<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
Form 10-K
ANNUAL REPORT
/X/ Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended December 31, 1998
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)
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<S> <C>
DELAWARE 06-0865505
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
ONE COLONIAL ROAD, MANCHESTER, CONNECTICUT 06045-0151
(Address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (860) 646-1233
------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------------------------- --------------------------------------------------
Common Stock, $.10 par value New York Stock Exchange
</TABLE>
--------------------------
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 15, 1999, the aggregate market value of the Registrant's voting stock
held by nonaffiliates was $138,582,758.
On March 15, 1999, there were 15,725,703 shares of Common Stock outstanding,
exclusive of treasury shares.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
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 12, 1999.
<PAGE>
INDEX TO ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1998
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PAGE
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PART I
Item 1. Business........................................................................................ 1
Item 2. Properties...................................................................................... 5
Item 3. Legal Proceedings............................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders............................................. 6
Executive Officers and Other Significant Employees of the Registrant............................ 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 7
Item 6. Selected Financial Data......................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 9
Item 7a. Quantitative and Qualitative Disclosure about Market Risk....................................... 22
Item 8. Financial Statements and Supplementary Data..................................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 22
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 23
Item 11. Executive Compensation.......................................................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 23
Item 13. Certain Relationships and Related Transactions.................................................. 23
The information called for by items 10, 11, 12, and 13, to the extent not included in this document, is incorporated
herein by reference to such information to be included under the captions "Election of Directors," "Common Stock
Ownership of Management," "Directors' Compensation" and "Executive Compensation," in the Company's definitive Proxy
Statement which is expected to be filed by March 30, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 24
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
The subsidiaries of Lydall, Inc. (hereafter referred to as "Lydall", the
"Company", or the "Registrant") are manufacturers of technologically advanced
engineered products for demanding specialty applications.
Lydall develops and manufactures engineered specialty papers in both roll and
sheet form; fabricated fiber-based, metal-and-fiber, and all-metal automotive
heat shields; and certain medical filtration and bioprocessing components as
well as wood-replacement board for pencils. Lydall's specialty papers are
supplied to other manufacturers that convert them or incorporate them into
finished products. The Company's fabricated products are sold primarily to
original equipment manufacturers. Utilizing a broad spectrum of available
fibers, materials, binders, resins, etc. combined with dry-laid and wet-laid
nonwoven processes, specialty weaving capabilities, and various fabricating
operations, the Company has been able to develop a broad range of
high-performance materials and products.
The Company serves a number of market niches. Lydall's products are primarily
sold directly to the customer through an internal sales force and are
distributed through common carrier, ocean cargo, or the Company's logistics
operation. Within each market niche there are typically several competitors. The
Company primarily competes through high-quality products, technology, and
customer service. Lydall has a number of domestic and foreign competitors for
its products, most of whom are either privately owned or divisions of large
companies, making it difficult to determine the Company's market share.
Lydall's products fall into four reportable segments: Heat-Management Products,
Filtration Products, Paperboard Products, and Woven Products. All other
operations are aggregated in Other Products and Services.
SEGMENTS
HEAT-MANAGEMENT PRODUCTS
Lydall's thermal barriers, heat shields, and insulating products include a range
of fiber-based materials and fiber-and-metal combinations that protect and
insulate within temperature requirements as low as -459 DEG. F (-273 DEG. C) up
to +3000 DEG. F (+1649 DEG. C). Lydall's fiber-based materials range in format
from specialty papers to textile-like materials to dense, board products.
At the highest temperature requirements, Lytherm-Registered Trademark- specialty
papers are used as linings for ovens, kilns, and furnaces and in glass and metal
manufacturing. In mid-range temperatures, Manninglas-Registered Trademark-
specialty papers are employed in consumer appliances as well as heat,
ventilation, and air conditioning ductwork.
Also, at mid-range temperatures, Lydall's heat-management products are organic
or inorganic fiber composites, fiber-and-metal combinations, or all-metal
components which are used as thermal barriers and heat shields in medium- and
light-duty trucks, vans, sport-utility vehicles, and cars. The Company holds
patents on many of its automotive products which are employed both inside and
outside vehicles to insulate passenger compartments, exhaust systems, luggage
compartments, electrical wiring harnesses, heat and air conditioning ducts,
batteries, electronic components, and engine compartments. An acquisition made
in April 1998 contributed to the growth of automotive related heat-management
sales during the year. A second acquisition, made on December 30, 1998, is
expected to be a major contributor to the international growth of this segment
in 1999.
<PAGE>
Lydall also manufactures custom-designed specialty papers employed in automotive
airbag pyrotechnic inflators. These materials perform both a filtration and
heat-reduction function and are included under Heat-Management Products.
At the very coldest temperatures (approaching absolute zero),
Cryotherm-Registered Trademark- cryogenic materials, composed of 100-percent
inorganic fibers, are used for super-insulating applications. These include
tanker trucks that transport liquid gases, stationary and portable cryogenic
storage vessels, gas tanks for vehicles fueled by liquid natural gas, and
supercolliders.
Sales of Heat-Management Products were approximately 36 percent of the Company's
sales for 1998, 37 percent for 1997, and 38 percent for 1996. Sales of these
products decreased 8 percent in 1998 from 1997 levels. This decline stemmed
primarily from the decrease in automotive product sales, product design changes,
and a strike at General Motors.
FILTRATION PRODUCTS
The Company manufactures Lydair-Registered Trademark- high-efficiency, glass
microfiber air filtration media for rigid frame applications. Lydall
manufactures six filtration classes of Lydair-Registered Trademark- media 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.
Lydair-Registered Trademark- filtration media are used in air filters, which are
capital goods rather than consumables and which last approximately five years. A
replacement market exists related to the upgrading of clean-room efficiency to
meet the needs of more sophisticated process and product technology. Lydall also
supplies media for pre-filters and intermediary filters in air-handling systems
that are replaced more frequently. The Company's HEPA filtration media are also
used in home air purification units.
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 sold under the
Lypore-Registered Trademark- trademark.
Lydall's line of fabricated medical filter components are also sold under the
trademark Lypore-Registered Trademark-. These products are employed 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. Early in 1998, a Lydall subsidiary funded the capitalization of
Charter Medical, Ltd., which acquired CharterMed, Inc., a manufacturer of
proprietary medical devices serving applications such as biotech and
pharmaceutical packaging, blood bank and transfusion services, and neonatal
intensive care. All of Lydall's medical products are now under Charter Medical,
Ltd. and are included in the Filtration Products segment.
Sales of Filtration Products increased to 24 percent of sales for 1998 compared
with 22 percent and 24 percent in 1997 and 1996, respectively. The overall sales
of these products increased 6 percent in 1998 from 1997. The increase reflects
the acquisition of CharterMed, Inc.
PAPERBOARD PRODUCTS
The Paperboard Products segment includes commodity paper products which are
employed primarily in materials-handling and packaging applications.
2
<PAGE>
Lydall produces slipsheets, separator sheets, and protective sheets.
Ly-Pak-Registered Trademark- slipsheets are used to ship a growing number of
products such as food, pharmaceuticals, and chemicals.
Ly-Pak-Registered Trademark- slipsheet systems are used to replace wooden
pallets, providing significant cost and space reductions for the customer.
Ly-Pak-Registered Trademark- separator sheets are supplied to the glass and
plastic bottle industry and are manufactured to meet industry specifications for
bulk palletizing. Ly-Pak-Registered Trademark- 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.
Sales of Paperboard Products approximated 14 percent of 1998 total sales as
compared with 13 percent in both 1997 and 1996. Sales in 1998 stabilized from
the extreme deflationary pressures of 1997.
WOVEN PRODUCTS
Lydall produces specialty woven composites which are used in advanced structural
materials sold to the aerospace, marine, and sporting goods industries. These
composites are extremely strong, yet lightweight and are used in
high-performance applications.
Sales of Woven Products approximated 2 percent of 1998 sales as compared with 4
percent of 1997 sales. The Woven Materials segment did not exist in 1996.
OTHER PRODUCTS AND SERVICES
Other Products and Services include fiberboard composites sold in sheet form to
fabricators of high-performance gaskets and electrical insulating products. It
also includes pencil slats made from recycled newsprint and cardboard, which
replaces wood. The Company's Logistics Management Operation provides specialized
distribution and warehouse services to other Lydall companies and various
American, Canadian, and European manufacturers of newsprint, specialty papers
and other assorted products.
Sales of Other Products and Services approximated 24 percent of the Company's
sales in 1998 compared with 24 percent and 25 percent in 1997 and 1996,
respectively.
GENERAL BUSINESS INFORMATION
Lydall operates 13 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; St. Johnsbury, Vermont; Lakewood, New Jersey;
Winston Salem, North Carolina; Columbus, Ohio; Jacksonville, Florida; Covington,
Tennessee; and Fort Washington, Pennsylvania. Lydall also has four international
manufacturing facilities located in Saint-Rivalain, France; Ludenscheid,
Germany; Ibbenburen, Germany; and Meinerzhagen, Germany.
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.
No significant portion of Lydall's business is seasonal. Lydall maintains levels
of inventory and grants credit terms which are normal within the industries it
serves. The Company uses a wide range of raw materials in the manufacturing of
its products and was able to obtain the raw materials needed during 1998. The
majority of raw materials used by Lydall are available from a variety of
suppliers who can be substituted if necessary.
3
<PAGE>
Sales to the automotive market represented 25 percent of Lydall's total sales in
1998 compared with 26 percent and 32 percent in 1997 and 1996, respectively.
Lydall sells primarily to original equipment manufacturers for use in a variety
of models and applications. Sales to Ford Motor Co. amounted to $35.0 million,
or 15 percent of Lydall's total sales, in 1998, and no other single customer
accounted for more than 10 percent of total sales.
Lydall invested $8.7 million in 1998, $8.7 million in 1997, and $6.8 million in
1996, respectively, to develop new products and 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 $29.5 million at December 31, 1998, $18.8 million at
December 31, 1997, and $25.1 million at December 31, 1996. Lydall expects to
fill its backlog of 1998 orders during the first quarter of 1999. Backlog at
February 28, 1999 was $28.0 million. There are no seasonal aspects to this
backlog. The increase in backlog reflects the inclusion of 1998 acquisitions.
No material portion of Lydall's business is subject to renegotiation of profits
or termination of contracts or subcontracts at the election of any governmental
body.
