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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-7665
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LYDALL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-0865505
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE COLONIAL ROAD, MANCHESTER, 06045-0151
CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 646-1233
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.10 par value New York Stock Exchange
----------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
On March 17, 1997, the aggregate market value of the Registrant's voting
stock held by nonaffiliates was $348,360,869.
On March 17, 1997, there were 16,881,912 shares of Common Stock outstanding,
exclusive of treasury shares.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II incorporate certain information by reference from the Annual
Report to Stockholders for the year ended December 31, 1996. Part III
incorporates information by reference from the definitive Proxy Statement to
be distributed in connection with the Registrant's Annual Meeting of
Stockholders to be held on May 14, 1997.
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PART I
ITEM 1. BUSINESS.
Lydall, Inc. (hereafter referred to as "Lydall" or the "Company") is a
manufacturer of technologically advanced engineered materials for demanding
specialty applications.
Lydall develops and manufactures engineered fiber materials and composites
in both roll and sheet form; fiber-based as well as combination-metal-and-
fiber heat shields; and fabricates certain medical filtration and automotive
thermal barrier components. The majority of Lydall's products are supplied to
customers who in turn incorporate them into finished products. Utilizing a
broad spectrum of available fibers, materials, binders, resins, etc. combined
with dry-laid and wet-laid nonwoven processes and specialty weaving
capabilities, the Company has been able to develop a broad range of high-
performance materials.
The Company serves a number of market niches. Lydall's products are
primarily sold directly to the customer (or fabricator), through an internal
sales force and are distributed through common carrier, ocean cargo, or the
Company's trucking operation. Within each market niche there are typically
several competitors. The Company primarily competes through high-quality
products and customer service. Lydall has a number of domestic and foreign
competitors for its products, most of whom are either privately owned or
divisions of large companies, making it difficult to determine the Company's
market share.
Lydall's products fall into five basic categories: thermal barriers, air and
liquid filtration media, materials handling systems, electrical insulation,
and other products and services.
MAJOR PRODUCTS
Thermal Barriers
Lydall manufactures a broad range of materials which serve as heat or
thermal barriers. The Cryotherm(R) and Lytherm(R) product lines include an
assortment of composites using distinctive materials, in both rigid and
flexible forms, manufactured by a variety of processes. Lydall's thermal
barrier products in differing forms are capable of withstanding temperatures
ranging from -459 degrees F to +3,000 degrees F.
At the highest temperature requirements, Lytherm thermal barrier products
are used as linings for ovens, kilns, and furnaces and in glass and metal
manufacturing.
At mid-range temperatures Lytherm nonwovens are patented layered composites
of either organic and inorganic fibers or fiber-and-metal-foil combinations
which are used as thermal barriers in medium and light-duty trucks, vans,
sport utility vehicles, and cars. An acquisition made in early 1994
contributed to the growth of thermal barrier sales. This acquisition also
expanded the Company's product offerings to include additional automotive heat
shields.
Also, in mid-range temperatures, Manninglas(R) nonwovens are employed in
consumer appliances and heat ventilation and air conditioning ducting and
insulation.
At the very coldest temperatures (approaching absolute zero), Cryotherm(R)
cryogenic insulation materials are used for super-insulating applications.
These include tanker trucks which transport liquid gases; stationary and
portable cryogenic storage vessels; gas tanks for vehicles fueled by liquid
natural gas; and supercolliders. These nonwovens are composed of 100-percent
inorganic fibers.
Lydall also manufactures custom-designed media employed in automotive air-
bag pyrotechnic inflators. Although these sales are classified as thermal
barriers by the Company, this specialty product performs both a filtration and
heat-reduction function.
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Sales of thermal barriers approximated 38 percent of the Company's sales for
1996, 36 percent 1995, and 34 percent for 1994. Thermal barrier sales
increased 6 percent in 1996 over 1995 activity. Increases can be primarily
attributable to solid growth for automotive heat-shield applications.
Filtration Media
The Company manufactures high-efficiency air filtration media, marketed
under the Lydair(R) name. Lydair filtration media are used for applications
where clean air is vital, such as in semiconductor manufacturing clean rooms,
industrial clean rooms, and biotechnology laboratories.
Lydall manufactures Lydair media in six filtration classes in over 100
grades with filtering efficiencies from 10 percent at 0.3 micron particle size
to 99.999999 percent at 0.1 micron particle size.
Lydall filtration media are primarily used in air filters which are capital
goods rather than consumables and last approximately five years. A replacement
market exists as facilities using these filters upgrade clean room technology.
The Company's HEPA filtration media are also used in home air-purification
units.
Lydall's line of fabricated medical filter components are sold under the
trademark Lypore(R) and are widely used in blood filtration devices, such as
cardiotomy reservoirs which filter the blood supply of an open-heart surgery
patient during the operation, and autotransfusion filters used to filter blood
collected from a patient before surgery or from an injured patient. This
product line also includes a leukocyte filtration media used in devices that
separate blood components.
In addition, Lydall produces liquid filtration media used primarily in high-
efficiency hydraulic oil and lubrication oil elements for off-road vehicles,
trucks, and heavy equipment. These products are also sold under the Lypore
trademark.
Sales of filtration media increased to 24 percent of sales for 1996 compared
with 22 percent and 20 percent for 1995 and 1994, respectively. The overall
sales of filtration media increased 9 percent in 1996 from that of 1995. High-
efficiency air filtration media, sold to air filter manufacturers for clean-
room applications, contributed the majority of total filtration sales. Sales
slowed somewhat in the last two quarters of 1996 mainly because of
postponements of planned clean-room construction and inventory reductions by
customers.
Materials Handling
Lydall produces slipsheets, separator sheets, and protective sheets. The
Ly-Pak(R) slipsheets are used to ship a growing number of products such as food,
pharmaceuticals, and chemicals. Ly-Pak slipsheet systems are used to replace
wooden pallets, providing significant cost and space reductions for a shipper.
Ly-Pak separator sheets are supplied to the glass and polyethylene
terephthalate bottle industry and are manufactured to meet industry
specifications for bulk palletizing. Ly-Pak protective sheets are used as
pallet pads, protective top caps, and stabilizing sheets. These products are
custom-made from plies of virgin kraft linerboard and laminated with a special
moisture-resistant adhesive. The Company also sells a complete line of dunnage
products.
Sales of these products approximated 13 percent of 1996 total sales as
compared with 15 percent and 14 percent of 1995 and 1994 total sales,
respectively. Total materials-handling sales decreased by 17 percent in 1996
as compared to 1995. Lower sales in 1996 were primarily a result of
deflationary pressures. As raw material costs decreased corresponding price
reductions were given which reduced sales dollars.
Electrical Insulation
Lydall's electrical insulation material, sold under the SE/duroid(R),
Sep-R-Max(R), and Voltex(R) trademarks are found in a broad range of
applications such as computers, consumer appliances, utility power transformers,
electric motors and other wiring devices. These materials are manufactured to
electrical resistance, flame retardancy, formability, thermal aging, and
moisture resistance specifications.
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The Company's electrical insulation products also include battery separator
materials primarily used in European automotive batteries. These products are
manufactured at the Company's European location.
Sales of electrical insulation products were approximately 6 percent of
total sales in 1996, 7 percent in 1995 and 8 percent in 1994. Actual sales
decreased in 1996 by 19 percent over 1995 levels. The gradual decline in this
market results from lower demand for automotive battery separator materials
and a shift in the battery separator technology, favoring different materials
than those used by the Company. As Lydall expected, these changes have had an
impact on European separator sales. The Company has successfully been
replacing electrical products with new products in air filtration at the
foreign facility.
Other Products and Services
Lydall maintains a transportation operation which brokers and/or hauls
freight for and between Lydall plants as well as for outside customers. In
addition, the Company manufactures paperboard products used in games and
packaging, specialty gasketing materials, and fiberboard shoe insole
materials. Lydall also produces a wood replacement material made from recycled
newsprint and cardboard which is currently being made into writing
instruments. An acquisition made in December 1996 added the manufacture of
high-performance woven structural components to the Company's products. Sales
of all other products and services approximated 19 percent of the Company's
sales in 1996 and 1995, and 24 percent in 1994.
GENERAL BUSINESS INFORMATION
Lydall operates eleven manufacturing and fabricating facilities in the
United States which are located in Rochester, New Hampshire; Green Island, New
York; Hoosick Falls, New York; Manchester, Connecticut; Richmond, Virginia;
Hamptonville, North Carolina; Rockwell, North Carolina; Columbus, Ohio;
Jacksonville, Florida, Covington, Tennessee and Hatboro, Pennsylvania. Lydall
also has one manufacturing facility in Saint-Rivalain en Melrand, France.
Lydall holds a number of patents, trademarks, and licenses. While no single
patent, trademark or license by itself is critical to the success of Lydall,
together these intangible assets are of considerable value to the Company's
operations.
The working capital requirements of the Company are financed primarily from
operations. No significant portion of Lydall's business is seasonal. Lydall
maintains levels of inventory and grants credit terms which are normal within
the industries it serves. The Company uses a wide range of raw materials in
the manufacturing of its products and was able to obtain all the raw materials
needed during 1996. The majority of these materials are available from a
variety of suppliers who can be substituted if necessary.
Thirty-two percent of Lydall's total sales in 1996 were to the world-wide
automotive market compared to thirty-three percent in 1995. Lydall's
automotive sales are sold to various customers including parts suppliers,
thermal insulation fabricators, air-bag manufacturers and original equipment
manufacturers for use in a variety of models and applications. Sales to Ford
Motor Company represented 16.6 percent of Lydall's total sales in 1996, and no
other single customer accounted for more than 10 percent of total sales.
Lydall invested $6.8 million in 1996, $6.2 million in 1995, and $5.5 million
in 1994, respectively, in activities to develop new products and special
manufacturing processes or to improve existing products. Most of Lydall's
investment in research and development is application specific; very little is
pure research. There were no significant customer-sponsored research and
development activities during the past three years.
Lydall's backlog was $25.1 million at December 31, 1996, $28.0 million at
December 31, 1995, and $24.5 million at December 31, 1994. Lydall expects to
fill its backlog of 1996 orders during the first quarter of 1997. Backlog at
February 28, 1997 was $27.2 million. There are no seasonal aspects to this
backlog.
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No material portion of Lydall's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
government.
Lydall believes that its plants and equipment are in substantial compliance
with applicable federal, state and local provisions that have been enacted or
adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment. Additional measures
to maintain compliance with presently enacted laws and regulations are not
expected to have a substantial adverse effect on the capital expenditures,
earnings and competitive position of the Company and its subsidiaries. For
information relating to certain environmental proceedings involving the
Company, please refer to Item 3 below.
As of March 1, 1997, Lydall and its subsidiaries had 1,272 employees,
including foreign employees. Approximately 175 of the domestic employees are
represented by eight unions under contracts expiring between November 1997 and
November 1999. Lydall considers its employee relationships to be satisfactory,
and there have not been any actual or threatened work stoppages due to union
related activities. All employees at the Company's facility in France are
covered under a National Collective Bargaining Agreement.
Foreign and export sales were 21 percent of total sales in 1996, 22 percent
in 1995 and 21 percent in 1994. Export sales are concentrated primarily in
Europe, the Far East, Mexico, and Canada and were $37.0 million, $38.9
million,and $30.7 million in 1996, 1995 and 1994, respectively.
Foreign sales were $17.6 million, $17.0 million, and $14.4 million for the
years ended December 31, 1996, 1995, and 1994, respectively. For the year
ended December 31, 1996, the foreign facility incurred losses of $796
thousand. For the year ended December 31, 1995 the foreign facility earned
$127 thousand excluding the effect of a statutory tax rate increase on
deferred tax balances which negatively impacted income by $292 thousand. For
the year ended December 31, 1994, net income was $192 thousand. Total foreign
assets were $18.5 million and $20.4 million at December 31, 1996 and 1995,
respectively.
There are no anticipated operating risks related to foreign investment law,
expropriation, inflation effects or availability of material, labor and
energy. The Company's foreign and domestic operations limit currency and
foreign exchange transaction risks by completing transactions primarily in
their functional currencies.
ITEM 2. PROPERTIES.
The principal properties of the Company and its subsidiaries are situated at
the following locations and have the following characteristics:
<TABLE>
<CAPTION>
APPROXIMATE AREA
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LAND BUILDINGS
LOCATION GENERAL DESCRIPTION (ACRES) (SQ. FEET)
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<C> <C> <S> <C> <C>
1 Manchester, Office Facilities..................... 2.0 25,000
Connecticut
2 Manchester, Paperboard Manufacturing.............. 11.6 70,500
Connecticut
3 Covington, Composite Materials Manufacturing..... 26.0 155,000
Tennessee
4 Richmond, Laminated Kraft Manufacturing......... 5.0 104,000
Virginia
5 Rochester, Specialty Paper Manufacturing......... 18.0 143,000
New Hampshire
6 Hoosick Falls, Composite Materials Manufacturing..... 11.0 129,000
New York
7 Hamptonville, Nonwoven Materials Manufacturing...... 35.2 85,000
North Carolina
</TABLE>
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<TABLE>
<CAPTION>
APPROXIMATE AREA
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LAND BUILDINGS
LOCATION GENERAL DESCRIPTION (ACRES) (SQ. FEET)
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<C> <S> <C> <C>
8 Green Island, Specialty Paper
New York Manufacturing &
Warehouse................. 5.4 275,000
9 Manchester, Corporate Office and
Connecticut Computer Center........... 4.5 20,000
10 Rockwell, Fabricating Facility...... 11.5 51,000
North Carolina
11 Saint-Rivalain en Melrand, Specialty Paper
France Manufacturing............. 14.3 156,000
12 Columbus, Fabricating Facility...... 9.0 80,000
Ohio
13 Jacksonville, Laminated Kraft
Florida Manufacturing............. -- 52,000
14 Hatboro, Specialty Materials
Pennsylvania Manufacturing............. -- 36,000
15 Manchester, Warehouse and Office
Connecticut Facilities................ 7.08 95,000
</TABLE>
Properties numbered 4, 10, 12, 13 and 14, are being leased; all others are
owned. For information with respect to obligations for lease rentals and owned
property, see the Notes to the Consolidated Financial Statements of the
Company included in the 1996 Annual Report to Stockholders, which are
incorporated herein by reference. Lydall considers its properties to be
suitable and adequate for its present needs. The properties are being fully
utilized. In addition to the properties listed above, the Company has several
additional leases for sales offices and warehouses in the United States and
overseas.
ITEM 3. LEGAL PROCEEDINGS.
In the mid-1980's, the United States Environmental Protection Agency ("EPA")
notified a former subsidiary of the Company that it and other entities may be
potentially responsible in connection with the release of hazardous substances
at a landfill and property located adjacent to a landfill located in Michigan
City, Indiana. The two sites have been combined and are viewed by the EPA as
one site. The preliminary indication, based on the Site Steering Committee's
volumetric analysis, is that the alleged contribution to the waste volume at
the site of the plant once owned by a former subsidiary is approximately 0.434
percent of the total volume. The portion of the 0.434 percent specifically
attributable to the former subsidiary by the current operator of the plant is
approximately 0.286 percent.
There are over 800 potentially responsible parties ("prp") which have been
identified by the Site Steering Committee. Of these, 38, not including the
Company's former subsidiary, are estimated to have contributed over 80 percent
of the total waste volume at the site. These prp's include Fortune 500
companies, public utilities, and the State of Indiana. The Company believes
that, in general, these parties are financially solvent and should be able to
meet their obligations at the site. The Company has reviewed Dun & Bradstreet
reports on several of these prp's, and based on these financial reports, does
not believe Lydall will have any material additional volume attributed to it
for reparation of this site due to insolvency of other prp's.
During the quarter ended September 30, 1994, the Company learned that the
EPA had completed its Record of Decision ("ROD") for the Michigan site and has
estimated the total cost of remediation to be between $17 million and $22
million. Based on the alleged volumetric contribution of its former subsidiary
to the site, and on the EPA's estimated remediation costs, Lydall's alleged
total exposure would be less than $100 thousand, which has been accrued. In
June 1995, the Company and its former subsidiary were sued in the Northern
District of Indiana by the insurer of the current operator of the former
subsidiary's plant seeking contribution. In January
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1997, the insurer made a settlement demand of $133,925 to the Company in
exchange for a release of the Company's liability at the site. Although the
Company believes it has several defenses to the action, it is evaluating the
demand.
Management believes the ultimate disposition of this matter will not have a
material adverse effect upon the Company's consolidated financial position or
results of operations.
On March 19, 1996, patent litigation brought by ATD Corporation ("ATD")
against Lydall in the U.S. District Court for the Eastern District of Michigan
was concluded with the jury finding in favor of Lydall and with all of ATD's
claims for damages being denied. Post trial motions of both parties for
judgment as a matter of law were denied by the Court on February 27, 1997. The
period for appeal to the U.S. Court of Appeals for the Federal Circuit
regarding this litigation expires on March 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT:
The name, age, current position, and other business experience since January
1, 1992 of each executive officer of the Company are listed on the following
page. Leonard R. Jaskol, John E. Hanley, Carole F. Butenas, Alan J. Gnann and
Mary Tremblay are elected annually at the organizational meeting of the Board
of Directors. All others are appointed by the President and Chief Executive
Officer for an indefinite period. There are no family relationships among
executive officers or other significant employees.
<TABLE>
<CAPTION>
OTHER BUSINESS
NAME AGE TITLE EXPERIENCE SINCE 1992
- ---- --- ----- ---------------------
<S> <C> <C> <C>
Leonard R. Jaskol 60 Chairman of the Board (since N/A
1991) President and Chief
Executive Officer (since 1988)
John E. Hanley 40 Vice President--Finance and N/A
Treasurer (since 1992)
Carole F. Butenas 54 Vice-President--Investor N/A
Relations (since 1991) Director
(1995)
Alan J. Gnann(1) 47 Vice President--Corporate President--Manning Nonwovens
Development (since 1993) Division
Mary Tremblay 36 General Counsel and Secretary N/A
(since 1991)
Raymond J. Lanzi 58 Division President (since 1979) N/A
Director (1993)
Elliott F. Whitely 53 Division President (since 1987) N/A
Director (1993) (1996)
James P. Carolan 54 Division President (since 1993) President--Lydall International
Director (1994) (1996)
William J. Rankin 43 Division President (since 1992) N/A
Director (1995)
Christopher R. 43 Division President (since 1990) N/A
Skomorowski Director (1994)
John J. Worthington 48 Division President (since 1996) General Manager, W. R. Grace
and Specialty Paperboard, Inc.
</TABLE>
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(1) Mr. Gnann has resigned effective March 31, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information regarding the common stock of the Company and recent market
prices of such stock, the cash dividend policy, and the approximate number of
holders of common stock, is incorporated herein by reference to pages 24, 34,
41 and 42 of the 1996 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
Information regarding selected financial data of the Company is incorporated
herein by reference to page 41 of the 1996 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's discussion and analysis of financial condition and results of
operations is incorporated herein by reference to the President's Letter, the
Analysis of Results and Key Financial Items on pages 2 through 6 and 16
through 24 of the 1996 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Lydall, Inc. and its subsidiaries
and the supplementary quarterly financial information are incorporated by
reference to pages 25 through 39 of the 1996 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with the Company's independent public
accountants on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding the directors of Lydall is incorporated by reference
to the definitive Proxy Statement of Lydall to be filed with the Commission
relating to its Annual Meeting of stockholders to be held on May 14, 1997.
Information regarding the executive officers and other significant employees
of the Company is contained on page 6 of this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding the compensation of Lydall's directors and executive
officers is incorporated by reference to the definitive Proxy Statement of
Lydall to be filed with the Commission relating to its Annual Meeting of
stockholders to be held on May 14, 1997, excluding the Compensation and Stock
Option Committee Report to Stockholders found on pages 16 through 18, and the
comparative performance graph located on page 19, therein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding beneficial ownership of the common stock by certain
beneficial owners and by management of the Company is incorporated by
reference to the definitive Proxy Statement of Lydall to be filed with the
Commission relating to its Annual Meeting of stockholders to be held on May
14, 1997.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions with
management is incorporated by reference to the definitive Proxy Statement of
Lydall to be filed with the Commission relating to its Annual Meeting of
stockholders to be held on May 14, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
a) 1) The following consolidated financial statements of Lydall, Inc. and its
subsidiaries are found in and are incorporated by reference to the Annual
Report to Stockholders for the year ended December 31, 1996:
<TABLE>
<CAPTION>
ANNUAL
REPORT
PAGES
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<S> <C>
Consolidated Income Statements--Years ended December 31, 1996, 1995, and 1994..... 25
Consolidated Balance Sheets--December 31, 1996 and 1995........................... 26-27
Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995, and
1994............................................................................. 28
Consolidated Statements of Changes in Stockholders' Equity--Years ended December
31, 1996,
1995, and 1994................................................................... 29
Notes to Consolidated Financial Statements........................................ 30-39
Report of Independent Accountants................................................. 40
<CAPTION>
10-K
PAGES
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<S> <C>
a) 2) Financial Statement Schedule:
Report of Independent Accountants................................................. 12
Consent of Independent
Accountants................. 13
Schedule II--Valuation and Qualifying Accounts--Years ended December 31, 1996,
1995, and 1994................................................................... 14
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, are inapplicable, or are presented in the notes to
financial statements, and therefore have been omitted.
With the exception of the consolidated financial statements and the
accountants' report thereon listed in the above index, the information referred
to in Items 2, 5, 6 and 7 and the supplementary quarterly financial information
referred to in Item 8, all of which is included in the 1996 Annual Report to
Stockholders of the Company and incorporated by reference into this Form 10-K
Annual Report, the 1996 Annual Report to Stockholders is not to be deemed
"filed" as part of this report.
a) 3) Exhibits included herein:
3.1 Amended and Restated Certificate of Incorporation of the registrant dated
August 14, 1995, (filed as Exhibit 4.1 to the registrants Quarterly
Report on Form 10-Q dated November 9, 1995 and incorporated herein by
this reference).
3.2 Bylaws of the registrant (filed as Exhibit 3.2 to the registrant's
Registration Statement on Form 8-B dated October 16, 1987, and
incorporated herein by this reference).
4.1 Certain long-term debt instruments, each representing indebtedness in an
amount equal to less than 10 percent of the registrant's total
consolidated assets, have not been filed as exhibits to this Annual
Report on Form 10-K. The registrant hereby undertakes to file these
instruments with the Commission upon request.
10.1* Lydall, Inc. 1978 Long-Term Incentive Compensation Plan (filed as Exhibit
4.4 to the registrant's Registration Statement on Form S-8 dated March
18, 1988 (Reg. No. 33-20777), and incorporated herein by this reference).
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10.2* Amended and restated, Lydall, Inc. 1982 Stock Incentive Compensation
Plan, amended through May 14, 1991 (filed as Exhibit 10.6 to the
registrant's Annual Report on Form 10-K dated March 26, 1992 and
incorporated herein by this reference).
10.3* Amended and restated, 1992 Stock Incentive Compensation Plan, dated May
14, 1992, amended through May 11, 1994, (filed as exhibit 10.3 to the
registrant's Annual Report on Form 10-K dated March 27, 1995, and
incorporated herein by this reference.)
10.4* Lydall, Inc. Senior Management Annual Incentive Compensation Plan (filed
as Exhibit 3.5 to the registrant's Registration Statement on Form 8-B
dated October 16, 1987, and incorporated herein by this reference).
10.5* Lydall, Inc. Management Annual Incentive Compensation Plan (filed as
Exhibit 3.6 to the registrant's Registration Statement on Form 8-B dated
October 16, 1987, and incorporated herein by this reference).
10.6* Employment Agreement with Leonard R. Jaskol dated March 1, 1995, (filed
as exhibit 10.6 to the registrant's Annual Report on Form 10-K dated
March 27, 1995, and incorporated herein by this reference.)
10.7* Employment Agreement with John E. Hanley dated March 10, 1995, (filed as
Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q dated May
9, 1995 and incorporated herein by this reference).
10.8* Employment Agreement with James P. Carolan dated March 10, 1995 (filed
as Exhibit 10.2 to the registrant's Quarterly report on Form 10-Q dated
May 9, 1995 and incorporated herein by this reference).
10.9* Employment Agreement with Elliott F. Whitely dated March 10, 1995 (filed
as Exhibit 10.3 to the registrant's Quarterly report on Form 10-Q dated
May 9, 1995 and incorporated herein by this reference).
10.10* Employment Agreement with Alan J. Gnann dated March 10, 1995 (filed as
Exhibit 10.4 to the registrant's Quarterly report on Form 10-Q dated
May 9, 1995 and incorporated herein by this reference).
10.11* Employment Agreement with Raymond J. Lanzi dated March 10, 1995 (filed
as Exhibit 10.5 to the registrant's Quarterly report on Form 10-Q dated
May 9, 1995 and incorporated herein by this reference).
10.12* Employment Agreement with Christopher R. Skomorowski dated March 10,
1995 (filed as Exhibit 10.6 to the registrant's Quarterly report on
Form 10-Q dated May 9, 1995 and incorporated herein by this reference).
10.13* Employment Agreement with William J. Rankin, dated March 10, 1995
(filed as Exhibit 10.7 to the registrant's Quarterly report on Form 10-
Q dated May 9, 1995 and incorporated herein by this reference).
10.14* Employment Agreement with Carole F. Butenas dated March 10, 1995 (filed
as Exhibit 10.8 to the registrant's Quarterly report on Form 10-Q dated
May 9, 1995 and incorporated herein by this reference).
10.15* Employment Agreement with Mona G. Estey dated March 10, 1995 (filed as
Exhibit 10.9 to the registrant's Quarterly report on Form 10-Q dated
May 9, 1995 and incorporated herein by this reference).
9
<PAGE>
10.16* Employment Agreement with Mary Adamowicz Tremblay dated March 10, 1995
(filed as Exhibit 10.10 to the registrant's Quarterly report on Form
10-Q dated May 9, 1995 and incorporated herein by this reference).
10.17* Employment Agreement with John J. Worthington dated November 7, 1996,
filed herewith.
10.18* Lydall, Inc. Board of Directors Deferred Compensation Plan effective
January 1, 1991, (filed as Exhibit 10.17 to the registrant's Annual
Report on Form 10-K dated March 26, 1991 and incorporated herein by
this reference).
10.19 Asset Purchase Agreement between Lydall Central, Inc. and Standard
Packaging, Inc. (filed as Exhibit 2.1 to the registrant's Current Report
on Form 8-K dated February 28, 1994 and incorporated herein by this
reference).
10.20 Asset Purchase Agreement between Lydall Eastern, Inc. and Riverwood
International Georgia, Inc. (filed as Exhibit 10.1 to the registrant's
Quarterly Report on Form 10-Q dated August 10, 1994 and incorporated
herein by this reference).
10.21* Lydall, Inc. Supplemental Executive Retirement Plan effective January
1, 1994, (filed as Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K dated March 27, 1996).
10.22 Asset Purchase Agreement between Lydall New York, Inc. and Textile
Technologies Industries, Inc. filed herewith. The registrant shall
furnish copies of exhibits to the Asset Purchase Agreement upon the
request of the Commission.
11.1 Schedule of Computation of Weighted Average Common Shares and
Equivalents Outstanding, filed herewith.
13.1 Annual Report to Stockholders for the year ended December 31, 1996,
filed herewith.
21.1 List of subsidiaries of the registrant, filed herewith.
23.1 Consent of Coopers and Lybrand, L.L.P.,filed herewith.
24.1 Power of Attorney, dated March 13, 1997, authorizing Leonard R. Jaskol
and/or John E. Hanley to sign this report on behalf of each member of
the Board of Directors indicated therein, filed herewith.
27.1 Financial Data Schedule, filed herewith.
- --------
*Management contract or compensatory plan.
b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter, 1996.
10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, LYDALL, INC. HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Lydall, Inc.
Leonard R. Jaskol
Date: March 27, 1997 By __________________________________
LEONARD R. JASKOL CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF LYDALL, INC. IN
THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
Leonard R. Jaskol Chairman, Chief March 27, 1997
- ------------------------------------- Executive Officer
LEONARD R. JASKOL and Director
John E. Hanley Vice President--Finance March 27, 1997
- ------------------------------------- and Treasurer
JOHN E. HANLEY (Principal Financial
and Accounting Officer)
John E. Hanley March 27, 1997
- -------------------------------------
JOHN E. HANLEY
ATTORNEY-IN-FACT FOR:
Lee A. Asseo Director* March 27, 1997
- -------------------------------------
LEE A. ASSEO
Paul S. Buddenhagen Director* March 27, 1997
- -------------------------------------
PAUL S. BUDDENHAGEN
James P. Carolan Director* March 27, 1997
- -------------------------------------
JAMES P. CAROLAN
Samuel P. Cooley Director* March 27, 1997
- -------------------------------------
SAMUEL P. COOLEY
W. Leslie Duffy Director* March 27, 1997
- -------------------------------------
W. LESLIE DUFFY
William P. Lyons Director* March 27, 1997
- -------------------------------------
WILLIAM P. LYONS
Joel Schiavone Director* March 27, 1997
- -------------------------------------
JOEL SCHIAVONE
Elliott F. Whitely Director* March 27, 1997
- -------------------------------------
ELLIOTT F. WHITELY
Roger M. Widmann Director* March 27, 1997
- -------------------------------------
ROGER M. WIDMANN
Albert E. Wolf Director* March 27, 1997
- -------------------------------------
ALBERT E. WOLF
* (constituting in excess of a majority of the full Board of Directors)
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Lydall, Inc.:
Our report on the consolidated financial statements of Lydall, Inc. and
Subsidiaries has been incorporated by reference in this Form 10-K from page 40
of the 1996 Annual Report to Stockholders of Lydall, Inc. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page 8 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Hartford, Connecticut February 14, 1997, except for Contingencies footnote,
for which the date is February 27, 1997.
