto, Inc. -2- August 21, 1992 not limited to the condition set forth in Section 5.01(d) (which must be satisfied or waived by each of the parties to the Merger Agreement), NFF, as a stockholder of Parent, shall contribute the Subordinated Note to the capital of Parent and, upon such contribution, shall cause Parent to contribute the Subordinated Note to the capital of the Company as contemplated by Section 5.02(f) of the Merger Agreement. The foregoing undertaking is made by NFF in order to induce DeSoto to enter into the Merger Agreement. The obligations of NFF hereunder shall terminate if the Merger Agreement is terminated. Sincerely, NARRAGANSETT FIRST FUND By: Narragansett Management Partners, its general partner By: /s/ Arthur D. Little ------------------------------------ Arthur D. Little, a general partner Accepted and acknowledged as of the date first above written. DESOTO, INC. By: /s/ William Spier ------------------------------ Name: William Spier Title: Chairman and Chief Executive Officer NARRAGANSETT/PRESCOTT, INC. By: /s/ Arthur D. Little ------------------------------ Name: Arthur D. Little Title: Chairman EX-10.16 11 STOCKHOLDERS AGREEMENT 1 EXHIBIT 10.16 STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of August 21, 1992, by and between DeSoto, Inc., a Delaware corporation ("DeSoto"), and Narragansett/Prescott, Inc., a Delaware corporation ("NPI"). WHEREAS, DeSoto, DeSoto Subsidiary One Corp., a New Jersey corporation and a direct wholly-owned subsidiary of DeSoto ("Newco"), and J.L. Prescott Company, a New Jersey corporation and a direct wholly-owned subsidiary of NPI (the "Company"), have entered into a Plan and Agreement of Merger, dated as of the date hereof (the "Merger Agreement"), pursuant to which the Company will merge with Newco and NPI, as the holder of all the shares of common stock, par value $.01 per share, of the Company ("Prescott Shares"), will receive shares of common stock, par value $1 per share, of DeSoto ("DeSoto Shares"), all on the terms and subject to the conditions set forth in the Merger Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements hereinafter contained, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS 1.01. Certain Definitions. (a) Any capitalized term used and not otherwise defined herein, and each of the terms "affiliate" and "subsidiary", shall have the meaning ascribed to it in the Merger Agreement (a copy of which has been previously provided to NPI and can be obtained by any Stockholder by contacting DeSoto). (b) As used herein: "associate" shall have the meaning ascribed to such term in Rule 12b-2 under the Exchange Act. "Banks" shall mean the banks under the Prescott Credit Agreement, being Fleet National Bank, Barclays Bank PLC and The Bank of Nova Scotia. "Board" shall mean the Board of Directors of DeSoto. "Director" shall mean a member of the Board. 2 "Encumbrance" shall mean any lien, option (excluding the purchase option granted by the Banks to Narrangansett First Fund in connection with the Bank Debt Restructuring), claim, security interest or other encumbrance (including, without limitation, any right of first refusal or similar right), except as created by this Agreement. "Narragansett Family Members" shall mean (i) NPI, Narragansett First Fund and their respective affiliates and associates, (ii) a liquidating trust of Narrangansett First Fund, the sole trustee (who shall have sole voting and dispositive power with respect to the property of such trust) of which shall be Narragansett Management Partners or a bank or other institutional trustee which in the regular course of business provides trust services to its customers and (iii) the Banks and their respective affiliates. "New DeSoto Shares" shall mean DeSoto Shares issued (x) in the Merger, (y) to the Banks in connection with the Bank Debt Restructuring or (z) pursuant to the CVRs. "Preferred Stock Purchasers" shall mean the initial purchasers under the Preferred Stock and Warrant Purchase Agreement with DeSoto dated as of the date hereof. "Public Offering" shall mean the offering of the primary or secondary sale of any common stock of DeSoto consummated pursuant to an effective registration statement under the Securities Act. "Related Business Affiliate" shall mean (i) with respect to any Stockholder which is a Narragansett Family Member, any other Narragansett Family Member or (unless such Stockholder is a Bank) any shareholder or partner (whether limited or general) or beneficiary (if such Stockholder is a trust) of such Stockholder at the Effective Time, and (ii) with respect to any other Stockholder which is a corporation, trust, partnership or joint venture, any affiliate of such Stockholder. "Related Individual" shall mean, with respect to any individual Stockholder, an individual who is the parent, spouse or any lineal descendant of such Stockholder. "Related Person" shall mean, with respect to any Stockholder, a Related Business Affiliate, a Related Individual or a Related Trust of such Stockholder. "Related Trust" shall mean, with respect to any individual Stockholder, a trust, all the beneficiaries of which are the Stockholder, his parents, his spouse and his lineal descendants. 2 3 "Rule 144" shall mean Rule 144 under the Securities Act or any similar rule or regulation hereafter adopted by the SEC. "Stockholder" shall mean (i) NPI and (ii) any Person (other than DeSoto) who shall have acquired New DeSoto Shares in accordance with Section 5.02(b). "Stockholder Representative" shall mean NPI until DeSoto shall have been notified in writing by Narragansett First Fund that NPI was liquidated, whereupon it shall mean Narragansett First Fund until DeSoto shall have been notified by the general partner of Narragansett First Fund that it was liquidated, and thereafter shall mean such Stockholder as is so designated in a writing executed and delivered to DeSoto by the holders of 66% of the New DeSoto Shares then outstanding and held by all Stockholders other than the Banks. "Third Party" shall mean any Person excluding each of the following: (i) any Stockholder and its Related Persons; (ii) any of the Narragansett Family Members; and (iii) DeSoto, the Company and any of the Preferred Stock Purchasers, and any of their respective officers, directors, affiliates or associates. "Transfer" shall mean, with respect to any property, any sale, assignment, transfer, pledge, hypothecation or other disposition thereof or an appurtenant right thereto or participation therein. ARTICLE II REPRESENTATIONS AND WARRANTIES OF NPI NPI represents and warrants to DeSoto as follows: 2.01. Organization. NPI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as it is now being conducted and to own, use and lease its assets and properties. 2.02. Authority Relative to This Agreement; Required Vote. NPI has all requisite corporate power to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement have been duly authorized by the Board of Directors of NPI, and no other corporate proceedings on the part of NPI are necessary to authorize this Agreement or compliance herewith. This 3 4 Agreement has been duly and validly executed and delivered by NPI and constitutes a valid and binding obligation of NPI, enforceable against it in accordance with its terms, except that such enforceability (i) may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors' rights generally and (ii) is subject to general principles of equity. 2.03. Consents; No Violations. Except as disclosed in writing by NPI to DeSoto concurrently with the execution and delivery of this Agreement, neither the execution, delivery or performance by NPI or the Company of this Agreement, the Merger Agreement or any of the definitive agreements providing for the Bank Debt Restructuring (collectively, the "Operative Agreements") nor the consummation of any of the transactions contemplated by any of the Operative Agreements (collectively, the "Operative Transactions") will (a) conflict with, or result in any breach or violation of, any provision of the Certificate of Incorporation or By-laws of NPI; (b) assuming compliance with the matters referred to in Section 2.08 of the Merger Agreement and clause (c) of this Section 2.03, constitute, with or without the passage of time or the giving of notice or both, a breach, violation or default, create a lien, or give rise to any contingencies, liquidated damages, penalties or rights of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration, under (i) any Law, or (ii) any note, bond, mortgage, indenture, lease, agreement or other instrument of NPI, Narragansett First Fund or Narragansett Management Partners, or to which any of them or any of their respective properties is subject, except, with respect to the matters set forth in clause (ii), for breaches, violations, defaults, liens, or contingencies, liquidated damages, penalties or rights of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration, singly or in the aggregate, which would not have (and would not reasonably be expected to have) a material adverse effect on the business, financial condition, assets, liabilities, properties or results of operations of NPI and its subsidiaries taken as a whole (a "NPI Material Adverse Effect") or materially adversely affect the ability of NPI to consummate any of the transactions contemplated by any of the Operative Agreements or to perform or comply with any of its obligations thereunder; or (c) assuming the accuracy of the representations and warranties contained in Section 3.04(a), require any consent, approval or authorization of, notification to, filing with, or exemption or waiver by, any Governmental Entity on the part of NPI other than consents, approvals, authorizations, notifications, filings, exemptions or waivers which, if not obtained or made would not, singly or in the 4 5 aggregate, have a NPI Material Adverse Effect or materially adversely affect the ability of NPI to consummate any of the transactions contemplated by any of the Operative Agreements or to perform or comply with any of its obligations thereunder. 2.04. Title to Stock; Capitalization. NPI has legal and valid title to, and is the owner of record of, all the issued and outstanding Prescott Shares. Other than as provided in connection with the Prescott Credit Agreement and NPI's guaranty and pledge related thereto and the Company's agreement as of the date hereof with the Banks pertaining to the Bank Debt Restructuring, NPI owns all such Prescott Shares free and clear of any and all Encumbrances and has sole unencumbered investment and voting power with respect to all such shares. The authorized capital stock of NPI consists of 1,250,000 shares of common stock, par value $.01 per share ("NPI Shares"), of which 701,389 NPI Shares are issued and outstanding and 34,722 NPI Shares are held in NPI's treasury. An additional 34,722 NPI Shares will be redeemed and cancelled immediately after the Effective Time as described in Section 1.07 of the Merger Agreement. Schedule 2.04 hereto sets forth the name of each Person reflected in NPI's books and records as the registered owner of NPI Shares and the number of NPI Shares held by such Person. 2.05. Approval of Merger Agreement. NPI, as sole shareholder of the Company, has duly approved and authorized the Merger Agreement in accordance with the BCA, and no other corporate or partnership (as the case may be) proceeding or action on the part of NPI or its shareholders or Narragansett First Fund or Narragansett Management Partners is necessary to approve or authorize the Merger Agreement or the transactions contemplated thereby. ARTICLE III REPRESENTATIONS AND WARRANTIES OF DESOTO DeSoto represents and warrants to NPI as follows: 3.01. Organization. DeSoto is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as it is now being conducted and to own, use and lease its assets and properties. 3.02. Authority Relative to This Agreement; Required Vote. DeSoto has all requisite corporate power to enter into this Agreement and to carry out its obligations hereunder. The execution, delivery and performance of this Agreement and have been duly authorized by the Board, and no other corporate proceedings on the part of DeSoto are necessary to authorize this Agreement or compliance herewith. This Agreement has been 5 6 duly and validly executed and delivered by DeSoto and constitutes a valid and binding obligation of DeSoto, enforceable against it in accordance with its terms, except that such enforceability (i) may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) is subject to general principles of equity. 3.03. DeSoto Shares. The New DeSoto Shares will, upon their issuance, be duly and validly issued, fully paid and nonassessable, will vest in NPI and any other initial Stockholders legal and valid title to such New DeSoto Shares free and clear of all Encumbrances (other than those Encumbrances created by NPI (or such other Stockholders) as permitted by this Agreement) and will not be issued in violation of any preemptive rights. 3.04. Consents; No Violation. (a) Assuming the accuracy of the representations and warranties contained in Section 2.03, no consent, approval or authorization of, notification to, filing with, or exemption or waiver by, any Governmental Entity, is required on the part of DeSoto in connection with the execution, delivery and performance by DeSoto of this Agreement or the consummation of the Operative Transactions, other than consents, approvals, authorizations, notifications, filings, exemptions or waivers which, if not obtained or made would not, singly or in the aggregate, have a DeSoto Material Adverse Effect or materially adversely affect the ability of DeSoto to perform or comply with any of its obligations hereunder. (b) Neither the execution, delivery or performance of this Agreement by DeSoto or Newco nor the consummation of any of the Operative Transactions will (x) conflict with, or result in any breach or violation of, any provision of the Certificate of Incorporation or By-laws of DeSoto or Newco; (y) assuming compliance with the matters referred to in Section 3.10 of the Merger Agreement and Section 3.04(a) hereof, constitute, with or without the passage of time or the giving of notice or both, a breach, violation or default, create a lien, or give rise to any contingencies, liquidated damages, penalties or rights of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration, under (i) any Law, or (ii) any note, bond, mortgage, indenture, lease, agreement or other instrument of DeSoto or Newco, or to which it or any of its properties is subject, except, with respect to the matters set forth in clause (ii), for breaches, violations, defaults, liens, or contingencies, liquidated damages, penalties or rights of termination, modification, cancellation, prepayment, suspension, limitation, revocation or acceleration, singly or 6 7 in the aggregate, which would not have (and would not reasonably be expected to have) a DeSoto Material Adverse Effect or materially adversely affect the ability of DeSoto to consummate any of the transactions contemplated by any of the Operative Agreements or to perform or comply with any of its obligations thereunder. ARTICLE IV BOARD OF DIRECTORS; VOTING ARRANGEMENTS 4.01. Nomination of Directors. If the Effective Time shall occur, DeSoto (by action of the Board) shall thereupon create two vacancies on the Board by enlarging the size of the Board to include two additional Directors and the Stockholder Representative shall on behalf of the Stockholders have the right to designate such two Directors to fill such vacancies, who shall initially be Arthur D. Little and a person reasonably satisfactory to DeSoto (it being agreed that any of the persons previously identified by Arthur D. Little are satisfactory to DeSoto), each such individual to hold office until his successor is elected and qualified or until his earlier resignation or removal in accordance with applicable law. The Stockholder Representative shall be entitled to maintain such Board representation on behalf of the Stockholders after the Effective Time as follows: (i) so long as the Narragansett Family Members collectively own 100% of the New DeSoto Shares then outstanding, the Stockholder Representative shall have the right to maintain on behalf of the Stockholders a total of two designees as Directors; (ii) from and after such time as the Narragansett Family Members collectively own 50% or more than 50% but in either case less than 100% of the New DeSoto Shares then outstanding, the Stockholder Representative shall have the right to maintain on behalf of the Stockholders one designee as a Director; and (iii) from and after such time as the Narragansett Family Members collectively own less than 50% of the New DeSoto Shares then outstanding, the Stockholder Representative shall not have any right to have any of its designees as Directors. If and only to the extent necessary to permit the Stockholder Representative to maintain the number of Directors specified in 7 8 this section, at such time as a Director previously designated by the Stockholder Representative is up for election at an annual meeting of DeSoto's shareholders, DeSoto shall nominate an individual designated by the Stockholder Representative and reasonably satisfactory to DeSoto for election as a Director at such shareholders' meeting. Any such designee of the Stockholder Representative may resign from the Board at any time. The Stockholder Representative may at any time waive the right contained in Section 4.01 to designate Directors or Section 4.02 to designate a replacement Director in respect of a resignation described in the preceding sentence. 4.02. Vacancies on the Board. If for any reason there shall exist or occur any vacancy on the Board with respect to a Director designated by the Stockholder Representative in accordance with Section 4.01, then, if and only to the extent necessary to permit the Stockholder Representative to maintain on behalf of the Stockholders the number of Directors specified in Section 4.01, the Stockholder Representative shall, if it so elects, designate an individual reasonably acceptable to DeSoto to fill such vacancy. In the event of any other vacancy on the Board, a majority of Directors then in office (other than those Directors designated by the Stockholder Representative in accordance with this Article IV) shall designate in their sole discretion an individual to fill such vacancy. 4.03. Voting Agreement. If the Effective Time shall occur, each Stockholder shall take all actions necessary to vote all DeSoto Shares owned or held of record by it at any annual or special meeting at which Directors are to be elected in favor of, or to take all actions by written consent in lieu of any such meeting necessary to cause, the election as Directors of all individuals nominated by DeSoto (including any designated by the Stockholder Representative in accordance with this Article IV). If the Effective Time shall occur, each Stockholder shall, with respect to all other matters to be voted upon by DeSoto's shareholders, vote its DeSoto Shares as recommended by a majority of Directors then in office (including those Directors designated by the Stockholder Representative in accordance with this Article IV). Notwithstanding the preceding two sentences, if at any time when the Stockholder Representative is entitled to designate one or more Directors pursuant to Section 4.01 or 4.02 and has designated such number of Director designees but such number of designees are not elected or appointed to office as Directors (other than during a temporary period preparatory to such election or appointment), the voting agreements contained in the two preceding sentences shall terminate and be of no further force or effect. The restrictions set forth in this Section 4.03 to the extent they apply to the Narragansett 8 9 Family Members and their Related Business Affiliates shall terminate and be of no further force or effect upon the fifth anniversary of the Effective Time if the CVR Payment (as defined in the CVR) has not been paid in full in cash, DeSoto Securities (as defined in the CVR) or DeSoto Shares (or any combination thereof) for a reason other than disagreement with respect to a CVR Value Reduction (as defined in the CVR) or if any DeSoto Securities have been issued in respect of a CVR Payment and remain outstanding and unpaid. 4.04. Restrictions on Other Agreements. Except as otherwise contemplated hereby, if the Effective Time shall occur no Stockholder shall enter into any agreements or arrangements of any kind (including, without limitation, any grant of a proxy to a Third Party) with respect to the voting of DeSoto Shares and no Stockholder shall execute a written consent to action in lieu of a meeting of DeSoto's shareholders, except at the request of DeSoto. ARTICLE V RESTRICTIONS ON TRANSFER AND ASSIGNMENT 5.01. General Restrictions. Each Stockholder agrees that it will not, directly or indirectly, effect any Transfer of, or create, incur or assume or suffer to exist any Encumbrance with respect to, any New DeSoto Shares owned by it (or solicit any offers to buy or otherwise acquire any such New DeSoto Shares), except (a) in compliance with the Securities Act and any applicable state securities laws and (b)(i) as permitted by Section 5.02 or 5.03 of this Agreement or (ii) in a Public Offering pursuant to an exercise of the registration rights set forth in Exhibit A (the "Registration Rights"). 5.02. Permitted Transfers of New DeSoto Shares. (a) Except as provided in Section 5.02(b) and Section 5.03 or in a Public Offering pursuant to an exercise of the Registration Rights, no Stockholder shall, directly or indirectly, effect any Transfer of, or create, incur or assume or suffer to exist any Encumbrance with respect to, any New DeSoto Shares owned by it without the prior written consent of DeSoto. (b) A Transfer of all or any of a Stockholder's New DeSoto Shares may be made to a Related Person of such Stockholder (including, without limitation, pursuant to an exercise of the purchase option granted by the Banks to Narragansett First Fund in connection with the Bank Debt Restructuring) or to a Third Party without the prior written 9 10 consent of DeSoto if all conditions set forth in Exhibit B are satisfied. 