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, or
competitive position of the Company and its subsidiaries. For information
relating to certain environmental proceedings involving the Company, please
refer to "Contingencies" in "Notes to Consolidated Financial Statements" on page
F-24.
As of March 1, 1999, Lydall and its subsidiaries had 2,112 employees, including
foreign employees. Four unions under contracts expiring at various points up to
November 2002 represented approximately 159 of the domestic employees. 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. Hourly employees at the newly acquired German
operations are also covered under a National Collective Bargaining Agreement.
Foreign and export sales were 18 percent of total sales in 1998, 20 percent in
1997, and 21 percent in 1996. Export sales are concentrated primarily in Europe,
the Far East, Mexico, and Canada and were $30.7 million, $34.9 million, and
$37.0 million in 1998, 1997, and 1996, respectively.
Foreign sales were $10.8 million, $11.2 million, and $15.3 million for the years
ended December 31, 1998, 1997, and 1996, respectively. The French operation
incurred losses of $979 thousand (including the recognition of an impairment
loss of $941 thousand), $348 thousand, and $796 thousand for the years ended
December 31, 1998, 1997 and 1996, respectively. Total foreign assets were $73.4
million at December 31, 1998 compared with $16.4 million at December 31, 1997.
The increase in foreign assets in 1998 is due to the acquisition of Gerhardi &
Cie. GmbH & Co. KG at the end of 1998.
4
<PAGE>
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:
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Approximate Area
Land Buildings
Location General Description (Acres) (Sq. Feet)
<C> <S> <C> <C> <C>
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1 Manchester, Connecticut Office Facility 2.0 25,000
2 Manchester, Connecticut Paperboard Manufacturing 11.6 70,500
3 Covington, Tennessee Composite Materials Manufacturing 26.0 155,000
4 Richmond, Virginia Laminated Paperboard Manufacturing 5.0 104,000
5 Rochester, New Hampshire Specialty Papers Manufacturing 18.0 143,000
6 Hoosick Falls, New York Composite Materials Manufacturing 11.0 129,000
7 Hamptonville, North Carolina Heat-Management Products Manufacturing and 35.2 85,000
Fabricating
8 Green Island, New York Specialty Papers Manufacturing 5.4 275,000
9 Manchester, Connecticut Corporate Office 4.5 20,000
10 Saint-Rivalain, France Specialty Papers Manufacturing 14.3 156,000
11 Columbus, Ohio Heat-Management Products Fabricating 9.0 80,000
12 Jacksonville, Florida Laminated Paperboard Manufacturing -- 52,000
13 Fort Washington, Pennsylvania Specialty Woven Materials Manufacturing -- 60,000
14 Manchester, Connecticut Warehouse and Office Facility 7.08 95,000
15 St. Johnsbury, Vermont Heat-Management Products Fabricating 10.0 45,400
16 Lakewood, New Jersey Biomedical Products Fabricating -- 20,250
17 Winston Salem, North Carolina Biomedical Products Manufacturing and Fabricating -- 29,000
18 Ludenscheid, Germany Heat-Management Products Fabricating and 28.5 108,000
Manufacturing
19 Ibbenburen, Germany Heat-Management Products Fabricating and 99.3 180,000
Manufacturing
20 Meinerzhagen, Germany Heat-Management Products Fabricating and 37.5 36,150
Manufacturing
21 Rockwell, North Carolina Fabricating Facility 9.0 80,000
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</TABLE>
Properties numbered 4, 11, 12, 13, 15, 16, 17, and 21 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. Lydall considers its properties to be suitable and adequate for its
present needs. The properties are being fully utilized, except the Rockwell,
North Carolina facility, as substantially all operations have been moved to
Hamptonville, North Carolina. In addition to the properties listed above, the
Company has several additional leases for sales offices and warehouses in the
United States, Europe, and Japan.
5
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
See "Contingencies" in the "Notes to Consolidated Financial Statements" on page
F-24.
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 1998.
EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT:
The name, age, current position, and other business experience since January 1,
1994 of each executive officer of the Company are listed below. Christopher R.
Skomorowski, James P. Carolan, John E. Hanley, Carole F. Butenas, and Mary A.
Tremblay are elected annually at the organizational meeting of the Board of
Directors. All others are appointed by the President and Chief Executive Officer
for an indefinite period. There are no family relationships among executive
officers or other significant employees.
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Other Business
Name Age Title Experience Since 1994
<S> <C> <C> <C>
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Christopher R. Skomorowski 45 President and Chief Executive Division President
Officer (since 1998), Director Lydall Westex
(1994-1995, 1998-1999)
James P. Carolan 56 Executive Vice President N/A
(since 1998), Division President
(since 1983), Director
(1994-1995, 1996-1998)
John E. Hanley 42 Vice President-Finance and N/A
Treasurer (since 1992)
Carole F. Butenas 56 Vice President-Investor Relations N/A
(since 1991), Director
(1995-1996)
Mary A. Tremblay 38 General Counsel and Secretary N/A
(since 1991)
Raymond J. Lanzi 60 Division President (since 1979), N/A
Director (1993-1994)
John J. Worthington 50 Division President (since 1996), General Manager, W. R. Grace and
Director (1998-1999) Specialty Paperboard, Inc.
Bill W. Franks, Jr. 40 Division President (since 1997) Vice President and General
Manager, Lydall Logistics
Management
Raymond S. Grupinski, Jr. 37 Division President (since 1998) Director of Operations, Lydall
Westex and General Manager of
Lydall Westex-Columbus Operation
Lisa Krallis-Nixon 38 President/General Manager Business Unit Manager of Medical
(since 1998) Filtration at Lydall Westex
Charter Medical, Ltd.,
Second-tier subsidiary
Kevin G. Lynch 46 Division President (since 1998) Vice President of Sales and
Marketing at Lydall Technical
Papers
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</TABLE>
6
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol LDL. Shares totaling 7,507,000 and 7,103,800 were traded during 1998 and
1997, respectively. The table below shows the range of reported last sale prices
on the New York Stock Exchange Composite Tape for the Company's Common Stock for
the periods indicated. As of March 15, 1999, the record date of the Company's
1999 Annual Meeting, approximately 1,556 stockholders of record held 15,725,703
shares of Lydall's Common Stock, $.10 par value. As of the record date, there
were no shares outstanding of the Company's Preferred Stock, $1.00 par value.
<TABLE>
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High Low Close
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<S> <C> <C> <C>
1998
FIRST QUARTER $20 13/16 $17 1/16 $18 1/16
SECOND QUARTER 18 15/16 14 7/16 14 9/16
THIRD QUARTER 14 3/4 10 1/4 10 1/4
FOURTH QUARTER 13 5/16 9 1/4 11 7/8
1997
First Quarter $24 $20 $20 1/4
Second Quarter 23 5/8 18 3/4 21 1/8
Third Quarter 25 3/4 20 7/8 23 7/16
Fourth Quarter 23 15/16 18 1/2 19 1/2
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</TABLE>
The Company does not pay a cash dividend on its Common Stock and does not
anticipate doing so for the foreseeable future. Cash will be reinvested into
core businesses.
7
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR STATISTICAL REVIEW
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$ thousands except per-share amounts 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Net sales $230,007 $244,289 $252,652 $252,128 $213,072
Net income 4,202 21,911 24,736 22,438 15,503
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COMMON STOCK PER-SHARE DATA (DILUTED)
Net income $ .26 $ 1.27 $ 1.38 $ 1.23 $ .87
Common stockholders' equity 6.96 7.04 6.89 5.88 4.57
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FINANCIAL POSITION
Total assets $226,848 $160,124 $182,119 $158,072 $136,613
Working capital (deficit) (9,090) 39,203 53,358 52,730 30,823
Current ratio 0.91 2.39 2.24 2.77 1.93
Long-term debt, net of current
maturities -- 2,100 5,050 7,750 10,607
Total stockholders' equity 109,225 113,030 117,844 101,811 76,227
Debt to total capitalization 33.4% 4.3% 12.9% 9.4% 15.0%
- ---------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT
Net property, plant, and equipment $107,836 $ 68,860 $ 62,038 $ 60,074 $ 54,771
Capital additions from acquisitions 32,065 -- 500 -- 3,077
Other capital additions 17,657 17,104 10,893 12,006 7,979
Capital divestment, net 679 685 894 632 687
Depreciation 8,844 7,993 7,824 7,122 6,101
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PERFORMANCE RATIOS AND OTHER ITEMS
Return on average assets 2.3% 12.8% 14.5% 15.2% 12.7%
Return on average common
stockholders' equity 3.8% 19.0% 22.5% 25.2% 22.8%
Return on sales 1.8% 9.0% 9.8% 8.9% 7.3%
Days of inventory on hand 36 33 31 33 36
Days of receivables outstanding 53 51 50 49 47
Number of employees at year-end 1,330 1,225 1,268 1,227 1,306
- ---------------------------------------------------------------------------------------------------
SHARES AND STOCKHOLDERS
Weighted average common stock and
equivalents 16,163,000 17,319,000 17,988,000 18,197,000 17,864,000
Common stock outstanding at year-end 15,693,860 16,065,473 17,092,011 17,320,252 16,677,524
Stockholders at year-end 1,603 1,653 1,855 1,918 1,900
Market price per share of common
stock--
Highest close $ 20.13 $ 25.75 $ 25.87 $ 28.50 $ 18.63
Lowest close $ 9.25 $ 18.50 $ 19.75 $ 14.75 $ 10.13
- ---------------------------------------------------------------------------------------------------
</TABLE>
Share figures adjusted to reflect a two-for-one stock split in 1995.
1998 Balance Sheet items incorporate the assets and liabilities of the newly
acquired subsidiary, Gerhardi & Cie. GmbH & Co. KG. The balances of Gerhardi are
not included in calculations in the Performance Ratios and Other Items section
above.
8
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SALES
OVERVIEW
Sales declined to $230.0 million in 1998 from $244.3 million in 1997. The
internal and external dynamics contributing to this overall sales decline
included the following:
- Acquisitions accounted for a net increase in sales of $7.2 million.
- Internal marketing actions resulted in an increase in sales of
approximately $700 thousand.
- External forces accounted for a $22.2 million decrease in sales.
In 1997, sales from acquisitions amounted to $9.8 million, entirely due to the
first-year sales of the Fort Washington Operation, a producer of woven
structural composites. Internal marketing actions plus external market forces
produced a combined negative impact of $18.2 million.
