-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OYu2VtiPjT3+VkL/i6sMhzLEDZqeN0rd4nVur1EFuKiK/+KzMtEP0kZmYMcVVoBZ BjU/lkkaaoI9jXXTPFNmXQ== 0000950109-98-002204.txt : 19980330 0000950109-98-002204.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950109-98-002204 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYDALL INC /DE/ CENTRAL INDEX KEY: 0000060977 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 060865505 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07665 FILM NUMBER: 98575437 BUSINESS ADDRESS: STREET 1: ONE COLONIAL RD STREET 2: P O BOX 151 CITY: MANCHESTER STATE: CT ZIP: 06045-0151 BUSINESS PHONE: 2036461233 FORMER COMPANY: FORMER CONFORMED NAME: COLONIAL BOARD CO DATE OF NAME CHANGE: 19700115 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- 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, 1997 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 ---------------- 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 ---------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- 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. [_] On March 16, 1998, the aggregate market value of the Registrant's voting stock held by nonaffiliates was $269,819,034. On March 16, 1998, there were 16,068,885 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, 1997. 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 13, 1998. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, metal-and-fiber, and all-metal automotive heat shields; and certain medical filtration and automotive thermal barrier components as well as wood-replacement board for pencils. Most of Lydall's products are supplied to original-equipment manufacturers who convert them or incorporate them into their 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 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, technology, 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 four basic categories: specialty nonwovens, fabricated components, fiberboard and paperboard, and other products and services. The majority of these products serve filtration and heat-management applications. MAJOR MARKETS Thermal Barriers Lydall manufactures a broad range of materials and fabricates components which serve as heat or thermal barriers. The Cryotherm(R) and Lytherm(R) product lines include an assortment of specialty nonwovens using distinctive materials, in both rigid and flexible forms, manufactured by a variety of processes. The Company also fabricates heat-shields used by the automotive market. Lydall products serve thermal-barrier applications in temperatures ranging from -459 degrees F to +3,000 degrees F. At the highest temperature requirements, Lytherm(R) specialty nonwoven products are used as linings for ovens, kilns, and furnaces and in glass and metal manufacturing. At mid-range temperatures Lytherm(R) specialty nonwoven composites of organic and inorganic fibers and certain Lydall fabricated heat shields are used as thermal barriers throughout trucks, vans, sport-utility vehicles, and cars. Lydall holds patents on many of its automotive products. Also, in mid-range temperatures, Manninglas(R) specialty 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 specialty nonwovens 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 nonwovens employed in automotive air-bag pyrotechnic inflators. These materials perform both a filtration and heat-reduction function. 1 Sales to thermal barrier markets were approximately 37 percent of the Company's sales for 1997, 38 percent 1996, and 36 percent for 1995. Sales for thermal barrier applications decreased 7 percent in 1997 from 1996 levels. This decrease can be attributable to the loss of a large piece of business to Chrysler at the end of 1996 which was not offset by new business in 1997 and the discontinuation of three Ford models that contained Lydall's thermal barriers. Filtration Markets The Company manufactures high-efficiency air filtration media, marketed under the Lydair(R) name. Lydair filtration media are specialty nonwovens used for applications where clean air is vital, such as in semiconductor manufacturing clean rooms, industrial clean rooms, and biotechnology laboratories. Lydall's product is sold in roll form to air filter manufacturers. 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. Replacement of pre-filters and intermediary filters take place more frequently. Lydall sells materials for these filters as well. 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(R) trademark. Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical Ltd. This separate corporate entity acquired Charter Med Inc. This entity manufactures proprietary medical devices serving applications such as biotech and pharmaceutical packaging, blood bank and transfusion services, neonatal intensive care, operating room/perfusion and stem cell processing and freezing. Sales to the filtration market decreased to 22 percent of sales for 1997 compared with 24 percent and 22 percent for 1996 and 1995, respectively. The overall sales to these markets decreased 11 percent in 1997 from 1996. High- efficiency air filtration media, sold to air filter manufacturers for clean- room applications, contributed the majority of total sales to filtration applications. Sales were slower in 1997 mainly because of postponements of planned clean-room construction and inventory reductions by customers supplying the semiconductor industry. Materials-Handling Market 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(R) slipsheet systems are used to replace wooden pallets, providing significant cost and space reductions for a shipper. Ly-Pak(R) separator sheets are supplied to the glass and polyethylene terephthalate bottle industry and are manufactured to meet industry specifications for bulk palletizing. Ly-Pak(R) 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 to materials-handling applications approximated 13 percent of 1997 total sales as compared with 13 percent and 15 percent of 1996 and 1995 total sales, respectively. Total sales to this market decreased by 2 4 percent in 1997 as compared to 1996. Lower sales in 1997 were primarily as a result of deflationary pressures through most of the year. Lydall's price reductions in response to lower raw-material costs reduced sales dollars. Other Markets 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. 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. 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. An acquisition made in December 1996 added the manufacture of high-performance woven structural components to the Company's products. These products are sold to the aerospace, marine, medical device, automotive and sporting goods industries. Sales of all other products and services approximated 28 percent of the Company's sales in 1997, 25 percent and 27 percent in 1996 and 1995 respectively. GENERAL BUSINESS INFORMATION Lydall operates 11 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 Fort Washington, Pennsylvania. Lydall also has one manufacturing facility in Saint-Rivalain, 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 the raw materials needed during 1997 with the exception of shortages of raw materials utilized at the Fort Washington location. The majority of raw materials used by Lydall are available from a variety of suppliers who can be substituted if necessary. Twenty-six percent of Lydall's total sales in 1997 were to the automotive market compared to thirty-two percent and thirty-three percent in 1996 and 1995 respectively. 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 18 percent of Lydall's total sales in 1997, and no other single customer accounted for more than 10 percent of total sales. Lydall invested $8.7 million in 1997, $6.8 million in 1996, and $6.2 million in 1995, 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 $18.8 million at December 31, 1997, $25.1 million at December 31, 1996, and $28.0 million at December 31, 1995. Lydall expects to fill its backlog of 1997 orders during the first quarter of 1998. 3 Backlog at February 28, 1998 was $19.5 million. There are no seasonal aspects to this backlog. 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, 1998, Lydall and its subsidiaries had 1,212 employees, including foreign employees. Approximately 169 of the domestic employees are represented by eight unions under contracts expiring between March 1998 and November 2002. 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 20 percent of total sales in 1997, 21 percent in 1996 and 22 percent in 1995. Export sales are concentrated primarily in Europe, the Far East, Mexico, and Canada and were $34.9 million, $37.0 million, and $38.9 million in 1997, 1996 and 1995, respectively. Foreign sales were $14.3 million, $17.6 million, and $17.0 million for the years ended December 31, 1997, 1996, and 1995, respectively. The French operation incurred losses of $348 thousand, $796 thousand and $165 thousand for the years ended December 31, 1997, 1996 and 1995, respectively. Total foreign assets were $16.4 million and $18.5 million at December 31, 1997 and 1996, 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:
APPROXIMATE AREA ------------------ LAND BUILDINGS LOCATION GENERAL DESCRIPTION (ACRES) (SQ. FEET) -------- ------------------- ------- ---------- 1 Manchester, Office Facilities.................... 2.0 25,000 Connecticut 2 Manchester, Paperboard Manufacturing............. 11.6 70,500 Connecticut 3 Covington, Fiberboard and Fabricated Materials Tennessee Manufacturing........................ 26.0 155,000 4 Richmond, Laminated Fiberboard Manufacturing... 5.0 104,000 Virginia 5 Rochester, Specialty Nonwoven Manufacturing..... 18.0 143,000 New Hampshire 6 Hoosick Falls, Fiberboard Composite Materials New York Manufacturing........................ 11.0 129,000 7 Hamptonville, Specialty Nonwoven Materials and North Carolina Fabricated Materials Manufacturing... 35.2 85,000
4
APPROXIMATE AREA ------------------ LAND BUILDINGS LOCATION GENERAL DESCRIPTION (ACRES) (SQ. FEET) -------- ------------------- ------- ---------- 8 Green Island, Specialty Nonwoven 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 Nonwoven France Manufacturing............. 14.3 156,000 12 Columbus, Fabricating Facility...... 9.0 80,000 Ohio 13 Jacksonville, Laminated Fiberboard Florida Manufacturing............. -- 52,000 14 Fort Washington, Specialty Woven Materials Pennsylvania Manufacturing............. -- 60,000 15 Manchester, Warehouse and Office Connecticut Facilities................ 7.08 95,000
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 1997 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 in Michigan City, Indiana. 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. The EPA has completed its Record of Decision for the 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. 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. 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 October 1997, the insurer made a settlement demand of $150,591 to the Company in exchange for a release of the Company's liability at the site and indemnification from the current operator against site-related claims. The Company executed a settlement agreement with the insurer and current operator for a full site release; however, the current operator subsequently backed out of the agreement. The Company is now evaluating its options. 5 Management believes the ultimate disposition of this matter will not have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. 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. A notice of appeal to the U.S. Court of Appeals for the Federal Circuit regarding this litigation was filed by ATD on March 28, 1997. The appeal issues were fully briefed and argued in January of 1998. No decision has been rendered. Management believes the ultimate disposition of this matter will not have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. 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 1997. EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT: The name, age, current position, and other business experience since January 1, 1993 of each executive officer of the Company are listed on the following page. Leonard R. Jaskol, John E. Hanley, Carole F. Butenas, and Mary A. 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.
OTHER BUSINESS NAME AGE TITLE EXPERIENCE SINCE 1993 - ---- --- ----- --------------------- Leonard R. Jaskol 61 Chairman of the Board (since N/A 1991) President and Chief Executive Officer (since 1988) John E. Hanley 41 Vice President--Finance and N/A Treasurer (since 1992) Carole F. Butenas 55 Vice-President--Investor N/A Relations (since 1991) Director (1995) Mary A. Tremblay 37 General Counsel and Secretary N/A (since 1991) Raymond J. Lanzi 59 Division President (since 1979) N/A Director (1993) Elliott F. Whitely(1) 54 Division President (since 1987) N/A Director (1993, 1996, 1997) James P. Carolan 55 Division President (since 1983) N/A Director (1994, 1996, 1997) William J. Rankin 44 Division President (since 1992) N/A Director (1995) Christopher R. 44 Division President (since 1990) N/A Skomorowski Director (1994) John J. Worthington 49 Division President (since 1996) General Manager, W. R. Grace and Specialty Paperboard, Inc. Bill W. Franks, Jr. 39 Division President (since 1997) Vice President and General Manager, Lydall Logistics Management Division
- -------- (1) Mr. Whitely resigned from his position as Division President, effective December 31, 1997. 6 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 28, 37, 45 and 46 of the 1997 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA. Information regarding selected financial data of the Company is incorporated herein by reference to page 45 of the 1997 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 19 through 27 of the 1997 Annual Report to Stockholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not yet applicable. 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 29 through 43 of the 1997 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 and disclosure of late filings required by Section 16 of the Exchange Act are 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 13, 1998. 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 13, 1998, including the Compensation and Stock Option Committee Report to Stockholders found on pages 8 through 18, and the comparative performance graph located on page 19, therein. 7 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 13, 1998. 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 13, 1998. PART IV ITEM 14.EHIBITS, 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, 1997:
ANNUAL REPORT PAGES ------ Consolidated Income Statements--Years ended December 31, 1997, 1996, and 1995.............................................................. 29 Consolidated Balance Sheets--December 31, 1997 and 1996................ 30-31 Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996, and 1995........................................................ 32 Consolidated Statements of Changes in Stockholders' Equity--Years ended December 31, 1997, 1996, and 1995..................................... 33 Notes to Consolidated Financial Statements............................. 34-43 Report of Independent Accountants...................................... 44
a) 2) Financial Statement Schedule:
10-K PAGES ---------- Report of Independent Accountants.................................. 12 Consent of Independent Accountants................................. 13 Schedule II--Valuation and Qualifying Accounts-- Years ended December 31, 1997, 1996, and 1995................................. 14
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 the consolidated 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 1997 Annual Report to Stockholders of the Company and incorporated by reference into this Form 10-K Annual Report, the 1997 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). 8 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 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 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). 10.11* 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). 10.12* 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). 10.13* 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). 10.14* 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 10.15* Employment Agreement with Mary A. 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). 10.16* Employment Agreement with John J. Worthington dated November 7, 1996, (filed as Exhibit 10.17 to the registrants Annual Report on Form 10-K dated March 27, 1997 and incorporated herein by this reference). 10.17* 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). 10.18* 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 and incorporated herein by this reference). 10.19 Asset Purchase Agreement between Lydall New York, Inc. and Textile Technologies Industries, Inc. (filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K dated March 27, 1997 and incorporated herein by this reference). 10.20 Asset Purchase Agreement between Chartermed Inc. and Charter Medical Ltd. filed herewith. The registrant shall furnish copies of exhibits to the Asset Purchase Agreement upon the request of the Commission. 13.1 Annual Report to Stockholders for the year ended December 31, 1997, 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, 1998, 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 for the year ended December 31, 1997, filed herewith. 27.2 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated November 7, 1997, filed herewith. 27.3 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated August 7, 1997, filed herewith. 27.4 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated May 8, 1997, filed herewith. 27.5 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated March 17, 1997, filed herewith. 27.6 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated November 7, 1996, filed herewith. 27.7 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated August 7, 1996, filed herewith. 27.8 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated May 8, 1996, filed herewith. 27.9 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated March 18, 1996, 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, 1997. 10 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. Date: March 25, 1998 By Leonard R. Jaskol ---------------------------------- 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 25, 1998 - ------------------------------------- Executive Officer LEONARD R. JASKOL and Director John E. Hanley Vice President--Finance March 25, 1998 - ------------------------------------- and Treasurer JOHN E. HANLEY (Principal Financial and Accounting Officer) John E. Hanley - ------------------------------------- JOHN E. HANLEY ATTORNEY-IN-FACT FOR: Lee A. Asseo Director* March 25, 1998 - ------------------------------------- LEE A. ASSEO Paul S. Buddenhagen Director* March 25, 1998 - ------------------------------------- PAUL S. BUDDENHAGEN James P. Carolan Director* March 25, 1998 - ------------------------------------- JAMES P. CAROLAN Samuel P. Cooley Director* March 25, 1998 - ------------------------------------- SAMUEL P. COOLEY W. Leslie Duffy Director* March 25, 1998 - ------------------------------------- W. LESLIE DUFFY William P. Lyons Director* March 25, 1998 - ------------------------------------- WILLIAM P. LYONS Joel Schiavone Director* March 25, 1998 - ------------------------------------- JOEL SCHIAVONE Elliott F. Whitely Director* March 25, 1998 - ------------------------------------- ELLIOTT F. WHITELY Roger M. Widmann Director* March 25, 1998 - ------------------------------------- ROGER M. WIDMANN Albert E. Wolf Director* March 25, 1998 - ------------------------------------- ALBERT E. WOLF * (constituting in excess of a majority of the full Board of Directors) 11 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 44 of the 1997 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 18, 1998. 12 SCHEDULE II LYDALL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
$ THOUSANDS ADDITIONS - ----------- --------------------- CHARGED TO CHARGED TO OTHER BALANCE AT COSTS AND ACCOUNTS-- DEDUCTIONS-- BALANCE AT DESCRIPTION JANUARY 1 EXPENSES DESCRIBE DESCRIBE DECEMBER 31 ----------- ---------- ---------- ---------- ------------ ----------- 1997 Allowance for doubtful receivables............ $1,727 $ 258 $ -- $ (604)(1) $1,381 Accumulated amortization of intangible assets... 7,741 450 -- (665)(3) 7,526 Accrued reorganization.. 28 -- -- (28)(7) -- Accrued environmental... 998 20 (128)(4) (506)(8) 384 Accumulated amortization of goodwill............ 1,688 1,119 -- -- 2,807 LIFO reserve............ 1,740 -- -- (568)(5) 1,172 Inventory obsolescence reserve................ 519 254 (13)(4) (183)(6) 577 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 Inventory obsolescence reserve................ 612 453 (6)(4) (540)(6) 519 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 Inventory obsolescence reserve................ 786 804 -- (978)(6) 612
Notes(1):Uncollected receivables written off and adjustments to allowance. (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. (6): Write off of obsolete inventory and adjustment to reserve level. (7): Adjustment to reserve level. (8): Disbursements of amounts previously accrued and adjustments to reserve level. 14 SCHEDULE X INDEX TO EXHIBITS ----------------- Page in Exhibit Sequentially Number Description of Document Numbered Copy - ------- ----------------------- ------------- 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). 1 INDEX TO EXHIBITS (Continued) ----------------------------- Page in Exhibit Sequentially Number Description of Document Numbered Copy - ------- ----------------------- ------------- 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 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). 10.11 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). 10.12 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). 10.13 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). 2 INDEX TO EXHIBITS (Continued) ----------------------------- Page in Exhibit Sequentially Number Description of Document Numbered Copy - ------- ----------------------- ------------- 10.14 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). 10.15 Employment Agreement with Mary A. 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). 10.16 Employment Agreement with John J. Worthington dated November 7, 1996, (filed as Exhibit 10.17 to the registrant's Annual Report on Form 10-K dated March 27, 1997 and incorporated herein by this reference). 10.17 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). 10.18 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 and incorporated herein by this reference). 10.19 Asset Purchase Agreement between Lydall New York, Inc. and Textile Technology Industries, Inc. filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K dated March 27, 1997 and incorporated herein by this reference). 10.20 Asset Purchase Agreement between Chartermed Inc. and Charter Medical Ltd. filed herewith. The registrant shall furnish copies of exhibits to the Asset Purchase Agreement upon request of the Commission. 13.1 Annual Report to Stockholders for the year ended December 31, 1997, filed herewith. 21.1 List of subsidiaries of the registrant, filed herewith. 23.1 Consent of Coopers and Lybrand, L.L.P., filed herewith. 3 INDEX TO EXHIBITS (Continued) ----------------------------- Page in Exhibit Sequentially Number Description of Document Numbered Copy - ------- ----------------------- ------------- 24.1 Power of Attorney, dated March 13, 1998, 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 for the year ended December 31, 1997, filed herewith. 27.2 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated November 7, 1997, filed herewith. 27.3 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated August 7, 1997, filed herewith. 27.4 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated May 8, 1997, filed herewith. 27.5 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated March 17, 1997, filed herewith. 27.6 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated November 7, 1996, filed herewith. 27.7 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated August 7, 1996, filed herewith. 27.8 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated May 8, 1996, filed herewith. 27.9 Restated Financial Data Schedule originally filed as Exhibit 27.1 to the registrant's Quarterly report on Form 10-Q dated March 18, 1996, filed herewith. 4 EX-10.20 2 ASSET PURCHASE AGREEMENT ................................................................ ASSET PURCHASE AGREEMENT By and Between CharterMed Inc. and Charter Medical, Ltd. Dated as of February 6, 1998 ................................................................ TABLE OF CONTENTS -----------------
1. PURCHASE AND SALE OF ASSETS........................... 1 1.01 Lease of Real Property......................... 2 1.02 Equipment and Personalty....................... 2 1.03 Contract Rights and Leases..................... 3 1.04 Prepaid Expenses and Deferred Costs............ 3 1.05 Inventory...................................... 3 1.06 Accounts Receivable............................ 4 1.07 Records........................................ 4 1.08 Goodwill....................................... 4 1.09 Intangible Property............................ 4 1.10 Customer and Supplier List..................... 5 1.11 CharterMed Names............................... 5 1.12 Insurance Policies............................. 5 1.13 Website........................................ 5 2. ASSETS TO BE RETAINED BY CHARTERMED................... 5 2.01 Cash........................................... 5 2.02 Certain Records................................ 5 2.03 Employee Pension and Benefit Plans............. 6 2.04 Tax Credits and Refunds........................ 6 2.05 Corporate Records.............................. 6 3. LIMITED ASSUMPTION OF LIABILITIES BY CML.............. 6 3.01 Obligations Under Contracts and Leases......... 6 3.02 Trade Payables................................. 6 3.03 Product Warranty and Return Obligations........ 7 3.04 Personal Property Taxes........................ 7 3.05 Post-Closing Responsibilities.................. 7 3.06 Liabilities Not Assumed........................ 8 3.07 No Expansion of Third Party Rights............. 8 4. CLOSING; PURCHASE PRICE AND PAYMENT................... 8 4.01 Closing Date, Place and Time................... 8 4.02 Purchase Price and Method of Payment........... 9 4.03 Allocation of Purchase Price................... 9 4.04 Risk of Loss................................... 9 4.05 Net Asset and Liability Adjustment............. 10 5. EMPLOYEES; EMPLOYEE PENSION AND WELFARE PLANS......... 13 5.01 Employment; Medical Benefits................... 13 5.02 Employee Pension Plans and Benefits............ 13 5.03 Other Employee Pension Plans and Benefits...... 13 5.04 Employee Welfare Plans, Worker's...............
