Lydall Inc.: 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, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 1-7665 ---------------- 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. [X] On March 17, 1997, the aggregate market value of the Registrant's voting stock held by nonaffiliates was $348,360,869. On March 17, 1997, there were 16,881,912 shares of Common Stock outstanding, exclusive of treasury shares. ---------------- DOCUMENTS INCORPORATED BY REFERENCE Parts I and II incorporate certain information by reference from the Annual Report to Stockholders for the year ended December 31, 1996. Part III incorporates information by reference from the definitive Proxy Statement to be distributed in connection with the Registrant's Annual Meeting of Stockholders to be held on May 14, 1997. =============================================================================== PART I ITEM 1. BUSINESS. Lydall, Inc. (hereafter referred to as "Lydall" or the "Company") is a manufacturer of technologically advanced engineered materials for demanding specialty applications. Lydall develops and manufactures engineered fiber materials and composites in both roll and sheet form; fiber-based as well as combination-metal-and- fiber heat shields; and fabricates certain medical filtration and automotive thermal barrier components. The majority of Lydall's products are supplied to customers who in turn incorporate them into finished products. Utilizing a broad spectrum of available fibers, materials, binders, resins, etc. combined with dry-laid and wet-laid nonwoven processes and specialty weaving capabilities, the Company has been able to develop a broad range of high- performance materials. The Company serves a number of market niches. Lydall's products are primarily sold directly to the customer (or fabricator), through an internal sales force and are distributed through common carrier, ocean cargo, or the Company's trucking operation. Within each market niche there are typically several competitors. The Company primarily competes through high-quality products and customer service. Lydall has a number of domestic and foreign competitors for its products, most of whom are either privately owned or divisions of large companies, making it difficult to determine the Company's market share. Lydall's products fall into five basic categories: thermal barriers, air and liquid filtration media, materials handling systems, electrical insulation, and other products and services. MAJOR PRODUCTS Thermal Barriers Lydall manufactures a broad range of materials which serve as heat or thermal barriers. The Cryotherm(R) and Lytherm(R) product lines include an assortment of composites using distinctive materials, in both rigid and flexible forms, manufactured by a variety of processes. Lydall's thermal barrier products in differing forms are capable of withstanding temperatures ranging from -459 degrees F to +3,000 degrees F. At the highest temperature requirements, Lytherm thermal barrier products are used as linings for ovens, kilns, and furnaces and in glass and metal manufacturing. At mid-range temperatures Lytherm nonwovens are patented layered composites of either organic and inorganic fibers or fiber-and-metal-foil combinations which are used as thermal barriers in medium and light-duty trucks, vans, sport utility vehicles, and cars. An acquisition made in early 1994 contributed to the growth of thermal barrier sales. This acquisition also expanded the Company's product offerings to include additional automotive heat shields. Also, in mid-range temperatures, Manninglas(R) nonwovens are employed in consumer appliances and heat ventilation and air conditioning ducting and insulation. At the very coldest temperatures (approaching absolute zero), Cryotherm(R) cryogenic insulation materials are used for super-insulating applications. These include tanker trucks which transport liquid gases; stationary and portable cryogenic storage vessels; gas tanks for vehicles fueled by liquid natural gas; and supercolliders. These nonwovens are composed of 100-percent inorganic fibers. Lydall also manufactures custom-designed media employed in automotive air- bag pyrotechnic inflators. Although these sales are classified as thermal barriers by the Company, this specialty product performs both a filtration and heat-reduction function. 1 Sales of thermal barriers approximated 38 percent of the Company's sales for 1996, 36 percent 1995, and 34 percent for 1994. Thermal barrier sales increased 6 percent in 1996 over 1995 activity. Increases can be primarily attributable to solid growth for automotive heat-shield applications. Filtration Media The Company manufactures high-efficiency air filtration media, marketed under the Lydair(R) name. Lydair filtration media are used for applications where clean air is vital, such as in semiconductor manufacturing clean rooms, industrial clean rooms, and biotechnology laboratories. Lydall manufactures Lydair media in six filtration classes in over 100 grades with filtering efficiencies from 10 percent at 0.3 micron particle size to 99.999999 percent at 0.1 micron particle size. Lydall filtration media are primarily used in air filters which are capital goods rather than consumables and last approximately five years. A replacement market exists as facilities using these filters upgrade clean room technology. The Company's HEPA filtration media are also used in home air-purification units. Lydall's line of fabricated medical filter components are sold under the trademark Lypore(R) and are widely used in blood filtration devices, such as cardiotomy reservoirs which filter the blood supply of an open-heart surgery patient during the operation, and autotransfusion filters used to filter blood collected from a patient before surgery or from an injured patient. This product line also includes a leukocyte filtration media used in devices that separate blood components. In addition, Lydall produces liquid filtration media used primarily in high- efficiency hydraulic oil and lubrication oil elements for off-road vehicles, trucks, and heavy equipment. These products are also sold under the Lypore trademark. Sales of filtration media increased to 24 percent of sales for 1996 compared with 22 percent and 20 percent for 1995 and 1994, respectively. The overall sales of filtration media increased 9 percent in 1996 from that of 1995. High- efficiency air filtration media, sold to air filter manufacturers for clean- room applications, contributed the majority of total filtration sales. Sales slowed somewhat in the last two quarters of 1996 mainly because of postponements of planned clean-room construction and inventory reductions by customers. Materials Handling Lydall produces slipsheets, separator sheets, and protective sheets. The Ly-Pak(R) slipsheets are used to ship a growing number of products such as food, pharmaceuticals, and chemicals. Ly-Pak slipsheet systems are used to replace wooden pallets, providing significant cost and space reductions for a shipper. Ly-Pak separator sheets are supplied to the glass and polyethylene terephthalate bottle industry and are manufactured to meet industry specifications for bulk palletizing. Ly-Pak protective sheets are used as pallet pads, protective top caps, and stabilizing sheets. These products are custom-made from plies of virgin kraft linerboard and laminated with a special moisture-resistant adhesive. The Company also sells a complete line of dunnage products. Sales of these products approximated 13 percent of 1996 total sales as compared with 15 percent and 14 percent of 1995 and 1994 total sales, respectively. Total materials-handling sales decreased by 17 percent in 1996 as compared to 1995. Lower sales in 1996 were primarily a result of deflationary pressures. As raw material costs decreased corresponding price reductions were given which reduced sales dollars. Electrical Insulation Lydall's electrical insulation material, sold under the SE/duroid(R), Sep-R-Max(R), and Voltex(R) trademarks are found in a broad range of applications such as computers, consumer appliances, utility power transformers, electric motors and other wiring devices. These materials are manufactured to electrical resistance, flame retardancy, formability, thermal aging, and moisture resistance specifications. 2 The Company's electrical insulation products also include battery separator materials primarily used in European automotive batteries. These products are manufactured at the Company's European location. Sales of electrical insulation products were approximately 6 percent of total sales in 1996, 7 percent in 1995 and 8 percent in 1994. Actual sales decreased in 1996 by 19 percent over 1995 levels. The gradual decline in this market results from lower demand for automotive battery separator materials and a shift in the battery separator technology, favoring different materials than those used by the Company. As Lydall expected, these changes have had an impact on European separator sales. The Company has successfully been replacing electrical products with new products in air filtration at the foreign facility. Other Products and Services Lydall maintains a transportation operation which brokers and/or hauls freight for and between Lydall plants as well as for outside customers. In addition, the Company manufactures paperboard products used in games and packaging, specialty gasketing materials, and fiberboard shoe insole materials. Lydall also produces a wood replacement material made from recycled newsprint and cardboard which is currently being made into writing instruments. An acquisition made in December 1996 added the manufacture of high-performance woven structural components to the Company's products. Sales of all other products and services approximated 19 percent of the Company's sales in 1996 and 1995, and 24 percent in 1994. GENERAL BUSINESS INFORMATION Lydall operates eleven manufacturing and fabricating facilities in the United States which are located in Rochester, New Hampshire; Green Island, New York; Hoosick Falls, New York; Manchester, Connecticut; Richmond, Virginia; Hamptonville, North Carolina; Rockwell, North Carolina; Columbus, Ohio; Jacksonville, Florida, Covington, Tennessee and Hatboro, Pennsylvania. Lydall also has one manufacturing facility in Saint-Rivalain en Melrand, France. Lydall holds a number of patents, trademarks, and licenses. While no single patent, trademark