During 1996, acquisitions produced a negligible effect on sales, while internal
and external forces largely offset each other.
ACQUISITIONS
Lydall isolates the impact of acquisitions for three years, after which time it
considers these businesses to be fully integrated. The Company made three
acquisitions in 1998.
1. CharterMed, Inc., acquired in February 1998, is a producer of proprietary
medical devices located in Lakewood, New Jersey. Its products complement the
Lypore-Registered Trademark- family of biomedical filtration media and
subassemblies. The Company's medical and pharmaceutical products were
consolidated under a new corporate entity, Charter Medical, Ltd.
2. Engineered Thermal Systems, Incorporated ("ETSI"), a fabricator of
automotive thermal and acoustical barrier products located in St. Johnsbury,
Vermont, was acquired in April 1998. ETSI, now known as the St. Johnsbury
Operation of Lydall Westex, extended Lydall's automotive heat-management
product line and provided increased access to DaimlerChrysler.
3. Gerhardi & Cie. GmbH & Co. KG ("Gerhardi"), a German manufacturer of
automotive thermal, acoustical and chrome-plated components, was acquired on
December 30, 1998. The acquisition of Gerhardi had no impact on sales or
results of operations in 1998. The acquired facilities are located in
Ludenscheid, Ibbenburen, and Meinerzhagen, Germany.
The addition of CharterMed, Inc. and the St. Johnsbury Operation combined to
produce sales of $11.3 million in 1998. Sales from the Fort Washington Operation
of Lydall Manning, included under the Woven Products segment, declined to $5.7
million in 1998 from $9.8 million in 1997. This Operation was acquired at the
end of 1996. Significant market share was lost during the year as production
difficulties associated with the relocation of the plant disrupted customer
relations. This business was reorganized early in 1999 to lower its break-even
point and to re-establish long-standing customer partnerships.
9
<PAGE>
In 1996, acquisitions, which included two operations acquired in 1994, produced
modest incremental growth of $900 thousand.
INTERNAL MARKETING ACTIONS
During 1998, sales increased by $700 thousand as a result of internal marketing
actions. Lydall considers factors such as product introductions, net of product
discontinuances, market-share changes, and selling price changes to be internal
marketing actions. Internal marketing actions caused sales to decrease by $13.0
million in 1997, while these dynamics produced a net gain of $9.5 million in
1996.
Lydall introduced $8.9 million of new products in 1998, compared with $2.4
million in 1997 and $11.8 million in 1996. Successes were achieved in the air
filtration markets for next generation Hi-alpha and ASHRAE products, moldable
high stiffness media, and meltblown materials. A number of new automotive
heat-management products, including underbody and gas tank shields, and parts
for the European market, were introduced as well.
Product discontinuance amounted to $3.1 million in 1998 compared with $6.1
million in 1997 and $2.8 million in 1996. Much of the change in 1998 resulted
from the displacement of existing products by new products. In 1997, Lydall
exited certain low-margin non-core products, while discontinuing a flame-barrier
material sold to the office-panel market.
Market-share changes in 1998 caused sales to decrease by $4.2 million, largely
stemming from lower demand in the Asian markets for specialty papers employed in
high-efficiency air filtration applications and from losses to lower cost
competitors in the mature electrical insulation market. Management is confident
that as economic conditions improve in Asia, the Company will benefit,
specifically in the filtration market.
In 1997, market-share losses offset gains resulting in a net sales reduction of
$1.4 million. Losses occurred primarily in the Heat-Management Products segment
related in general to the automotive market, and specifically to (i) Ford's
discontinuation of three models that contained Lydall's thermal barriers and
(ii) the loss of a major part supplied to DaimlerChrysler. Gains in the
Paperboard Products segment and the Other Products and Services segment offset a
portion of the 1997 market-share losses. In 1996, Heat-Management Products and
Filtration Products produced $1.5 million of market-share gains.
Prices declined by $900 thousand over the course of 1998. Pricing weakness was
felt in markets for thermal barriers and air filter media. Prices of
Heat-Management Products sold to the automotive market also declined modestly as
part of long-term contractual commitments. Paperboard Products for
materials-handling applications recorded price increases of approximately $1.7
million.
In 1997, prices decreased by $7.9 million, following a decline of $1.0 million
in 1996. Price changes in 1997 were concentrated in the Paperboard Products
segment. The selling prices of Lydall's materials-handling products move in
relation to prices of raw materials, namely linerboard. Competitive pressures
forced Lydall to meet historically low market prices. For the most part, these
price declines were accompanied by a corresponding decline in linerboard costs.
EXTERNAL MARKET FORCES
Lydall defines external market forces as the effects of economic and market
changes beyond the influence of management actions, including the effects of
market decay and foreign exchange. Sales in 1998 declined by $22.2 million due
to these conditions. A continuing weakness in the semiconductor market, to which
Lydall
10
<PAGE>
supplies specialty air filtration materials, and a trend away from the use of
pyrotechnic airbag inflator systems that employ Lydall's heat-management
materials, were contributing factors. However, the majority of the decrease
resulted from the loss of sales of fabricated automotive thermal barriers.
Design-out of Lydall components from new models exceeded the number of new
Lydall parts being designed in, which accounted for a net $13.6 million decrease
in sales. While design-out is a normal occurrence in the automotive industry,
this trend reached a peak in 1998, and is not expected to recur at 1998 levels.
Also, Lydall had an exceptional number of new products in the commercialization
stage during 1998, which were not brought to market in as timely or
cost-efficient manner as in the past. These inefficiencies are being corrected
in 1999.
In 1997, external forces reduced sales by $5.2 million as losses due to
design-out plus market decay were offset by positive economic forces and market
growth. Currency exchange rates, which have had a nominal effect in other years,
resulted in a $2.2 million reduction in sales in 1997 with the dollar stronger
in relation to most currencies in which Lydall conducts business.
External forces caused net sales to decline by $9.8 million in 1996. The chief
causes were decay in battery separator markets, design-out of certain heat
shields, and decreased demand for materials-handling products.
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN SALES
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------
<CAPTION>
$ millions 1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------
Prior year's net sales $244.3 $252.7 $252.1
................................................................
Acquisitions 7.2 9.8 .9
Internal marketing actions .7 (13.0) 9.5
External market forces (22.2) (5.2) (9.8)
................................................................
Total change (14.3) (8.4) .6
................................................................
Current year's net sales $230.0 $244.3 $252.7
- ----------------------------------------------------------------
</TABLE>
GROSS MARGIN
OVERVIEW
During 1998, gross margin declined to $64.8 million, or 28.2 percent of sales,
from $77.6 million, or 31.8 percent of sales, in 1997. In 1996, Lydall's gross
margin was $82.1 million, or 32.5 percent of sales. Margins in 1998 were
impacted by the following factors:
- Acquisitions produced incremental margins despite poor results at the Fort
Washington Operation
- Significantly lower sales volume
- Combined effect of price decreases in relation to net cost increases
- Shutdown and consolidation of automotive heat-management operations in
North Carolina
- Additional overhead to support the operations of Charter Medical, Ltd. as
a stand-alone facility
11
<PAGE>
In 1997, margins were also negatively impacted by lower sales volume and net
effects of price decreases that were only partially offset by cost decreases
from vendors. Fort Washington contributed modestly to Lydall's consolidated
gross margin while lowering the overall percentage by approximately one point.
Cost-reduction programs contributed positively to overall gross margin
performance.
Gross margin in 1996 was positively impacted by acquisitions, including the
Columbus and Jacksonville Operations, a more favorable price/cost environment,
and cost-reduction programs. Factors such as lower sales volume and increased
depreciation offset some of these gains.
ACQUISITIONS
Gross margins at Fort Washington declined by $1.8 million, due in part to
substantial write-downs of excess raw material inventories to their estimated
realizable value. Financial results in 1998 were also hampered by the inability
to maintain historical sales levels despite keeping overhead levels relatively
constant. Future expectations for this business are being evaluated to determine
the most effective approach to realizing value from this producer of
lightweight, high-strength composite materials. In early 1999, Lydall reduced
overhead levels through layoffs and consolidation of functions. Future savings
are projected to be close to $1.0 million annually.
The addition of CharterMed, Inc. and the St. Johnsbury Operation resulted in
$3.2 million of incremental gross margins in 1998. Both operations were
profitable and are expected to grow in sales and profits.
The December 1998 acquisition of Gerhardi in Germany had no effect on Lydall's
1998 consolidated operating results. Lydall is committed to achieving a quicker,
more thorough integration of Gerhardi than other recent acquisitions.
Significant internal and external resources have been allocated for this
purpose.
Results in 1997 included incremental gross margin of $700 thousand related to
the first year of operating Fort Washington. Results were depressed by costs to
relocate the facility, uneven supply of key raw materials, and difficulty in
meeting customer demand.
During 1996, the third year of operating the Columbus and Jacksonville
Operations acquired in 1994, acquisitions caused a positive change in gross
margin of $2.2 million. Benefits from major process changes and management
techniques were realized during the year.
EFFECTS OF CHANGES IN SALES VOLUME
Lower sales volume produced a $9.7 million decline in gross margin in 1998,
accounting for approximately three-quarters of the total margin decline for the
year. Despite new-product contributions and market growth in several product
lines, the combined negative effects of design-outs in automotive
heat-management products; market decay in mature products; market-share losses
and effects of the Asian economy; and a poor market for filtration products
worldwide overwhelmed the positive dynamics.
In 1998, Lydall marked the third year of gross-margin decline caused by
decreases in sales volume. Management expects improved results in 1999 and
beyond based on new-product approvals in the Heat-Management Products segment
for thermal and acoustical barriers sold to automotive markets, and more stable
results in other key markets.
12
<PAGE>
The same dynamics that affected gross margin in 1998 detracted from gross margin
in 1997 by an estimated $5.2 million. The loss of operating leverage due to
design-outs and product discontinuation offset the benefits of economic and
market growth.
Similar effects were felt in 1996, although the magnitude of the change was much
lower. Gross margin decreased by $1.0 million on a small decline in volume.
PRICE CHANGES IN RELATION TO COST CHANGES
As described in the Sales section, 1998 sales prices declined overall by $900
thousand. Vendor costs rose by an estimated $2.0 million, which created a
combined negative impact on gross margin of $2.9 million. The largest impact
occurred in the Heat-Management Products segment for products sold to
non-automotive thermal applications. The materials-handling and automotive
thermal-barrier businesses also experienced some margin erosion due to
price-cost effects.