12
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Lydall, Inc. on Form S-8 (File No. 33-93768) of our reports dated February
14, 1997 except as to the information presented in the Contingencies footnote,
for which the date is February 27, 1997, on our audits of the consolidated
financial statements and financial statement schedule of Lydall, Inc., and
Subsidiaries as of December 31, 1996 and 1995, and for the years ended
December 31, 1996, 1995 and 1994, which reports are incorporated by reference
from the 1996 Annual Report to Stockholders, and included, respectively, in
this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Hartford, Connecticut March 27, 1997
13
<PAGE>
SCHEDULE II
LYDALL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
$ THOUSANDS ADDITIONS
- ----------- ---------------------
CHARGED TO
CHARGED TO OTHER
BALANCE AT COSTS AND ACCOUNTS-- DEDUCTIONS-- BALANCE AT
DESCRIPTION JANUARY 1 EXPENSES DESCRIBE DESCRIBE DECEMBER 31
----------- ---------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1996
Allowance for doubtful
receivables............ $1,938 $ 235 $ -- $ (446)(1) $1,727
Accumulated amortization
of intangible assets... 8,446 772 -- (1,477)(3) 7,741
Accrued reorganization.. 137 -- -- (109)(2) 28
Accrued environmental... 1,072 -- (62)(4) (12)(2) 998
Accumulated amortization
of goodwill............ 1,103 585 -- -- 1,688
LIFO reserve............ 2,493 316 -- (1,069)(5) 1,740
1995
Allowance for doubtful
receivables............ $1,724 $ 565 $ -- $ (351)(1) $1,938
Accumulated amortization
of intangible assets... 7,524 923 -- (1)(4) 8,446
Accrued reorganization.. 157 4 -- (24)(2) 137
Accrued environmental... 1,002 -- 83 (4) (13)(2) 1,072
Accumulated amortization
of goodwill............ 516 587 -- -- 1,103
LIFO reserve............ 1,659 1,152 -- (318)(5) 2,493
1994
Allowance for doubtful
receivables............ $1,126 $1,345 $ -- $ (747)(1) $1,724
Accumulated amortization
of intangible assets... 6,733 921 -- (130)(3) 7,524
Accrued reorganization.. 95 72 -- (10)(2) 157
Accrued environmental... 954 -- 90 (4) (42)(2) 1,002
Accumulated amortization
of goodwill............ 34 482 -- -- 516
LIFO reserve............ 1,426 589 -- (356)(5) 1,659
</TABLE>
Notes(1):Uncollected receivables written off.
(2): Disbursements of amounts previously accrued.
(3): Write off of fully amortized asset.
(4): Record foreign currency translation adjustments.
(5): Adjustment of LIFO reserve for inventory levels.
14
<PAGE>
SCHEDULE X
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE IN
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED COPY
- ------- ------------------------ -------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the
registrant dated August 14, 1995, (filed as Exhibit 4.1 to the
registrants Quarterly Report on Form 10-Q dated November 9,
1995 and incorporated herein by this reference).
3.2 Bylaws of the registrant (filed as Exhibit 3.2 to the
registrant's Registration Statement on Form 8-B dated October
16, 1987, and incorporated herein by this reference).
4.1 Certain long-term debt instruments, each representing
indebtedness in an amount equal to less than 10 percent of the
registrant's total consolidated assets, have not been filed as
exhibits to this Annual Report on Form 10-K. The registrant
hereby undertakes to file these instruments with the
Commission upon request.
10.1 Lydall, Inc. 1978 Long-Term Incentive Compensation Plan (filed
as Exhibit 4.4 to the registrant's Registration Statement on
Form S-8 dated March 18, 1988 (Reg. No.33-20777), and
incorporated herein by this reference).
10.2 Amended and restated, Lydall, Inc. 1982 Stock Incentive
Compensation Plan, amended through May 14, 1991,(filed as
Exhibit 10.6 to the registrant's Annual Report on Form 10-K
dated March 26, 1992 amended through May 14, 1991, by this
reference).
10.3 Amended and restated 1992 Stock Incentive Compensation Plan,
dated May 14, 1992 amended through May 11, 1994, (filed as
exhibit 10.3 to the registrant's Annual Report on Form 10-K
dated March 27, 1995, and incorporated herein by this reference).
10.4 Lydall, Inc. Senior Management Annual Incentive Compensation
Plan (filed as Exhibit 3.5 to the registrant's Registration
Statement on Form 8-B dated October 16, 1987, and incorporated
herein by this reference).
10.5 Lydall, Inc. Management Annual Incentive Compensation Plan
(filed as Exhibit 3.6 to the registrant's Registration
Statement on Form 8-B dated October 16, 1987, and incorporated
herein by this reference).
10.6 Employment Agreement with Leonard R. Jaskol dated March 1,
1995 filed as exhibit 10.6 to the registrant's Annual Report
on Form 10-K dated March 27, 1995, and incorporated herein by
this reference).
10.7 Employment Agreement with John E. Hanley dated March 10, 1995,
(filed as Exhibit 10.1 to the registrant's Quarterly Report on
Form 10-Q dated May 9, 1995 and incorporated herein by this
reference).
10.8 Employment Agreement with James P. Carolan dated March 10,
1995 (filed as Exhibit 10.2 to the registrant's Quarterly
report on Form 10-Q dated May 9, 1995 and incorporated herein
by this reference).
10.9 Employment Agreement with Elliott F. Whitely dated March 10,
1995 (filed as Exhibit 10.3 to the registrant's Quarterly
report on Form 10-Q dated May 9, 1995 and incorporated herein
by this reference).
10.10 Employment Agreement with Alan J. Gnann dated March 10, 1995
(filed as Exhibit 10.4 to the registrant's Quarterly report on
Form 10-Q dated May 9, 1995 and incorporated herein by this
reference).
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
PAGE IN
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED COPY
- ------- ------------------------ --------------
<S> <C> <C>
10.11 Employment Agreement with Raymond J. Lanzi dated March 10, 1995
(filed as Exhibit 10.5 to the registrant's Quarterly report on Form
10-Q dated May 9, 1995 and incorporated herein by this reference).
10.12 Employment Agreement with Christopher R. Skomorowski dated March
10, 1995 (filed as Exhibit 10.6 to the registrant's Quarterly
report on Form 10-Q dated May 9, 1995 and incorporated herein by
this reference).
10.13 Employment Agreement with William J. Rankin dated March 10, 1995
(filed as Exhibit 10.7 to the registrant's Quarterly report on Form
10-Q dated May 9, 1995 and incorporated herein by this reference).
10.14 Employment Agreement with Carole F. Butenas dated March 10, 1995
(filed as Exhibit 10.8 to the registrant's Quarterly report on Form
10-Q dated May 9, 1995 and incorporated herein by this reference).
10.15 Employment Agreement with Mona G. Estey dated March 10, 1995 (filed
as Exhibit 10.9 to the registrant's Quarterly report on Form 10-Q
dated May 9, 1995 and incorporated herein by this reference).
10.16 Employment Agreement with Mary Adamowicz Tremblay dated March 10,
1995 (filed as Exhibit 10.10 to the registrant's Quarterly report
on Form 10-Q dated May 9, 1995 and incorporated herein by this
reference).
10.17 Employment Agreement with John J. Worthington dated November 7,
1996, filed herewith.
10.18 Lydall, Inc. Board of Directors Deferred Compensation Plan
effective January 1, 1991,(filed as Exhibit 10.17 to the
registrant's Annual Report on Form 10-K dated March 26, 1991 and
incorporated herein by this reference).
10.19 Asset Purchase Agreement between Lydall Central, Inc. and Standard
Packaging, Inc. (filed as Exhibit 2.1 to the registrant's Current
Report on Form 8-K dated February 28, 1994 and incorporated herein
by this reference).
10.20 Asset Purchase Agreement between Lydall Eastern, Inc. and Riverwood
International Georgia, Inc. (filed as Exhibit 10.1 to the
registrant's Quarterly Report on Form 10-Q dated August 10, 1994
and incorporated herein by this reference).
10.21 Lydall, Inc. Supplemental Executive Retirement Plan effective
January 1, 1994, (filed as Exhibit 10.20 to the Registrant's Annual
Report on Form 10-K dated March 27, 1996).
10.22 Asset Purchase Agreement between Lydall New York, Inc. and Textile
Technology Industries, Inc. filed herewith. The registrant shall
furnish copies of exhibits to the Asset Purchase Agreement upon
request of the Commission.
11.1 Schedule of Computation of Weighted Average Common Shares and
Equivalents Outstanding, filed herewith.
13.1 Annual Report to Stockholders for the year ended December 31, 1996,
filed herewith.
21.1 List of subsidiaries of the registrant, filed herewith.
23.1 Consent of Coopers and Lybrand, L.L.P., filed herewith.
24.1 Power of Attorney, dated March 13, 1997, authorizing Leonard R.
Jaskol and/or John E. Hanley to sign this report on behalf of each
member of the Board of Directors indicated therein, filed herewith.
27.1 Financial Data Schedule, filed herewith.
</TABLE>
16
<PAGE>
EXHIBIT 10.17
AGREEMENT
---------
THIS AGREEMENT made this 7th day of November 1996 by and between LYDALL,
INC. and its subsidiaries (the "Company") and
John J. Worthington (the "Executive").
W I T N E S S E T H :
Recitals.
- ---------
Executive is employed by the Company as a Division President. The Company
and Executive have agreed that if Executive should cease to be Division
President under the circumstances set forth in this Agreement his employment
will be continued in another capacity for a specified period;
NOW, THEREFORE, the Company and Executive, in consideration of the mutual
promises set forth below, agree as follows:
1. Executive to Serve as Division President. The Executive shall
-----------------------------------------
continue to act as Division President, subject to the direction of its Chairman,
President and Chief Executive Officer.
2. Definitions. The phrase "Change of Control," as used in this
------------
Agreement, shall mean i) an acquisition of the Company by means of a merger or
consolidation or purchase of substantially all of its assets if and when
incident thereto (a) the composition of the Board of Directors of the Company
(the "Board") or its successor changes so that a majority of the Board is not
comprised of individuals who were members of the board immediately prior to such
merger, consolidation or purchase of
1
<PAGE>
assets or (b) the stockholders of the Company acquire a right to receive, in
exchange for or upon surrender a majority of their stock, cash or other
securities or a combination of the two; and/or ii) the acquisition by a person
(as that term is hereafter defined) of the voting rights with respect to 25
percent or more of the outstanding Common Stock of the Company if such person
was not an officer of director of the Company on the date of this Agreement;
and/or iii) the election or appointment to the Board of any director or
directors whose appointment or election or nomination for election was not
approved by a vote of at least a majority of the directors then still in office
who were either directors on the date hereof or whose election, appointment or
nomination for election was previously so approved.
The word "person," as used in the preceding sentence, shall mean an
individual, corporation, trust, or other legal or commercial entity and include
two or more persons acting as a partnership, limited partnership, syndicate or
other group for the purpose of acquiring, holding or disposing of securities of
the Company.
The word "cause", as used in this Agreement, shall mean (i) conviction of a
crime involving moral turpitude, or (ii) material and unexcused breach by
Executive of his obligations under this Agreement, which results in material
harm to the Company and which is not cured within the period set forth below;
provided, however, that a termination shall not be for "cause" hereunder unless,
- -----------------
such conviction or breach is detailed in a
2
<PAGE>
written notice of intent to terminate by the Board, providing for sixty (60)
days from receipt by Executive to cure the breach prior to termination of
Executive; except that such notice would not be required if, in the Chairman,
President and Chief Executive Officer's discretion, the Company would be
immediately harmed.
The phrase "Fringe Benefits," as used in this Agreement, shall mean the
benefits listed on Exhibit A hereto.
3. Termination After Change of Control. If a Change of Control occurs
-----------------------------------
after the date of this Agreement and subsequent to such Change of Control (a)
Executive shall resign as a Division President of the Company within one year
from the time such Change of Control occurs or (b) another shall be appointed or
elected Division President by the Company in place of Executive at any time
prior to June 21, 2013, Executive's normal retirement date (such resignation or
replacement of Executive being hereinafter referred to as a "Termination"),
Executive shall continue to be an employee of the Company and be compensated and
receive benefits in accordance with this Agreement; provided, however, that if
Executive's resignation shall be requested by the Company for cause or Executive
is replaced for cause, such resignation or replacement shall not be deemed a
Termination for the purpose of this Agreement and shall not entitle Executive to
continue to be an employee of the Company and be compensated and receive the
benefits provided for in this Agreement.
3
<PAGE>
4. Termination Prior to Change of Control. If prior to a Change of
---------------------------------------
Control (a) the Executive shall resign as Division President of the Company at
the request of the Company or because the duties and responsibilities of the
Division President have been significantly modified by the Company without his
consent or (b) another is appointed Division President in place of the Executive
(such resignation or replacement of the Executive being hereinafter referred to
a "Termination"), the Executive shall continue to be an employee of the Company
and be compensated and receive benefits in accordance with this Agreement;
provided, however, that if Executive's resignation shall be requested by the
Company for Cause or if Executive is replaced for Cause, such resignation or
replacement shall not be deemed a Termination for the purpose of this Agreement
and shall not entitle Executive to continue to be an employee of the Company and
be compensated and receive the benefits provided for in this Agreement.
5. Termination for Cause If Executive's employment is terminated for
---------------------
cause prior to the beginning of the Employment Period, (either prior or
subsequent to a Change of Control), earned but unpaid Base Salary will be paid
on a prorated basis for the year in which the termination occurs, plus accrued
vacation benefits, but all other Company obligations shall cease as of the date
of termination for cause, unless otherwise provided in separate agreements.
6. Employment Period. In the event of a Termination pursuant to
-----------------
paragraph 3b above, Executive shall continue to be an employee of the Company
for a period of two years from the date
4
<PAGE>
of such Termination, and in the event of a Termination pursuant to either
Paragraph 3a or Paragraph 4 above, Executive shall continue to be an employee of
the Company for a period of one year from the date of such Termination, such two
year period or one year period, as the case may be, being hereinafter referred
to as the "Employment Period"; provided, however, that (a) Executive may end the
Employment Period at any time in his absolute discretion and the Employment
Period may be ended by the Company at any time for cause, (b) the Employment
Period shall not extend beyond June 21, 2013, Executive's normal retirement
date, and (c) the Employment Period shall terminate if and when the Executive
becomes employed on substantially a full time basis by another entity or as a
partner or sole proprietor and with Executive's full recognition of his
responsibilities under Paragraph 11 below (but such termination of the
Employment Period under clause (a), (b) or (c) above shall not preclude the
Executive from being paid for his obligation not to compete as provided in
Paragraphs 11 and 12 below).
7. Title and Duties. During the Employment Period, the Executive shall
----------------
perform such duties and undertake such responsibilities as are assigned to him
from time to time by the Chairman, President and Chief Executive Officer;
provided, however, that such duties and responsibilities shall be commensurate
with his status as a senior executive of the Company and bear a reasonable
relationship to the business of the Company.
5
<PAGE>
8. Compensation. The Company shall pay to Executive during the
------------
Employment Period an annual salary (the "Annual Salary") equal to one-third
(1/3rd) of the aggregate of the base salary and bonuses paid to him during the
period commencing three (3) years prior to the date of Termination and ending on
the date of Termination, (or if Executive has been employed for less than three
years, then for the corresponding fraction of the aggregate of the base salary
and bonuses paid to him during the period commencing on his start date and
ending on the date of Termination). Payment shall be made twice monthly and be
appropriately prorated during the first and last month of the Employment Period.
In addition, during the Employment Period Executive shall receive (a) the same
Fringe Benefits that he would have been entitled to receive if he had continued
to be Division President during such period, (b) reimbursement for reasonable
expenses incurred by him in the performance of his duties and (c) the use of an
automobile on substantially the same basis as prior to his termination. If the
Employment Period shall end, pursuant to Paragraph 6 above, prior to the end of
the two year term provided for in Paragraph 3b above or the one year term
provided for in Paragraph 3a or Paragraph 4 above, as the case may be, the
Annual Salary (but, except to the extent provided in Paragraph 10 below, not
fringe benefits and perquisites) shall continue to be payable until the end of
the non-compete period provided for in Paragraph 11 below and shall be deemed
payment for Executive's obligation not to compete as provided in said Paragraph
11, and such Annual Salary for the
6
<PAGE>
remainder of the non-compete period shall be paid to the Executive in a lump sum
cash payment within ten days after the end of the Employment Period.
9. Tax Gross-up. Anything in this Agreement to the contrary
-------------
notwithstanding, in the event it shall be determined that any payment or
distribution made, or benefit provided, by the Company to or for the benefit of
the Executive (whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise, but determined without regard to
any additional payments required under this Section 9 (a 'Payment') would be
subject to the excise tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended and then in effect (the 'Code') (or any similar excise tax)
or any interest or penalties are incurred by the Executive with respect to such
excise tax (such excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the ('Excise Tax'), then the Executive
shall be entitled to receive an additional payment (a 'Gross-Up Payment') in an
amount such that after payment by the Executive of all Federal, state, local or
other taxes (including any interest or penalties imposed with respect to any
such taxes), including, without limitation, any such income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. An Executive may receive
Gross-Up Payments under this Section 9 whether or not
7
<PAGE>
the Executive actually receives other payments or benefits under the Agreement.
(i) Subject to the provisions of paragraph (ii) of this Section 9, all
determinations required to be made under this Section 9, including whether and
when a Gross-Up Payment is required and the amount of such Gross-Up Payment and
the assumptions to be utilized in arriving at such determination, shall be made
by Coopers & Lybrand (the "Accounting Firm') which shall provide detailed
supporting calculations both to the Company and the Executive within 20 calendar
days of the receipt of written notice from the Executive that there has been a
Payment, or such earlier time as is requested by the Company. In the event that
the Accounting Firm is serving as accountant or auditor for the individual,
entity or group effecting the Change of Control, the Executive shall have the
right by written notice to the Company to appoint another nationally recognized
accounting firm to make the determinations required hereunder (which accounting
firm shall then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Company and shall
be paid by the Company upon demand of the Executive as incurred or billed by the
Accounting Firm. Any Gross-Up Payment, as determined pursuant to this Section
9, shall be paid by the Company to the Executive within five days of the receipt
of the Accounting Firm's determination. If the Accounting Firm determines that
no Excise Tax is payable by the Executive, it shall furnish the Executive with
an unqualified written opinion
8
<PAGE>
in form and substance satisfactory to the Executive that failure to report the
Excise Tax on the Executive's applicable federal income tax return would not
result in the imposition of a negligence or similar penalty. As a result of the
uncertainty in the application of Section 4999 of the Code at the time of the
initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made ('Underpayment'), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies described in
paragraph (ii) of this Section 9 and the Executive thereafter is required to
make a payment of any Excise Tax, the Accounting Firm shall determine the amount
of the Underpayment that has occurred and any such Underpayment shall be paid by
the Company to or for the benefit of the Executive within five days of the
receipt of the Accounting Firm's determination. All determinations made by the
Accounting Firm in connection with any Gross-Up Payment or Underpayment shall be
final and binding upon the Company and the Executive.
(ii) The Executive shall notify the Company in writing of any claim
asserted in writing by the Internal Revenue Service to the Executive that, if
successful, would require the payment by the Company of the Gross-Up Payment.
Such notification shall be given as soon as practicable but not later than 60
days after the Executive is informed in writing of such claim and shall apprise
the Company of the nature of such claim and the date on which such claim is
requested to be paid. The Executive shall not pay
9
<PAGE>
such claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall at the Company's
expense:
a. give the Company any information reasonably requested by the Company
relating to such claim.
b. take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company.
c. cooperate with the Company in good faith in order effectively to
contest such claim, and
d. permit the Company to participate in any proceedings relating to such
claim; provided, however, that the Company shall bear and pay directly as
incurred all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis, for any Excise Tax or any Federal,
state, local or other income or other tax (including interest and penalties with
respect thereto) imposed as a result of such representation and payment of costs
and expenses. Without limitation on the foregoing provisions of this Section 9,
the Company shall control all proceedings taken in connection
10
<PAGE>
with such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or Federal,
state, local or other income or other tax (including interest or penalties with
respect thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and further provided that any
extension of the status of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount. Furthermore, the
Company's control of the contest shall be limited to issues with respect to
which a Gross-Up Payment would be payable hereunder and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
11
<PAGE>
(iii) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to paragraph (ii) of this Section 9, the Executive becomes
entitled to receive any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of paragraph (ii) of
this Section 9 promptly pay to the Company the amount of such refund (together
with any interest paid or credited thereon after taxes applicable thereto) upon
receipt thereof. If, after the receipt by the Executive of an amount advanced
by the Company pursuant to paragraph (ii) of this Section 9, a determination is
made that the Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Medical Insurance Coverage. Executive and his beneficiaries shall
---------------------------
continue to participate in all life, health, disability and other welfare plans
or programs existing at the time of a Change of Control in which they were
participating at such time (or substantially similar plans or programs), to the
extent that such continued participation is possible under the general terms and
conditions of such plans and programs throughout the Employment Period.
12
<PAGE>
Company and Executive will continue to pay the same relative portion of the
cost of each such plan or program as each were paying at the time of the Change
of Control. Further, in the event that Executive's or his beneficiaries'
continued participation in any group plan or program is not permitted, then in
lieu thereof, Company shall acquire individual insurance policies providing
substantially similar coverage for Executive and his beneficiaries, and Company
and Executive will pay the same relative portion of the cost of such comparable
coverage plans or programs or in the event that Company cannot acquire
individual insurance policies providing substantially similiar coverage, the
Company will self-insure the Executive, and the Executive in the case of self
insurance will pay the COBRA rate then applicable to the Company's group plan.
For purposes of COBRA, a qualifying event is not deemed to occur until the
Employment Period, as defined in paragraph 6, has expired.
11. Non-Compete. During the Employment Period Executive will not compete
------------
directly or indirectly with the Company or be directly or indirectly interested
in any business competing with the business being conducted by the Company.
Ownership of less than 1 percent of the issued and outstanding capital stock of
any corporation the stock of which is listed upon a national exchange or
regularly quoted by the National Association of Security Dealers Automated
Quotation (NASDAQ) shall not be deemed to create a material conflict of interest
as contemplated hereunder. For the purpose of this Paragraph 11, the Employment
Period shall be deemed to extend two years from Termination if such
13
<PAGE>
Termination occurred pursuant to Paragraph 3b above or one year from Termination
if such Termination occurred pursuant to Paragraph 3a or Paragraph 4 above,
notwithstanding any prior ending of the Employment Period pursuant to Paragraph
6 above.
12. Trade Secrets. Executive shall regard and preserve as confidential
--------------
and not use, communicate or disclose to any person, orally, in writing or by a
publication, any secret or confidential information of the Company, regardless
of where or when or how acquired by the Company, or of others which the Company
is obligated to maintain in confidence. This obligation shall exist during the
Employment Period and after the termination of the Employment Period until such
information becomes a matter of public knowledge through no act of Executive.
At the termination of employment by the Company, Executive agrees to return to
employer all documents, writings, drawings and other property of the Company
within his custody and control.
13. Indemnification. The parties agree to execute a separate
---------------
Indemnification Agreement in the form attached as Exhibit B.
14. Arbitration. The Company and Executive undertake to execute this
------------
Agreement in good faith. Any controversy or claim arising out of or relating to
this Agreement other benefit plans or arrangements with the Company or breach of
this Agreement, shall receive prompt attention by the other party and both
parties agree to make good faith efforts to resolve any controversy or claim in
an amicable way.
14
<PAGE>
If the Company and Executive fail to settle the controversy or claim in an
amicable way, they agree to submit the matter to be settled by arbitration in
accordance with the Arbitration Rules of the American Arbitration Association.
This Agreement, its execution, interpretation and performance shall be governed
by the laws of the state of Connecticut of the United States of America. The
arbitration will be held in Hartford, Connecticut, or such other place as may be
agreed at the time by the parties. The award of this arbitration shall be final
and binding both for the Company and Executive and may be entered in any court
with jurisdiction.
15. Litigation Expenses. In the event of any action, suit, proceeding,
-------------------
arbitration or claim between or by or against the Company and/or the Executive
with respect to this Agreement, other benefit plans or arrangements between the
parties, and the assertion or enforcement of his rights hereunder, the Company
shall promptly pay or reimburse the Executive upon such Executive's written
demand therefor, for eighty (80) percent of his costs and expenses (including
costs and fees of witnesses, evidence and attorney fees and expenses) relating
to or arising out of (directly or indirectly) such action, suit, proceeding,
arbitration or claim, on a monthly basis, as such costs and expenses are
incurred in investigating, prosecuting, defending or preparing to prosecute or
defend, regardless of the outcome thereof. In no event shall the Executive be
required to reimburse the Company for any of the costs and expenses relating to
any such action, suit, proceeding, arbitration or claim. The
15
<PAGE>
obligation of the Company under this Section 15 shall survive the termination
for any reason of this Agreement. This Section 15 cannot be amended or modified
to affect the rights of the Executive without the prior written consent of such
Executive which specifically refers to this Section 15.
16. Rabbi Trust. Within sixty (60) days of the date of this Agreement, the
------------
Company shall enter into a trust agreement (the "Trust Agreement") with a third
party institutional trustee, substantially in the form set forth in Rev. Proc.
92-64, 1992-2 C.B. 422, to assist it in meeting its obligations to the Executive
under the Company's Supplemental Executive Retirement Plan (the "SERP"). The
trust established pursuant to the Trust Agreement (the "Trust") shall be
irrevocable. The Trust Agreement shall provide that upon a Change of Control
the Company shall, no later than 30 days following the Change of Control, make
an irrevocable contribution of cash or cash equivalents to the Trust in an
amount sufficient to pay each SERP participant or beneficiary the benefits to
which they would be entitled pursuant to the terms of the SERP, and within 30
days following the end of each calendar year ending after the Change of Control
the Company shall irrevocably contribute any additional cash to the Trust
necessary for the Trustee to pay each SERP participant or beneficiary the
benefits payable pursuant to the terms of the SERP as of the close of the year.
The Trust Agreement shall also provide (i) that all income received by the Trust
shall be accumulated and reinvested, (ii) that the Company will be responsible
for the payment of all fees and expenses related to
16
<PAGE>
the Trust, (iii) that after a Change of Control the Trustee may not be removed
by the Company, and (iv) that, if the Trustee shall resign, any successor
Trustee must be an independent institutional entity, such as a bank trust
department or other party that has been granted corporate trustee powers under
state law. The Trust Agreement shall also provide that the provisions of the
Trust described in this Paragraph 16 may not be amended after a Change of
Control.
17. Entire Agreement. This Agreement embodies the whole understanding
-----------------
between the parties hereto with respect to the subject matter hereof and
supersedes all earlier agreements. There are no inducements, promises, terms,
conditions or obligations made or entered into by either party other than as
contained herein.
18. Modification. This Agreement may not be changed orally, but only be
------------
means of an agreement in writing signed by the parties hereto.
19. Waiver. The waiver by any party of a breach of any provision of this
-------
Agreement shall not operate as, or be construed as, a waiver of any subsequent
breach.
20. Applicable Law. This Agreement shall be governed and construed in
---------------
accordance with the laws of the State of Connecticut, without reference to
principles of conflict of laws.
21. Successors. This Agreement is personal to the Executive and without
-----------
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall
17
<PAGE>
inure to the benefit of and be enforceable by the Executive's legal
representatives. This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume expressly and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law or otherwise.
IN WITNESS WHEREOF, the parties have hereunto set their hands as of the date
first above written.
LYDALL, INC.
By /s/ Roger M. Widmann /s/ John J. Worthington
----------------------- ------------------------
Roger M. Widmann, Chairman, John J. Worthington
Compensation and Stock Option Division President
Committee
By /s/ Leonard R. Jaskol
---------------------
Leonard R. Jaskol
Chairman, President and CEO
18
<PAGE>
EXHIBIT A - FRINGE BENEFITS
---------------------------
1. Medical Benefits
a. Lydall, Inc. Health Care Payment Plan for Salaried Employees (includes
dental benefits)
b. Lydall, Inc. Health Care Expense Plan
c. Lydall, Inc. Health Care Spending Reimbursement Plan
2. Disability Benefits
a. Lydall, Inc. Short Term Disability Plan
b. Lydall, Inc. Executive Group Long Term Disability Plan
3. Life Insurance
a. Executive Life Insurance Plan
b. Accidental Death and Dismemberment Plan
c. Family Assistance Program
d. Business Travel Accident Plan
4. Retirement Plans
a. Lydall, Inc. Pension Plan No. 1A
b. Lydall, Inc. Profit Sharing Plan No. 1
c. Lydall, Inc. 401(k) Plan
d. Lydall, Inc. Supplemental Executive Retirement Plan
5. Stock Plans
a. Lydall, Inc. Employee Stock Purchase Plan
b. Lydall, Inc. 1992 Stock Incentive Compensation Plan
c. Lydall, Inc. 1982 Stock Incentive Compensation Plan
6. Other
a. Holidays, vacations
b. Lydall, Inc. Dependent Care Assistance Plan
19
<PAGE>
EXHIBIT B
---------
INDEMNIFICATION AGREEMENT
-------------------------
This Agreement, made and entered into this 7th day of November, 1996
("Agreement"), by and between Lydall, Inc., a Delaware corporation ("Company"),
and John J. Worthington ("Indemnitee"):
WHEREAS, highly competent persons are becoming more reluctant to serve
publicly-held corporations as directors or in other capacities unless they are
provided with adequate protection through insurance or adequate indemnification
against inordinate risks of claims and actions against them arising out of their
service to and activities on behalf of the corporation; and
WHEREAS, the current impracticability of obtaining adequate insurance and
the uncertainties relating to indemnification have increased the difficulty of
attracting and retaining such persons;
WHEREAS, the Board of Directors of the Company has determined that the
inability to attract and retain such persons is detrimental to the best
interests of the Company's stockholders and that the Company should act to
assure such persons that there will be increased certainty of such protection in
the future; and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest extent
permitted by applicable law so that they will serve or continue to serve the
Company free from undue concern that they will not be so indemnified; and
WHEREAS, Indemnitee is willing to serve, continue to serve and to take on
additional service for or on behalf of the Company on the condition that he be
so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
Section 1. Services by Indemnitee. Indemnitee agrees to serve (as a
-----------------------
director, officer, employee, agent of the Company) (at the request of the
Company, as a director, officer, employee, agent, fiduciary of another
corporation, partnership, joint venture, trust employee benefit plan or other
enterprise. Indemnitee may at any time and for any reason resign from such
position (subject to any other contractual obligation or any obligation imposed
by operation of law), in which event the
1
<PAGE>
Company shall have no obligation under this Agreement to continue Indemnitee in
such position.