or license by itself is critical to the success of Lydall, together these intangible assets are of considerable value to the Company's operations. The working capital requirements of the Company are financed primarily from operations. No significant portion of Lydall's business is seasonal. Lydall maintains levels of inventory and grants credit terms which are normal within the industries it serves. The Company uses a wide range of raw materials in the manufacturing of its products and was able to obtain all the raw materials needed during 1996. The majority of these materials are available from a variety of suppliers who can be substituted if necessary. Thirty-two percent of Lydall's total sales in 1996 were to the world-wide automotive market compared to thirty-three percent in 1995. Lydall's automotive sales are sold to various customers including parts suppliers, thermal insulation fabricators, air-bag manufacturers and original equipment manufacturers for use in a variety of models and applications. Sales to Ford Motor Company represented 16.6 percent of Lydall's total sales in 1996, and no other single customer accounted for more than 10 percent of total sales. Lydall invested $6.8 million in 1996, $6.2 million in 1995, and $5.5 million in 1994, respectively, in activities to develop new products and special manufacturing processes or to improve existing products. Most of Lydall's investment in research and development is application specific; very little is pure research. There were no significant customer-sponsored research and development activities during the past three years. Lydall's backlog was $25.1 million at December 31, 1996, $28.0 million at December 31, 1995, and $24.5 million at December 31, 1994. Lydall expects to fill its backlog of 1996 orders during the first quarter of 1997. Backlog at February 28, 1997 was $27.2 million. There are no seasonal aspects to this backlog. 3 No material portion of Lydall's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. Lydall believes that its plants and equipment are in substantial compliance with applicable federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Additional measures to maintain compliance with presently enacted laws and regulations are not expected to have a substantial adverse effect on the capital expenditures, earnings and competitive position of the Company and its subsidiaries. For information relating to certain environmental proceedings involving the Company, please refer to Item 3 below. As of March 1, 1997, Lydall and its subsidiaries had 1,272 employees, including foreign employees. Approximately 175 of the domestic employees are represented by eight unions under contracts expiring between November 1997 and November 1999. Lydall considers its employee relationships to be satisfactory, and there have not been any actual or threatened work stoppages due to union related activities. All employees at the Company's facility in France are covered under a National Collective Bargaining Agreement. Foreign and export sales were 21 percent of total sales in 1996, 22 percent in 1995 and 21 percent in 1994. Export sales are concentrated primarily in Europe, the Far East, Mexico, and Canada and were $37.0 million, $38.9 million,and $30.7 million in 1996, 1995 and 1994, respectively. Foreign sales were $17.6 million, $17.0 million, and $14.4 million for the years ended December 31, 1996, 1995, and 1994, respectively. For the year ended December 31, 1996, the foreign facility incurred losses of $796 thousand. For the year ended December 31, 1995 the foreign facility earned $127 thousand excluding the effect of a statutory tax rate increase on deferred tax balances which negatively impacted income by $292 thousand. For the year ended December 31, 1994, net income was $192 thousand. Total foreign assets were $18.5 million and $20.4 million at December 31, 1996 and 1995, respectively. There are no anticipated operating risks related to foreign investment law, expropriation, inflation effects or availability of material, labor and energy. The Company's foreign and domestic operations limit currency and foreign exchange transaction risks by completing transactions primarily in their functional currencies. ITEM 2. PROPERTIES. The principal properties of the Company and its subsidiaries are situated at the following locations and have the following characteristics: 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, Composite Materials Manufacturing..... 26.0 155,000 Tennessee 4 Richmond, Laminated Kraft Manufacturing......... 5.0 104,000 Virginia 5 Rochester, Specialty Paper Manufacturing......... 18.0 143,000 New Hampshire 6 Hoosick Falls, Composite Materials Manufacturing..... 11.0 129,000 New York 7 Hamptonville, Nonwoven Materials Manufacturing...... 35.2 85,000 North Carolina 4 APPROXIMATE AREA ------------------ LAND BUILDINGS LOCATION GENERAL DESCRIPTION (ACRES) (SQ. FEET) -------- ------------------- ------- ---------- 8 Green Island, Specialty Paper New York Manufacturing & Warehouse................. 5.4 275,000 9 Manchester, Corporate Office and Connecticut Computer Center........... 4.5 20,000 10 Rockwell, Fabricating Facility...... 11.5 51,000 North Carolina 11 Saint-Rivalain en Melrand, Specialty Paper France Manufacturing............. 14.3 156,000 12 Columbus, Fabricating Facility...... 9.0 80,000 Ohio 13 Jacksonville, Laminated Kraft Florida Manufacturing............. -- 52,000 14 Hatboro, Specialty Materials Pennsylvania Manufacturing............. -- 36,000 15 Manchester, Warehouse and Office Connecticut Facilities................ 7.08 95,000 Properties numbered 4, 10, 12, 13 and 14, are being leased; all others are owned. For information with respect to obligations for lease rentals and owned property, see the Notes to the Consolidated Financial Statements of the Company included in the 1996 Annual Report to Stockholders, which are incorporated herein by reference. Lydall considers its properties to be suitable and adequate for its present needs. The properties are being fully utilized. In addition to the properties listed above, the Company has several additional leases for sales offices and warehouses in the United States and overseas. ITEM 3. LEGAL PROCEEDINGS. In the mid-1980's, the United States Environmental Protection Agency ("EPA") notified a former subsidiary of the Company that it and other entities may be potentially responsible in connection with the release of hazardous substances at a landfill and property located adjacent to a landfill located in Michigan City, Indiana. The two sites have been combined and are viewed by the EPA as one site. The preliminary indication, based on the Site Steering Committee's volumetric analysis, is that the alleged contribution to the waste volume at the site of the plant once owned by a former subsidiary is approximately 0.434 percent of the total volume. The portion of the 0.434 percent specifically attributable to the former subsidiary by the current operator of the plant is approximately 0.286 percent. There are over 800 potentially responsible parties ("prp") which have been identified by the Site Steering Committee. Of these, 38, not including the Company's former subsidiary, are estimated to have contributed over 80 percent of the total waste volume at the site. These prp's include Fortune 500 companies, public utilities, and the State of Indiana. The Company believes that, in general, these parties are financially solvent and should be able to meet their obligations at the site. The Company has reviewed Dun & Bradstreet reports on several of these prp's, and based on these financial reports, does not believe Lydall will have any material additional volume attributed to it for reparation of this site due to insolvency of other prp's. During the quarter ended September 30, 1994, the Company learned that the EPA had completed its Record of Decision ("ROD") for the Michigan site and has estimated the total cost of remediation to be between $17 million and $22 million. Based on the alleged volumetric contribution of its former subsidiary to the site, and on the EPA's estimated remediation costs, Lydall's alleged total exposure would be less than $100 thousand, which has been accrued. In June 1995, the Company and its former subsidiary were sued in the Northern District of Indiana by the insurer of the current operator of the former subsidiary's plant seeking contribution. In January 5 1997, the insurer made a settlement demand of $133,925 to the Company in exchange for a release of the Company's liability at the site. Although the Company believes it has several defenses to the action, it is evaluating the demand. Management believes the ultimate disposition of this matter will not have a material adverse effect upon the Company's consolidated financial position or results of operations. On March 19, 1996, patent litigation brought by ATD Corporation ("ATD") against Lydall in the U.S. District Court for the Eastern District of Michigan was concluded with the jury finding in favor of Lydall and with all of ATD's claims for damages being denied. Post trial motions of both parties for judgment as a matter of law were denied by the Court on February 27, 1997. The period for appeal to the U.S. Court of Appeals for the Federal Circuit regarding this litigation expires on March 30, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the fourth quarter of 1996. EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT: The name, age, current position, and other business experience since January 1, 1992 of each executive officer of the Company are listed on the following page. Leonard R. Jaskol, John E. Hanley, Carole F. Butenas, Alan J. Gnann and Mary Tremblay are elected annually at the organizational meeting of the Board of Directors. All others are appointed by the President and Chief Executive Officer for an indefinite period. There are no family relationships among executive officers or other significant employees. OTHER BUSINESS NAME AGE TITLE EXPERIENCE SINCE 1992 - ---- --- ----- --------------------- Leonard R. Jaskol 60 Chairman of the Board (since N/A 1991) President and Chief Executive Officer (since 1988) John E. Hanley 40 Vice President--Finance and N/A Treasurer (since 1992) Carole F. Butenas 54 Vice-President--Investor N/A Relations (since 1991) Director (1995) Alan J. Gnann(1) 47 Vice President--Corporate President--Manning Nonwovens Development (since 1993) Division Mary