During 1997, net pricing actions eroded gross margin by $3.5 million. The
largest part of this erosion was produced in the Paperboard Products segment
related to materials-handling systems. Competitive forces did not allow Lydall
to pass vendor-imposed cost increases through to customers. Price concessions
were evident in Lydall's Heat-Management Products and Filtration Products
segments as well.
Net pricing actions resulted in a positive $2.2 million effect on gross margins
in 1996. Vendor costs declined in relation to stable customer prices, a cycle
that reversed in 1997 after several years of net positive gross margin effects.
COST REDUCTIONS
Lydall has been able to consistently drive down manufacturing costs over the
years through a combination of management actions and capital improvements. Net
savings in 1998 were an estimated $2.5 million, compared with savings of $2.4
million in 1997 and $2.9 million in 1996. Lydall's Comprehensive Quality
Program, also known as Cost of Quality, continues to result in significant
savings. These process improvements and cost-reduction programs produced
positive results despite losses of operating leverage in each of the past three
years.
INVENTORY EFFECTS
Gross margin was $700 thousand lower in 1998 due to increased LIFO reserves,
inventory write-offs, and changes in FIFO inventory levels. In 1997 and 1996,
these factors combined to largely offset each other.
OTHER EFFECTS
Other effects normally include changes in depreciation expense, fixed overhead,
and product-mix shifts. In 1998, these factors reduced gross margin by
approximately $2.0 million. Lydall also suspended most operations at a facility
in North Carolina, with direct and indirect costs of over $600 thousand, in
order to realize savings of an estimated $1.0 million in annual operating and
logistics costs. Relocation of the medical business from within the automotive
thermal-barrier operation to a separate facility and legal entity impacted fixed
overhead by $800 thousand, bringing the total impact of other effects on 1998
gross margin to approximately $3.4 million.
In 1997, positive changes in product mix and overhead levels resulted in a $1.1
million increase to gross margin compared with a decrease of $2.2 million in
1996.
13
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN GROSS MARGIN
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
$ millions 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Prior year's gross margin $ 77.6 $ 82.1 $ 77.7
............................................................................
Acquisitions 1.4 0.7 2.2
Effects of changes in sales volume (9.7) (5.2) (1.0)
Price changes in relation to cost changes (2.9) (3.5) 2.2
Cost reductions 2.5 2.4 2.9
Inventory effects (0.7) -- .3
Other effects (3.4) 1.1 (2.2)
............................................................................
Total change (12.8) (4.5) 4.4
Current year's gross margin $ 64.8 $ 77.6 $ 82.1
............................................................................
As a percent of net sales 28.2 31.8 32.5
- ----------------------------------------------------------------------------
</TABLE>
PRETAX INCOME
OVERVIEW
Pretax income declined to $5.4 million in 1998 from $34.5 million in 1997. The
major causes include the effects of acquisitions, results of ongoing operations,
nonoperating investments and financing, as well as asset impairment charges
recorded in the fourth quarter, and the costs associated with the retirement of
Lydall's former chairman and chief executive officer. The impairment losses are
discussed under "Acquisitions" and "Operations." The chairman's retirement costs
are described under "Operations."
In 1997, pretax income declined to $34.5 million from $39.9 million in 1996,
largely due to the combined effects of reduced operating leverage and a negative
price/cost relationship. During 1996, pretax income rose by $3.0 million to
$39.9 million as cost-reduction programs and acquisitions provided additional
income compared with 1995.
ACQUISITIONS
In 1998, results were affected by the Fort Washington Operation, acquired at the
end of 1996 and operated in 1997 and 1998, and two acquisitions completed during
1998, CharterMed, Inc. and the St. Johnsbury Operation.
Fort Washington reported very disappointing results in 1998. A combination of
poor market response and continuing negative effects from relocation of the
facility produced higher operating losses in 1998 than in 1997. During the
fourth quarter, management determined that projected future cash flows from
operations were not sufficient to recover the net carrying value of the
business. As a result, Lydall recorded a pretax impairment loss of $6.5 million
in the fourth quarter to adjust the carrying value of long-lived assets to their
expected net realizable value of the Fort Washington Operation. In addition,
Lydall wrote down excess raw material inventories to their estimated realizable
value, impacting gross margin and pretax income by $800 thousand. Before
considering these charges, pretax operating losses at Fort Washington
deteriorated to approximately $1.8 million in 1998, from $700 thousand in 1997.
As described under the analysis of gross margin, management has reduced fixed
overhead levels at Fort
14
<PAGE>
Washington in 1999 and expects operating losses to decline by more than $1.0
million in 1999. Efforts to increase revenues are expected to bring about
further improvement in operating results.
Charter Medical, New Jersey and the St. Johnsbury Operation were both profitable
during 1998, adding $700 thousand of operating profits before financing costs.
Management feels that both operations are well positioned for healthy sales and
income growth beyond 1998.
Gerhardi, acquired on December 30, 1998, is also expected to positively impact
Lydall's results in future years. This strategically important acquisition moves
Lydall toward a position of global leadership in automotive heat-management
products.
The Columbus and Jacksonville Operations, which Lydall reported as acquisitions
through 1996, added $1.6 million of pretax profits in 1996. Lydall normally
reports results of newly acquired operations for three full years before
considering them as fully integrated.
OPERATIONS
In 1998, pretax profits from operations other than acquisitions were
substantially lower than in 1997, declining by $18.0 million. In the Gross
Margin section, management described the various conditions that lowered profits
at the gross margin level before acquisitions by $14.2 million. Cost-containment
efforts instituted during 1998 resulted in significant savings; however, gains
were offset by pricing pressures and the pretax cost of the severance agreement
for Lydall's former chairman and chief executive officer of $3.3 million.
Lydall continued its aggressive product development spending in 1998, equaling
the record levels of 1997. Expenses also increased related to the Company's
investment in Lydall 2000, a comprehensive overhaul of systems to meet the
demands of doing business in the 21(st) Century. Both of these investments are
expected to bring long-term benefits to Lydall and its stockholders.
Pretax income from operations declined by $5.4 million in 1997 compared with
1996. Lower margins and increased selling, product development, and
administrative spending led to the profit decline. In 1996, existing operations
generated a $900 thousand improvement in pretax profits. Key drivers of
improvement in 1996 were cost-reduction programs and efficiency improvements in
Lydall facilities.
Other income and expense, net, reduced earnings by $100 thousand in 1998,
compared with an increase of $400 thousand in 1997 and a $200 thousand
improvement in 1996. This category normally captures changes in environmental
costs, fixed asset dispositions and other non-operating effects.
INVESTMENTS AND FINANCING
Nonoperating investments and financing costs combined to decrease pretax income
by $2.7 million in 1998. Investment balances were much lower as Lydall funded a
$17.7 million capital program, $10.3 million to repurchase Common Stock, and the
acquisitions of CharterMed and ETSI. In addition, Lydall liquidated certain
investments in marketable securities resulting in a decrease from the previous
year.
In 1997, investments and financing costs produced $700 thousand of additional
pretax income, compared with an incremental increase of $500 thousand in 1996.
During 1997 and 1996, Lydall's cash flow was in excess of operating and
financing requirements, resulting in higher investment income.
15
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN PRETAX INCOME
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
$ millions 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Prior year's pretax income $ 34.5 $ 39.9 $ 36.9
................................................................................................................
Acquisitions--change in:
Gross margin 1.4 0.7 2.2
Selling, product development, and administrative expenses (9.8) (1.4) (0.6)
................................................................................................................
Total change from acquisitions (8.4) (0.7) 1.6
................................................................................................................
Operations--change in:
Gross margin (14.2) (5.2) 2.2
Selling, product development, and administrative expenses (3.7) (0.6) (1.5)
Other income/expense (0.1) 0.4 0.2
................................................................................................................
Total change from operations (18.0) (5.4) 0.9
................................................................................................................
Nonoperating investments and financing--change in:
Investment income (2.3) 0.6 0.3
Interest expense (0.4) 0.1 0.2
................................................................................................................
Total change from nonoperating investments and financing (2.7) 0.7 0.5
................................................................................................................
Total change (29.1) (5.4) 3.0
................................................................................................................
Current year's pretax income $ 5.4 $ 34.5 $ 39.9
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. In general, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements within the meaning of Section
21E. Without limiting the generality of the foregoing, the words "believes,"
"anticipates," "plans," "expects," and other similar expressions are intended to
identify forward-looking statements. Investors should be aware that such
forward-looking statements are based on the current expectations of management
and are inherently subject to a number of risks and uncertainties that could
cause the actual results of the Company to differ materially from those
reflected in the forward-looking statements. In addition to general economic
conditions and market trends, some of the important factors which could cause
actual results to differ materially from those projected include, but are not
limited to, the following:
A MAJOR DOWNTURN OF THE U.S. AND EUROPEAN AUTOMOTIVE MARKETS. Although Lydall's
automotive sales are not solely contingent on the strength of the automotive
market, a significant downturn of the U.S. and European automotive industry
could have a substantial impact on Lydall's results. The Company also can be
affected when automotive manufacturers discontinue production of specific models
that contain Lydall's products. On the other hand, Lydall benefits from the
introduction of new models. Twenty-five percent of Lydall's total sales in 1998
were to the automotive market. This is expected to increase to approximately 45
percent with the addition of Lydall
16
<PAGE>
Gerhardi's sales in 1999. Lydall's primary automotive products are thermal
barriers and heat shields employed both inside and outside of vehicles. Most of
Lydall's products are supplied to meet unique, niche applications. There is no
direct correlation between the number of Lydall parts on a vehicle and the
number of units built, as with tires or steering wheels for example. Slight
fluctuations in automotive production have relatively little effect on Lydall's
business; however, a major downward shift could prevent Lydall from achieving
its projected results.
A SIGNIFICANT CHANGE IN THE NUMBER OF CLEAN ROOMS BEING BUILT. Lydall's
high-efficiency air filtration business is linked to the fabrication of clean
rooms and the growth of commercial heating, ventilation, and air conditioning
applications around the world. Lydall is affected by the cyclicality of these
industries. Various independent industry-published forecasts project excellent
long-term growth for clean-room fabrications and clean-air applications in
general. Lydall relies on these forecasts, feedback from its filtration
customers, and other market intelligence sources for forward-looking
information. Lydall's outlook for 1999 is based in part on a slight improvement
in these markets; however, if a market decline or significant upsurge were to
occur, Lydall's results would be affected accordingly.