Compensation................................... 14 6. INSTRUMENTS OF CONVEYANCE AND ASSUMPTION.............. 14 6.01 Conveyance Documents........................... 15 7. REPRESENTATIONS AND WARRANTIES OF CHARTERMED.......... 15 7.01 Completeness of Disclosure..................... 15 7.02 Organization and Good Standing of CharterMed..................................... 16 7.03 Title to and Condition of the Assets........... 16 7.04 Contracts of CharterMed........................ 17 7.05 CharterMed's Authority and No Conflict......... 17 7.06 Brokers........................................ 18 7.07 Financial Statements........................... 18 7.08 Taxes.......................................... 19 7.09 Litigation or Claims........................... 19 7.10 Compliance with Law............................ 20 7.11 Absence of Certain Changes or Events........... 20 7.12 Environmental Matters.......................... 22 7.13 No Change in Business Relationships............ 27 7.14 Employment Agreements.......................... 27 7.15 Patents, Trademarks, Trade Names and Copyrights................................. 29 7.16 Processes and Know-how......................... 30 7.17 Utilities...................................... 30 7.18 Licenses and Permits........................... 30 7.19 Absence of Undisclosed Liabilities............. 31 7.20 Inventory...................................... 31 7.21 Accounts and Notes Receivable.................. 33 7.22 Solvency....................................... 33 7.23 Subsidiaries................................... 34 7.24 ERISA and COBRA Compliance..................... 34 7.25 Product Liability.............................. 35 7.26 Corrupt Practices.............................. 36 7.27 Adequate Assets................................ 37 7.28 Condition of Equipment and Personalty.......... 37 8. REPRESENTATIONS AND WARRANTIES OF CML................. 38 8.01 Completeness of Disclosure..................... 38 8.02 Organization and Good Standing................. 38 8.03 Authority of CML............................... 38 8.04 Brokers........................................ 39 8.05 Financing...................................... 39 9. CML'S CONDITIONS PRECEDENT TO CLOSING................. 39 9.01 Representations and Warranties................. 40 9.02 Consent of Landlord to Assumption of Lease....................................... 40 9.03 Execution of Covenants Not to Compete.......... 40 9.04 Hart-Scott-Rodino Filings...................... 40
9.05 Employment Agreement of Peter Hussey........... 41 9.06 Purchase of Insurance Policy................... 41 10. CHARTERMED'S CONDITIONS PRECEDENT TO CLOSING.......... 41 10.01 Representations and Warranties................. 41 10.02 Consent of Landlord to Assumption of Lease....................................... 41 10.03 Indemnification Note and Guaranty.............. 42 11. COVENANTS............................................. 42 11.01 Transition Period.............................. 42 11.02 Collection of Receivables...................... 43 11.03 Preservation of Records........................ 45 11.04 Confidentiality................................ 45 11.05 Further Assurances............................. 45 11.06 Product Warranty Costs......................... 45 11.07 Use of Name.................................... 46 11.08 Board Membership............................... 47 11.09 Insurance Policy............................... 47 11.10 Corporate Existence............................ 47 12. INDEMNIFICATION BY CHARTERMED......................... 48 12.01 Indemnification Note........................... 48 12.02 Indemnification Obligation..................... 49 13. INDEMNIFICATION BY CML................................ 50 14. LIMITATIONS ON INDEMNIFICATION........................ 51 14.01 Limitation on Amount........................... 51 14.02 Survival of Representations and Warranties..................................... 51 14.03 Defense of Claims.............................. 51 15. MISCELLANEOUS......................................... 52 15.01 Bulk Transfer Compliance....................... 52 15.02 Successors and Assigns......................... 53 15.03 Governing Law.................................. 53 15.04 Notices........................................ 53 15.05 Payment of Expenses............................ 54 15.06 Entire Agreement; Amendment.................... 54 15.07 Counterparts................................... 55 15.08 Headings....................................... 55 15.09 Waiver......................................... 55 15.10 Separability................................... 55
ASSET PURCHASE AGREEMENT ------------------------ This Asset Purchase Agreement (the "Agreement") is made and entered into this 6th day of February, 1998 by and between Charter Medical, Ltd., a Delaware corporation having a principal office in Winston-Salem, NC ("CML")and CharterMed Inc., a New Jersey corporation having a principal office in 1805 Swarthmore Avenue, Lakewood, NJ 08701 ("CharterMed"). W I T N E S S E T H : WHEREAS, CharterMed is the owner and operator of a manufacturing facility which designs, fabricates and assembles medical products (the "Business") at a leased facility located at 1805 Swarthmore Avenue, Lakewood, NJ 08701 ("Facility"); and WHEREAS, CharterMed desires to sell and transfer to CML, and CML desires to purchase and assume from CharterMed, certain assets, certain liabilities and the Business as a going concern, upon the terms and subject to the conditions set forth in this Agreement; 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 on the Closing Date (as these terms are defined in Article 4), and upon 1 the basis of the representations, warranties, covenants and agreements in this Agreement, CharterMed shall sell, transfer, assign, convey and deliver to CML, and CML shall purchase on the terms and conditions set forth in this Agreement, all of CharterMed's right, title and interest in and to the Assets, free and clear of all mortgages, liens, pledges, security interests, charges, claims, restrictions and encumbrances of any nature whatsoever, except Permitted Liens (as defined in Section 7.03 below). The "Assets" shall mean all real, personal and mixed properties, tangible and intangible, wherever located, which are owned by CharterMed on the Closing Date and are used by CharterMed in connection with the conduct of the Business, except as set forth in Article 2 below, including, without limitation: 1.01 Lease of Real Property. All of CharterMed's right, title and ----------------------- interest in and to the lease dated January 31, 1994, as modified, relating to the land, buildings, improvements and fixtures located at the Facility (the "Lease"). The Lease, pursuant to an Assumption of Lease dated February 3, 1998, is between CML as tenant and George and Constance Stamos and Arthur and Karen Sommers, as landlord. (The real property, improvements and fixtures which are the subject of the Lease and are sometimes hereinafter referred to as the "Real Property"); 1.02 Equipment and Personalty. All the fixtures, machinery, ------------------------ equipment, tooling, motor vehicles, spare parts, furniture, appliances, supplies, computer hardware, software and 2 other items of tangible personal property owned by CharterMed or used in the operation of the Business 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 CharterMed under the contracts, purchase orders, agreements and leases in the ordinary course of business (in addition to the Lease) in effect on the Closing Date entered into by, or for the benefit of, CharterMed relating to the operation of the Business; including without limitation those listed on Schedule 1.03 attached; 1.04 Prepaid Expenses and Deferred Costs. Except as provided by ------------------------------------ Sections 2.04, all rights to prepaid expenses, including the security deposit described in the Lease, and deferred costs of CharterMed relating to the Business and existing on the Closing Date (collectively, the "Prepaid Expenses"), 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; 1.05 Inventory. All of the raw materials, work in process, finished --------- goods, spare parts and supplies inventory, whether on-site or on consignment, used or maintained by CharterMed in connection with the operation of the Business on the Closing Date (the "Inventory"), including without limitation all items set forth on a list of such inventory, with its actual 3 cost, as of the date specified, attached as Schedule 1.05, except such Inventory as shall have been sold in the ordinary course of CharterMed'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 ------------------- CharterMed attributable to the operation of the Business as of the Closing Date, (the "Accounts Receivable") which on June 30, 1997 were $466,452 collectively. CharterMed shall furnish within 10 days prior to the Closing Date a list of all Accounts Receivable as of December 31, 1997, which list is attached hereto as Schedule 1.06; 1.07 Records. All books, accounts, lab notebooks, research and -------- development documents and other records (whether in printed or electronic form) of CharterMed relating to the operation of the Business, wherever located; 1.08 Goodwill. The goodwill of the business including its going -------- concern value; 1.09 Intangible Property. All inventions, patents, formulae, know- -------------------- how, patent applications, copyrights, trade secrets, trademarks, tradenames, drawings, designs, blue prints, computer programs, software and manufacturing records owned by CharterMed and relating to the Business, including but not limited to, records relating to products presently conceived, in research or development, or produced or in use in the business of CharterMed; 4 1.10 Customer and Supplier List. All information, files, records, --------------------------- data, plans, contracts and recorded knowledge, including customer and supplier lists, relating to the Business. A complete and accurate list of the customers and suppliers of CharterMed, which shall include all accounts shipped to in 1995 and 1996 by dollar amount, plus all new customers added in 1997; by dollar amount is attached as Schedule 1.10; 1.11 CharterMed Names. The exclusive right to use the name ----------------- "CharterMed" and any derivation and all related names, marks, logos and abbreviations, subject, however, to the provisions of Section 11.07 below; 1.12 Insurance Policies. All insurance policies of CharterMed and ------------------- rights in connection therewith including, without limitation, any prepaid premiums as listed in Schedule 1.12; and 1.13 Website. All rights to the use of the existing CharterMed -------- website. 2. ASSETS TO BE RETAINED BY CHARTERMED. Notwithstanding the foregoing, the Assets to be sold, transferred, assigned or conveyed to CML shall not include the following: 2.01 Cash. All of CharterMed's cash on hand and all cash contained in ---- any bank account of CharterMed; 2.02 Certain Records. Such business records which relate to the ---------------- assets and obligations of CharterMed retained by CharterMed, provided, however, that CharterMed shall preserve and maintain such business records for a period of seven (7) years, 5 or until all open tax years are closed, from and after the Closing Date and permit CML reasonable access to the same and not destroy or discard the same without CML's prior written consent; 2.03 Employee Pension and Benefit Plans. Assets associated with any ----------------------------------- employee benefit plans of CharterMed, including but not limited to, welfare plans and all contracts and insurance policies entered into or issued pursuant to any such plan; 2.04 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 CharterMed prior to the Closing, whether or not in being or known at the Closing Date; and 2.05 Corporate Records. CharterMed 's corporate minute book, stock ------------------ record books and corporate seal. 3. LIMITED ASSUMPTION OF LIABILITIES BY CML. ----------------------------------------- 3.01 Obligations Under Contracts and Leases. As partial consideration --------------------------------------- for the sale of the Assets, CML will assume responsibility for, and perform or satisfy when due, all liabilities, commitments and obligations of CharterMed under the Lease, and those contracts, purchase orders, agreements and other leases existing as of the Closing and listed on Schedule 1.03; 3.02 Trade Payables. CML shall assume responsibility for the specific --------------- trade payables and accrued expenses set forth in Schedule 3.02 (the "Trade Payables"); 6 3.03 Product Warranty and Return Obligations. (a) CML shall 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 the Business manufactured by CML and sold, distributed or otherwise disposed of by CML after the Closing, except those described in paragraph 3.03(b)(ii). (b) CharterMed 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 (i) sold, distributed or otherwise disposed of by CharterMed at any time prior to the Closing Date, including claims made after the Closing Date, and (ii) in inventory as finished goods or inventory at the sterilizer at the Closing Date and sold, distributed or otherwise disposed of by CML; 3.04 Personal Property Taxes. CharterMed will pay to CML any unpaid ------------------------ property taxes that accrue prior to the Closing Date; 3.05 Post-Closing Responsibilities. (a) CML 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 by CML after the Closing and relating to periods from and after the Closing. (b) CharterMed shall be solely responsible for any and all liabilities and obligations directly or indirectly arising out of 7 or relating to the conduct of the Business by CharterMed before the Closing and relating to periods before the Closing. 3.06 Liabilities Not Assumed. All liabilities other than those listed ------------------------ in sections 3.01 through 3.05 are expressly not assumed by CML. CharterMed agrees that it will remain responsible for all liabilities not assumed; and 3.07 No Expansion of Third Party Rights. The assumption provided for ----------------------------------- in Sections 3.01 through 3.05 above shall in no way expand the rights or remedies of any third party against CML or CharterMed as compared to the rights and remedies which such third party would have had against CharterMed had CML not assumed such liabilities. 4. CLOSING; PURCHASE PRICE AND PAYMENT. 4.01 Closing Date, Place and Time. The transactions contemplated ----------------------------- shall take place at 11:00 a.m. on February 6, 1998 at the offices of Burns, Kennedy, Schilling & O'Shea, 598 Madison Avenue, 9/th/ Floor, New York, NY 10022, 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 CharterMed to CML 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 8 by the Agreement shall be deemed effective as of 11:59 p.m. on the Closing Date; 4.02 Purchase Price and Method of Payment. The purchase price for the ------------------------------------- Assets and the Covenants Not to Compete referred to in Section 9.03, net of the specific liabilities assumed, (the "Net Purchase Price") shall be $7,300,000 which will be payable as follows: (a) $6,580,000 by wire transfer of funds to CharterMed's bank account, or delivery of other immediately available funds to CharterMed, at the Closing and (b) an Indemnification Note in the amount of $720,000 ("Indemnification Note" described further in paragraph 12.01 below) with a guarantee of Lydall Central, Inc. both substantially in the form of Exhibits A1 and 2 attached hereto. The Net Purchase Price shall be subject to adjustment as set forth in Section 4.05; 4.03 Allocation of Purchase Price. After Closing, CML and CharterMed ----------------------------- shall attempt in good faith to agree to an allocation of the Purchase Price (including liabilities assumed by CML pursuant to Section 3) among the Assets, the Covenants Not to Compete and the liabilities assumed. The parties shall cause appropriate filing reflecting the allocation to be made with Federal and State taxing authorities as shall be required by law. In the event CML and CharterMed do not agree on such allocation, each may allocate the Purchase Price in its own discretion and file its tax return accordingly; 9 4.04 Risk of Loss. All risk of loss with respect to the Assets shall ------------ remain with CharterMed until the Closing and shall pass to CML when the transactions contemplated are deemed effective as defined in 4.01 above; and 4.05 Net Asset and Liability Adjustment. ----------------------------------- (a) Within 30 days after the Closing Date, CharterMed shall prepare and deliver to CML a statement (the "Closing Date Statement") setting forth CharterMed's Net Assets and Liabilities (as defined in Section 4.05(d)(iii)) as of the Closing Date ("Closing Date Net Assets and Liabilities"). The Closing Date Statement shall also set forth a calculation of the amount by which Closing Date Net Assets and Liabilities exceeds or is less than $1,167,796 ("Adjustment"). Within 90 days of the Closing Date, CML shall complete its examination of the Closing Date Statement and shall deliver to CharterMed either a written acknowledgment of CML accepting the Closing Date Statement and the Adjustment or a written report ("Adjustment Report") setting forth in detail any proposed adjustments to the Closing Date Statement and the Adjustment and the reasons and supporting data therefor. In the event that CML fails to deliver such acknowledgment or Adjustment Report within such ninety (90) day period, the Closing Date Statement (and each of the Closing Date Net Assets and Liabilities and the Adjustment set forth thereon) delivered by CharterMed to CML shall be deemed to be correct and to have been finally determined under Section 4.05 (c) below. 10 (b) If CML shall deliver an Adjustment Report to CharterMed within the period set forth in Section 4.05(a), CML and CharterMed shall attempt to resolve any differences and agree upon the Adjustment. In the event that CharterMed and CML fail to agree on any or all of CML's proposed adjustments to the Closing Date Statement contained in the Adjustment Report within 15 days after CharterMed receives the Adjustment Report, then the parties shall submit the matter to Arthur Anderson (the "Independent Auditors") to resolve any dispute. The Independent Auditors, acting as independent auditors and not for the benefit of CML or CharterMed, shall make the final determination with respect to the correctness of the adjustments in Closing Date Net Assets and Liabilities proposed by CML in the Adjustment 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 CML and CharterMed. The costs and expenses of the Independent Auditors for their services rendered pursuant hereto shall be borne equally by CML and CharterMed. (c) The term "Final Closing Date Statement" shall mean the Closing Date Statement delivered pursuant to Section 4.05(a), as adjusted, if at all, pursuant to Section 4.05(a) or 4.05(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, CML agrees to provide CharterMed, its 11 representatives and advisors, and the Independent Auditors with access, during CML's normal business hours and upon reasonable advance notice, to the books and records of CharterMed 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 Assets and Liabilities set forth in the Final Closing Date Statement exceeds $1,167,796, CML agrees to pay to CharterMed within 5 days of the Settlement Date an amount equal to the excess of the Closing Date Net Assets and Liabilities set forth in the Final Closing Date Statement over $1,167,796 within 5 days of the Settlement Date to CharterMed's bank account. (ii) In the event that the Closing Date Net Assets and Liabilities set forth in the Final Closing Date Statement is less than $1,167,796, the parties agree that the amount of the difference shall be paid to CML by off set against amounts due and owing under the Indemnification Note, within 5 days of the Settlement Date, as provided in the Indemnification Note. (iii) For purposes of this Section 4.05, the term "Net Assets and Liabilities" shall mean an amount equal to the difference between (x) the aggregate amount of CharterMed's Accounts Receivable, less any applicable allowance for doubtful accounts and other reserves, Inventory, Prepaid Expenses and Net Fixed Assets as of the Closing Date, and (y) the amount of CharterMed's Trade Payables (including accrued expenses) being assumed pursuant to Section 3.02 as of the Closing Date, all 12 determined consistently with the way such amounts were determined for purposes of the 1996 Year End Statements (as defined in Section 7.07). 5. EMPLOYEES; EMPLOYEE PENSION AND WELFARE PLANS 5.01 Employment; Medical Benefits. With respect to any employee who ----------------------------- becomes employed by CML, CML shall provide substantially the same medical benefits as are presently provided by CharterMed; 5.02 Employee Pension Plans and Benefits. CML shall not assume any ------------------------------------ obligation for and shall have no liability to provide to any employee or former employee of CharterMed pension benefits earned or accrued prior to the Closing, if any, under any pension plan or any other employee benefit plan maintained by CharterMed with respect to service with CharterMed or any other entity prior to the Closing. All such obligations and liabilities, if any, shall remain the sole and exclusive responsibility of CharterMed; 5.03 Other Employee Pension Plans and Benefits. CML shall not assume ------------------------------------------ any obligation and shall have no liability whatsoever to CharterMed or any employee or former employee thereof or any other person or entity with respect to the funding, payment or provision of pension, profit-sharing, 401(k) benefits or other plans earned or accrued prior to the Closing, if any, under any pension, profit-sharing 401(k) benefits or 13 other plans sponsored by CharterMed, whether or not any employees become employees of CML. CharterMed 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 5.04 Employee Welfare Plans, Worker's Compensation. CML shall have --------------------------------------------- no liability whatsoever to employees or former employees of CharterMed with respect to incurred worker's compensation claims or to benefits provided, earned or accrued under any welfare benefit plan sponsored by CharterMed prior to the Closing. CML 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 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. 6. INSTRUMENTS OF CONVEYANCE AND ASSUMPTION. (a) At the Closing, CharterMed shall deliver to CML such bills of sale, endorsements and assignments in the form of Exhibits B-1 attached hereto, and such other instruments of sale, conveyance, transfer 14 and assignment as may be reasonably requested by CML, in order to convey to CML 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 7.03 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. CML shall pay the costs for recording the instruments of conveyance. Any sales, use, excise, transfer or other similar taxes, imposed with respect to the transfer of the Assets shall be the sole responsibility of CharterMed; and 6.01 Conveyance Documents. At the Closing, CML shall execute and --------------------- deliver to CharterMed an Assumption Agreement in the form attached as Exhibit B- 2 and such other instruments or agreements of assumption as may be reasonably requested by CharterMed, in order to further evidence the assumption by CML of the liabilities specified in Article 3. 