Section 2. Indemnification - General. The Company shall indemnify, and
--------------------------
advance Expenses (as hereinafter defined) to, Indemnitee (a) as provided in this
Agreement and (b) to the fullest extent permitted by applicable law in effect on
the date hereof and as amended from time to time. The rights of Indemnitee
provided under the preceding sentence shall include, but shall not be limited
to, the rights set forth in the other Sections of this Agreement.
Section 3. Proceedings Other than Proceedings by or in the Right of the
------------------------------------------------------------
Company. Indemnitee shall be entitled to the rights of indemnification provided
- --------
in this Section 3 if, by reason of his Corporate Status (as hereinafter
defined), he is, or is threatened to be made, a party to any threatened,
pending, or completed Proceeding (as hereinafter defined), other than a
Proceeding by or in the right of the Company. Pursuant to this Section 3,
Indemnitee shall be indemnified against all expenses, judgements, penalties,
fines, and amounts paid in settlement actually and reasonably incurred by him or
on his behalf in connection with such Proceeding or any claim, issue or matter
therein, if he acted in good faith and in a manner be reasonably believed to be
in or not opposed to the best interests of the Company and, with respect to any
criminal Proceeding, had no reasonable cause to believe his conduct was
unlawful.
Section 4. Proceedings by or in the Right of the Company. Indemnitee
----------------------------------------------
shall be entitled to the rights of indemnification provided in this Section 4
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to any threatened, pending or completed Proceeding brought by or in the
right of the Company to procure a judgment in its favor. Pursuant to this
Section, Indemnitee shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection with such Proceeding
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company; provided, however, that if
applicable law so provides, no indemnification against such Expenses shall be
made in respect of any claim, issue or matter in such Proceeding as to which
Indemnitee shall have been adjudged to be liable to the Company unless and to
the extent that the Court of Chancery of the State of Delaware, or the court in
which such Proceeding shall have been brought or is pending, shall determine
that such indemnification may be made.
Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly
---------------------------------------------------------------
Successful. Notwithstanding any other provision of this Agreement, to the
- -----------
extent that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits
2
<PAGE>
or otherwise, in any Proceeding, he shall be indemnified against all Expenses
actually and reasonably incurred by him or on his behalf in connection
therewith. If Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to one or more but less than all
claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all expenses actually and reasonably incurred by him or on
his behalf in connection with each successfully resolved claim, issue or matter.
For purposes of this Section and without limitation, the termination of any
claim, issue or matter in such a Proceeding by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such claim, issue or
matter.
Section 6. Indemnification for Expenses of a Witness. Notwithstanding any
------------------------------------------
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding to which Indemnitee is not
a party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.
Section 7. Advancement of Expenses. The Company shall advance all
------------------------
reasonable Expenses incurred by or on behalf of Indemnitee in connection with
any Proceeding within ten days after the receipt by the Company of a statement
or statements from Indemnitee requesting such advance or advances from time to
time, whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses.
Section 8. Procedures for Determination of Entitlement to Indemnification.
---------------------------------------------------------------
(a) To obtain indemnification under this Agreement, Indemnitee shall
submit to the Company a written request, including therein or therewith such
documentation and information as is reasonably available to Indemnitee and is
reasonably necessary to determine whether and to what extent Indemnitee is
entitled to indemnification. The Secretary of the Company shell, promptly upon
receipt of such a request for indemnification, advise the Board of Directors in
writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to the
first sentence of Section 8(a) hereof, a determination, if required by
applicable law, with respect to Indemnitee's entitlement thereto shall be made
in the specific case; (i) if a Change in Control (as hereinafter defined) shall
be
3
<PAGE>
made in the Independent Counsel (as hereinafter defined) in a written opinion to
the Board of Directors, a copy of which shall be delivered to Indemnitee; or
(ii) if a Change of Control shall not have occurred, (A) by the Board of
Directors by a majority vote of a quorum consisting of Disinterested Directors
(as hereinafter defined), or (B) if a quorum of the Board of Directors
consisting of Disinterested Directors is not obtainable or, even if obtainable,
such quorum of Disinterested Directors so directs, by Independent Counsel in a
written opinion to the Board of Directors, a copy of which shall be delivered to
Indemnitee or (C) if so directed by the Board of Directors, by the stockholders
of the Company; and, if it is so determined that Indemnitee is entitled to
indemnification, payment to Indemnitee shall be made within ten (10) days after
such determination. Indemnitee shall cooperate with the person, persons or
entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
costs or expenses (including attorneys' fees and disbursements) incurred by
Indemnitee in so cooperating with this person, persons or entity making such
determination shall be borne by the Company (Irrespective of the determination
as to Indemnitee's entitlement to indemnification) and the Company hereby
indemnifies and agrees to hold Indemnitee harmless therefrom.
(c) In the event the determination of entitlement to indemnification is to
be made by Independent Counsel pursuant to Section 8(b) hereof, the Independent
Counsel shall be selected as provided in this Section 8(c). If a Change of
Control shall not have occurred, the Independent Counsel shall be selected by
the Board of Directors, and the Company shall give written notice to Indemnitee
advising him of the identity of the Independent Counsel so selected. If a
Change of Control shall have occurred, the Independent Counsel shall be selected
by Indemnitee (unless Indemnitee shall request that such selection be made by
the Board of Directors, in which event the preceding sentence shall apply), and
Indemnitee shall give written notice to the Company advising it of the identity
of the Independent Counsel so selected. In either event, Indemnitee or the
Company, as the case may be, may, within 10 days after such written notice of
selection shall have been given, deliver to the Company or to Indemnitee, as the
case may be, a written objection to such selection; provided, however, that such
-------- -------
objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of "Independent Counsel" as defined in
Section 17 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. If such written objection is
so made and substantiated, the Independent Counsel so selected may not
4
<PAGE>
serve as Independent Counsel unless and until such objection is withdrawn or a
court has determined that such objection is without merit. If, within 20 days
after submission by Indemnitee of a written request for indemnification pursuant
to Section 8(a) hereof, no Independent Counsel shall have been selected and not
objected to, either the Company or Indemnitee may petition the Court of Chancery
of the State of Delaware or other court of competent jurisdiction for resolution
of any objection which shall have been made the Company or Indemnitee to the
other's selection of Independent Counsel and/or for the appointment as
Independent Counsel of a person selected by the Court of by such other person as
the Court shall designate, and the person with respect to whom all objections
are so resolved or the person so appreciated shall act as Independent Counsel
under Section 8(b) hereof. The Company shall pay any and all reasonable fees and
expenses of Independent Counsel incurred by such Independent Counsel in
connection with acting pursuant to Section 8(b) hereof, and the Company shall
pay all reasonable fees and expenses incident to the procedures of this Section
8(c), regardless of the manner in which such Independent Counsel was selected or
appointed. Upon the due commencement of any judicial proceeding or arbitration
pursuant to Section 10(a)(iii) of this Agreement, Independent Counsel shall be
discharged and relived of any further responsibility in such capacity (subject
to the applicable standards of professional conduct then prevailing).
Section 9. Presumptions and Effect of Certain Proceedings.
----------------------------------------------
(a) If a Change of Control shall have occurred, in making a
determination with respect to entitlement to indemnification hereunder, the
person or persons or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement if Indemnitee has
submitted a request for indemnification in accordance with Section 8(a) of this
Agreement, and the Company shall have the burden of proof to overcome that
presumption in connection with the making by any person, persons or entity of
any determination contrary to that presumption.
(b) The termination of any Proceeding or of any claim, issue or
matter therein, by judgment, order, settlement of conviction, or upon a plea of
nolo contendere or its equivalent, shall not (except as otherwise expressly
provided in this Agreement) of itself adversely affect the right of Indemnitee
to indemnification or create a presumption that Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company or, with respect to any criminal Proceeding,
that Indemnitee had reasonable cause to believe that his conduct was unlawful.
5
<PAGE>
Section 10. Remedies of Indemnitee.
----------------------
(a) In the event that (i) a determination is made pursuant to Section
8 of this Agreement that Indemnitee is not entitled to indemnification under
this Agreement, (ii) advancement of Expenses is not timely made pursuant to
Section 7 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 8(b) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to Section 5 or 6 of this
Agreement within ten (10) days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is not made within 10 (10) days
after a determination has been made that Indemnitee is entitled to
indemnification, Indemnitee shall be entitled to an adjudication in an
appropriate court of the State of Delaware, or in any other court of competent
jurisdiction, of his entitlement to such indemnification or advancement of
Expenses. Alternatively, Indemnitee, at his option, may seek an award in
arbitration to be conducted by a single arbitrator pursuant to the Commercial
Arbitration Rules of the American Arbitration Association. Indemnitee shall
commence such proceeding seeking an adjudication or an award in arbitration
within 180 days following the data on which Indemnitee first has the right to
commence such proceeding pursuant to this Section 10(a); provided, however,
-------- -------
that the foregoing clause shall not apply in respect of a proceeding brought by
Indemnitee to enforce his rights under Section 5 of this Agreement.
(b) In the event that a determination shall have been made
pursuant to Section 8(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 10 shall be conducted in all respects as a de novo trial, or
-------
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. If a Change of Control shall have occurred, in any
judicial proceeding or arbitration commenced pursuant to this Section 10 the
Company shall have the burden of proving that Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made pursuant to Section
8(b) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or
arbitration commenced pursuant to this Section 10, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
6
<PAGE>
(d) In the event that Indemnitee, pursuant to this Section 10,
seeks a judicial adjudication of or an award in arbitration to enforce his
rights under, or to recover damages for breach of, this Agreement, Indemnitee
shall be entitled to recover from the Company, and shall be indemnified by the
Company against, any and all expenses (of the types described in the definition
of Expenses in Section 17 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or arbitration
that Indemnitee is entitled to receive part but not all of the indemnification
or advancement of expenses sought, the expenses incurred by Indemnitee in
connection with such judicial adjudication or arbitration shall be appropriately
prorated.
Section 11. Non-Exclusivity; Survival of Rights; Insurance;
-----------------------------------------------
Subrogation.
- -----------
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Certificate of Incorporation, the By-Laws, any agreement, a vote of
stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or
restrict any right of Indemnitee in his Corporate Status prior to such
amendment, alteration or repeal.
(b) To the extent that the Company maintains an insurance policy
or policies providing liability insurance for directors, officers, employees, or
agents of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which such person serves at the
request of the Company, Indemnitee shall be covered by such policy or policies
in accordance with its or their terms to the maximum extent of the coverage
available for any such director, officer, employee or agent under such policy or
policies.
(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnities, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make
any payment of amounts otherwise indemnifiable hereunder if and to the extend
that Indemnities has otherwise
7
<PAGE>
actually received such payment under any insurance policy, contract, agreement
or otherwise.
Section 12. Duration of Agreement. This Agreement shall continue
----------------------
until and terminate upon the later of: (a)10 years after the date that
Indemnities shall have ceased to serve as a director, officer, employee, or
agent of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which Indemnitee served at the
request of the Company; or (b) the final termination of any Proceeding then
pending in respect of which Indemnitee is granted rights of indemnification or
advancement of expenses hereunder and of any proceeding commenced by Indemnitee
pursuant to Section 10 of this Agreement relating thereto. This Agreement shall
be binding upon the Company and its successors and assigns and shall inure to
the benefit of Indemnitee and his heirs, executors and administrators.
Section 13. Severability. If any provision or provisions of this
-------------
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, each portion of any
Section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; and (b) to the fullest
extent possible, the provisions of this Agreement (including, without
limitation, each portion of any Section of this Agreement containing any such
provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall be construed to as to give effect to
the intent manifested thereby.
Section 14. Exception to Right of Indemnification or Advancement of
-------------------------------------------------------
Expenses. Notwithstanding any other provision of this Agreement, Indemnitee
- --------
shall not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding brought by Indemnitee, or any claim
therein prior to a Change in Control, unless the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors.
Section 15. Identical Counterparts. This agreement may be executed
----------------------
in one or more counterparts, each of which shall for all purposes be deemed to
be an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this
Agreement.
8
<PAGE>
Section 16. Headings. The headings of the paragraphs of this
--------
Agreement re inserted for convenience only and shall not be deemed to constitute
part of this Agreement or to affect the construction thereof.
Section 17. Definitions. (a) The phrase "Change of Control," as
-----------
used in this Agreement, shall mean i) an acquisition of the Company by means of
a merger or consolidation or purchase of substantially all of its assets if and
when incident thereto (A) the composition of the Board of Directors of the
Company (the "Board") or its successor changes so that a majority of the Board
is not comprised of individuals who were members of the board immediately prior
to such merger, consolidation or purchase of assets or (B) the stockholders of
the Company acquire a right to receive, in exchange for or upon surrender a
majority of their stock, cash or other securities or a combination of the two;
and/or ii) the acquisition by a person (as that term is hereafter defined) of
the voting rights with respect to 25 percent or more of the outstanding Common
Stock of the Company if such person was not an officer of director of the
Company on the date of this Agreement; and/or iii) the election or appointment
to the Board of any director or directors whose appointment or election or
nomination for election was not approved by a vote of at least a majority of the
directors then still in office who were either directors on the date hereof or
whose election, appointment or nomination for election was previously so
approved.
(b) "Corporate Status" describes the status of a person who is
or was a director, officer, employee or agent of the Company or of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise which such person is or was serving at the request of the Company.
(c) "Disinterested Director" means a director of the Company who
is not and was not a party to the Proceeding in respect of which indemnification
is sought by Indemnitee.
(d) "Effective Date" means March 10, 1995.
(e) "Expenses" shall include all reasonable attorney's fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
9
<PAGE>
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, or being or preparing to be a witness in
a Proceeding.
10
<PAGE>
(f) "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past five years has been, retained to represent: (i) the Company
or Indemnitee in any matter material to either such party, or (ii) any other
party to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement.
(g) "Proceeding" includes any action, suite, arbitration,
alternate dispute resolution mechanism, investigation, administrative hearing or
any other proceeding, whether civil, criminal, administrative, or investigative,
except one (i) initiated by an Indemnitee pursuant to Section 10 of this
Agreement to enforce his rights under this Agreement or (ii) pending on or
before the Effective Date.
Section 18. Modification and Waiver. No supplement, modification
-----------------------
or amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
Section 19. Notice by Indemnitee. Indemnitee agrees promptly to
--------------------
notify the Company in writing upon being served with any summons, citation,
subpoena, complaint, indictment, information or other document relating to any
Proceeding or matter which may be subject to indemnification or advancement of
Expenses covered hereunder.
Section 20. Notices. All notices, requests, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to:
John J. Worthington
2319 Algonquin Road
Niskayuna, NY 12309
11
<PAGE>
(b) If to the Company to:
Mary Adamowicz
General Counsel and Secretary
Lydall, Inc.
P.O. Box 151
One Colonial Road
Manchester, CT 06045-0151
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
Section 21. Governing Law. The parties agree that this Agreement
-------------
shall be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware.
Section 22. Miscellaneous. Use of the masculine pronoun shall be
-------------
deemed to include usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first written.
ATTEST: LYDALL, INC.
By /s/ Roger M. Widmann By /s/ Leonard R. Jaskol
------------------------ ------------------------
INDEMNITEE
/s/ John J. Worthington
----------------------------
John J. Worthington
2319 Algonquin Road
Niskayuna, NY 12309
12
<PAGE>
EXHIBIT 10.22
- --------------------------------------------------------------------------------
ASSET PURCHASE AGREEMENT
By and Between
TEXTILE TECHNOLOGIES INDUSTRIES, INC.
and
LYDALL NEW YORK, INC.
Dated as of December 20, 1996
- --------------------------------------------------------------------------------
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
This Agreement (the "Agreement") made and entered into this 20 day of
December, 1996 by and between Lydall New York, Inc., a New York corporation
having a principal office in Green Island, New York ("Lydall") and Textile
Technologies Industries, Inc., a Delaware corporation having a principal office
in Hatboro, Pennsylvania, ("TTII").
W I T N E S S E T H :
WHEREAS, TTII is the owner and operator of two manufacturing facilities
which fabricate and manufacture advanced composite woven fabrics at leased
facilities located at: (i) 2800 Turnpike Drive, Hatboro, PA 19040 and (ii) 300
Penns Street, Pennsburg, PA 18073 ( "TTII"); and
WHEREAS, TTII will consolidate all of the assets located at the two leased
facilities at its Hatboro location and at another location specified by Lydall
promptly after the execution of this Agreement, at the shared expense of TTII
and Lydall; and
WHEREAS, TTII desires to sell and transfer to Lydall, and Lydall desires to
purchase and assume from TTII, certain assets, certain liabilities and the
business as a going concern of TTII, upon the terms and subject to the
conditions set forth in this Agreement;
1
<PAGE>
NOW, THEREFORE, in consideration of the mutual premises hereinafter set
forth, the parties agree as follows:
1. PURCHASE AND SALE OF ASSETS. At the "Closing" of the transactions
contemplated (the "Closing") on the "Closing Date" (as these terms are defined
in Article 5), and upon the basis of the representations, warranties, covenants
and agreements in this Agreement, TTII shall sell, transfer, assign, convey and
deliver to Lydall, and Lydall shall purchase on the terms and conditions set
forth in this Agreement, all of TTII's right, title and interest in and to the
Assets. The "Assets" shall mean all real, personal and mixed properties, which
are owned by TTII on the Closing Date and used exclusively in the business of
TTII except as set forth in Article 2 below, including, without limitation:
1.01 Lease of Real Property. All of TTII's right, title and
-----------------------
interest in and to the lease dated June 28, 1991, as modified, of the land and
buildings, improvements and fixtures located at 2800 Turnpike Drive, Hatboro, PA
19040 in which facility TTII conducts its business (the "Lease"). The Lease,
pursuant to an assumption of Lease dated March 22, 1993, is between TTII as
tenant and 2800 Associates, a Pennsylvania Limited partnership as landlord.
(The real property, improvements and fixtures which are the subject of the Lease
are referred to as the "Real Property");
1.02 Equipment and Personalty. All the fixtures, machinery,
------------------------
equipment, motor vehicles, spare parts, furniture, appliances, supplies,
computer hardware, software and other items
2
<PAGE>
of tangible personal property owned by TTII or used in the operation of TTII on
the Closing Date (the"Equipment and Personalty")including without limitation all
items set forth in a list and description of such Equipment and Personalty,
attached as Schedule 1.02;
1.03 Contract Rights and Leases. All rights, benefits and obligations
--------------------------
of TTII under the contracts, purchase orders, agreements and leases in the
ordinary course (other than the Lease) in effect on the Closing Date entered
into by, or for the benefit of, TTII relating to the operation of TTII;
including without limitation those listed on Schedule 1.03 attached;
1.04 Prepaid Expenses and Deferred Costs. Except as provided by
------------------------------------
Sections 2.04 and 2.05, all rights to prepaid expenses and deferred costs of
TTII relating exclusively to the business of TTII and existing on the Closing
Date, including without limitation all items set forth on a list and description
of such prepaid expenses and deferred costs, as of the date specified being
attached as Schedule 1.04 (collectively, the "Prepaid Expenses");
1.05 Inventory. All of the usable raw materials, salable work in
---------
process, finished goods, spare parts and supplies inventory used by TTII in
connection with the operation of the business of TTII on the Closing Date (the
"Inventory"); including without limitation all items set forth on a list of such
inventory, with its pricing, as of the date specified, being attached as
Schedule 1.05, except such inventory as shall have
3
<PAGE>
been sold in the ordinary cause of TTII's business in the period from the date
of such list until the Closing Date;
1.06 Accounts Receivable. All of the accounts receivable of TTII
-------------------
attributable to the operation of its business as of the Closing Date including
the amount set forth in the Interim Statements (as defined in Section 8.06) as
"Due From Affiliate," to the extent that there is such an amount, which on
September 30, 1996 was $ 0 and which on December 31, 1995 was $313,002
(collectively the "Accounts Receivable"). TTII shall furnish within 10 days
prior to the Closing Date a list of the Accounts Receivable anticipated as of
the Closing Date, which list is attached hereto as Schedule 1.06.
1.07 Records. All books, accounts, documents and records (whether in
--------
printed or electronic form) of TTII relating exclusively to the operation of the
business of TTII whether located at the TTII facility or at facilities owned by
TTII's affiliate, Mutual Industries, Inc.;
1.08 Goodwill. The goodwill of the business of TTII, including its
--------
going concern value;
1.09 Intangible Property. All inventions, patents, formulae, know-
--------------------
how, patent applications, copyrights, trade secrets, trademarks, tradenames
drawings, designs, formulae, blue prints, computer programs, software and
manufacturing records owned by TTII, relating to products presently produced or
in development or used in the business of TTII;
4
<PAGE>
1.10 Customer and Supplier List. A complete and accurate list of the
--------------------------
customers and suppliers of TTII, which shall include all accounts shipped to in
1993, 1994 and 1995 by dollar amount, plus all new customers added in 1996; a
copy of which is attached as Schedule 1.10;
1.11 TTII Names. Any right of TTII to use the names "Textile
----------
Technologies Industries, Inc." or "TTII" and any derivation and all related
names, marks, logos and abbreviations; and
1.12 Order Backlog. All orders for products of TTII pending on the
-------------
date of the Close, including, but not limited to, those listed in Schedule 1.12.
2. ASSETS TO BE RETAINED BY TTII. Notwithstanding the foregoing, the
Assets to be sold, transferred, assigned or conveyed to Lydall shall not include
the following:
2.01 Cash. All of TTII's cash on hand and all cash contained in any
----
account of TTII;
2.02 Certain Records. TTII's check registers and canceled checks, and
---------------
such business records as relate to the assets and obligations of TTII retained
by TTII, provided, however, that TTII shall preserve and maintain such check
registers, canceled checks, and business records for a period of seven (7)
years, or until all open tax years are closed, from and after the Closing Date
and permit Lydall reasonable access to the
5
<PAGE>
same and not destroy or discard the same without Lydall's consent;
2.03 Insurance Policies. All insurance policies of TTII and rights in
------------------
connection with such policies including, without limitation, any prepaid
premiums;
2.04 Employee Pension and Benefit Plans. Assets associated with any
----------------------------------
employee benefit plans of TTII, including but not limited to, welfare plans and
all contracts and insurance policies entered into or issued pursuant to any such
plan;
2.05 Tax Credits and Refunds. Local, state and federal income and
-----------------------
franchise tax credits, refunds and prepayments arising with respect to the
property, business or income of TTII prior to the Closing, whether or not in
being or known at the Closing Date; and
2.06 Corporate Records. TTII's corporate minute book, stock record
-----------------
books and corporate seal.
2.07 Miscellaneous Assets. Those assets that are listed on Schedule
--------------------
2.07 attached hereto.
3. LIMITED ASSUMPTION OF LIABILITIES BY LYDALL.
-------------------------------------------
3.01 Obligations Under Contracts and Leases. As partial consideration
---------------------------------------
for the sale of the Assets, Lydall will assume responsibility for and perform or
satisfy when due all liabilities, commitments and obligations of TTII , from the
closing and after under those contracts, purchase orders, agreements and other
leases referred to in Section 1.03 from the
6
<PAGE>
Closing and after and listed on Schedule 1.03; and excluding the Lease defined
in Section 1.01.
3.02 Accrued Vacation. Lydall shall recognize and provide credit for
----------------
all accrued vacation as of the Closing Date of such employees of TTII only at
such amounts as are set forth in Schedule 3.02 (the "Employees"). At the
Closing, TTII will pay to Lydall the amount of the obligation or effect a
reduction in Purchase Price in such amount;
3.03 Trade Payables. Lydall shall assume responsibility for the
---------------
specific trade payables and accrued expenses set forth in Schedule 3.03 (the
"Trade Payables");
3.04 Product Warranty and Return Obligations. (a) Lydall shall
----------------------------------------
assume and be responsible for all liabilities and obligations relating to or
arising out of any replacements under any product warranty relating to, or the
return of, or any allowance given with respect to, any product of TTII
manufactured by Lydall and sold, distributed or otherwise disposed of by Lydall
after the Closing, except those described in paragraph 3.04(b)(ii).
(b) TTII shall continue to be responsible for all liabilities and
obligations relating to or arising out of any replacements under any product
warranty relating to, or the return of, or any allowance given with respect to,
any product of TTII (i) sold, distributed or otherwise disposed of by TTII at
any time prior to the Closing Date, including claims made after the Closing
Date, and (ii) in finished goods inventory on hand at
7
<PAGE>
the Closing Date and sold, distributed or otherwise disposed of by Lydall;
3.05 Personal Property Taxes. TTII will prepay to Lydall any unpaid
------------------------
property taxes that accrue prior to the Closing Date;
3.06 Post-Closing Responsibilities. Lydall shall be solely
------------------------------
responsible for any and all liabilities and obligations directly or indirectly
arising out of or relating to the conduct of the business of TTII by Lydall on
and after the Closing and relating to periods from and after the Closing or
Lydall's ownership, possession, occupancy, use, sale or operation of any of the
Assets or Real Property on and after the Closing and relating to periods on and
after the Closing;
TTII shall be solely responsible for any and all liabilities and
obligations other than those liabilities specifically assumed in sections 3.01,
3.02, 3.03, 3.04 and 3.05 above directly or indirectly arising out of or
relating to the conduct of the business of TTII by TTII before the Closing and
relating to periods before the Closing or TTII's ownership, possession,
occupancy, use, sale or operation of any of the Assets or Real Property before
the Closing and relating to periods before the Closing;
3.07 Liabilities Not Assumed. All liabilities other than those listed
------------------------
in sections 3.01 through 3.06 are expressly not assumed by Lydall. TTII agrees
that it will remain responsible for all liabilities not assumed; and
8
<PAGE>
3.08 No Expansion of Third Party Rights. The assumption provided for
-----------------------------------
in Sections 3.01 through 3.06 above shall in no way expand the rights or
remedies of any third party against Lydall, TTII or TTII as compared to the
rights and remedies which such third party would have had against TTII had
Lydall not assumed such liabilities.
4. COVENANTS NOT TO COMPETE.
4.01 Covenants Not to Compete of TTII and Its Principal Officers. A
------------------------------------------------------------
condition of Closing is that TTII, Mutual Industries North, Inc. and each of
Edmund M. Dunn, Andrew D. Dunn, John Burns, Marshall Sbar and Keith Eurle shall
have executed and delivered Covenants Not to Compete running to the benefit of
Lydall and its parent, Lydall, Inc., a Delaware corporation having its principal
offices at One Colonial Road, Manchester, Connecticut 06040, in the form annexed
as Exhibit A-1 through A-7 respectively.
4.02 Covenants Not to Compete of Lydall New York, Inc. and Lydall,
-------------------------------------------------
Inc. A condition of Closing is that Lydall and its parent Lydall, Inc. shall
have executed and delivered a Covenant Not to Compete running to the benefit of
Mutual Industries, Inc. in the form annexed as Exhibit A-8.
5. CLOSING; PURCHASE PRICE AND PAYMENT.
5.01 Closing Date, Place and Time. The transactions contemplated
-----------------------------
shall take place at 10:00 a.m. on December 20, 1996 at the law offices of Blank,
Rome, Comisky and McCauley, Four
9
<PAGE>
Penn Center Plaza, Philadelphia, PA 19103-2599, or at such other time, date and
place as are mutually determined by the parties. "Closing" shall mean the
meeting between the parties and their representatives at which title to the
Assets is transferred from TTII to Lydall and the transactions contemplated by
the Agreement are consummated, and "Closing Date" shall mean the date on which
the Closing takes place. The transactions contemplated by the Agreement shall be
deemed effective as of 11:59 p.m. on the Closing Date;
5.02 Purchase Price and Method of Payment. The purchase price for the
-------------------------------------
Assets and the Covenants Not to Compete referred to in Article 4, net of the
specific liabilities assumed, (the "Purchase Price") shall be $11,750,000 which
will be payable as follows: (a) $2,000,000 by wire transfer of funds to TTII's
bank account in partial consideration for those assets that do not qualify for
installment sales reporting under section 453 of the Internal Revenue Code, (b)
a Promissory Note in the amount of $8,000,000 payable January 2, 1997, together
with a stand-by letter of credit for such note, in the forms attached as Exhibit
B-1 and b-2 and (c) an Indemnification Note in the amount of $1,750,000 which
will be payable as set forth is Section 13.01 below in the form attached as
Exhibit C The Purchase Price shall be subject to adjustment as set forth in
Section 5.05;
5.03 Allocation of Purchase Price. Lydall will allocate $500,000 to
-----------------------------
the Equipment and Personalty. With respect to the balance of the purchase
price, after the Closing Lydall
10
<PAGE>
and TTII shall attempt in good faith to agree on an allocation of the Purchase
Price (including liabilities, assumed by Lydall pursuant to Section 3) among the
Assets.. The parties shall cause appropriate filings reflecting the allocation
to be made with the Federal and State taxing authorities as shall be required by
law. In the event that Lydall and TTII do not agree on such allocation (other
than the allocation to the Covenant not to compete of TTII), each may allocate
the Purchase Price in its own discretion and file its tax return accordingly.
and
5.04 Risk of Loss. All risk of loss with respect to the Assets shall
------------
remain with TTII until the Closing and shall pass to Lydall when the
transactions contemplated are deemed effective as defined in 5.01 above.