Tremblay 36 General Counsel and Secretary N/A (since 1991) Raymond J. Lanzi 58 Division President (since 1979) N/A Director (1993) Elliott F. Whitely 53 Division President (since 1987) N/A Director (1993) (1996) James P. Carolan 54 Division President (since 1993) President--Lydall International Director (1994) (1996) William J. Rankin 43 Division President (since 1992) N/A Director (1995) Christopher R. 43 Division President (since 1990) N/A Skomorowski Director (1994) John J. Worthington 48 Division President (since 1996) General Manager, W. R. Grace and Specialty Paperboard, Inc. - -------- (1) Mr. Gnann has resigned effective March 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 24, 34, 41 and 42 of the 1996 Annual Report to Stockholders. ITEM 6. SELECTED FINANCIAL DATA. Information regarding selected financial data of the Company is incorporated herein by reference to page 41 of the 1996 Annual Report to Stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's discussion and analysis of financial condition and results of operations is incorporated herein by reference to the President's Letter, the Analysis of Results and Key Financial Items on pages 2 through 6 and 16 through 24 of the 1996 Annual Report to Stockholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of Lydall, Inc. and its subsidiaries and the supplementary quarterly financial information are incorporated by reference to pages 25 through 39 of the 1996 Annual Report to Stockholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no disagreements with the Company's independent public accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding the directors of Lydall is incorporated by reference to the definitive Proxy Statement of Lydall to be filed with the Commission relating to its Annual Meeting of stockholders to be held on May 14, 1997. Information regarding the executive officers and other significant employees of the Company is contained on page 6 of this report. ITEM 11. EXECUTIVE COMPENSATION. Information regarding the compensation of Lydall's directors and executive officers is incorporated by reference to the definitive Proxy Statement of Lydall to be filed with the Commission relating to its Annual Meeting of stockholders to be held on May 14, 1997, excluding the Compensation and Stock Option Committee Report to Stockholders found on pages 16 through 18, and the comparative performance graph located on page 19, therein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information regarding beneficial ownership of the common stock by certain beneficial owners and by management of the Company is incorporated by reference to the definitive Proxy Statement of Lydall to be filed with the Commission relating to its Annual Meeting of stockholders to be held on May 14, 1997. 7 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information regarding certain relationships and related transactions with management is incorporated by reference to the definitive Proxy Statement of Lydall to be filed with the Commission relating to its Annual Meeting of stockholders to be held on May 14, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. a) 1) The following consolidated financial statements of Lydall, Inc. and its subsidiaries are found in and are incorporated by reference to the Annual Report to Stockholders for the year ended December 31, 1996: ANNUAL REPORT PAGES ------ Consolidated Income Statements--Years ended December 31, 1996, 1995, and 1994..... 25 Consolidated Balance Sheets--December 31, 1996 and 1995........................... 26-27 Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995, and 1994............................................................................. 28 Consolidated Statements of Changes in Stockholders' Equity--Years ended December 31, 1996, 1995, and 1994................................................................... 29 Notes to Consolidated Financial Statements........................................ 30-39 Report of Independent Accountants................................................. 40 10-K PAGES ----- a) 2) Financial Statement Schedule: Report of Independent Accountants................................................. 12 Consent of Independent Accountants................. 13 Schedule II--Valuation and Qualifying Accounts--Years ended December 31, 1996, 1995, and 1994................................................................... 14 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or are presented in the notes to financial statements, and therefore have been omitted. With the exception of the consolidated financial statements and the accountants' report thereon listed in the above index, the information referred to in Items 2, 5, 6 and 7 and the supplementary quarterly financial information referred to in Item 8, all of which is included in the 1996 Annual Report to Stockholders of the Company and incorporated by reference into this Form 10-K Annual Report, the 1996 Annual Report to Stockholders is not to be deemed "filed" as part of this report. a) 3) Exhibits included herein: 3.1 Amended and Restated Certificate of Incorporation of the registrant dated August 14, 1995, (filed as Exhibit 4.1 to the registrants Quarterly Report on Form 10-Q dated November 9, 1995 and incorporated herein by this reference). 3.2 Bylaws of the registrant (filed as Exhibit 3.2 to the registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 4.1 Certain long-term debt instruments, each representing indebtedness in an amount equal to less than 10 percent of the registrant's total consolidated assets, have not been filed as exhibits to this Annual Report on Form 10-K. The registrant hereby undertakes to file these instruments with the Commission upon request. 10.1* Lydall, Inc. 1978 Long-Term Incentive Compensation Plan (filed as Exhibit 4.4 to the registrant's Registration Statement on Form S-8 dated March 18, 1988 (Reg. No. 33-20777), and incorporated herein by this reference). 8 10.2* Amended and restated, Lydall, Inc. 1982 Stock Incentive Compensation Plan, amended through May 14, 1991 (filed as Exhibit 10.6 to the registrant's Annual Report on Form 10-K dated March 26, 1992 and incorporated herein by this reference). 10.3* Amended and restated, 1992 Stock Incentive Compensation Plan, dated May 14, 1992, amended through May 11, 1994, (filed as exhibit 10.3 to the registrant's Annual Report on Form 10-K dated March 27, 1995, and incorporated herein by this reference.) 10.4* Lydall, Inc. Senior Management Annual Incentive Compensation Plan (filed as Exhibit 3.5 to the registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 10.5* Lydall, Inc. Management Annual Incentive Compensation Plan (filed as Exhibit 3.6 to the registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 10.6* Employment Agreement with Leonard R. Jaskol dated March 1, 1995, (filed as exhibit 10.6 to the registrant's Annual Report on Form 10-K dated March 27, 1995, and incorporated herein by this reference.) 10.7* Employment Agreement with John E. Hanley dated March 10, 1995, (filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.8* Employment Agreement with James P. Carolan dated March 10, 1995 (filed as Exhibit 10.2 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.9* Employment Agreement with Elliott F. Whitely dated March 10, 1995 (filed as Exhibit 10.3 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.10* Employment Agreement with Alan J. Gnann dated March 10, 1995 (filed as Exhibit 10.4 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.11* Employment Agreement with Raymond J. Lanzi dated March 10, 1995 (filed as Exhibit 10.5 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.12* Employment Agreement with Christopher R. Skomorowski dated March 10, 1995 (filed as Exhibit 10.6 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.13* Employment Agreement with William J. Rankin, dated March 10, 1995 (filed as Exhibit 10.7 to the registrant's Quarterly report on Form 10- Q dated May 9, 1995 and incorporated herein by this reference). 10.14* Employment Agreement with Carole F. Butenas dated March 10, 1995 (filed as Exhibit 10.8 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.15* Employment Agreement with Mona G. Estey dated March 10, 1995 (filed as Exhibit 10.9 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 9 10.16* Employment Agreement with Mary Adamowicz Tremblay dated March 10, 1995 (filed as Exhibit 10.10 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.17* Employment Agreement with John J. Worthington dated November 7, 1996, filed herewith. 10.18* Lydall, Inc. Board of Directors Deferred Compensation Plan effective January 1, 1991, (filed as Exhibit 10.17 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.19 Asset Purchase Agreement between Lydall Central, Inc. and Standard Packaging, Inc. (filed as Exhibit 2.1 to the registrant's Current Report on Form 8-K dated February 28, 1994 and incorporated herein by this reference). 10.20 Asset Purchase Agreement between Lydall Eastern, Inc. and Riverwood International Georgia, Inc. (filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q dated August 10, 1994 and incorporated herein by this reference). 10.21* Lydall, Inc. Supplemental Executive Retirement Plan effective January 1, 1994, (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K dated March 27, 1996). 10.22 Asset Purchase Agreement between Lydall New York, Inc. and Textile Technologies Industries, Inc. filed herewith. The registrant shall furnish copies of exhibits to the Asset Purchase Agreement upon the request of the Commission. 11.1 Schedule of Computation of Weighted Average Common Shares and Equivalents Outstanding, filed herewith. 13.1 Annual Report to Stockholders for the year ended December 31, 1996, filed herewith. 21.1 List of subsidiaries of the registrant, filed herewith. 23.1 Consent of Coopers and Lybrand, L.L.P.,filed herewith. 24.1 Power of Attorney, dated March 13, 1997, authorizing Leonard R. Jaskol and/or John E. Hanley to sign this report on behalf of each member of the Board of Directors indicated therein, filed herewith. 27.1 Financial Data Schedule, filed herewith. - -------- *Management contract or compensatory plan. b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter, 1996. 