RAW-MATERIAL PRICING AND SUPPLY. Raw-material pricing and supply issues affect
all of Lydall's businesses and can influence results in the short term. Pricing
fluctuations, however, particularly impact the Company's materials-handling
business. These products are made from laminated virgin kraft paperboard, also
known as linerboard. The materials-handling business is unique for Lydall
because it is the one area where the market pushes for price reductions that
directly track decreases in raw materials and accepts price increases in the
face of higher raw-material costs. Thus, significant changes in the pricing of
linerboard directly affect this portion of Lydall's business.
NEW PRODUCT INTRODUCTIONS. Improved performance and growth is partially linked
to new product introductions planned for the future. The timing and degree of
success of new product programs impact Lydall's projected results.
YEAR 2000. The estimates and conclusions relating to Lydall 2000 are based on
management's best estimates of future events. Risks to completing the plan
include the availability of resources, the ability to discover and correct the
potential Year 2000 sensitive problems, and the ability of third parties to
bring their systems into Year 2000 compliance.
The Company does not undertake to update any forward-looking statement made in
this report or that may from time to time be made by or on behalf of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
Lydall ended 1998 with $52.3 million outstanding against short-term credit lines
to support significant investments in a variety of areas. The Company completed
three strategic acquisitions for cash totaling $46.4 million, in addition to
capital expenditures of $17.7 million and purchases of Common Stock totaling
$10.3 million. Late in 1998, the Company suspended the purchase of Common Stock
except to offset shares granted under the Company's stock option award program,
choosing to focus on the cash requirements for existing operations and
acquisitions.
Lydall funded an aggressive capital plan in 1997 of $17.1 million in addition to
purchasing 1.3 million shares of Common Stock for $27.4 million. Lydall ended
the year with $8.9 million in cash and cash equivalents, plus $3.9 million in
short-term investments.
17
<PAGE>
YEAR 2000
Many computer systems and equipment with embedded microchips or processors use
only two digits to represent the year, which results in their inability to
accurately process certain data before, during or after the year 2000. As a
result, business and governmental entities are at risk of possible
miscalculations or system failures causing disruptions in their business
operations. The century-dating issue can arise at any point in the Company's
supply, manufacturing, processing, distribution, and financial chains.
Lydall has recognized the urgency of updating its information technology systems
to improve product quality, process efficiencies, productivity, and to
accommodate century-dating issues. The Company and each of its operating
subsidiaries are in the process of implementing a Year 2000 readiness program
with the objective of having all significant systems processing date-sensitive
transactions properly. The project, Lydall 2000, has been underway since 1995.
Lydall 2000 addresses information technology and non-information technology
systems as well as an assessment of the status of third parties.
Information technology systems were analyzed to determine those which must be
replaced to meet the criteria of Lydall 2000. The identified systems have been
segregated into two logical implementation projects. The scope of these projects
has been determined, the infrastructure has been put in place, and the Company
is progressing with the implementations. World-class systems that meet the
objectives of the Company were chosen to replace legacy systems. Domestic
financial and manufacturing system implementations were approximately 80 percent
complete at the end of 1998. The Company expects total completion by the
beginning of the third quarter of 1999. Several domestic locations were Year
2000 compliant at the end of 1998. The implementation of the international
financial and manufacturing systems were approximately 25 percent completed at
the end of 1998 and are expected to be totally integrated by the end of the
fourth quarter of 1999. The completion timeframe includes time for testing and
verification of newly implemented systems. The human resource management system
is currently Year 2000 compliant. An implementation strategy is currently being
developed to integrate newly acquired Gerhardi operations and to address any
century-dating issues.
Assessment of non-information technology systems was also completed as part of
Lydall 2000. Systems requiring remediation are expected to be substantially
compliant by mid-year 1999.
Additionally, customers and suppliers, who could have a material impact on the
Company's operations, are being contacted to verify their Year 2000 readiness.
The Company intends to assess their compliance and consider alternatives where
necessary.
Since the inception of Lydall 2000, the Company has capitalized costs of
approximately $9.5 million. Based on experience to date, approximately $2.0
million of Lydall 2000 costs remain to be capitalized. The cost to update
Gerhardi's systems has not yet been determined.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially affect the Company's results of
operations, liquidity or financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on its results of operations, liquidity or financial
condition. Lydall 2000 is expected to significantly reduce the level of
uncertainty about the Year 2000 problem. The Company believes that, with the
implementation of new systems and completion of Lydall 2000, the possibility of
significant interruptions of normal operations should be substantially reduced.
18
<PAGE>
With respect to contingency plans, the Company is anticipating being compliant
prior to the year 2000. The Company will continue to reassess the need for
formal contingency plans, based upon progress of Year 2000 efforts by the
Company and third parties. If deemed necessary, contingency planning will begin
in the first quarter of 1999.
CASH FLOW OVERVIEW
Cash provided by operating activities was approximately $20.3 million in 1998,
compared with $24.5 million and $37.8 million in 1997 and 1996, respectively.
Positive cash flows in 1998 were derived from operating earnings before
deducting non-cash charges for depreciation, amortization, and impairment
losses. Working capital increases partially offset operating earnings and
non-cash charges.
Operating activities generated substantially higher cash flows in 1997 and 1996
due to higher earnings levels. Working capital increases in 1997 reduced cash
flows, while 1996 results were positively impacted by strong working capital
management results.
Cash flow used in investing activities in 1998 reached a record $60.0 million,
with $46.4 million used for strategic acquisitions and $17.7 million for capital
expenditures. Investing activities consumed $16.2 million in 1997 and $15.9
million in 1996. In both 1997 and 1996, capital expenditures were the primary
use of cash as acquisition activity was minimal.
Lydall generated $33.0 million in cash flow from financing activities in 1998.
Net proceeds from bank credit lines were $44.6 million, while the largest use of
cash was the purchase of Common Stock for $10.3 million. In 1997, financing
activities resulted in net cash outflows of $37.5 million, including debt
repayments totaling $12.5 million and Common Stock purchases amounting to $27.4
million. Financing activities in 1996 used $11.4 million, which included Common
Stock purchases of $10.3 million, debt payments of $2.9 million, and partially
offset by $1.8 million of proceeds from stock option exercises.
WORKING CAPITAL PRODUCTIVITY
Lydall has measured working capital productivity, or working capital turnover,
for a number of years to assess short-term utilization of operating resources.
Working capital turnover is defined as annual sales divided by the quarterly
average of receivables and inventory, less accounts payable. Since the
acquisition of Gerhardi was not completed until December 30, 1998, its related
working capital has been excluded from this analysis. Turnover declined by 16
percent in 1998 to 6.4 times from 7.6 times in 1997. The overall performance was
driven by increased finished goods inventories at many locations, while sales
declined by 6 percent. Acquisitions, especially Fort Washington, experienced
very low turnover as the dynamics of higher inventories and lower sales were
more pronounced. Inventories will be managed more closely in line with demand
patterns in 1999. Management's goal is to improve turnover to historical rates
in 1999.
19
<PAGE>
Turnover in 1997 of 7.6 times compared with turnover of 8.2 times in 1996, the
peak efficiency recorded by Lydall. Results in 1997 were also diluted by effects
of acquisitions.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
$ millions 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 230.0 $ 244.3 $ 252.7
Average working capital 36.2 32.3 30.7
Working capital turnover 6.4 7.6 8.2
Percent change from previous year (16) (8) 12
- ----------------------------------------------------------------------------------------------------------
</TABLE>
FUTURE CASH REQUIREMENTS
Cash requirements for 1999 include the funding of ongoing operations, capital
expenditures, and acquisitions. Lydall anticipates refinancing the short-term
credit facilities used to acquire Gerhardi in December 1998. Lydall has
suspended purchases of Common Stock except to offset shares granted under the
Company's stock option award program, choosing to focus on cash requirements for
existing operations and acquisitions.
The 1999 capital expenditure budget for operations, excluding Gerhardi, is $11.0
million, down from actual expenditures in 1998 and 1997 exceeding $17.0 million.
The lower level reflects the substantial completion of Lydall 2000 and somewhat
lower requirements for strategic capital investments. Capital expenditures at
Gerhardi will be substantial in 1999 as Lydall takes over a growing company in
the midst of a large capacity expansion for the metal heat-shield market.
Capital requirements at Gerhardi are expected to range between $8.0 million and
$11.0 million in 1999 and to decline substantially in 2000.
Management expects to finance capital expenditures and working capital needs
from cash provided by operating activities in 1999. Acquisitions, if completed,
would require additional borrowing which is anticipated to be provided from a
renegotiated credit facility as described under "Credit Arrangements."
CREDIT ARRANGEMENTS
At the end of 1998, domestic credit arrangements totaled $70.0 million. Lydall
also acquired credit capacity with Gerhardi amounting to approximately $7.7
million. Domestic credit lines are renewed annually, and Lydall pays interest at
money market rates. Lydall also compensates banks for certain services on a fee
basis. Management is in the process of refinancing current facilities to extend
maturities beyond one year, to provide adequate capacity for capital spending
requirements, and to provide additional capacity for unforeseen events,
including potential acquisitions. Based on market conditions in early 1999,
Lydall expects the refinancing to occur on reasonable terms by mid-year 1999.
CAPITAL STRUCTURE
Lydall's long-term financial strategy is to prudently utilize debt financing for
future growth opportunities, both internal and external. The Company plans to
maintain an investment-grade credit rating, while allowing temporary departures
to facilitate acquisitions. At the end of 1998, Lydall's total borrowing was
$54.7 million. Coupled with stockholder's equity of $109.2 million, total
capitalization was $163.9 million. Debt represented 33 percent of Lydall's total
capital structure.
Based on capital spending plans in 1999, and expected cash flows from operating
activities, Lydall's capacity to fund strategic acquisitions is limited to less
than $50 million. Lydall would consider exceeding its long-term goal of
40-percent debt to total capitalization in the short-term, with a goal of
refinancing or restructuring the Company to
20
<PAGE>
return within those guidelines. The Company continues to seek strategic
acquisitions in the filtration and thermal-barrier markets.
OTHER KEY FINANCIAL ITEMS
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased to $2.3 million
at the end of 1998 from $8.9 million in 1997.
SHORT-TERM INVESTMENTS. Lydall invests in highly liquid investments with
maturities greater than three months at the time the investments are made. The
Company had no short-term investments at December 31, 1998 and $3.9 million at
December 31, 1997.