5.05 Net Working Capital Purchase Price Adjustment.
----------------------------------------------
(a) Within 30 days after the Closing Date, TTII shall prepare and deliver to
Lydall a statement (the "Closing Date Statement") setting forth TTII's Net
Working Capital (as defined in Section 5.05(d)(iii)) as of the Closing Date
("Closing Date Net Working Capital"). The Closing Date Statement shall also set
forth a calculation of the amount by which Closing Date Net Working Capital
exceeds or is less than $1,599,657 ("Working Capital Adjustment"). Within 15
days after receipt of the Closing Date Statement, Lydall shall complete its
examination of the Closing Date Statement and shall deliver to TTII either a
written acknowledgment of Lydall accepting the Closing Date Statement and the
Working Capital Adjustment or a written report ("Adjustment
11
<PAGE>
Report") setting forth in detail any proposed adjustments to the Closing Date
Statement and the Working Capital Adjustment and the reasons and supporting data
therefor. In the event that Lydall fails to deliver such acknowledgment or
Adjustment Report within such fifteen (15) day period, the Closing Date
Statement (and each of the Closing Date Net Working Capital and the Working
Capital Adjustment set forth thereon) delivered by TTII to Lydall shall be
deemed to be correct and to have been finally determined under Section 5.05 (c)
below;
(b) If Lydall shall deliver an Adjustment Report to TTII within the period
set forth in Section 5.05(a), Lydall and TTII shall attempt to resolve any
differences and agree upon the Working Capital Adjustment. In the event that
TTII and Lydall fail to agree on any or all of Lydall's proposed adjustments to
the Closing Date Statement contained in the Adjustment Report within 15 days
after TTII receives the Adjustment Report, then BDO Seidman ("Seidman") shall,
or if Seidman shall be unavailable, the parties shall select an independent
certified public accounting firm of national reputation (who shall not be a firm
previously or currently retained by Lydall or TTII) which is mutually agreeable
to the parties (Seidman, or such other firm, the "(Independent Auditors") to,
resolve any dispute. The Independent Auditors, acting as independent auditors
and not for the benefit of Lydall or TTII, shall make the final determination
with respect to the correctness of the adjustments in Closing Date Net Working
Capital proposed by Lydall in the Adjustment
12
<PAGE>
Report in light of the terms and provisions of this Agreement. The decision of
the Independent Auditors shall be in writing and state the basis for the finding
and shall be final and binding on Lydall and TTII. The costs and expenses of the
Independent Auditors for their services rendered pursuant hereto shall be borne
equally by Lydall and TTII.
(c) The term "Final Closing Date Statement" shall mean the Closing Date
Statement delivered pursuant to Section 5.05(a), as adjusted, if at all,
pursuant to Section 5.05(a) or 5.05(b) and the "Settlement Date" shall mean the
date on which the Final Closing Date Statement is agreed to by the parties or
finally determined by the Independent Auditors, as the case may be. Until the
Settlement Date, Lydall agrees to provide TTII, its representatives and
advisors, and the Independent Auditors with access, during Lydall's normal
business hours and upon reasonable advance notice, to the books and records of
TTII for the purpose of preparing the Closing Date Statement and reviewing any
proposed adjustments set forth in the Adjustment Report.
(d)(i) In the event that the Closing Date Net Working Capital set forth
in the Final Closing Date Statement exceeds $1,599,657, Lydall agrees to pay to
TTII within 5 days of the Settlement Date an amount equal to the excess of the
Closing Date Net Working Capital set forth in the Final Closing Date Statement
over $1,599,657 by wire transfer of immediately available funds to TTII's bank
account;
13
<PAGE>
(ii) In the event that the Closing Date Net Working Capital set forth in
the Final Closing Date Statement is less than $1,599,657, the parties agree that
the amount of the difference shall be paid to Lydall within 5 days of the
Settlement Date;
(iii) For purposes of this Section 5.05, the term "Net Working Capital"
shall mean an amount equal to the difference between (x) the aggregate amount of
TTII's Accounts Receivable, less any applicable allowance for doubtful accounts
and other reserves, Inventory and Prepaid Expenses as of the Closing Date, and
(y) the amount of TTII's Trade Payables being assumed pursuant to Section 3.03
as of the Closing Date, all determined consistently with the way such amounts
were determined for purposes of the 1995 Year End Statements (as defined in
Section 8.06).
6. EMPLOYEES; EMPLOYEE PENSION AND WELFARE PLANS
6.01 Employment; Medical Benefits. With respect to any employee who
-----------------------------
becomes employed by Lydall, Lydall shall provide substantially the same benefits
as are presently provided by TTII;
6.02 Employee Pension Plans and Benefits. Lydall shall not assume any
------------------------------------
obligation for and shall have no liability to provide to any employee or former
employee of TTII pension benefits earned or accrued prior to the Closing, if
any, under any pension plan or any other employee benefit plan maintained by
TTII with respect to service with TTII or any other entity prior
14
<PAGE>
to the Closing. All such obligations and liabilities, if any, shall remain the
sole and exclusive responsibility of TTII;
6.03 Other Employee Pension Plans and Benefits. Lydall shall not
------------------------------------------
assume any obligation and shall have no liability whatsoever to TTII or any
employee or former employee thereof or any other person or entity with respect
to the funding, payment or provision of pension or profit-sharing or 401(k)
benefits earned or accrued prior to the Closing, if any, under any pension,
profit-sharing or 401(k) plans sponsored by TTII, whether or not any employees
become employees of Lydall. TTII shall retain all such obligations, if any, and
shall remain solely and exclusively liable for all benefits earned or accrued
prior to the Closing, if any, under any such plans; and
6.04 Employee Welfare Plans, Worker's Compensation. Lydall shall have
---------------------------------------------
no liability whatsoever to employees or former employees of TTII with respect to
incurred worker's compensation claims or to benefits provided, earned or accrued
under any welfare benefit plan sponsored by TTII prior to the Closing. Lydall
shall not assume any obligation and shall have no liability whatsoever with
respect to any welfare benefit claims, including without limitation medical,
dental, life, or disability claims incurred by an employee or his family prior
to the Closing or workers compensation claims incurred prior to the Closing. A
medical or dental claim shall be deemed to be incurred when the services
relating to that event that is the subject of the claim were performed. A life
or disability claim is deemed to have
15
<PAGE>
been incurred on the date of death or disability. A worker's compensation claim
is deemed to have been incurred on the date of accident.
7. INSTRUMENTS OF CONVEYANCE AND ASSUMPTION.
7.01 Conveyance Documents. At the Closing, TTII shall deliver to
---------------------
Lydall such bills of sale, endorsements and assignments in the form of Exhibits
D-1 through D-3 attached hereto, and such other instruments of sale, conveyance,
transfer and assignment as may be reasonably requested by Lydall, in order to
convey to Lydall good title to the Assets, free and clear of all claims,
charges, equities, liens (including tax liens other than liens for taxes and
assessments not yet due and payable), security interests and encumbrances except
as described in Section 8.02 and except for minor imperfections of title and
liens, security interests, and encumbrances which, individually and in the
aggregate, do not materially detract from the value of or impair the use of the
Assets as currently utilized. TTII shall pay the costs for preparing the
instruments of conveyance. Lydall shall pay the costs for recording same. Any
sales, use, excise, transfer or other similar taxes, if any, imposed with
respect to the transfer of the Assets shall be the sole responsibility of TTII.
TTII has provided to Lydall a draft resale exemption certificate for the
purchased inventory; and
7.02 Assumption Documents. At the Closing, Lydall shall execute and
---------------------
deliver to TTII an Assumption Agreement in the form attached as Exhibit D-4 and
such other instruments or agreements
16
<PAGE>
of assumption as may be reasonably requested by TTII, in order to further
evidence the assumption by Lydall of the liabilities specified in Article 3.
Lydall shall pay the costs for preparing the instruments or agreements of
assumption.
8 REPRESENTATIONS AND WARRANTIES OF TTII. TTII represents,
warrants and agrees that:
8.01 Organization and Good Standing of TTII. TTII is a corporation
---------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware with full power and authority to own and operate the Assets
and to conduct the business of TTII as now being conducted and is duly qualified
to do business in Pennsylvania and all other jurisdictions where the nature of
the properties owned or leased by it or the business conducted by it require
that it be so qualified;
8.02 Title to and Condition of the Assets. TTII has good title to the
-------------------------------------
Assets, free and clear of any claims, charges, equities, liens (including tax
liens), security interests and encumbrances except for (a) liens for taxes and
assessments not yet due and payable, (b) liens listed on Schedule 8.02, and (c)
minor imperfections of title and liens, security interests and encumbrances
which, individually and in the aggregate, do not materially detract from the
value of or impair the use of the Assets as currently utilized (collectively,
"Permitted Liens"). TTII has full right, power, capacity and authority to sell,
transfer, assign, convey and deliver good title to the Assets to Lydall as
provided in this Agreement, and delivery on the Closing
17
<PAGE>
Date will convey to Lydall good title to the Assets, free and clear of any
claims, charges, equities, liens (including tax liens), security interests and
encumbrances, except for Permitted Liens;
8.03 Contracts of TTII. Schedule 1.03 includes a correct and
-----------------
complete list of all written or oral contracts agreements or arrangements to
which TTII is a party relating to the operation of TTII, including any
agreements with TTII's shareholders, directors or officers. TTII has no
contracts in excess of $1,000 other than those listed on Schedule 1.03. TTII
has provided Lydall with true and correct copies of all such written contracts,
including the Lease and a true and complete summary of all oral contracts;
8.04 TTII's Authority and No Conflict. TTII has the full corporate
--------------------------------
right, power and authority, to execute, deliver and carry out the terms of this
Agreement and all documents and agreements necessary to give effect to the
provisions of this Agreement. This Agreement has been duly authorized, executed
and delivered by TTII. Except as set forth on Schedule 8.04, the execution of
this Agreement and the consummation of the transactions contemplated will not
result in any conflict with, breach, violation or termination of, or default
under any charter, by-law, law, statute, rule, regulation, judgment, order,
decree, mortgage, agreement, deed of trust, indenture or other instrument to
which TTII is a party or by which it is bound and TTII has obtained all
necessary material consents or approvals of
18
<PAGE>
governmental bodies, lenders, lessors or other third parties. All corporate
action and other authorizations prerequisite to the execution of this Agreement
by TTII and the consummation by TTII of the transactions contemplated by this
Agreement have been taken or obtained by TTII. The Agreement is a valid and
binding agreement of TTII, enforceable against TTII in accordance with its
terms;
8.05 Brokers. Except for Palisade Capital Securities, LLC, whose fee
--------
shall be paid by TTII, there has been no broker or finder involved in any manner
in the negotiations leading up to the execution of this Agreement or the
consummation of any transactions contemplated;
8.06 Financial Statements. Attached as Schedule 8.06 are the
---------------------
unaudited financial statements of TTII for the nine month period ended September
30, 1996 ("Interim Statements") and the audited financial statements for the
full fiscal years ended December 31, 1993, December 31, 1994 and December 31,
1995 ("Year-End Statements"). The Year-End Statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") consistently
applied throughout the periods indicated and fairly present in all material
respects the financial position of TTII at and as of December 31, 1993, December
31, 1994 and December 31, 1995 respectively, and the results of operations for
the fiscal year then ended. Except as set forth in the Notes to the Interim
Statements, the Interim Statements have been prepared in accordance with GAAP,
do not
19
<PAGE>
reflect any material accounting principle changes from prior periods and fairly
present in all material respects the financial position of TTII at and as of
September 30, 1996 and the results of operations for the nine months then ended.
The information set forth in Schedule 1.10 is true and correct in all material
respects; and;
8.07 Taxes. TTII has filed, or caused to be filed, with the
-----
appropriate Federal, state and local governmental agencies all tax returns
required to be filed on or before the Closing Date, and has paid, or caused to
be paid all taxes, excise taxes, assessments, charges, penalties and interest
shown to be due and payable or claimed to be due and payable thereon prior to
Closing. TTII has paid, or caused to be paid, all applicable corporate franchise
taxes, unemployment taxes, payroll taxes, social security taxes, occupation
taxes, ad valorem taxes, property taxes, excise taxes and imposts, sales and use
taxes, and all other taxes of every kind, character or description which arise
out of the conduct of the business of TTII or relate to the Assets and which are
required to be paid on or prior to the Closing Date, and has received no notices
and is not otherwise aware of any deficiencies, adjustments or changes in
assessments with respect to any such taxes. TTII shall continue to be
responsible for all such taxes, until those tax years through the Closing Date
are closed and no longer subject to audit;
8.08 Litigation or Claims. There is no litigation, proceeding,
--------------------
arbitration, alternate dispute matter assessment,
20
<PAGE>
governmental investigation or other claim pending, or so far as known to TTII,
threatened, against or relating to TTII or TTII with respect to the transaction
contemplated by this Agreement or otherwise involving TTII except as set forth
on Schedule 8.08;
8.09 Compliance with Law. TTII has complied with all applicable
--------------------
material statutes and regulations of all governmental authorities having
jurisdiction over TTII or any of the Assets. There is no outstanding order,
investigation, inquiry, writ, injunction or decree of any court or arbitrator,
government or governmental agency against, or affecting the business of TTII or
any of the Assets;
8.10 Absence of Certain Changes or Events
-------------------------------------
(a) Since December 31, 1995 except as disclosed to Lydall in Schedule 8.10
or in the Interim Statements TTII has not:
(i) incurred any obligation or liability (fixed or contingent),
except (a) trade or business obligations incurred in the ordinary course of
business, which are not in excess of $25,000 individually, and except (b)
obligations under contracts, agreements, leases and documents listed in Schedule
1.03;
(ii) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (fixed or contingent), except current liabilities
included on the December 31, 1995 Balance Sheet or on the Interim Balance Sheet,
current liabilities incurred since the date of the December 31, 1995 Balance
Sheet in the ordinary course of business, and obligations and liabilities
21
<PAGE>
under contracts, leases or documents referred to in Schedule 1.03 or Section
1.01.
(iii) mortgaged, pledged or subjected to lien, charge, security
interest or to any other encumbrance any of its assets or properties;
(iv) sold, transferred, leased or otherwise disposed of any of its
assets or properties, or entered into any option, contract or other commitment
to sell, transfer, lease or otherwise dispose of any of its assets or
properties, except for inventory sold for fair consideration in the ordinary
course of business;
(v) canceled or compromised any debt or claim except for
adjustments made with respect to contracts for the purchase of supplies or for
the sale of products in the ordinary course of business, which individually are
not material;
(vi) waived or released any rights of any material value;
(vii) transferred or granted any rights of TTII under any
concessions, leases, licenses, agreements, patents, inventions, trademarks,
trade names, copyrights, or with respect to know-how;
(viii) made or granted any general wage or salary increase or entered
into any employment contract with any officer or employee or increased any wage
or salary more than 5% since November 15, 1995;
22
<PAGE>
(ix) entered into any transaction other than in the ordinary course
of business;
(x) suffered any operating loss or casualty loss or damage, whether
or not such loss or damage shall have been insured against;
(xi) suffered any material adverse change in its financial
condition, properties or business; and
(xii) made or entered into any contract or commitment to make any
capital expenditures in excess of $10,000 in the aggregate.
8.11. Environmental Matters.
----------------------
(a) The following definitions shall apply for purposes of this Section:
(i) "Environmental Laws" means any and all Federal, state, local or
--------------------
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, guidelines, policies or requirements of any governmental authorities
regulating or imposing standards of liability or standards of conduct (including
common laws) concerning air, water, solid waste, Hazardous Materials, worker and
community right-to-know, hazard communication, noise, resource protection,
subdivision, wetlands and watercourses, health protection and similar
environmental, health, safety, building, and land use concerns as may at any
time be in effect.
2. "Environmental Condition" means circumstances with
-------------------------
respect to soil, surface waters, groundwaters, stream
23
<PAGE>
sediments, air and similar environmental media both on and off the Real Property
and any other real property which TTII owns, leases or operates or has ever in
the past owned, leased or operated (together "TTII Property") resulting from any
activity or inactivity, including but not limited to, storage, treatment,
transporation, disposal, or operations occurring on or off such real property,
that could require investigatory, corrective and/or remedial measures and/or
that may result in claims, demands and/or liabilities by TTII or third parties
including, but not limited to, governmental entities.
3. "Hazardous Materials" means any petroleum, petroleum
---------------------
products, fuel oil, derivatives of petroleum products or fuel oil, explosives,
reactive materials, ignitable materials, corrosive materials, hazardous
chemicals, hazardous wastes, hazardous substances, extremely hazardous
substances, toxic substances, toxic chemicals, radioactive materials, medical
waste, biomedical waste, infectious materials and any other element, compound
mixture, solution or substance which may pose a present or potential hazard to
human health or safety or to the environment.
4. "Release" means releasing, spilling, leaking, pumping,
---------
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping, or as otherwise defined under the Resource Conservation
and Recovery Act ("RCRA"), the Comprehensive Environmental Response Compensation
Liability Act ("CERCLA") or other Environmental Laws. This term shall be
24
<PAGE>
interpreted to include the past, present and future tense, as appropriate.
(b) Except as set forth in Schedule 8.11,
(i) At no time have the Assets or TTII Property been used for the
generation, storage, transportation or disposal of Hazardous Materials or as a
landfill or other waste disposal site. There are not now underground storage
tanks on TTII Property.
(ii) TTII and TTII Property are in material compliance with
all Environmental Laws. No event has occurred which, with the passage of time
or the giving of notice or both, would constitute non-compliance with
Environmental Laws.
(iii) There are no agreements, consent orders, decrees, judgments,
licenses or permit conditions, or other directives, issued by a governmental
department or agency which require any change in the present condition of the
Assets or TTII Property.
(iv) There are no actions, suits, claims or proceedings, pending or
threatened, arising out of the condition of the Assets or TTII Property or
relating to a violation or non-compliance with any Environmental Law or with
respect to the generation, storage, disposal, discharge or release of Hazardous
Materials off-site or at or from the Assets or TTII Property or relating to
health or safety practices at TTII.
(v) TTII has not received any notice from its insurance carrier or
mortgagee as to recommendations made
25
<PAGE>
regarding Hazardous Materials or safety issues at the Assets or TTII Property,
and TTII has not been denied insurance coverage (nor has any insurance coverage
been canceled) by reason of Hazardous Materials at the Assets or TTII Property
or for any other reason.
(vi) Neither the Assets nor TTII Property are a designated
landmark or in a designated Historic District, and TTII has not received any
notice that either the Assets or TTII Property are being considered for landmark
designation or are to be included within any contemplated Historic District.
(vii) All material zoning, use, building, housing, safety, fire
and health approvals, and all material permits and licenses necessary to
operate, occupy and use the Assets and TTII Property as intended by Lydall have
been issued and are in full force and effect, and TTII is in full compliance
therewith. TTII has not taken any action or made any improvements which would
require amending, modifying or supplementing the foregoing.
(viii) There has been no Release of any Hazardous Materials on,
upon or into the Assets or TTII Property and there has been no such release on,
upon or into any real property adjoining or in the vicinity of the Assets or
TTII Property which through air, soil or groundwater migration could have come
from sources located upon the Assets or TTII Property.
(ix) TTII has obtained all material permits, licenses and other
authorizations which are required under federal, state and local laws relating
to pollution or protection
26
<PAGE>
of the environment, including laws relating to emissions, discharges, releases
or threatened releases of pollutants, contaminants, or hazardous or toxic
materials or wastes into ambient air, surface water, ground water, or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling of pollutants, contaminants or
hazardous or toxic materials or wastes or any other Environmental Law, and all
permits, licenses and authorizations are valid and in full force and effect.
TTII is in full compliance with all terms and conditions of such required
permits, licenses and authorizations, and is also in full compliance with all
other material limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in those laws or
contained in any regulation, code, plan, order decree, judgment, notice or
demand letter issued, entered, promulgated or approved thereunder.
(x) TTII is not aware of, nor has TTII received notice of, any past,
present or future events, conditions, Environmental Conditions, circumstances,
activities, practices, incidents, actions or plans which may interfere with or
prevent continued compliance, or which may give rise to any common law or legal
liability, or otherwise form the basis of any claim, action, suit, proceeding,
hearing or investigation, based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling, or the
27
<PAGE>
emission, discharge, release or threatened release into the environment, of any
Hazardous Material in connection with the operation of TTII;
8.12 No Change in Business Relationships. Since December 31, 1995,
------------------------------------
there has not been any interruption in the business relationship of TTII with
any supplier, customer or other party with which TTII has or has had any
substantial business agreement or arrangement. Except as may be caused by
general economic conditions, TTII has no knowledge that any such party
contemplates termination of such party's business relationship with TTII or any
reduction in the volume of business carried on with TTII during the preceding
two years, except as set forth on Schedule 8.12;
8.13 Employment Agreements. (a) TTII has no:
----------------------
(i) collective bargaining agreement in effect with respect to
the employees of TTII, nor
(ii) employment agreement with any of the employees of TTII;
(b) With respect to employees of TTII:
(i) TTII is and has been in compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, including, without limitation, any such laws
respecting employment discrimination, occupational safety and health, and unfair
labor practices;
28
<PAGE>
(ii) there is no unfair labor practice complaint against TTII
pending or, to the best of TTII's knowledge, threatened before the National
Labor Relations Board or any comparable state, local or foreign agency;
(iii) there is no labor strike, dispute, slowdown or stoppage pending
or, to the best of TTII's knowledge, threatened against or directly affecting
TTII.
(iv) no union representation question exists and, to the best of
TTII's knowledge, no union organization effort is underway, respecting the
employees of TTII.
(v) TTII has not experienced any material work stoppage in the
last eighteen (18) months;
(vi) TTII is not delinquent in payments to any of its employees for
any wages, salaries, commissions, bonuses or other direct compensation for any
services performed by them to the Closing Date or amounts required to be
reimbursed to such employees;
(vii) to the best of TTII's knowledge, upon termination of the
employment of any of the employees of TTII by TTII, TTII will not be liable to
any of its employees for severance pay;
(viii) The employment of each of TTII's employees is terminable at
will without cost to TTII except for payments required under the Plans, welfare
plans and Employee Plans and payment of accrued salaries or wages and vacation
pay. No
29
<PAGE>
employee or former employee has any right to be rehired by TTII prior to TTII
hiring a person not previously employed by TTII.
(xi) Schedule 8.13 contains a true and complete list of all employees
who are employed by TTII as of November 30, 1996, and said list correctly
reflects their salaries, wages, other compensation (other than benefits under
the Plans, welfare plans and Employee Plans), dates of employment and positions.
TTII does not owe any past or present employees any sum other than for accrued
wages or salaries for the current payroll period, and amounts payable under the
Plans, welfare plans or Employee Plans.
8.14 Patents, Trademarks, Trade Names and Copyrights. The business of
-----------------------------------------------
TTII as presently conducted does not infringe, interfere or contravene any
presently outstanding patents, patent licenses, trademarks, service marks, trade
names, brand names, applications or license rights or other proprietary rights
held by others; and TTII is not in violation of any such rights with respect to
any past events. All patents, patent licenses, trademarks, service marks, trade
names, brand names, and other proprietary rights owned by TTII or used by TTII
in the operation of its business are listed in Schedule 8.14;
8.15 Processes and Know-how. TTII possesses without restriction all
-----------------------
of the processes, know-how, technology, designs, patterns, blueprints,
franchises, licenses and applications, and rights in respect thereof, necessary
for the continued conduct of the business of TTII as presently conducted,
without the need for
30
<PAGE>
patents or licenses other than as disclosed in Schedule 8.14 or listed under
Schedule 1.03;
8.16 Utilities. There is available to the real property which TTII
----------
presently leases, and such property is adequately serviced by, such public
utilities as are required to conduct the business of TTII as it presently is
being conducted, including, but not limited to, water, sewer, heat and
electricity; and all payments, assessments, deposits and other charges related
to such utilities and other existing on-site improvements have been paid in full
to the extent that they are due;
8.17 Licenses and Permits. Schedule 8.17 contains a complete and
--------------------
accurate list of all material permits, licenses, approvals, authorizations and
consents of any federal, state or municipal governmental agency or authority
held by TTII which are required for the conduct of the business of TTII as it is
now being conducted ("Licenses and Permits"); all such Licenses and Permits are
in full force and effect; and there is no claim, action, investigation or
proceeding pending or threatened, which would materially affect any of the
foregoing; TTII has no knowledge of any condition presently existing which
affects the validity of any of the Licenses and Permits. TTII shall transfer to
Lydall such Licenses and Permits as are transferable without the consent of a
third party. If any Licenses and Permits are not transferable to the Lydall,
TTII will cooperate with and
31
<PAGE>
assist Lydall in applying for any such Licenses and
Permits as are not transferable, or obtaining such consents;
8.18 Absence of Undisclosed Liabilities - The Interim Statements have
----------------------------------
made, and the balance sheet contained in the Interim Statements ("the Interim
Balance Sheet") makes, full and adequate provision for all obligations and
liabilities of TTII as of the date of the Interim Balance Sheet to the extent
required by GAAP. As of that date, TTII had no obligations or liabilities of
any kind whatsoever (whether known or unknown, fixed or contingent) except (i)
to the extent reflected or reserved against on the Interim Balance Sheet or (ii)
incurred since the date of the Interim Balance Sheet in the ordinary course of
business, none of which are material, or (iii) disclosed in Schedule 8.18;
8.19 Inventory - The inventories of TTII as reflected on the Interim
---------
Statements consist, and the Inventory on hand on the Closing Date consist, of
items of a quality and quantity usable and salable in the ordinary course of its
business, except for obsolete items and items of below standard quality, all of
which have been written down to realizable market value or for which adequate
reserves have been provided. All such Inventory is of good and merchantable
quality, except for obsolete, defective or damaged items, if any. Any obsolete,
defective or damaged items have been written down to realizable market value.
Except as set forth on Schedule 8.19, an item of Inventory shall be considered
obsolete if such item is not expected to be
32
<PAGE>
consumed in the manufacturing process or is not expected to be sold within a
nine month period following its date of acquisition or manufacture. "Realizable
market value" for items which are obsolete, defective or damaged shall mean the
value ascertained by valuing the item, if it is finished, at net selling price
(gross selling price less all discounts) less any related sale or delivery
expense, or if it constitutes work in process, at net selling price (gross
selling price less all discounts) less cost to complete and any related sales or
delivery expense, or if it constitutes manufacturing supplies, at market value
or if it constitutes raw material, at the lesser of cost or market value;
8.20 Accounts and Notes Receivable - The accounts receivable and notes
-----------------------------
receivable of TTII as reflected on the Interim Statements, and the accounts
receivable and notes receivable of TTII on the Closing Date, will be
collectible in the ordinary course of business at the aggregate face amounts
thereof. In the event that all of the accounts receivable and notes receivable
of TTII on the Closing Date are not paid in full prior to the one hundred and
twentieth (120th) day after the Closing Date, TTII shall repurchase, free and
clear of any encumbrance, all said unpaid accounts and notes (and any unpaid
portion of either) from Lydall for its or their then unpaid balance in
accordance with Section 12.02. The accounts receivable and notes receivable
shall be valid and enforceable, uncontested claims for goods delivered or
services performed,
33
<PAGE>
with no offsets, defenses, counterclaims or disputes as to the amount owing,
except as specifically noted in Schedule 8.20;
8.21 Solvency. TTII is not insolvent as of the Closing Date and shall
--------
not be rendered insolvent as a result of the transactions contemplated by this
Agreement. The transactions contemplated hereby will not cause TTII to fail to
pay its debts as they become due, and will not cause the remaining assets of
TTII to be unreasonably small in relation to its business. For purposes of this
Agreement, the term "insolvent" shall have the same meaning such term has under
the Uniform Fraudulent Transfer Act, as adopted and in effect on the Closing
Date;
8.22 Subsidiaries. TTII has no subsidiaries and does not own,
-------------
directly or indirectly, any capital stock or other equity securities of any
corporation or other entity, or have any direct or indirect equity interest in
any business;
8.23 ERISA and COBRA Compliance. (a) Except for the plans disclosed
---------------------------
on Schedule 8.23 (the "Plans"), TTII neither maintains nor contributes to any
employee pension benefit or welfare plans, as defined in the Employee Retirement
Income Security Act of 1974 ("ERISA"), or any other severance, bonus, stock
option, stock appreciation, stock purchase, retirement, insurance, pension,
profit-sharing or deferred compensation plan, agreement or arrangement for the
benefit of TTII's employees (collectively, the "Employee Plans"), nor has TTII
nor any of its officers or directors taken any action directly or indirectly to
obligate TTII to institute any such Employee Plan. TTII has
34
<PAGE>
complied with all terms and conditions of, and has no liabilities or obligations
with respect to, the Plans. As of the date of this Agreement, all benefits
relating to periods of service under the Plans are fully funded to the extent
required by law. To the best of TTII's knowledge, all Plans have been maintained
in full compliance with all laws, regulations and orders, including without
limitation, ERISA, of all governmental authorities.
(b) TTII, and any entity that is a member of a group described in Section
414(b),(c),(m), or (o) of the Code, which group includes TTII, maintain only the
group health plans listed in Schedule 8.23, covering employees of TTII. Except
as disclosed in Schedule 8.23 each such group health plan has been administered
in accordance with published requirements from and after the respective
publication dates of such requirements (and in good faith with requirements with
respect to issues and for periods prior to the dates on which published guidance
was available) relating to continuation coverage for people who would otherwise
lose coverage as a result of certain events set forth in the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), as amended by the Tax
Reform Act of 1986 and the Technical and Miscellaneous Revenue Act of 1988, and
proposed regulations thereunder;
8.24 Product Liability. TTII has not made any oral or written
-----------------
warranties with respect to the quality or absence of defects of its products or
services which it has sold or performed which are in force as of the date hereof
except as are
35
<PAGE>
described in Schedule 8.24. There are no material claims pending or, to the best
of TTII's knowledge, anticipated or threatened against TTII with respect to the
quality of or absence of defects in such products or services. Schedule 8.24
sets forth a summary, which is accurate in all material respects, of all returns
of defective products during the period beginning December 31, 1994 and ending
on the date hereof, and all credits and allowances for defective products given
to customers during said period, and said summary in each case accurately
describes the defect which resulted in the return, allowance or credit. TTII has
no knowledge or reason to believe that the percentage of products sold and
services performed by TTII for which warranties are presently in effect and for
which warranty adjustments can be expected during unexpired warranty periods
which extend beyond the Closing Date will be higher than the percentage of such
products and services which TTII has sold and performed for which warranty
adjustments have been required in the past. TTII has not paid direct,
incidental, or consequential damages to any person in connection with any of
such products or services at any time during its existence;
8.25 Corrupt Practices. Neither TTII nor, to the best of TTII's
-----------------
knowledge, any of its former or current officers, directors, employees, agents
or representatives has made, directly or indirectly, with respect to TTII or its
business activities, any bribes or kickbacks, illegal political contributions,
payments from corporate funds not recorded on the
36
<PAGE>
books and records of TTII, payments from corporate funds to governmental
officials, in their individual capacities, for the purpose of affecting their
action or the action of the government they represent, to obtain favorable
treatment in securing business or licenses or to obtain special concessions, or
illegal payments from corporate funds to obtain or retain business. Without
limiting the generality of the foregoing, TTII has not directly or indirectly
made or agreed to make (whether or not said payment is lawful) any payment to
obtain, or with respect to, sales other than usual and regular compensation to
its employees and sales representatives with respect to such sales;
8.26 Adequate Assets. The Assets conveyed to Lydall on the Closing
----------------
Date will be adequate to enable Lydall to continue to conduct the business of
TTII as it is presently being conducted; and
8.27 Condition of Equipment and Real Estate. Subject to Schedule
---------------------------------------
8.27, The Equipment and Real Estate are in good operating condition and repair
(ordinary wear and tear excepted). Subject to Schedule 8.27, The Equipment, Real
Estate and the buildings and other facilities located on the Real Estate are
free of any latent structural or engineering defects known to TTII or any patent
structural or engineering defects. TTII does not use in the conduct of its
business any property, assets, or rights, real or personal, tangible or
intangible, which are not either (i) owned by it and reflected in the 12/31/95
Year End Statements, (ii) leased by it under the Lease, or (iii) which it
37
<PAGE>
otherwise has the right to use under contracts, licenses or agreements disclosed
to Lydall pursuant to Schedules to this Agreement.