7. REPRESENTATIONS AND WARRANTIES OF CHARTERMED. CharterMed represents, warrants and agrees that: 7.01 Completeness of Disclosure. No representation or warranty by --------------------------- CharterMed in this Agreement nor any certificate, schedule, statement, document or instrument furnished or to be furnished to CML pursuant hereto, or in connection with the 15 negotiation, execution or performance of this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact required to be stated herein or therein or necessary to make any statement herein or therein not misleading; 7.02 Organization and Good Standing of CharterMed. CharterMed is a --------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey with full power and authority to own and operate the Assets and to conduct the Business as now being conducted and CharterMed is duly qualified to do business in New Jersey 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; 7.03 Title to and Condition of the Assets. CharterMed 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 7.03, 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"). CharterMed has full right, power, capacity and authority to sell, transfer, assign, convey and deliver good title to the Assets to CML as provided in this Agreement, and 16 delivery on the Closing Date will convey to CML 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; 7.04 Contracts of CharterMed. Schedule 1.03 includes a correct and ----------------------- complete list of all written or oral contracts agreements or arrangements to which CharterMed is a party relating to the operation of the Business including any agreements with CharterMed's shareholders, directors or officers. CharterMed has no contracts in excess of $1,000 other than those listed on Schedule 1.03. CharterMed has provided CML with true and correct copies of all such written contracts, including the Lease and a true and complete summary of all oral contracts; 7.05 CharterMed's Authority and No Conflict. CharterMed 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 CharterMed. The execution of this Agreement and the consummation of the transactions contemplated will not result in any conflict with, breach, result in a violation or termination of, or default under CharterMed's charter or by-laws or any law, statute, rule, regulation, judgment, order, decree, mortgage, agreement, deed of trust, indenture or other instrument to which CharterMed is a party or by which it is bound and CharterMed has obtained all necessary 17 consents or approvals of governmental bodies, lenders, lessors or other third parties. All corporate action and other authorizations prerequisite to the execution of this Agreement by CharterMed and the consummation by CharterMed of the transactions contemplated by this Agreement have been taken or obtained by CharterMed. The Agreement is a valid and binding agreement of CharterMed, enforceable against CharterMed in accordance with its terms; 7.06 Brokers. 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; 7.07 Financial Statements. Attached as Schedule 7.07 are the --------------------- unaudited financial statements of CharterMed for the twelve month period ended December 31, 1997 ("Interim Statements") and the reviewed financial statements for the full fiscal years ended December 31, 1994, December 31, 1995 and December 31, 1996 ("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 CharterMed at and as of December 31, 1994, December 31, 1995 and December 31, 1996 respectively, and the results of operations for the fiscal years then ended. Except as set forth in the Notes to the Interim Statements, the Interim Statements have been prepared in 18 accordance with GAAP, do not reflect any material accounting principle changes from prior periods and fairly present in all material respects the financial position of CharterMed at and as of December 31, 1997 and the results of operations for the twelve months then ended. The information set forth in Schedule 7.07 is true and correct in all material respects; 7.08 Taxes. CharterMed 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. CharterMed 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 CharterMed 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. CharterMed shall continue to be responsible for all such taxes; 7.09 Litigation or Claims. There is no litigation, proceeding, -------------------- arbitration, alternate dispute matter assessment, governmental investigation or other claim pending, or so far as 19 known to CharterMed, threatened, against or relating to CharterMed or the Business or otherwise relating to the transactions contemplated by this Agreement, except as set forth on Schedule 7.09; 7.10 Compliance with Law. CharterMed has complied with all -------------------- applicable statutes and regulations of all governmental authorities having jurisdiction over CharterMed 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 or any of the Assets; 7.11 Absence of Certain Changes or Events ------------------------------------- (a) Since June 30, 1997, except as set forth in Schedule 7.11, CharterMed has not: (i) incurred any obligation or liability (fixed or contingent), except trade or business obligations incurred in the ordinary course of business which are (either individually or in the aggregate) materially adverse, and except for 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 Interim Balance Sheet, current liabilities incurred since the date of the Interim Balance Sheet in the ordinary course of business, and obligations 20 and liabilities under contracts, leases or documents referred to in Schedule 1.03; (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, except for a fair consideration in the ordinary course of business or entered into any option, contract or other commitment to sell, transfer, lease or otherwise dispose of any of its assets or properties; (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 in the aggregate are not material; (vi) waived or released any rights of any material value; (vii) transferred or granted any rights under any concessions, leases, licenses, agreements, patents, inventions, trademarks, trade names, copyrights, or other know-how relating to the Business; (viii) made or granted any general wage or salary increase or entered into any employment contract with any officer or key employee or increased any officer or key employee wage or salary more than 5% since June 30, 1997; (ix) entered into any transaction other than in the ordinary course of business; 21 (x) suffered any business interruption 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; (xii) made or entered into any contract or commitment to make any capital expenditures, which have not yet been paid for, in excess of $10,000 individually or $15,000 in the aggregate; and (xiii) made any non-cash distribution of any kind to any of the shareholders, officers or directors of CharterMed; 7.12. Environmental Matters. ---------------------- (a) The following definitions shall apply for purposes of this Section: 1 "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. 22 (ii) "Environmental Condition" means circumstances with ------------------------- respect to soil, surface waters, groundwaters, stream sediments, air and similar environmental media both on and off the Real Property and any other real property which CharterMed owns, leases or operates or has ever in the past owned, leased or operated (together "CharterMed Property") resulting from any activity or inactivity, including but not limited to, storage, treatment, transportation, 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 CharterMed or third parties including, but not limited to, governmental entities. (iii) "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 . (iv) "Release" means releasing, spilling, leaking, pumping, --------- pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping, or as 23 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 interpreted to include the past, present and future tense, as appropriate. (b) Except as set forth in Schedule 7.12, (i) At no time have the Assets or CharterMed 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, nor have there ever been, underground storage tanks on CharterMed Property, to the best of the knowledge of CharterMed. (ii) CharterMed and the CharterMed Property are in full 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 the CharterMed Property. (iv) There are no actions, suits, claims or proceedings, pending or threatened, arising out of the condition of the Assets or the CharterMed Property or relating to a violation or non-compliance with any Environmental Law or with respect to the generation, storage, disposal, discharge or 24 Release of Hazardous Materials off-site or at or from the Assets or the CharterMed Property or relating to health or safety practices at the CharterMed Property. (v) CharterMed has not received any notice from its insurance carrier or mortgagee as to recommendations made regarding Hazardous Materials or safety issues at the Assets or the CharterMed Property, and CharterMed has not been denied insurance coverage (nor has any insurance coverage been canceled) by reason of Hazardous Materials at the Assets or the CharterMed Property or for any other reason. (vi) Neither the Assets nor the CharterMed Property are a designated landmark or in a designated Historic District, and CharterMed has not received any notice that either the Assets or the CharterMed 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 the CharterMed Property as intended by CML have been issued and are in full force and effect, and CharterMed is in full compliance therewith. CharterMed 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 the CharterMed 25 Property and there has been no such release on, upon or into any real property adjoining or in the vicinity of the Assets or the CharterMed Property which through air, soil or groundwater migration could have come from sources located upon the Assets or the CharterMed Property. (ix) CharterMed has obtained all material permits, licenses and other authorizations which are required under federal, state and local laws relating to pollution or protection 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. CharterMed 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. 26 (x) CharterMed is not aware of, nor has CharterMed 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 emission, discharge, release or threatened release into the environment, of any Hazardous Material in connection with the operation of the CharterMed Property; 7.13 No Change in Business Relationships. Since June 30, 1997, there ------------------------------------ has not been any interruption in the business relationship of CharterMed with any supplier, customer or other party with which CharterMed has or has had any substantial business agreement or arrangement. CharterMed has no knowledge that any such party contemplates termination of such party's business relationship with CharterMed or any reduction in the volume of business carried on with CharterMed during the preceding two years, except as set forth on Schedule 7.13; 7.14 Employment Agreements. (a) CharterMed has no: ---------------------- (i) collective bargaining agreement in effect with respect to the employees of CharterMed, nor 27 (ii) employment agreement with any of the employees of CharterMed. (b) With respect to employees of CharterMed: (i) CharterMed 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; (ii) there is no unfair labor practice complaint against CharterMed pending or 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 threatened against or directly affecting CharterMed; (iv) no union representation question exists and no union organization effort is underway, respecting the employees of CharterMed. (v) CharterMed has not experienced any material work stoppage in the last eighteen (18) months; (vi) CharterMed 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; 28 (vii) upon termination of the employment of any of the employees of CharterMed by CML after the Closing Date, CML will not be liable to any of its employees for severance pay pursuant to any severance policy or agreement entered into by CharterMed for payments to be made in the event of a change of control; (viii) The employment of each of CharterMed's employees is terminable at will without cost to CharterMed except for payments required under the welfare plans and employee plans and payment of accrued salaries or wages and vacation pay. No employee or former employee has any right to be rehired by CharterMed before a non-employee is hired by CharterMed. (ix) Schedule 7.14 contains a true and complete list of all employees who are employed by CharterMed as of December 31, 1997, and said list correctly reflects their current salaries, wages, most recent compensation adjustment, other compensation (other than benefits under the plans, welfare plans and employee plans), dates of employment and positions. CharterMed 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. 7.15 Patents, Trademarks, Trade Names and Copyrights. ------------------------------------------------ The Business as presently conducted by CharterMed, and as proposed to be conducted by CML, does not infringe, interfere or contravene any presently outstanding patents, patent licenses, trademarks, service marks, trade names, brand names, applications 29 or license rights or other proprietary rights held by others, and CharterMed, to its knowledge, 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 CharterMed or used by CharterMed in the operation of its business are listed in Schedule 7.15; 7.16 Processes and Know-how. CharterMed possesses, and upon ----------------------- consummation of the transactions contemplated hereby CML will possess, 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 as presently conducted, without the need for patents or licenses other than as disclosed in Schedule 7.15 or listed under Schedule 1.03; 7.17 Utilities. There is available to the facility and such ---------- facility is adequately serviced by, such public utilities as are required to conduct the Business 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; 7.18 Licenses and Permits. Schedule 7.18 contains a complete and -------------------- accurate list of all registrations, certifications, permits, licenses, approvals, authorizations and consents of any 30 federal, state or municipal governmental agency or authority held by CharterMed which are required for the conduct of the Business 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. CharterMed has no knowledge of any condition presently existing which affects the validity of any of the Licenses and Permits. CharterMed shall transfer to CML such Licenses and Permits as are transferable without the consent of a third party. If any Licenses and Permits are not transferable to the CML, CharterMed will cooperate with and assist CML in applying for any such Licenses and Permits as are not transferable, or obtaining such consents; 7.19 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 (whether known or unknown, fixed or contingent) of CharterMed as of the date of the Closing. As of the Closing Date, CharterMed will have 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 is material, or (iii) disclosed in Schedule 7.19; 31 7.20 Inventory - Except as listed on Schedule 7.20, the inventories of --------- CharterMed as reflected on the Interim Statements consist, and the Inventory on hand on the Closing Date, as listed on Schedule 1.05, consists, of items of a quality and quantity usable and salable in the ordinary course of the 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 defective or damaged items have been written down to realizable market value. Obsolete items shall be deemed to have no value. An item of Inventory shall be considered obsolete if no portion of such item is not expected to be consumed in the manufacturing process or is not expected to be sold within a twenty-four month period following Closing. "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 32 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 constitutes raw material, at the lesser of cost or market value; 7.21 Accounts and Notes Receivable - The accounts receivable listed on ----------------------------- Schedule 1.06 and notes receivable of CharterMed as reflected on the Interim Statements, and the accounts receivable and notes receivable of CharterMed 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 CharterMed on the Closing Date are not paid in full prior to the one hundred and twentieth (120/th/) day after the Closing Date, CharterMed shall repurchase, free and clear of any encumbrance, all said unpaid accounts and notes (and any unpaid portion of either) from CML for its or their then unpaid balance in accordance with Section 11.02. The accounts receivable and notes receivable shall be valid and enforceable, uncontested claims for goods delivered or services performed, with no offsets, defenses, counterclaims or disputes as to the amount owing, except as specifically noted in Schedule 7.21; 7.22 Solvency. CharterMed 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 33 transactions contemplated hereby will not cause CharterMed to fail to pay its debts as they become due, and will not cause the remaining assets of CharterMed 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; 7.23 Subsidiaries. CharterMed 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; 7.24 ERISA and COBRA Compliance. (a) Except for the plans disclosed --------------------------- on Schedule 7.24 (the "Plans"), CharterMed 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 CharterMed's employees (collectively, the "Employee Plans"), nor has CharterMed nor any of its officers or directors taken any action directly or indirectly to obligate CML to institute any such Employee Plan. CharterMed has 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 34 to the extent required by law. To the best of CharterMed'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) CharterMed 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 CharterMed, maintain only the group health plans listed in Schedule 7.24, covering employees of CharterMed. Except as disclosed in Schedule 7.24 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, and regulations thereunder; 7.25 Product Liability. CharterMed 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 described in Schedule 7.25. There are no material claims pending or anticipated or threatened against CharterMed with respect to the quality of or absence of defects in such products or services. Schedule 7.25 sets forth a summary, which is accurate 35 in all material respects, of all returns of defective products during the period beginning January 1, 1996 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. CharterMed has no knowledge or reason to believe that the percentage of products sold and services performed by CharterMed 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 CharterMed has sold and performed for which warranty adjustments have been required in the past. CharterMed has not been required to pay direct, incidental, or consequential damages to any person in connection with any of such products or services at any time during the six (6) year period preceding the date hereof; 7.26 Corrupt Practices. Neither CharterMed nor any of its former or ----------------- current officers, directors, employees, agents or representatives has made, directly or indirectly, with respect to CharterMed or its business activities, any bribes or kickbacks, illegal political contributions, payments from corporate funds not recorded on the books and records of CharterMed, 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 36 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, CharterMed 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; 7.27 Adequate Assets. Except for cash, the Assets are adequate to ---------------- conduct the Business as it is presently being conducted, and the Assets conveyed to CML on the Closing Date will be adequate to enable CML to continue to conduct such Business as it is presently being conducted; and 7.28 Condition of Equipment and Personalty. The Equipment and ------------------------------------- Personalty are in good operating condition and repair (ordinary wear and tear excepted). 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 CharterMed or any patent structural or engineering defects. CharterMed 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 6/30/97 Interim Statements, (ii) leased by it under the Lease, or (iii) which it otherwise has the right to use under contracts, licenses or agreements disclosed to CML pursuant to Schedules to this Agreement. 37 8. REPRESENTATIONS AND WARRANTIES OF CML. CML represents, warrants and covenants that: 8.01 Completeness of Disclosure. No representation or warranty by CML -------------------------- in this Agreement nor any certificate, schedule, statement, document or instrument furnished or to be furnished to CharterMed pursuant hereto, or in connection with the negotiation, execution or performance of this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact required to be stated herein or therein or necessary to make any statement herein or therein not misleading; 8.02 Organization and Good Standing. CML 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 carry on the Business as now being conducted; 8.03 Authority of CML. CML has the full 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 CML and the execution of this Agreement and the consummation of the transactions contemplated hereby 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, 38 mortgage, agreement, deed of trust, indenture or other instrument to which CML is a party or by which it is bound and CML has obtained all necessary 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 by this Agreement have been taken or obtained by CML. This Agreement is a valid and binding agreement of CML, enforceable against CML in accordance with its terms; 8.04 Brokers. There has been no broker or finder involved in any -------- manner on behalf of CML 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 CML; and 8.05 Financing. CML 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 transactions contemplated by this Agreement. CML has furnished reasonable substantiation of the foregoing to CharterMed and will, from time to time prior to the Closing at the reasonable request of CharterMed, provide to CharterMed additional substantiation of the status thereof. 9. CML'S CONDITIONS PRECEDENT TO CLOSING. CML's agreement to purchase and pay for the Assets is subject to 39 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 6 and to the occurrence of each of the following conditions (any of which may be waived by CML): 9.01 Representations and Warranties. Each of the representations and ------------------------------- warranties set forth in Article 7 and in the Schedules delivered pursuant thereto shall be true and correct in all material respects on the Closing Date, and CharterMed shall execute and deliver to CML a certificate signed by authorized officers of CharterMed dated the Closing Date to such effect; 9.02 Consent of Landlord to Assumption of Lease. On the Closing Date, ------------------------------------------- CML shall receive from the landlord under the Lease, landlord's consent to CML's assumption of the Lease as modified; 9.03 Execution of Covenants Not to Compete. CharterMed and each of --------------------------------------- Messrs. Hussey and Stroller shall have executed and delivered Covenants Not to Compete running to the benefit of CML in the form of Exhibits C1 through C3 respectively attached; 9.04 Hart-Scott-Rodino Filings. In the reasonable opinion of CML, all ------------------------- necessary requirements of the provisions of the Hart-Scott-Rodino Act (15 U.S.C. (S)18A) and the regulations thereunder shall 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; 40 9.05 Employment Agreement of Peter Hussey. On the Closing Date, CML ------------------------------------ shall have received from Peter Hussey, the executed Employment Agreement of Peter Hussey, substantially in the form of Exhibit D attached; and 9.06 Purchase of Insurance Policy. CML shall have received from ---------------------------- CharterMed a certificate of insurance evidencing coverage under the Insurance Policy described in Section 11.09 and designating CML as an additional insured. 