RECEIVABLES. Receivables were $48.6 million in 1998 and $32.2 million in 1997,
of which trade receivables were $46.0 million and $31.9 million for 1998 and
1997, respectively. Days of sales outstanding in trade receivables were 53 in
1998 and 51 in 1997. Foreign and export sales were approximately 18 percent of
total sales in 1998, 20 percent in 1997, and 21 percent in 1996. These sales are
concentrated primarily in Europe, the Far East, Mexico, and Canada.
INVENTORIES. Inventories were $28.9 million at December 31, 1998, net of LIFO
reserves of $1.2 million, and $15.5 million at December 31, 1997, net of LIFO
reserves of $1.2 million.
WORKING CAPITAL. Working capital decreased to a deficit of $9.1 million on
December 31, 1998 from $39.2 million on December 31, 1997. The ratio of current
assets to current liabilities decreased to 0.91 from 2.39.
CAPITAL ASSET EXPENDITURES. Capital asset expenditures were $17.7 million in
1998, $17.1 million in 1997, and $10.9 million in 1996. Depreciation was $8.8
million in 1998, $8.0 million in 1997, and $7.8 million in 1996. The Company's
1999 Capital Plan calls for commitments of $11.0 million plus expenditures of
between $8.0 million and $11.0 million at Gerhardi with spending focused on the
following areas--(1) expansion of metal heat-shield capacity at Gerhardi; and
(2) process improvements that lower the Company's Cost of Quality. Expenditures
in 1999 are expected to be financed from existing cash balances or cash
generated from operations.
DEBT TO TOTAL CAPITALIZATION. Debt to total capitalization increased to 33
percent in 1998 from 4 percent in 1997.
COMMON STOCKHOLDERS' EQUITY. Common stockholders' equity decreased to $109.2
million at December 31, 1998, a decrease of 3 percent from $113.0 million at
December 31, 1997. On a per-share basis, common stockholders' equity decreased
to $6.96 at December 31, 1998 from $7.04 at December 31, 1997.
DIVIDEND POLICY. The Company does not pay a cash dividend on its Common Stock
and does not anticipate doing so in the foreseeable future. Cash will be
reinvested into core businesses.
RESEARCH AND DEVELOPMENT. Research and development investments were $8.7
million in 1998, $8.7 million in 1997, and $6.8 million in 1996.
RECENTLY ISSUED ACCOUNTING STANDARDS.
See "Significant Accounting Policies" in "Notes to Consolidated Financial
Statements" on Page F-8.
21
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Lydall is exposed to market risk related to changes in foreign currency exchange
rates and interest rates.
FOREIGN CURRENCY RISK
Lydall has sales and manufacturing activities in foreign countries. As a result,
financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in the foreign markets in
which the Company distributes its products. The Company's primary currency
exposures are with the French franc and German mark.
Lydall's foreign and domestic operations limit foreign currency exchange
transaction risk by completing transactions primarily in their local currencies.
Lydall utilizes bank loans and other debt instruments throughout its operations.
To mitigate foreign currency risk, such debt is primarily taken out in the
underlying local currency of the subsidiary.
Lydall used a foreign currency forward exchange contract to mitigate exposure to
foreign currency volatility in its December 30, 1998 acquisition of a German
subsidiary. The contract, for the contractual amount equivalent to $17 million
at a contract rate of 1.6733, limited Lydall's exposure to both favorable and
unfavorable currency fluctuations and settled on January 5, 1999 resulting in a
minimal gain.
There were no outstanding foreign currency forward exchange contracts at
December 31, 1997.
INTEREST RATE RISK
Lydall's interest rate exposure is most sensitive to changes in US interest
rates. All of Lydall's outstanding debt at December 31, 1998 matures at various
dates during 1999. The weighted average interest rate on this debt was 6 percent
which approximates market.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is contained under Item 14: Exhibits, Financial
Statement Schedules, and Reports on Form 8-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent accountants on
accounting and financial disclosure.
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of Lydall and disclosure of late filings
required by Section 16 of the Exchange Act are incorporated by reference to the
definitive Proxy Statement of Lydall to be filed with the Commission relating to
its Annual Meeting of Stockholders to be held on May 12, 1999. 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 12, 1999, including the Compensation and Stock
Option Committee Report to Stockholders, found on pages 6 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 12, 1999.
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 12, 1999.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PAGE
- ----------------------------------------------------------------------------------------------------------
<S> <C>
A)1, FINANCIAL STATEMENTS:
Report of Management F-1
Report of Independent Accountants F-2
Consolidated Statements of Income and Comprehensive Income for the three years ended December
31, 1998 F-3
Consolidated Balance Sheets at December 31, 1998 and 1997 F-4
Consolidated Statements of Changes in Stockholders' Equity for the three years ended December
31, 1998 F-6
Consolidated Statements of Cash Flows for the three years ended December 31, 1998 F-7
Notes to Consolidated Financial Statements F-8
A)2, FINANCIAL STATEMENT SCHEDULES:
Schedule II-Valuation and Qualifying Accounts for the three years ended December 31, 1998 S-1
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable, or are presented in the Notes to the
Consolidated Financial Statements, and therefore have been omitted.
24
<PAGE>
A)3, EXHIBITS INCLUDED HEREIN OR INCORPORATED BY REFERENCE:
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Registrant dated August 14, 1995
(filed as Exhibit 4.1 to the Registrant's 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 will file these instruments with the
Commission upon request.
10.1* 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).
10.2* 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).
10.3* 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).
10.4* 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).
10.5* 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).
10.6* 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).
10.7* 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).
10.8* 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).
10.9* 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).
10.10* 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).
10.11* Employment Agreement with Mary A. Tremblay dated March 10, 1995 (filed as Exhibit 10.10 to the
Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this
reference).
10.12* Employment Agreement with John J. Worthington dated November 7, 1996 (filed as Exhibit 10.17
to the Registrant's Annual Report on Form 10-K dated March 27, 1997 and incorporated herein by
this reference).
10.13* 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).
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10.14* Lydall, Inc. Supplemental Executive Retirement Plan effective January 1, 1994 (filed as
Exhibit 10.20 to the Registrant's Annual Report on Form 10-K dated March 27, 1996, and
incorporated herein by this reference).
10.15* Amended and restated, 1992 Stock Incentive Compensation Plan, dated May 14, 1992, amended
through May 14, 1997 (filed as Exhibit 4.3 to the Registrant's Registration Statement on Form
S-8 dated April 17,1998, Reg. No. [33-93768], and incorporated herein by this reference).
10.16* Employment Agreement with James P. Carolan dated February 1, 1999, filed herewith.
10.17* Employment Agreement with Christopher R. Skomorowski dated February 1, 1999, filed herewith.
10.18 Asset Purchase Agreement between Lydall New York, Inc. and Textile Technologies Industries,
Inc. (filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K dated March 27,
1997, and incorporated herein by this reference).
10.19 Asset Purchase Agreement between CharterMed, Inc. and Charter Medical, Ltd. (filed as Exhibit
10.20 to the Registrant's Annual Report on Form 10-K dated March 16, 1998, and incorporated
herein by this reference).
10.20 Asset Purchase Agreement between Lydall Central, Inc. and Engineered Thermal Systems, Inc.
(filed as Exhibit 10.1 to the Registrant's Quarterly report on Form 10-Q dated May 7, 1998,
and incorporated herein by this reference).
10.21 Purchase and Sale Agreement (English Translation) signed as of December 30, 1998 by and
between HOHENSTAUFEN EINHUNDERTSTE Vermogensverwaltungs GmbH, a wholly owned subsidiary of
Lydall, Inc. and Gerhardi & Cie. GmbH & Co. KG related to the purchase of all the outstanding
shares of Gerhardi & Cie. GmbH & Co. KG (filed as Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed January 14, 1999).
21.1 List of subsidiaries of the Registrant, filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP, filed herewith.
24.1 Power of Attorney, dated March 10, 1999, authorizing Christopher R. Skomorowski 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:
99.1 The Company filed a Current Report on Form 8-K dated December 3, 1998 reporting the Board of
Directors' election of Christopher R. Skomorowski to succeed Leonard R. Jaskol as President
and Chief Executive Officer.
99.2 The Company filed a Current Report on Form 8-K dated January 14, 1999 reporting the
acquisition of Gerhardi & Cie. GmbH and Co. KG by a wholly owned subsidiary of Lydall, Inc.;
the appointment of Roger M. Widmann as Chairman of the Board of Directors; and the Company's
recording of non-recurring expenses and write-offs in the fourth quarter ended December 31,
1998, totaling approximately $9 million.
</TABLE>
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Lydall, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C> <C>
LYDALL, INC.
Date March 18, 1999 By /s/ CHRISTOPHER R. SKOMOROWSKI
------------------------------ ------------------------------------------
March 18, 1999 Christopher R. Skomorowski
President and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Lydall, Inc. in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ------------------------------ ----------------------
<S> <C> <C>
CHRISTOPHER R. SKOMOROWSKI President, Chief Executive March 18, 1999
- ------------------------------ Officer and Director --------------
Christopher R. Skomorowski March 18, 1999
Vice President-Finance and
JOHN E. HANLEY Treasurer (Principal March 18, 1999
- ------------------------------ Financial and Accounting --------------
John E. Hanley Officer) March 18, 1999
JOHN E. HANLEY
- ------------------------------ March 18, 1999
John E. Hanley --------------
Attorney-in-fact for: March 18, 1999
</TABLE>
<TABLE>
<S> <C> <C>
Christopher R. Skomorowski Director
Lee A. Asseo Director
Samuel P. Cooley Director
W. Leslie Duffy Director
David Freeman Director (constituting in excess of a majority of the full
Board of Directors)
Joel Schiavone Director
Elliott F. Whitely Director
Roger M. Widmann Director
Albert E. Wolf Director
John J. Worthington Director
</TABLE>
27
<PAGE>
MANAGEMENT'S REPORT
While Lydall's financial statements and the related
financial data contained in this Annual Report have been
prepared in conformity with generally accepted accounting
principles and such financial statements have been audited
by PricewaterhouseCoopers LLP, the ultimate accuracy and
validity of this information is the responsibility of the
Company's management. To carry out this responsibility,
Lydall maintains comprehensive financial policies,
procedures, accounting systems and internal controls which
management believes provide reasonable assurance that
accurate financial records are maintained and corporate
assets are safeguarded.