10 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, LYDALL, INC. HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Lydall, Inc. Leonard R. Jaskol Date: March 27, 1997 By __________________________________ LEONARD R. JASKOL CHAIRMAN AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF LYDALL, INC. IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- Leonard R. Jaskol Chairman, Chief March 27, 1997 - ------------------------------------- Executive Officer LEONARD R. JASKOL and Director John E. Hanley Vice President--Finance March 27, 1997 - ------------------------------------- and Treasurer JOHN E. HANLEY (Principal Financial and Accounting Officer) John E. Hanley March 27, 1997 - ------------------------------------- JOHN E. HANLEY ATTORNEY-IN-FACT FOR: Lee A. Asseo Director* March 27, 1997 - ------------------------------------- LEE A. ASSEO Paul S. Buddenhagen Director* March 27, 1997 - ------------------------------------- PAUL S. BUDDENHAGEN James P. Carolan Director* March 27, 1997 - ------------------------------------- JAMES P. CAROLAN Samuel P. Cooley Director* March 27, 1997 - ------------------------------------- SAMUEL P. COOLEY W. Leslie Duffy Director* March 27, 1997 - ------------------------------------- W. LESLIE DUFFY William P. Lyons Director* March 27, 1997 - ------------------------------------- WILLIAM P. LYONS Joel Schiavone Director* March 27, 1997 - ------------------------------------- JOEL SCHIAVONE Elliott F. Whitely Director* March 27, 1997 - ------------------------------------- ELLIOTT F. WHITELY Roger M. Widmann Director* March 27, 1997 - ------------------------------------- ROGER M. WIDMANN Albert E. Wolf Director* March 27, 1997 - ------------------------------------- ALBERT E. WOLF * (constituting in excess of a majority of the full Board of Directors) 11 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Lydall, Inc.: Our report on the consolidated financial statements of Lydall, Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from page 40 of the 1996 Annual Report to Stockholders of Lydall, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 8 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Hartford, Connecticut February 14, 1997, except for Contingencies footnote, for which the date is February 27, 1997. 12 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Lydall, Inc. on Form S-8 (File No. 33-93768) of our reports dated February 14, 1997 except as to the information presented in the Contingencies footnote, for which the date is February 27, 1997, on our audits of the consolidated financial statements and financial statement schedule of Lydall, Inc., and Subsidiaries as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994, which reports are incorporated by reference from the 1996 Annual Report to Stockholders, and included, respectively, in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Hartford, Connecticut March 27, 1997 13 SCHEDULE II LYDALL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 $ THOUSANDS ADDITIONS - ----------- --------------------- CHARGED TO CHARGED TO OTHER BALANCE AT COSTS AND ACCOUNTS-- DEDUCTIONS-- BALANCE AT DESCRIPTION JANUARY 1 EXPENSES DESCRIBE DESCRIBE DECEMBER 31 ----------- ---------- ---------- ---------- ------------ ----------- 1996 Allowance for doubtful receivables............ $1,938 $ 235 $ -- $ (446)(1) $1,727 Accumulated amortization of intangible assets... 8,446 772 -- (1,477)(3) 7,741 Accrued reorganization.. 137 -- -- (109)(2) 28 Accrued environmental... 1,072 -- (62)(4) (12)(2) 998 Accumulated amortization of goodwill............ 1,103 585 -- -- 1,688 LIFO reserve............ 2,493 316 -- (1,069)(5) 1,740 1995 Allowance for doubtful receivables............ $1,724 $ 565 $ -- $ (351)(1) $1,938 Accumulated amortization of intangible assets... 7,524 923 -- (1)(4) 8,446 Accrued reorganization.. 157 4 -- (24)(2) 137 Accrued environmental... 1,002 -- 83 (4) (13)(2) 1,072 Accumulated amortization of goodwill............ 516 587 -- -- 1,103 LIFO reserve............ 1,659 1,152 -- (318)(5) 2,493 1994 Allowance for doubtful receivables............ $1,126 $1,345 $ -- $ (747)(1) $1,724 Accumulated amortization of intangible assets... 6,733 921 -- (130)(3) 7,524 Accrued reorganization.. 95 72 -- (10)(2) 157 Accrued environmental... 954 -- 90 (4) (42)(2) 1,002 Accumulated amortization of goodwill............ 34 482 -- -- 516 LIFO reserve............ 1,426 589 -- (356)(5) 1,659 Notes(1):Uncollected receivables written off. (2): Disbursements of amounts previously accrued. (3): Write off of fully amortized asset. (4): Record foreign currency translation adjustments. (5): Adjustment of LIFO reserve for inventory levels. 14 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). 10.6 Employment Agreement with Leonard R. Jaskol dated March 1, 1995 filed as exhibit 10.6 to the registrant's Annual Report on Form 10-K dated March 27, 1995, and incorporated herein by this reference). 10.7 Employment Agreement with John E. Hanley dated March 10, 1995, (filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.8 Employment Agreement with James P. Carolan dated March 10, 1995 (filed as Exhibit 10.2 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.9 Employment Agreement with Elliott F. Whitely dated March 10, 1995 (filed as Exhibit 10.3 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.10 Employment Agreement with Alan J. Gnann dated March 10, 1995 (filed as Exhibit 10.4 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 15 PAGE IN EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF DOCUMENT NUMBERED COPY - ------- ------------------------ -------------- 10.11 Employment Agreement with Raymond J. Lanzi dated March 10, 1995 (filed as Exhibit 10.5 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.12 Employment Agreement with Christopher R. Skomorowski dated March 10, 1995 (filed as Exhibit 10.6 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.13 Employment Agreement with William J. Rankin dated March 10, 1995 (filed as Exhibit 10.7 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.14 Employment Agreement with Carole F. Butenas dated March 10, 1995 (filed as Exhibit 10.8 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.15 Employment Agreement with Mona G. Estey dated March 10, 1995 (filed as Exhibit 10.9 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.16 Employment Agreement with Mary Adamowicz Tremblay dated March 10, 1995 (filed as Exhibit 10.10 to the registrant's Quarterly report on Form 10-Q dated May 9, 1995 and incorporated herein by this reference). 10.17 Employment Agreement with John J. Worthington dated November 7, 1996, filed herewith. 10.18 Lydall, Inc. Board of Directors Deferred Compensation Plan effective January 1, 1991,(filed as Exhibit 10.17 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.19 Asset Purchase Agreement between Lydall Central, Inc. and Standard Packaging, Inc. (filed as Exhibit 2.1 to the registrant's Current Report on Form 8-K dated February 28, 1994 and incorporated herein by this reference). 10.20 Asset Purchase Agreement between Lydall Eastern, Inc. and Riverwood International Georgia, Inc. (filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q dated August 10, 1994 and incorporated herein by this reference). 10.21 Lydall, Inc. Supplemental Executive Retirement Plan effective January 1, 1994, (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K dated March 27, 1996). 10.22 Asset Purchase Agreement between Lydall New York, Inc. and Textile Technology Industries, Inc. filed herewith. The registrant shall furnish copies of exhibits to the Asset Purchase Agreement upon request of the Commission. 11.1 Schedule of Computation of Weighted Average Common Shares and Equivalents Outstanding, filed herewith. 13.1 Annual Report to Stockholders for the year ended December 31, 1996, filed herewith. 21.1 List of subsidiaries of the registrant, filed herewith. 23.1 Consent of Coopers and Lybrand, L.L.P., filed herewith. 24.1 Power of Attorney, dated March 13, 1997, authorizing Leonard R. Jaskol and/or John E. Hanley to sign this report on behalf of each member of the Board of Directors indicated therein, filed herewith. 27.1 Financial Data Schedule, filed herewith. 16 EXHIBIT 10.17 AGREEMENT --------- THIS AGREEMENT made this 7th day of November 1996 by and between LYDALL, INC. and its subsidiaries (the "Company") and John J. Worthington (the "Executive"). W I T N E S S E T H : Recitals. - --------- Executive is employed by the Company as a Division President. The Company and Executive have agreed that if Executive should cease to be Division President under the circumstances set forth in this Agreement his employment will be continued in another capacity for a specified period; NOW, THEREFORE, the Company and Executive, in consideration of the mutual promises set forth below, agree as follows: 1. Executive to Serve as Division President. The Executive shall ----------------------------------------- continue to act as Division President, subject to the direction of its Chairman, President and Chief Executive Officer. 2. Definitions. The phrase "Change of Control," as used in this ------------ Agreement, shall mean i) an acquisition of the Company by means of a merger or consolidation or purchase of substantially all of its assets if and when incident thereto (a) the composition of the Board of Directors of the Company (the "Board") or its successor changes so that a majority of the Board is not comprised of individuals who were members of the board immediately prior to such merger, consolidation or purchase of 1 assets or (b) the stockholders of the Company acquire a right to receive, in exchange for or upon surrender a majority of their stock, cash or other securities or a combination of the two; and/or ii) the acquisition by a person (as that term is hereafter defined) of the voting rights with respect to 25 percent or more of the outstanding Common Stock of the Company if such person was not an officer of director of the Company on the date of this Agreement; and/or iii) the election or appointment to the Board of any director or directors whose appointment or election or nomination for election was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date hereof or whose election, appointment or nomination for election was previously so approved. The word "person," as used in the preceding sentence, shall mean an individual, corporation, trust, or other legal or commercial entity and include two or more persons acting as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding or disposing of securities of the Company. The word "cause", as used in this Agreement, shall mean (i) conviction of a crime involving moral turpitude, or (ii) material and unexcused breach by Executive of his obligations under this Agreement, which results in material harm to the Company and which is not cured within the period set forth below; provided, however, that a termination shall not be for "cause" hereunder unless, - ----------------- such conviction or breach is detailed in a 2 written notice of intent to terminate by the Board, providing for sixty (60) days from receipt by Executive to cure the breach prior to termination of Executive; except that such notice would not be required if, in the Chairman, President and Chief Executive Officer's discretion, the Company would be immediately harmed. The phrase "Fringe Benefits," as used in this Agreement, shall mean the benefits listed on Exhibit A hereto. 