5.03 Special Resale Provisions. Each Stockholder may sell New DeSoto Shares in open market transactions in conformity with the requirements of Rule 144, provided that: (x) the number of New DeSoto Shares that may be so sold by a Stockholder in the aggregate in any open market sale, together with all other New DeSoto Shares sold by all Stockholders in open market sales within the three-month period preceding such sale, shall not exceed the largest number of shares of DeSoto common stock that may be sold by one person in accordance with the volume limitations prescribed by paragraph (e)(1) of Rule 144 as such rule is in effect at the Effective Time, regardless of whether any of such Stockholders (or all the Stockholders taken together) is an "affiliate" within the meaning of Rule 144 or whether the provisions of paragraph (k) of Rule 144 or any other provision of Rule 144 would permit such sales to be made not in compliance therewith, (y) each such open market transaction shall be made in compliance with the provisions of paragraph (f) of Rule 144 as such rule is in effect at the Effective Time, regardless of whether such Stockholder is an "affiliate" within the meaning of Rule 144 or whether the provisions of paragraph (k) of Rule 144 or any other provision of Rule 144 would permit such sale to be made not in compliance therewith, and (z) no Stockholder will, in any series of related open market transactions pursuant to this Section 5.03, knowingly sell, transfer or otherwise dispose of New DeSoto Shares constituting more than 3% of the then outstanding shares of common stock of DeSoto to a single person or to a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) or any New DeSoto Shares to a person or "group" then owning in excess of 5% of such then outstanding shares. 5.04. Legend; Improper Transfer. (a) The certificates representing the New DeSoto Shares, and any replacement certificate or certificates, shall bear the 10 11 following legend or any similar legend which may from time to time be deemed appropriate by counsel to DeSoto: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER WITHOUT AN OPINION OF COUNSEL, SATISFACTORY TO THE ISSUER, THAT SUCH TRANSFER MAY PROPERLY BE MADE WITHOUT REGISTRATION UNDER SUCH ACT, UNLESS SUCH TRANSFER IS MADE IN CONNECTION WITH AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT. THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND OTHER LIMITATIONS AS SET FORTH IN A STOCKHOLDERS' AGREEMENT DATED AS OF AUGUST 21, 1992, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER. NO REGISTRATION OF TRANSFER OF SUCH SECURITIES WILL BE MADE ON THE BOOKS OF THE ISSUER UNLESS AND UNTIL SUCH RESTRICTIONS SHALL HAVE BEEN COMPLIED WITH. (b) In the event of a Transfer of any New DeSoto Shares in a Public Offering pursuant to an exercise of the Registration Rights or pursuant to Section 5.03, all of the restrictions set forth in this Agreement shall cease to apply to the shares subject of such Transfer and DeSoto shall, upon the written request of the holder thereof, issue to such holder a new certificate evidencing such New DeSoto Shares without the legend required by Section 5.04(a). (c) Any purported Transfer of, or creation, incurrence or assumption of an Encumbrance with respect to, any New DeSoto Shares not in compliance with this Agreement shall be null and void, and neither DeSoto nor any transfer agent of DeSoto shall give any effect in DeSoto's stock records to such purported Transfer or creation, incurrence or assumption of an Encumbrance. 11 12 ARTICLE VI ADDITIONAL COVENANTS 6.01. Filings, Consents and Arrangements. Until the Effective Time or prior termination of the Merger Agreement in accordance with its terms, DeSoto and NPI shall cooperate with each other and use (i) their best efforts in promptly determining whether any submissions, notifications or filings are required to be or should be made or whether any consents, approvals, permits, authorizations, exemptions or waivers are required to be or should be obtained under any other Law or from any Third Parties to Commitments material to the Company's business in connection with the consummation of any of the Operative Transactions and (ii) their reasonable efforts in promptly making any such submissions, notifications or filings, furnishing information required in connection therewith and seeking timely to obtain any such consents, approvals, permits, authorizations, exemptions or waivers. 6.02. Further Action. Until the Effective Time or prior termination of the Merger Agreement in accordance with its terms, and subject to the terms and conditions of the Operative Agreements, each of DeSoto and NPI shall use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable, and shall provide all reasonable assistance to and shall cooperate with each other, to consummate and make effective as promptly as practicable the Operative Transactions. Notwithstanding the foregoing, nothing herein shall impose upon DeSoto any obligation to accept terms of the Financing which are not acceptable to it in its sole discretion. Until the earlier of the Effective Time or the termination of the Merger Agreement in accordance with its terms, NPI shall cause the Company not to take any action which would result in a breach (with or without the passage of time or the giving of notice or both) of any of the Company's agreements or covenants contained in the Merger Agreement. At any time or from time to time after the Effective Time, the parties hereto, at the request of any other and at such other party's expense, shall execute and deliver any further instruments or documents and take all such further action as such other may reasonably request in order to evidence the consummation of the Operative Transactions. 6.03. No Solicitation of Transactions. Until the Effective Time or the prior termination of the Merger Agreement in accordance with its terms, NPI will not, and will cause its employees, representatives, investment bankers, consultants, advisors, agents or affiliates not to, directly or indirectly, 12 13 (a) initiate contact with, solicit or encourage submission of any inquiries, proposals or offers by, or (b) participate in any discussions or negotiations with, or disclose any information concerning the Company to, or afford any access to the properties, books or records of the Company to, or otherwise assist, facilitate or encourage, any Person (other than DeSoto, Newco, their respective employees, consultants, affiliates, agents and representatives and those of DeSoto's and the Company's lenders in connection with the Operative Transactions) in connection with any Acquisition Proposal. NPI represents that as of the date hereof it has ceased any and all existing activities, discussions or negotiations with any parties (other than DeSoto and Newco and the Company's lenders in connection with the Operative Transactions) conducted heretofore with respect to any of the foregoing. Until the Effective Time or the prior termination of the Merger Agreement in accordance with its terms, NPI will (i) notify DeSoto immediately if any inquiry or proposal is made or any such information or access is requested in connection with an Acquisition Proposal or potential Acquisition Proposal and (ii) immediately communicate to DeSoto the terms and conditions of any such Acquisition Proposal or potential Acquisition Proposal or inquiry and the identity of the offeror or potential offeror. 6.04. Access and Information. Until the Effective Time or the prior termination of the Merger Agreement in accordance with its terms, NPI shall, and shall cause its officers, directors, employees and agents to, afford to DeSoto and its officers, directors, employees, counsel, accountants, advisors, representatives, consultants and agents and those of DeSoto's lenders full access to the officers, employees, agents, properties, offices and other facilities, and to the books, records (including, without limitation, tax returns and work papers of NPI's independent auditors) and Commitments of NPI, and shall furnish DeSoto and such others all financial, operating, technical and other data and information which DeSoto or its lenders, through their respective officers, employees or agents, may from time to time reasonably request. DeSoto will treat, and will cause it sources of financing and their respective accountants, counsel and other representatives and Persons described in the preceding sentence to treat, confidentially all non-public information, whether written or oral, concerning NPI furnished to DeSoto in connection with the Operative Transactions and not disclose such information to any other Person without NPI's written consent, subject to the requirements of Law and the provisions of this Agreement, and upon NPI's written request and the termination of the Merger Agreement in accordance with its terms, DeSoto shall deliver to NPI or destroy all such information in written or tangible form 13 14 without retaining any copies, summaries, analyses or extracts thereof. 6.06. Tender Offers. If the Effective Time shall occur, notwithstanding anything in this Agreement (including Sections 5.02(a) and 5.03) to the contrary: (i) each Stockholder may sell any or all of its New DeSoto Shares pursuant to a tender offer (as such term is used in the Exchange Act and the rules and regulations thereunder) made by a Person or "group" (within the meaning of Section 13(d)(3) of the Exchange Act) to purchase or exchange for cash or other consideration any shares of DeSoto common stock with respect to which tender offer (A) a majority of the Board recommends stockholder acceptance or (B) a majority of the Board does not recommend stockholder acceptance (an "Opposed Tender Offer") if but only if William Spier or any of the Preferred Stock Purchasers or his or their respective affiliates elect to tender shares into such Opposed Tender Offer; and (ii) no Stockholder may sell any of its New DeSoto Shares pursuant to an Opposed Tender Offer other than as permitted by clause (i)(B) above. (b) In the event that any Stockholder is required to file a Schedule 13D under the Exchange Act, individually or as a member of a "group", such Schedule 13D will recite that such Stockholder's New DeSoto Shares were acquired by it as a passive investor with no intent on the part of such Stockholder to acquire or affect control of DeSoto (except to the extent the Stockholder Representative has the right to designate Directors pursuant to Article IV and except for the actions of such Directors in their capacity as Directors). 6.07. No Transfer of Shares. Until the Effective Time or the prior termination of the Merger Agreement in accordance with its terms, NPI will not Transfer, or create, incur or assume or suffer to exist any Encumbrance (other than that created in respect of the Prescott Credit Agreement) with respect to, any of the Prescott Shares held by it. Subject to the terms and conditions of the Merger Agreement, at the Closing, NPI shall deliver to DeSoto certificates representing all Prescott Shares issued and outstanding immediately prior to the Effective Time, duly endorsed in blank for transfer or accompanied by duly executed stockpowers assigning all such Prescott Shares in blank and, at the Effective Time, DeSoto shall deliver to NPI the consideration provided in Section 1.07(a) of the Merger Agreement duly issued and in authenticated form in such amount as is provided in the Merger 14 15 Agreement (it being agreed that NPI shall bear the cost of any documentary or stamp taxes payable in respect of the issuance of New DeSoto Shares in exchange for Prescott Shares as contemplated by the Merger Agreement). In addition, at the Closing NPI (i) shall deliver to DeSoto an affidavit pursuant to Section 1.1445-2(b)(2) of the United States Treasury Regulations which (A) states that NPI is not a "foreign person" for purposes of United States income taxation, (B) sets forth NPI's taxpayer identification number and its office address, and (C) is duly signed under penalties of perjury, and (ii) shall deliver to DeSoto an accurate and complete signed original of Internal Revenue Service Form W-9 (or successor form) indicating that NPI is entitled to receive payment of the consideration provided for in Section 1.07(a) of the Merger Agreement without any deduction or withholding of any federal income Taxes (it being agreed that if NPI does not deliver such form, DeSoto shall be entitled to withhold from any such payments any amounts required by applicable law to be withheld). 6.08. Registration Rights. The Stockholders as a group shall have the Registration Rights, all the terms and provisions of which being incorporated herein by this reference as if set forth in full in this Agreement. The Stockholders collectively will not, in any single Public Offering or series of Public Offerings, after reasonable inquiry by the Stockholders of the underwriters of such Public Offering, knowingly sell, transfer or otherwise dispose of New DeSoto Shares constituting more than 3% of the then outstanding shares of common stock of DeSoto to a Third Party or to a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) or any New DeSoto Shares to a person or "group" then owning in excess of 5% of such then outstanding shares. In the event that any New DeSoto Shares are sold by any Stockholders in an underwritten Public Offering, NPI will cause the underwriters to use their reasonable efforts to distribute such shares in a manner consistent with the provisions of the preceding sentence (provided, however, that if the underwriters advise the Stockholders that the Public offering cannot be successfully completed on this basis, then the Public Offering shall be cancelled and shall not count as an exercise of Registration Rights by the Stockholders; and, provided, further, that if DeSoto common stock is sold in contravention of the foregoing maximum percentage stock ownership and sale limitations pursuant to a Public Offering as to which the underwriters did not know of such contravention and used the reasonable efforts described above, then none of the Stockholders or underwriters shall have any liability in connection therewith). 6.09. Capital Contribution. NPI shall prior to the Effective Time contribute to the capital of the Company all 15 16 indebtedness of the Company held or received by NPI, including any notes or indebtedness to be contributed to NPI by Narragansett First Fund pursuant to the letter from Narragansett First Fund to each of NPI and DeSoto dated as of the date hereof at the time and subject to the conditions set forth in such letter. ARTICLE VII MISCELLANEOUS PROVISIONS 7.01. Investment Intent. Each Stockholder hereby represents and warrants to DeSoto at the time it becomes a Stockholder that it is acquiring the New DeSoto Shares for investment and not with a view to, or in connection with, any public resale or other distribution thereof except in compliance with all applicable federal and state securities Laws and the provisions of this Agreement. NPI and its affiliates hereby acknowledge that they have had the opportunity to obtain from DeSoto and its representatives any information they wish regarding DeSoto, its business, financial condition, assets, liabilities and prospects. Each Stockholder hereby represents and warrants to DeSoto at the time it becomes a Stockholder that (i) its financial situation is such that such Stockholder can afford to bear the economic risk of holding the New DeSoto Shares for an indefinite period of time and suffer complete loss of such Stockholder's investment in the New DeSoto Shares, (ii) it understands that the New DeSoto Shares have not been registered under the Securities Act and that an offer or Transfer of New DeSoto Shares without registration under the Securities Act will require the availability of an exemption from such registration and, in addition, must be effected in compliance with the provisions of this Agreement, and (iii) it understands that the New DeSoto Shares are an investment which involves a degree of risk of loss of such Stockholder's investment therein and that there are substantial restrictions on the transferability of the New DeSoto Shares, and, accordingly, it may not be possible to liquidate such Stockholder's investment in DeSoto in case of emergency, if at all. 7.02. Binding Effect; Assignment. Except as otherwise provided herein, the provisions of this Agreement shall be binding upon the parties hereto and their respective heirs, legal representatives and permitted successors and assigns. DeSoto may not assign or otherwise Transfer, or create, incur or assume or suffer to exist any Encumbrance with respect to, any of its rights or obligations hereunder. No Stockholder may assign or otherwise Transfer, or create, incur or assume or suffer to exist any Encumbrance with respect to, any of its rights or obligations hereunder to any Person other than in 16 17 compliance with the provisions of this Agreement (including, without limitation, Sections 5.02 and 5.03) in all respects; provided, however, that in no event may the Stockholder Representative assign or otherwise Transfer, or create, incur or assume or suffer to exist any Encumbrance with respect to, any of its rights or powers as the Stockholder Representative except to a successor Stockholder Representative. Upon the Transfer of New DeSoto Shares permitted by this Agreement, the obligations of any Stockholder hereunder shall terminate at such time as it shall no longer own any New DeSoto Shares, except with respect to breaches of this Agreement made in connection with or prior to any such Transfer. 7.03. Recapitalization, Exchanges, Etc. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to the New DeSoto Shares, to any and all shares of capital stock of DeSoto or any permitted successor or assign of DeSoto (whether by merger, consolidation, sale of assets or otherwise) which capital stock may be issued in respect of, in exchange for, or in substitution of, New DeSoto Shares, by reason of (i) any merger or consolidation in which the holders of DeSoto Shares immediately prior to such merger or consolidation continue to hold at least 50% of the common stock of the surviving or resulting corporation (or its ultimate parent) or (ii) any stock dividend, stock split, stock issuance, reverse stock split, combination, recapitalization or reclassification. 7.04. Amendments. This Agreement may be amended only by a written instrument signed by (i) DeSoto and (ii) such Stockholders who shall own in the aggregate not less than 66% of all New DeSoto Shares then outstanding and held by all Stockholders. Each Stockholder shall be bound by any amendment authorized by this Section 7.04, whether or not such Stockholder shall have consented thereto. 7.05. Entire Agreement. This Agreement and the other Operative Agreements constitute the sole understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements among the parties with respect to the subject matter hereof and thereof. 7.06. Waiver. Any of the terms or provisions of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only in writing at any time by the party which is entitled to the benefits of such waived terms or provisions. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar). No delay on the part of any party in exercising 17 18 any right, power or privilege hereunder shall operate as a waiver thereof. 7.07. Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement (except to the extent that effectiveness of such other provisions is conditioned upon the effectiveness of provisions which are invalid or unenforceable) or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 7.08. Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 7.09. Public Announcements. Prior to the Closing, none of the parties hereto (or any of their respective officers, directors or employees) shall make any public statements, including, without limitation, any press releases, with respect to this Agreement or any of the other Operative Agreements or any of the Operative Transactions, except as may be required by Law (in which case, to the extent practicable, the nature of the statement shall be described to the other party prior to dissemination to the public) or as agreed to by the parties hereto. 7.10. Expenses. Except as otherwise explicitly set forth herein or in the Operative Agreements, if the Effective Time shall occur, the reasonable legal, accounting and tax advice expenses incurred by NPI and the Company in connection with the Merger, this Agreement and the redemption of the Parent's minority stockholder shall be borne by DeSoto in accordance with DeSoto's existing policies and practices regarding the fees and expenses of its own legal counsel and other outside professional advisors and subject to receipt of documentary evidence of such expenses reasonably satisfactory to DeSoto, and all reasonable costs and expenses of the Parent and the Company in connection with the Bank Debt Restructuring shall be borne by the Company (and assumed by the Surviving Corporation), subject to the same requirements as to documentation and existing policies and practices of DeSoto. 18 19 If the Effective Time does not occur, each of the parties hereto shall pay all costs and expenses incurred by it or on its behalf in connection with this Agreement, the other Operative Agreements and the Operative Transactions, including, without limiting the generality of the foregoing, fees and expenses of its own financial consultants, accountants and counsel. 7.11. Notices. Any notice, request, instruction or other document to be given hereunder (a "Notice") by any party hereto to any other party shall be dated and in writing and delivered personally, sent by a recognized overnight delivery service with charges prepaid, sent by registered or certified mail with postage prepaid, or sent by facsimile transmission: if to DeSoto to: DeSoto, Inc. 1471 Business Center Drive Suite 800 Mt. Prospect, Illinois 60056 Facsimile: (708) 391-9043 Confirmation: (708) 391-9000 Attention: William Spier with a copy to: Fried, Frank, Harris, Shriver Jacobson One New York Plaza New York, New York 10004 Facsimile: (212) 747-1526 Confirmation: (212) 820-8000 Attention: Peter Golden if to NPI or the Stockholder Representative to: Narragansett/Prescott, Inc. c/o Narragansett Capital Inc. Manufacturing Group One Turks Head Place Suite 1550 Providence, Rhode Island 02903 Facsimile: (401) 455-0076 Confirmation: (401) 751-8110 Attention: Arthur D. Little with a copy to: Edwards & Angell 2700 Hospital Trust Tower Providence, Rhode Island 02903 Facsimile: (401) 276-6611 Confirmation: (401) 274-9200 Attention: Christopher D. Graham 19 20 or at such other address for a party as shall be specified by like Notice. Any Notice which is delivered in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party, except that any Notice delivered by facsimile transmission shall be deemed to have been given upon confirmation of transmission; provided that Notice so delivered is promptly followed by duplicate Notice to that same party sent by recognized overnight delivery service with changes prepaid, or by registered or certified mail, postage prepaid. 7.12. Termination. This Agreement (and each of the provisions contained herein or in the Exhibits hereto) shall terminate and be of no further force and effect on the earlier of (i) the termination prior to the Effective Time of the Merger Agreement in accordance with its terms or (ii) the sixth anniversary of the Effective Time, unless the parties hereto shall otherwise agree to extend such provisions. 