10. CHARTERMED'S CONDITIONS PRECEDENT TO CLOSING. CharterMed's agreement to sell and deliver the Assets is subject to payment at the Closing of the amount specified in Sections 4.02, the delivery at the Closing of the instruments and agreements of assumption as contemplated and to the occurrence of each of the following conditions (any of which may be waived by CharterMed): 10.01 Representations and Warranties. Each of the representations and ------------------------------- warranties set forth in Article 8 shall be true and correct in all material respects on the Closing Date, and CML shall execute and deliver to CharterMed a certificate signed by authorized officers of CML dated the Closing Date to such effect; and 10.02 Consent of Landlord to Assumption of Lease. On the Closing Date, ------------------------------------------- CharterMed shall receive from the landlord under the Lease, landlord's consent to CharterMed's assignment of 41 and CML's assumption of the Lease as modified, and landlord shall have released CharterMed from any obligations under the Lease. 10.03 Indemnification Note and Guaranty. CharterMed shall have --------------------------------- received from CML the Indemnification Note and Guarantee of Lydall Central, Inc. described in Section 4.02. 11. COVENANTS 11.01 Transition Period. During the transition of ownership from ------------------ CharterMed to CML beginning on the Closing Date and continuing for a reasonable period thereafter, not to exceed one year, CharterMed will: (a) to the extent not included in the Assets, make available to, and take all actions reasonably necessary to transfer and convey to, CML all information or records needed for the manufacture of the products and the operation of the Business including access to all software or other computer systems used by CharterMed or any entity under CharterMed's control in relation to CharterMed's operation of the Business; and (b) make available to CML its representatives for conferences, assistance and meetings at 42 reasonable times during normal business hours, as CML shall reasonably request; 11.02 Collection of Receivables. If any Account Receivable listed on -------------------------- Schedule 1.06 shall be or become overdue and owing for a period in excess of one hundred twenty (120) days after date of invoice, at CML's request, CharterMed shall repurchase said Account Receivable from CML for its then unpaid balance, provided that CharterMed's obligation to repurchase Accounts Receivable shall be subject to the following: (a) CML shall promptly and diligently attempt to collect all of the Accounts Receivable before the end of 120-day collection period above referred to, but CML shall not be required to institute legal proceedings for this purpose; (b) any amounts received by CML with respect to an Account Receivable from an account debtor shall be applied against the invoice to which it relates. (c) CML agrees to permit CharterMed, including its attorneys, accountants, agents and designees, such access to the records of CML relating to the Accounts Receivable, and CML's collection thereof during normal business hours as CharterMed may deem necessary or desirable; (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) 43 before CML receives payment from CharterMed under this section 11.02, and (ii) such products are reasonably marketable by CML, then the amount of the Accounts Receivable related to such products that CML may require CharterMed to repurchase shall be reduced by an amount equal to the standard cost under CharterMed's system that was incurred by CharterMed in producing such returned products less any cost of rework incurred by CML and a reasonable restocking charge. If such reasonably marketable products are returned after CML instituted its rights to require CharterMed to repurchase, CML shall reverse or eliminate the set- off to the extent of an amount equal to the standard cost incurred by CharterMed in producing such goods less any cost of rework incurred by CML and a reasonable restocking charge. The return of any products which are not reasonably marketable by CML shall not result in a reduction of the amount of CharterMed's obligation under this Section 11.02. (e) CML shall transfer to CharterMed all rights to the Accounts Receivable with respect to which CML has exercised its repurchase rights under this Section 11.02 as well as those Accounts Receivable which come within the limitation set forth in 44 Section 14.01. CharterMed 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. CharterMed, in collecting the unpaid Accounts Receivable, will make best efforts to maintain CML's relationship with the account; 11.03 Preservation of Records. CML covenants that for a period of ------------------------ seven years from and after the Closing Date, it shall preserve and maintain the records referred to in Section 1.07, shall permit CharterMed reasonable access to such records, and shall not discard or destroy such records without CharterMed's written consent; 11.04 Confidentiality. CharterMed and CML have executed a --------------- Confidentiality Agreement dated February 12, 1997 which is attached as Exhibit E, which will continue in full force and effect; 11.05 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 documents and take such other actions as such other party may reasonably request in order to effect the transactions contemplated; 11.06 Product Warranty Costs. CML shall perform, in a workmanlike ----------------------- manner, any product warranty repair or replacement obligation of CharterMed (not assumed by CML pursuant to Section 45 3.04) with respect to products of CharterMed sold by CharterMed prior to the Closing and any finished inventory or inventory at the sterilizer acquired from CharterMed. CharterMed shall reimburse CML for its actual costs for salaries, wages, employee benefits and other out-of-pocket costs to perform such warranty services on CharterMed's behalf; 11.07 Use of Name. From and after the Closing Date, neither ----------- CharterMed, Peter Hussey nor Charles Stroller shall have any right to utilize the name "CharterMed" or any derivation, related name, mark, logo or abbreviation of such name, all of which shall be the sole and exclusive property of CML; provided, however, that CharterMed shall be permitted to continue its corporate existence and to utilize its present corporate name for the sole purpose of winding up its affairs and dissolving its corporate existence. Until such time as CharterMed is dissolved, CharterMed shall not engage in any active trade or business and shall exist for the sole purpose of winding up its corporate affairs, including the preparation and filing of any necessary tax returns and other filings with governmental agencies. In the event that CML reasonably determines that the continued corporate existence of CharterMed impairs or negatively affects the ability of CML to utilize the name "CharterMed" for purposes of continuing the active conduct of the Business, then, upon no less than 30 days prior written notice from CML, CharterMed, Peter Hussey and Charles Stroller shall take whatever actions are 46 necessary or appropriate to change its corporate name to a name that has no similarity to the name "CharterMed"; 11.08 Board Membership. CML will nominate, and use its best efforts to ---------------- cause, Peter Hussey and Charles Stroller to be elected to its board of directors for a one year term, subject however to the right of CML to remove them from the board as provided for under the law, in CML's sole discretion; 11.09 Insurance Policy. CharterMed shall purchase a policy of ---------------- insurance to cover up to $5 million of continuing liability of the Business arising out of its operation of the Business prior to the Closing or as otherwise set forth in this Agreement (the "Insurance Policy"). CML shall be named as an additional insured on the Insurance Policy. CML shall pay one half of the premium of the Insurance Policy up to $27,500 by including that amount in the Purchase Price Adjustment described in Section 4.05. CharterMed hereby represents and warrants to CML that the policy will insure against all claims relating to or arising out of CharterMed's operation of the Business prior to the Closing, including but not limited to liability for all products manufactured or in inventory at the sterilizer prior to Closing, even if sold after the Closing; and 11.10 Corporate Existence. CharterMed will maintain its corporate ------------------- existence in good standing under the laws of the State of New Jersey. 47 12. INDEMNIFICATION BY CHARTERMED. 12.01 Indemnification Note. In accordance with paragraph 4.02, -------------------- $720,000 of the Purchase Price will be in the form of an Indemnification Note for the purpose of satisfying to the extent possible, CharterMed's, obligations if any, arising out of paragraph 12.02. On June 5, 1998, the amount of $240,000, less any amounts payable or claimed prior to that date with respect to the covenants, agreements, obligations, representations and warranties , will be paid by CML to CharterMed. On October 5, 1998, the amount of $240,000, less any amounts payable or claimed with respect to the covenants, agreements, obligations, representations and warranties prior to that date will be paid by CML to CharterMed. On August 6, 1999, the balance of the Indemnification Note with all interest earned, less any amounts payable or claimed prior to that date with respect to the covenants, agreements, obligations, representations and warranties, will be paid by CML to CharterMed. Upon notice to CharterMed specifying in reasonable detail the basis for such set-off, CML may set-off any amount to which it may be entitled under this Section 12 against amounts otherwise payable under the Indemnification Note. The exercise of such right of set-off by CML in good faith, whether or not ultimately determined to be justified, will not constitute an event of default under the Indemnification Note. Neither the 48 exercise of nor the failure to exercise such right of set-off will constitute an election of remedies or limit CML in any manner in the enforcement of any other remedies that may be available to it. If CharterMed disagrees with the set-off, it will so notify CML within ten days of CML's notice and the matter will be referred to Arthur Anderson for its decision as provided in Section 4.05(a); and 12.02 Indemnification Obligation. Subject to the conditions and --------------------------- limitations set forth in this Agreement, CharterMed, shall defend, indemnify and hold CML harmless from and against any and all claims, actions, suits, demands, assessments, judgments, damages, liabilities, losses, costs or expenses (including, without limitation, fines, penalties, punitive damages and reasonable attorneys' fees) (collectively, "Damages") actually incurred or suffered by CML 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 CharterMed that is contained in this Agreement or any certificate, document or instrument delivered to CML in connection with this Agreement, (b) any breach or failure to perform any covenant or other agreement of CharterMed that is contained in this Agreement, (c) any failure by CharterMed to comply with any applicable bulk sales laws or to discharge any claims asserted against CML under such laws, (d) any debt, liability or obligation of CharterMed not expressly assumed by CML pursuant to this Agreement, (e) any claim for a finder's fee 49 or brokerage or other commission arising by reason of any services alleged to have been rendered for or at the request of CharterMed with respect to this Agreement and (f) any claim based on any action, transaction, condition or event occurring or existing in connection with the 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. 13. INDEMNIFICATION BY CHARTER MEDICAL, LTD. Subject to the conditions and limitations set forth in this Agreement, CML shall defend, indemnify and hold CharterMed harmless from and against any and all Damages actually incurred or suffered by CharterMed 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 CML that is contained in this Agreement or any certificate, document or instrument delivered to CharterMed in connection with this Agreement, (b) any breach or failure to perform any covenant or other agreement of CML that is contained in this Agreement, (c) any of the debts, liabilities and obligations of CharterMed specifically assumed by CML pursuant to this Agreement, and (d) any claim based on any action, transaction, condition or event occurring or existing in connection with the Business or any of the Assets after the 50 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. LIMITATIONS ON INDEMNIFICATION. The obligation of the indemnifying party to indemnify the indemnified party set forth in Sections 12 and 13 above shall be subject to the following limitations: 14.01 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 $37,500 in the aggregate; 14.02 Survival of Representations and Warranties. Regardless of any ------------------------------------------- investigation made by any party, each of the covenants, agreements, obligations, representations and warranties of the parties will survive the Closing; and 14.03 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 12 and 13 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 51 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 wherein 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. MISCELLANEOUS 52 15.01 Bulk Transfer Compliance. CML hereby waives compliance by ------------------------ CharterMed with the provisions of Article 6 of the Uniform Commercial Code Bulk Transfers Laws of any state, and CharterMed warrants and agrees to pay and discharge when due all claims of creditors which could be asserted against CML by reason of such non-compliance. CharterMed hereby indemnifies and agrees to hold CML harmless from, against and in respect of (and shall on demand reimburse CML for) any loss, liability, cost or expense, including, without limitation, attorneys' fees, suffered or incurred by CML by reason of the failure of CharterMed to pay or discharge such claims; 15.02 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; 15.03 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; 15.04 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 CharterMed, addressed to: Peter Hussey CharterMed, Inc. 1805 Swarthmore Avenue Lakewood, NJ 08701 with a copy to: 53 Charles Stroller CharterMed, Inc. 1805 Swarthmore Avenue Lakewood, NJ 08701 If to CML , addressed to: Lisa Krallis-Nixon Charter Medical Ltd. 3948-A Westpoint Boulevard Winston-Salem, NC 27103 with a copy to: Mary A. 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; 15.05 Payment of Expenses. CharterMed and CML 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; 15.06 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. This Agreement supersedes all prior agreements and/or understandings between the parties, including the non- 54 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; 15.07 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; 15.08 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; 15.09 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 15.10 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, 55 invalid or unenforceable shall substantially impair the value of the whole Agreement to either Party. 56 WITNESS the due execution of this Asset Purchase Agreement as of the date first above written. For and on behalf of CharterMed, Inc. ATTEST:__________________ By:_________________________ Charles Stroller Vice President and For and on behalf of CharterMed, Inc. ATTEST:__________________ By:_________________________ Peter Hussey President For and on behalf of ATTEST: CHARTER MEDICAL, LTD. _____________________ By:__________________________ Lisa Krallis-Nixon 57 EX-13.1 3 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13.1 [GRAPHIC DESIGN APPEARS HERE] One Colonial Road P.O. Box 151 Manchester, CT 06045-0151 +++++++++++++++++++++++++++++++++++++ +[LOGO OF LYDALL, INC. APPEARS HERE]+ +++++++++++++++++++++++++++++++++++++ +++++++++++++++++++++++++++++++++++++ +[LOGO OF LYDALL, INC. APPEARS HERE]+ +++++++++++++++++++++++++++++++++++++ ++++++++++++++++++++ +1997 ANNUAL REPORT+ ++++++++++++++++++++ [GRAPHIC DESIGN APPEARS HERE] +++++++++++++++++++++++++++++++++++++ +[LOGO OF LYDALL, INC. APPEARS HERE]+ +++++++++++++++++++++++++++++++++++++ +++++++++++++++++++ +TABLE OF CONTENTS+ +++++++++++++++++++ 1 Financial Highlights 2 Letter to Stockholders 7 Lydall Products 16 Directory of Lydall Companies 18 Financial Review - -------------------------------------------------------------------------------- Lydall, Inc. - -------------------------------------------------------------------------------- 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, and materials handling. A customer-driven company, Lydall is known for its exceptional service, high quality, and innovative product solutions. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Financial Highlights - -------------------------------------------------------------------------------- Percent ------------------ Increase In thousands except per-share data 1997 1996 (Decrease) - -------------------------------------------------------------------------------- Net sales $244,289 $252,652 (3) ................................................................................ Net income 21,911 24,736 (11) ................................................................................ Diluted earnings per common share 1.27 1.38 (8) ................................................................................ Stockholders' equity 113,030 117,844 (4) ................................................................................ Stockholders's equity per share 7.04 6.89 2 ................................................................................ Market capitalization at December 31, 313,277 384,570 (19) ................................................................................ Closing price NYSE on December 31, 19.50 22.50 (13) ................................................................................ Weighted average common stock and equivalents outstanding 17.319 17,988 (4) - -------------------------------------------------------------------------------- 1 LYDALL, INC. TO OUR STOCKHOLDERS AND EMPLOYEES "Lydall embraces a four-pronged strategy to promote its growth: participation in expanding, dynamic markets; new product and market development; unique quality programs; and strategic acquisitions." Although results for 1997 were solid, they did not keep up with the pace set in prior years. Lower sales and earnings in 1997 followed 12 years of consecutive earnings increases and 6 years of sales growth. We are dedicated to repeating and exceeding these records in the future, and we have the means to meet this goal. The fundamentals of Lydall are sound, and many growth opportunities exist, especially in our core businesses. Lydall embraces a four-pronged strategy to promote its growth: participation in expanding, dynamic markets; new product and market development; unique quality programs; and strategic acquisitions. Although we encountered obstacles of varying degrees in 1997, I am confident in the potential that each holds for Lydall's future. Lydall's Markets Lydall's engineered materials, including specialty nonwovens, various fabricated components, and fiberboard systems, serve a variety of markets. Our strongest focus is in the air and liquid filtration and heat-management markets. Sales to these markets represented 59 percent of our business in 1997. Air Filtration During 1997, sales of our high-efficiency air filtration materials for clean- room applications were down approximately 10 percent from 1996, a year bolstered by extraordinary sales levels in the first half. Erratic shipping schedules and postponements of planned clean-room construction continued through early 1997. We began to see increased requests for quotes and smaller clean-room contracts coming onstream toward the end of the year; however, this market did not return to its previous robust levels of growth. The slowdown in sales of materials for clean-room applications was primarily related to a decline in the semiconductor industry and the resultant postponements of chip manufacturing clean-room fabrications. We typically lag semiconductor market recoveries in the same manner that we lag market declines. The lag has been more lengthy through this most recent lull. Semiconductor industry analysts are predicting renewed growth of associated markets in 1998, and the trend toward faster, more complex and more powerful semiconductors bodes well for suppliers to this market, 2 LYDALL, INC. including Lydall. Lydall's market share is solid, and as I've stated many times, increased sales and a return to historical growth in this market is not a question of "if", just a question of "when." The strength of sales of materials for other types of clean-rooms, such as those used by pharmaceutical manufacturers, hospitals, coating and painting operations, and research laboratories, partially offset the lackluster semiconductor-related sales in 1997. Lydall also entered the consumer air purification market, and our Lydair(R) filtration materials can now be found in portable air purifiers, vacuum cleaners, and central home air cleaning systems. In fact, in some instances, filter manufacturers have incorporated Lydall's Certified HEPA Seal into their packaging graphics and are including Lydall's informational pamphlet regarding filtration technology together with their product. Healthy prospects exist in all three arenas served by Lydall air filtration products. We expect growth to be fueled by renewed strength of the semiconductor industry, expanding use of clean-room environments by all kinds of industrial and medical applications, and extensive interest by consumers in clean air in their homes and offices. Heat Management Lydall supplies a wide variety of materials and components to heat-management applications within temperatures ranging from absolute zero, or -459(degrees) F, up to 3000(degrees) F. Sales of these products, which include cryogenic insulation used for the storage of liquid natural gases, automotive thermal barriers and heat-shields, and various higher temperature industrial insulating materials, represented 37 percent of total 1997 sales. Thermal markets have been an important source of growth for the Company in the past and will be a major focus in the future. Sales to these markets were down by 7 percent in 1997 compared with 1996. The decline related primarily to the automotive