3. Termination After Change of Control. If a Change of Control occurs ----------------------------------- after the date of this Agreement and subsequent to such Change of Control (a) Executive shall resign as a Division President of the Company within one year from the time such Change of Control occurs or (b) another shall be appointed or elected Division President by the Company in place of Executive at any time prior to June 21, 2013, Executive's normal retirement date (such resignation or replacement of Executive being hereinafter referred to as a "Termination"), Executive shall continue to be an employee of the Company and be compensated and receive benefits in accordance with this Agreement; provided, however, that if Executive's resignation shall be requested by the Company for cause or Executive is replaced for cause, such resignation or replacement shall not be deemed a Termination for the purpose of this Agreement and shall not entitle Executive to continue to be an employee of the Company and be compensated and receive the benefits provided for in this Agreement. 3 4. Termination Prior to Change of Control. If prior to a Change of --------------------------------------- Control (a) the Executive shall resign as Division President of the Company at the request of the Company or because the duties and responsibilities of the Division President have been significantly modified by the Company without his consent or (b) another is appointed Division President in place of the Executive (such resignation or replacement of the Executive being hereinafter referred to a "Termination"), the Executive shall continue to be an employee of the Company and be compensated and receive benefits in accordance with this Agreement; provided, however, that if Executive's resignation shall be requested by the Company for Cause or if Executive is replaced for Cause, such resignation or replacement shall not be deemed a Termination for the purpose of this Agreement and shall not entitle Executive to continue to be an employee of the Company and be compensated and receive the benefits provided for in this Agreement. 5. Termination for Cause If Executive's employment is terminated for --------------------- cause prior to the beginning of the Employment Period, (either prior or subsequent to a Change of Control), earned but unpaid Base Salary will be paid on a prorated basis for the year in which the termination occurs, plus accrued vacation benefits, but all other Company obligations shall cease as of the date of termination for cause, unless otherwise provided in separate agreements. 6. Employment Period. In the event of a Termination pursuant to ----------------- paragraph 3b above, Executive shall continue to be an employee of the Company for a period of two years from the date 4 of such Termination, and in the event of a Termination pursuant to either Paragraph 3a or Paragraph 4 above, Executive shall continue to be an employee of the Company for a period of one year from the date of such Termination, such two year period or one year period, as the case may be, being hereinafter referred to as the "Employment Period"; provided, however, that (a) Executive may end the Employment Period at any time in his absolute discretion and the Employment Period may be ended by the Company at any time for cause, (b) the Employment Period shall not extend beyond June 21, 2013, Executive's normal retirement date, and (c) the Employment Period shall terminate if and when the Executive becomes employed on substantially a full time basis by another entity or as a partner or sole proprietor and with Executive's full recognition of his responsibilities under Paragraph 11 below (but such termination of the Employment Period under clause (a), (b) or (c) above shall not preclude the Executive from being paid for his obligation not to compete as provided in Paragraphs 11 and 12 below). 7. Title and Duties. During the Employment Period, the Executive shall ---------------- perform such duties and undertake such responsibilities as are assigned to him from time to time by the Chairman, President and Chief Executive Officer; provided, however, that such duties and responsibilities shall be commensurate with his status as a senior executive of the Company and bear a reasonable relationship to the business of the Company. 5 8. Compensation. The Company shall pay to Executive during the ------------ Employment Period an annual salary (the "Annual Salary") equal to one-third (1/3rd) of the aggregate of the base salary and bonuses paid to him during the period commencing three (3) years prior to the date of Termination and ending on the date of Termination, (or if Executive has been employed for less than three years, then for the corresponding fraction of the aggregate of the base salary and bonuses paid to him during the period commencing on his start date and ending on the date of Termination). Payment shall be made twice monthly and be appropriately prorated during the first and last month of the Employment Period. In addition, during the Employment Period Executive shall receive (a) the same Fringe Benefits that he would have been entitled to receive if he had continued to be Division President during such period, (b) reimbursement for reasonable expenses incurred by him in the performance of his duties and (c) the use of an automobile on substantially the same basis as prior to his termination. If the Employment Period shall end, pursuant to Paragraph 6 above, prior to the end of the two year term provided for in Paragraph 3b above or the one year term provided for in Paragraph 3a or Paragraph 4 above, as the case may be, the Annual Salary (but, except to the extent provided in Paragraph 10 below, not fringe benefits and perquisites) shall continue to be payable until the end of the non-compete period provided for in Paragraph 11 below and shall be deemed payment for Executive's obligation not to compete as provided in said Paragraph 11, and such Annual Salary for the 6 remainder of the non-compete period shall be paid to the Executive in a lump sum cash payment within ten days after the end of the Employment Period. 9. Tax Gross-up. Anything in this Agreement to the contrary ------------- notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided, by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9 (a 'Payment') would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended and then in effect (the 'Code') (or any similar excise tax) or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the ('Excise Tax'), then the Executive shall be entitled to receive an additional payment (a 'Gross-Up Payment') in an amount such that after payment by the Executive of all Federal, state, local or other taxes (including any interest or penalties imposed with respect to any such taxes), including, without limitation, any such income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. An Executive may receive Gross-Up Payments under this Section 9 whether or not 7 the Executive actually receives other payments or benefits under the Agreement. (i) Subject to the provisions of paragraph (ii) of this Section 9, all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand (the "Accounting Firm') which shall provide detailed supporting calculations both to the Company and the Executive within 20 calendar days of the receipt of written notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall have the right by written notice to the Company to appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and shall be paid by the Company upon demand of the Executive as incurred or billed by the Accounting Firm. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with an unqualified written opinion 8 in form and substance satisfactory to the Executive that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ('Underpayment'), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies described in paragraph (ii) of this Section 9 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to or for the benefit of the Executive within five days of the receipt of the Accounting Firm's determination. All determinations made by the Accounting Firm in connection with any Gross-Up Payment or Underpayment shall be final and binding upon the Company and the Executive. (ii) The Executive shall notify the Company in writing of any claim asserted in writing by the Internal Revenue Service to the Executive that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but not later than 60 days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay 9 such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall at the Company's expense: a. give the Company any information reasonably requested by the Company relating to such claim. b. take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company. c. cooperate with the Company in good faith in order effectively to contest such claim, and d. permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly as incurred all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or any Federal, state, local or other income or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9, the Company shall control all proceedings taken in connection 10 with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or Federal, state, local or other income or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the status of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. 