9. REPRESENTATIONS AND WARRANTIES OF LYDALL. Lydall represents,
warrants and covenants that:
9.01 Organization and Good Standing. Lydall is a corporation duly
-------------------------------
organized, validly existing and in good standing under the laws of the State of
New York with full power and authority to own and operate the Assets and to
carry on the business of TTII as now being conducted;
9.02 Authority of Lydall. Lydall has the full corporate right, power
--------------------
and authority, to execute, deliver and carry out the terms of this Agreement
and all documents and agreements necessary to give effect to the provisions of
this Agreement. This Agreement has been duly authorized, executed and delivered
by Lydall and the execution of this Agreement and the consummation of the
transactions contemplated will not result in any conflict, breach, violation or
termination of or default under any charter, by-law, law, statute, rule,
regulation, judgment, order, decree, mortgage, agreement, deed of trust,
indenture or other instrument to which Lydall is a party or by which it is bound
and Lydall has obtained all necessary material consents, approvals of
governmental bodies, lenders, lessors, or other third parties. All corporate
action and other authorizations prerequisite to the execution and delivery of
this Agreement and the consummation of the transactions contemplated
38
<PAGE>
by this Agreement have been taken or obtained by Lydall. This Agreement is a
valid and binding agreement of Lydall, enforceable against Lydall in accordance
with its terms; and
9.03 Brokers. Except for that noted in Section 8.05, there has been no
--------
broker or finder involved in any manner in the negotiations leading up to the
execution of this Agreement, or the consummation of any transactions
contemplated as a result of any agreements or understandings made by Lydall; and
9.04 Financing. Lydall has funds available (including those to be
----------
provided to it pursuant to binding financing commitments) which are sufficient
to pay the Purchase Price and to pay all other amounts owing by it in connection
with the transaction contemplated by this Agreement. Lydall has furnished
reasonable substantiation of the foregoing to TTII and will, from time to time
prior to the Closing at the reasonable request of TTII, provide to TTII
additional substantiation of the status thereof.
10. LYDALL'S CONDITIONS PRECEDENT TO CLOSING. Lydall's agreement to
purchase and pay for the Assets is subject to delivery at the Closing of the
deeds, bills of sale, endorsements, assignments, and other instruments of sale,
conveyance, transfer and assignment as contemplated by Section 7 and to the
occurrence of each of the following conditions (any of which may be waived by
Lydall):
10.01 Representations and Warranties. Each of the representations and
-------------------------------
warranties set forth in Article 8 and in the
39
<PAGE>
Schedules delivered pursuant thereto shall be true and correct in all material
respects on the Closing Date, and TTII shall execute and deliver to Lydall a
certificate signed by authorized officers of TTII dated the Closing Date to such
effect;
10.02 Intentionally Omitted.
10.03 Execution of Covenants Not to Compete. TTII, Mutual Industries
--------------------------------------
North, Inc., Messrs. Andrew D. Dunn, Edmund M. Dunn, John Burns, Marshall Sbar
and Keith Eurle shall have executed and delivered the Covenants Not to Compete
referred to in Section 4.01, in the form of Exhibit A1 to A7 attached;
10.04 Opinion of Counsel. On the Closing Date, Lydall shall have
-------------------
received from Blank, Rome, Comisky & McCauley, Counsel of TTII, an opinion,
dated the Closing Date, substantially in the form of Exhibit E attached and
certified resolutions of TTII's board of directors and shareholders;
10.05 Hart-Scott-Rodino Filings. In the reasonable opinion of Lydall,
-------------------------
all necessary requirements of the provisions of the Hart-Scott-Rodino Act (15
U.S.C. (S)18A) and the regulations thereunder have been complied with, and any
"waiting periods" applicable to this transaction which are imposed by statute or
regulations shall have expired prior to the Closing Date or shall have been
terminated by the appropriate agency;
11. TTII'S CONDITIONS PRECEDENT TO CLOSING.
TTII's agreement to sell and deliver the Assets is subject to payment at the
Closing of the amount specified in Sections 5.02, the delivery at the Closing of
the instruments and agreements of
40
<PAGE>
assumption as contemplated and to the occurrence of each of the following
conditions (any of which may be waived by TTII):
11.01 Representations and Warranties. Each of the representations and
-------------------------------
warranties set forth in Article 9 shall be true and correct in all material
respects on the Closing Date, and Lydall shall execute and deliver to TTII a
certificate signed by authorized officers of Lydall dated the Closing Date to
such effect; and
11.02 Intentionally Omitted.
11.03 Covenant Not to Compete of Lydall and Lydall, Inc. Lydall and its
-----------------------------------------------------------------
parent Lydall, Inc. shall have executed and delivered the Covenant Not to
- -------------------------------------------------------------------------
Compete referred to in Section 4.02, in the form of Exhibit A-8 attached.
- -------------------------------------------------------------------------
11.04 Opinion of Counsel. On the Closing Date, TTII shall have
-------------------
received from Murtha, Cullina, Richter and Pinney, Counsel of Lydall, an
opinion, dated the Closing Date, substantially in the form of Exhibit F
attached; and
11.05 Employment Agreement of Andrew D. Dunn. On the Closing Date,
---------------------------------------
TTII shall have received from Lydall, the Employment Agreement of Andrew D.
Dunn, substantially in the form of Exhibit G attached.
12. POST-CLOSING COVENANTS
12.01 Transition Period. During the transition of ownership from TTII
------------------
to Lydall beginning on the Closing Date and
41
<PAGE>
continuing for a reasonable period thereafter, not to exceed one year, TTII
will:
(a) to the extent not included in the Assets, make available to
Lydall all information or records needed for the manufacture
of the Products and the operation of TTII including access
to all software or other computer systems used by TTII or
any entity under TTII's control in relation to TTII's
operation of TTII; and
(b) make available to Lydall its representatives for
conferences, assistance and meetings at reasonable times
during normal business hours, as Lydall shall reasonably
request;
(c) If Lydall requests information, records or assistance and
TTII elects to hire a third party (such as an outside
information systems contractor) to provide such information,
records or assistance, then TTII shall pay all expenses of
such third party. If Lydall elects to hire a third party
(such as an outside information systems contractor) to
assist Lydall, then Lydall shall pay all expenses of such
third party.
12.02 Collection of Receivables. If any Account Receivable listed on
--------------------------
Schedule 1.06 shall be or become overdue and
42
<PAGE>
owing for a period in excess of one hundred twenty (120) days after date of
invoice, at Lydall's request, TTII shall repurchase said Account Receivable from
Lydall for its then unpaid balance, provided that TTII's obligation to
repurchase Accounts Receivable shall be subject to the following:
(a) Lydall shall promptly and diligently attempt to collect all
of the Accounts Receivable before the end of 120-day
collection period above referred to, but Lydall shall not be
required to institute legal proceedings for this purpose;
(b) any amounts received by Lydall with respect to an Account
Receivable from an account debtor shall first be applied
against the Accounts Receivable of such account debtor in
order of the age of the Accounts Receivable - i.e., oldest
Account Receivable shall be paid first, unless the account
debtor specifies a dispute as to the older Account
Receivable in which case it shall be applied to the next
oldest Account Receivable of such account debtor;
(c) Lydall agrees to permit TTII, including its attorneys,
accountants, agents and designees, such access to the
records of Lydall relating to the Accounts Receivable, and
Lydall's collection thereof during normal business hours as
TTII may deem necessary or desirable;
43
<PAGE>
(d) if: (i) any products with respect to which there is an
Account Receivable are returned by a customer (other than
for repair or replacement) before Lydall receives payment
from TTII under this section 12.02, and (ii) such products
are reasonably marketable by Lydall, then the amount of the
Accounts Receivable related to such products that Lydall may
require TTII to repurchase shall be reduced by an amount
equal to the standard cost under TTII'S system that was
incurred by TTII in producing such returned products, less
any cost of rework incurred by Lydall and a reasonable
restocking charge. If such reasonable marketable products
are returned after Lydall instituted its rights to require
TTII to repurchase, Lydall shall reverse or eliminate such
repurchase to the extent of an amount equal to the standard
cost incurred by TTII in producing such goods less any cost
of rework incurred by Lydall and a reasonable restocking
charge. The return of any products which are not reasonably
marketable by Lydall shall not result in a reduction of the
amount of TTII's obligation under this Section 12.02.
(e) Lydall shall transfer to TTII all rights to the
Accounts Receivable with respect to which
44
<PAGE>
Lydall has exercised its repurchase rights under this Section
12.02 as well as those Accounts Receivable which come within the
limitation set forth in Section 15.01. TTII may use all
commercially reasonable means of collecting the unpaid Accounts
Receivable, including, but not limited to, the institution of
legal action against the account debtor. TTII, in collecting the
unpaid Accounts Receivable will make best efforts to maintain
Lydall's relationship with the account.
(f) Notwithstanding anything to the contrary contained herein,
if a specific reserve is established for a particular Account
Receivable pursuant to Section 5.05 for purposes of computing
"Net Working Capital," or if a specific reserve exists on TTII's
books for such Account Receivable as listed in Schedule 1.06, the
unpaid balance for such Account Receivable shall be deemed to be
equal to the gross unpaid balance thereof less the specific
reserve. Notwithstanding anything to the contrary contained
herein, if (a) general or specific reserves are established for
Accounts Receivable listed on Schedule 1.06 pursuant to Section
5.05 for purposes of computing "Net Working Capital," or if
general or specific
45
<PAGE>
reserves exist on TTII's books for such Accounts Receivable
listed on Schedule 1.06, and (b) Lydall's total collections of
all Accounts Receivable equal or exceed the total amount of all
Accounts Receivable less the total general and specific reserves
listed on Schedule 1.06, TTII shall not have any obligation to
repurchase any particular Account Receivable listed on Schedule
1.06 which is uncollected for a period in excess of one hundred
and twenty (120) days; in such event, any excess of such total
collections by Lydall over and above the total amount of all
Accounts Receivable less the total general and specific reserves,
shall be promptly paid to TTII.
12.03 Preservation of Records. Lydall covenants that for a period of
------------------------
seven years from and after the Closing Date, or until all open tax years of TTII
are closed, it shall preserve and maintain the records referred to in Section
1.07, shall permit TTII and/or Edmund Dunn or Andrew Dunn reasonable access to
such records, and shall not discard or destroy such records without written
consent;
12.04 Confidentiality. TTII and Lydall shall execute a Confidentiality
---------------
Agreement in the form of Exhibit H, attached;
12.05 Further Assurances. Each party shall, at the request of the
-------------------
other, execute and deliver to such other party all such further assignments,
assumptions, endorsements and other
46
<PAGE>
documents and take such other actions as such other party may reasonably request
in order to effect the transactions contemplated; and
12.06 Product Warranty Costs. Upon TTII's request, Lydall shall
-----------------------
perform, in a workmanlike manner, any product warranty repair or replacement
obligation of TTII (not assumed by Lydall pursuant to Section 3.04) with respect
to products of TTII sold by TTII prior to the Closing and any finished or work-
in-process inventory acquired from TTII. TTII shall reimburse Lydall for its
actual costs for salaries, wages, employee benefits and actual out-of-pocket
costs to perform such warranty services on TTII's behalf.
13. INDEMNIFICATION BY TTII.
13.01 Indemnification Note. In accordance with paragraph 5.02 above,
--------------------
$1,750,000 of the Purchase Price will be in the form of an Indemnification Note.
Subject to Lydall's right of offset for TTII's obligations under Section 13, the
Indemnification Note will be paid as follows: (i) on April 30, 1997, the
amount of $500,000, (ii) on December 31, 1997, the amount of $500,000, and (iii)
on June 30, 1998, the balance of the Indemnification Note including interest
earned;, and
13.02 Indemnification Obligation. Subject to the conditions and
---------------------------
limitations set forth in this Agreement, TTII shall defend, indemnify and hold
Lydall harmless from and against any and all claims, actions, suits, demands,
assessments, judgments, damages, liabilities, damages losses, costs or
47
<PAGE>
expenses (including, without limitation, fines, penalties, punitive damages and
attorneys' fees) (collectively, "Damages") actually incurred or suffered by
Lydall resulting from or arising out of (a) any inaccuracy or falsehood in any
representation or any breach of warranty or nonfulfillment of any covenant by
TTII that is contained in this Agreement or any certificate, document or
instrument delivered to Lydall in connection with this Agreement, (b) any breach
or failure to perform any covenant or other agreement of TTII that is contained
in this Agreement, (c) any failure by TTII to comply with any applicable bulk
sales laws or to discharge any claims asserted against Lydall under such laws,
(d) any debt, liability or obligation of TTII not expressly assumed by Lydall
pursuant to this Agreement, (e) any claim for a finder's fee or brokerage or
other commission arising by reason of any services alleged to have been rendered
to or at the request of TTII with respect to this Agreement, and (f) any claim
based on any action, transaction, condition or event occurring or existing in
connection with the TTII business or any of the Assets prior to the Closing
Date. "Claim" as used herein shall include without limitation any action by a
governmental authority to require the taking of an action or performance of an
act and any claim for environmental damage, product liability or workers
compensation.
14. INDEMNIFICATION BY LYDALL. Subject to the conditions and
limitations set forth in this Agreement, Lydall shall defend, indemnify and hold
TTII harmless from and against
48
<PAGE>
any and all Damages actually incurred or suffered by TTII resulting from or
arising out of (a) any inaccuracy or falsehood in any representation or any
breach of warranty or nonfulfillment of any covenant by Lydall that is contained
in this Agreement or any certificate, document or instrument delivered to TTII
in connection with this Agreement, (b) any breach or failure to perform any
covenant or other agreement of Lydall that is contained in this Agreement, (c)
any of the debts, liabilities and obligations of TTII specifically assumed by
Lydall pursuant to this Agreement, and (d) any claim based on any action,
transaction, condition or event occurring or existing in connection with the
TTII business or any of the Assets after the Closing Date. "Claim" as used
herein shall include without limitation any action by a governmental authority
to require the taking of an action or performance of an act and any claim for
environmental damage, product liability or workers compensation.
15. LIMITATIONS ON INDEMNIFICATION. The obligation of the
indemnifying party to indemnify the indemnified party set forth in Sections 13
and 14 above shall be subject to the following limitations:
15.01 Limitation on Amount. The indemnifying party shall be obligated
---------------------
to indemnify the indemnified party only to the extent that the amount which the
indemnified party shall be entitled to receive as indemnification shall exceed
$62,500 in the aggregate, and then only to the extent of the excess over the
$62,500;
49
<PAGE>
15.02 Survival of Representations and Warranties. Regardless of any
-------------------------------------------
investigation made by any party, each of the covenants, agreements, obligations,
representations and warranties listed on Schedule 15.02 will survive the Closing
and remain in full force and effect until the dates specified on Schedule 15.02,
at which respective times such specified representations and warranties shall
expire. Any claim for indemnification with respect to any of such matters that
is not asserted by a written notice that describes the claim and the underlying
facts and the alleged Damages relating thereto and that is not given by the
indemnified party to the indemnifying party by 5:00 p.m. (E.S.T) on the date
specified in the schedule for the obligation in question may not be pursued and
shall be irrevocably waived after such time. Any claim for which timely notice
has been given shall survive until that claim is finally resolved. The
covenants and agreements contained in this paragraph shall survive the Closing
and remain in effect in accordance with their terms.
15.03 Defense of Claims. In the event that any legal proceedings shall
------------------
be instituted or that any claim or demand shall be asserted by any person in
respect of which indemnification may be sought from the indemnifying party under
the provisions of Sections 13 and 14 above, the indemnifying party shall have
the right, at its option and at its own expense, to be represented by counsel of
its choice and to assume the defense of, negotiate, settle or otherwise deal
with any such legal proceeding, claim or
50
<PAGE>
demand; provided, however, that if the liability or obligation which is the
subject matter of such claim shall arise out of a transaction or cover any
period or periods where in the indemnified party shall be responsible for part
of any such liability or obligation, then both parties jointly shall defend,
contest, litigate, settle and otherwise deal with any such claims, each bearing
its own expenses and each choosing its own counsel. After any final judgment or
award shall have been rendered by a court, arbitration board or administrative
agency of competent jurisdiction, or a settlement shall have been consummated,
or the parties shall have arrived at a mutually binding agreement with respect
to any matter which is the subject matter of an indemnity, the indemnified party
shall forward to the indemnifying party notice of any sums due and owing by it
with respect to such matter, and the indemnifying party shall pay all of the
sums so owing, by certified or bank cashier's check, within thirty (30) days
after the date of such notice. The parties agree to cooperate fully with each
other in connection with the defense, negotiation or settlement of any such
legal proceedings, claim or demand, and will not compromise or settle any such
legal proceeding, claim or demand without the prior written consent of the other
party, which consent shall not be unreasonably withheld or delayed.
15.04 Materiality. For purposes of this Agreement, the words
-----------
"material" or "materially adverse" or the like mean a misrepresentation,
violation or other noncompliance, or an
51
<PAGE>
effect, loss, cost, expense or other damage as to particular matter or item, in
excess of $5,000.
15.05 Notwithstanding anything to the contrary set forth in this
Agreement, the following provisions shall apply and prevail over any conflicting
provisions of this Agreement:
a. there are no warranties or representations made by either party
to the other except as set forth in this Agreement;
b. the indemnification rights and remedies set forth in this
Agreement shall be the sole and exclusive rights and remedies of the parties
hereto with respect to any breach of a representation, warranty or covenant
contained herein;
c. the liability of TTII to Lydall hereunder or otherwise, other
than the Working Capital Adjustment, shall be limited to the then unpaid
principal amount (plus accrued but unpaid interest) of the Indemnification Note
referred to in Section 13.01 and TTII shall have no liability to Lydall, whether
hereunder or otherwise, for an amount in excess of the then unpaid principal
amount (plus accrued but unpaid interest) of the Indemnification Note referred
to in Section 13.01;
16. MISCELLANEOUS
16.01 Bulk Transfer Compliance. Lydall hereby waives compliance by TTII
------------------------
with the provisions of Article 6 of the Uniform Commercial Code Bulk Transfers
Laws of any state, and TTII warrants and agrees to pay and discharge when due
all claims of creditors which could be asserted against Lydall by reason of such
non-compliance to the extent that such liabilities are not
52
<PAGE>
specifically assumed by Lydall under this Agreement. TTII hereby indemnifies and
agrees to hold Lydall harmless from, against and in respect of (and shall on
demand reimburse Lydall for) any loss, liability, cost or expense, including,
without limitation, attorneys' fees, suffered or incurred by Lydall by reason of
the failure of TTII to pay or discharge such claims;
16.02 Successors and Assigns. All the terms and provisions of this
-----------------------
Agreement shall be binding upon, and inure to the benefit of, and be enforceable
by, the respective successors and assigns of the parties, whether so expressed
or not;
16.03 Governing Law. This Agreement is to be governed by and
--------------
interpreted under the laws of the State of Delaware, without giving effect to
the principles of conflicts of laws;
16.04 Notices. All notices, requests, consents and other
--------
communications shall be in writing and shall be mailed first class, registered,
with postage prepaid as follows:
If to TTII, addressed to:
Edmund M. Dunn
Mutual Industries, Inc.
707 West Grange Street
Philadelphia, PA 19120
with a copy to:
Frederick D. Lipman, Esquire
Blank, Rome, Comisky and McCauley
Four Penn Center Plaza
Philadelphia, PA 19103-2599
If to Lydall, addressed to:
James P. Carolan
Division President
53
<PAGE>
Lydall New York, Inc.
P.O. Box 328
Troy, NY 12181
with a copy to:
Mary Tremblay
General Counsel and Secretary
Lydall, Inc.
One Colonial Road
Manchester, Connecticut 06040
or such other address as either party may request by notice given as aforesaid.
Notice sent as provided shall be deemed filed on the date mailed;
16.05 Payment of Expenses. Except as set forth in Section 8.05, TTII
--------------------
and Lydall shall each pay their own expenses, including without limitation, the
disbursements and fees of all their respective attorneys, accountants, advisors,
agents and other representatives incidental to the preparation and carrying out
of this Agreement, whether or not the transactions contemplated are consummated;
16.06 Entire Agreement; Amendment. This Agreement (including the
----------------------------
Schedules and Exhibits), and all other agreements and documents executed in
connection therewith constitute the entire agreement between the parties with
respect to the sale of the business of TTII. This Agreement supersedes all
prior agreements and/or understandings between the parties, including the non-
binding letters of intent. No amendment, alteration or modification of this
Agreement shall be valid unless in each instance such amendment, alteration or
modification is expressed in a written instrument duly executed by both parties;
54
<PAGE>
16.07 Counterparts. This Agreement including any amendments,
-------------
alterations, and/or modifications may be executed simultaneously in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument;
16.08 Headings. The headings contained in this Agreement have been
---------
inserted for convenience of reference only and shall in no way restrict or
modify any of the terms or provisions;
16.09 Waiver. The failure of any party to insist, in any one or more
-------
instances, on performance of any of the terms and conditions of this Agreement
shall not be construed as a waiver or relinquishment of any rights granted or of
the future performance of any such term, covenant or condition, but the
obligations of the parties with respect to the term, covenant or condition shall
continue in full force and effect;
and
16.10 Separability. The provisions of this Agreement shall be deemed
-------------
separable. Therefore, if any part of this Agreement is rendered void, invalid
or unenforceable, the validity or enforceability of the remainder of this
Agreement shall not be affected unless the part or parts which are void, invalid
or unenforceable shall substantially impair the value of the whole Agreement to
either Party.
16.11 Disclosure Statement Regarding Schedules. Disclosure of any
-----------------------------------------
information in any Schedule or Exhibit hereto
55
<PAGE>
shall be deemed to be disclosure in all Schedules hereto and shall qualify and
amplify each representation and warranty given herewith by TTII to the same
extent as if specific reference were made to such Schedule or Exhibit in the
warranty or representation.
56
<PAGE>
WITNESS the due execution of this Asset Purchase Agreement as of the date
first above written.
TEXTILE TECHNOLOGIES INDUSTRIES, INC.
ATTEST: Andrew C. Dunn By:/s/ Edmund M. Dunn
----------------- -------------------
Edmund M. Dunn
Treasurer
and
ATTEST: Edmund M. Dunn By:/s/ Andrew C. Dunn
---------------- ------------------
Andrew C. Dunn
President
ATTEST: LYDALL NEW YORK, INC.
Mary Tremblay By /s/ James P. Carolan
------------------- ---------------------
James P. Carolan
Division President
57
<PAGE>
INDEX OF SCHEDULES
------------------
Schedule 1.02 Equipment and Personalty
Schedule 1.03 Contract Rights and Leases
Schedule 1.04 Prepaid Expenses
Schedule 1.05 Inventory
Schedule 1.06 Accounts Receivable
Schedule 1.10 Customer and Supplier List
Schedule 1.12 Order Backlog List
Schedule 2.07 Excluded Miscellaneous Assets
Schedule 3.02 Accrued Vacation
Schedule 3.03 Trade Payables
Schedule 8.02 Title to and Condition of the Assets
Schedule 8.04 Required Consents
Schedule 8.06 Financial Statements
Schedule 8.08 Litigation or Claims
Schedule 8.10 Changes
Schedule 8.11 Environmental Matters
Schedule 8.12 No Change in Business Relationships
Schedule 8.13 Employment Agreements
Schedule 8.14 Patents, Trademarks
Schedule 8.17 Licenses and Permits
Schedule 8.18 Absence of Undisclosed Liabilities
Schedule 8.19 Inventory
Schedule 8.20 Disputed Accounts Receivable
Schedule 8.23 ERISA and COBRA Compliance
Schedule 8.24 Product Liability
Schedule 8.27 Condition of Equipment and Real Estate
Schedule 15.02 Time Periods of Obligations Indemnified
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit A1-7 Covenants Not to Compete of TTII, Mutual
Industries Inc. and certain individuals
(4.01), (10.03)
Exhibit A-8 Covenant Not to Compete
(4.02) (11.03)
Exhibit B-1 Promissory Note (5.02)
Exhibit B-2 Stand-by Letter of Credit
Exhibit C Indemnification Note (5.02)
Exhibit D-1 Bill of Sale (7.01)
Exhibit D-2 Assignment of Trademarks (7.01)
Exhibit D-3 Assignment of Patent Applications (7.01)
Exhibit D-4 Assumption of Liabilities (7.02)
Exhibit E Opinion of Counsel from Blank, Rome,
Comisky and McCauley (10.04)
Exhibit F Opinion of Counsel from Murtha, Cullina,
Richter and Pinney (11.03)
Exhibit G Employment Agreement for Andrew C. Dunn
(11.04)
Exhibit H Mutual Confidentiality Agreement (12.04)
<PAGE>
EXHIBIT 11.1
LYDALL, INC.
Schedule of Computation of Weighted Average Shares Outstanding
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995 1994
IN THOUSANDS ------ ------ ------
<S> <C> <C> <C>
Primary
Weighted average number of common shares................. 17,140 17,263 16,637
Additional shares assuming conversion of stock options
and warrants............................................ 967 1,050 1,316
------ ------ ------
Weighted average common shares and equivalents
outstanding............................................. 18,107 18,313 17,953
====== ====== ======
Fully Diluted
Weighted average number of common shares................. 17,140 17,263 16,637
Additional shares assuming conversion of stock options
and warrants............................................ 981 1,071 1,335
------ ------ ------
Weighted average common shares and equivalents
outstanding............................................. 18,121 18,334 17,972
====== ====== ======
</TABLE>
1994 has been restated to reflect a two-for-one stock split distributed in
1995.
17
<PAGE>
[LOGO OF LYDALL, INC. APPEARS HERE]
One Colonial Road P.O. Box 151 Manchester, CT 06045-0151
<PAGE>
[LOGO OF LYDALL, INC APPEARS HERE] 1996 Annual Report
ADVANCING TECHNOLOGIES
[GRAPHICS APPEARS HERE]
<PAGE>
1996 Highlights
- --------------------------------------------------------------------------------
12TH CONSECUTIVE YEAR OF EARNINGS GROWTH
RECORD GROSS MARGIN - 32.5%
RECORD RETURN ON SALES - 9.8%
RECORD OPERATING CASH FLOW - $48.2 MILLION
STRATEGIC ACQUISITION - SPECIALIZED ADVANCED COMPOSITES
<PAGE>
[GRAPHICS APPEAR HERE]
<PAGE>
PRODUCT OVERVIEW
Air Filtration Lydall is a leading manufacturer of high-efficiency glass
microfiber air filtering media for rigid-frame filtration applications.
Lydair/R/ filtration media filter the air in clean rooms of hospitals,
industrial facilities, pharmaceutical processing plants, research laboratories,
and semiconductor manufacturing sites around the world.
Heat-Management Systems Lydall's patented automotive thermal barrier and heat
shielding components provide design engineers with effective solutions to
heat-management problems throughout the vehicle. The Company also manufactures
industrial insulating materials which perform in temperatures as high as
3,000(degree)F (1,649(degree)C).
Materials Handling Lydall produces a full line of materials-handling products,
including Ly-Pak/R/ solid fiber "push-pull" slip sheets which replace wooden
pallets and provide significant cost reductions and greater efficiency for
shippers.
Liquid Filtration Lydall's patented biomedical systems perform complex
functions as components or subassemblies in blood filters and related medical
filtration devices. The Company also produces liquid filtration media used in
high-efficiency, high-capacity hydraulic and lubrication elements.
Cryogenic Superinsulation The Company's Cryotherm/R/ and CRS Wrap/TM/ products
insulate at temperatures as low as absolute zero (-459(degree)F). Applications
include tanker trucks which transport liquid gases, fleet vehicles fueled by
liquid natural gas, and other cryogenic storage vessels.
Other These products include electrical insulation materials, specialty
shoeboard composites, a material made from postconsumer newspapers and cardboard
that replaces wood in pencils, high-performance gasket materials, and
paperboard. The Company also operates a contract motor carrier that services
Lydall operations as well as outside customers. In addition, Lydall recently
acquired a manufacturer of high-performance woven structural composites.
Contents
- ------------
<TABLE>
<S> <C>
Financial Highlights 1
Letter to Stockholders 2
Strategic Focus 7
Financial Review 15
</TABLE>
<PAGE>
Lydall possesses extensive fiber and fiber-composite knowledge as well as a
variety of proprietary manufacturing capabilities. The Company's core competence
is designing and producing technologically advanced, unique materials for
critical, high-performance applications.
Lydall develops engineered, specialty products primarily in the areas of air and
liquid filtration, thermal barriers and insulation, electrical insulation, and
materials handling. A customer-driven company, Lydall is known for its
exceptional service, high quality, and innovative product solutions.