market. The continuous flow of new products being designed into vehicles and older products being designed out is a common dynamic of this business. Normally the number of new Lydall products being introduced far outnumbers those being phased out. However, sales of a large insulation part lost at the end of 1996 was not replaced by new business in 1997. Also, in mid-1997, Ford discontinued its T-Bird, Cougar, and Aerostar models, and the popularity of the Taurus and Sable waned somewhat during the year. Each of these models contained a number of Lydall thermal barriers and shields. We strongly believe that the circumstances affecting us in our automotive markets are temporary. Automotive engineers specify our products to solve a variety of specific heat problems throughout a vehicle. Heat management has become a major concern of car companies as vehicle designs move toward larger passenger cabins and smaller engine compartments. Increasingly aerodynamic lines have resulted in components being packed into tighter spaces with less free air flow. Stricter emission standards have translated into increasing heat issues. Also, high-performance workhorses like trucks and sport-utility vehicles, which create the most heat issues, have been extremely popular. These market trends have meant increasing use of Lydall's thermal barriers and heat shields. Of all the thermal barrier markets we serve, the automotive market holds the most significant growth opportunities. Our work continues with Ford, Chrysler, and General Motors on a wide variety of cars, sport-utility vehicles, and trucks. We are also working on proposals with several of the European auto manufacturers to supply their U.S. [BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE] OPERATING CASH CAPITAL $ millions FLOW - EBITDA $ millions INVESTMENT 93 23.9 93 6.3 94 35.1 94 8.0 95 45.2 95 12.0 96 48.2 96 10.9 97 42.3 97 17.1 3 LYDALL, INC. operations, as well as to expand our automobile thermal business into Europe through joint ventures and acquisitions. New Product and Market Development In the Analysis of Results portion of our annual report we have always classified annual incremental sales emanating from products and technology introduced within the preceding three years as new in the current year. By this definition, prior to 1997, we averaged around $8 million a year of incremental sales attributable to new products. We did not match our historical performance in 1997. If, however, we were to take a broader, more conventional, viewpoint, well over $50 million of our 1997 sales were of products we did not produce five years ago - better than 20 percent. We targeted a great deal of effort and investment at new-product development during the year. A 29 percent increase in research and development spending in 1997 supported an extensive roster of programs. Despite these initiatives and financial support, customer program delays and market circumstances hampered commercialization efforts during the year. In addition to advancing development within our current product lines, we are diversifying products into new markets, moving forward into fabrication in some instances, and exploring a number of opportunities for combinations of materials from two or more of our divisions. For example, we extended our high-efficiency filtration products into the consumer market. Certain grades of our filtration materials, previously sold only for industrial clean-room applications, are now employed in consumer air cleaning appliances as well. Another avenue of growth is the extension of our manufacturing and processing technologies. We are in the midst of installing a melt-blown capability at our Technical Papers facility. This operation produces the majority of the Company's high-efficiency air filtration materials. The equipment is expected to be operational early in the second quarter of 1998. The technology complements our existing wet-laid process and opens us to new markets and applications, particularly in liquid filtration. We also look forward to combining the attributes of a melt-blown media with a variety of Lydall's other materials to form composites with unique performance characteristics. Unique Quality Programs Our Cost of Quality Program is based on the ideal that everything should run perfectly. Employees throughout the organization are trained to identify, statistically measure, and track areas that need improvement with the goal of making the Company more efficient and enabling us to produce the highest quality products at a competitive price. This includes investment in computer systems and plant machinery and equipment. Training and organizational programs to increase efficiencies and improve productivity fall under this program as well. Formal, third-party validated quality assurance programs, such as ISO9000 certification, also play an important role. During 1997 all of Lydall Westex's plants plus its sales support office were awarded QS9000 and ISO9002 quality assurance certification. QS9000 is an ISO9000-based, supplier quality rating system established by the three major U.S. automotive manufacturers. Certification covers key elements such as customer satisfaction, continuous improvement, emphasis on defect prevention, and reduction of variations and waste in the supply [BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE] GROSS MARGIN AS NET $ millions A PERCENT OF SALES $ millions SALES 93 30.8 93 157.4 94 30.5 94 213.1 95 30.8 95 252.1 96 32.5 96 252.7 97 31.8 97 244.3 4 LYDALL, INC. chain, all of which reflect the mandate of Lydall's own comprehensive quality program. At the time of our certification, only about 10 percent of the estimated 15,000 to 20,000 direct automotive suppliers had been QS9000 certified. Although the deadlines for certification varied by automotive manufacturer, all direct suppliers were required to be certified by the end of 1997. We were very proud to be among the first to successfully achieve this important quality rating. Lydall's quality programs allow us to integrate and improve acquisitions and to continually improve existing processes and products. We strive to deliver the same high-quality product whether it's the first shipment or the ten thousandth. These efforts act as our road map to continually improve margins in a deliberate, systematic way. Over the past ten years, we have captured average savings of over $2.0 million a year under these programs. Strategic Acquisitions We acquired a small business in December, 1996 (Textile Technologies Industries, Inc.) which we incorporated into the Company during 1997 as the Fort Washington Operation of Lydall Manning. In its first year, the operation did not perform to Lydall standards, but I expect that to change by the end of 1998. During 1997, we discontinued many of the operation's low-margin product lines which reduced sales. Also, the operation, which manufactures components utilized in highly specialized, advanced structural materials for the aerospace, marine, and sporting goods industries, needed to be relocated. The move was both time consuming and distracting but should provide improved operating efficiencies and productivity in future years. The move is now complete, and the plant's efficiency has benefited already. In addition, we suffered from a severe shortage of a type of carbon fiber needed for many of Fort Washington's high- performance products. We are in the process of qualifying alternate sources of carbon fiber, and we are introducing our Lydall programs as well as aggressively pursuing some intriguing market opportunities. We intensified our acquisition efforts during 1997. We engaged the assistance of investment bankers to focus specifically on filtration and automotive thermal applications. We also carried out an extensive in-house search initiative aimed at filtration applications. A similar program targeting thermal applications began early in 1998. Over the long term, acquisitions have represented 40 percent of Lydall's growth and remain an important source of future expansion. During the first quarter of 1998, Charter Medical, Ltd., a new corporate entity established earlier in the year, acquired CharterMed, Inc., a privately held company located in Lakewood, New Jersey. CharterMed, a growing and profitable manufacturer of proprietary medical devices, serves applications such as biotech and pharmaceutical processing, blood bank and transfusion services, neonatal intensive care, open-heart surgery, and stem cell processing and freezing. These products directly complement the Lypore(R) family of biomedical filtration media and sub-assemblies of Lydall Westex in Hamptonville, North Carolina, and represent Lydall's broadening presence in the market for advanced medical and blood filtration devices. In the second quarter of 1998, Lydall will be spinning off its biomedical filtration business into the new [BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE] NET RETURN $ millions INCOME $ millions ON SALES 93 10.2 93 6.5 94 15.5 94 7.3 95 22.4 95 8.9 96 24.7 96 9.8 97 21.9 97 9.0 5 LYDALL, INC. entity, Charter Medical, Ltd. As part of this organizational change, the Westex medical products operation will move to a new facility in Winston-Salem, North Carolina. Financial Position In addition to the four areas for growth discussed above, Lydall is financially in excellent shape. As of December 31, 1997, cash, cash equivalents, and short-term investments totaled $12.8 million. This is after reinvesting $27.4 million to purchase 1.3 million shares of Lydall Common Stock throughout the year. Working capital was $39.2 million, total debt to total capitalization was 4 percent, debt to equity, 4 percent, and our current ratio was 2.39. We realize that a debt-to-capital ratio of 4 percent is an under-utilization of assets, and we are not comfortable with that. We plan to use our healthy borrowing capacity to acquire companies that fit our strategic focus. Using a conservative debt-to- total-capitalization ratio of 40 percent, or a reasonable debt-to-cash-flow ratio to maintain investment quality ratings, we could borrow from $75 million to $125 million to finance corporate development. We would certainly consider going above a 40-percent debt-to-total-capitalization ratio if the right opportunity arose and feel comfortable that our earnings stream and cash flow would provide adequate funding. Operating cash flow (operating income plus depreciation and amortization) totaled $42.3 million in 1997. Capital expenditures in 1997 amounted to $17.1 million. Our 1998 budget plan calls for capital expenditures totaling $17.2 million. Expenditures related to "Lydall 2000" amounted to about $6.6 million in 1997. Additional implementation costs in 1998 and 1999 are expected to bring total expenditures for the project to around $9 million. Lydall 2000 is a proactive information technology effort which has included evaluating and selecting enterprisewide software and hardware that will provide the Company with a competitive platform to last well into the next decade. Lydall expects to complete implementation of its Lydall 2000 systems over the next two years without any material disruption of operations. Through this enhanced information system we will gain the benefits of improved customer response, lower cost of delivering products and services, better internal and external communications, and access to real-time information. Solving the century-dating issue will be an added benefit of these extensive efforts. 1998 Many of the same market conditions and product delays that affected us in 1997 continue to be a factor early in 1998. Although we've begun the year somewhat behind the same period last year, we are optimistic that a number of programs currently underway will begin to benefit operating results as we move further into 1998. Longer term, we will concentrate on harvesting the potential of the four areas of growth I've discussed in this letter--expanding markets, new products, internal quality programs, and acquisitions. I am confident in our strategy and direction, and I am enthusiastic about the opportunities on the horizon. LEONARD R. JASKOL Chairman and Chief Executive Officer [BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE] TOTAL RESEARCH AND $ millions CAPITALIZATION $ millions DEVELOPMENT SPENDING Debt Equity Total 93 13.8 60.1 73.9 93 4.8 94 13.5 76.2 89.7 94 5.5 95 10.6 101.8 112.4 95 6.2 96 9.5 117.8 127.3 96 6.8 97 5.1 113.0 118.1 97 8.7 6 LYDALL, INC. LYDALL PRODUCTS Lydall's engineered materials and components serve a wide variety of demanding, high-performance applications. In most cases, Lydall's products are not visible or apparent to the general public. The following illustrations depict some examples of where Lydall's products are employed to perform critical filtration and heat-management functions. 7 LYDALL, INC. CLEAN ROOMS Lydair(R) filtration materials are specified throughout the world for filter systems installed in the ceilings, floors, walls, workbenches, and mini- environments of semiconductor and microchip manufacturing facilities, hospital operating rooms, industrial clean rooms, food and pharmaceutical processing plants, and biotechnology laboratories. Lydall's filtration materials serve a wide range of performance efficiencies, from 40 percent ASHRAE up to 99.999999 percent ULPA at the most penetrating particle size -- particles as minute as one-tenth of one micron (3000 times smaller than the period at the end of this sentence.) [DRAWING APPEARS IN BACKGROUND] Lydall is a pioneer and a world leader in High Efficiency Particulate Arrestance (HEPA) technology. HEPA-standard filtration materials filter out 99.97 percent of all contaminants as small as 0.3 micron. These include but are not limited to tobacco smoke, pollen, dust, dust mite allergens, mold spores, bacteria, and other airborne allergens. The Company's Lydair(R) filtration materials can be found in consumer applications such as portable air purifiers, vacuum cleaners and central home air cleaning systems. HOME FILTRATION [DRAWING OF HOUSE APPEARS IN BACKGROUND] AUTOMOTIVE DESIGN Lydall's patented thermal barrier and heat-shield components provide automotive design engineers with effective solutions to heat-management problems within stringent space, weight and cost constraints. Lydall products solve heat- management issues throughout a vehicle. Examples of applications include: catalytic converters, exhaust systems, transmissions, floor pans, gas tanks, fuel systems, brakes, electronic components, steering gears, and batteries. [DRAWING OF CAR APPEARS IN BACKGROUND] Lydall's Cryotherm(R) and CRS Wrap(R) superinsulating materials insulate at temperatures as low as absolute zero (-459(degrees) F). Applications include tanker trucks which transport liquid gases, fleet vehicles fueled by liquid natural gas, and other cryogenic storage vessels. CRYOGENIC STORAGE VESSELS [DRAWING OF TANKER TRUCK APPEARS HERE] LYDAL COMPANIES 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 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 AXOHM - ------------------------------------------------------------------------------- President: James P. Carolan Saint-Rivalain 56310 Melrand France Telephone 33-2-97-28-5300 Facsimile 33-2-97-39-5890 Lydall Axohm produces high-efficiency air filtration media as well as thermal barrier products. The operation also manufactures and converts nonwoven battery separators sold primarily to European automotive markets. 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 Lydall Composite Materials manufactures high-performance specialty products including fiber composites and fiberboard products for gasket, thermal barrier, electrical insulation, and packaging applications. Composite Materials also produces Cycle-Write(R) wood replacement board which is currently being used in the manufacture of pencils both in the U.S. and overseas. LYDALL LOGISTICS MANAGEMENT - -------------------------------------------------------------------------------- President: Bill W. Franks, Jr. 615 Parker Street P. O. Box 151 Manchester, Connecticut 06045-0151 Telephone (860) 646-1233 Facsimile (860) 645-0822 Logistics Management provides specialized distribution and warehouse services on a national basis to other Lydall companies and various American, Canadian, and European manufacturers of newsprint, specialty papers and other assorted products. LYDALL & FOULDS - -------------------------------------------------------------------------------- President: Bill W. Franks, Jr. 615 Parker Street P. O. Box 151 Manchester, Connecticut 06045-0151 Telephone (860) 646-1233 Facsimile (860) 646-4448 Lydall & Foulds produces chip, white-lined, and solid kraft paperboard used primarily by the setup and folding box industries and is a major consumer of recycled materials. LYDALL MANNING - -------------------------------------------------------------------------------- President: William J. Rankin P. O. Box 328 Troy, New York 12181-0328 Telephone (518) 273-6320 Facsimile (518) 273-6361 Fort Washington Operation 1100 Virginia Avenue, Suite 100 Fort Washington, Pennsylvania 19034-3295 Telephone (215) 542-2433 Facsimile (215) 542-1696 Lydall Manning manufactures specialty materials and technical paper products that offer a wide variety of performance capabilities. Manning's products are used as cryogenic superinsulating media, thermal, flame, and electrical barriers, and high-performance, lightweight structural composites. 16 LYDALL, INC. LYDALL SOUTHERN PRODUCTS - -------------------------------------------------------------------------------- President: Raymond J. Lanzi 3021 Vernon Road P. O. Box 9550 Richmond, Virginia 23228-3737 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 Southern Products produces laminated fiberboard sheets which replace wood pallets in materials-handling applications. These operations also make bulk palletizing tier sheets used in the shipping and storing of products like glass bottles and a variety of protective dunnage products used in the shipping industry. LYDALL TECHNICAL PAPERS - -------------------------------------------------------------------------------- President: James P. Carolan 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 Technical Papers manufactures air filtration media serving a wide range of performance efficiencies, from 40 percent ASHRAE up to 99.999999 percent ULPA at the most penetrating particle size. The operation also manufactures thermal barrier materials for use in high-temperature applications and liquid filtration media used primarily in high-efficiency, high-capacity hydraulic oil and lubrication oil elements for off-road vehicles, trucks, and heavy machinery. 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 Investment Drive Suite 205 Troy, Michigan 48098 Telephone (248) 952-5570 Facsimile (248) 952-5575 Lydall Westex is a leader in the automotive heat-management field. Westex makes a range of patented thermal barrier and heat-shield products for mid-to-high- temperature applications throughout a vehicle. LYDALL INTERNATIONAL, INC. - -------------------------------------------------------------------------------- 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 An international sales and marketing arm of all Lydall Companies. LYDALL ON-LINE - -------------------------------------------------------------------------------- info@lydall.com www.lydall.com 17 LYDALL, INC. FINANCIAL REVIEW 19 Analysis of Results 28 Key Financial Items 29 Income Statements 30 Balance Sheets 32 Statements of Cash Flows 33 Statements of Changes in Stockholders' Equity 34 Notes to Consolidated Financial Statements 44 Report of Independent Accountants 44 Management's Report 45 Five-Year Statistical Review 46 Officers, Directors, and Stockholder Information Sales Overview Sales in 1997 declined by 3 percent to $244.3 million from $252.7 million in 1996. The net sales change was a function of several factors: - -- Acquisition of a specialty materials company increased sales by $9.8 million. - -- Internal marketing actions resulted in a net sales decrease of $13.0 million. - -- External forces reduced sales by $5.2 million. The acquisition in late 1996 of the Fort Washington Operation, formerly known as the Hatboro Operation, resulted in $9.8 million of additional sales in 1997. Acquisition effects in 1996 and 1995 included the incremental sales of the Columbus and Jacksonville Operations. These two businesses were acquired in 1994. Internal marketing actions and external forces produced a combined negative impact of $18.2 million in 1997. In 1996, these two factors largely offset each other. During 1995, major internal marketing efforts resulted in most of the large increase in sales recorded in that year. Acquisitions For analytical purposes, Lydall isolates the impact of acquisitions for three years, after which time the business is considered to be fully integrated into Lydall's operations. Lydall began operating the Fort Washington Operation at the beginning of 1997. Acquisition of this business marked Lydall's entry into the specialty woven fiber materials market. Lydall relocated the operation to a new facility late in 1997 to provide more efficient operating conditions and product flow. This business was severely impacted by shortages of critical raw materials, which hampered sales efforts. Initiatives to qualify additional raw material sources are underway, although progress has been difficult in the face of strong demand for the same raw materials by larger manufacturers in the aerospace industry. During 1996, the Columbus and Jacksonville Operations produced modest additional growth of $900 thousand, compared with incremental sales of $8.6 million in 1995. Results from these businesses were included with all other Lydall operations in 1997. Internal Marketing Actions Normally a source of revenue growth, internal marketing actions resulted in a net revenue drop of $13.0 million in 1997. Price decreases, which were the largest factor, amounted to $7.9 million. A large portion of the price decreases related to the materials-handling business. Internal marketing actions resulted in net gains of $9.5 million in 1996 and $33.0 million in 1995. Incremental new-product sales were $2.4 million in 1997, following $11.8 million in 1996 and $17.6 million in 1995. Despite record spending for product development on major new initiatives in 1997, commercialization did not meet Company objectives. Efforts in filtration and thermal applications have been extensive, and prospects for increased new-product sales are positive for later in 1998. Sales of all-metal insulating shields to the domestic automotive industry, a major contributor in 1996, increased again in 1997. Lydall launched a concerted effort to penetrate the European market for these products during 1997 by pursuing acquisition possibilities and focusing on discrete product- development opportunities and potential production joint ventures. These latter efforts are expected to generate sales in 1998. Market-share losses offset gains in 1997 resulting in a net sales reduction of $1.4 million. Losses occurred primarily in the automotive market and were related to Ford's discontinuing three models that contained Lydall's thermal barriers in mid-1997 and the loss of a major part supplied to Chrysler at the end of 1996. Gains were 19 LYDALL, INC. ANALYSIS OF RESULTS continued made in the materials-handling and transportation markets to partially offset losses. The net loss of market share in 1997 followed net gains of $1.5 million in 1996 and $5.4 million in 1995. Gains in 1996 and 1995 occurred predominantly in automotive heat-management products and high-efficiency