11 (iii) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (ii) of this Section 9, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of paragraph (ii) of this Section 9 promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto) upon receipt thereof. If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (ii) of this Section 9, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Medical Insurance Coverage. Executive and his beneficiaries shall --------------------------- continue to participate in all life, health, disability and other welfare plans or programs existing at the time of a Change of Control in which they were participating at such time (or substantially similar plans or programs), to the extent that such continued participation is possible under the general terms and conditions of such plans and programs throughout the Employment Period. 12 Company and Executive will continue to pay the same relative portion of the cost of each such plan or program as each were paying at the time of the Change of Control. Further, in the event that Executive's or his beneficiaries' continued participation in any group plan or program is not permitted, then in lieu thereof, Company shall acquire individual insurance policies providing substantially similar coverage for Executive and his beneficiaries, and Company and Executive will pay the same relative portion of the cost of such comparable coverage plans or programs or in the event that Company cannot acquire individual insurance policies providing substantially similiar coverage, the Company will self-insure the Executive, and the Executive in the case of self insurance will pay the COBRA rate then applicable to the Company's group plan. For purposes of COBRA, a qualifying event is not deemed to occur until the Employment Period, as defined in paragraph 6, has expired. 11. Non-Compete. During the Employment Period Executive will not compete ------------ directly or indirectly with the Company or be directly or indirectly interested in any business competing with the business being conducted by the Company. Ownership of less than 1 percent of the issued and outstanding capital stock of any corporation the stock of which is listed upon a national exchange or regularly quoted by the National Association of Security Dealers Automated Quotation (NASDAQ) shall not be deemed to create a material conflict of interest as contemplated hereunder. For the purpose of this Paragraph 11, the Employment Period shall be deemed to extend two years from Termination if such 13 Termination occurred pursuant to Paragraph 3b above or one year from Termination if such Termination occurred pursuant to Paragraph 3a or Paragraph 4 above, notwithstanding any prior ending of the Employment Period pursuant to Paragraph 6 above. 12. Trade Secrets. Executive shall regard and preserve as confidential -------------- and not use, communicate or disclose to any person, orally, in writing or by a publication, any secret or confidential information of the Company, regardless of where or when or how acquired by the Company, or of others which the Company is obligated to maintain in confidence. This obligation shall exist during the Employment Period and after the termination of the Employment Period until such information becomes a matter of public knowledge through no act of Executive. At the termination of employment by the Company, Executive agrees to return to employer all documents, writings, drawings and other property of the Company within his custody and control. 13. Indemnification. The parties agree to execute a separate --------------- Indemnification Agreement in the form attached as Exhibit B. 14. Arbitration. The Company and Executive undertake to execute this ------------ Agreement in good faith. Any controversy or claim arising out of or relating to this Agreement other benefit plans or arrangements with the Company or breach of this Agreement, shall receive prompt attention by the other party and both parties agree to make good faith efforts to resolve any controversy or claim in an amicable way. 14 If the Company and Executive fail to settle the controversy or claim in an amicable way, they agree to submit the matter to be settled by arbitration in accordance with the Arbitration Rules of the American Arbitration Association. This Agreement, its execution, interpretation and performance shall be governed by the laws of the state of Connecticut of the United States of America. The arbitration will be held in Hartford, Connecticut, or such other place as may be agreed at the time by the parties. The award of this arbitration shall be final and binding both for the Company and Executive and may be entered in any court with jurisdiction. 15. Litigation Expenses. In the event of any action, suit, proceeding, ------------------- arbitration or claim between or by or against the Company and/or the Executive with respect to this Agreement, other benefit plans or arrangements between the parties, and the assertion or enforcement of his rights hereunder, the Company shall promptly pay or reimburse the Executive upon such Executive's written demand therefor, for eighty (80) percent of his costs and expenses (including costs and fees of witnesses, evidence and attorney fees and expenses) relating to or arising out of (directly or indirectly) such action, suit, proceeding, arbitration or claim, on a monthly basis, as such costs and expenses are incurred in investigating, prosecuting, defending or preparing to prosecute or defend, regardless of the outcome thereof. In no event shall the Executive be required to reimburse the Company for any of the costs and expenses relating to any such action, suit, proceeding, arbitration or claim. The 15 obligation of the Company under this Section 15 shall survive the termination for any reason of this Agreement. This Section 15 cannot be amended or modified to affect the rights of the Executive without the prior written consent of such Executive which specifically refers to this Section 15. 16. Rabbi Trust. Within sixty (60) days of the date of this Agreement, the ------------ Company shall enter into a trust agreement (the "Trust Agreement") with a third party institutional trustee, substantially in the form set forth in Rev. Proc. 92-64, 1992-2 C.B. 422, to assist it in meeting its obligations to the Executive under the Company's Supplemental Executive Retirement Plan (the "SERP"). The trust established pursuant to the Trust Agreement (the "Trust") shall be irrevocable. The Trust Agreement shall provide that upon a Change of Control the Company shall, no later than 30 days following the Change of Control, make an irrevocable contribution of cash or cash equivalents to the Trust in an amount sufficient to pay each SERP participant or beneficiary the benefits to which they would be entitled pursuant to the terms of the SERP, and within 30 days following the end of each calendar year ending after the Change of Control the Company shall irrevocably contribute any additional cash to the Trust necessary for the Trustee to pay each SERP participant or beneficiary the benefits payable pursuant to the terms of the SERP as of the close of the year. The Trust Agreement shall also provide (i) that all income received by the Trust shall be accumulated and reinvested, (ii) that the Company will be responsible for the payment of all fees and expenses related to 16 the Trust, (iii) that after a Change of Control the Trustee may not be removed by the Company, and (iv) that, if the Trustee shall resign, any successor Trustee must be an independent institutional entity, such as a bank trust department or other party that has been granted corporate trustee powers under state law. The Trust Agreement shall also provide that the provisions of the Trust described in this Paragraph 16 may not be amended after a Change of Control. 17. Entire Agreement. This Agreement embodies the whole understanding ----------------- between the parties hereto with respect to the subject matter hereof and supersedes all earlier agreements. There are no inducements, promises, terms, conditions or obligations made or entered into by either party other than as contained herein. 18. Modification. This Agreement may not be changed orally, but only be ------------ means of an agreement in writing signed by the parties hereto. 19. Waiver. The waiver by any party of a breach of any provision of this ------- Agreement shall not operate as, or be construed as, a waiver of any subsequent breach. 20. Applicable Law. This Agreement shall be governed and construed in --------------- accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. 21. Successors. This Agreement is personal to the Executive and without ----------- the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall 17 inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. IN WITNESS WHEREOF, the parties have hereunto set their hands as of the date first above written. LYDALL, INC. By /s/ Roger M. Widmann /s/ John J. Worthington ----------------------- ------------------------ Roger M. Widmann, Chairman, John J. Worthington Compensation and Stock Option Division President Committee By /s/ Leonard R. Jaskol --------------------- Leonard R. Jaskol Chairman, President and CEO 18 EXHIBIT A - FRINGE BENEFITS --------------------------- 1. Medical Benefits a. Lydall, Inc. Health Care Payment Plan for Salaried Employees (includes dental benefits) b. Lydall, Inc. Health Care Expense Plan c. Lydall, Inc. Health Care Spending Reimbursement Plan 2. Disability Benefits a. Lydall, Inc. Short Term Disability Plan b. Lydall, Inc. Executive Group Long Term Disability Plan 3. Life Insurance a. Executive Life Insurance Plan b. Accidental Death and Dismemberment Plan c. Family Assistance Program d. Business Travel Accident Plan 4. Retirement Plans a. Lydall, Inc. Pension Plan No. 1A b. Lydall, Inc. Profit Sharing Plan No. 1 c. Lydall, Inc. 401(k) Plan d. Lydall, Inc. Supplemental Executive Retirement Plan 5. Stock Plans a. Lydall, Inc. Employee Stock Purchase Plan b. Lydall, Inc. 1992 Stock Incentive Compensation Plan c. Lydall, Inc. 1982 Stock Incentive Compensation Plan 6. Other a. Holidays, vacations b. Lydall, Inc. Dependent Care Assistance Plan 19 EXHIBIT B --------- INDEMNIFICATION AGREEMENT ------------------------- This Agreement, made and entered into this 7th day of November, 1996 ("Agreement"), by and between Lydall, Inc., a Delaware corporation ("Company"), and John J. Worthington ("Indemnitee"): WHEREAS, highly competent persons are becoming more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation; and WHEREAS, the current impracticability of obtaining adequate insurance and the uncertainties relating to indemnification have increased the difficulty of attracting and retaining such persons; WHEREAS, the Board of Directors of the Company has determined that the inability to attract and retain such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; and WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: Section 1. Services by Indemnitee. Indemnitee agrees to serve (as a ----------------------- director, officer, employee, agent of the Company) (at the request of the Company, as a director, officer, employee, agent, fiduciary of another corporation, partnership, joint venture, trust employee benefit plan or other enterprise. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the 1 Company shall have no obligation under this Agreement to continue Indemnitee in such position. Section 2. Indemnification - General. The Company shall indemnify, and -------------------------- advance Expenses (as hereinafter defined) to, Indemnitee (a) as provided in this Agreement and (b) to the fullest extent permitted by applicable law in effect on the date hereof and as amended from time to time. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other Sections of this Agreement. Section 3. Proceedings Other than Proceedings by or in the Right of the ------------------------------------------------------------ Company. Indemnitee shall be entitled to the rights of indemnification provided - -------- in this Section 3 if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to any threatened, pending, or completed Proceeding (as hereinafter defined), other than a Proceeding by or in the right of the Company. Pursuant to this Section 3, Indemnitee shall be indemnified against all expenses, judgements, penalties, fines, and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner be reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. Section 4. Proceedings by or in the Right of the Company. Indemnitee ---------------------------------------------- shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware, or the court in which such Proceeding shall have been brought or is pending, shall determine that such indemnification may be made. Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly --------------------------------------------------------------- Successful. Notwithstanding any other provision of this Agreement, to the - ----------- extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits 2 or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. Section 6. Indemnification for Expenses of a Witness. Notwithstanding any ------------------------------------------ other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. Section 7. Advancement of Expenses. The Company shall advance all ------------------------ reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within ten days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Section 8. Procedures for Determination of Entitlement to Indemnification. --------------------------------------------------------------- (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shell, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 8(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case; (i) if a Change in Control (as hereinafter defined) shall be 3 made in the Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee or (C) if so directed by the Board of Directors, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with this person, persons or entity making such determination shall be borne by the Company (Irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b) hereof, the Independent Counsel shall be selected as provided in this Section 8(c). If a Change of Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such -------- ------- objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 17 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is so made and substantiated, the Independent Counsel so selected may not 4 serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 8(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court of by such other person as the Court shall designate, and the person with respect to whom all objections are so resolved or the person so appreciated shall act as Independent Counsel under Section 8(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 8(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 8(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 10(a)(iii) of this Agreement, Independent Counsel shall be discharged and relived of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). Section 9. Presumptions and Effect of Certain Proceedings. ---------------------------------------------- (a) If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 8(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. (b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement of conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. 5 Section 10. Remedies of Indemnitee. ---------------------- (a) In the event that (i) a determination is made pursuant to Section 8 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 7 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 8(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5 or 6 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within 10 (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the data on which Indemnitee first has the right to commence such proceeding pursuant to this Section 10(a); provided, however, -------- ------- that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5 of this Agreement. (b) In the event that a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 10 shall be conducted in all respects as a de novo trial, or ------- arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section 10 the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. 6 (d) In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 17 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. Section 11. Non-Exclusivity; Survival of Rights; Insurance; ----------------------------------------------- Subrogation. - ----------- (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the By-Laws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnities, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extend that Indemnities has otherwise 7 actually received such payment under any insurance policy, contract, agreement or otherwise. Section 12. Duration of Agreement. This Agreement shall continue ---------------------- until and terminate upon the later of: (a)10 years after the date that Indemnities shall have ceased to serve as a director, officer, employee, or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Company; or (b) the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 10 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. Section 13. Severability. If any provision or provisions of this ------------- Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed to as to give effect to the intent manifested thereby. Section 14. Exception to Right of Indemnification or Advancement of ------------------------------------------------------- Expenses. Notwithstanding any other provision of this Agreement, Indemnitee - -------- shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein prior to a Change in Control, unless the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors. Section 15. Identical Counterparts. This agreement may be executed ---------------------- in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 8 Section 16. Headings. The headings of the paragraphs of this -------- Agreement re inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. Section 17. Definitions. (a) The phrase "Change of Control," as ----------- used in this Agreement, shall mean i) an acquisition of the Company by means of a merger or consolidation or purchase of substantially all of its assets if and when incident thereto (A) the composition of the Board of Directors of the Company (the "Board") or its successor changes so that a majority of the Board is not comprised of individuals who were members of the board immediately prior to such merger, consolidation or purchase of assets or (B) the stockholders of the Company acquire a right to receive, in exchange for or upon surrender a majority of their stock, cash or other securities or a combination of the two; and/or ii) the acquisition by a person (as that term is hereafter defined) of the voting rights with respect to 25 percent or more of the outstanding Common Stock of the Company if such person was not an officer of director of the Company on the date of this Agreement; and/or iii) the election or appointment to the Board of any director or directors whose appointment or election or nomination for election was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date hereof or whose election, appointment or nomination for election was previously so approved. (b) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. (c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Effective Date" means March 10, 1995. (e) "Expenses" shall include all reasonable attorney's fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the 9 types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding. 10 (f) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (g) "Proceeding" includes any action, suite, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative, or investigative, except one (i) initiated by an Indemnitee pursuant to Section 10 of this Agreement to enforce his rights under this Agreement or (ii) pending on or before the Effective Date. Section 18. Modification and Waiver. No supplement, modification ----------------------- or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Section 19. Notice by Indemnitee. Indemnitee agrees promptly to -------------------- notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. Section 20. Notices. All notices, requests, demands and other ------- communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: John J. Worthington 2319 Algonquin Road Niskayuna, NY 12309 11 (b) If to the Company to: Mary Adamowicz General Counsel and Secretary Lydall, Inc. P.O. Box 151 One Colonial Road Manchester, CT 06045-0151 or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. Section 21. Governing Law. The parties agree that this Agreement ------------- shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. Section 