The Audit Committee of the Board of Directors, consisting
of three outside directors, meets regularly with Company
management and the internal auditor to review corporate
financial policies and internal controls. The Audit
Committee also meets with the independent auditors to
review the scope of the annual audit and any comments they
may have regarding the Company's internal accounting
controls.
In management's opinion, Lydall's system of internal
accounting control is adequate to ensure that the
financial information in this report presents fairly the
Company's results of operations and financial condition.
[LOGO]
John E. Hanley
Vice President-Finance
and Treasurer
F-1
<PAGE>
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Board of Directors and
Stockholders of Lydall, Inc.:
In our opinion, the consolidated financial statements
listed in the index appearing under Item 14(a)(1) on page
24 present fairly, in all material respects, the financial
position of Lydall Inc. and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 24 presents
fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our
audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion
expressed above.
[LOGO]
Hartford, Connecticut
March 10, 1999
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
In thousands except per-share data For the years ended December
31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 230,007 $ 244,289 $ 252,652
Cost of sales 165,190 166,648 170,597
......................................................................................................
Gross margin 64,817 77,641 82,055
Selling, product development, and administrative expenses 50,071 44,888 42,778
Impairment loss 8,467 -- --
......................................................................................................
Operating income 6,279 32,753 39,277
Other (income) expense:
Investment (income) loss 284 (1,986) (1,389)
Interest expense 825 368 518
Other (214) (82) 294
......................................................................................................
895 (1,700) (577)
......................................................................................................
Income before income taxes 5,384 34,453 39,854
Income tax expense 1,182 12,542 15,118
......................................................................................................
NET INCOME $ 4,202 $ 21,911 $ 24,736
......................................................................................................
BASIC EARNINGS PER COMMON SHARE $ .27 $ 1.31 $ 1.44
Weighted average common stock outstanding 15,847 16,692 17,140
......................................................................................................
DILUTED EARNINGS PER COMMON SHARE $ .26 $ 1.27 $ 1.38
Weighted average common stock and equivalents outstanding 16,163 17,319 17,988
......................................................................................................
NET INCOME $ 4,202 $ 21,911 $ 24,736
......................................................................................................
Other comprehensive income (loss):
Foreign currency translation adjustments, net of $(180), $772,
and $406 in tax effect, respectively 637 (1,349) (666)
Unrealized gain (loss) on securities:
Unrealized holding gains (losses) arising during period, net of
$103, $(317), and $(70) in tax effect, respectively (366) 553 116
Less: reclassification adjustment for gains (losses) included in
net income (344) 608 34
......................................................................................................
Net unrealized gain (loss) on securities, net of $6, $31, and
$(50) in tax effect, respectively (22) (55) 82
Minimum pension liability adjustment, net of $281, $121, and
$(224) in tax effect, respectively (522) (224) 416
......................................................................................................
Other comprehensive income (loss), net of tax 93 (1,628) (168)
......................................................................................................
COMPREHENSIVE INCOME $ 4,295 $ 20,283 $ 24,568
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
In thousands except share data December 31, 1998 1997
<CAPTION>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,254 $ 8,891
Short-term investments -- 3,873
Accounts receivable (less allowance for doubtful receivables of
$1,504 in 1998 and $1,381 in 1997) 48,609 32,203
Inventories:
Finished goods 10,303 6,243
Work in process 8,859 2,867
Raw materials and supplies 11,003 7,600
LIFO reserve (1,216) (1,172)
......................................................................................................
Total inventories 28,949 15,538
Taxes receivable 2,256 2,032
Prepaid expenses 1,966 1,314
Deferred tax assets 6,785 3,586
......................................................................................................
Total current assets 90,819 67,437
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land 2,729 983
Buildings and improvements 30,764 21,178
Machinery and equipment 111,157 81,496
Office equipment 16,865 10,447
Vehicles 1,310 1,178
Assets in progress 9,660 10,340
......................................................................................................
172,485 125,622
Less accumulated depreciation (64,649) (56,762)
......................................................................................................
107,836 68,860
OTHER NONCURRENT ASSETS:
Goodwill, at cost (net of accumulated amortization of $4,463 and an impairment
loss of $6,519 in 1998 and accumulated amortization of $2,807 in 1997) 23,380 19,155
Other assets, at cost (net of accumulated amortization of $7,922 in 1998 and
$7,526 in 1997) 4,813 4,672
......................................................................................................
28,193 23,827
......................................................................................................
TOTAL ASSETS $ 226,848 $ 160,124
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
In thousands except share data December 31, 1998 1997
<CAPTION>
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,340 $ 2,950
Short-term borrowings 52,324 --
Accounts payable 22,530 13,342
Accrued taxes 1,411 1,030
Accrued payroll and other compensation 5,810 4,856
Other accrued liabilities 15,494 6,056
......................................................................................................
Total current liabilities 99,909 28,234
......................................................................................................
Long-term debt -- 2,100
Deferred tax liabilities 10,726 12,979
Other long-term liabilities 6,988 3,781
Contingencies
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock, par value $.10 per share, authorized 30,000,000 shares, issued
21,714,301 shares in 1998 and 21,432,346 shares in 1997. 2,171 2,143
Capital in excess of par value 38,697 36,510
Retained earnings 129,310 125,108
Accumulated other comprehensive income (71) (164)
......................................................................................................
170,107 163,597
Less cost of 6,020,441 shares of common stock in treasury in 1998 and 5,366,873
shares in 1997 (60,882) (50,567)
......................................................................................................
Total stockholders' equity 109,225 113,030
......................................................................................................
Total liabilities and stockholders' equity $ 226,848 $ 160,124
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulated
Capital in Other Cost of Total
Preferred Common Excess of Retained Comprehensive Stock in Stockholders'
In thousands Stock Stock Par Value Earnings Income (Loss) Treasury Equity
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ -- $ 2,089 $ 32,448 $ 78,461 $ 1,632 $ (12,819) $ 101,811
Stock options exercised 23 1,787 1,810
Purchase of treasury shares (10,345) (10,345)
Net income 24,736 24,736
Other comprehensive income (168) (168)
.............................................................................................................................
BALANCE AT DECEMBER 31, 1996 -- 2,112 34,235 103,197 1,464 (23,164) 117,844
Stock options exercised 31 2,275 2,306
Purchase of treasury shares (27,403) (27,403)
Net income 21,911 21,911
Other comprehensive income (1,628) (1,628)
.............................................................................................................................
BALANCE AT DECEMBER 31, 1997 -- 2,143 36,510 125,108 (164) (50,567) 113,030
Stock options exercised 28 2,187 2,215
Purchase of treasury shares (10,315) (10,315)
Net income 4,202 4,202
Other comprehensive income 93 93
.............................................................................................................................
BALANCE AT DECEMBER 31, 1998 $ -- $ 2,171 $ 38,697 $ 129,310 $ (71) $ (60,882) $ 109,225
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
In thousands For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,202 $ 21,911 $ 24,736
......................................................................................................
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 8,844 7,993 7,824
Amortization 2,052 1,569 1,357
Impairment loss 8,467 -- --
Loss on disposition of property, plant and equipment 403 685 894
Changes in operating assets and liabilities,
excluding effects from acquisitions:
Accounts receivable 2,045 1,281 2,128
Taxes receivable (224) (2,032) --
Inventories 333 (1,140) 860
Prepaid and other assets 5 (1,708) (579)
Accounts payable (895) (2,049) (196)
Accrued taxes 343 (249) 1,087
Accrued payroll and other accrued liabilities (2,294) (2,452) 263
Deferred income taxes (5,600) 818 (620)
Other long-term liabilities 2,651 (158) --
......................................................................................................
Total adjustments 16,130 2,558 13,018
......................................................................................................
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,332 24,469 37,754
......................................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (46,447) (78) (2,030)
Additions of property, plant and equipment (17,657) (17,104) (10,893)
Proceeds from the sale of property, plant and equipment 276 -- --
Sale (purchase) of investments, net 3,851 1,013 (2,940)
......................................................................................................
NET CASH USED FOR INVESTING ACTIVITIES (59,977) (16,169) (15,863)
......................................................................................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (3,484) (4,450) (2,863)
Proceeds from short-term borrowings 110,820 -- --
Payments of short-term borrowings (66,245) -- --
Notes payable -- (8,000) --
Issuance of common stock 2,215 2,306 1,810
Acquisition of common stock (10,315) (27,403) (10,345)
......................................................................................................
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 32,991 (37,547) (11,398)
......................................................................................................
EFFECT OF EXCHANGE RATE CHANGES ON CASH 17 (88) (87)
......................................................................................................
Increase (decrease) in cash and cash equivalents (6,637) (29,335) 10,406
Cash and cash equivalents at beginning of year 8,891 38,226 27,820
......................................................................................................
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,254 $ 8,891 $ 38,226
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
- --------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest $ 734 $ 687 $ 897
Income taxes 6,231 14,678 13,985
Noncash transactions:
Amounts payable for acquired operations 240 16 10,527
Additional minimum pension liability 999 591 930
Unrealized gains (losses) on available-for-sale securities (22) (55) 82
Liabilities assumed with acquisitions 26,496 -- --
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Lydall, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on hand and
highly liquid investments with a maturity of three months or less at the date of
purchase. The investments are stated at cost, plus accrued interest which
approximates market value.
SHORT-TERM INVESTMENTS. Lydall invests in highly liquid investments with
maturities greater than three months at the time the investments are made. The
investments are recorded at the lower of cost or market, plus accrued interest.
Lydall had no short-term investments at December 31, 1998.
CONCENTRATION OF RISK. Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments, and trade receivables. The Company places
its cash, cash equivalents and short-term investments in high-quality financial
institutions and instruments. Concentrations of credit risk with respect to
trade receivables are limited by the large number of customers comprising the
Company's customer base and their dispersion across many different industries
and geographies. The Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral. Sales
to the automotive market were 25.4 percent of the Company's 1998 total sales
compared with 26.3 percent in 1997 and 32.3 percent in 1996. Sales to the Ford
Motor Co. represented 15.2 percent, 19.3 percent, and 16.6 percent of Lydall's
total sales in 1998, 1997, and 1996, respectively. No other single customer
accounted for more than 10 percent of total sales in 1998, 1997, or 1996. As of
December 31, 1998, the Company had no other significant concentrations of risk.