air filtration markets. The Company discontinued $6.1 million of product sales in 1997 compared with $2.8 million in 1996 and $3.1 million in 1995. The higher than normal level of product discontinuations in 1997 included exiting some low-margin products, primarily outside of Lydall's focus of thermal and filtration, and the discontinuation of a unique flame barrier supplied to the office-panel market. Net pricing actions in 1997 caused revenues to drop by $7.9 million. For the third consecutive year, Lydall's materials-handling business drove net pricing actions. Over the long term, raw-material costs and selling prices in this market move in a relatively similar manner. Linerboard costs, the principal raw material, stabilized after weakness early in the year. However, an extremely competitive environment evolved, and average selling prices declined. Lydall's equally aggressive response resulted in record unit volumes in the materials- handling business for the year. In 1997 and 1996, selling prices of materials-handling systems declined, offsetting significant price increases which were instituted in 1995 in response to rapidly rising raw material costs. In 1996, prices decreased by a net $1.0 million, following increases in 1995 totaling $13.1 million. In 1995, a year characterized by severe commodity inflation, Lydall was able to pass most of its raw-material increases on to customers. External Market Forces Lydall defines external market forces as the effects of economic and market changes beyond the influence of management, including the effects of market decay and foreign exchange. In 1997, external forces reduced revenues by a net $5.2 million. The major portion of this reduction resulted from the loss of certain automotive thermal business to lower performance solutions. Shorter product life-cycle trends, particularly evident in domestic automotive markets, also impacted other Lydall businesses, although to a much lesser extent. Offsetting these factors were the net positive effect of the economy plus market growth, which increased sales by $6.1 million in 1997. In 1996, external forces reduced sales by a net $9.8 million. The Company was affected by market decay in leaf-type battery separators sold in Europe; loss of certain heat shields; and the increased reuse of a particular materials-handling product by customers. During 1995, external effects resulted in a revenue drop of $2.6 million. Strong growth in filtration and thermal product markets and other factors were offset by decay in mature markets such as footwear. Currency changes have traditionally had a minimal effect on Lydall. In 1997, weaker currencies in relation to the U. S. dollar resulted in a $2.2 million reduction in sales. Most of this reduction related to European sales. The Asian currency crisis arising late in the year had no material impact on sales. The effect of foreign currency in 1996 and 1995 was not material. - ------------------------------------------------------------- STATEMENTS OF CHANGES IN SALES - ------------------------------------------------------------- In millions 1997 1996 1995 - ------------------------------------------------------------- Prior year's net sales $252.7 $252.1 $213.1 - ------------------------------------------------------------- Acquisitions 9.8 .9 8.6 Internal marketing actions (13.0) 9.5 33.0 External market forces (5.2) (9.8) (2.6) - ------------------------------------------------------------- Total change (8.4) .6 39.0 - ------------------------------------------------------------- Current year's net sales $244.3 $252.7 $252.1 - ------------------------------------------------------------- 20 LYDALL, INC. Gross Margin Overview Gross margin declined to $77.6 million, or 31.8 percent of sales, in 1997. This compares with gross margin of $82.1 million, or 32.5 percent of sales, in 1996, and $77.7 million, or 30.8 percent of sales, in 1995. Margins were significantly affected by lower sales volume and the net effect of price decreases, which were only partially offset by cost decreases from vendors. Companywide cost-reduction programs continued to have a positive impact on gross margin. The Fort Washington Operation produced modest incremental gains in gross margin but lowered Lydall's average gross margin as a percent of sales by approximately one percentage point. In 1996, gross margin gains came from improvements in the Columbus and Jacksonville Operations acquired in 1994. Over time, management expects to see a similar pattern develop at the Fort Washington Operation where volume, efficiencies, and quality programs are currently being implemented. Cost reductions under Lydall's Cost of Quality Program also contributed positively to gross margin in 1996, as did the net positive effect of price increases in relation to cost increases. Improvements in gross margin in 1995 were largely due to increased sales volume from new products, market-share gains, and the impact on production costs from the Cost of Quality Program. Acquisitions Lydall's Fort Washington Operation experienced many operating difficulties in 1997. Gross margin of $700 thousand, or 7 percent of the operation's sales, was depressed for several reasons. Critical raw materials were in extremely short supply, which caused inefficient production scheduling and an inability to meet customer demand. As mentioned under Sales, initiatives are underway to alleviate the problem. For the years 1995 and 1996, acquisitions added $1.3 million and $2.2 million, respectively, to consolidated gross margin totals. These improvements were caused by the second- and third-year effects of Lydall's operating culture on the Columbus and Jacksonville facilities acquired in 1994. During the first year of ownership by Lydall, major process changes were instituted along with improved management techniques. This has been a typical pattern. The immediate results from acquisitions tend to be negative as local management implements the changes, gradually turning to meaningful positive results in later years. Effects of Changes in Sales Volume Sales volume (excluding the effects of acquisitions and pricing actions) declined in 1997, resulting in a drop in gross margin of $5.2 million. Loss of operating leverage related to our products being designed out of certain applications and the discontinuation of various products more than offset the benefits of a stronger worldwide economy and market growth for many of Lydall's products. The dynamics in 1996 were similar, although less significant in their impact on gross margin. A slight decline in sales volume caused a drop in gross margin of approximately $1.0 million. This was mainly attributable to the transfer of filtration media production to France, where manufacturing efficiencies did not reach those achieved domestically. In 1995, a large volume increase produced incremental gross margin of $6.9 million. Improvements came from a surge of new-product growth in heat- management materials and air filtration media. Price Increases in Relation to Cost Increases Net pricing actions eroded gross margins by $3.5 million. As described under Sales, a large portion of the impact emanated from pricing issues in the materials-handling business. While percentage margins declined only modestly in this business, the competitive environment forced Lydall to absorb some incremental 21 LYDALL, INC. ANALYSIS OF RESULTS continued vendor-imposed costs without the ability to pass these costs along to customers. The thermal barrier business was not immune either, and price concessions were necessary in several of these markets. In 1996, net pricing actions resulted in a $2.2 million increase in gross margins as costs declined in relation to relatively stable revenues. A net surplus of $900 thousand was generated in 1995 when the Company aggressively raised prices in a period of rapidly increasing raw material prices. Cost Reductions Cost-reduction programs were an important element in maintaining a healthy gross margin ratio in 1997. The net impact on margins was positive $2.4 million. The Company's Comprehensive Quality Program, also known as Cost of Quality, continued to produce impressive results in improving production efficiencies and reducing costs. In addition to process-related improvements at many plants, initiatives to reformulate certain products to achieve improved quality and lower costs were very successful. Strategically focused capital spending helped to produce additional improvements at Manning and Composite Materials. Westex's automotive thermal barrier operations produced especially positive results. Net savings in 1996 were $2.9 million, following record savings of $3.7 million in 1995. 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 1997, these combined effects produced a negligible net effect. This compares with effects in 1996 of a positive $300 thousand and in 1995 of a negative $500 thousand. Other Effects Other effects, including depreciation expense, changes in fixed overhead, and product-mix changes increased gross margins by $1.1 million. This compares with a decrease of $2.2 million in 1996 and an increase in 1995 of $500 thousand. - ----------------------------------------------------------------------- STATEMENTS OF CHANGES IN GROSS MARGIN - ----------------------------------------------------------------------- $ millions 1997 1996 1995 - ----------------------------------------------------------------------- Prior year's gross margin $82.1 $77.7 $64.9 - ----------------------------------------------------------------------- Acquisitions .7 2.2 1.3 Effects of changes in sales volume (5.2) (1.0) 6.9 Price increases in relation to cost increases (3.5) 2.2 .9 Cost reductions 2.4 2.9 3.7 Inventory effects - .3 (.5) Other effects 1.1 (2.2) .5 - ----------------------------------------------------------------------- Total change (4.5) 4.4 12.8 - ----------------------------------------------------------------------- Current year's gross margin $77.6 $82.1 $77.7 - ----------------------------------------------------------------------- As a percent of net sales 31.8 32.5 30.8 - ----------------------------------------------------------------------- 22 LYDALL, INC. Pretax Income Overview Pretax income declined to $34.5 million in 1997 from $39.9 million in 1996, a decrease of 14 percent. This compares with increases of 8 percent in 1996 and 39 percent in 1995. In 1997, lower sales volume and a negative cost/price relationship, which created a drop in gross margin, caused much of the decline in pretax income. Also, the net impact of the Fort Washington Operation was modestly negative. For the years of 1996 and 1995, pretax income rose by $3.0 million and $10.4 million, respectively. Increases were driven by cost-reduction programs and acquisitions in those two years, while 1995 also benefited from strong internal sales and margin growth. Acquisitions The Fort Washington Operation generated a pretax operating loss of $700 thousand in 1997. This newly acquired entity is expected to show improving results during 1998 and later years. The Columbus and Jacksonville operations, which were no longer classified as acquisitions in 1997, contributed incremental pretax income of $1.6 million in 1996 and $600 thousand in 1995. Both of those acquisitions took over a year to begin generating meaningful incremental profits. This timetable tracks Lydall's experience with other acquired operations, and management looks forward to achieving similar improvements at the Fort Washington Operation. Operations Pretax earnings from operations other than acquisitions were $5.4 million lower in 1997 than in 1996. Lower gross margins coupled with increased selling, product development, and administrative spending resulted in the decreased profits. Lydall increased its long-term investment in new-product development, a major component of the spending increase. These expenditures are expected to provide a solid foundation for future growth. Existing operations generated a $900 thousand increment to pretax income in 1996. During that year, cost reductions and efficiency improvements were key to creating a small increase in gross margin. In 1995, operating leverage from higher sales combined with record savings from Cost of Quality initiatives at existing operations produced an $8.3 million increase in pretax income. Other income and expense improved by $400 thousand in 1997. Management assessed environmental risks at one facility and, based on positive factors that indicated a declining exposure, reduced reserves sufficiently to create the positive swing. This was offset by write-offs of fixed assets companywide. Other expenses declined by $200 thousand in 1996 following a decrease of $600 thousand in 1995. Investments and Financing Nonoperating investment income and financing costs combined to increase pretax income by $700 thousand in 1997 over 1996 levels. Despite investment balances that declined steadily over the course of the year, investment income increased due to a greater concentration of investments in strong domestic equity markets. The Company does not expect to generate this increased level of investment income in 1998 as cash balances will continue to be drawn down to fund capital projects, the repurchase of Lydall Common Stock, and acquisitions. Interest expense declined by $100 thousand as already low debt levels declined further. In 1996, investment income increased by $300 thousand while interest expense declined by $200 thousand. In 1995, investment income surged by $900 thousand as cash balances grew substantially in a year with moderate capital spending and no stock repurchase activity. Interest expense declined by $600 thousand in 1995. 23 LYDALL, INC. ANALYSIS OF RESULTS continued - ---------------------------------------------------------------- STATEMENTS OF CHANGES IN PRETAX INCOME - ----------------------------------------------------------------- In millions 1997 1996 1995 - ----------------------------------------------------------------- Prior year's pretax income $39.9 $36.9 $26.5 - ----------------------------------------------------------------- Acquisitions - change in: Gross margin .7 2.2 1.3 Selling, product development, and administrative expenses (1.4) (.6) (.7) - ----------------------------------------------------------------- Total change from acquisitions (.7) 1.6 .6 - ----------------------------------------------------------------- Operations - change in: Gross margin (5.2) 2.2 11.5 Selling, product development, and administrative expenses (.6) (1.5) (3.8) Other income/expense .4 .2 .6 - ----------------------------------------------------------------- Total change from operations (5.4) .9 8.3 - ----------------------------------------------------------------- Nonoperating investments and financing - change in: Investment income .6 .3 .9 Interest expense .1 .2 .6 - ----------------------------------------------------------------- Total change from nonoperating investments and financing .7 .5 1.5 - ----------------------------------------------------------------- Total change (5.4) 3.0 10.4 - ----------------------------------------------------------------- Current year's pretax income $34.5 $39.9 $36.9 - ----------------------------------------------------------------- Accounting Standards In 1998, the Company will adopt Statement of Financial Accounting Standards No. 130, No. 131, and No. 132, "Reporting Comprehensive Income," ("SFAS 130"), "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131"), and "Employers' Disclosures about Pensions and Other Postretirement Benefits," ("SFAS 132"), all of which are effective for fiscal years beginning after December 15, 1997. SFAS 130 requires an enterprise to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital. Lydall will adopt SFAS 130 effective for the first quarter ending March 31, 1998. There will be no effect on the Company's consolidated financial position, results of operations, or cash flows. SFAS 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. SFAS 131 is based on the management approach to segment reporting and includes requirements to report selected segment information quarterly and to include entitywide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenues. The Company currently reports under one segment and is evaluating the impact of the 24 LYDALL, INC. disclosure requirements. SFAS 131 may require Lydall to disclose more than one segment. The Company will adopt SFAS 131 effective for the year ending December 31, 1998. There will be no effect on the Company's consolidated financial position, results of operations, or cash flows. SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. The Company will adopt SFAS 132 effective for the year ending December 31, 1998. There will be no effect on the Company's consolidated financial position, results of operations, or cash flows. 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 1997 Annual Report and Form 10-K for the fiscal year ended December 31, 1997. 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. The Company can also be affected when automotive manufacturers discontinue production of specific models that contain Lydall's products, as happened at Ford in mid-1997. On the other hand, Lydall benefits from the introduction of new models. Twenty-six percent of Lydall's total sales in 1997 were to the U. S. automotive market, excluding aftermarket 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 early 1996, the demand for these air filtration materials was the strongest the Company had ever seen. Since then the demand curve has leveled. This slowdown was related primarily to the semiconductor industry. The Company estimates that about one-third of its total high- efficiency air filtration sales are to semiconductor related clean rooms. Various independent industry-published forecasts project excellent long-term growth for clean-room fabrications in general. Lydall relies on these forecasts, feedback from its filtration customers, and other market intelligence sources for forward-looking information. Lydall's outlook is based in part on the renewed strength of this market; however, if a significant market decline were to occur, it would have a negative impact on Lydall's results. Raw-Material Pricing and Supply. Raw-material pricing and supply issues affect all of Lydall's businesses and can influence results in the short term. Pricing fluctuations, however, particularly impact the Company's materials-handling business. 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 that year. In 1996, as raw-material costs declined, Lydall reduced prices. Linerboard prices began to rise slightly in mid-1997, and Lydall instituted a price increase on its products in the third quarter of the year. The materials-handling business is unique for Lydall because it is the one area where the market pushes for price reductions that directly track decreases in raw materials and accepts price increases in the face of higher raw-material costs. Thus, significant changes in the pricing of linerboard directly affect this portion of Lydall's business. 25 LYDALL, INC. ANALYSIS OF RESULTS continued Liquidity and Capital Resources Liquidity Overview Lydall used a strong beginning balance sheet and free cash flow from operations to fund an aggressive capital investment plan and to purchase 1.3 million shares of Lydall stock for $27.4 million in 1997. The Company ended 1997 with $8.9 million in cash and cash equivalents, as well as $3.9 million in short-term investments. Stockholders' equity decreased by $4.8 million as treasury share purchases exceeded net income and stock option proceeds. These changes will have little impact on Lydall's financial capacity to complete future strategic acquisitions. In December 1996, Lydall acquired Textile Technologies Industries, Inc., now part of Lydall Manning as its Fort Washington Operation. The Company paid $2.0 million in cash at closing and issued an $8.0 million note which was paid on January 2, 1997. A $1.75 million note was also issued payable through 1998. The Year 2000 Issue Lydall has proactively addressed the year 2000 issue by evaluating and selecting enterprisewide software and hardware that will provide the Company with a competitive information technology platform to last well into the next decade. This program is referred to as "Lydall 2000." During 1995 and 1996, plans were developed and put in place to meet the Company's future information needs. Lydall expects to complete implementation of new systems within the next two years and to avoid any disruption of operations. In fact, an enhanced information technology capability is expected to provide the benefits of improved customer response, lower cost of delivering products and services, enhanced internal and external communications, and access to real-time information. Solving the century dating issue will be another benefit of these extensive efforts. The Company is assessing the impact of Year 2000 compliance by its suppliers and customers and the potential affect, if any, on the Company's operations. Capital expenditures in 1997 for Lydall 2000, including the majority of necessary software and hardware outlays, amounted to $6.6 million. Including additional implementation costs to be expended in 1998 and 1999, total capital outlays for Lydall 2000 are expected to be approximately $9 million. These additional expenditures in 1998 and 1999 will have a minimal effect on Lydall's liquidity and capital resources. Cash Flow Overview Cash flow from operating activities was $23.8 million in 1997. The major investing activity was a $17.1 million capital expenditure program in 1997. Lydall's purchase of $27.4 million worth of its common stock represented the Company's most significant financing activity. In addition, the $8.0 million short-term note payable on the Textile Technologies acquisition was repaid early in 1997. During 1996, cash flow from operating activities was a record $36.9 million, due to record net income and better working capital management. Capital expenditures amounted to $10.9 million, and the Company purchased $10.3 million of its Common Stock. The net effect was a large increase in liquid assets during the year. In 1995, cash flow from operating activities reached $25.8 million. Net income and non-cash charges were somewhat offset by increased working capital productivity. Strong sales growth increased receivables at year-end, and inventory costs were inflated by high commodity costs. Investing activities included moderate capital spending of $12.0 million. Financing activities included scheduled payments under the existing long-term note agreement. Working Capital Productivity Lydall measures working capital turnover to evaluate the utilization of short- term operating resources. Working capital productivity is defined as annual sales divided by the quarterly average of all receivables and inventory, less accounts payable. Inventory turnover receives particular attention at Lydall operations. Although inventory turnover had improved steadily moving from 6.6 times in 1991 to 11.8 times and 11.1 times in 1996 and 1995, 26 LYDALL, INC. respectively, it dropped to 10.6 times in 1997. Much of the decline this past year came from the Fort Washington Operation which maintains higher working capital levels than other Lydall plants. Management expects to improve working capital turnover at the Fort Washington Operation in the future. The Company has demonstrated improved use of short-term operating resources for many years. Working capital productivity measured 7.6 times in 1997, 8.2 times in 1996, and 7.4 times in 1995 compared with 5.2 times in 1991. - ------------------------------------------------------------- $ millions 1997 1996 1995 - ------------------------------------------------------------- Net Sales $244.3 $252.7 $252.1 Average working capital 32.3 30.7 34.2 Working capital productivity 7.6 8.2 7.4 Percent change from previous year (8) 12 3 - ------------------------------------------------------------- Future Cash Requirements Cash requirements for 1998 will include the funding of ongoing operations, capital expenditures, purchase of Lydall Common Stock as conditions permit, and acquisitions. At January 1, 1998, the Company had remaining authorization to purchase up to an additional 487,321 shares of its Common Stock. Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical, Ltd. On February 6, 1998, this separate corporate entity acquired CharterMed, Inc., a privately held company located in Lakewood, New Jersey, for $6.6 million in cash and a note for $720 thousand, payable through 1999. CharterMed is a growing and profitable manufacturer of proprietary medical devices serving applications such as biotech and pharmaceutical packaging, blood bank and transfusion services, neonatal intensive care, operating room/perfusion, and stem cell processing and freezing. The 1998 capital expenditure forecast is $17.2 million. Expenditures will be concentrated on upgrading existing production capability at all of Lydall's operations, including a capacity expansion at Technical Papers to produce melt- blown media. In addition, implementation costs of Lydall 2000 are budgeted for 1998. Management expects to finance capital expenditures and ongoing operating cash requirements from cash on hand and cash generated from operations. Acquisitions of operating companies and Lydall Common Stock may require Lydall to utilize existing credit facilities or to negotiate additional credit capacity. Credit Arrangements Lydall maintains domestic and foreign credit arrangements totaling over $25 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, 1997 and 1996, no amounts were outstanding on domestic or foreign lines of credit. Capital Structure Lydall continued to produce cash flow from operating activities well in excess of capital spending needs. The Company has reduced its long- and short-term indebtedness to $5.1 million and concluded 1997 with cash and investments of $12.8 million. Since 1991, Lydall has acquired five operating companies, in effect, for cash. In the past two years, Lydall has also acquired approximately $38 million of Lydall Common Stock without needing to borrow funds. Acquisition searches are underway in Lydall's core markets of filtration and heat management. Lydall's resources to complete strategic acquisitions are considerable. Borrowing capacity can be measured in various ways. Using a debt-to-capitalization target of 40 percent or a reasonable debt-to-cash-flow ratio that would maintain investment quality ratings, Lydall could borrow between $75 million and $125 million to finance corporate development. This range is based on Lydall's current cash flow. Depending on the acquisition, the addition of an acquired company's cash flow could provide additional debt capacity. Management is willing to stretch these targets in the short-term to finance a compelling business combination. 27 LYDALL, INC. KEY FINANCIAL ITEMS Cash and Cash Equivalents Cash and cash equivalents decreased to $8.9 million in 1997 from $38.2 million in 1996. Short-term Investments Lydall invests in equities and other highly liquid investments with maturities greater than three months at the time the investments are made. The Company had short-term investments of $3.9 million and $4.9 million at December 31, 1997 and 1996, respectively. Receivables Receivables were $32.2 million in 1997 and $34.0 million in 1996, of which trade receivables were $31.9 million and $32.7 million for 1997 and 1996, respectively. Days of sales outstanding in trade receivables were 51 in 1997 and 50 in 1996. Foreign and export sales were approximately 19 percent of total sales in 1997, 21 percent in 1996, and 22 percent in 1995. These sales are concentrated primarily in Europe, the Far East, Mexico, and Canada. Inventories Inventories were $15.5 million at December 31, 1997 and $14.7 million at December 31, 1996, net of LIFO reserves of $1.2 million and $1.7 million at the end of 1997 and 1996, respectively. Working Capital Working capital decreased to $39.2 million on December 31, 1997 from $53.4 million on December 31, 1996. The ratio of current assets to current liabilities increased to 2.39 from 2.24. Capital Asset Expenditures Capital asset expenditures were $17.1 million in 1997, $10.9 million in 1996, and $12.0 million in 1995. Depreciation was $8.0 million in 1997, $7.8 million in 1996, and $7.1 million in 1995. The Company's 1998 Capital Plan calls for commitments of $17.2 million with spending focused on the following areas: process improvements that lower the Company's Cost of Quality; capacity to produce melt-blown media; and Lydall 2000, a companywide upgrade of information technology. Expenditures in 1998 are expected to be financed from existing cash balances or cash generated from operations. Debt to Total Capitalization Debt to total capitalization decreased to .04 in 1997 from .13 in 1996. Common Stockholders' Equity Common stockholders' equity decreased to $113.0 million at December 31, 1997, a decrease of 4 percent from $117.8 million at December 31, 1996. On a per-share basis, common stockholders' equity increased to $7.04 at December 31, 1997 from $6.89 at December 31, 1996. 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 long-term return on their investment. Research and Development Research and development investments were $8.7 million in 1997, $6.8 million in 1996, and $6.2 million in 1995. 28 LYDALL, INC. INCOME STATEMENTS - --------------------------------------------------------------------- In thousands except per-share data For the years ended December 31, 1997 1996 1995 - --------------------------------------------------------------------- Net sales $244,289 $252,652 $252,128 Cost of sales 166,648 170,597 174,430 - --------------------------------------------------------------------- Gross margin 77,641 82,055 77,698 Selling, product development, and administrative expenses 44,888 42,778 40,668 - --------------------------------------------------------------------- Operating income 32,753 39,277 37,030 - --------------------------------------------------------------------- Other (income) expense: Investment income (1,986) (1,389) (1,113) Interest expense 368 518 778 Other (82) 294 490 - --------------------------------------------------------------------- (1,700) (577) 155 - --------------------------------------------------------------------- Income before income taxes 34,453 39,854 36,875 Income tax expense 12,542 15,118 14,437 - --------------------------------------------------------------------- Net income $ 21,911 $ 24,736 $ 22,438 - --------------------------------------------------------------------- Basic earnings per common share $ 1.31 $ 1.44 $ 1.30 Weighted average common stock outstanding 16,692 17,140 17,263 - --------------------------------------------------------------------- Diluted earnings per common share $ 1.27 $ 1.38 $ 1.23 Weighted average common stock and equivalents outstanding 17,319 17,988 18,197 - --------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 29 LYDALL, INC. BALANCE SHEETS - ------------------------------------------------------------------- In thousands except share data December 31, 1997 1996 - ------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 8,891 $ 38,226 Short-term investments 3,873 4,941 Accounts receivable (less allowance for doubtful receivables of $1,381 in 1997 and $1,727 in 1996) 32,203 33,953 Inventories: Finished goods 6,243 5,965 Work in process 2,867 3,712 Raw materials and supplies 7,600 6,743 LIFO reserve (1,172) (1,740) - ------------------------------------------------------------------- Total inventories 15,538 14,680 - ------------------------------------------------------------------- Taxes receivable 2,032 - Prepaid expenses 1,314 959 Deferred tax assets 3,586 3,612 - ------------------------------------------------------------------- Total current assets 67,437 96,371 - ------------------------------------------------------------------- Property, plant, and equipment, at cost: Land 983 957 Buildings and improvements 21,178 20,868 Machinery and equipment 81,496 78,171 Office equipment 10,447 8,504 Vehicles 1,178 1,228 Assets in progress 10,340 3,619 - ------------------------------------------------------------------- 125,622 113,347 Less accumulated depreciation (56,762) (51,309) - ------------------------------------------------------------------- 68,860 62,038 Other noncurrent assets: Goodwill, at cost (net of accumulated amortization of $2,807 in 1997 and $1,688 in 1996) 19,155 20,259 Other assets, at cost (net of accumulated amortization of $7,526 in 1997 and $7,741 in 1996) 4,672 3,451 - ------------------------------------------------------------------- 23,827 23,710 - ------------------------------------------------------------------- Total assets $160,124 $182,119 - ------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 30 LYDALL, INC. - -------------------------------------------------------------------- In thousands except share data December 31, 1997 1996 - -------------------------------------------------------------------- Liabilities and stockholders' equity Current liabilities: Current portion of long-term debt $ 2,950 $ 4,450 Notes payable - 8,000 Accounts payable 13,342 15,758 Accrued taxes 1,030 1,322 Accrued payroll and other compensation 4,856 6,014 Other accrued liabilities 6,056 7,469 - -------------------------------------------------------------------- Total current liabilities 28,234 43,013 - -------------------------------------------------------------------- Long-term debt 2,100 5,050 Deferred tax liabilities 12,979 12,667 Other long-term liabilities 3,781 3,545 Contingencies Stockholders' equity: Preferred stock - - Common stock, par value $.10 per share, authorized 30,000,000 shares, issued 21,432,346 shares in 1997 and 21,122,913 shares in 1996. 2,143 2,112 Capital in excess of par value 36,510 34,235 Foreign currency translation adjustment 76 1,425 Equity adjustments (240) 39 Retained earnings 125,108 103,197 - -------------------------------------------------------------------- 163,597 141,008 Less cost of 5,366,873 shares of common stock in treasury in 1997 and 4,030,902 shares in 1996 (50,567) (23,164) - -------------------------------------------------------------------- Total stockholders' equity 113,030 117,844 - -------------------------------------------------------------------- Total liabilities and stockholders' equity $160,124 $182,119 - -------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 31 LYDALL, INC. STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- In thousands For the years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net Income $ 21,911 $ 24,736 $ 22,438 - -------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,993 7,824 7,122 Amortization 1,569 1,357 1,510 Changes in operating assets and liabilities, excluding effects from acquisitions: Accounts receivable 1,281 2,128 (2,015) Taxes receivable (2,032) - - Inventories (1,140) 860 (376) Other assets (1,708) (579) 170 Accounts payable (2,049) (196) (2,503) Accrued taxes (249) 1,087 (1,986) Accrued payroll and other accrued liabilities (2,452) 263 594 Deferred income taxes 818 (620) 1,068 Other long-term liabilities (158) - (263) - -------------------------------------------------------------------------------- Total adjustments 1,873 12,124 3,321 - -------------------------------------------------------------------------------- Net cash provided by operating activities 23,784 36,860 25,759 - -------------------------------------------------------------------------------- Cash flows from investing activities: Acquisitions (78) (2,030) - Additions of property, plant and equipment (17,104) (10,893) (12,006) Disposals of property, plant and equipment, net 685 894 632 Sale (purchase) of investments, net 1,013 (2,940) 2,451 - -------------------------------------------------------------------------------- Net cash used for investing activities (15,484) (14,969) (8,923) - -------------------------------------------------------------------------------- Cash flows from financing activities: Long-term debt payments (4,450) (2,863) (2,856) Notes payable (8,000) - - Issuance of common stock 2,306 1,810 2,105 Acquisition of common stock (27,403) (10,345) - - -------------------------------------------------------------------------------- Net cash used for financing activities (37,547) (11,398) (751) - -------------------------------------------------------------------------------- Effect of exchange rate changes on cash (88) (87) 51 - -------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (29,335) 10,406 16,136 Cash and cash equivalents at beginning of year 38,226 27,820 11,684 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 8,891 $ 38,226 $ 27,820 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Supplemental Schedule of Cash Flow Information Cash paid during the year for: Interest $ 687 $ 897 $ 875 Income taxes 14,678 13,985 14,959 Noncash transactions: Amounts payable for acquired operations 16 10,527 - Additional minimum pension liability 591 930 40 Unrealized gains/losses on available-for-sale securities 55 82 13 Stock split effected in the form of a stock dividend - - 1,041 Reclassification between short-term and long-term investments, net - - 447 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. 32 LYDALL, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 1995 $ - $ 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 Stock options exercised 31 2,275 2,306 Purchase of treasury shares (27,403) (27,403) Foreign currency translation adjustment (1,349) (1,349) Equity adjustments (279) (279) Net income 21,911 21,911 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 $ - $ 2,143 $36,510 $ 76 $ (240) $125,108 $(50,567) $113,030 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 33 LYDALL, INC. 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 26.3 percent of the Company's 1997 total sales compared with 32.3 percent in 1996 and 32.9 percent in 1995. Sales to the Ford Motor Co. represented 18.4 percent, 16.6 percent, and 13.7 percent of Lydall's total sales in 1997, 1996, and 1995, respectively. No other single customer accounted for more than 10 percent of total sales in 1997, 1996, or 1995. As of December 31, 1997, the Company had no other significant concentrations of risk. Inventories. Approximately 54 percent in 1997 and 59 percent in 1996 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 Company evaluates the recoverability of goodwill by analyzing the associated estimated undiscounted cash flows. At the time such evaluations indicate that the future undiscounted cash flows are not sufficient to recover the carrying value of the goodwill, the asset would be adjusted to fair value. Based on these evaluations, there were no adjustments to the carrying value of goodwill in 1997 or 1996. Research and development. Costs are charged to expense as incurred. Revenue recognition. Lydall recognizes revenues when the product is shipped. Earnings per share ("EPS"). Basic earnings per common share are based on net income divided by the weighted average number of common shares outstanding during the period. Diluted 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. 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. 34 LYDALL, INC. Foreign operations. The Company operates a manufacturing plant in Saint- Rivalain, France. Foreign sales were $14.3 million, $17.6 million, and $17.0 million, for the years ended December 31, 1997, 1996, and 1995, respectively. The French operation incurred losses of $348 thousand, $796 thousand, and $165 thousand for the years ended December 31, 1997, 1996, and 1995, respectively. Total foreign assets were $16.4 million and $18.5 million at December 31, 1997 and 1996, 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, earnings per share have been restated to conform with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." 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. The Company will adopt Statement of Financial Accounting Standards No. 130, No. 131, and No. 132, "Reporting Comprehensive Income," ("SFAS 130"), and "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131"), and "Employers' Disclosures about Pensions and Other Postretirement Benefits," ("SFAS 132"), all of which are effective for fiscal years beginning after December 15, 1997. SFAS 130 requires an enterprise to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital. Lydall will adopt SFAS 130 effective for the first quarter ending March 31, 1998. There will be no effect on the Company's consolidated financial position, results of operations, or cash flows. SFAS 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. SFAS 131 is based on the management approach to segment reporting and includes requirements to report selected segment information quarterly and to include entitywide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenues. The Company currently reports under one segment and is evaluating the impact of the disclosure requirements. SFAS 131 may require Lydall to disclose more than one segment. The Company will adopt SFAS 131 effective for the year ending December 31, 1998. There will be no effect on the Company's consolidated financial position, results of operations, or cash flows. SFAS 132 revises employers' disclosures about pension and other postretirement benefit plans. The Company will adopt SFAS 132 effective for the year ending December 31, 1998. There will be no effect on the Company's consolidated financial position, results of operations, or cash flows. Investments The Company's investments are categorized as available-for-sale debt and equity securities, as defined by the Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The carrying value of these securities was $13.5 million in 1997 and $42.5 million in 1996, both of which approximated fair market value. In 1997, $9.6 million was classified in cash equivalents and $3.9 million, in short-term investments. For 1996, $37.6 million was classified in cash equivalents and $4.9 million, in short-term investments. 35 LYDALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued The amortized costs of investments in debt securities by contractual maturity are shown below. - -------------------------------------------------------------------------------- Available-for-Sale Securities ------------------------------- In thousands December 31, 1997 1996 - -------------------------------------------------------------------------------- Due in one year or less $6,400 $6,350 Due after one year through five years - 309 Due after five years through ten years - 210 Due after ten years 220 2,033 - -------------------------------------------------------------------------------- $6,620 $8,902 - -------------------------------------------------------------------------------- The net unrealized gains and losses are included as a component of stockholders' equity. Gross unrealized gains were $318 thousand and $195 thousand, and gross unrealized losses were $296 thousand and $118 thousand as of December 31, 1997 and 1996, respectively. Gains of $1.1 million and losses of $136 thousand were realized on these sales during 1997. The gross realized gains and losses were immaterial to the consolidated financial statements during 1996 and 1995. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. Long-term Debt - -------------------------------------------------------------------------------- In thousands December 31, 1997 1996 - -------------------------------------------------------------------------------- 7.25% Note Purchase Agreement, payable annually to 1999 $ 4,300 $ 6,500 5% Promissory Note - 1,250 5.48% Indemnification Note, balance due in full in 1998 750 1,750 - -------------------------------------------------------------------------------- 5,050 9,500 Less portion due within one year (2,950) (4,450) - -------------------------------------------------------------------------------- $2,100 $ 5,050 - -------------------------------------------------------------------------------- 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 .04, it is .09 as defined by the terms of this agreement as of December 31, 1997. As of December 31, 1997, long-term debt payment requirements totaled $5.1 million, $3.0 million payable in 1998 and $2.1 million payable in 1999. Credit Arrangements Lydall maintains domestic and foreign bank credit arrangements totaling over $25 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, 1997, and 1996, no amounts were outstanding on the domestic or foreign lines of credit. Financial Instruments The Company utilizes letters of credit to satisfy self-insurance security deposit requirements and in the ordinary course of business. Outstanding letters of credit were $1.8 million and $1.6 million as of December 31, 1997 and 1996, respectively. The Company does not expect any material losses to result from these off-balance-sheet instruments as performance is not expected to be required, and therefore, believes that the fair value of these instruments is zero. 36 LYDALL, INC. Long-term Operating Leases Lydall has operating leases which cost the Company $1.9 million in 1997, $1.7 million in 1996, and $1.8 million in 1995. These contracts range from vehicle leases to building leases which require payment of property taxes, insurance, repairs and other operating costs. Future net lease commitments under noncancelable operating leases are: - -------------------------------------------------------------------------------- In thousands 1998 1999 2000 2001 2002 Thereafter Total - -------------------------------------------------------------------------------- Net lease payments $1,581 $1,520 $1,309 $1,212 $983 $3,084 $9,689 - -------------------------------------------------------------------------------- Acquisitions and Other Investments Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical, Ltd. On February 6, 1998, this separate corporate entity acquired CharterMed, Inc., a privately held company located in Lakewood, New Jersey, for $6.6 million in cash and a $720 thousand note, payable through 1999. CharterMed is a growing and profitable manufacturer of proprietary medical devices serving applications such as biotech and pharmaceutical packaging, blood bank and transfusion services, neonatal intensive care, operating room/perfusion, and stem cell processing and freezing. On December 20, 1996, the Company acquired certain assets and assumed certain liabilities of Textile Technologies Industries, Inc. ("Fort Washington Operation"). The Fort Washington 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 a $8.0 million note, which was paid on January 2, 1997, and a $1.75 million note, which is payable through 1998. As a result of this purchase, the Company recorded goodwill and other intangible assets of $10.4 million. The results of the Fort Washington Operation since the date of acquisition have been included in the Company's consolidated results. 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. 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 1997, 1,653 Lydall stockholders of record held 16,065,473 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. Balances at December 31, 1995 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.