22. Miscellaneous. Use of the masculine pronoun shall be ------------- deemed to include usage of the feminine pronoun where appropriate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first written. ATTEST: LYDALL, INC. By /s/ Roger M. Widmann By /s/ Leonard R. Jaskol ------------------------ ------------------------ INDEMNITEE /s/ John J. Worthington ---------------------------- John J. Worthington 2319 Algonquin Road Niskayuna, NY 12309 12 EXHIBIT 10.22 - -------------------------------------------------------------------------------- ASSET PURCHASE AGREEMENT By and Between TEXTILE TECHNOLOGIES INDUSTRIES, INC. and LYDALL NEW YORK, INC. Dated as of December 20, 1996 - -------------------------------------------------------------------------------- ASSET PURCHASE AGREEMENT ------------------------ This Agreement (the "Agreement") made and entered into this 20 day of December, 1996 by and between Lydall New York, Inc., a New York corporation having a principal office in Green Island, New York ("Lydall") and Textile Technologies Industries, Inc., a Delaware corporation having a principal office in Hatboro, Pennsylvania, ("TTII"). W I T N E S S E T H : WHEREAS, TTII is the owner and operator of two manufacturing facilities which fabricate and manufacture advanced composite woven fabrics at leased facilities located at: (i) 2800 Turnpike Drive, Hatboro, PA 19040 and (ii) 300 Penns Street, Pennsburg, PA 18073 ( "TTII"); and WHEREAS, TTII will consolidate all of the assets located at the two leased facilities at its Hatboro location and at another location specified by Lydall promptly after the execution of this Agreement, at the shared expense of TTII and Lydall; and WHEREAS, TTII desires to sell and transfer to Lydall, and Lydall desires to purchase and assume from TTII, certain assets, certain liabilities and the business as a going concern of TTII, upon the terms and subject to the conditions set forth in this Agreement; 1 NOW, THEREFORE, in consideration of the mutual premises hereinafter set forth, the parties agree as follows: 1. PURCHASE AND SALE OF ASSETS. At the "Closing" of the transactions contemplated (the "Closing") on the "Closing Date" (as these terms are defined in Article 5), and upon the basis of the representations, warranties, covenants and agreements in this Agreement, TTII shall sell, transfer, assign, convey and deliver to Lydall, and Lydall shall purchase on the terms and conditions set forth in this Agreement, all of TTII's right, title and interest in and to the Assets. The "Assets" shall mean all real, personal and mixed properties, which are owned by TTII on the Closing Date and used exclusively in the business of TTII except as set forth in Article 2 below, including, without limitation: 1.01 Lease of Real Property. All of TTII's right, title and ----------------------- interest in and to the lease dated June 28, 1991, as modified, of the land and buildings, improvements and fixtures located at 2800 Turnpike Drive, Hatboro, PA 19040 in which facility TTII conducts its business (the "Lease"). The Lease, pursuant to an assumption of Lease dated March 22, 1993, is between TTII as tenant and 2800 Associates, a Pennsylvania Limited partnership as landlord. (The real property, improvements and fixtures which are the subject of the Lease are referred to as the "Real Property"); 1.02 Equipment and Personalty. All the fixtures, machinery, ------------------------ equipment, motor vehicles, spare parts, furniture, appliances, supplies, computer hardware, software and other items 2 of tangible personal property owned by TTII or used in the operation of TTII on the Closing Date (the"Equipment and Personalty")including without limitation all items set forth in a list and description of such Equipment and Personalty, attached as Schedule 1.02; 1.03 Contract Rights and Leases. All rights, benefits and obligations -------------------------- of TTII under the contracts, purchase orders, agreements and leases in the ordinary course (other than the Lease) in effect on the Closing Date entered into by, or for the benefit of, TTII relating to the operation of TTII; including without limitation those listed on Schedule 1.03 attached; 1.04 Prepaid Expenses and Deferred Costs. Except as provided by ------------------------------------ Sections 2.04 and 2.05, all rights to prepaid expenses and deferred costs of TTII relating exclusively to the business of TTII and existing on the Closing Date, including without limitation all items set forth on a list and description of such prepaid expenses and deferred costs, as of the date specified being attached as Schedule 1.04 (collectively, the "Prepaid Expenses"); 1.05 Inventory. All of the usable raw materials, salable work in --------- process, finished goods, spare parts and supplies inventory used by TTII in connection with the operation of the business of TTII on the Closing Date (the "Inventory"); including without limitation all items set forth on a list of such inventory, with its pricing, as of the date specified, being attached as Schedule 1.05, except such inventory as shall have 3 been sold in the ordinary cause of TTII's business in the period from the date of such list until the Closing Date; 1.06 Accounts Receivable. All of the accounts receivable of TTII ------------------- attributable to the operation of its business as of the Closing Date including the amount set forth in the Interim Statements (as defined in Section 8.06) as "Due From Affiliate," to the extent that there is such an amount, which on September 30, 1996 was $ 0 and which on December 31, 1995 was $313,002 (collectively the "Accounts Receivable"). TTII shall furnish within 10 days prior to the Closing Date a list of the Accounts Receivable anticipated as of the Closing Date, which list is attached hereto as Schedule 1.06. 1.07 Records. All books, accounts, documents and records (whether in -------- printed or electronic form) of TTII relating exclusively to the operation of the business of TTII whether located at the TTII facility or at facilities owned by TTII's affiliate, Mutual Industries, Inc.; 1.08 Goodwill. The goodwill of the business of TTII, including its -------- going concern value; 1.09 Intangible Property. All inventions, patents, formulae, know- -------------------- how, patent applications, copyrights, trade secrets, trademarks, tradenames drawings, designs, formulae, blue prints, computer programs, software and manufacturing records owned by TTII, relating to products presently produced or in development or used in the business of TTII; 4 1.10 Customer and Supplier List. A complete and accurate list of the -------------------------- customers and suppliers of TTII, which shall include all accounts shipped to in 1993, 1994 and 1995 by dollar amount, plus all new customers added in 1996; a copy of which is attached as Schedule 1.10; 1.11 TTII Names. Any right of TTII to use the names "Textile ---------- Technologies Industries, Inc." or "TTII" and any derivation and all related names, marks, logos and abbreviations; and 1.12 Order Backlog. All orders for products of TTII pending on the ------------- date of the Close, including, but not limited to, those listed in Schedule 1.12. 2. ASSETS TO BE RETAINED BY TTII. Notwithstanding the foregoing, the Assets to be sold, transferred, assigned or conveyed to Lydall shall not include the following: 2.01 Cash. All of TTII's cash on hand and all cash contained in any ---- account of TTII; 2.02 Certain Records. TTII's check registers and canceled checks, and --------------- such business records as relate to the assets and obligations of TTII retained by TTII, provided, however, that TTII shall preserve and maintain such check registers, canceled checks, and business records for a period of seven (7) years, or until all open tax years are closed, from and after the Closing Date and permit Lydall reasonable access to the 5 same and not destroy or discard the same without Lydall's consent; 2.03 Insurance Policies. All insurance policies of TTII and rights in ------------------ connection with such policies including, without limitation, any prepaid premiums; 2.04 Employee Pension and Benefit Plans. Assets associated with any ---------------------------------- employee benefit plans of TTII, including but not limited to, welfare plans and all contracts and insurance policies entered into or issued pursuant to any such plan; 2.05 Tax Credits and Refunds. Local, state and federal income and ----------------------- franchise tax credits, refunds and prepayments arising with respect to the property, business or income of TTII prior to the Closing, whether or not in being or known at the Closing Date; and 2.06 Corporate Records. TTII's corporate minute book, stock record ----------------- books and corporate seal. 2.07 Miscellaneous Assets. Those assets that are listed on Schedule -------------------- 2.07 attached hereto. 3. LIMITED ASSUMPTION OF LIABILITIES BY LYDALL. ------------------------------------------- 3.01 Obligations Under Contracts and Leases. As partial consideration --------------------------------------- for the sale of the Assets, Lydall will assume responsibility for and perform or satisfy when due all liabilities, commitments and obligations of TTII , from the closing and after under those contracts, purchase orders, agreements and other leases referred to in Section 1.03 from the 6 Closing and after and listed on Schedule 1.03; and excluding the Lease defined in Section 1.01. 3.02 Accrued Vacation. Lydall shall recognize and provide credit for ---------------- all accrued vacation as of the Closing Date of such employees of TTII only at such amounts as are set forth in Schedule 3.02 (the "Employees"). At the Closing, TTII will pay to Lydall the amount of the obligation or effect a reduction in Purchase Price in such amount; 3.03 Trade Payables. Lydall shall assume responsibility for the --------------- specific trade payables and accrued expenses set forth in Schedule 3.03 (the "Trade Payables"); 3.04 Product Warranty and Return Obligations. (a) Lydall shall ---------------------------------------- assume and be responsible for all liabilities and obligations relating to or arising out of any replacements under any product warranty relating to, or the return of, or any allowance given with respect to, any product of TTII manufactured by Lydall and sold, distributed or otherwise dispo