7.13. Miscellaneous. All representations and warranties contained herein shall survive the execution and delivery of this Agreement, regardless of any investigation made by any party hereto or on such party's behalf. This Agreement shall be construed and enforced in accordance with and governed by the law of the State of Delaware without giving effect to the conflict of laws principles thereof which require the application of any other law; provided; however, that insofar as the provisions of Article VI relate to the voting of Prescott Shares, such provisions shall be governed by New Jersey law. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one instrument. 20 21 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed on its behalf as of the date first above written. DESOTO, INC. By: /s/ William Spier ----------------------------------- Name: William Spier Title: Chairman and Chief Executive Officer NARRAGANSETT/PRESCOTT, INC. By: /s/ Arthur D. Little ----------------------------------- Name: Arthur D. Little Title: Chairman 21 22 Exhibit A REGISTRATION RIGHTS (Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Stockholders Agreement to which this Exhibit A is annexed (the "Stockholders Agreement"). The terms "affiliate" and "subsidiary" each shall have the meaning ascribed to it in the Merger Agreement, and the term "associate" shall have the meaning ascribed to it in Rule 12b-2 under the Exchange Act.) 1. Demand Registration Rights. At any time at which there has not been a Public Offering during the preceding six months (other than pursuant to a stock option or other employee benefit plan), upon the written request of the Stockholder Representative DeSoto will file with the SEC as reasonably promptly as practicable (and in any event within 60 days) after receiving such request, a registration statement under the Securities Act covering the New DeSoto Shares included in such request, and DeSoto shall use its best efforts to cause such registration statement to become effective as expeditiously as practicable; provided, however, that such request shall cover at least 100,000 New DeSoto Shares. Such request by the Stockholder Representative shall: (1) express the Stockholders' present intent to offer such shares for distribution; (2) describe in reasonable detail the nature or method of the proposed offer and sale thereof; (3) contain information as to all prior sales of New DeSoto Shares in the preceding twelve months by the Stockholders in detail reasonably sufficient to complete such registration statement; and (4) contain an undertaking to furnish all such information and materials and take all such action as may be required in order to permit DeSoto to comply with all applicable requirements of the SEC and to obtain acceleration of the effective date of the registration statement. The Stockholders collectively shall be entitled to one request for registration pursuant to this Section 1. 2. Other Registration Rights. If DeSoto proposes to file a registration statement under the Securities Act for a Public Offering for cash, DeSoto shall give written notice as promptly as practicable of such registration statement to the Stockholder Representative and will use all reasonable efforts (or, if greater, such efforts as DeSoto may then be required to exert with respect to an exercise by a third party of incidental registration rights granted by DeSoto) to include such New DeSoto Shares owned by the Stockholders in such Public Offering as the Stockholder Representative shall request within 22 23 10 days after receipt of such notice from DeSoto; provided, however, that DeSoto shall not be required to include such New DeSoto Shares in any such registration statement if it relates solely to shares of DeSoto common stock to be issued pursuant to a stock option or other employee benefit plan, an exchange offer, a merger or consolidation with another corporation or an acquisition of assets. There shall be no limit as to the number of times the Stockholders may participate in registration statements pursuant to this Section 2. 3. Expenses. In connection with any registration pursuant to this Exhibit A, the Stockholders and any other holders of New DeSoto Shares which are included in such registration statement pursuant to this Exhibit A shall pay all underwriting discounts and commissions (insofar as they are attributable to shares of DeSoto common stock being sold by the Stockholders or such other holder pursuant to an effective registration statement) and fees and disbursements of the Stockholders' (including the Stockholder Representative's) and such other holders', counsel and accountants. DeSoto will pay all other expenses of the offering, including without limitation SEC registration and filing fees and underwriting discounts and commissions (other than those attributable to shares of DeSoto common stock being sold by the Stockholders or such other holders pursuant to such registration statement), underwriting expenses, SEC and "blue sky" registration and filing fees, printing expenses, fees and disbursements of legal counsel and accountants for DeSoto and blue sky counsel, transfer agents' and registrars' fees, fees and disbursements of experts used by DeSoto in connection with such registration, expenses of any special audits of DeSoto incidental to or required by such registration, and expenses incidental to any post-effective amendment to any such registration statement. 4. DeSoto's Obligations in Connection with Registrations. In connection with any registration by DeSoto pursuant to this Exhibit A, DeSoto shall: Use its best efforts to prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all shares of DeSoto common stock (including New DeSoto Shares) covered by such registration statement for the period required to effect the distribution of such shares of DeSoto common stock, but in no event shall 23 24 DeSoto be required to do so for a period of more than 75 days following the effective date of such registration statement. Furnish to the Stockholders such number of copies of a summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act and such other documents as the Stockholder Representative may reasonably request in order to facilitate the disposition of their New DeSoto Shares, but only while DeSoto is required under the provisions hereof to cause the registration statement to remain current. Use its best efforts to register or qualify the shares of DeSoto common stock (including New DeSoto Shares) covered by such registration statement under such other securities or blue sky laws of such jurisdictions in the United States as the managing underwriter shall request, and do any and all other acts and things which may be reasonably necessary to enable the Stockholders to consummate the disposition in such jurisdiction of the New DeSoto Shares owned by them; Provided, however, that DeSoto shall in no event be required to qualify to do business as a foreign corporation or as a dealer in any jurisdiction where it is not so qualified, to conform the composition of its assets at the time to the securities or blue sky laws of such jurisdiction, to execute or file any general consent to service of process in suits other than those arising out of the offer and sale of the New DeSoto Shares covered by such registration statement or to subject itself to taxation in any jurisdiction where it has not theretofore done so. To the extent not specifically deemed improper under any statement or Auditing Procedure issued by the American Institute of Certified Public Accountants, Inc., or any successor to such organization, obtain a "comfort" letter from DeSoto's independent public accountants in customary form and covering such matters of the type customarily covered by "comfort" letters as the Stockholder Representative shall reasonably request. Deliver an opinion of counsel for DeSoto, dated the effective date of such registration statement or any post-effective amendment or supplement thereto, addressed to the Stockholder Representative and any underwriter, in the form usual and customary in connection with secondary public offerings of securities. 5. Limitations, Conditions and Qualifications of DeSoto Under Registration Rights. The obligations of DeSoto to use all reasonable efforts to cause New DeSoto Shares to be 24 25 registered under the Securities Act are subject to the following limitations: DeSoto shall be entitled to postpone once (and only once) for a reasonable period of time not to exceed 90 days from the date it receives the written request of the Stockholder Representative pursuant to this Exhibit A the filing of any registration statement otherwise required to be prepared and filed by it pursuant to Section 1 of this Exhibit A if at the time DeSoto determines, in its reasonable judgment, that such registration and related Public Offering would materially adversely affect or interfere with any financing, acquisition, corporate reorganization or other material transaction involving DeSoto or any of its affiliates and as promptly as practicable gives the Stockholder Representative written notice of such determination. If DeSoto shall so postpone the filing of a registration statement the Stockholder Representative shall within 60 days after receipt of the notice of postponement advise DeSoto in writing whether or not it has determined to withdraw the Stockholders' request for registration, and, in the event of a withdrawal, such request for registration shall not be counted for purposes of determining the number of requests for registration to which the Stockholders collectively are entitled pursuant to Section 1 of this Exhibit A. Failure by the Stockholder Representative to timely notify DeSoto of its determination shall for all purposes be treated as a withdrawal of its request for registration and any such withdrawn requests for registration shall not be counted for purposes of determining the number of requests for registration to which the Stockholders collectively are entitled pursuant to Section 1 of this Exhibit A. In the event that the Stockholder Representative notifies DeSoto that it does not withdraw its request for registration, DeSoto shall be obligated to file a registration statement by the later of (i) the date to which DeSoto determined to postpone the filing of such registration statement and (ii) sixty days from the date on which the Stockholder Representative advises DeSoto that it has determined not to withdraw its request for registration, less the number of days that had elapsed from the date the Stockholder Representative requested registration until the date DeSoto advised the Stockholder Representative that it had determined to postpone the filing of the registration statement. DeSoto may, at its option, require that the number of shares offered for sale by the Stockholders, pursuant to a request for registration under Section 2 hereof be decreased if, in the written opinion of DeSoto's managing underwriters, such reduction (a "Scale-Back") is reasonably necessary in order to permit the orderly distribution and sale of the shares 25 26 of DeSoto common stock being offered by DeSoto and such other holders of shares of DeSoto common stock covered by such Public Offering; provided that the number of shares of DeSoto common stock (including New DeSoto Shares) offered for sale pursuant to such registration by any sellers other than DeSoto (including the Stockholders) shall be reduced proportionately. If DeSoto shall require a Scale-Back, any participant in such registration shall have the right to withdraw from the Public offering. In the event the Stockholders request registration pursuant to Section 1 hereof, (i) the offering or distribution of New DeSoto Shares shall be pursuant to a firm commitment underwriting in which the Stockholders, any other holder of shares of DeSoto common stock selling pursuant to such registration and any underwriter in the registration shall agree to use its reasonable efforts not to knowingly sell (either alone or in conjunction with any other holder of shares or underwriter or member of the selling group) more than 3% of the then outstanding shares of DeSoto common stock to any one Person (including the affiliates of the foregoing and other members of a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) of which such Person is a member, but excluding another underwriter or member of the selling group) or any shares of DeSoto common stock to a Person or group which owns in excess of 5% of the then outstanding shares of DeSoto common stock (provided, however, that if the underwriters advise the Stockholders that the Public Offering cannot be successfully completed on this basis, then the Public Offering shall be cancelled and shall not count as an exercise of Registration Rights by the Stockholders; and, provided, further, that if DeSoto common stock is sold in contravention of the foregoing maximum stock ownership and sale limitations pursuant to a Public Offering as to which the underwriters did not know of such contravention and used the reasonable efforts described above, then none of the Stockholders or underwriters shall have any liability in connection therewith), (ii) the managing underwriter shall be a member firm in good standing of the New York Stock Exchange, Inc. or a recognized investment banking firm approved by DeSoto (which approval shall not be unreasonably withheld) and (iii) DeSoto shall enter into an underwriting agreement containing representations, warranties and agreements (including customary agreements with respect to indemnification of the underwriters) not substantially different from those customarily included by an issuer in underwriting agreements with respect to secondary distributions; provided, however, that DeSoto shall not be obligated to enter into an agreement with respect to indemnification of the underwriters different in any material respect from that set forth in Section 6(a) of this Exhibit A. 26 27 DeSoto shall not be obligated to prepare and file a registration statement otherwise required pursuant to Section 1 hereof or to include New DeSoto Shares owned by the Stockholders in a registration statement pursuant to Section 2 hereof if counsel to DeSoto delivers an opinion addressed to the Stockholder Representative, in form reasonably satisfactory to the Stockholder Representative, stating that a Transfer of such New DeSoto Shares without registration under the Securities Act will comply in all respects with the Securities Act and the rules promulgated thereunder. In such event, the request for registration shall not be counted for purposes of determining the number of requests for registration to which the Stockholders collectively are entitled pursuant to Section 1 of this Exhibit A. 6. Indemnification (a) By DeSoto. In the case of each registration effected by DeSoto pursuant to this Exhibit A, DeSoto will indemnify and hold harmless each Stockholder and the Stockholder Representative (for the purpose of this Section, each Stockholder and the Stockholder Representative shall be referred to individually as a "Seller" and collectively as "Sellers"), any underwriter and each other Person, if any, who controls such Seller or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities (or actions in respect thereof), joint or several, to which any Seller or any such controlling Person or underwriter may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of, or are based upon, any untrue statement or alleged untrue statement of any material fact contained in such registration statement or final or summary prospectus contained therein (if used during the period DeSoto is required to keep the registration statement effective), or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse each such Seller, underwriter and controlling Person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such action or claim, excluding any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected without the prior written consent of DeSoto; provided, however, that DeSoto will not be liable to a particular Seller or underwriter in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or omission or alleged omission made in said 27 28 registration statement or said final or summary prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with information furnished to DeSoto by that Seller or any of its affiliates or associates, or by that underwriter, as the case may be, specifically for use in the preparation thereof. (b) By Sellers. In the case of each such registration, each Seller shall indemnify and hold harmless DeSoto, each of its directors, each of its officers who have signed such registration statement, any underwriter and each other Person, if any, who controls DeSoto or any such underwriter within the meaning of the Securities Act or who is an affiliate or associate of DeSoto, against any losses, claims, damages or liabilities, joint or several, to which DeSoto or any such director, officer, underwriter or controlling Person or affiliate or associate may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of, or are based upon, any untrue statement or alleged untrue statement of any material fact contained in such registration statement or final or summary prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein not misleading, and will reimburse DeSoto and each such director, officer, underwriter and controlling Person and affiliate and associate for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such action or claim, excluding any amounts paid in settlement of any litigation, commenced or threatened, if such settlement is effected without the prior written consent of the Seller; but in all such cases only if, and to the extent that, any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission therein made in reliance upon and in conformity with information furnished to DeSoto by the Seller or any of its affiliates or associates specifically for use in the preparation thereof. (c) Actions Commenced. Promptly after receipt by an indemnified party under Sections 6(a) or 6(b) hereof of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party, notify the indemnifying party in writing of the commencement thereof. In case any such action is brought against the indemnified party and it shall so notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to 28 29 the extent that it so chooses, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party that it so chooses, such indemnifying party shall not be liable for the costs of defense incurred by such indemnified party in connection with the defense thereof; provided, however, that if the indemnifying party fails to take reasonable steps necessary to diligently defend such claim within 20 days after receiving notice from the indemnified party that the indemnified party believes the indemnifying party has failed to take such steps, the indemnifying party shall be liable for any expenses therefor. The indemnity agreements in this Section 6 shall be in addition to any liabilities which the indemnifying parties may have pursuant to other agreement or law. 29 30 Exhibit B CONDITIONS TO TRANSFER (Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Stockholders Agreement to which this Exhibit B is annexed (the "Stockholders Agreement"). The terms "affiliate" and "subsidiary" each shall have the meaning ascribed to it in the Merger Agreement, and the term "associate" shall have the meaning ascribed to it in Rule 12b-2 under the Exchange Act.) 1. Standard Conditions. Any Transfer of New DeSoto Shares pursuant to Section 5.02(b) of the Stockholders Agreement is subject to satisfaction of all the following conditions: (i) prior to such Transfer, the transferor Stockholder must deliver to DeSoto an unqualified written opinion of counsel reasonably acceptable to DeSoto, in form and substance satisfactory to DeSoto, to the effect that such Transfer is being made in compliance with the registration provisions (or exemptions thereto) of the Securities Act; and (ii) prior to such Transfer, the transferee must execute and deliver to the transferor Stockholder and DeSoto an undertaking, in form and substance reasonably satisfactory to DeSoto, agreeing to be bound as a Stockholder by the terms of the Stockholders Agreement and, unless the transferee is any of the Narragansett Family Members at the time of the Transfer, by the terms set forth in Sections 2(b) and 3 of this Exhibit B (and upon such execution, all such terms set forth in Sections 2(b) and 3 of Exhibit B shall be deemed incorporated in the Stockholders Agreement with respect to the transferee as if set forth in full in the Stockholders Agreement). 2. Notices; Consent to Jurisdiction. (a) The undertaking contemplated by clause (ii) of Section 1 of this Exhibit B shall specify the address for the transferee Stockholder for all Notices, and upon consummation of the Transfer pursuant to which such undertaking is executed, Section 7.11 of the Stockholders Agreement shall be deemed correspondingly amended. 30 31 (b) If the transferee Stockholder is not a Narragansett Family Member, the undertaking contemplated by clause (ii) of Section 1 of this Exhibit B shall include the following additional provisions: (i) The transferee Stockholder hereby irrevocably submits to the jurisdiction of any State of Delaware court, State of New York court or Federal court sitting in the State of Delaware or the City of New York in any action or proceeding arising out of any breach of any representation or warranty, or the failure to perform any covenant or other agreement to be performed by such Stockholder contained in or contemplated by the Stockholders Agreement and each of the other agreements and documents referred to in, contemplated by, or to be entered into in connection with, the Stockholders Agreement. The undersigned also hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of any such action or proceeding. (ii) The transferee Stockholder also hereby irrevocably appoints CT Corporation System with an office located at 1633 Broadway, New York, New York 10019, as such Stockholder's agent. Such agent shall receive, on behalf of such Stockholder and such Stockholder's property, service of copies of the summons and complaint and any other process which may be served in any such action or proceeding referred to herein. Such service may be made by mailing or delivering a copy of any such process addressed to such Stockholder in care of the aforementioned agent at the address set forth above for CT Corporation System, and such Stockholder hereby irrevocably authorizes and directs said agent to accept such service on its behalf. DeSoto shall mail to the Stockholder at the last address provided to DeSoto by such Stockholder a copy of any process so delivered to the agent; it being understood and agreed that the failure of DeSoto to mail such a copy to the Stockholder shall not constitute a defect in or invalidate process given to the agent in accordance with the preceding sentence. In addition to, and without limiting the foregoing, as an alternative method of service, such Stockholder also irrevocably consents to the service of any and all process in any such action or proceeding in such State of Delaware or State of New York court or Federal court sitting in the State of Delaware or the City of New York by the 31 32 mailing of copies of such process to such Stockholder at the address set forth for such Stockholder in Section 7.11 of the Stockholders Agreement. Such Stockholder agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other matter provided by law. (iii) Nothing herein shall affect the right of such Stockholder or the right of any other party to the Stockholders Agreement, or the agent referred to herein, to serve process in any other manner permitted by Law or affect the right of such Stockholder or any other party referred to herein to bring any action or proceeding against such Stockholder or such Stockholder's property in the courts of any other jurisdiction. (iv) The foregoing consents to jurisdiction as set forth in this undertaking shall not constitute general consents to service of process in the State of New York and shall have no effect for any purpose except as provided above and shall not be deemed to confer rights on any Person other than the parties to the Stockholders Agreement. 