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------------------------------------
Percent
Increase
In thousands except per-share data 1996 1995 (Decrease)
==============================================================================================================
<S> <C> <C> <C>
Net sales $252,652 $252,128 -
..............................................................................................................
Net income 24,736 22,438 10
..............................................................................................................
Net income per common share 1.37 1.23 11
..............................................................................................................
Stockholders' equity 117,844 101,811 16
..............................................................................................................
Stockholders' equity per share 6.89 5.88 17
..............................................................................................................
Market capitalization at December 31, 384,570 394,036 (2)
..............................................................................................................
Closing price NYSE on December 31, 22.50 22.75 (1)
..............................................................................................................
Weighted average common
stock and equivalents outstanding 18,107 18,313 (1)
==============================================================================================================
</TABLE>
<PAGE>
OPERATING CASH FLOW - EBITDA
[BAR GRAPH APPEARS HERE]
To Our Stockholders and Employees
Lydall reached a number of milestones during 1996. We posted record earnings for
the twelfth consecutive year and increased sales for the sixth year in a row.
Gross margin rose to a record $82.1 million, or 32.5 percent of sales, and
after-tax return on sales was a record 9.8 percent. We generated record
operating cash flow (EBITDA) for the year of $48.2 million, and we acquired a
materials business which, for the first time, moved us beyond nonwoven products
into woven media. Also, Lydall was recognized by Forbes as one of the best 200
small companies in America in 1996.
Our momentum was tempered, however, by some less-than-favorable market
conditions during the year which restricted sales growth. The dynamics of this
slowdown in sales growth are discussed in detail under "Products and Markets" in
this letter and in the Sales section of "Analysis of Results."
All in all, I would describe 1996 as a year in which we invested a great deal of
energy and made significant strides toward shaping the Lydall of tomorrow. The
intensity and focus of our efforts will be recognized as having laid the
foundation for future sales and earnings growth. We invested in new-product
development and focused on advancing our current technologies and identifying
new markets for existing technologies. Our search for strategic acquisitions
intensified. We continued to build upon our comprehensive quality programs and
enjoyed new successes from these efforts. Capital investments in projects to
enhance our products and processes further strengthened the Company.
Products and Markets
Although business conditions overall were more difficult in 1996 than in 1995,
we experienced solid growth of thermal barrier products, particularly for
automotive heat-shield applications. Thermal barrier sales accounted for 38
percent of 1996's total sales. Sales to the three major U. S. automotive
manufacturers accounted for 29 percent of total sales. We continued to increase
penetration of this market through the identification of new applications,
crossing to different models with existing applications, and gaining recognition
as a total system producer.
Air and liquid filtration media sales, representing 24 percent of total sales,
slowed during 1996 from the extraordinary pace experienced in 1995 and 1994.
High-efficiency air filtration media, sold to filter manufacturers for
clean-room applications, accounted for the majority of total filtration sales.
Of these sales, we estimate that one-third are semiconductor related. Although
Lydall's sales in this area do not directly track the ups and downs of the
semiconductor market, there is an influence. The slower growth of these products
in the second half of 1996 related primarily to postponements of planned
semiconductor clean-room construction and inventory reductions by our customers.
<PAGE>
In general, the long-term growth prospects for our air filtration business are
very promising. Underlying demand for an increasing variety of clean rooms
remains strong. In addition, we see opportunities for increasing demand in
developing countries. The home air filtration market also shows good growth
potential, domestically and overseas.
To a lesser degree, the decline in electrical insulation sales also contributed
to slower sales growth. These products accounted for 6 percent of total sales in
1996. Most of the decline related to the further decay of cellulose-based
battery separator products in Europe. As we have said for a number of years,
this decay has not been unexpected, and, in fact, has stretched over a longer
time period than we initially anticipated.
In 1991, we acquired the Axohm operation in France, where these battery
separator materials are made, to add manufacturing capacity in Europe for
filtration and thermal materials and to increase market share overseas. Since
1991, an increasing number of filtration and thermal products have been
qualified for manufacture in France. Operating in France has also facilitated
the establishment of a European distribution center. This has particularly
benefited sales of our filtration products but has also been important in
increasing market penetration for certain thermal materials and our materials-
handling products.
Sales of our materials-handling products, which accounted for 13 percent of
total sales in 1996, were off from record highs last year. This has always been
a solid growth business for us. Lower sales in 1996 were primarily a result of
deflationary pressures. Raw-material prices increased dramatically in 1995, and
we passed through corresponding price increases. In 1996, the opposite was true.
This is one area of our business where the market tracks decreases in raw
materials and, in turn, demands corresponding price reductions. Thus, we
suffered price erosion in 1996 as raw-material costs decreased. Despite this,
unit volume and profitability remained healthy. As we enter 1997, this market
seems to be stabilizing domestically, and we are looking to grow
internationally, particularly in South America and Asia.
Acquisitions
Acquisitions have played, and will continue to play, an important role in
Lydall's long-term growth. For the past ten years, sales have grown at a
compound annual rate of 13 percent, and earnings have grown at 24 percent.
Acquisitions accounted for roughly 40 percent of the sales growth. The timing of
acquisitions, new product introductions, and economic cycles explains in part
Lydall's historic pattern of periods of high growth, followed by a leveling off,
then another period of high growth.
Lydall actively seeks companies or product lines that complement existing
businesses and expand its strategic focus. We look for opportunities that, while
profitable, can benefit
NET SALES
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RETURN ON SALES
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<PAGE>
NET INCOME
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EARNINGS PER SHARE
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from Lydall's culture, process knowledge, marketing know-how, and distinct
approach to quality and cost containment.
Today, we have the financial wherewithal to make much larger acquisitions than
we could have a few years ago. We have looked at companies with sales ranging
from $10 million to $180 million. During 1996, we came close with a number of
opportunities, but for one reason or another, were not able to come to terms.
However, at the end of December, we purchased a specialty company in Hatboro,
Pennsylvania, that presents attractive product and market opportunities.
Textile Technologies Industries, Inc., now known as the Hatboro Operation of
Lydall Manning, posted sales of approximately $14 million in 1996. It
manufactures components utilized in highly specialized, advanced structural
materials which are sold to the aerospace, marine, medical device, automotive,
and sporting goods industries. The Operation uses an array of sophisticated
fibers including carbon/graphite, glass, ceramic, and aramid to produce high-
performance, specialty materials.
This acquisition expands Lydall's breadth of engineered materials to include
woven advanced composites and strengthens our position in existing markets, as
well as places us in some exciting new markets. Approximately 60 percent of
Hatboro's sales are to high-performance aerospace and marine applications where
extremely strong, yet lightweight composite materials are required.
Comprehensive Quality Program
As our long-term growth pattern shows, we, on average, grow earnings close to
twice the rate of sales. Our comprehensive quality program and its continuing
positive effect on margins play a big role in this phenomenon. Lydall's core
gross margin (excluding recent acquisitions) has increased from 29 percent of
sales in 1988 to over 34 percent today. Lydall's quality program is also a major
factor in our ability to gain market share and to further improve acquired
companies.
The program has one clear objective - to manufacture and deliver a perfect
product every time. This includes everything from statistically controlled
formulations and processing to on-time delivery and post-sale customer
relations. You may find this goal a bit idealistic. However, continuing pursuit
of this ideal results in constant enhancement of our products and processes,
elimination of waste, and better customer service.
The ongoing improvement at the Columbus Operation, acquired in 1994, is an
excellent example of what the program can mean to an acquisition. Columbus
contributed substantially to Lydall's margin expansion in 1996 as a direct
result of major process changes and improved operating performance driven by the
underlying premise of our quality program.
<PAGE>
Company-wide efforts to streamline operations and improve efficiencies under our
comprehensive quality program yielded near record savings of $2.9 million in
1996. Since 1986, when we began reporting "cost of quality," we have recognized
savings averaging over $2 million a year.
Also related to our quality efforts, we have been dedicating a great deal of
time and energy to ISO 9000 certification at all our plants. This extensive
quality assurance program validates the quality and reliability of our systems
to customers and suppliers worldwide and is critical to international expansion.
I am very pleased that another facility attained this distinction in 1996.
Congratulations to our Manning, Green Island Operation.
Financial Position
Our financial position is exceptional. As of December 31, 1996, cash, cash
equivalents, and short-term investments totaled $43.2 million; working capital,
$53.4 million; total debt to total capitalization was 13 percent; debt to
equity, 15 percent; and our current ratio was 2.24. We have a healthy borrowing
capacity. Keeping a conservative debt-to-total-capitalization ratio of 40
percent, as of December 31, 1996, we could have borrowed up to $75 million. Our
borrowing power plus cash would enable us to comfortably acquire a relatively
large company or a number of small- to medium-sized businesses.
In addition to acquisitions, the Company from time to time uses its cash to buy
back stock on the open market when conditions are favorable. This purchasing is
authorized by an ongoing Board-approved program under which the number of shares
purchased is tied to the number of stock option awards granted in previous
years. In 1996, we purchased 457,200 shares at an average per-share price of
$22.61.
Capital expenditures in 1996 amounted to $10.9 million. Our 1997 budget plan
calls for expenditures totaling $16.4 million. This increase primarily relates
to a major management information system project scheduled to be implemented
over the next three years.
Investment in the Future
We focus capital investment primarily on strategic projects to improve product
quality, process efficiencies, and productivity. The upgrading of our entire
management information system, an effort we have named Lydall 2000, meets all
these criteria.
Lydall 2000 will provide a flexible platform to address the dynamic business
environment of the 21st Century. Access to real-time information will speed our
decision-making process and enhance our response time to customers. All Lydall
locations will benefit from this comprehensive system upgrade, as will future
acquisitions. It will enable us to institute programs such as our comprehensive
quality program faster and more efficiently.
TOTAL CAPITALIZATION
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CLOSING MARKET PRICE PER SHARE
[BAR GRAPH APPEARS HERE]
<PAGE>
PRODUCT AREAS
AS PERCENT OF
1996 SALES
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[PIE CHART
APPEARS HERE]
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The new system will also solve the century-dating issue we all have been hearing
about, help to reduce the time it takes to commercialize new products, and
provide more timely information to all levels of management. Although this
effort represents a significant investment over the next three years, it also
earmarks many savings opportunities and is expected to produce an exceptional
return on investment.
Looking Forward
Lydall's strong sense of purpose and the same kind of behind-the-scenes drive
and intensity evident in 1996 will fuel our future growth and success. It is
apparent in our innovative problem-solving approach to product development and
in the hard work by people throughout the Company. It is reflected in our
rigorous quality programs and in the strength of our balance sheet. We look
forward to the excitement and challenge of achieving our next level of growth.
[PHOTO OF LEONARD R. JASKOL /s/ Leonard R. Jaskol
APPEARS HERE]
LEONARD R. JASKOL
-----------------------------------
Chairman and Chief Executive Officer
6
<PAGE>
Strong Strategic Focus
PRODUCER OF TECHNOLOGICALLY ADVANCED ENGINEERED MATERIALS
FOR DEMANDING SPECIALTY APPLICATIONS
PRODUCTS WHOSE TECHNOLOGIES ARE CONTINUOUSLY BEING UPGRADED
AND WHICH ARE SOLD TO NICHE MARKETS
CUSTOMER-DRIVEN, HIGHLY RESPONSIVE TO SERVICE, QUALITY, AND
END-USE REQUIREMENTS
..................................................................
Lydall's commitment to customer needs and its concentration on products whose
technologies are continuously being advanced are supported by extensive testing
and development capabilities. Lydall's focused capital spending is closely tied
to sustaining new-product commercialization opportunities and fostering
continuous improvement in the quality of processes and products. As a result,
Lydall provides a full range of services to its customers--from design and
development to final production.
In many instances, Lydall and its customers form development teams, with Lydall
functioning as an extension of a customer's in-house capabilities. Many of these
development projects being long before a final product is manufactured--
sometimes three or four years before commercialization.
Focusing on technologies which are continuously advancing is a strategy that
Lydall applies to all areas of its business. By concentrating on niches with
dynamic technologies and by actively managing the process, Lydall continues to
be a leader in providing innovative product solutions to meet customers'
critical needs.
<PAGE>
[GRAPHICS APPEAR HERE]
Automotive
HEAT-MANAGEMENT SYSTEMS
Since entering the automotive thermal-barrier market in the mid-1980's, Lydall
has expanded its line of patented heat-management systems to address a wide
array of applications in an ever increasing number of vehicles. The Company's
ability to continually advance the technology of its thermal-barrier product
lines and to effectively address customer needs has been paramount to its
success in this industry.
Years ago, automotive manufacturers identified problems, designed solutions,
drew up the specifications, and handed the print to suppliers. The supplier only
had to determine how to make the product most efficiently and price it. The
market has changed. Detroit's original equipment manufacturers are cutting the
number of direct suppliers and, in turn, are relying on qualified suppliers for
complete system design.
Lydall's team of highly skilled engineers and technicians has established an
engineering and testing facility equal to any professional laboratory within the
industry. Capabilities, which include empirical testing as well as computational
analysis, range from a proprietary heat-shield test chamber, pioneered and
developed by Lydall engineers, to sophisticated CAD/CAM design systems and the
latest in thermal analysis software.
8
<PAGE>
[GRAPHIC APPEARS HERE]
<PAGE>
[GRAPHIC APPEARS HERE]
<PAGE>
HIGH-EFFICIENCY
Air Filtration [GRAPHICS APPEAR HERE]
Lydall continuously works to advance the breadth and efficiency of its air
filtration products. The Company's engineers have developed one of the most
sophisticated filtration testing and development laboratories in the industry to
support its commitment to technological advancement.
Lydall's development capabilities have been key to achieving a leadership
position in the high-efficiency air filtration market. The Company's technicians
and researchers work with clean-room designers as well as with Lydall's direct
customers, the filter manufacturers, to anticipate technological needs of the
industry.
Lydair(R) filtration media are sold to rigid-frame filter manufacturers who
process, pleat, and assemble the media into a filter housing. These filter
systems are then sold for use in a wide variety of clean rooms -- hospitals,
laboratories, and food, chemical, and pharmaceutical processing plants --
wherever the need for clean air is critical.
Typically, end-users in the industry have set the standards, but through
extensive research and development efforts, Lydall has, in many cases, become
the driver of change.
11
<PAGE>
Cryogenic
SUPERINSULATION
The extreme conditions (temperatures approaching absolute zero, or minus
459(degrees)F) under which Lydall's cryogenic insulating products perform
require materials with highly engineered physical properties that are difficult
to design and produce. Because of outgassing that occurs during vacuum drawdown
and the absolute requirement for noncombustible insulating materials, Lydall's
completely inorganic and binderless systems are preferred. Cryotherm(R)
materials are binderless; no resins are added to hold the material together.
They are 100-percent inorganic and nonflammable and represent the worldwide
benchmark for thermal efficiency in cryogenic environments.
As a global leader in cryogenic insulating technology, Lydall has developed
unparalleled testing capabilities in the field of low-temperature, vacuum
insulation. For example, its custom-designed cryostat testing equipment,
developed in-house by Lydall engineers, surpasses any in the industry and is
comparable to government and university testing resources. Lydall's years of
experience, broad technical knowledge, and extensive analytical tools provide
customers with a valuable resource beyond traditional suppliers. Customers look
to Lydall to develop the most efficient, cost-effective system for specific
applications and distinct operations.
[GRAPHICS APPEAR HERE]
12
<PAGE>
[GRAPHIC APPEARS HERE]
<PAGE>
[GRAPHICS APPEAR HERE]
Expansion
THROUGH ACQUISITION
Acquisitions are an important part of Lydall's growth. Lydall seeks
opportunities that complement existing businesses, enhance its product lines and
market positions, or expand the Company's strategic focus.
In 1996, Lydall purchased Textile Technologies Industries, Inc., now the Hatboro
Operation of Lydall Manning. This acquisition fits Lydall's strategy of focusing
on products and markets with a highly advanced, evolving technological
component. In addition, it expands Lydall's breadth of engineered materials to
include advanced woven composites, strengthens existing market positions, and
places the Company in exciting new arenas.
The Hatboro Operation manufactures components that are used in highly
specialized, advanced structural materials sold to the aerospace, marine,
medical device, automotive, and sporting goods industries. Utilizing an array of
sophisticated fibers including carbon/graphite, glass, ceramic, and aramid,
these extremely strong, yet lightweight materials are employed in such
high-performance applications as F-22 fighter planes, C-130 cargo aircraft, the
Boeing 777, high-performance bicycle frames and wheels, sophisticated sailboats,
and NASCAR bumpers. Lydall has had a minor presence in these markets in the past
and expects this acquisition to provide many new opportunities.
14
<PAGE>
16 Analysis of Results FINANCIAL
REVIEW
24 Key Financial Items
25 Income Statements
26 Balance Sheets
28 Statements of Cash Flows
29 Statements of Changes in Stockholders' Equity
30 Notes to Consolidated Financial Statements
40 Report of Independent Accountants
40 Management's Report
41 Five-Year Statistical Review
42 Officers, Directors, and Stockholder Information
IBC Directory of Locations
<PAGE>
Analysis of Results
SALES
- --------------------------------------------------------------------------------
Overview
Sales grew modestly in 1996 to $252.7 million from $252.1 million in 1995,
marking Lydall's sixth consecutive year of record sales. Attaining the
substantial increases achieved in the previous two years was made difficult in
1996 by a severely deflationary market for the Company's materials-handling
products, which depressed sales by $5.6 million. In 1995 and 1994, increases
were augmented by strong new-product sales and acquisitions.
Acquisitions had a small impact on 1996 revenues, in contrast with 1995 and 1994
when newly acquired companies added significant sales volume. For the three
years shown in the "Statements of Changes in Sales," acquisitions refer to the
Columbus Operation, a supplier of fiber-and-metal thermal barriers to the
domestic automotive industry, and the Jacksonville Operation, a producer of
materials-handling products. Both operations were acquired in 1994.
Internal marketing actions and external forces largely offset each other in
1996. In 1995, gains from aggressive internal marketing programs outweighed the
slight negative impact of external forces. In 1994, both internal and external
forces had a positive effect on sales.
Acquisitions
For analytical purposes, Lydall reports the results from acquired companies or
product lines as acquisitions for the first three fiscal years of operation.
During 1996, the Columbus and Jacksonville Operations produced modest additional
growth of $900 thousand, compared with incremental growth of $8.6 million in
1995 and $26.1 million in 1994. During 1994, Lydall owned the Columbus Operation
for ten months and the Jacksonville Operation for six months.
Revenues from the Columbus Operation were stable in 1996 compared with 1995 as
management focused heavily on process improvements and margin expansion.
Throughout 1996, Jacksonville operated in a deflationary market in which unit
prices declined in direct proportion to dropping linerboard prices. Pure
deflation reduced revenues by $1.2 million in 1996 at Jacksonville; however,
increased unit volume alleviated the negative effect.
Internal Marketing Actions
Over the past three years, Lydall generated significant incremental revenues by
commercializing new products, increasing market share, and raising prices as
market conditions permitted. Although pricing actions are clearly internally
driven, external market forces can heavily influence these decisions, as was the
case in 1996. Factoring in the $5.6 million deflationary effect of the
materials-handling business, internal marketing gains totaled $9.5 million in
1996. This compares with gains of $33.0 million in 1995, a year in which
inflationary price increases were a major factor, and $24.9 million in 1994.
The Company successfully commercialized $11.8 million of new products in 1996,
mostly in thermal barriers sold to the domestic automotive industry. The next
generation of battery insulation, including soft-wrap designs, and additional
market penetration of the Company's all-metal shields produced the majority of
this new commercialization. Expansion of high-efficiency air filtration products
through the introduction of several new grades also contributed to incremental
sales growth during the year. Product introductions totaled $17.6 million in
1995 and $15.2 million in 1994.
Market-share gains, other than those stemming solely from new products, were
$1.5 million in 1996, $5.4 million in 1995, and $10.9 million in 1994.
New-product and market-share gains in 1995 and 1994 emanated largely from the
air filtration and thermal barrier markets.
Lydall discontinued sales of $2.8 million in 1996, after discontinuing product
revenues of $3.1 million in 1995 and $4.8 million in 1994. In all three years,
most of the decline resulted from new-product introductions directly displacing
existing product offerings.
16
<PAGE>
Net pricing actions had less of an effect on sales growth in 1996 than in the
record year of 1995 when commodity inflation reached a cyclical peak. For 1996,
net pricing actions produced a drop in sales of $1.0 million, excluding the $1.2
million decline in prices attributable to the Jacksonville Operation, which is
captured under "Acquisitions." The main driver of increases and decreases in
sales from pricing actions in the past two years has been the cost of
linerboard, an important raw material in the materials-handling business. In
1996, Lydall reduced prices of materials-handling products in direct relation to
dropping linerboard costs. While margins in this product line remained
consistent, net revenues dropped by almost 15 percent. Without the impact of
this product line, price increases were moderate in 1996, averaging about 1.4
percent of sales.
In 1995, when the cost of raw materials rose rapidly in the linerboard and other
pulp and paper markets, Lydall was able to pass on significant price increases.
Price increases, averaging between 5 and 6 percent of sales, generated $13.1
million in 1995.
Price increases in 1994 averaged 2.3 percent of sales.
External Market Forces
Lydall defines external forces as the effects of economic and market changes
beyond the influence of management, including the effects of market decay and
foreign exchange. During 1996, external forces depressed net revenues by $9.8
million, the largest negative effect since the Company began measuring external
forces. The positive effects of economic and market growth, especially evident
in areas of the filtration and thermal markets in 1996, were more than offset by
the following factors: market decay in leaf-type battery separators sold in
Europe; the design-out of certain products; and customers reusing a particular
materials-handling product more than they did in the past. Management does not
expect these factors to severely affect future years.
External effects resulted in a net revenue drop in 1995 of $2.6 million. Strong
growth in air filtration and thermal markets, the benefit of a take-or-pay
contract, and modest macroeconomic growth were more than offset by several
factors, including the effects of market decay in mature markets such as
battery-separator materials and footwear products. External effects produced a
net positive impact of $4.7 million in 1994.
Statements of Changes in Sales
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Prior year's net sales $252,100 $213,100 $157,400
............................................................................
Acquisitions 900 8,600 26,100
Internal marketing actions 9,500 33,000 24,900
External market forces (9,800) (2,600) 4,700
............................................................................
Total change 600 39,000 55,700
............................................................................
Current year's net sales $252,700 $252,100 $213,100
- ----------------------------------------------------------------------------
</TABLE>
GROSS MARGIN
- --------------------------------------------------------------------------------
Overview
Gross margin rose by 6 percent to a record $82.1 million, or 32.5 percent of
sales, in 1996. In 1995, gross margin was $77.7 million, or 30.8 percent of
sales, compared with $64.9 million, or 30.5 percent of sales, in 1994. The
acquisitions made in 1994 depressed overall gross margin percentages in both
1995 and 1994. Both Columbus and Jacksonville showed substantial margin
improvement in 1996 measured against the previous two years. The integration
process often results in taking steps backward before making permanent
17
<PAGE>
Analysis of Results continued
progress, and this was particularly true at Columbus. Equally as important in
improving margins were continuing improvements at core operations that have been
owned and operated for more than three years. These operations produced gains
from pricing actions and cost-reduction programs that outpaced increases in
depreciation expense and other forces. The majority of gains registered in 1995
and 1994 came from increases in sales volume, followed by the impact of cost
reductions and acquisitions.
Acquisitions
Margins at Columbus and Jacksonville increased by $2.2 million in 1996,
following increases of $1.3 million in 1995 and $3.8 million in 1994. The
improvements in 1996 were caused by improved operating performance at both
plants. The increases reported in the previous two years related mostly to the
partial-year effect in 1994, the year of acquisition, versus the full-year
effect in 1995.
For 1996, average gross margins at these units increased by six percentage
points over the margins reported in the acquisition year of 1994. Major process
changes were introduced in 1995, when margins were relatively consistent with
those in 1994. These longer-term investments and management changes provided
significant benefits in 1996.
Effects of Changes in Sales Volume
Sales volume (other than from acquisitions or pricing actions) declined
slightly, causing a negative effect on gross margin of $1.0 million. The margin
decline can primarily be attributed to the transfer of air filtration grades to
France where production was achieved at profitable levels, but efficiencies were
not at the same level as the transferring domestic plant. Considering the high
volume of business and the wide variety of grades and customer specifications
that have been involved, the transfer has been an important success. Lydall was
able to satisfy tremendous demand in the first half of 1996 directly as a result
of the capability of the European facility to supply air filtration media.
Other dynamics such as new products and market-share changes offset negative
influences including market decay and product discontinuance.
In 1995 and 1994, sales volume changes were significant, creating large
increases in gross margins. The incremental margin generated in 1995 was $6.9
million. In 1994, margins rose by $11.6 million due to changes in sales volume.
In both years, new-product introductions and market-share increases drove gross
margin expansion.
Price Increases in Relation to Cost Increases
Net pricing actions in 1996 produced a decline in overall revenues of
approximately $1.0 million, excluding the effects of acquisitions. At the gross
margin level, however, the Company reported its best ever performance with a net
gain of $2.2 million. Lydall was able to take advantage of weakening commodity
markets to successfully leverage purchases of critical raw materials through its
Lead Buyer Program. This Program capitalizes on aggregation of company-wide
purchases and effective vendor evaluation and negotiation techniques to bring
about meaningful savings. In 1995, Lydall was able to raise prices aggressively
to stay just ahead of rapidly increasing commodity prices, which resulted in a
net surplus of $900 thousand. In 1994, vendor-imposed cost increases exceeded
price increases by $500 thousand.
Cost Reductions
Lydall recorded its third consecutive year of above-average cost reductions at
plant facilities in 1996. A strong company-wide commitment to process
improvements and active solicitation of ideas from all employees are critical
elements of Lydall's Comprehensive Quality Program, also known as Cost of
Quality. The relentless drive to measure and ultimately improve process
efficiencies has helped to expand margins every year since the Program began
over ten years ago. Net savings in 1996 were $2.9 million, following savings of
$3.7 million in 1995 and $3.2 million in 1994. Especially noteworthy were the
positive results achieved at our thermal-material operations at the Westex
Division in North Carolina and at the Manning Division in New York through a
combination of strategically focused capital spending and management programs.
18
<PAGE>
Inventory Effects
Gross margins are affected by inventory write-offs, changes in FIFO inventory
levels, as well as increases or decreases in LIFO reserves. In 1996, the net
effect was a positive $300 thousand, compared to negative effects in 1995 and
1994 of $500 thousand and $800 thousand, respectively.
Other Effects
Other effects, including increased depreciation expense, fixed overhead changes,
and product-mix changes, decreased gross margin by $2.2 million in 1996. This
compares with an increase in 1995 of $500 thousand, and a decrease in 1994 of
$900 thousand.
Statements of Changes in Gross Margin
<TABLE>
<CAPTION>
$ thousands 1996 1995 1994
========================================================================================================
<S> <C> <C> <C>
Prior year's gross margin $77,700 $64,900 $48,500
........................................................................................................
Acquisitions 2,200 1,300 3,800
Effects of changes in sales volume (1,000) 6,900 11,600
Price increases in relation to cost increases 2,200 900 (500)
Cost reductions 2,900 3,700 3,200
Inventory effects 300 (500) (800)
Other effects (2,200) 500 (900)
........................................................................................................
Total change 4,400 12,800 16,400
........................................................................................................
Current year's gross margin $82,100 $77,700 $64,900
........................................................................................................
As a percent of net sales 32.5 30.8 30.5
========================================================================================================
</TABLE>
PRETAX INCOME
- --------------------------------------------------------------------------------
Overview
Pretax income rose to a record $39.9 million in 1996, an 8-percent increase over
1995. Comparable increases over the prior years were 39 percent in 1995 and 57
percent in 1994. Strong internal growth combined with acquisitions drove income
levels higher in both 1995 and 1994.
For the three-year period ended December 31, 1996, pretax income rose by 136
percent from $16.9 million to $39.9 million. Acquisitions accounted for
approximately 17 percent of the rise, while existing operations generated the
balance of the increase, including the effects of nonoperating investments and
financing.
Acquisitions
The Columbus and Jacksonville operations contributed incremental pretax profits
of $1.6 million, $600 thousand, and $1.7 million for 1996, 1995, and 1994,
respectively. In 1994 and 1995, earnings were not significantly influenced by
management as the operations were being assimilated into Lydall. During the past
year, management actions to improve profitability were key to the $1.6 million
pretax profit gain.
Operations
Increased profits from existing operations resulted principally from cost
reductions and efficiency improvements in 1996, a year in which sales volume
gains from internal marketing actions were offset by external influences such as
market decay and design-out of products. Also in 1996 and 1995, the successful,
but expensive, defense against a patent infringement lawsuit decreased results
from existing operations.
19
<PAGE>
Analysis of Results continued
Other expense declined by $200 thousand in 1996 compared with a decrease of $600
thousand in 1995 and an increase of $1.1 million in 1994. During 1995, Lydall
recorded the favorable settlement of a materials contract.
Investments and Financing
Nonoperating investments and financing costs resulted in a net increment to
pretax income in 1996 of $500 thousand. Cash balances grew steadily over the
course of the year, more than covering capital expenditures and the repurchase
of over $10 million of common stock. Interest expense declined by $200 thousand
as debt levels were reduced in accordance with scheduled principal payments. In
1995, a year with no stock repurchases, the effect was a positive $1.5 million.
The effect on pretax earnings in 1994 was negligible.
Statements of Changes in Pretax Income
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prior year's pretax income $36,900 $26,500 $16,900
................................................................................................................
Acquisitions - change in:
Gross margin 2,200 1,300 3,800
Selling, product development,
and administrative expenses (600) (700) (2,100)
................................................................................................................
Total change from acquisitions 1,600 600 1,700
................................................................................................................
Operations - change in:
Gross margin 2,200 11,500 12,600
Selling, product development,
and administrative expenses (1,500) (3,800) (3,600)
Other expense 200 600 (1,100)
................................................................................................................
Total change from operations 900 8,300 7,900
................................................................................................................
Nonoperating investments and financing - change in:
Investment income 300 900 (100)
Interest expense 200 600 100
................................................................................................................
Total change from nonoperating
investments and financing 500 1,500 -
................................................................................................................