- ----------------------------------------------------------------------------------------------------------------------------- For the Year Ended 1997 For the Year Ended 1996 For the Year Ended 1995 - ----------------------------------------------------------------------------------------------------------------------------- Net Per-Share Net Per-Share Net Per-Share Income Shares Amount Income Shares Amount Income Shares Amount - ----------------------------------------------------------------------------------------------------------------------------- Basic earnings per share $21,911 16,692 $1.31 $24,736 17,140 $1.44 $22,438 17,263 $1.30 Effect of dilutive securities Stock Options 627 848 934 Diluted earnings per share $21,911 17,319 $1.27 $24,736 17,988 $1.38 $22,438 18,197 $1.23 - -----------------------------------------------------------------------------------------------------------------------------
37 LYDALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued Options to purchase 297,946 shares, 317,446 shares, and 130,750 shares of Lydall Common Stock were outstanding at December 31, 1997, 1996, and 1995, respectively, which were not included in the computation of diluted earnings per share. These options were excluded because the average exercise price was greater than the average market price of the Common Stock for each respective year. Stock Option Plans At December 31, 1997, the Company had two stock option plans under which employees and directors had options to purchase Lydall Common Stock. Under these plans -- 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 because IRS regulations, with regard to ISO awards, cap the total dollar amount that can vest in one year for an individual at $100,000. The 1982 Plan has expired; therefore, no further options can be granted under this plan. 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. At December 31, 1996 and December 31, 1995, the Company had three stock option plans under which employees and directors had options or warrants to purchase Lydall Common Stock. The 1984 Outside Directors' Warrant Plan was terminated in 1992. At the end of 1996 and 1995, there were warrants for 30,330 shares outstanding under the Plan. All of these warrants were exercised during 1997. 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 three stock option plans been determined based on the fair value at the grant dates for awards under those plans 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: - ----------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------- Net income As reported $21,911 $24,736 $22,438 Pro forma 21,170 24,363 22,412 Basic earnings per share As reported $ 1.31 $ 1.44 $ 1.30 Pro forma 1.27 1.42 1.30 Diluted earnings per share As reported $ 1.27 $ 1.38 $ 1.23 Pro forma 1.22 1.35 1.23 - ----------------------------------------------------------------------------- The fair value of each option grant is estimated for the above disclosure on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996, and 1995, respectively: zero dividend yield for all years; expected volatility of 27 percent, 31 percent, and 28 percent; risk-free interest rates of 5.8 percent, 6.1 percent, and 5.6 percent; and an expected six-year life for all years. 38 LYDALL, INC. A summary of the status of the Company's stock option plans as of December 31, 1997, 1996, and 1995, and changes during the years ended on those dates is presented below:
- -------------------------------------------------------------------------------------------------------------------- In thousands except per-share data 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price Shares - -------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,772 $11.51 1,822 $ 9.63 2,323 Granted 156 19.80 191 23.41 142 Exercised (303) 6.20 (229) 6.21 (643) Forfeited (33) 20.80 (12) 16.85 - ................................................................................................................... Outstanding at end of year 1,592 13.14 1,772 11.51 1,822 ................................................................................................................... Options exercisable at year-end 1,156 1,176 1,115 Shares reserved for grants 301 424 603 Weighted-average fair value per option granted during the year $7.85 $10.07 $10.12 - --------------------------------------------------------------------------------------------------------------------
In 1995, the option price of outstanding shares ranged from $1.76 to $26.00 per share. Option exercises in 1995 ranged from $1.55 to $10.38. The following table summarizes information about stock options outstanding at December 31, 1997:
- -------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------------------------------------------------------------- Number Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price - -------------------------------------------------------------------------------------------------------------- $ 1.85 to 2.83 138,566 0.06 years $ 2.40 138,566 $ 2.40 4.21 to 5.85 195,893 2.7 4.58 195,893 4.58 8.21 to 10.67 579,661 5.2 9.67 551,979 9.65 13.81 to 19.81 379,897 8.1 17.90 165,424 16.55 22.63 to 26.00 297,946 8.4 24.42 103,908 24.86 .............................................................................................................. $ 1.85 to 26.00 1,591,963 5.8 $13.14 1,155,770 $10.28 - --------------------------------------------------------------------------------------------------------------
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: - ------------------------------------------------------------------------------ In thousands For the years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------ Service cost - benefits earned during the year $ 1,065 $ 1,048 $ 850 Interest cost on projected benefit obligations 1,392 1,262 1,125 Actual return on plan assets (1,813) (1,703) (2,081) Net amortization and deferral 362 451 1,083 .............................................................................. Net pension cost $ 1,006 $ 1,058 $ 977 - ------------------------------------------------------------------------------ 39 LYDALL, INC. 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 7.25 percent for 1997, 7.50 percent for 1996, and 7.25 percent for 1995; expected long-term rates of return on plan assets of 9.25 percent for 1997, 1996, and 1995; and annual compensation increases of 5.0 percent for 1997, 1996, and 1995. 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:
- ----------------------------------------------------------------------------------------------------------------- 1997 1996 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: Vested $12,540 $ 3,358 $15,898 $13,464 $ 322 $13,786 Nonvested 738 115 853 686 23 709 ................................................................................................................ Accumulated benefit obligations 13,278 3,473 16,751 14,150 345 14,495 Additional benefits related to assumed future compensation levels 3,499 - 3,499 2,932 - 2,932 ................................................................................................................ Projected benefit obligations 16,777 3,473 20,250 17,082 345 17,427 Plan assets at fair market value 13,643 3,286 16,929 15,279 322 15,601 ................................................................................................................ Projected benefit obligations in excess of the plan assets (3,134) (187) (3,321) (1,803) (23) (1,826) Unrecognized net assets (410) (118) (528) (614) (17) (631) Unrecognized prior service cost (101) 295 194 117 50 167 Unrecognized net losses 2,663 523 3,186 2,184 76 2,260 Additional minimum liability - (700) (700) - (109) (109) ................................................................................................................ Accrued pension cost included in liabilities $ (982) $ (187) $(1,169) $ (116) $ (23) $ (139) - -----------------------------------------------------------------------------------------------------------------
The Company also 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 $2.1 million in 1997, $1.9 million in 1996, and $1.7 million in 1995. 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. 40 LYDALL, INC. The discount rates used in determining the accumulated postretirement benefit obligations were 7.50 percent and 7.75 percent at December 31, 1997 and 1996, respectively. The health-care cost trend rate was 8 percent, gradually declining to 5.5 percent over a four-year period in 1997 and 10 percent declining to 5.5 percent over a five-year period in 1996. An increase of 1 percent in the health- care cost trend rates would cause the accumulated benefit obligation to increase by $11 thousand. The increase in the service and interest components of the 1997 postretirement benefit cost is immaterial. The total expense was $83 thousand for 1997, $110 thousand for 1996, and $111 thousand for 1995. 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, the Company provides 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 $234 thousand in 1997, $246 thousand in 1996, and $203 thousand in 1995. Quarterly Financial Information (Unaudited) The following table summarizes quarterly financial information for 1997 and 1996. 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:
- ------------------------------------------------------------------------------------------------------------------------------------ 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter In thousands except -------------------------------------------------------------------------------------------------- per-share data 1997 1996 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $61,971 $65,794 $64,019 $67,669 $59,377 $59,707 $58,922 $59,482 .................................................................................................................................... Gross margin $19,263 $20,791 $20,036 $21,522 $18,873 $19,399 $19,469 $20,343 .................................................................................................................................... Net income $ 5,625 $ 5,965 $ 5,716 $ 6,871 $ 5,515 $ 5,780 $ 5,055 $ 6,120 .................................................................................................................................... Basic EPS $.33 $.34 $.34 $ .40 $ .33 $ .34 $ .31 $ .36 .................................................................................................................................... Diluted EPS $.32 $.33 $.33 $ .39 $ .32 $ .32 $ .30 $ .34 - ------------------------------------------------------------------------------------------------------------------------------------
Income Taxes The provision (benefit) for income taxes consists of the following: - -------------------------------------------------------------------------------- In thousands For the years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Current Federal $ 9,827 $13,662 $11,278 State 1,915 2,072 1,893 Foreign 341 171 (45) ................................................................................ Total current 12,083 15,905 13,126 Deferred Federal 347 (385) 926 State 127 194 (47) Foreign (15) (596) 432 ................................................................................ Total deferred 459 (787) 1,311 ................................................................................ Provision for income taxes $12,542 $15,118 $14,437 - ------------------------------------------------------------------------------- 41 LYDALL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued The statutory tax rate in France increased from 36.6 percent to 41.7 percent retroactive to January 1, 1997. The provision for income taxes for 1997 includes $127 thousand for the impact of the higher tax rate on the deferred tax liability balance. 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 statutory tax rate in France increased for 1995 from 33.3 percent to 36.6 percent retroactive to January 1, 1995. 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. - -------------------------------------------------------------------- For the years ended December 31, 1997 1996 1995 - -------------------------------------------------------------------- Statutory federal income tax rates 35% 35% 35% State income taxes, net of federal tax deduction 3.9 3.7 3.3 Exempt FSC foreign trade income (1.0) (.9) (1.5) Tax exempt income (.8) (.9) - Other (.7) 1.0 2.4 - -------------------------------------------------------------------- Effective income tax rates 36.4% 37.9% 39.2% - -------------------------------------------------------------------- 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:
- -------------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------- Current Long-term Current Long-term Deferred Deferred Deferred Deferred Tax In thousands Tax Assets Liabilities Tax Assets Liabilities - -------------------------------------------------------------------------------------------- Federal $2,215 $ 7,353 $2,344 $ 7,256 State 1,015 2,739 960 2,556 Foreign 356 2,887 308 2,855 - -------------------------------------------------------------------------------------------- Total $3,586 $12,979 $3,612 $12,667 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- 1997 1996 ------------------------------------------------------------------ Deferred Tax Deferred Tax Deferred Tax Deferred Tax In thousands Assets Liabilities Tax Assets Liabilities - -------------------------------------------------------------------------------------------- Accounts receivable $ 568 $ - $ 709 $ - Inventory 434 - 599 - Plant and equipment - 10,655 - 10,258 Other accrued expenses 1,640 - 1,799 - Retirement accounts 804 - 529 - Other, net - 2,184 - 2,433 - -------------------------------------------------------------------------------------------- Total $3,446 $12,839 $3,636 $12,691 - --------------------------------------------------------------------------------------------
42 LYDALL, INC. The Internal Revenue Service conducted its examination of the Company's federal income tax returns for the years 1990 through 1992 and proposed various adjustments which increased federal taxable income in those years. During January 1997, Lydall settled all issues raised during the examination and paid approximately $353 thousand in taxes and $141 thousand in interest. The Company had previously provided sufficient deferred tax accruals to cover the assessment of the above taxes and interest. Unremitted earnings of foreign subsidiaries which are deemed to be permanently invested amounted to $585 thousand at December 31, 1997. 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 in Michigan City, Indiana. 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. The EPA has completed its Record of Decision for the 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. 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. 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 October 1997, the insurer made a settlement demand of $150,591 to the Company in exchange for a release of the Company's liability at the site and indemnification from the current operator against site-related claims. The Company executed a settlement agreement with the insurer and current operator for a full site release; however, the current operator subsequently backed out of the agreement. The Company is now evaluating its options. Management believes the ultimate disposition of this matter will not have a material adverse effect upon the Company's consolidated financial position, results of operations, or cash flows. 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. A notice of appeal to the U.S. Court of Appeals for the Federal Circuit regarding this litigation was filed by ATD on March 28, 1997. The appeal issues were fully briefed and argued in January of 1998. No decision has been rendered. Management believes the ultimate disposition of this matter will not have a material adverse effect upon the Company's consolidated financial position, results of operations, or cash flows. 43 LYDALL, INC. 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Hartford, Connecticut February 18, 1998 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 auditor 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. John E. Hanley Vice President-Finance and Treasurer 44 LYDALL, INC. FIVE-YEAR STATISTICAL REVIEW
- ------------------------------------------------------------------------------------------------------------------------------- $ thousands except per-share amounts 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- Financial results Net sales $ 244,289 $ 252,652 $ 252,128 $ 213,072 $ 157,431 Income before cumulative effect of accounting change 21,911 24,736 22,438 15,503 10,013 Net income 21,911 24,736 22,438 15,503 10,248 - ------------------------------------------------------------------------------------------------------------------------------- Common stock per-share data (diluted) Income before cumulative effect of accounting change $ 1.27 $ 1.38 $ 1.23 $ .87 $ .57 Net income 1.27 1.38 1.23 .87 .58 Common stockholders' equity 7.04 6.89 5.88 4.57 3.63 - ------------------------------------------------------------------------------------------------------------------------------- Financial position Total assets $ 160,124 $ 182,119 $ 158,072 $ 136,613 $ 107,842 Working capital 39,203 53,358 52,730 30,823 31,791 Current ratio 2.39 2.24 2.77 1.93 2.48 Long-term debt, net of current maturities 2,100 5,050 7,750 10,607 11,171 Total stockholders' equity 113,030 117,844 101,811 76,227 60,057 Debt to total capitalization 4.3% 12.9% 9.4% 15.0% 18.7% - ------------------------------------------------------------------------------------------------------------------------------- Property, plant, and equipment Net property, plant, and equipment $ 68,860 $ 62,038 $ 60,074 $ 54,771 $ 49,364 Capital additions from acquisitions - 500 - 3,077 - Other capital additions 17,104 10,893 12,006 7,979 6,253 Capital divestments, net 685 894 632 687 356 Depreciation 7,993 7,824 7,122 6,101 4,997 - ------------------------------------------------------------------------------------------------------------------------------- Performance ratios and other items Return on average assets 12.8% 14.5% 15.2% 12.7% 9.9% Return on average common stockholders' equity 19.0% 22.5% 25.2% 22.8% 18.6% Return on sales 9.0% 9.8% 8.9% 7.3% 6.5% Days of inventory on hand (LIFO) 33 31 33 36 41 Days of receivables outstanding 51 50 49 47 52 Number of employees at year-end 1,225 1,268 1,227 1,306 944 - ------------------------------------------------------------------------------------------------------------------------------- Shares and stockholders Weighted average common stock and equivalents 17,319,000 17,988,000 18,197,000 17,864,000 17,520,000 Common stock outstanding at year-end 16,065,473 17,092,011 17,320,252 16,677,524 16,538,126 Stockholders at year-end 1,653 1,855 1,918 1,900 1,904 Market price per share of common stock - Highest close $ 25.75 $ 25.87 $ 28.50 $ 18.63 $ 10.69 Lowest close $ 18.50 $ 19.75 $ 14.75 $ 10.13 $ 9.50 - -------------------------------------------------------------------------------------------------------------------------------
Share figures adjusted to reflect a two-for-one stock split in 1995, and a three-for-two stock split in 1993. 45 LYDALL, INC. 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 Technical Papers 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/ Former 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 13, 1998 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 1997 and 1996, 7,103,800 and 6,578,300 shares, respectively, were traded. The closing price on December 31, 1997 was $19.50. As of March 16, 1998, the record date of Lydall's 1998 Annual Meeting, stockholders of record held 16,068,885 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. - ---------------------------------------------------- Quarters 1 2 3 4 - ---------------------------------------------------- 1997 High $24.0000 $23.6250 $25.7500 $23.9375 Low 20.0000 18.7500 20.8750 18.5000 Close 20.2500 21.1250 23.4375 19.5000 1996 High $25.1250 $25.8750 $25.7500 $24.5000 Low 19.7500 21.8750 21.0000 20.2500 Close 25.0000 22.0000 24.3750 22.5000 - ---------------------------------------------------- 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 www.lydall.com investor@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. 46 LYDALL, INC. EX-21.1 4 LIST OF SUBSIDIARIES OF LYDALL, INC. LYDALL, INC. Exhibit 21.1 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 the 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 the State of New York DBA: Lydall Composite Materials, Hoosick Falls Operation Lydall Manning Nonwovens Division Lydall Manning Fort Washington Division Lydall Central, Inc. - Incorporated in the State of Indiana DBA: Lydall Westex, Hamptonville Operation Lydall Westex, Rockwell Operation Lydall Westex, Columbus Operation Subsidiary: Charter Medical, Ltd. - Incorporated in the State of Delaware Lydall International, Inc. - Incorporated in the State of Delaware Lydall FSC, Limited - Incorporated in Jamaica Trident II, Inc. - Incorporated in the 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 EX-23.1 5 CONSENT OF INDEPENDENT ACCOUNTANTS 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 18, 1998, on our audits of the consolidated financial statements and financial statement schedule of Lydall, Inc., and Subsidiaries as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which reports are incorporated by reference from the 1997 Annual Report to Stockholders, and included, respectively, in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Hartford, Connecticut March 25, 1998 13 EX-24.1 6 POWER OF ATTORNEY 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, 1997, 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 16, 1998 ------------------- Board and Chief Leonard R. Jaskol Executive Officer Lee A. Asseo Director March 16, 1998 - -------------- Lee A. Asseo Paul S. Buddenhagen Director March 16, 1998 - --------------------- Paul S. Buddenhagen James P. Carolan Director March 16, 1998 - ------------------- James P. Carolan Samuel P. Cooley Director March 16, 1998 - ------------------- Samuel P. Cooley W. Leslie Duffy Director March 18, 1998 - ------------------ W. Leslie Duffy William P. Lyons Director March 16, 1998 - ------------------- William P. Lyons Joel Schiavone Director March 16, 1998 - ----------------- Joel Schiavone Elliott F. Whitely Director March 16, 1998 - --------------------- Elliott F. Whitely Roger M. Widmann Director March 16, 1998 - ------------------- Roger M. Widmann A. E. Wolf Director March 16, 1998 - ------------- A. E. Wolf EX-27.1 7 FINANCIAL DATA SCHEDULE 12/31/97
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 8,891 3,873 33,254 (1,381) 15,538 67,427 125,622 56,762 160,124 28,234 5,050 0 0 2,143 110,887 160,124 244,289 244,289 166,648 166,648 (1,700) (57) 368 34,453 12,542 21,911 0 0 0 21,911 1.31 1.27
EX-27.2 8 FINANCIAL DATA SCHEDULE RESTATED 9/30/97
5 1,000 9-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 13,638 9,227 35,645 1,348 15,664 78,146 123,986 55,391 169,276 31,878 5,550 0 0 2,141 117,818 169,276 185,367 185,367 127,195 127,195 (1,162) (282) 360 26,768 9,912 16,856 0 0 0 16,856 1.00 0.97
EX-27.3 9 FINANCIAL DATA SCHEDULE RESTATED 6/30/97
5 1,000 6-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 11,852 8,220 34,917 1,518 15,661 75,110 121,381 54,566 164,825 31,457 5,550 0 0 2,138 113,040 164,825 125,990 125,990 86,691 86,691 (584) (148,508) 277 18,205 6,864 11,341 0 0 0 11,341 0.67 0.65
EX-27.4 10 FINANCIAL DATA SCHEDULE RESTATED 3/31/97
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 24,055 4,943 34,339 (1,647) 15,832 82,669 118,643 52,855 171,632 34,637 8,250 0 0 2,123 114,135 171,632 61,971 61,971 42,708 42,708 (250) (162) 158 9,017 3,392 5,625 0 0 0 5,625 0.33 0.32
EX-27.5 11 FINANCIAL DATA SCHEDULE RESTATED 12/31/96
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 38,226 4,941 34,427 (1,727) 14,680 96,371 113,347 51,309 182,119 43,013 17,500 0 0 2,112 115,732 182,119 252,652 252,652 170,597 170,597 (577) (28) 518 39,854 15,118 24,736 0 0 0 24,736 1.44 1.38
EX-27.6 12 FINANCIAL DATA SCHEDULE RESTATED 9/30/96
5 1,000 9-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 35,298 2,518 34,533 (2,009) 14,357 90,961 110,520 50,196 165,891 31,762 7,792 0 0 2,108 109,601 165,891 193,170 193,170 131,458 131,458 (239) 159 457 29,987 11,371 18,616 0 0 0 18,616 1.09 1.04
EX-27.7 13 FINANCIAL DATA SCHEDULE RESTATED 6/30/97
5 1,000 6-MOS DEC-31-1996 APR-01-1996 JUN-30-1996 28,440 2,273 37,539 (2,004) 14,933 87,738 108,077 48,561 162,086 32,064 7,833 0 0 2,102 105,801 162,086 133,463 133,463 91,150 91,150 (64) 165 314 20,683 7,847 12,836 0 0 0 12,836 0.75 0.72
EX-27.8 14 FINANCIAL DATA SCHEDULE RESTATED 3/31/96
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 26,423 1,977 36,910 1,966 15,482 84,891 106,690 47,268 159,490 33,352 10,076 0 0 2,097 99,075 159,490 65,794 65,794 45,003 45,003 (17) 59 182 9,592 3,627 5,965 0 0 0 5,965 0.35 0.33
EX-27.9 15 FINANCIAL DATA SCHEDULE RESTATED 12/31/95
5 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 27,820 913 34,849 (1,938) 14,124 82,469 105,467 45,393 158,072 29,739 10,621 0 0 2,089 99,722 158,072 252,128 252,128 174,430 174,430 155 503 778 36,875 14,437 22,438 0 0 0 22,438 1.30 1.23
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