3. Standstill. If the transferee Stockholder is not a Narragansett Family Member, the undertaking contemplated by clause (ii) of Section 1 of this Exhibit B shall include the following additional provisions: The transferee Stockholder and each of its affiliates and associates will not, and will not assist, advise, induce or encourage others (including by providing financing), to, directly or indirectly, from the date hereof until the termination of the Stockholders Agreement in accordance with its terms (i) acquire or agree, offer, seek or propose to acquire ownership (including but not limited to beneficial ownership as defined in Rule 13d-3 under the Exchange Act) of (x) DeSoto or any of its assets (except in the ordinary course) or businesses, (y) any securities issued by DeSoto, its assets or businesses (other than New DeSoto Shares), or (z) any rights or options to acquire such ownership (including from a Person other than DeSoto), (ii) seek or propose to influence or control the management or policies of DeSoto, its assets or business (other than through any Director designated by the Stockholder Representative in accordance with Article IV of the Stockholders Agreement in his capacity as a Director), 32 33 (iii) solicit or become a "participant" in any "solicitation" of "proxies" or written consents to vote DeSoto securities or become a "participant" in any "election contest" involving DeSoto or seek to advise or influence any Person with respect to the voting of any DeSoto securities (as such terms are used in the "proxy rules" of the SEC), (iv) form, join or in any way participate (including, without limitation, by acquiring or agreeing to acquire securities of any Person which is publicly disclosed (or otherwise known by the transferee Stockholder or any of its affiliates or associates) to be the beneficial owner of more than 5% of the outstanding DeSoto common stock) in a "group" within the meaning of Section 13(d)(3) of the Exchange Act with respect to any DeSoto securities (except to the extent specifically provided in the Stockholders Agreement), (v) sell any DeSoto Shares in connection with or pursuant to any Opposed Tender Offer unless permitted by Section 6.06 of the Stockholders Agreement to sell New DeSoto Shares pursuant to such Opposed Tender Offer, (vi) make any public announcement or make any written or oral proposal or invitation to discuss any possibility, intention, plan or arrangement relating to a tender or exchange offer for securities of DeSoto or a business combination (or other similar transaction which would result in a change of control), sale of assets, liquidation or other extraordinary corporate transaction involving DeSoto or any of its subsidiaries, (vii) make any request or proposal to DeSoto or any other Person to amend, terminate, modify or waive any provision of this Section or to permit otherwise any action or statement prohibited by this Section or (viii) enter into any discussions, negotiations, arrangements or understandings with any Person with respect to, announce any intention to do, or take any action which might require DeSoto to make a public announcement regarding, any of the foregoing. The restrictions contained in subclauses (x) and (y) of clause (i) of this Section shall not be applicable to ordinary brokerage or trading transactions by a securities broker or dealer or by an investor solely for investment purposes aggregating less than 5% of DeSoto's outstanding equity securities or less than 10% of any class of DeSoto's outstanding non-equity securities. 33 EX-10.17 12 REAL ESTATE SALE CONTRACT 1 EXHIBIT 10.17 REAL ESTATE SALE CONTRACT THIS REAL ESTATE SALE CONTRACT (hereinafter referred to as this "Contract") is made and entered into as of the 1st day of December, 1994, by and between DESOTO, INC., a Delaware corporation (hereinafter referred to as "Seller"), and JOHN M. GILLEN, not personally but solely as Trustee of the DeSoto, Inc. Pension Plans Real Property Trust under Trust Agreement dated October 1, 1992 (hereinafter referred to as "Purchaser"). R E C I T A L S: A. Seller currently holds title to approximately 14.88 acres of land legally described in Exhibit "A" attached hereto and by this reference incorporated herein, which is improved with a building containing approximately 195,560 square feet of floor area, located at 16750 South Vincennes Road, South Holland, Illinois and appurtenant rights (said land and building and appurtenant rights are hereinafter referred to collectively as the "Project"). B. Purchaser desires to purchase the Project from Seller, and Seller desires to sell the Project to Purchaser, upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants and promises of Seller and Purchaser, Seller and Purchaser hereby covenant and agree as follows: 1. Sale and Purchase. Seller agrees to sell and Purchaser agrees to purchase the Project upon the terms and conditions herein set forth for a purchase price of FOUR MILLION ONE HUNDRED SEVENTEEN THOUSAND AND NO/100 ($4,117,000.00) DOLLARS (hereinafter referred to as the "Purchase Price"). 2. Lease. At the Closing (as hereinafter defined), Seller and Purchaser shall enter into the Lease attached hereto as Exhibit "B" and by this reference incorporated herein (hereinafter referred to as the "Lease"), whereby Purchaser demises and leases the Project to Seller pursuant to the terms and conditions thereof. 3. Conveyance. Seller agrees to convey to Purchaser title to the Project by recordable, stamped Quitclaim Deed in Trust, subject only to: (a) general real estate taxes and special assessments not due and payable as of the date of the Closing hereof, (b) the Lease; (c) acts of Purchaser and those parties acting through or for Purchaser; (d) building lines, zoning laws, statutes and ordinances; and (e) the easements, covenants, rights of way, conditions and restrictions set forth on Exhibit "C" attached hereto and by this reference incorporated herein. 4. Closing. The consummation of the transaction herein described (herein referred to as the "Closing") shall be held on December 7, 1994, unless subsequently mutually agreed otherwise, at the offices of Katz Randall & Weinberg in Chicago, Illinois or such other location as is acceptable to Purchaser and Seller, provided title is shown to be good or is acceptable to Purchaser. At the Closing, Seller shall deliver the Deed described in Paragraph 3 hereof and a Bill of Sale conveying to Purchaser 2 the personal and intangible property owned by Seller and relating to the operation of the Project, as opposed to personal property owned by Seller and used in the operation of Seller's business on the Project. 5. Condition. Seller agrees to deliver and Purchaser agrees to accept possession of the Project in the same condition as it is at the date of this Contract, ordinary wear and tear excepted. Purchaser acknowledges and represents that at neither Seller nor any party acting on behalf of Seller has made any warranty or representation concerning the Project and Seller is purchasing the Project in an "as-is" condition. 6. Evidence of Title, Survey. Seller shall deliver to Purchaser at the Closing a current survey of the Project and a current title commitment from First American Title Insurance Company on the Project whereby such title company agrees to issue an ALTA (1990) Form B Owner's Title Insurance in the amount of the Purchase Price as set forth in Paragraph 1 hereof. The aforesaid commitment shall show title in Seller, subject only to (a) the title exceptions set forth in Paragraph 3 hereof, (b) title exceptions pertaining to liens or encumbrances of a definite or ascertainable amount which may be removed by the payment of money at the Closing and which the Seller may so remove at that time by using the funds to be paid to Seller hereunder, and (c) the general exceptions contained on said form of policy (all of which are herein referred to as the "Permitted Exceptions"). The title policy shall be conclusive evidence of good title as therein shown as to all matters insured by the policy or policies subject only to the exceptions therein stated. If the said survey is not available by the Closing, Seller shall continue to be obligated to deliver same after the Closing subject to Purchaser's right to reasonably reject same and repay the Purchase Price and reconvey the Project to Seller, at Purchaser's cost and expense, without further liability on either party. 7. Closing Adjustments. General real estate taxes and assessments shall not be adjusted with respect to the subject transaction, provided Seller shall pay when due all real estate taxes, assessments and other governmental impositions payable with respect to the Project through the date of the Closing. Seller shall also pay all utility charges imposed with respect to the Project through the Closing. No items shall be prorated at the Closing. Seller shall pay all transfer taxes and Seller and Purchaser shall furnish completed Real Estate Transfer Declarations in the forms required pursuant to the applicable Real Estate Transfer Tax Acts. 8. Damage. The provisions of the Uniform Vendor and Purchaser Risk Act of the State of Illinois shall be applicable to this Contract. 9. Time. Time is of the essence of this Contract. 10. Miscellaneous. If the date for Closing or performance of an obligation falls on a Saturday, Sunday or holiday, the date shall be deferred until the first business day following. No amendments, modifications or changes shall be binding upon a party unless set forth in a duly executed document. 11. No Broker. Purchaser and Seller hereby represent to each other that neither of them have had any dealings with respect to the Project with any broker or real estate dealer. 2 3 12. Authority to Execute. Purchaser and Seller hereby covenant that the execution of this Contract and the transaction herein contemplated have been duly approved and that the party executing this Contract on behalf of Seller and Purchaser, as applicable, is authorized to execute same. 13. Entire Agreement. This Contract contains the entire agreement of the parties with respect to the sale and purchase of the Project. All previous and contemporaneous negotiations, understandings and agreements between the parties hereto, with respect to the transaction set forth herein, are merged in this instrument, which alone fully and completely expresses the parties' rights and obligations. The preparation of this Contract has been a joint effort of the parties hereto and the resulting documents shall not, solely as a matter of judicial construction, be construed more severely against one of the parties than the other. 14. Terms. As used herein, the terms (a) "person" shall mean an individual, a corporation, a partnership, a trust, an unincorporated organization or any agency or political subdivision thereof, (b) "including" shall mean including, without limiting the generality of the foregoing, and (c) the masculine shall include the feminine and the neuter. 15. Binding Effect and Survival. This Contract shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors and assigns. Notwithstanding the foregoing, neither party may assign its rights hereunder without the prior written consent of the other party. No assignment of this Contract shall relieve the assigning party of its obligations hereunder. 16. Captions. The captions of this Contract are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Contract or any of the provisions hereof. 17. Notices. All notices, demands, requests and other communications under this Agreement shall be in writing and shall be deemed properly served when received if delivered by hand or expedited messenger service with proof of receipt to the party to whose attention it is directed or when received if sent, postage prepaid, by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If intended for Purchaser: John M. Gillen, Trustee 50 Jane Street New York, NY 10014 If intended for Seller: DeSoto, Inc. 16750 South Vincennes Road South Holland, Illinois 60473 Attn: Anne E. Eisele, Sr. Vice President or such other address or to such other party which any party entitled to receive notice hereunder designates to the others in writing by a notice duly given hereunder. 3 4 18. Exculpation. This Contract is executed by John M. Gillen, not personally but solely as Trustee of the DeSoto, Inc. Pension Plans Real Property Trust under Trust Agreement dated October 1, 1992, in the exercise of the power and authority conferred upon and vested in it as such Trustee. All the terms, provisions, stipulations, covenants and conditions to be performed by John M. Gillen are undertaken by it solely as Trustee, as aforesaid, and not individually, and all statements herein made are made on information and belief and are to be construed accordingly, and no personal liability shall be asserted or be enforceable against John M. Gillen, personally, by reason of any of the terms, provisions, stipulations, covenants and/or statements contained in this Contract. IN WITNESS WHEREOF, the parties hereto have executed this Real Estate Sale Contract as of the day first above written. PURCHASER: /s/ JOHN M. GILLEN -------------------------------------- JOHN M. GILLEN, not personally or individually, but as Trustee as aforesaid SELLER: DESOTO, INC., a Delaware corporation By: /s/ [ILLEGIBLE] ----------------------------------- Its: Sr. V.P. 4 5 EXHIBIT "A" LEGAL DESCRIPTION 16750 South Vincennes Road South Holland, Illinois 60473 Parcel I (North Parcel): Lot 13 in South Holland Industrial Park 1st Addition, being a subdivision of part of the southwest quarter and part of the southeast quarter of Section 21, Township 36 North, Range 14 east of the Third Principal Meridian in Cook County, Illinois. Parcel 2 (South Parcel): That part of the north 292.90 feet of Lot 4 in DeVries and others' subdivision of the southeast quarter of Section 21, Township 36 north, Range 14 east of the Third Principal Meridian, lying east of a line described as beginning at the point of intersection of the north line of said Lot 4 with the east line of that portion of said Lot 4 conveyed to Chicago Terminal Transfer Company by deed recorded as Document No. 2972842; and running thence southeasterly on a line parallel with the center line of Vincennes Road (Thornton Blue Island Road) to the south line of the north 292.90 feet of said Lot 4, all in Cook County, Illinois. Permanent Index Numbers: 29-21-400-108 29-21-400-031 5 6 EXHIBIT "B" LEASE (ATTACHED) 6 7 EXHIBIT "C" PERMITTED TITLE EXCEPTIONS 1. BUILDING LINE 25 FEET ON THE EASTERLY LINE OF THE LAND AS SHOWN ON THE PLAT OF SUBDIVISION. (AFFECTS PARCEL 1) 2. EASEMENT FOR PUBLIC UTILITIES AS SHOWN ON THE PLAT OF SUBDIVISION. (AFFECTS THE NORTH AND SOUTH 10 FEET OF THE LAND) (AFFECTS PARCEL 1) 3. EASEMENT IN FAVOR OF NORTHERN ILLINOIS GAS FOR THE INSTALLATION, MAINTENANCE, REPAIR, RELOCATION, REMOVAL AND RENEWAL OF GAS MAINS GRANTED BY DOCUMENT 21193241 ON JUNE 25, 1970, AND THE TERMS AND CONDITIONS THEREOF. (AFFECTS PARCEL 2) 4. PLAT OF DEDICATION FOR PUBLIC STREETS (VINCENNES AVENUE) DATED APRIL 18,1977 AND RECORDED JUNE 9,1977 AS DOCUMENT 23961218. (AFFECTS PARCEL 2) 5. EASEMENT FOR INGRESS AND EGRESS OVER THE NORTH 18 FEET OF PARCEL 2, CREATED BY DOCUMENTS 13364166 AND 13364168. (AFFECTS PARCEL 2) 6. SPURS, SWITCH TRACKS, AND RAILROAD RIGHTS OF WAY, IF ANY. 7 EX-10.18 13 LEASE AGREEMENT 1 EXHIBIT 10.18 SOUTH HOLLAND LEASE THIS LEASE, made this 7th day of December, 1994 between JOHN M. GILLEN, not personally or individually, but solely as Trustee of the DeSoto, Inc. Pension Plans Real Property Trust under Trust Agreement dated October 1, 1992 (hereinafter referred to as "Landlord"), and DESOTO, INC., a Delaware corporation (hereinafter referred to as "Tenant"); WITNESSETH: ARTICLE I PREMISES SECTION 1.1. Landlord, for and in consideration of the rents herein reserved and of the covenants and agreements herein contained on the part of Tenant to be kept, observed and performed, does by these presents, lease to Tenant, and Tenant hereby leases from Landlord, the real estate located at 16750 South Vincennes Road in South Holland, Illinois, and legally described on Exhibit "A" attached hereto and by this reference incorporated herein (hereinafter referred to as the "Land"), together with easements and rights and obligations appurtenant thereto and all improvements now located or hereafter constructed thereon (hereinafter referred to as the "Improvements"), subject to covenants, conditions, agreements, easements, encumbrances and restrictions affecting the Land and the Improvements thereon. SECTION 1.2. The Land and Improvements are hereinafter referred to collectively as the "Premises." ARTICLE II TERM SECTION 2.1. The initial term of this Lease shall commence on December ____, 1994 (hereinafter referred to as the "Commencement Date") and shall end on December 31, 2004 unless sooner terminated as hereinafter set forth. SECTION 2.2. The initial ten (10) year term as so fixed is herein referred to as the "Initial Term", and the Initial Term as may be extended or sooner terminated is hereinafter referred to as the "Term". ARTICLE III CONDITION OF PREMISES SECTION 3.1. Tenant agrees to accept the Premises in an absolutely "as-is" condition, and Tenant acknowledges that Landlord, its agents, attorneys, representatives and employees have not and do not make any representation or warranties, express or implied, to Tenant regarding the Premises, including, but not limited to those relating to: (i) the zoning of the Premises; (ii) the condition of any underground, above ground or surface 2 improvements; (iii) the size, area, use or type of the Premises or the fitness of the Premises for any intended or particular use; (iv) the nature of the soil on and underlying the Premises or its suitability for development or any other use thereof; (v) any financial information pertaining to the operation of the Premises; (vi) the status of any requirements or obligations imposed, implied or to be undertaken by the owner or developer of the Premises pursuant to any zoning, subdivision, development laws or agreements with any governmental entities; (vii) the presence or absence of any toxic wastes, hazardous materials or structural defects in, on or under the Premises or any improvements thereon; or (viii) the presence or absence of any rights of any governmental authority, or of owners of property in the vicinity of the Premises, to obtain reimbursement, recapture or special assessments from any owner of the Premises for all or a portion of the cost of any utilities, roads, or other improvements heretofore or hereafter located on or in the vicinity of the Premises (and if such rights exist, Tenant agrees to pay all sums due pursuant thereto, it being expressly acknowledged and agreed that, Tenant hereby waives any claim Tenant may have or may hereafter acquire against Landlord, its agents, attorneys, representatives or employees for said costs), any and all such representations and warranties, express or implied, being hereby expressly waived by Tenant and disclaimed by Landlord, Tenant waives any claim that may exist for patent and/or latent defects or for mutual or unilateral mistake of fact. SECTION 3.2. The Landlord has made no promise to alter, remodel, decorate, clean or improve the Premises or any portion thereof and no representation respecting the condition of the Premises or any portion thereof have been made by Landlord to Tenant. ARTICLE IV RENT SECTION 4.1 In consideration of the leasing aforesaid, Tenant agrees to pay Landlord, without offset or deduction, a total Base Rent for the Initial Term of THREE MILLION NINE HUNDRED ELEVEN THOUSAND TWO HUNDRED AND NO/100 (3,911,200.00) DOLLARS, plus any prorata Base Rent for the period commencing with the Commencement Date and ending on December 31, 1994, payable monthly in advance in installments of THIRTY-TWO THOUSAND FIVE HUNDRED NINETY-THREE AND 33/100 ($32,593.33) DOLLARS commencing on January 1, 1995 and continuing on the first day of each month thereafter for the balance of the Initial Term of this Lease, and in addition thereto, shall, commencing on the Commencement Date, pay such charges as are herein described as Additional Rent. The term "Rent" when used in this Lease shall include all Base Rent payable under this Section 4.1. as well as the charges herein described as "Additional Rent". Any installment of Rent accruing under the provisions of this Lease which shall not be paid when due, shall bear interest at the "Lease Interest Rate", as defined in Section 35.8 hereof, from the date when the same is due hereunder until the same shall be paid. All Rent payable hereunder shall be payable to DeSoto Pension, c/o DeSoto, Inc., 16750 South Vincennes Road, South Holland, Illinois, 60473, Attention: Anne E. Eisele, Senior Vice President, or as Landlord may otherwise from time to time designate in writing. SECTION 4.2. Monthly Base Rent for the period commencing with the Commencement Date and ending on December 31, 1994 shall be payable on the Commencement Date in the amount of ONE THOUSAND FIFTY-ONE AND 40/100 ($1,051.40) DOLLARS per day. 2 3 ARTICLE V TAXES SECTION 5.1. Tenant further agrees to pay before any fine, penalty, interest or cost may be added thereto for the nonpayment thereof, as Additional Rent for the Premises, all "Taxes" (as hereinafter defined) levied, assessed or imposed upon the Premises or any part thereof accruing during the Term of this Lease, notwithstanding that such taxes may not be due and payable until after the expiration of the Term of this Lease; provided, however, that the Taxes levied against the Premises shall be prorated between Landlord and Tenant for the first year