Total change 3,000 10,400 9,600
................................................................................................................
Current year's pretax income $39,900 $36,900 $26,500
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting
for Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed
of," ("SFAS 121") was issued. The Statement sets forth guidance as to when to
recognize an impairment of long lived assets, including goodwill, and how to
measure such an impairment. The Statement also requires that long-lived assets
to be disposed of be reported at the lower of carrying amount or fair value,
less cost to sell. The methodology set forth in SFAS 121 is not significantly
different from the Company's existing policies. Therefore, the adoption of the
Statement had no impact on the consolidated financial statements of the Company.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") was issued effective
for the year ended December 31, 1996. The Company
20
<PAGE>
adopted the disclosure requirement of SFAS 123 as presented under "Stock Option
Plans" in the "Notes to Consolidated Financial Statements." As permitted under
SFAS 123, the Company elected not to adopt the fair-value-based method of
accounting for its stock-based compensation plans but has continued to account
for compensation under the provisions of APB No. 25. Accordingly, there was no
effect on the Company's consolidated financial position or results of
operations.
FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
Lydall, Inc. desires to take advantage of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995. In addition to economic
conditions and market trends, the Company considered the following market
circumstances in determining any forward-looking statements made in its 1996
Annual Report and Form 10-K for the fiscal year ended December 31, 1996.
A Major Downturn of the U. S. Automotive Market. Although Lydall's automotive
sales are not solely contingent on the strength of the automotive market, a
significant downturn of the U. S. automotive industry could have a substantial
impact on Lydall's results. Twenty-nine percent of Lydall's total sales in 1996
were to the U. S. automotive market, excluding after market sales.
Lydall's primary automotive products are thermal barriers and heat shields
employed both inside and outside of vehicles. Most of Lydall's products are
supplied to meet unique, niche applications. There is no direct correlation
between the number of Lydall parts on a vehicle and the number of units built,
as with tires or steering wheels for example. Slight fluctuations in U. S.
automotive production have relatively little effect on Lydall's business;
however, a major downward shift could prevent Lydall from achieving its
projected results.
A Significant Change in the Number of Clean Rooms being Built. Lydall's
high-efficiency air filtration business is linked to the fabrication of clean
rooms around the world. In 1995 and in 1994, the demand for these air filtration
media was the strongest the Company has ever seen. In the second half of 1996,
the demand curve began to level. Various independent industry-published
forecasts project excellent long-term growth for clean-room fabrications. Lydall
relies on these forecasts, feedback from its filtration customers, and its own
market knowledge. Lydall's forward-looking statements are based in part on the
belief that the strength of the industry will continue for the foreseeable
future; however, if a significant decline in this market were to occur, it would
have a negative impact on Lydall's results.
Raw-Material Pricing. Raw-material pricing affects all of Lydall's businesses;
however, it particularly impacts the Company's materials-handling products.
These products are made from laminated virgin kraft paperboard, also known as
linerboard. In 1995, costs of linerboard were extremely high, and Lydall, in
turn, raised prices, partially accounting for the higher than average sales
growth in 1995. In 1996, as raw-material costs declined, Lydall lost sales
dollars. Linerboard prices began to stabilize at the end of 1996. Since the
materials-handling business is one area where the market pushes for price
reductions that directly track decreases in raw materials, significant changes
in the pricing of linerboard affect this portion of Lydall's business.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Liquidity Overview
Lydall completed 1996 with $38.2 million in cash and cash equivalents, as well
as $4.9 million in short-term investments. Cash and cash equivalents increased
by $10.4 million during the year, compared with an increase of $16.1 million in
1995 and a decrease of $2.1 million in 1994. In addition to a significant
improvement in its balance sheet in 1996, Lydall continued to expand its
borrowing capacity by increasing stockholders' equity through profitable
operations and decreasing long-term debt. The Company closed the year with
substantial resources to implement its current acquisition strategy in the
future.
On December 20, 1996, Lydall completed the acquisition of Textile Technologies
Industries, Inc., a Hatboro, Pennsylvania, manufacturer of advanced structural
materials sold to the aerospace, marine, medical device, automotive, and
sporting goods industries. The Company paid $2.0 million in cash at closing and
issued an
21
<PAGE>
Analysis of Results continued
$8.0 million note which was paid on January 2, 1997, and a $1.75 million note
which is payable through 1998. The balance of the purchase price will consist of
a working capital adjustment to be settled in 1997.
No acquisitions were completed in 1995. In 1994, Lydall purchased the Columbus
and Jacksonville Operations for a total of $16.8 million in cash and the
assumption of $2.25 million in debt.
Cash Flow Overview
Cash flow from operating activities reached a record $36.9 million in 1996,
based on increased net income and lower levels of working capital. The record
cash flow allowed Lydall to fund a $10.9 million capital spending program, to
repurchase $10.3 million of its common stock, and to increase short-term
investments.
During 1995, cash flow from operating activities was $25.8 million. Negative
effects on working capital included strong sales growth and significant
inflation of certain raw-material costs. These factors were somewhat offset by
improved working capital productivity (turnover) during the year. Investing and
financing activities were moderate, resulting in a large increase in
liquid assets.
In 1994, Lydall produced positive cash flows from working capital changes,
during a period of substantial growth, due to significant improvement in working
capital turnover. Investing activities totaled $26.0 million, including two
acquisitions made during the year.
The following table summarizes major components of Lydall's after-tax cash flow
from operating activities:
<TABLE>
<CAPTION>
$ thousands 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $24,700 $22,400 $15,500
Depreciation and amortization 9,200 8,600 7,500
Working capital changes 3,600 (6,300) 4,900
Other changes (600) 1,100 (1,100)
...................................................................................................................
Net cash provided by operating activities $36,900 $25,800 $26,800
...................................................................................................................
Percent change from previous year 43 (4) 47
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Summary Statements of Cash Flows
The following table summarizes cash flows for the years 1996, 1995, and 1994.
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided by operating activities $36,900 $25,800 $26,800
Key investing activities:
Acquisitions (2,000) - (16,800)
Capital additions and disposals, net (10,000) (11,400) (7,300)
Sale (purchase) of investments, net (3,000) 2,500 (1,900)
...................................................................................................................
Net cash used for investing activities (15,000) (8,900) (26,000)
...................................................................................................................
Key financing activities:
Payment of debt (2,900) (2,900) (2,700)
Issuance of common stock 1,800 2,100 500
Acquisition of common stock (10,300) - (800)
...................................................................................................................
Net cash used for financing activities (11,400) (800) (3,000)
...................................................................................................................
Other increase (decrease), net (100) - 100
...................................................................................................................
Increase (decrease) in cash and cash equivalents $10,400 $16,100 $(2,100)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
Working Capital Productivity
Lydall measures the turnover of working capital to determine how well net
short-term operating resources are employed by its operating entities. Working
capital productivity is defined as annual sales divided by the quarterly average
of all receivables and inventory, less accounts payable.
Excluding the assets of the Hatboro Operation purchased in late December, Lydall
demonstrated improved working capital productivity for the fifth consecutive
year in 1996. Over this period, productivity improved from 5.17 times in 1991 to
8.24 times in 1996, an increase of 59 percent.
<TABLE>
<CAPTION>
$ thousands 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $252,700 $252,100 $213,100
Average working capital 30,700 34,200 29,700
Working capital productivity 8.24 7.37 7.17
Percent change from previous year 12 3 12
- --------------------------------------------------------------------------------
</TABLE>
Inventory Turnover
Lydall focuses on continuously improving all of its processes. Particular
attention is paid to managing inventory levels. Excluding the inventory of the
Hatboro Operation acquired in late December, inventory turnover increased by 6
percent in 1996 to 11.8 times from 11.1 times in 1995 and 10.2 times in 1994.
Measured against results from five years ago in 1991, when turnover was 6.6
times, turnover has increased by 79 percent.
Future Cash Requirements
Cash requirements for 1997 will include the funding of ongoing operations,
capital expenditures, and acquisitions, including $9.0 million in debt payments
relating to the purchase of the Hatboro Operation. Capital expenditures,
budgeted at $16.4 million for 1997, will focus on two key strategic areas:
Lydall 2000, a company-wide information technology hardware and software
platform, and process improvements to lower Lydall's Cost of Quality.
Management expects to finance capital expenditures, the balance of the Hatboro
purchase, and ongoing operating cash requirements from cash on hand and cash
generated from operations.
Credit Arrangements
Lydall maintains domestic and foreign credit arrangements totaling over $20
million, the majority of which are renewed annually. Lydall primarily pays
interest at the lower of prime or money market rates and compensates its banks
for services on a fee basis. At December 31, 1996 and 1995, no amounts were
outstanding on domestic or foreign lines of credit.
Capital Structure
In recent years, Lydall's strong cash flow from operations has significantly
exceeded capital spending needs, debt payments, and capital to acquire five
operating companies. In addition, Lydall repurchased over $10 million of common
stock in 1996 with accumulated cash. At December 31, 1996, the Company
maintained cash and investments well in excess of its long-term indebtedness.
Lydall continues to explore its core businesses and related markets to locate
suitable strategic acquisitions and maintains substantial financial resources to
complete transactions. Borrowing capacity increased significantly in 1996.
Assuming a debt-to-total-capitalization ratio of 40 percent, a conservative
model that would sustain Lydall's high-quality credit rating, the Company could
have borrowed approximately $75 million as of December 31, 1996. Lydall could
borrow considerably more without compromising the Company's financial position.
Management has indicated a willingness to exceed its stated long-term
debt-to-total-capitalization target in the short-term to acquire a compelling
strategic business.
23
<PAGE>
Key Financial Items
Cash and Cash Equivalents. Cash and cash equivalents increased to $38.2
million in 1996 from $27.8 million in 1995.
Short-term Investments. Lydall invests in highly liquid investments with
maturities greater than three months at the time the investments are made. The
Company had short-term investments of $4.9 million and $913 thousand at
December 31, 1996 and 1995, respectively.
Receivables. Receivables were $34.0 million in 1996 and $34.2 million in 1995,
of which trade receivables were $32.7 million and $32.9 million for 1996 and
1995, respectively. Days of sales outstanding in trade receivables were 50 in
1996 and 49 in 1995. Foreign and export sales were approximately 21 percent of
total sales in 1996, 22 percent in 1995, and 21 percent in 1994. These sales are
concentrated primarily in Europe, the Far East, Mexico, and Canada.
Inventories. Inventories were $14.7 million at December 31, 1996 and $14.1
million at December 31, 1995. Inventory levels were reduced by $1.7 million and
$2.5 million at the end of 1996 and 1995, respectively, to reflect the LIFO
method of inventory valuation.
Working Capital. Working capital increased to $53.4 million on December 31, 1996
from $52.7 million on December 31, 1995. The ratio of current assets to current
liabilities decreased to 2.24 from 2.77.
Capital Asset Expenditures. Capital asset expenditures were $10.9 million in
1996, $12.0 million in 1995, and $8.0 million in 1994. Depreciation was $7.8
million in 1996, $7.1 million in 1995, and $6.1 million in 1994. The Company's
1997 Capital Plan calls for commitments of $16.4 million with spending focused
in two critical areas -- process improvements that lower the Company's Cost of
Quality and Lydall 2000, a company-wide information technology hardware and
software platform. Expenditures in 1997 are expected to be financed from cash
balances or cash generated from operations.
Debt to Total Capitalization. Debt to total capitalization increased to .13
in 1996 from .09 in 1995.
Common Stockholders' Equity. Common stockholders' equity increased to $117.8
million at December 31, 1996, an increase of 15.7 percent from $101.8 million
last year. On a per-share basis, common stockholders' equity increased to $6.89
in 1996 from $5.88 in 1995.
Dividend Policy. The Company does not pay a cash dividend on its common stock
and does not anticipate doing so for the foreseeable future. Cash will be
reinvested into core businesses which should continue to earn Lydall
stockholders an excellent overall return on their common stock investment.
Research and Development. Research and development investment was $6.8
million in 1996, $6.2 million in 1995, and $5.5 million in 1994.
24
<PAGE>
Income Statements
<TABLE>
<CAPTION>
In thousands except per-share data For the years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $252,652 $252,128 $213,072
Cost of sales 170,597 174,430 148,188
...........................................................................................................................
Gross margin 82,055 77,698 64,884
Selling, product development,
and administrative expenses 42,778 40,668 36,211
...........................................................................................................................
Operating income 39,277 37,030 28,673
...........................................................................................................................
Other (income) expense:
Investment income (1,389) (1,113) (231)
Interest expense 518 778 1,335
Other 294 490 1,033
...........................................................................................................................
(577) 155 2,137
...........................................................................................................................
Income before income taxes 39,854 36,875 26,536
Income tax expense 15,118 14,437 11,033
...........................................................................................................................
Net income $ 24,736 $ 22,438 $ 15,503
- ---------------------------------------------------------------------------------------------------------------------------
Net income per common share/1/ $ 1.37 $ 1.23 $ .86
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common stock and
equivalents outstanding/1/ 18,107 18,313 17,953
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
/1/ 1994 restated to reflect a two-for-one stock split distributed in 1995.
25
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
In thousands except share data December 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 38,226 $ 27,820
Short-term investments 4,941 913
Accounts receivable (less allowance for doubtful
receivables of $1,727 in 1996 and $1,938 in 1995) 33,953 34,202
Inventories:
Finished goods 5,965 6,033
Work in process 3,712 3,367
Raw materials and supplies 6,743 7,217
LIFO reserve (1,740) (2,493)
...........................................................................................................................
Total inventories 14,680 14,124
Prepaid expenses 959 820
Deferred tax assets 3,612 4,590
...........................................................................................................................
Total current assets 96,371 82,469
Property, plant, and equipment, at cost:
Land 957 874
Buildings and improvements 20,879 19,143
Machinery and equipment 81,719 77,090
Office equipment 8,564 7,189
Vehicles 1,228 1,171
...........................................................................................................................
113,347 105,467
Less accumulated depreciation (51,309) (45,393)
...........................................................................................................................
62,038 60,074
Other noncurrent assets:
Goodwill, at cost (net of accumulated amortization of
$1,688 in 1996 and $1,103 in 1995) 20,259 10,584
Other assets, at cost (net of accumulated amortization
of $7,741 in 1996 and $8,446 in 1995) 3,451 4,945
...........................................................................................................................
23,710 15,529
...........................................................................................................................
Total assets $182,119 $158,072
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
<TABLE>
<CAPTION>
In thousands except share data December 31, 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 4,450 $ 2,871
Notes payable 8,000 -
Accounts payable 15,758 14,770
Accrued taxes 1,322 263
Accrued payroll and other compensation 6,014 5,426
Other accrued liabilities 7,469 6,409
...........................................................................................................................
Total current liabilities 43,013 29,739
Long-term debt 5,050 7,750
Deferred tax liabilities 12,667 14,207
Other long-term liabilities 3,545 4,565
Contingencies - -
Stockholders' equity:
Preferred stock - -
Common stock, par value $.10 per share,
authorized 30,000,000 shares, issued
21,122,913 shares in 1996 and
20,893,954 shares in 1995 2,112 2,089
Capital in excess of par value 34,235 32,448
Foreign currency translation adjustment 1,425 2,091
Equity adjustments 39 (459)
Retained earnings 103,197 78,461
...........................................................................................................................
141,008 114,630
Less cost of 4,030,902 shares of common stock
in treasury in 1996 and 3,573,702 in 1995 (23,164) (12,819)
...........................................................................................................................
Total stockholders' equity 117,844 101,811
...........................................................................................................................
Total liabilities and stockholders' equity $182,119 $158,072
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
In thousands For the years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $24,736 $22,438 $15,503
...........................................................................................................................
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 7,824 7,122 6,101
Amortization 1,357 1,510 1,403
Changes in operating assets and liabilities,
excluding effects from acquisitions:
Accounts receivable 2,128 (2,015) (5,503)
Inventories 860 (376) 645
Other assets (579) 170 93
Accounts payable (196) (2,503) 5,465
Accrued taxes 1,087 (1,986) 1,532
Accrued payroll and other accrued liabilities 263 594 2,729
Deferred income taxes (620) 1,068 (954)
Other long-term liabilities - (263) (171)
...........................................................................................................................
Total adjustments 12,124 3,321 11,340
...........................................................................................................................
Net cash provided by operating activities 36,860 25,759 26,843
...........................................................................................................................
Cash flows from investing activities:
Acquisitions (2,030) - (16,846)
Additions of property, plant, and equipment (10,893) (12,006) (7,979)
Disposals of property, plant, and equipment, net 894 632 687
Sale (purchase) of investments, net (2,940) 2,451 (1,863)
...........................................................................................................................
Net cash used for investing activities (14,969) (8,923) (26,001)
...........................................................................................................................
Cash flows from financing activities:
Long-term debt payments (2,863) (2,856) (2,724)
Issuance of common stock 1,810 2,105 519
Acquisition of common stock (10,345) - (855)
...........................................................................................................................
Net cash used for financing activities (11,398) (751) (3,060)
...........................................................................................................................
Effect of exchange rate changes on cash (87) 51 82
...........................................................................................................................
Increase (decrease) in cash and cash equivalents 10,406 16,136 (2,136)
Cash and cash equivalents at beginning of year 27,820 11,684 13,820
...........................................................................................................................
Cash and cash equivalents at end of year $38,226 $27,820 $11,684
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Cash Flow Information
Cash paid during the year for:
Interest $ 897 $ 875 $ 1,339
Income taxes 13,985 14,959 10,894
Noncash transactions:
Amounts payable for acquired operations 10,527 - 2,250
Additional minimum pension liability 416 75 -
Unrealized gains/losses on available-
for-sale securities 82 13 18
Stock split effected in the form of a stock dividend - 1,041 -
Reclassification between short-term and long-term
investments, net - 447 1,984
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Foreign
Capital in Currency Cost of Total
Preferred Common Excess of Translation Equity Retained Stock in Stockholders'
In thousands Stock Stock Par Value Adjustment Adjustments Earnings Treasury Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ - $1,003 $30,910 $ 117 $(529) $ 40,520 $ (11,964) $ 60,057
Stock options exercised 10 509 519
Purchase of treasury shares (855) (855)
Foreign currency translation
adjustment 1,021 1,021
Equity adjustments (18) (18)
Net income 15,503 15,503
...................................................................................................................................
Balance at December 31, 1994 - 1,013 31,419 1,138 (547) 56,023 (12,819) 76,227
Two-for-one stock split in the form
of a stock dividend 1,041 (1,041) -
Stock options exercised 35 2,070 2,105
Foreign currency translation
adjustment 953 953
Equity adjustments 88 88
Net income 22,438 22,438
...................................................................................................................................
Balance at December 31, 1995 - 2,089 32,448 2,091 (459) 78,461 (12,819) 101,811
Stock options exercised 23 1,787 1,810
Purchase of treasury shares (10,345) (10,345)
Foreign currency translation
adjustment (666) (666)
Equity adjustments 498 498
Net income 24,736 24,736
...................................................................................................................................
Balance at December 31, 1996 $ - $2,112 $34,235 $1,425 $ 39 $103,197 $ (23,164) $117,844
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
29
<PAGE>
Notes to Consolidated Financial Statements
Significant Accounting Policies
Principles of consolidation. The consolidated financial statements include the
accounts of Lydall, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of estimates. The preparation of the consolidated 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, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from estimates.
Cash and cash equivalents. Cash and cash equivalents include cash on hand and
highly liquid investments with a maturity of three months or less at the date of
purchase. The investments are stated at cost plus accrued interest which
approximates market value.
Short-term investments. Lydall invests in highly liquid investments with
maturities greater than three months at the time the investments are made. The
investments are recorded at the lower of cost or market, plus accrued interest.
Concentration of risk. Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments, and trade receivables. The Company places
its cash, cash equivalents and short-term investments in high-quality financial
institutions and instruments. Concentrations of credit risk with respect to
trade receivables are limited by the large number of customers comprising the
Company's customer base and their dispersion across many different industries
and geographies. The Company performs ongoing credit evaluations of its
customers' financial conditions and generally does not require collateral. Sales
to the automotive market were 32.3 percent of the Company's 1996 total sales
compared with 32.9 percent in 1995 and 31.2 percent in 1994. Sales to the Ford
Motor Co. represented 16.6 percent and 13.7 percent of Lydall's total sales in
1996 and in 1995, respectively. No other single customer accounted for more than
10 percent of total sales in 1996 or in 1995. In 1994, no customer accounted for
more than 10 percent of total sales. As of December 31, 1996, the Company had no
other significant concentrations of risk.
Inventories. Approximately 59 percent in 1996 and 68 percent in 1995 of the
inventories have been valued on a last-in, first-out (LIFO) method and the
balance on a first-in, first-out (FIFO) method at the lower of cost or market.
Depreciation and amortization. Property, plant, and equipment are depreciated
over their estimated useful lives on the straight-line method for financial
statement purposes. Leasehold improvements are depreciated on a straight-line
basis over the term of the lease or the life of the asset, whichever is shorter.
Intangibles. Goodwill and other intangibles are being amortized on a
straight-line basis over periods not exceeding 25 years. The carrying amount of
the cost in excess of the net assets acquired is evaluated for future
recoverability on a recurring basis.
Research and development. Costs are charged to expense as incurred.
Revenue recognition. Lydall recognizes revenues when the product is shipped.
Earnings per share. Earnings per common share are based on net income divided by
the weighted average number of common shares outstanding during the period,
including the effect of stock options, stock awards and warrants where such
effect is dilutive. Fully diluted earnings per share are not presented since the
dilution is negligible.
30
<PAGE>
Income taxes. The provision for income taxes is based upon income reported in
the accompanying financial statements. Deferred income taxes reflect the impact
of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax
purposes. In accordance with SFAS 109, these deferred taxes are measured by
applying currently enacted tax laws.
Foreign operations. The Company operates a manufacturing plant in
Saint-Rivalain, Melrand, France. Foreign sales were $17.6 million, $17.0
million, and $14.4 million, for the years ended December 31, 1996, 1995, and
1994, respectively. For the year ended December 31, 1996, the French operation
incurred losses of $796 thousand. For the year ended December 31, 1995, the
French operation earned $127 thousand excluding the effect of a statutory tax
rate increase on deferred tax balances which negatively impacted income by $292
thousand. For the year ended December 31, 1994, net income was $192 thousand.
Total foreign assets were $18.5 million and $20.4 million at December 31, 1996
and 1995, respectively.
Translation of foreign currencies. Assets and liabilities of the foreign
subsidiary are translated at exchange rates prevailing on the balance sheet
date; revenues and expenses are translated at average exchange rates prevailing
during the period; and elements of stockholders' equity are translated at
historical rates. Any resulting translation gains and losses are reported
separately in Stockholders' Equity.
Equity adjustments. Equity adjustments consist of a pension liability adjustment
and an adjustment for unrealized gains and losses on securities held as
available-for-sale.
Restatement. Where appropriate, prior-year share amounts and per-share
figures have been restated to reflect a two-for-one stock split distributed in
1995.
Recently issued accounting standards. In March 1995, Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and For Long-Lived Assets to be Disposed of," ("SFAS 121") was issued. The
Statement sets forth guidance as to when to recognize an impairment of
long-lived assets, including goodwill, and how to measure such an impairment.
The Statement also requires that long-lived assets to be disposed of be reported
at the lower of carrying amount or fair value, less cost to sell. The
methodology set forth in SFAS 121 is not significantly different from the
Company's existing policies. Therefore, the adoption of the Statement had no
impact on the consolidated financial statements of the Company.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") was issued effective for
the year ended December 31, 1996. The Company adopted the disclosure requirement
of SFAS 123 as presented under "Stock Option Plans" in the "Notes to
Consolidated Financial Statements." As permitted under SFAS 123, the Company
elected not to adopt the fair-value-based method of accounting for its employee
stock-based compensation plans, but has continued to account for compensation
under the provisions of APB No. 25. Accordingly, there was no effect on the
Company's consolidated financial position or results of operations.
Investments
Investments at December 31, 1996 and 1995 consisted of available-for-sale debt
and equity securities. The carrying value of these securities was $42.5 million
in 1996 and $28.7 million in 1995, both of which approximated fair market value.
In 1996, $37.6 million was classified in cash equivalents and $4.9 million in
short-term investments. For 1995, $26.8 million was classified in cash
equivalents, $913 thousand in short-term investments, and $1.0 million in
long-term investments.
31
<PAGE>
Notes to Consolidated Financial Statements continued
The amortized costs of investments in debt securities by contractual maturity
are shown below.
<TABLE>
<CAPTION>
In thousands December 31, 1996 Available-for-Sale Securities
- ---------------------------------------------------------------------
<S> <C>
Due in one year or less $6,350
Due after one year through five years 309
Due after five years through ten years 210
Due after ten years 2,033
.....................................................................
$8,902
</TABLE>
- ---------------------------------------------------------------------
The net unrealized gains and losses on the available-for-sale portfolio were
immaterial at December 31, 1996 and 1995. The gross realized gains and losses on
sales of available-for-sale securities were immaterial to the consolidated
financial statements during both years. Realized gains and losses are based on
specific identification of the security being sold.
Long-term Debt
<TABLE>
<CAPTION>
In thousands December 31, 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
7.25% Note Purchase Agreement, payable
annually to 1999 $ 6,500 $ 8,700
5% Promissory Note, balance due in full in 1997 1,250 1,750
5.48% Indemnification Note, $1,000,000 payable
in 1997, balance due in full in 1998 1,750 -
French money market rate plus 0.8% bank loan,
payable quarterly through 1996;
machinery and equipment of the Axohm
Division serve as collateral - 171
...........................................................................................................
9,500 10,621
Less portion due within one year (4,450) (2,871)
...........................................................................................................
$ 5,050 $ 7,750
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Note Purchase Agreement is restricted by a debt covenant, among others, that
requires a debt-to-capital ratio of no more than .45 in order to borrow under
long-term debt agreements in the future. While by commonly used methods Lydall's
current debt-to-capital ratio is .13, it is .12 as defined by the terms of this
agreement as of December 31, 1996.
Long-term debt payment requirements:
<TABLE>
<CAPTION>
In thousands 1997 1998 1999 Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term debt payments $4,450 $2,950 $2,100 $9,500
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
Credit Arrangements
Lydall maintains domestic and foreign bank credit arrangements totaling over $20
million, the majority of which are renewed annually. Lydall primarily pays
interest at the lower of prime or money market rates and compensates its banks
for services on a fee basis. At December 31, 1996, and 1995, no amounts were
outstanding on the domestic or foreign lines of credit.
Long-term Operating Leases
Lydall has operating leases which cost the Company $1.7 million in 1996, $1.8
million in 1995, and $1.9 million in 1994. These contracts range from vehicle
leases to building leases which require payment of property taxes, insurance,
repairs and other operating costs.
<TABLE>
<CAPTION>
Future net lease commitments under noncancelable operating leases are:
In thousands 1997 1998 1999 2000 2001 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net lease payments $1,641 $1,439 $1,251 $966 $914 $2,023 $8,234
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Acquisitions and Other Investments
On December 20, 1996, the Company acquired certain assets and assumed certain
liabilities of Textile Technologies Industries, Inc. ("Hatboro Operation"). The
Hatboro Operation is a manufacturer of components utilized in highly
specialized, advanced structural materials which are sold to the aerospace,
marine, medical device, automotive and sporting goods industries. The Company
paid $2.0 million in cash at closing and issued an $8.0 million note which was
paid on January 2, 1997, and a $1.75 million note which is payable through 1998.
The balance of the purchase price will consist of a working capital adjustment
to be settled in 1997. As a result of this purchase, the Company recorded
goodwill of $10.3 million. The results of the Hatboro Operation from the date of
acquisition to year-end were immaterial. The pro forma effect on the Company's
results of operations for the years ended December 31, 1996 and 1995, had the
acquisition occurred at the beginning of each respective period, is not
material.
On February 28, 1994, the Company acquired for $15 million in cash and a note
payable of $2.25 million, certain assets and assumed certain liabilities of the
Clecon Molding Division of Standard Packaging, Inc. ("Columbus Operation"). As a
result of this purchase, the Company recorded goodwill and other intangible
assets of approximately $11.4 million. The Columbus Operation is a designer and
manufacturer of thermal and acoustical insulation products sold to the
automotive market. The results of the Columbus Operation since the date of
acquisition have been included in the Company's consolidated results.
On June 30, 1994, the Company acquired the laminates operation of Riverwood
International Georgia Inc. located in Jacksonville, Florida ("Jacksonville
Operation"). The Company purchased certain assets for approximately $1.8
million. This operation, which manufactures materials-handling slipsheets,
directly complemented Lydall's existing slipsheet business in Richmond,
Virginia. The results of the Jacksonville Operation since the date of
acquisition have been included in the Company's consolidated results.
The following pro forma consolidated information of Lydall, Inc. reflects the
Columbus and Jacksonville acquisitions described above as if the acquisitions
had occurred at the beginning of the period presented.
<TABLE>
<CAPTION>
$ thousands except per-share data 1994
- ------------------------------------------------------------------------------
<S> <C>
Sales $220,968
Net income 16,020
Net income per common share .89
- ------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
Notes to Consolidated Financial Statements continued
The pro forma consolidated information is presented for informational purposes
only and does not purport to be indicative of results that would actually have
been obtained if the acquisitions had been in effect for the periods indicated
or of results that may be obtained in the future.
Capital Stock
Preferred Stock. The Company has a class of Serial Preferred Stock with a par
value of $1. None of the 500,000 authorized shares has been issued.
Common Stock. At the end of 1996, 1,855 Lydall stockholders of record held
17,092,011 shares of Common Stock. Approximately 8 percent of the Company's
Common Stock was owned by Lydall's officers and directors and their immediate
families. Other Lydall employees, their families, and Lydall associates owned an
additional 9 percent either directly or through participation in the Company's
Employee Stock Ownership Trust.
On May 10, 1995, the Company increased its authorized shares to 30,000,000 from
15,000,000. Also on that date, Lydall's Board of Directors declared a
two-for-one stock split in the form of a stock dividend which resulted in the
issuance of 10,413,216 shares of previously unissued Common Stock. December 31,
1995 balances reflect the split with an increase in Common Stock and a reduction
in Capital in Excess of Par Value of $1.0 million. The distribution was made on
June 21, 1995 to stockholders of record on May 24, 1995. All earnings-per-share
information in this report prior to the distribution date has been adjusted to
reflect the 1995 stock split.