of the Initial Term hereof as of the Commencement Date and as of the date of expiration of the Term of this Lease for the last year of said Term, all on the basis of the most recent ascertainable taxes as applied to the most recent assessed valuation of the Premises. Tenant shall be responsible for all increases in Taxes based upon Tenant's occupancy of the Premises. After the expiration of the Term hereof, including any extensions thereof, Tenant hereby agrees to reprorate Taxes if necessary in Landlord's discretion. In the event of any increase in Taxes from the Taxes reflected on the proration made upon the expiration of the Term of this Lease, Tenant agrees to immediately pay to Landlord such sums as reflected by such reproration. Benefit may be taken by Tenant of the provisions of any statute or ordinance permitting any special assessment to be paid over a period of years; provided, however, Tenant shall pay all installments of special assessments due during the Term hereof. Tenant shall, in addition to the foregoing, pay any new Tax of a nature not presently in effect but which may hereafter be levied, assessed or imposed upon Landlord or upon the Premises, if such Tax shall be based upon or arise out of the ownership, use or operation of the Premises; provided, however, that for the purpose of computing Tenant's liability for such new type of Tax, the Premises shall be deemed the only property of Landlord. As used herein, the term "Taxes" shall mean real estate taxes, assessments, sewer rents, rates and charges, permit and license fees, transit taxes, taxes based upon the receipt of rent, and any other federal, state or local governmental charge, general, special, ordinary or extraordinary, which may now or hereafter be assessed against the Premises or any portion thereof in any year during the Term hereof, and shall also include any personal property taxes (attributable to the year in which paid) imposed upon the furniture, fixtures, machinery, equipment, apparatus, systems and appurtenances used in connection with the operation of the Premises. Nothing contained herein shall be construed to require Tenant to pay any franchise, inheritance, estate, succession or transfer tax of Landlord or any income or excess profits tax assessed upon or in respect of all income of Landlord or chargeable to or required to be paid by Landlord unless such tax shall be specifically levied against the rental income of Landlord derived hereunder (as opposed to a general income tax), which tax shall be paid by Tenant as part of Taxes hereunder provided said rental income shall be considered as the sole income of Landlord. SECTION 5.2. Tenant further agrees to pay as Additional Rent for the Premises all utilities and all other impositions, ordinary and extraordinary, of every kind and nature whatsoever, which may be levied, assessed or imposed upon the Premises or any part thereof accruing or becoming due and payable during the Term of this Lease, including but not limited to all costs and obligations under that certain Parking Easement recorded as Document No. 92780730. SECTION 5.3. The Tenant shall pay all of the obligations contained in Section 5.1 hereof at least five (5) days prior to the due date thereof and shall thereupon provide Landlord with evidence of such payment. SECTION 5.4. Landlord shall, at its option, have the right, without notice to Tenant, at all times during the Term to pay any such Taxes not timely paid by Tenant, and the amounts so paid, including reasonable expenses, shall be so much Additional Rent due at the next rent day after any such payments, with interest at the Lease Interest Rate from the date of payment thereof. SECTION 5.5. Tenant shall not be required to pay any Tax, Tax lien or other imposition or charge upon or against the Premises or any part thereof so long as Tenant shall, in good faith and with due diligence, contest the same or the validity thereof by appropriate legal proceeding which shall have the effect of preventing the collection of the tax, tax lien or other imposition or charge so contested; provided that on or before 3 4 the due date of any such Tax, Tax lien or other imposition or charge, Tenant shall either pay such Tax or deposit with Landlord an amount equal to the amount of such Tax, Tax lien, imposition or charge so contested, which amount, together with all interest earned thereon, shall be held by Landlord as security to insure payment of the amount of the Tax, Tax lien or other imposition or charge, and all interest and penalties thereon. The amount so deposited and all interest earned therein shall be held by Landlord in a separate account at a federally insured banking institution until final resolution of such contest. SECTION 5.6. In the event that Tenant at any time institutes suit to recover any Tax, Tax lien or other imposition or charge paid by Tenant under protest in Landlord's name, Tenant shall have the right, at its sole expense, to institute and prosecute such suit or suits in Landlord's name, in which event Tenant covenants and agrees to indemnify Landlord and save it harmless from and against all costs, charges or liabilities in connection with any such suit. All funds received as a result of any such suit shall belong to Tenant unless any such recovery relates to a period of time which is not part of the Term, and in such case shall be paid to Landlord. ARTICLE VI USE SECTION 6.1. The Premises shall be used for manufacturing, distribution, warehousing, office, retail, research and other legal uses. Tenant shall not use or occupy the Premises or permit the Premises to be used or occupied contrary to any statute, rule, order, ordinance, requirement, regulation or restrictive covenant applicable thereto or in any manner which would violate any certificate of occupancy affecting the same or which would render the insurance thereon void or the insurance risk more hazardous, or which would cause structural injury to the Improvements or cause the value or usefulness of the Premises or any part thereof to diminish or which would constitute a public or private nuisance or waste, and Tenant agrees that it will, promptly upon discovery of any such use, immediately notify Landlord and take all necessary steps to compel the discontinuance of such use. SECTION 6.2. Tenant shall not permit the Premises, or any portion thereof, to be used in such manner which impairs Landlord's right, title or interest in the Premises or any portion thereof, or in such manner which gives rise to a claim or claims of adverse possession or of a dedication of the Premises, or any portion thereof, for public use. ARTICLE VII MAINTENANCE OF PREMISES SECTION 7.1. Tenant agrees to take good care of the Premises, including the Improvements, and keep same and all parts thereof, including without limitation, the entire exterior and interior, the roof, foundations, parking areas, sidewalks and appurtenances thereto together with any and all alterations and additions thereto, in good order, condition and repair, suffering no waste or injury. Tenant shall, at its sole cost and expense, promptly make all necessary repairs and replacements, structural or otherwise, ordinary as well as extraordinary, foreseen as well as unforeseen, in and to any Improvements or equipment now or hereafter located upon the Land, including, without limitation, the entire interior and exterior of the Improvements, the roof, the foundation, sidewalks, parking areas, railroad tracks, water, sewer, gas and electricity connections, pipes, mains and all other fixtures, machinery, apparatus, equipment and appurtenances now or hereafter belonging to, connected with or used in conjunction with the Premises. All such repairs and replacements shall be of first class quality and sufficient for the proper maintenance and operation of the Premises. Tenant shall keep and maintain the Premises, including the Improvements and all sidewalks, vault space, parking areas and areas adjacent thereto, safe, secure and clean, 4 5 specifically including, but not by way of limitation, snow and ice clearance, landscaping and removal of waste and refuse matter so as to comply with any applicable governmental law, statute, ordinance or regulation. Tenant shall not permit anything to be done upon the Premises (and shall perform all maintenance and repairs thereto so as not) to invalidate, in whole or in part, or prevent the procurement of any insurance policies which may, at any time, be required under the provisions of this Lease. Tenant shall not obstruction of any parking area, adjoining street or sidewalk. SECTION 7.2. Tenant shall not create any openings in the roof or exterior walls of the Improvements, without the prior written consent of Landlord , nor shall Tenant make any alterations, additions or improvements to the Premises, except as permitted by Section 12.1 hereof, without the prior written consent of Landlord. All alterations, additions and improvements (except "Tenant's Equipment", as defined in Section 20.2 hereof), put in at the expense of Tenant shall become the property of Landlord and shall remain upon and be surrendered with the Premises as a part thereof at the termination of this Lease, or at Landlord's option, Landlord may require Tenant to remove such alterations, additions and improvements and restore the Premises to its original condition. Tenant, at its sole cost and expense, will make all additions, improvements and alterations on the Premises which may be necessary by the act or neglect of any other person or corporation (public or private), including supporting the streets and alleys adjoining the Premises. No additions, improvements or alterations shall be commenced until Tenant has first satisfied the requirements set forth in Section 10.2 hereof. SECTION 7.3. Tenant at its own cost and expense also shall promptly comply with any and all governmental requirement to or affecting the Premises or any part thereof, irrespective of the nature of the work required to be done, extraordinary as well as ordinary, whether or not the same involve or require any structural changes or additions in or to the Improvements and irrespective of whether or not such changes or additions be required on account of any particular use to which the Premises or any part thereof are being put. SECTION 7.4. Landlord shall not be required to furnish any services of facilities whatsoever to the Premises. Tenant hereby assumes full and sole responsibility for condition, operation, repair, alteration, improvement, replacement, maintenance and management of the Premises. Landlord shall not be responsible for any loss or damage to the person or property of Lessee, any guests or invitees, any persons using or working on the Premises, or any persons claiming by, through or under, or any agents, employees, heirs, legal representatives, successors or assigns of, any of the foregoing. SECTION 7.5. Tenant covenants and agrees to hold Landlord (if Landlord is a trustee, the term "Landlord" for the purpose of this Section 7.5 shall include the trustee and all beneficiaries of such trust) and its partners, shareholders, officers, directors, agents, employees and their respective successors and assigns harmless and indemnified at all times against any loss, liability, claim, damage, cost or expense, including reasonable attorneys' fees, by reasons of any accident, loss or damage resulting to persons or property from any use which may be made of the Premises or of any equipment at any time situated thereon, or by reason of or growing out of any act or thing done or omitted to be done upon the Premises or in any equipment at any time situated thereon. Tenant further agrees that it will keep Landlord and the Premises free and clear of and from any and all loss, liabilities, damage, cost or expenses, including reasonable attorneys' fees, arising out of any damage which may be sustained by adjoining property or adjoining owners or other persons or property in connection with any maintenance, remodeling altering or repairing of any improvements or the erection of any new improvements on the Land. ARTICLE VIII LIABILITY INSURANCE SECTION 8.1. Tenant further agrees that it will at all times during the Term hereof, at its sole cost and expense, carry and maintain, for the benefit of Landlord, Landlord's agents and beneficiaries and 5 6 Tenant, comprehensive general public liability insurance against claims for personal injury, sickness or disease, including death and property damage, including Scaffolding Act coverage, in, on or about the Premises, or in, on or about the streets, sidewalks or premises adjacent to the Premises, such insurance to afford protection in such amounts as Landlord may, from time to time, require, but not less than $2,000,000.00 in respect to each person, and to the limit of not less than $5,000,000.00 in respect to any one occurrence causing bodily injury, personal injury or death, and to the limit of not less than $1,000,000.00 in respect to property damage, and will also carry, for the mutual benefit of Landlord and of Tenant, if any is required, steam boiler insurance on all steam boilers, pressure vessels and other such apparatus, including piping, in such amounts as Landlord may from time to time reasonably require. SECTION 8.2. Tenant will, at all such times as there may be one or more passenger or freight elevators in any Improvements during the Term hereof, carry and maintain elevator liability insurance, for the mutual benefit of Landlord and Tenant, in an amount, in form and with companies satisfactory to Landlord. SECTION 8.3. In the event the Premises are owned by a trust, Tenant shall maintain all insurance required pursuant to this Lease in the name of said trust, as well as the agents and beneficiaries thereof, as their respective interests may appear. At Landlord's request, Tenant shall cause any lender of Landlord secured in whole or in part to be a named insured under any policy of insurance required to be maintained by Tenant under this Lease. SECTION 8.4 Tenant shall furnish Landlord with certified copies or duplicate originals of all insurance policies required to be procured by Tenant under this Lease. All such insurance shall be procured from a responsible insurance company or companies reasonably satisfactory to Landlord and to Landlord's mortgagee, if any, and authorized to do business in the state where the Premises are located and may, with Landlord's prior written consent, be obtained by Tenant by endorsement on its blanket insurance policies. All policies of insurance required to be procured of Tenant under this Lease shall provide that the same may not be canceled or altered except upon thirty (30) days' prior written notice to Landlord and Landlord's mortgagee, if any. ARTICLE IX HAZARD INSURANCE SECTION 9.1. Tenant shall, at all times during the Term of this Lease, at its sole expense, keep in effect insurance on all Improvements against loss by fire and lightning, the risks covered by what is commonly known as extended coverage, malicious mischief and vandalism, and all other risks of direct physical loss, in an amount equal to the full replacement value on the replacement form basis, of such Improvements. The policy or policies evidencing such insurance shall be written by a company or companies reasonably satisfactory to Landlord and to Landlord's mortgagee, if any, and authorized to do business in the state where the Premises are located, shall name Landlord and Tenant as insureds thereunder, and shall provide that losses shall be paid to said insureds as their respective interests may appear. At the request of Landlord, a mortgage clause may be included in said policies covering Landlord's mortgagee, if any. Said policies shall provide that the same may not be canceled or altered except upon thirty (30) day's prior written notice to Landlord and to Landlord's mortgagee, if any. The originals or certified copies of such policies shall be deposited with Landlord who may deposit the same with its mortgagee, if any. SECTION 9.2. Tenant further agrees that, at Landlord's written request, if and when obtainable, it will procure and maintain so-called war risk and war damage insurance, earthquake and flood insurance on the Improvements for not less than one hundred (100%) percent of the full insurance value above foundation. Such insurance shall provide for payment of loss thereunder to Landlord and Tenant, as their interests may appear, and shall, at Landlord's request, contain a mortgage clause in favor of Landlord's mortgage, if any. 6 7 SECTION 9.3. Tenant shall furnish insurance against loss of Rents due to the occurrence of any casualty or hazard in the amount of all Base Rent payments, Taxes and insurance premiums required hereunder for a twelve (12) month period. SECTION 9.4. In the event Tenant shall at any time fail, neglect or refuse to procure such insurance and keep the same in full force as provided for in this Lease, then Landlord may, at its election, procure or renew such insurance, and any amounts paid therefor by Landlord shall be so much Additional Rent due at the next Rent payment date after any such payment, with interest at the Lease Interest Rate from the date of payment thereof. SECTION 9.5. Landlord and Tenant hereby waive all claims for recovery from the other party for any loss or damage (whether or not such loss or damage is caused by negligence of the other party and, notwithstanding any provision or provisions obtained in the Lease to the contrary) to any person or property insured under valid and collectible insurance policies to the extent of any recovery collectible under such insurance, subject to the limitation that this waiver shall apply only when it is permitted by the applicable policy of insurance. SECTION 9.6. Policies or certificates evidencing all insurance required under this Lease shall be delivered to Landlord within sixty (60) days after demand, and renewals thereof shall be delivered to Landlord at least thirty (30) days prior to the expiration dates of the respective policies. ARTICLE X DAMAGE OR DESTRUCTION SECTION 10.1 Tenant agrees that in case of damage to or destruction of any Improvements or of the fixtures and equipment therein, by fire or other casualty, it will promptly, at its sole cost and expense, subject to Section 10.3 hereof, repair, restore, or rebuild the same and upon the completion of such repair, restoration or rebuilding, the value and rental value of the Improvements shall be at least equal to the value and rental value of the Improvements immediately prior to the happening of such fire or other casualty. Rent and all other charges payable by Tenant hereunder shall not abate during the period of such repair, restoration or rebuilding and during any period that the Improvements are not tenantable because of any damage or destruction. If any such loss or damage is not fully insured, Tenant shall repair, restore or rebuild at its sole cost and expense. SECTION 10.2. Before commencing any repairing, restoring or rebuilding, involving an estimated cost of more than $100,000.00, (a) plans and specifications therefor, prepared by a licensed architect, shall be submitted to and approved by Landlord; (b) Tenant shall furnish to Landlord an estimate of the cost of the proposed work, certified by the architect who prepared such plans and specifications; and (c) all contracts for any proposed work shall be submitted to and approved by Landlord. All restoration, repair, rebuilding and other construction performed by or on behalf of Tenant to the Premises shall be performed in a good and workmanlike manner in accordance with all applicable governmental statutes, ordinances and regulations. SECTION 10.3. In the event of loss under any policy or policies of insurance described in Article IX hereof, the proceeds thereof shall, subject to the rights of Landlord's mortgagee, if any, be paid to Landlord and shall thereafter be disbursed from time to time by Landlord for the expense of repairing or rebuilding the Improvements which have been damaged or destroyed; provided, however, that it shall first appear to the satisfaction of Landlord that the amount of insurance money in its hands, plus any additional funds deposited by Tenant, shall at all times be sufficient to pay for the completion of said repairs or rebuilding. Upon the completion of said repairs or rebuilding, free from all liens of mechanics and materialmen and others, any surplus insurance proceeds subject to the rights of Landlord's mortgagee, if any, shall be paid to Landlord. If, in the reasonable estimate of Tenant, the cost of repair or rebuilding exceeds $500,000.00, Tenant shall deposit with Landlord any 7 8 sums required to the end that the sums held by Landlord shall, prior to commencement of such work and at all times during the prosecution of same be sufficient to fully and completely pay all costs of such work. All payouts by Landlord as hereinabove required, shall be made after making provision for a holdback of ten (10%) percent of the cost of such work and upon the written request of Tenant accompanied by the certificate of the architect or engineer in charge of the repairs and rebuilding stating: (a) that the sum requested is due to the contractors, materialmen, laborers, engineers, architects or other persons (whose names and address shall be stated) who have furnished services or materials for the repairs and restoration, or is required to reimburse Tenant for expenditures made by Tenant in connection with the repairs and restoration; (b) that the sum requested when added to all sums previously paid out under this Article for the repairs and restoration does not exceed the value of the repairs and restoration done to the date of such certificate; (c) the progress of the repairs and restoration and a certification that the same have been made in a good and workmanlike manner; (d) that the repairs and restoration have been done pursuant to all plans and specifications required by Section 10.2. hereof; and (e) that in the opinion of the architect or engineer, the remaining amount of the sum on deposit will be sufficient to pay for same in full upon completion of the repairs and restoration. Tenant shall furnish Landlord at the time of any such payment, statements and waivers of lien as may be required under the mechanic's lien law of the state wherein the Premises are located to fully waive lien rights with respect to any payment to be made, and an official title or other search, or other evidence satisfactory to Landlord, that there has not been filed with respect to the Premises any mechanic's or other lien which has not been discharged of record, in respect of any work, labor, services or materials performed, furnished or supplied, in connection with the repair and restoration, and that all of said materials have been purchased free and clear of any security agreement or title retention agreement. Landlord shall not be required to pay out any sum when the Premises shall be encumbered with