Stock Option Plans
At December 31, 1996, the Company had three stock option plans under which
employees and directors have options or warrants to purchase Lydall Common
Stock. Under these plans -- the 1984 Outside Directors' Warrant Plan, the 1982
Stock Incentive Compensation Plan, and the 1992 Stock Incentive Compensation
Plan -- options are granted at fair market value on the grant date and expire
ten years after the grant date. In most cases, options vest at a rate of 25
percent per year starting with the first anniversary of the award. A few
incentive stock option (ISO) awards have an extended vesting period to comply
with IRS regulations, which cap the total dollar amount of ISO awards that can
vest in one year for an individual at $100,000. The Warrant and 1982 Plans have
expired, therefore, no further options can be granted under these plans. The
1992 Plan provides for automatic acceleration of vesting in the event of a
change in control of the Company. The Plan also provides for the use of shares
of Lydall Common Stock in lieu of cash to exercise options if the shares are
held for more than six months and if the Compensation and Stock Option Committee
of the Board of Directors approves this form of exercise.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's active stock option plan been determined
based on the fair value at the grant dates for awards under the plan consistent
with the method of SFAS 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $24,736 $22,438
Pro forma 24,363 22,412
Net income per common share As reported $ 1.37 $ 1.23
Pro forma 1.35 1.22
- ---------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated for the above disclosure on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
zero-dividend yield for both years; expected volatility of 31 and 28 percent;
risk-free interest rates of 6.1 and 5.6 percent; and expected lives of 6 years
for 1996 and 1995.
34
<PAGE>
A summary of the status of the Company's stock option plans as of December 31,
1996, 1995, and 1994, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
........................ ......................... .......
Weighted-Average Weighted-Average
In thousands except per-share data Shares Exercise Price Shares Exercise Price Shares
==========================================================================================================
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,822 $ 9.63 2,323 $ 6.85 2,285
Granted 191 23.41 142 25.38 236
Exercised (229) 6.21 (643) 3.05 (192)
Forfeited (12) 16.85 - - (6)
.................................... ...... ...... ......
Outstanding at end of year 1,772 11.51 1,822 9.63 2,323
.................................... ...... ...... ......
Options exercisable at year-end 1,176 1,115 1,421
Shares reserved for grants 424 603 745
Weighted-average fair value of
options granted during the year $10.07 $10.12
==========================================================================================================
</TABLE>
In 1994, the option price of outstanding shares ranged from $1.55 to $16.75 per
share. Option exercises in 1994 ranged from $1.47 to $9.92.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------
Number Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
===================================================================================== ==============================
<S> <C> <C> <C> <C> <C>
$ 1.85 to 2.83 232,208 1.5 years $ 2.29 232,208 $ 2.29
4.21 to 5.85 260,793 3.5 4.53 260,793 4.53
8.21 to 10.67 718,012 6.0 9.58 533,138 9.39
13.81 to 18.06 243,272 7.9 16.59 118,868 16.56
22.63 to 26.00 317,446 9.4 24.44 31,398 26.00
................ ......... .........
$ 1.85 to 26.00 1,771,731 5.9 11.51 1,176,405 8.08
===================================================================================== ==============================
</TABLE>
Employer-Sponsored Benefit Plans
The Company contributes to four defined benefit pension plans which cover
substantially all domestic Lydall employees. The pension plans are
noncontributory, and benefits are based on either years of service or eligible
compensation paid while a participant is in a plan. The Company's funding policy
is to fund not less than the ERISA minimum funding standard nor more than the
maximum amount which can be deducted for federal income tax purposes.
The following items are the components of net pension cost:
<TABLE>
<CAPTION>
In thousands For the years ended December 31, 1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Service cost -- benefits earned during the year $ 1,048 $ 850 $ 851
Interest cost on projected benefit obligations 1,262 1,125 1,025
Actual (return) loss on plan assets (1,703) (2,081) 75
Net amortization and deferral 451 1,083 (1,020)
.........................................................................................................
Net pension cost $ 1,058 $ 977 $ 931
=========================================================================================================
</TABLE>
35
<PAGE>
Notes to Consolidated Financial Statements continued
Plan assets include investments in bonds and equity securities. Actuarial
computations, which used the "projected unit credit" method and the "unit
credit" method, assumed the following: discount rates on benefit obligations of
7.50 percent for 1996, 7.25 percent for 1995, and 7.75 percent for 1994;
expected long-term rates of return on plan assets of 9.25 percent for 1996 and
1995 and 9.5 percent for 1994; and annual compensation increases of 5.0 percent
for 1996 and 1995 and 5.25 percent for 1994. The Company determines the assumed
discount rate, long-term rate, and annual compensation increase rate for each
year. The following table presents a reconciliation of the funded status of the
plans:
<TABLE>
<CAPTION>
1996 1995
............................................. ...........................................
Plans in Which Plans in Which Plans in Which Plans in Which
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Exceed Accumulated Benefits Exceed
In thousands December 31, Benefits Assets Total Benefits Assets Total
=================================================================================================================
Actuarial present value of
benefit obligations:
<S> <C> <C> <C> <C> <C> <C>
Vested $13,464 $322 $13,786 $9,384 $4,069 $13,453
Nonvested 686 23 709 249 103 352
..................................................................................................................
Accumulated benefit
obligations 14,150 345 14,495 9,633 4,172 13,805
Additional benefits related
to assumed future
compensation levels 2,932 - 2,932 2,805 - 2,805
..................................................................................................................
Projected benefit obligations 17,082 345 17,427 12,438 4,172 16,610
Plan assets at fair
market value 15,279 322 15,601 9,900 3,622 13,522
..................................................................................................................
Projected benefit obligations
in excess of the
plan assets (1,803) (23) (1,826) (2,538) (550) (3,088)
Unrecognized net assets (614) (17) (631) (579) (155) (734)
Unrecognized prior
service cost 117 50 167 (159) 334 175
Unrecognized net losses 2,184 76 2,260 2,779 860 3,639
Additional minimum liability - (109) (109) - (1,039) (1,039)
..................................................................................................................
Accrued pension cost
included in liabilities $ (116) $ (23) $ (139) $ (497) $ (550) $(1,047)
==================================================================================================================
</TABLE>
The Company sponsors a Stock Purchase Plan, Profit Sharing Plan, and 401(k)
Plan. Contributions are determined under various formulas. Employer
contributions to these plans amounted to $1.9 million in 1996, $1.7 million in
1995, and $1.4 million in 1994.
Postemployment, Postretirement and Deferred Compensation
While it is not Lydall's practice to provide health care or life insurance for
retired employees, it does so for some retired employees of certain units
acquired before 1990. These benefits are unfunded. The plan participants are
primarily retirees; therefore, the postretirement benefit transition obligation
of $691 thousand is being amortized over the actuarially determined average
remaining future lifetime of the plan participants.
The discount rates used in determining the accumulated postretirement benefit
obligations were 7.75 percent at December 31, 1996 and 1995. The health-care
cost trend rate was 10 percent, gradually declining
36
<PAGE>
to 5.5 percent over a five-year period both in 1996 and 1995. A 1-percent
increase in the health-care cost trend rates would cause the accumulated benefit
obligation to increase by $19 thousand. The increase in the service and interest
components of the 1996 postretirement benefit cost is immaterial. The total
expense was $110 thousand for 1996, $111 thousand for 1995, and $136 thousand
for 1994.
The Company provides deferred compensation to a small number of former
employees, and has a deferred compensation plan which was frozen as of December
31, 1996, that provides the Company's outside directors and Chairman with
compensation upon their retirement from service with the Board. In addition, in
1994, the Company adopted a Supplemental Executive Retirement Plan ("SERP")
which provides supplemental income payments after retirement for senior
executives. The total net deferred compensation expense related to these three
plans was $246 thousand in 1996, $203 thousand in 1995, and $105 thousand in
1994.
Quarterly Financial Information (Unaudited)
The following table summarizes quarterly financial information for 1996 and
1995. In management's opinion, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the information for such
quarters have been reflected below:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
In thousands .................. .................. .................. .................
except per-share data 1996 1995 1996 1995 1996 1995 1996 1995
=========================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $65,794 $62,736 $67,669 $65,552 $59,707 $61,487 $59,482 $62,353
.........................................................................................................
Gross margin 20,791 19,226 21,522 20,024 19,399 18,915 20,343 19,533
.........................................................................................................
Net income $ 5,965 $ 5,306 $ 6,871 $ 5,872 $ 5,780 $ 5,447 $ 6,120 $ 5,813
.........................................................................................................
Net income per
common share $ .33 $ .29 $ .38 $ .32 $ .32 $ .30 $ .34 $ .32
=========================================================================================================
</TABLE>
Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
In thousands For the years ended December 31, 1996 1995 1994
=========================================================================================================
Current
<S> <C> <C> <C>
Federal $13,662 $11,278 $ 9,802
State 2,072 1,893 2,057
Foreign 171 (45) 142
.........................................................................................................
Total current 15,905 13,126 12,001
Deferred
Federal (385) 926 (895)
State 194 (47) 7
Foreign (596) 432 (80)
.........................................................................................................
Total deferred (787) 1,311 (968)
.........................................................................................................
Provision for income taxes $15,118 $14,437 $11,033
=========================================================================================================
</TABLE>
The statutory tax rate in France increased from 33.3 percent to 36.6 percent
retroactive to January 1, 1995.
37
<PAGE>
Notes to Consolidated Financial Statements continued
The provision for income taxes for 1995 includes $292 thousand for the impact of
the higher tax rate on the deferred tax liability balance.
The following is a reconciliation of the difference between the actual provision
for income taxes and the provision computed by applying the federal statutory
tax rate on earnings.
<TABLE>
<CAPTION>
For the years ended December 31, 1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Statutory federal income tax rates 35% 35% 35%
State income taxes, net of federal
tax deduction 3.7 3.3 5.1
Exempt FSC foreign trade income (.9) (1.5) (1.1)
Tax exempt income (.9) - -
Tax on income of foreign subsidiary - - (.1)
Other 1.0 1.7 2.7
Tax rate changes - .7 -
..........................................................................................................
Effective income tax rates 37.9% 39.2% 41.6%
=========================================================================================================
</TABLE>
The following is a schedule of the net current deferred tax assets and long-term
deferred tax liability accounts by tax jurisdiction as of December 31:
<TABLE>
<CAPTION>
1996 1995
............................ ...........................
Current Long-term Current Long-term
Deferred Deferred Tax Deferred Deferred Tax
In thousands Tax Assets Liabilities Tax Assets Liabilities
=========================================================================================================
<S> <C> <C> <C> <C>
Federal $2,344 $ 7,256 $2,195 $ 7,267
State 960 2,556 2,277 3,679
Foreign 308 2,855 118 3,261
.........................................................................................................
Total $3,612 $12,667 $4,590 $14,207
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996 1995
............................ ...........................
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
In thousands Assets Liabilities Assets Liabilities
=========================================================================================================
<S> <C> <C> <C> <C>
Accounts receivable $ 709 $ - $ 827 $ -
Inventory 599 - 580 -
Plant and equipment - 10,258 - 10,412
Other accrued expenses 1,799 - 1,257 -
Retirement accounts 529 - 498 -
Other, net - 2,433 - 2,367
.........................................................................................................
Total $3,636 $12,691 $3,162 $12,779
=========================================================================================================
</TABLE>
38
<PAGE>
The Internal Revenue Service is currently examining the Company's federal income
tax returns for the years 1990 through 1992. Lydall's management believes any
potential issues resulting from this examination will be immaterial to the
consolidated financial position or results of operations of the Company.
The Internal Revenue Service conducted its examination of the Company's federal
income tax returns for the years 1987, 1988, and 1989 and proposed various
adjustments which increased federal taxable income in those years. During
December 1994, Lydall settled all but one issue raised during the examination
and paid approximately $600 thousand in taxes and $400 thousand in interest. The
final issue was resolved in January of 1996. Lydall paid approximately $277
thousand in taxes and $251 thousand in interest, which had been accrued at
December 31, 1995.
Unremitted earnings of foreign subsidiaries which are deemed to be permanently
invested amounted to $933 thousand at December 31, 1996. The unrecognized
deferred tax liability on those earnings is not practical to calculate.
Contingencies
In the mid-1980's, the United States Environmental Protection Agency ("EPA")
notified a former subsidiary of the Company that it and other entities may be
potentially responsible in connection with the release of hazardous substances
at a landfill and property located adjacent to a landfill located in Michigan
City, Indiana. The two sites have been combined and are viewed by the EPA as one
site. The preliminary indication, based on the Site Steering Committee's
volumetric analysis, is that the alleged contribution to the waste volume at the
site of the plant once owned by a former subsidiary is approximately 0.434
percent of the total volume. The portion of the 0.434 percent specifically
attributable to the former subsidiary by the current operator of the plant is
approximately 0.286 percent.
There are over 800 potentially responsible parties ("prp") which have been
identified by the Site Steering Committee. Of these, 38, not including the
Company's former subsidiary, are estimated to have contributed over 80 percent
of the total waste volume at the site. These prp's include Fortune 500
companies, public utilities, and the State of Indiana. The Company believes
that, in general, these parties are financially solvent and should be able to
meet their obligations at the site. The Company has reviewed Dun & Bradstreet
reports on several of these prp's and, based on these financial reports, does
not believe Lydall will have any material additional volume attributed to it for
reparation of this site due to insolvency of other prp's.
During the quarter ended September 30, 1994, the Company learned that the EPA
had completed its Record of Decision ("ROD") for the Michigan site and has
estimated the total cost of remediation to be between $17 million and $22
million. Based on the alleged volumetric contribution of its former subsidiary
to the site, and on the EPA's estimated remediation costs, Lydall's alleged
total exposure would be less than $100 thousand, which has been accrued. In June
1995, the Company and its former subsidiary were sued in the Northern District
of Indiana by the insurer of the current operator of the former subsidiary's
plant seeking contribution. In January 1997, the insurer made a settlement
demand of $133,925 to the Company in exchange for a release of the Company's
liability at the site. Although the Company believes it has several defenses to
the action, it is evaluating the demand.
Management believes the ultimate disposition of this matter will not have a
material adverse effect upon the Company's consolidated financial position or
results of operations.
On March 19, 1996, patent litigation brought by ATD Corporation ("ATD") against
Lydall in the U.S. District Court for the Eastern District of Michigan was
concluded with the jury finding in favor of Lydall and with all of ATD's claims
for damages being denied. Post-trial motions of both parties for judgement as a
matter of law were denied by the Court on February 27, 1997. The period for
appeal to the U.S. Court of Appeals for the Federal Circuit regarding this
litigation expires on March 30, 1997.
39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of Lydall, Inc.:
We have audited the accompanying consolidated balance sheets of Lydall, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lydall, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Hartford, Connecticut /s/ Coopers & Lybrand L.L.P.
February 14, 1997, except for the Contingencies
footnote, for which the date is February 27, 1997 Coopers & Lybrand L.L.P.
MANAGEMENT'S REPORT
- --------------------------------------------------------------------------------
While Lydall's financial statements and the related financial data contained in
this Annual Report have been prepared in conformity with generally accepted
accounting principles and such financial statements have been audited by Coopers
& Lybrand L.L.P., the ultimate accuracy and validity of this information is the
responsibility of the Company's management. To carry out this responsibility,
Lydall maintains comprehensive financial policies, procedures, accounting
systems and internal controls which management believes provide reasonable
assurance that accurate financial records are maintained and corporate assets
are safeguarded.
The Audit Committee of the Board of Directors, consisting of three outside
directors, meets regularly with Company management and the internal auditors to
review corporate financial policies and internal controls. The Audit Committee
also meets with the independent auditors to review the scope of the annual audit
and any comments they may have regarding the Company's internal accounting
controls.
In management's opinion, Lydall's system of internal accounting control is
adequate to ensure that the financial information in this report presents fairly
the Company's operations and financial condition.
/s/ John E. Hanley
John E. Hanley
Vice President-Finance and Treasurer
40
<PAGE>
Five-Year Statistical Review
<TABLE>
<CAPTION>
$ thousands except per-share amounts 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial results
Net sales $ 252,652 $ 252,128 $ 213,072 $ 157,431 $ 151,148
Income before cumulative effect of
accounting change 24,736 22,438 15,503 10,013 9,038
Net income 24,736 22,438 15,503 10,248 9,038
...................................................................................................................................
Common stock per-share data
Income before cumulative effect of
accounting change $ 1.37 $ 1.23 $ .86 $ .57 $ .52
Net income 1.37 1.23 .86 .58 .52
Common stockholders' equity 6.89 5.88 4.57 3.63 3.08
...................................................................................................................................
Financial position
Total assets $ 182,119 $ 158,072 $ 136,613 $ 107,842 $ 99,353
Working capital 53,358 52,730 30,823 31,791 24,614
Current ratio 2.24 2.77 1.93 2.48 2.11
Long-term debt, net of
current maturities 5,050 7,750 10,607 11,171 16,195
Total stockholders' equity 117,844 101,811 76,227 60,057 50,071
Debt to total capitalization 12.9% 9.4% 15.0% 18.7% 27.7%
...................................................................................................................................
Property, plant, and equipment
Net property, plant, and equipment $ 62,038 $ 60,074 $ 54,771 $ 49,364 $ 46,269
Capital additions from acquisitions 500 -- 3,077 -- --
Other capital additions 10,893 12,006 7,979 6,253 6,235
Capital divestments, net 894 632 687 356 487
Depreciation 7,824 7,122 6,101 4,997 4,347
...................................................................................................................................
Performance ratios and other items
Return on average assets 14.5% 15.2% 12.7% 9.9% 9.4%
Return on average common stockholders' equity 22.5% 25.2% 22.8% 18.6% 20.3%
Return on sales 9.8% 8.9% 7.3% 6.5% 6.0%
Days of inventory on hand (LIFO) 31 33 36 41 42
Days of receivables outstanding 50 49 47 52 57
Number of employees at year-end 1,268 1,227 1,306 944 945
...................................................................................................................................
Shares and stockholders
Weighted average common stock and equivalents 18,107,000 18,313,000 17,953,000 17,582,000 17,421,000
Common shares outstanding at year-end 17,092,011 17,320,252 16,677,524 16,538,126 16,239,380
Stockholders at year-end 1,855 1,918 1,900 1,904 1,960
Market price per share of common stock -
Highest close $ 25.87 $ 28.50 $ 18.63 $ 10.69 $ 11.17
Lowest close $ 19.75 $ 14.75 $ 10.13 $ 9.50 $ 8.04
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Share figures adjusted to reflect a two-for-one stock split in 1995, and a
three-for-two stock split in 1993.
41
<PAGE>
Officers, Directors and Stockholder Information
Officers
Leonard R. Jaskol
Chairman and Chief Executive Officer
John E. Hanley
Vice President-Finance and Treasurer
Carole F. Butenas
Vice President-Investor Relations
Mary Adamowicz Tremblay
General Counsel and Secretary
Geoffrey W. Nelson
Assistant Secretary
Directors
Lee A. Asseo /2,6/
Retired Chairman and Chief Executive Officer
The Whiting Company
Paul S. Buddenhagen /1,6/
Partner
Carlisle Fagan Gaskins & Wise, Inc.
James P. Carolan /3/
President
Lydall Manning
Samuel P. Cooley /3,4/
Retired Executive Vice President
and Senior Credit Approval Officer
Fleet Bank Connecticut
W. Leslie Duffy /3,5/
Partner
Cahill Gordon & Reindel
Leonard R. Jaskol /1,5,6/
Chairman and Chief Executive Officer
Lydall, Inc.
William P. Lyons /3,4/
Managing Partner
Madison Partners L.L.C.
Joel Schiavone /1/
President and Chief Executive Officer
The Schiavone Corporation
Elliott F. Whitely /5/
President
Lydall Technical Papers
Roger M. Widmann /2,5/
Principal
Tanner & Co. Inc.
Albert E. Wolf /2,4/
Chairman
Checkpoint Systems, Inc.
/1/ Executive Committee
/2/ Compensation and Stock Option Committee
/3/ Pension Committee
/4/ Audit Committee
/5/ Development Committee
/6/ Nominating Committee
Annual Meeting
Lydall's annual meeting will be held on Wednesday, May 14, 1997 at 11:00 a.m. at
The Hartford Club located at 46 Prospect Street in Hartford, Connecticut.
Stockholders who are unable to attend the meeting are invited to mail any
questions they might have about the Company to any of Lydall's Officers.
Questions may also be directed to the Audit Committee of Lydall's Board of
Directors. Such inquiries may be sent to Samuel P. Cooley, Chairman of the Audit
Committee, in care of Lydall, Inc.
Transfer Agent
American Stock Transfer &
Trust Company
New York, New York
Auditors
Coopers & Lybrand L.L.P.
Hartford, Connecticut
Stockholder Information
Lydall Common Stock is traded on the New York Stock Exchange under the symbol
LDL. During 1996 and 1995, 6,578,300 and 3,748,500 shares, respectively, were
traded. The closing price on December 31, 1996 was $22.50.
As of March 17, 1997, the record date of Lydall's 1997 Annual Meeting,
stockholders of record held 16,881,912 shares of Common Stock.
The following are the high, low and closing prices of Lydall Common Stock for
each quarter during the past two years. Prior-period prices are restated to
reflect a two-for-one stock split distributed in June of 1995.
<TABLE>
<CAPTION>
Quarters 1 2 3 4
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 High $25.125 $25.875 $25.750 $24.500
Low 19.750 21.875 21.000 20.250
Close 25.000 22.000 24.375 22.500
1995 High $17.625 $22.000 $26.000 $28.500
Low 14.750 16.500 21.750 21.500
Close 16.875 22.000 24.875 22.750
- ------------------------------------------------------------
</TABLE>
Any stockholder correspondence regarding change of address or other
recordkeeping matters may be addressed to:
Isaac Kagan
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Telephone: 800-937-5449
All other stockholder correspondence -- questions about the Company and requests
for Lydall's Annual Report and Form 10-K -- may be directed to:
Carole F. Butenas
Vice President-Investor Relations
Lydall, Inc.
P.O. Box 151
Manchester, Connecticut 06045-0151
E-mail: [email protected]
Web Site: http://lydall.com
Lydall hires and promotes qualified employees in accordance with the law without
regard to race, color, religion, sex, national origin, age, sexual preference,
marital status, or physical or mental disabilities, except where, in
management's view, a disability interferes with job performance or cannot be
reasonably accommodated.
42
<PAGE>
Directory
Corporate Headquarters
Lydall, Inc.
One Colonial Road
P.O. Box 151
Manchester, Connecticut 06045-0151
Telephone (860) 646-1233
Facsimile (860) 646-4917
Facsimile (860) 646-8847
Lydall Axohm
President Elliott F. Whitely
Saint-Rivalain
56310 Melrand
France
Telephone 33-2-97-28-5300
Facsimile 33-2-97-39-5890
Lydall Composite Materials
President John J. Worthington
12 Davis Street
P.O. Box 400
Hoosick Falls, New York 12090-0400
Telephone (518) 686-7313
Facsimile (518) 686-7205
Covington Operation
230 Industrial Park Road
P.O. Box 599
Covington, Tennessee 38019-0599
Telephone (901) 476-7174
Facsimile (901) 476-9685
Logistics Management, Inc.
President William J. Rankin
580 Parker Street
P.O. Box 151
Manchester, Connecticut 06045-0151
Telephone (860) 646-1233
Facsimile (860) 645-0822
Lydall & Foulds
President William J. Rankin
580 Parker Street
P.O. Box 151
Manchester, Connecticut 06045-0151
Telephone (860) 646-1233
Facsimile (860) 646-4448
Lydall International
Saint-Rivalain
56310 Melrand
France
Telephone 33-2-97-28-8989
Facsimile 33-2-97-28-8980
Branch Office
Comodo Nishi-Azabu Building
25-22, Nishi-Azabu 2-Chome
Minato-ku, Tokyo 106 Japan
Telephone 81-3-3406-1575/6
Facsimile 81-3-3406-1577
Lydall Manning
President James P. Carolan
Green Island Operation
P.O. Box 328
Troy, New York 12181-0328
Telephone (518) 273-6320
Facsimile (518) 273-6361
Hatboro Operation
2800 Turnpike Drive
Hatboro, Pennsylvania 19040
Telephone (215) 443-5325
Facsimile (215) 675-4580
Lydall Southern Products
President Raymond J. Lanzi
3021 Vernon Road
P.O. Box 9550
Richmond, Virginia 23228
Telephone (804) 266-9611
Facsimile (804) 266-3875
Jacksonville Operation
500-B North Ellis Road
Jacksonville, Florida 32254
Telephone (904) 783-1247
Facsimile (904) 783-8907
Sales Office
1300 West Lodi Avenue, Suite A9
Lodi, California 95242
Telephone (209) 333-0885
Facsimile (209) 333-0887
Lydall Technical Papers
President Elliott F. Whitely
Chestnut Hill Road
P.O. Box 1960
Rochester, New Hampshire 03866-1960
Telephone (603) 332-4600
Facsimile (603) 332-9602
Facsimile (603) 332-3734
Lydall Westex
President Christopher R. Skomorowski
Brooks Crossroads
P.O. Box 109
Hamptonville, North Carolina 27020
Telephone (910) 468-8522
Facsimile (910) 468-8555
Columbus Operation
6767 Huntley Road
Columbus, Ohio 43229
Telephone (614) 885-6379
Facsimile (614) 885-5967
Rockwell Operation
711 Palmer Road
Rockwell, North Carolina 28138
Telephone (704) 279-5031
Facsimile (704) 279-6104
Sales Office
4555 Corporate Drive
Suite 205
Troy, Michigan 48098
Telephone (810) 952-5570
Facsimile (810) 952-5575
Lydall On-line
E-mail: [email protected]
Web Site: http://lydall.com
43
<PAGE>
EXHIBIT 21.1
LYDALL, INC.
LIST OF SUBSIDIARIES
Lydall, Inc.--Incorporated in the State of Delaware
Logistics Management, Inc.--Incorporated in the State of Connecticut
Lydall Distribution Services, Inc.--Incorporated in the State of Connecticut
Lydall Express, Inc.--Incorporated in the State of Connecticut
Lydall Transport, Ltd.--Incorporated in the State of Virginia
Lydall Eastern, Inc.--Incorporated in State of Connecticut
DBA: Lydall Composite Materials, Covington Operation
Lydall Southern Products, Richmond Operation
Lydall Southern Products, Jacksonville Operation
Lydall Technical Papers
Lydall & Foulds
Lydall New York, Inc.--Incorporated in State of New York
DBA: Lydall Composite Materials, Hoosick Falls Operation
Lydall Manning Nonwovens Division
Lydall Manning Hatboro Division
Lydall Central, Inc.--Incorporated in State of Indiana
DBA: Lydall Westex, Hamptonville Operation
Lydall Westex, Rockwell Operation
Lydall Westex, Columbus Operation
Lydall International, Inc.--Incorporated in State of Delaware
Lydall FSC, Limited--Incorporated in Jamaica
Trident II, Inc.--Incorporated in State of Connecticut
Sopatex, S.A.--Organized under the laws of France
Axohm Industries, S.A.--Organized under the laws of France
DBA: Lydall Axohm
Axohm S.A. Operations
Axohm U.K.--Organized under the laws of Great Britain
18
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and
officers of Lydall, Inc. (the "Corporation"), does hereby constitute and appoint
Leonard R. Jaskol and John E. Hanley, and each of them singly, as his agent and
attorney-in-fact to do any and all things and acts in his name and in the
capacities indicated below and to execute any and all instruments for him and in
his name in the capacities indicated below which said Leonard R. Jaskol and John
E. Hanley, or either of them, may deem necessary or advisable to enable the
Corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the preparation and filing of the Corporation's
Annual Report on Form 10-K (the "Annual Report") respecting the fiscal year
ended December 31, 1996, including specifically, but not limited to, power and
authority to sign for him in his name in the capacities indicated below the
Annual Report and any and all amendments thereto, and each of the undersigned
does hereby ratify and confirm all that said Leonard R. Jaskol and John E.
Hanley, or either of them, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his or her name.
Leonard R. Jaskol Chairman of the March 13, 1997
- --------------------
Leonard R. Jaskol Board and Chief
Executive Officer
Lee A. Asseo Director March 13, 1997
- ---------------
Lee A. Asseo
Paul S. Buddenhagen Director March 13, 1997
- ----------------------
Paul S. Buddenhagen
James P. Carolan Director March 13, 1997
- -------------------
James P. Carolan
Samuel P. Cooley Director March 13, 1997
- -------------------
Samuel P. Cooley
<PAGE>
W. Leslie Duffy Director March 13, 1997
- ------------------
W. Leslie Duffy
William P. Lyons Director March 13, 1997
- -------------------
William P. Lyons
Joel Schiavone Director March 13, 1997
- -----------------
Joel Schiavone
Elliott F. Whitely Director March 13, 1997
- ---------------------
Elliott F. Whitely
Roger M. Widmann Director March 13, 1997
- -------------------
Roger M. Widmann
A. E. Wolf Director March 13, 1997
- -------------------
A. E. Wolf
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 38,226
<SECURITIES> 4,941
<RECEIVABLES> 34,427
<ALLOWANCES> 1,727
<INVENTORY> 14,680
<CURRENT-ASSETS> 96,371
<PP&E> 113,347
<DEPRECIATION> 51,309
<TOTAL-ASSETS> 182,119
<CURRENT-LIABILITIES> 43,013
<BONDS> 17,500
0
0
<COMMON> 2,112
<OTHER-SE> 115,731
<TOTAL-LIABILITY-AND-EQUITY> 182,119
<SALES> 252,652
<TOTAL-REVENUES> 252,652
<CGS> 170,597
<TOTAL-COSTS> 170,597
<OTHER-EXPENSES> (577)
<LOSS-PROVISION> (28)
<INTEREST-EXPENSE> 518
<INCOME-PRETAX> 39,854
<INCOME-TAX> 15,118
<INCOME-CONTINUING> 24,736
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,736
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
</TABLE>