any such lien or agreement, or when Tenant is in default under any covenant or obligation set forth herein. SECTION 10.4. In the event Tenant shall not commence the repair, restoration or rebuilding as required by this Article within a reasonable time (but in no event in excess of six (6) months) after any damage or destruction and diligently pursue the completion of same, then Tenant shall be in default under this Lease and in addition to any remedy of Landlord provided for herein, at law or in equity, Landlord may retain the balance of all sums deposited pursuant to this Article remaining in the hands of Landlord. ARTICLE XI LIENS SECTION 11.1. Tenant shall not do any act which shall in any way encumber the title of Landlord in and to the Premises, nor shall any interest or estate of Landlord in the Premises be in any way subject to any claim by way of lien or encumbrance, whether by operation of law or by virtue of any express or implied contract by Tenant, and any claim to or lien upon the Premises arising from any act or omission of Tenant shall accrue only against the leasehold estate of Tenant and shall in all respects be subject and subordinate to the paramount title and rights of Landlord in and to the Premises. Tenant will not permit the Premises to become subject 8 9 to any mechanics', laborers' or materialmen's lien on account of labor or material furnished to Tenant or claimed to have been furnished to Tenant in connection with work of any character performed or claimed to have been performed on the Premises by or at the direction of sufferance of Tenant; provided, however that Tenant shall have the right to contest in good faith and with reasonable diligence, the validity of any such lien or claimed lien if Tenant shall first give to Landlord an amount equal to the amount of the lien or claimed lien which, together with interest earned thereon, shall be held by Landlord as security to insure payment thereof and to prevent any sale, foreclosure or forfeiture of the Premises by reason of non-payment thereof. The amount so deposited with Landlord shall be held by Landlord in an account established at a federally insured banking institution until satisfactory removal of said lien or claim of lien. On any final determination of the lien or claim for lien, Tenant will immediately pay any judgment rendered, with all proper costs and charges, and will, at its own expense, have the lien released and any judgment satisfied. Should Tenant fail to diligently contest and pursue such lien contest, Landlord may, at its option, use the sums so deposited to discharge any such lien upon the renewal of such lien or encumbrance Landlord shall pay all such sums remaining on deposit to Tenant. SECTION 11.2. If Tenant shall fail to contest the validity of any lien or claimed lien or fail to give security to Landlord to insure payment thereof, or shall fail to prosecute such contest with diligence, or shall fail to have the same released and satisfy any judgment rendered thereon, then Landlord may, at its election (but shall not be so required) remove or discharge such lien or claim for lien (with the right, in its discretion, to settle or compromise the same), and any amounts advanced by Landlord, including reasonable attorneys' fees, for such purposes shall be so much Additional Rent due from Tenant to Landlord at the next rent date after any such payment, with interest thereon at the Lease Interest Rate from the date so advanced. ARTICLE XII ALTERATIONS AND IMPROVEMENTS SECTION 12.1. The Tenant may make alterations, improvements and additions to the Premises provided that no alteration, addition or improvement to the Premises shall be commenced by Tenant until Tenant has furnished Landlord with a satisfactory certificate or certificates from an insurance company reasonably acceptable to Landlord, evidencing workmen's compensation coverage, and insurance coverage in amounts reasonably satisfactory to Landlord and protecting Landlord against public liability and property damage to any person or property, on or off the Premises arising out of and during the making of such alterations, additions or improvements. Any alteration, addition or improvement by Tenant hereunder shall be done in a good and workmanlike manner in compliance with any applicable governmental law, statute, ordinance or regulation and shall, upon termination of this Lease, automatically be deemed the property of Landlord. ARTICLE XIII CONDEMNATION SECTION 13.1. In the event the whole of the Premises shall be taken as a result of the exercise of the power of eminent domain or condemned for a public or quasi-public use or purpose by any competent authority or sold to the condemning authority under threat of condemnation, or in the event a portion of the Premises shall be taken or sold as a result of such event, and as a result thereof the balance of the Premises cannot be used for the same purpose as before such taking, sale or condemnation, then and in either of such events, the Term of this Lease shall terminate as of the date of vesting of title pursuant to such proceeding of sale. The total award, compensation or damages received from such proceeding or sale (hereinafter collectively called the "Award"), shall be paid to and be the property of Landlord, whether the Award shall be made as compensation for diminution of the 9 10 value of the leasehold or the fee of the Premises or otherwise. Tenant may petition the condemning authority for loss of its leasehold and moving expenses. Tenant shall execute, immediately upon demand of Landlord, such documents as may be necessary to facilitate collection by Landlord of any such Award. SECTION 13.2. In the event only a part of the Premises shall be taken as a result of the exercise of the power of eminent domain or condemned for a public or quasi-public use or purpose by any competent authority or sold to the condemning authority under threat of condemnation, and as a result thereof the balance of the Premises can be used for the same purpose as before such taking, sale or condemnation, this Lease shall not terminate and Tenants at its sole cost and expense, shall promptly repair and restore the Premises. Any Award paid as a consequence of such taking, sale, or condemnation, shall be paid to Landlord and shall be disbursed in accordance with the provisions of Section 10.3. hereof. Any sums not so disbursed shall be retained by Landlord. In the event Tenant shall not promptly commence the repair or restoration required hereby, and diligently pursue the completion of same, Tenant shall be deemed in default under this Lease and, in addition to any remedy of Landlord provided for under this Lease, at law or in equity, Landlord may retain the Award, or the balance thereof remaining in the hands of Landlord. ARTICLE XIV RENT ABSOLUTE SECTION 14.1. This Lease shall be deemed and construed to be a "net lease" and Tenant agrees to pay all costs and expenses of every kind and nature whatsoever, ordinary and extraordinary, arising out of or in connection with the ownership, maintenance, repair, replacement, use and occupancy of the Premises during the Term of this Lease, which, except for the execution and delivery hereof, would otherwise have been payable by Landlord. Any damage to or destruction of all or any portion of the Improvements by fire, the elements or any other cause whatsoever, whether with or without fault on the part of Tenant, shall not terminate this Lease or entitle Tenant to surrender the Premises or entitle Tenant to any abatement of, or set off to, or reduction in the rent payable, or otherwise affect the respective obligations of the parties hereto. If the use of the Premises for any purpose should, at any time during the Term of this Lease, be prohibited by law or ordinance or other governmental regulation, or prevented by injunction, this Lease shall not be thereby terminated nor shall Tenant be entitled by reason thereof to surrender the Premises, or to any abatement or reduction in Rent nor shall the respective obligations of the parties hereto be otherwise affected. ARTICLE XV ASSIGNMENT-SUBLETTING BY TENANT SECTION 15.1. Tenant may assign this Lease or any interest hereunder, and may sublet or permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant, without the consent of Landlord. Notwithstanding the foregoing provisions of this Article XV. no assignment or subletting shall relieve Tenant of its obligations hereunder, and Tenant shall continue to be liable as a principal and not as a guarantor or surety, to the same extent as though no assignment or sublease had been made. 10 11 ARTICLE XVI ANNUAL STATEMENTS SECTION 16.1. Tenant agrees, upon the prior written request of Landlord, to furnish Landlord annually, within one hundred twenty (120) days of the end of Tenant's fiscal year with a copy of its annual audited financial statements and agrees that Landlord may deliver such statements to any mortgagee, prospective mortgagee or prospective purchaser of the Premises. ARTICLE XVII INDEMNITY FOR LITIGATION SECTION 17.1. Tenant agrees to pay all costs and expenses, including fees, which may be incurred by or imposed on Landlord, either in enforcing this Lease (whether or not suit is filed) or in any litigation or claims to which Landlord, without fault on its part, may be a party, and if paid by Landlord, shall be so much Additional Rent due on the next Rent date after such payment together with interest at the Lease Interest Rate. ARTICLE XVIII ESTOPPEL CERTIFICATES SECTION 18.1. Each party thereto agrees that at any time and from time to time, upon not less than ten (10) days' prior written request by the other party, it will execute, acknowledge and deliver to the requesting party or its Lender or proposed purchaser, a statement in writing certifying that (i) this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified, and stating the modifications), (ii) the party requesting the certificate is not in default under any term or condition of this Lease and there are no existing circumstances that with the giving of notice or the passage of time or both would give rise to such a default (or if any default exists same will be specified), (iii) the date to which the rent and other charges have been paid in advance, if any, (iv) the date that the Lease terminates, and (v) such other matters as the party so requesting the statement, any prospective purchaser or any Lender may reasonably request, it being intended that any such statement delivered pursuant to this Section 18.1. may be relied upon by any prospective purchaser of the fee, or mortgagee or assignee of any mortgage upon the fee, of the Premises. If the Landlord requests such a statement, the Tenants shall also certify (a) the Tenant has unconditionally accepted the Premises, (v) the Premises are acceptable to Tenant as is, and Tenant agrees not to look to Landlord to remedy or cure any faults therein, including, without limitation, latent defects, (b) there are no set-offs or defenses to the enforcement of any or all of the terms, conditions and covenants contained in the Lease, and (c) there are no obligations of the Landlord to reduce any future rent payable under the Lease or construct any improvements to the Premises or make any monetary payments to such Tenant. 11 12 ARTICLE XIX INSPECTION OF PREMISES SECTION 19.1. Tenant agrees to permit Landlord and any authorized representatives of Landlord, to enter the Premises at all reasonable times on reasonable advance notice, except in the case of emergency, for the purpose of inspecting the same. Any such inspections shall be solely for Landlord's purposes and may not be relied upon by Tenant or any other person. SECTION 19.2. Tenant agrees to permit Landlord and any authorized representative of Landlord to enter the Premises at all reasonable times during business hours on reasonable advance notice to exhibit the same for the purpose of sale, mortgage or lease, and during the final year of the Term hereof or any extension thereof, Landlord may display on the Premises customary "For Sale" or "For Rent" signs. ARTICLE XX FIXTURES SECTION 20.1. All Improvements and all plumbing, heating, lighting, electrical and air-conditioning fixtures and equipment, and other articles of personal property used in the operation of the Premises (as distinguished from operations incident to the business of Tenant), whether or not attached or affixed to the Premises (hereinafter referred to as "Building Fixtures"), including but not limited to the items identified in Exhibit "B" attached hereto, shall be and remain a part of the Premises and shall constitute the property of Landlord. SECTION 20.2. All of Tenant's trade fixtures and all personal property, fixtures, apparatus, machinery and equipment now or hereafter located upon the Premises, other than Building Fixtures, as shall be and remain the personal property of Tenant, and the same are herein referred to as "Tenant's Equipment" SECTION 20.3. Tenant's Equipment may be removed from time to time by Tenant; provided, however, that if such removal shall injure or damage the Premises, Tenant shall repair the damage and place the Premises in the same condition as it would have been if such Tenant's Equipment had not been installed. ARTICLE XXI DEFAULT SECTION 21.1. Tenant agrees that any one or more of the following events shall be considered "Events of Default" as said term is used herein: (a) If an order, judgment or decree shall be entered by any court adjudicating Tenant a bankrupt or insolvent, or approving a petition seeking reorganization of Tenant or appointing a receiver, trustee or liquidator of Tenant, or of all or a substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of sixty (60) days; or (b) Tenant shall file an answer admitting the material allegations of a petition filed against Tenant in any bankruptcy, reorganization or insolvency proceeding or under 12 13 any laws relating to the relief of debtors, readjustment or indebtedness, reorganization, arrangements, composition or extension; or (c) Tenant shall make any assignment for the benefit of creditors or shall apply for or consent to the appointment of a receivers trustee or liquidator of Tenant or any of the assets of Tenant; or (d)Tenant shall file a voluntary petition in bankruptcy, or shall admit in writing its inability to pay its debts as they come due, or shall file a petition or an answer seeking reorganization or arrangement with creditors or take advantage of any insolvency law; or (e) A decree or order appointing a receiver of the property of Tenant shall be made and such decree or order shall not have been vacated within sixty (60) days from the date of entry or granting thereof; or (f) Tenant shall default in making any payment of Rent or other payment required to be made by Tenant hereunder when due and such default shall continue for in excess of five (5) days after notice thereof to Tenant; or (g) Tenant shall be in default in the performance of or compliance with any of the agreements, terms, covenants or conditions in this Lease other than those referred to in the foregoing subparagraphs (a) through (f) of this Section for a period of twenty (20) days after notice from Landlord to Tenant specifying the items in default or in the case of a default which cannot, with due diligence, be cured within said twenty (20) day period, Tenant fails to proceed within said twenty (20) day period to cure the same and thereafter to prosecute the curing of such default with due diligence (it being intended in connection with a default not susceptible of being cured with due diligence within said twenty (20) day period that the time of Tenant within which to cure the same shall be extended for such period as may be necessary to complete the same with all due diligence). Upon the occurrence of any one or more of such Events of Default, Landlord may at its election terminate this Lease or terminate Tenant's right to possession only, without terminating this Lease. Upon termination of this Lease or of Tenant's right to possession, Tenant shall immediately surrender possession and vacate the Premises, and deliver possession thereof to Landlord, and Landlord or Landlord's agents may immediately or any time thereafter without notice, re-enter the Premises and remove all persons and all or any property therefrom either by any suitable action or proceeding at law or equity or by force or otherwise, without being liable in indictment prosecution or damages, therefor, and repossess and enjoy the Premises, together with the right to receive all income of, and from, the Premises. If Landlord elects to terminate Tenant's right to possession only, without terminating this Lease, Landlord may, at Landlord's option, enter into the Premises. remove Tenant's signs and other evidences of tenancy, and take and hold possession thereof as hereinabove provided. without such entry and possession terminating this Lease or releasing Tenant, in whole or in part, from Tenant's obligations to pay the Rent hereunder for the full Term or from any other obligations of Tenant under this Lease. Landlord shall use commercially reasonably efforts to relet all or any part of the Premises for such rent and upon terms as shall be satisfactory to Landlord (including the right to relet the Premises for a term greater or lesser than that remaining of the Term of premises and the right to relet the Premises as a part of a larger area, the right to change the character or use made of the Premises and the right to grant concessions of free rent). For the purpose of such reletting, Landlord may decorate or make any repairs, changes, alterations, or additions in or to the Premises that may be necessary or desirable. If Landlord is unable to relet the Premises after using such commercially reasonably efforts to do so, Tenant shall pay to Landlord damages equal to the amount of the Rent, and other sums provided herein to be paid by Tenant for the remainder of the Term. 13 14 If the Premises are relet and sufficient sums shall not be realized from such reletting after payment of all expenses of such decorations, repairs, changes, alterations, additions and the expenses of repossession and such reletting, and the collection of the Rent herein provided and other payments required to be made by Tenant under the provisions of this Lease for the remainder of the Term of this Lease then, in such event, Tenant shall pay to Landlord on demand any such deficiency and Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Section from time to time, and all costs and expenses of Landlord, including attorneys' fees, incurred in connection with any such suit shall be paid by Tenant. SECTION 21.2. Tenant hereby expressly waives, so far as permitted by law, the service of any notice of intention to re-enter provided for in any statute, and except as is herein otherwise provided. Tenant for and on behalf of itself and all persons claiming through or under Tenant, also waives any and all rights of redemption or re-entry or repossession in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge or in case of re-entry or repossession by Landlord or in case of any expiration or termination of this Lease. The terms "enter," "re-enter," "entry" or "re-entry" as used in this Lease are not restricted to their technical legal meanings. ARTICLE XXII LANDLORD'S PERFORMANCE OF TENANT'S COVENANTS SECTION 22.1. Should Tenant at any time fail to do any act or make any payment required to be done or made by it under the provisions of this Lease, Landlord, at its option, may (but shall not be required to) do the same or cause the same to be done, and the amounts paid and expenses incurred by Landlord in connection therewith shall be so much Additional Rent due on the next rent date after such payment, together with interest at the Lease Interest Rate from the date of payment. ARTICLE XXIII EXERCISE OF REMEDIES SECTION 23.1. No remedy contained herein or otherwise conferred upon or reserved to Landlord, shall be considered exclusive of any other remedy, but the same shall be cumulative and shall be in addition to every other remedy given herein, now or hereafter existing at law or in equity or by statute, and every power and remedy given by this Lease to Landlord may be exercised from time to time and as often as occasion may arise or as may be deemed expedient. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein. SECTION 23.2. No waiver of any breach of any of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach, or a waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. The acceptance by Landlord of any payment of Rent or other sums payable hereunder after the termination by Landlord of this Lease or of Tenant's right to possession hereunder shall not, in the absence of agreement in writing to the contrary by Landlord, be deemed to restore this Lease or Tenant's right to possession hereunder, as the case may be, but shall be construed as a payment on account and not in satisfaction of damages due from Tenant to Landlord. Receipt of Rent by Landlord, with knowledge of any breach of this Lease by Tenant or of any default by Tenant in the observance or performance of any of the conditions or covenants of this Lease, shall not be deemed to be a waiver of any provision of this Lease. 14 15 SECTION 23.3. In the event of any breach or threatened breach by Tenant of any of the agreements, terms, covenants or conditions contained in this Lease, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise as though re-entry, summary proceedings, and other remedies were not provided for in this Lease. ARTICLE XXIV SUBORDINATION TO MORTGAGES SECTION 24.1. Landlord may execute and deliver a mortgage or trust deed in the nature of a mortgage (both sometimes hereinafter referred to as "Mortgage") against the Premises or any portion thereof. This Lease and the rights of Tenant hereunder shall automatically, and without the requirement of the execution of any further documents, be and are hereby made expressly subject and subordinate at all times to the lien of any Mortgage now or hereafter encumbering any portion of the Improvements, and to all advances made or hereafter to be made upon the security thereof. Notwithstanding the foregoing, Tenant agrees to execute and deliver such instruments subordinating this Lease to the lien of any such Mortgage as may be requested in writing by Landlord from time to time. Notwithstanding anything to the contrary contained herein, any mortgagee under a Mortgage may, by notice in writing to the Tenant, subordinate its Mortgage to this Lease. SECTION 24.2. Tenant agrees to give the holder of any Mortgage, by registered or certified mail, a copy of any notice of default served upon the Landlord by Tenant, provided that prior to such notice Tenant has received notice (by way of service on Tenant of a copy of an assignment of rents and leases, or otherwise) of the address of such mortgagee and containing a request therefor. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then said mortgagee shall have an additional thirty (30) days after receipt of notice thereof within which to cure such default or, if such default cannot be cured within that time, then such additional time as may be necessary, if, within such thirty (30) days, any mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure). Such period of time shall be extended by any period within which such mortgagee is prevented from commencing or pursuing such foreclosure proceedings by reason of Landlord's bankruptcy. Until the time allowed as aforesaid for said mortgagee to cure such defaults has expired without cure, Tenant shall have no right to, and shall not, terminate this Lease on account of default. This Lease may not be modified or amended so as to reduce the rent or shorten the term, or so as to adversely affect in any other respect to any material extent the rights of the Landlord, nor shall this Lease be cancelled or surrendered, without the prior written consent, in each instance, of the mortgagee. ARTICLE XXV INDEMNIFY AND WAIVER SECTION 25.1. Tenant will protect indemnify and save Landlord, its partners, shareholders, employees officers, directors, agents and their respective successors and assigns harmless (if Landlord is a trustee, the term "Landlord" for the purposes of this Article XXV only, shall include the trustee and all beneficiaries of the trust) from and against all liabilities, obligations, claims, damages penalties, causes of action, costs and expenses (including without limitation, reasonable attorneys' fees and expenses) imposed upon, incurred by or asserted against Landlord by reason of (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Premises or any part thereof or the adjoining properties, sidewalks, curbs, streets or ways, or resulting from an act or omission of Tenant or anyone claiming by, through or under Tenant; (b) any failure on the part of Tenant to perform or comply with any of the terms of this Lease or any other agreements affecting the Premises; 15 16 (c) the use, occupation, condition, or operation of the Premises or any part thereof; or (d) performance of any labor or services or the furnishing of any materials or other property in respect of the Premises or any part thereof. In case any action, suit or proceeding is brought against Landlord by reason of any such occurrence. Tenant will, at Tenant's sole expense, resist and defend such action, suit or proceeding, or cause the same to be resisted and defended. SECTION 25.2. Tenant agrees to pay, and to indemnify and defend Landlord against, all costs and expenses (including reasonable attorney's fees) incurred by or imposed upon Landlord by or in connection with any litigation to which Landlord becomes or is made a party without fault on its part, whether commenced by or against Tenant, or any other person or entity or that may be incurred by Landlord in enforcing any of the covenants and agreements of this Lease with or without the institution of any action or proceeding relating to the Premises or this Lease, or in obtaining possession of the Premises after an Event of Default hereunder or upon expiration or earlier termination of this Lease. The foregoing notwithstanding, Tenant's responsibility under this Section 25.2 to pay Landlord's costs and expenses (including reasonable attorneys fees) shall not extend to such costs and expenses incurred in defending an action brought by Tenant to enforce the terms of this Lease in which there is a court determination that Landlord failed to perform its obligations under this Lease. The provisions of this Section 25.2 shall survive the expiration or earlier termination of this Lease. SECTION 25.3. Tenant waives all claims it may have against Landlord and Landlord's agents for damage or injury to person or property sustained by Tenant or any persons claiming through Tenant or by any occupant of the Premises, or by any other person, resulting from any part of the Premises becoming out of repair, or resulting from any accident on or about the Premises or resulting directly or indirectly from any act or neglect of any person, including Landlord to the extent permitted by law. This Section 25.3. shall include, but not by way of limitation, damage caused by water, snow, frost, steam, excessive heat or cold, sewage, gas, odors, or noise, or caused by bursting or leaking pipes or plumbing fixtures and shall apply equally whether any such damage results from the act or neglect of Tenant or of any other person, including Landlord to the extent permitted by law, and whether such damage be caused or result from anything or circumstance above mentioned or referred to, or to any other thing or circumstance whether of a like nature or of a wholly different nature. All Tenant's Equipment and other personal property belonging to Tenant or any occupant of the Premises that is in or on any part of the Premises shall be there at the risk of Tenant or of such other person only, and Landlord shall not be liable for any damage thereto or for the theft or misappropriation thereof. ARTICLE XXVI SURRENDER SECTION 26.1. Upon the termination of this Lease whether by forfeiture, lapse of time or otherwise, or upon the termination of Tenant's right to possession of the Premises, Tenant will at once surrender and deliver up the Premises to Landlord, broom clean, in good order, condition and repair, reasonable wear and tear excepted. "Broom clean" means free from all debris, dirt, rubbish, personal property of Tenant, oil, grease, tire tracks or other substances, inside and outside of the Improvements and on the grounds comprising the Premises. Any damage caused by removal of Tenant from the Premises, including any damages caused by removal of tenant's equipment as herein defined, shall be repaired and paid for by Tenant prior to the expiration of the Term. All additions, hardware, alterations and improvements, temporary or permanent, excluding Tenant's Equipment, in or upon the Premises placed there by Tenant, shall become Landlord's property and shall remain upon the Premises upon such termination of this Lease by lapse of time or otherwise, without compensation or allowance or credit to Tenant, unless Landlord requests their removal. If Landlord so requests removal of said additions, hardware, alterations or improvements and Tenant does not make such removal by the termination of this Lease, or within ten (10) days after such request, whichever is later, Landlord may remove the same and deliver the same to 16 17 any other place of business of Tenant or warehouse same, and Tenant shall pay the cost of such removal, delivery and warehousing to Landlord on demand. SECTION 26.2. Upon the termination of this Lease by lapse of time, or otherwise, Tenant may remove Tenant's Equipment provided, however, that Tenant shall repair any injury or damage to the Premises which may result from such removal. If Tenant does not remove Tenant's Equipment from the Premises prior to the end of the Term, however ended, Landlord may, at its option, remove the same and deliver the same to any other place of business of Tenant or warehouse the same, and Tenant shall pay the cost of such removal (including the repair of any injury or damage to the Premises resulting from such removal), delivery and warehousing to Landlord on demand, or Landlord may treat tenant's equipment as having been conveyed to Landlord with this Lease as a Bill of Sale, without further payment or credit by Landlord to Tenant. SECTION 26.3. If Tenant retains possession of the Premises or any part thereof after the termination of the Term, by lapse of time and otherwise, then Tenant shall pay to Landlord monthly rent, at double the rate payable for the month immediately preceding said holding over (including increases for additional rent which Landlord may reasonably estimate), computed on a per-month basis, for each month or part thereof (without reduction for any such partial month) that Tenant thus remains in possession, and in addition thereto, Tenant shall pay Landlord all damages, consequently as well as direct, sustained by reason of Tenant's retention of possession. Alternatively, at the election of Landlord expressed in a written notice to Tenant and not otherwise, such retention of possession shall constitute a renewal of this Lease for one (1) year, at a rental equal to one hundred twenty (120) percent of the Rent during the previous year. The provisions of this paragraph do not exclude the Landlord's rights of re-entry or any other right hereunder. Any such extension or renewal shall be subject to all other terms and conditions herein contained. ARTICLE XXVII COVENANT OF QUIET ENJOYMENT SECTION 27.1. Landlord agrees that at all times when Tenant is not in default under the terms of and during the Term of this Lease, Tenant's quiet and peaceable enjoyment of the Premises shall not be disturbed or interfered with by Landlord or by any other person claiming by, through or under Landlord. ARTICLE XXVIII SHORT FORM LEASE SECTION 28.1. This Lease shall not be recorded, but the parties agree, at the request of either of them, to execute a Short Form Lease for recording, containing the names of the parties, the legal description and the Term of this Lease. ARTICLE XXIX NOTICES SECTION 29.1. All notices, consents, approvals to or demands upon or by Landlord or Tenant desired or required to be given under the provisions hereof, shall be in writing. Any notices or demands from Landlord to Tenant shall be deemed to have been duly and sufficiently given if a copy thereof has been personally 17 18 served, forwarded by expedited messenger service with evidence of delivery or mailed by United States registered or certified mail in an envelope properly stamped and addressed to Tenant at the premises or at such other address as Tenant may theretofore have furnished by written notice to Landlord, and any notices or demands from Tenant to Landlord shall be deemed to have been duly and sufficiently given if forwarded by expedited messenger service with evidence of delivery or mailed by United States registered or certified mail in an envelope properly stamped and addressed to Landlord c/o DeSoto, Inc., 16750 South Vincennes Road, South Holland, Illinois, 60473, Attention: Anne E. Eisele, Senior Vice President or at such other address as Landlord may theretofore have furnished by written notice to Tenant. The effective date of such notice shall be the earlier of three (3) days after delivery of the same to the United States Post Office for mailing or the date of actual delivery. ARTICLE XXX COVENANTS RUN WITH LAND SECTION 30.1. All of the covenants, agreements, conditions and undertakings in this Lease contained shall extend and inure to and be binding upon the heirs, executors, administrators, successors and assigns of the respective parties hereto, the same as if they were in every case specifically named, and shall be construed as covenants running with the land, and wherever in this Lease reference is made to either of the parties hereto, it shall be held to include and apply to, wherever applicable, the heirs, executors, administrators, successors and assigns of such party. Nothing herein contained shall be construed to grant or confer upon any person or persons, firm, corporation or governmental authority, other than the parties hereto, their heirs, executors, administrators, successors and assigns, any right, claim or privilege by virtue of any covenant, agreement, condition or undertaking in this Lease contained. SECTION 30.2. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the fee of the Premises, and in the event of any transfer or transfers of the title to such fee, Landlord herein named (and in the case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all personal liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed; provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee, and any amount then due and payable to Tenant by Landlord or the then grantor under any provisions of this Lease, Shall be paid to Tenant. ARTICLE XXXI ENVIRONMENTAL MATTERS SECTION 31.1. Tenant agrees that it will not use, handle, generate, treat, store or dispose of, or permit the use, handling, generation, Treatments storage or disposal of any Hazardous Materials (as hereinafter defined) in, on, under, around or above the Premises now or at any future time and will indemnify, defend and save Landlord harmless from any and all actions, proceedings, claims, costs, expenses and losses of any kind, including, but not limited to, those arising from injury to any person, including death, damage to or loss of use or value of real or personal property, and costs of investigation and cleanup or other environmental remedial work, which arise prior to the Term of this Lease during any period Tenant owned or occupied the Premises (hereinafter referred to as "Tenant's Prior Ownership or Occupancy"), or which may arise during the Term hereof, in connection with the existence of Hazardous Materials on the Premises. The term "Hazardous Materials," when used herein, shall include, but shall not be limited to, any substances, materials or wastes that are regulated by any local governmental authority, 18 19 the state where the Premises is located, or the United States of America because of toxic, flammable, explosive, corrosive, reactive, radioactive or other properties that may be hazardous to human health or the environment, including without limitation, above or underground storage tanks, flammables, explosives, radioactive materials, radon, petroleum and petroleum products, asbestos, urea formaldehyde foam insulation, methane, lead-based paint, polychlorinated biphenyl compounds, hydrocarbons or like substances and their additives or constituents, pesticides and toxic or hazardous substances on materials of any kind, including without limitation, substances now or hereafter defined as "hazardous substances," "hazardous materials," "toxic substances" or "hazardous wastes" in the following statutes, as amended: the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. Section 9601, et seq., "CERCLA"); the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C. Section 9671 et seq., "SARA"); the Hazardous Materials Transportation Act (49 U.S.C. Section 1801, et seq., "HMTA"); the Toxic Substances Control Act (15 U.S.C. Section 2601, et seq., "TSCA"); the Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq., "RCRA"); the Clean Air Act (42 U.S.C. Section 7401 et seq., "CAA"); the Clean Water Act (33 U.S.C. Section 1251, et seq., "CWA"); the Rivers and Harbors Act, (33 U.S.C. Section 401 et seq., "RHA"); and any so-called "Superlien law"; and in the regulations promulgated pursuant thereto, and any other applicable federal, state or local law, common law, code, rule, regulation, order, policy or ordinance, presently in effect or hereafter enacted, promulgated or implemented, or any other applicable governmental regulation imposing liability or standards of conduct concerning any hazardous, toxic or dangerous substances, waste or material, now or hereafter in effect. The foregoing covenant shall not extend to substances typically found or used in Tenant's business operations so long as: (i) such substances and any equipment which generates such substances are maintained only in such quantities as are reasonably necessary for Tenant's operations in the Premises; (ii) such substances are used strictly in accordance with the manufacturers' instructions therefor; (iii) such substances are not disposed of in or about the Premises in a manner which would constitute a release or discharge thereof, and (iv) all such substances and any equipment which generates such substances are removed from the Premises by Tenant upon the expiration or earlier termination of this Lease. Any use, storage, generation, disposal, release or discharge by Tenant of hazardous materials in or about the Premises shall be carried out in compliance with all applicable federal, state and local laws, ordinances, rules and regulations. SECTION 31.2. Tenant does hereby indemnify, defend and hold harmless Landlord and its agents and their respective officers, directors, beneficiaries, lenders, shareholders, partners, agents and employees and their respective successors and assigns from all fines, suits, procedures, claims liabilities, damages (including consequential damages) and actions of every kind, and all costs associated therewith (including reasonable attorneys', experts' and consultants' fees and costs of testing) arising out of or in any way connected with any deposit, spill, discharge or other release of Hazardous Materials that occurred during Tenant's Prior Ownership or Occupancy and that occurs during the Term of this Lease, in either case at or from the Premises or which arises at any time from (i) Tenant's failure to provide all information, make all submissions, and take all steps required by all applicable governmental authorities; (ii) any Hazardous Materials on, in, under or affecting all or any portion of the Premises or the groundwater as a result of events that occurred during Tenant's Prior Ownership or Occupancy or that occur during the Term of this Lease or as a result of the construction of the Improvements; (iii) any violation by Tenant or claim of a violation by Tenant of any governmental law, statute, rule, regulation, ordinance, requirement, decree, order or judgment now or hereafter in effect relating to public health, safety, protection of the environment or any Hazardous Material; (iv) the imposition of any lien for damages caused by, or the recovery of any costs for, the remediation cleanup of Hazardous Material as a result of events that occurred during Tenant's Prior Ownership or Occupancy or that occur during the Term of this Lease or as a result of the construction of the Improvements; (v) costs of removal of any and all Hazardous Material from all or any portion of the Premises, which Hazardous Material were placed on the Premises during Tenant's Prior Ownership or Occupancy or are placed on the Premises during the Term of this Lease or as a result of the construction of the Improvements; (vi) costs incurred to comply, in connection with all or any portion of the Premises, with all governmental regulations with respect to Hazardous Materials on, in, under or affecting the Premises, which Hazardous Materials were placed on the Premises during Tenant's Prior Ownership or Occupancy or are placed on the Premises during the Term of this Lease or as a result of the construction of the Improvements; or (vii) any spills, discharges, leaks, escapes, releases, dumping, transportation, storage, treatment or disposal of any Hazardous Substances which occurred during Tenant's Prior 19 20 Ownership or Occupancy or which occur during the Term of this Lease or as a result of the construction of the Improvements, but only to the extent that such Hazardous Materials originated from or were or are located on the Premises. Tenant's obligations and liabilities under this Section 31.2 shall survive the expiration of this Lease. ARTICLE XXXII EXCULPATION SECTION 32.1. Notwithstanding anything to the contrary herein contained, there shall be absolutely no personal liability asserted or enforceable against Landlord or on any persons, firms or entities who constitute Landlord with respect to any of the terms, covenants, conditions and provisions of this Lease, and Tenant shall, subject to the rights of any mortgagee, look solely to the interest of Landlord, its successors and assigns in the Premises for the satisfaction of each and every remedy of Tenant in the event of default by Landlord hereunder, such exculpation of personal liability is absolute and without any exception whatsoever. ARTICLE XXXIII RENEWAL OPTIONS SECTION 33.1. Tenant shall have options (hereinafter referred to individually as a "Renewal Option" and collectively as the "Renewal Options") to renew the Initial Term for all of the Premises as of the expiration date of the Initial Term, for two additional periods of five (5) years each (hereinafter referred to individually as a "Renewal Term" and collectively as the "Renewal Terms") upon the following terms and conditions: (a) Tenant gives Landlord written notice of its exercise of the first Renewal Option at least three full calendar months prior to the expiration of the Initial Term, and gives Landlord written notice of its exercise of the second Renewal Option at least three full calendar months prior to the expiration of the first exercised Renewal Term. (b) Tenant is not in default under this Lease either on the date Tenant delivers the notice required under (a) above or at any time thereafter prior to the commencement of the Renewal Term so exercised. (c) Should Tenant fail to exercise the first Renewal Option, the second Renewal Option shall be void. (d) All of the terms and provisions of this Lease (except this Article XXXIII shall be applicable to the Renewal Terms, except that monthly Base Rent for each Renewal Term shall be 90% of Landlord's determination of the Fair Value as hereinafter defined for such Renewal Term, which determination shall be given to Tenant by Landlord not later than ten (10) months prior to the expiration of the Initial Term or the first Renewal Term, as applicable. Notwithstanding the foregoing, if Tenant does not agree with Landlord's determination of Fair Value for any Renewal Term and notifies Landlord in writing of same within thirty (30) days after receipt of Landlord's determination (hereinafter referred to as the "Rental Agreement Date"), the Base Rent payable under this Lease for such Renewal Term shall be equal to ninety percent (90%) of the fair market rental value (hereinafter referred to as the "Fair Value") for the Premises for such Renewal Term which shall be determined by appraisal as hereinafter set forth. Within fifteen (15) days after the applicable Rental Agreement Date, Landlord and Tenant shall institute an 20 21 appraisal procedure to determine the Fair Value of the Premises for the applicable Renewal Term by jointly nominating and appointing one appraiser who shall forthwith make a determination of the Fair Value of the Premises. If Landlord and Tenant fail to jointly agree on the nomination and appointment of one appraiser within said 15-day period, each party shall then each nominate and appoint one appraiser within thirty (30) days after the applicable Rental Agreement Date and give notice of such appointment to the other party. Upon the appointment of the two appraisers as aforesaid, the two appraisers so appointed shall forthwith jointly make a determination of the Fair Value of the Premises for the applicable Renewal Term. If either party fails to appoint an appraiser within said 30-day period, the appraiser appointed by the other party shall forthwith make the said determination of the Fair Value of the Premises. If the two appraisers are unable to agree upon a determination of such Fair Value of the Premises within thirty (30) days after the appointment of the second appraiser, the two appraisers shall jointly nominate and appoint a third appraiser within fifteen (15) days after the expiration of said 30-day period and give written notice of such appointment to both parties. In the event the two appraisers fail to appoint such third appraiser within said 15-day period, either party may thereafter apply to the United States District Court for the Northern District of Illinois for the appointment of such third appraiser. The third appraiser shall forthwith make a determination of the Fair Value of the Premises. In the event the three appraisers are unable to agree upon a determination of the Fair Value of the Premises within thirty (30) days after the appointment of the third appraiser, then the Fair Value of the Premises shall be an amount equal to the average of the three values contained in the respective written appraisals submitted by the appraisers. The appraisers shall make their determination in writing and give notice thereof to both parties. The Fair Value of the Premises shall be the highest Base Rent which the Premises would generate for each Renewal Term in a competitive and open market lease transaction under all conditions requisite to a fair lease and assuming that (i) the Landlord and the Tenant are each acting voluntarily, prudently and knowledgeably, (ii) no real estate broker's commission or finder's fee is to be paid by the Landlord, (iii) the Landlord and the Tenant are each typically motivated and are acting without malice, (iv) Landlord and Tenant are each well informed or well advised and each acting in what it considers its own best interest, and (v) a reasonable time is allowed for exposure in the open market. Each appraiser shall afford both parties a hearing and the right to submit evidence, with the privilege of cross-examination in connection with its determination of the Fair Value of the Premises. In the event any appraiser appointed as aforesaid shall die or become unable or unwilling to act before completion of the appraisal, such appraiser's successor shall be appointed in the same as provided above. Any appraiser appointed hereunder shall (x) be independent of both parties (and of all persons and entities with interest in either party); (y) have not less than five (5) years' experience in the appraisal of real property; and (z) hold the professional designation M.A.I., or if the M.A.I. ceases to exist, a comparable designation from an equivalent professional appraiser organization. All appraisal fees and expenses shall be borne equally by the parties. SECTION 33.2. Tenant agrees to accept the Premises to be covered by this Lease during any Renewal Term in an "as is" physical condition and Tenant shall not be entitled to receive any allowance, credit, concession or payment from Landlord for the improvement thereof. SECTION 33.3. In the event Tenant exercises a Renewal Option, Landlord and Tenant shall mutually execute and deliver an amendment to this Lease reflecting the renewal of the Term on the terms herein provided, which amendment shall be executed and delivered promptly after the determination of the monthly Base Rent to be applicable to the Renewal Term as hereinabove provided. SECTION 33.4. The Renewal Options herein granted shall automatically terminate upon the earliest to occur of (i) the expiration or termination of this Lease, (ii) the termination of Tenant's right to possession 21 22 of the Premises, (iii) any assignment or subletting by Tenant, or (iv) the failure of Tenant to timely or properly exercise any applicable Renewal Option. SECTION 33.5. Landlord and Tenant acknowledge and agree that no real estate brokerage commission or finder's fee shall be payable by Landlord in connection with any exercise by Tenant of the Renewal Options herein contained. ARTICLE XXXIV RIGHT OF FIRST OFFER TO PURCHASE SECTION 34.1. Landlord agrees that if, at any time during the Term of this Lease, Landlord desires to sell the Premises, Landlord shall first offer to sell the Premises to Tenant on the following terms and conditions: (a) If at any time Landlord desires to sell the Premises to any third party pursuant to a written agreement to purchaser agreed to by such third party (said agreement is hereinafter referred to as the "Proposed Contract") (except as set forth in subparagraph (b) below), Landlord shall submit the Proposed Contract to Tenant and Tenant shall have the right within ninety (90) days after receipt of the Proposed Contract, to agree to purchase the Premises on such terms and conditions as set forth in the Proposed Contract. If Tenant notifies Landlord in writing within said ninety (90) day period that it intends to purchase the Premises, then such purchase shall occur within sixty (60) days after Tenant's notice, pursuant to the terms of the Proposed Contract. If Tenant does not give Landlord notice in writing within said ninety (90) day period that Tenant intends to exercise its rights hereunder, then Landlord shall be free to sell the Premises to the aforesaid third party upon the terms and conditions set forth in the Proposed Contract. Should such sale not be consummated or should Landlord's successor in interest desire to sell the Premises, the provisions of this Article XXXIV shall apply to any subsequent sale by Landlord or its successors or assigns. (b) Tenant shall have no rights hereunder if Landlord obtains a bona fide mortgage from an unrelated third party and the Premises are purchased by said mortgagee or as a result of a foreclosure action or if the Premises are sold in a transaction involving the simultaneous lease back of the Premises by Landlord or if the Premises or interests therein are transferred in any way to said mortgagee. ARTICLE XXXV SECURITY DEPOSIT SECTION 35.1. Tenant agrees to deposit with Landlord, upon the execution of this Lease, the sum of THREE HUNDRED NINETY-ONE THOUSAND ONE HUNDRED TWENTY AND NO/100 ($391,120.00) DOLLARS as security for the full and faithful performance by Tenant of each and every term, provision, covenant and condition of this Lease. If Tenant defaults in respect to any of the terms, provisions, covenants and conditions of this Lease including, but not limited to, payment of all rental and other sums required to be paid by Tenant hereunder, Landlord may use, apply or retain the whole or any part of the security so deposited for the payment of such rent in default, for any sum which Landlord may expend or be required to expend by reason of Tenant's default including, without limitation, any damages or deficiency in the reletting of the Premises, whether such damages or deficiency shall have accrued before or after re-entry by Landlord. If any of the security deposit 22 23 shall be so used, applied or retained by Landlord at any time or from time to time. Tenant shall promptly, in each such instance, on written demand therefor by Landlord, pay to Landlord such additional sums as may be necessary to restore the security deposit to the original amount set forth in the first sentence of this section. SECTION 35.2. If Tenant shall fully and faithfully comply with all the terms, provisions, covenants and conditions of this Lease, the security deposit, or the balance thereof, shall be returned to Tenant after the earlier to occur of the following: (a) the time fixed as the expiration of the Term of this Lease; (b) the removal of Tenant from the Premises; (c) the surrender of the Premises by Tenant to Landlord in accordance with this Lease; (d) Tenant's financial statements, in form required by Landlord, indicate a profit for a period of two (2) consecutive calendar quarters; (e) this Lease is assigned to an entity in which Tenant owns less than a fifty (50%) percent ownership interest and which entity has a net worth, as determined by Landlord, of not less than FIVE MILLION AND NO/100 ($5,000,000.00) DOLLARS, or such an entity becomes a guarantor of this Lease; and (f) final determination of all amounts payable by Tenant hereunder and payment of same. SECTION 35.3. Tenant shall be entitled to interest on the aforesaid security deposit, payable annually on or before January 31 of each year with respect to the prior calendar year, at an interest rate equal to the average interest rate earned by Landlord on its investments for such prior calendar year. The security deposit may be commingled with other funds of Landlord. SECTION 35.4. In the absence of evidence satisfactory to Landlord of an assignment of the right to receive the security deposit or the remaining balance thereof, Landlord may return the security deposit to the original Tenant, regardless of one or more assignments of this Lease. ARTICLE XXXVI MISCELLANEOUS SECTION 36.1. The captions of this Lease are for convenience only and are not to be construed as part of this Lease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. SECTION 36.2. If any covenant, agreement or condition of this Lease or the application thereof to any person, firm or corporation or to any circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such covenant, agreement or condition to persons, firms or corporations or to circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby. Each covenant, agreement or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. SECTION 36.3. This Lease shall be construed and enforced in accordance with the laws of the state where the Premises are located. SECTION 36.4. None of the covenants, terms or conditions of this Lease, to be kept and performed by either party, shall in any manner be altered, waived, modified, changed or abandoned, except by a written instrument, duly signed, acknowledged and delivered by the other party. SECTION 36.5. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. 23 24 SECTION 36.6. Tenant warrants that it has no dealings with any real estate broker or agent in connection with this lease and Tenant covenants to pay, hold harmless and indemnify Landlord from and against any and all cost, expense or liability for any compensation, commissions and charges claimed by any other broker or other agent with respect to this Lease or the negotiation thereof arising out of any acts of Tenant. SECTION 36.7. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated and additional rent shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. SECTION 36.8. The term "Lease Interest Rate," when used herein, shall be defined as being an annual interest rate equal to two (2%) percent per annum over and above the corporate base or prime rate of interest published from time to time by the First National Bank of Chicago as such rate may change from time to time. SECTION 36.9. The preparation of this Lease has been a joint effort of the parties hereto and the resulting documents shall not, solely as a matter of judicial construction, be construed more severely against one of the parties than the other. SECTION 36.10. Tenant hereby waives a jury trial in action brought by Landlord hereunder. SECTION 36.11. Time is of the essence of this Lease, and all provisions herein relating thereto shall be strictly construed. SECTION 36.12. Landlord's granting of any consent under this Lease, or Landlord's failure to object to any action taken by Tenant without Landlord's consent required under this Lease, shall not be deemed a waiver by Landlord of its rights to require such consent for any further similar act by Tenant. No waiver by Landlord of any other breach of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach or to be a waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. None of the Tenant's covenants under this Lease, and no breach thereof, shall be waived, altered or modified except by a written instrument executed by Landlord. SECTION 36.13. Landlord is not, and shall not be deemed to be, in any way or for any purpose, the partner, employer, principal, master or agent of or with Tenant. SECTION 36.14. This Lease is executed by John M. Gillen, not personally but solely as Trustee of the DeSoto, Inc. Pension Plans Real Property Trust under Trust Agreement dated October 1, 1992, in the exercise of the power and authority conferred upon and vested in it as such Trustee. All the terms, provisions, stipulations, covenants and conditions to be performed by John M. Gillen are undertaken by it solely as Trustee, as aforesaid, and not individually, and all statements herein made are made on information and belief and are to be construed accordingly, and no personal liability shall be asserted or be enforceable against John M. Gillen, personally, by reason of any of the terms, provisions, stipulations, covenants and/or statements contained in this Lease. 24 25 IN WITNESS WHEREOF, the parties have executed this Lease on the day and year first above written. LANDLORD: /s/ JOHN M. GILLEN ------------------------------------ JOHN M. GILLEN, not personally or individually, but as Trustee as aforesaid TENANT: DESOTO, INC., a Delaware corporation By: /s/ ANNE E. EISELE --------------------------------- Its: SENIOR VICE PRESIDENT 25 26 EXHIBIT "A" LEGAL DESCRIPTION 16750 South Vincennes Road South Holland, Illinois, 60473 Parcel 1 (North Parcel): Lot 13 in South Holland Industrial Park 1st Addition, being a subdivision of part of the southwest quarter and part of the southeast quarter of Section 21, Township 36 North, Range 14 east of the Third Principal Meridian in Cook County, Illinois. Parcel 2 (South Parcel): That part of the north 292.90 feet of Lot 4 in DeVries and others' subdivision of the southeast quarter of Section 21, Township 36 north, Range 14 east of the Third Principal Meridian, lying east of a line described as beginning at the point of intersection of the north line of said Lot 4 with the east line of that portion of said Lot 4 conveyed to Chicago Terminal Transfer Company by deed recorded as Document No. 2972842; and running thence southeasterly on a line parallel with the center line of Vincennes Road (Thornton Blue Island Road) to the south line of the north 292.90 feet of said Lot 4, all in Cook County, Illinois. Permanent Index Numbers: 29-21-400-108 29-21-400-031 26 EX-10.19 14 AGREEMENT TO SALE OF LAND 1 EXHIBIT 10.19 DESOTO, INC 16750 SOUTH VINCENNES ROAD SOUTH HOLLAND, ILLINOIS 60473 August 6, 1993 Mr. John Gillen, not personally or individually, but as Trustee of the DeSoto, Inc. Pension Plan's Real Property Trust under Trust Agreement dated October 1, 1992. Dear Mr. Gillen: DeSoto, Inc. is about to enter into a Real Estate Sale Contract (the "Sale Contract") providing for the sale of approximately 8.126 acres of land, which is improved with buildings containing in the aggregate approximately 275,025 square feet of floor area, located at 1700 South Mt. Prospect Road, Des Plaines, Illinois (the "Property") and other real property to the Illinois Gas Institute. As you are aware, DeSoto has entered into a Lease (the "Lease"), as tenant, whereby it currently leases the Property from the DeSoto, Inc. Pension Plan's Real Property Trust under Trust Agreement dated October 1, 1992 (the "Trust"). DeSoto, Inc. has indicated to you that it desires to purchase the Property from the Trust in order to sell the Property pursuant to the Sale Contract. Upon the consummation of the sale described in the Sale Contract or, upon the earlier election of DeSoto, Inc., DeSoto, Inc. will purchase the property from the Trust for a sum equal to Five Million Five Hundred Five Thousand Five Hundred and no/100 ($5,505,500.00) Dollars. Upon such purchase, the Trust shall convey the Property either to DeSoto, Inc. or to its designee. Upon the conveyance of the Property, the Lease shall be terminated. There shall be no prorations or apportionments of any nature which would cause a deduction from the Purchase Price, and the Trust shall not be required to provide DeSoto, Inc. a survey or title policy, however, with respect to the Property, the trust shall convey title to the Property to DeSoto, Inc. or its nominee in the same condition as DeSoto, Inc. conveyed same to the Trust. The aforesaid sale may occur at any time on or prior to April 1, 1994. 2 August 6, 1993 Page 2 Should the foregoing be acceptable to you, kindly execute the enclosed copy of this letter to evidence your agreement to the terms and conditions set forth herein. Very truly yours, DE SOTO, INC. By: /s/ ANDERS U. SCHROEDER ---------------------------- Anders U. Schroeder Vice Chairman AGREED TO AND ACCEPTED this 9th day of August, 1993 /s/ JOHN M. GILLEN, JR. - --------------------------------- JOHN GILLEN, as Trustee aforesaid EX-23.1 15 CONSENT OF COOPERS & LYBRAND LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion by reference in this registration statement on Form S-4 (Registration Statement Under the Securities Act of 1933 - Registration number 333-0917) of our report dated February 16, 1996, except for Note 14 as to which the date is March 13, 1996, on our audits of the consolidated financial statements and the financial statement schedule of Keystone Consolidated Industries, Inc. as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993. We also consent to the reference to our firm under the caption "Experts." /s/ COOPERS & LYBRAND L.L.P. Dallas, Texas August 22, 1996 EX-23.2 16 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of Registration Statement No. 333-0917. /s/ ARTHUR ANDERSEN LLP Chicago, Illinois August 22, 1996 EX-23.6 17 CONSENT OF SALOMAN BROTHERS INC. 1 EXHIBIT 23.6 [SALOMON BROTHERS LETTERHEAD] New York, New York August 22,1996 CONSENT OF SALOMON BROTHERS INC We hereby consent to the use of our name and to the description of our opinion letter dated the date of the Joint Proxy Statement/Prospectus referred to below, under the caption "The Merger and Related Transactions - Opinion of Financial Advisors" in, and to the inclusion of such opinion letter as Appendix C to, the Joint Proxy Statement/Prospectus of Keystone Consolidated Industries, Inc., which Joint Proxy Statement/Prospectus is part of the Registration Statement on Form S-4 (File Number 33-0917) of Keystone Consolidated Industries, Inc. By giving such consent we do not thereby admit that we are experts with respect to any part of such Registration Statement within the meaning of the term "expert" as used in, or that we come within the category of persons whose consent is required under, the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. SALOMON BROTHERS INC By /s/ [ILLEGIBLE] ------------------------- Managing Director EX-99.1 18 FORM OF PROXY TO BE USED BY REGISTRANT 1 EXHIBIT 99.1 PROXY KEYSTONE CONSOLIDATED INDUSTRIES, INC. 5430 LBJ FREEWAY, SUITE 1740 DALLAS, TX 75240 SOLICITED BY THE BOARD OF DIRECTORS FOR SPECIAL MEETING OF STOCKHOLDERS FRIDAY, SEPTEMBER 27, 1996 The undersigned, having received Notice of Special Meeting and Joint Proxy Statement/Prospectus dated August 23, 1996, hereby appoints Ralph P. End and Sandra K. Myers, or either of them, proxies, with full power of substitution, to vote, as specified, in this proxy, all the shares of common stock of KEYSTONE CONSOLIDATED INDUSTRIES, INC., a Delaware corporation (the "Company"), held of record by the undersigned on the record date, August 23, 1996, at the Special Meeting of Stockholders to be held on September 27, 1996, and all adjournments thereof, as directed and, in their discretion, on all other matters which may properly come before the Special Meeting or any adjournments thereof. The undersigned directs said proxies to vote as specified upon the items shown on the reverse side, which are referred to in the Notice of Special Meeting and set forth in the Joint Proxy Statement/Prospectus. (Continued, and to marked, dated and signed, on the other side) - -------------------------------------------------------------------------------- FOLD AND DETACH HERE 2 This Proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder. If no direction is made, this Proxy will be voted "FOR" the issuance of Keystone Common Stock pursuant to the Agreement and Plan of Reorganization dated June 26, 1996. FOR AGAINST ABSTAIN Please mark, date and sign exactly as your name appears on this proxy card. When shares are held jointly, both holders should sign. When signing as attorney, executor, administrator, trustee or guardian, please give your full title. If the holder is a corporation or partnership, the full corporate or partnership name should be signed by a duly authorized officer. ----------------------------------- Signature ----------------------------------- Signature, if shares held jointly Date: 1996 -------------------- THIS PROXY MAY BE REVOKED AS SET FORTH IN THE KEYSTONE CONSOLIDATED INDUSTRIES, INC. JOINT PROXY STATEMENT/PROSPECTUS THAT ACCOMPANIED THIS PROXY. Dear Stockholder: Enclosed you will find material relative to the Company's Special Meeting of Stockholders. The Notice of Special Meeting and Joint Proxy Statement/Prospectus describe the formal business to be transacted at the meeting. Whether or not you expect to attend the Special Meeting, please complete and return promptly the attached proxy card in the accompanying envelope, which requires no postage if mailed in the United States. Keystone Consolidated Industries, Inc. EX-99.2 19 FORM OF PROXY TO BE UED BY DE SOTO 1 EXHIBIT 99.2 PROXY DESOTO, INC. The undersigned hereby appoints ANNE E. EISELE and IRVING KAGAN, and each of them, as Proxies with the power of substitution and revocation (to act by a majority present or if only one acts then by that one) and hereby authorizes them to represent and to vote as designated below all of the shares of stock of DeSoto, Inc. held of record by the undersigned on August 23, 1996, at the special meeting of stockholders to be held in New York, New York, on Friday, September 27, 1996, at 10:00 A.M., New York time, or any adjournment thereof. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF DESOTO, INC. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF REORGANIZATION DATED AS OF JUNE 26, 1996 BETWEEN DESOTO, INC. AND KEYSTONE CONSOLIDATED INDUSTRIES, INC. (THE "REORGANIZATION AGREEMENT"). The undersigned hereby revokes any proxy or proxies heretofore given to vote such shares at said meeting or any adjournment thereof. (CONTINUED AND TO BE SIGNED ON OTHER SIDE) 2 THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE LISTED PROPOSAL. PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. / / [ ] APPROVAL AND ADOPTION OF THE PLAN OF FOR AGAINST ABSTAIN REORGANIZATION / / / / / / PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give your full title as such. If a corporation, please sign in full corporate name by the President or other authorized officer. If a partnership, please sign in partnership name by authorized person. Dated: , 1996 ------------------------------------------------------ ------------------------------------------------------------------ ------------------------------------------------------------------ Signature(s) of Stockholder(s) PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. -----END PRIVACY-ENHANCED MESSAGE-----