INVENTORIES. Approximately 33 percent in 1998 and 54 percent in 1997 of the
inventories have been valued on a last-in, first-out (LIFO) method and the
balance on a first-in, first-out (FIFO) method at the lower of cost or market.
DEPRECIATION AND AMORTIZATION. Property, plant, and equipment are depreciated
over their estimated useful lives on the straight-line method for financial
statement purposes. Leasehold improvements are depreciated on a straight-line
basis over the term of the lease or the life of the asset, whichever is shorter.
Useful lives by category are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Category Useful Life
- ------------------------------------------------------------------------------------------------
<S> <C>
Buildings and improvements 10-35 years
Machinery and equipment 5-25 years
Office equipment 2-8 years
Vehicles 3-6 years
- ------------------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
Software capitalized in conjunction with Lydall 2000 is included in Office
Equipment and is depreciated over an estimated useful life of 8 years.
INTANGIBLES. Goodwill and other intangibles are being amortized on a
straight-line basis over periods not exceeding 25 years.
VALUATION OF LONG-LIVED ASSETS. The Company periodically evaluates the
recoverability of long-lived assets, including goodwill and other intangible
assets, by analyzing the associated estimated undiscounted cash flows. At the
time such evaluations indicate that the future undiscounted cash flows are not
sufficient to recover the carrying value of the asset, the asset is adjusted to
fair value. Fair value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Based on these
evaluations, certain machinery and goodwill were adjusted down to fair value in
1998. There were no such adjustments to carrying values in 1997.
RESEARCH AND DEVELOPMENT. Costs are charged to expense as incurred.
REVENUE RECOGNITION. Lydall recognizes revenues when the product is shipped.
EARNINGS PER SHARE. Basic earnings per common share are based on net income
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share are based on net income divided by the
weighted average number of common shares outstanding during the period,
including the effect of stock options, stock awards and warrants where such
effect is dilutive.
INCOME TAXES. The provision for income taxes is based upon income reported in
the accompanying financial statements. Deferred income taxes reflect the impact
of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax
purposes. In accordance with SFAS 109, these deferred taxes are measured by
applying currently enacted tax laws.
FOREIGN OPERATIONS. The Company operates a manufacturing plant in
Saint-Rivalain, France. Foreign sales were $10.8 million, $11.2 million, and
$15.3 million, for the years ended December 31, 1998, 1997, and 1996,
respectively. The French operation incurred losses of $979 thousand (including
the recognition of an impairment loss of $941 thousand), $348 thousand and $796
thousand for the years ended December 31, 1998, 1997, and 1996, respectively.
Total foreign assets were $73.4 million and $16.4 million at December 31, 1998
and 1997, respectively. Assets in 1998 include those acquired with the purchase
of Gerhardi. Gerhardi did not contribute to operations in 1998.
TRANSLATION OF FOREIGN CURRENCIES. Assets and liabilities of foreign
subsidiaries are translated at exchange rates prevailing on the balance sheet
date; revenues and expenses are translated at average exchange rates prevailing
during the period except for individually significant transactions which are
translated at the prevailing rate on the date of the transaction; and elements
of stockholders' equity are translated at historical rates. Any resulting gains
or losses are reported in Other Comprehensive Income.
RESTATEMENT OF PRIOR YEAR'S FINANCIAL STATEMENTS. Certain components of the
financial statements have been restated to reflect the adoption of new
accounting standards.
RECENTLY ISSUED ACCOUNTING STANDARDS. The Company adopted Statement of Financial
Accounting Standards No. 130, No. 131, and No. 132, "Reporting Comprehensive
Income," ("SFAS 130"), "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131"), and "Employers' Disclosures about Pensions and Other
F-9
<PAGE>
Postretirement Benefits," ("SFAS 132"), all of which are effective for fiscal
years beginning after December 15, 1997.
In June of 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. This statement is effective for fiscal years beginning after June 15,
1999. As of December 31, 1998, the Company does not have any material derivative
instruments. Lydall does not anticipate there will be a material effect on the
Company's consolidated financial position, results of operations, comprehensive
income, or cash flows as a result of implementing this pronouncement.
INVESTMENTS
The Company's investments are categorized as available-for-sale debt and equity
securities, as defined by the Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company held no available-for-sale debt or equity securities at December 31,
1998. The carrying value of these securities was $13.5 million in 1997, which
approximated fair market value. In 1997, $9.6 million was classified in cash
equivalents and $3.9 million, in short-term investments.
The amortized costs of investments in debt securities by contractual maturity
are shown below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
In thousands December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ -- $ 6,400
Due after one year through five years -- --
Due after five years through ten years -- --
Due after ten years -- 220
..........................................................................................................
$ -- $ 6,620
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The net unrealized gains and losses at December 31, 1997 are included as a
component of Accumulated Other Comprehensive Income. There were no unrealized
gains or losses as of December 31, 1998. Gross unrealized gains were $318
thousand, and gross unrealized losses were $296 thousand as of December 31,
1997. Gains were realized on sales of securities of $1.1 million in both 1998
and 1997, and losses were realized of $1.5 million and $136 thousand during 1998
and 1997, respectively. The gross realized gains and losses were immaterial to
the consolidated financial statements during 1996. For the purpose of computing
realized gains and losses, cost is determined on a specific identification
basis.
F-10
<PAGE>
LONG-TERM DEBT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
In thousands December 31, 1998 1997
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
7.25% Note Purchase Agreement, balance due in full in 1999 $ 2,100 $4,300
5.48% Indemnification Note -- 750
5.37% Note Payable, balance due in full in 1999 240 --
..........................................................................................................
2,340 5,050
Less portion due within one year (2,340) (2,950)
..........................................................................................................
$ -- $2,100
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The Note Purchase Agreement is restricted by a debt covenant, among others, that
requires a debt-to-capital ratio of no more than .45 in order to borrow under
long-term debt agreements in the future. While by commonly used methods Lydall's
current debt-to-capital ratio is .33, it is .43 as defined by the terms of this
agreement as of December 31, 1998. The Company obtained a waiver for default of
certain covenants in the Note Purchase Agreement. The waiver is effective
through the date of final payment.
CREDIT ARRANGEMENTS
Lydall maintains domestic and foreign credit arrangements totaling over $77.7
million, the majority of which are renewed annually. The facilities have
interest rate options determinable by the Company based upon prime, money
market, or LIBOR rates, plus an applicable margin. During 1998, interest rates
on lines of credit averaged 6.0 percent. The Company compensates its banks on a
fee-for-service basis for services provided. These credit arrangements contain
cross-default provisions that could accelerate payment requirements. At December
31, 1998, $52.3 million was outstanding on domestic and foreign lines of credit.
Of this amount, $9.2 million was related to the acquisition of the St. Johnsbury
Operation on April 18, 1998, and $31.6 million related to the acquisition of
Gerhardi & Cie. GmbH & Co. KG on December 30, 1998.
At December 31, 1997, no amounts were outstanding on domestic and foreign lines
of credit.
FINANCIAL INSTRUMENTS
The Company utilizes letters of credit in the ordinary course of business and to
satisfy self-insurance security deposit requirements. Outstanding letters of
credit were $2.4 million and $1.8 million as of December 31, 1998 and 1997,
respectively. The Company does not expect any material losses to result from
these off-balance-sheet instruments as performance is not expected to be
required.
LONG-TERM OPERATING LEASES
Lydall has operating leases which resulted in an expense of $2.6 million in
1998, $1.9 million in 1997, and $1.7 million in 1996. These contracts range from
vehicle leases to building leases which require payment of property taxes,
insurance, repairs and other operating costs.
F-11
<PAGE>
Future net lease commitments under noncancelable operating leases are:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 2000 2001 2002 2003 THEREAFTER TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Net lease payments $ 2,204 $ 1,788 $ 1,439 $ 739 $ 656 $ 817 $ 7,643
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
ACQUISITIONS AND OTHER INVESTMENTS
On December 30, 1998, a subsidiary of the Company acquired for cash all of the
outstanding shares of Gerhardi & Cie GmbH & Co. KG ("Gerhardi"), a privately
held German manufacturer of automotive components. Under the terms of the
agreement and in consideration for Gerhardi's outstanding shares, the Company's
subsidiary paid to Gerhardi a negotiated purchase price of $30.7 million and
assumed Gerhardi's existing liabilities, net of cash, of approximately $26.5
million. The purchase price is subject to a post-closing net equity adjustment
as defined in the agreement and has been allocated on a preliminary basis.
Lydall, Inc. funded the subsidiary's acquisition through interim borrowing on
existing lines of credit. It is the Company's intention to evaluate and obtain
permanent financing. This acquisition was accounted for under the purchase
method of accounting. The fair value of assets acquired exceeded the cost of the
acquisition, and as a result, the Company reduced the appraised value of long-
term assets by $9.1 million. The operating results of Gerhardi will be included
in the Company's consolidated financial statements from the date of acquisition.
On April 18, 1998, a subsidiary of Lydall acquired Engineered Thermal Systems,
Inc. ("ETSI"), a producer of automotive thermal and acoustical components for
$9.2 million, accounted for under the purchase method. ETSI, which operates as
the St. Johnsbury Operation of Lydall Westex, complements the Company's
extensive automotive thermal-barrier business. The results of the St. Johnsbury
Operation have been included in the Company's consolidated results since the
date of acquisition. The Company recorded $6.7 million in goodwill and other
intangible assets related to this acquisition which are being amortized on a
straight-line basis over 17 years.
Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical,
Ltd. On February 6, 1998, this separate corporate entity acquired CharterMed,
Inc., a privately held company located in Lakewood, New Jersey, for $6.6 million
in cash and a note for $720 thousand, payable through 1999, accounted for under
the purchase method. CharterMed, Inc., a growing and profitable manufacturer of
proprietary medical devices, served applications such as biotech and
pharmaceutical packaging, blood bank and transfusion services and neonatal
intensive care. The results of CharterMed, Inc., now the Charter Medical, New
Jersey Operation, since the date of acquisition have been included in the
Company's consolidated results. The Company recorded $5.8 million in goodwill
and other intangible assets related to this acquisition which are being
amortized on a straight-line basis over 20 years.
The following table summarizes the unaudited consolidated pro forma information
of Lydall, Inc., assuming the acquisitions had occurred on January 1, 1997.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
In thousands except per-share data 1998 1997
(UNAUDITED) (unaudited)
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Sales $ 313,675 $ 326,976
Net income $ 4,716 22,503
Basic earnings per common share $ .30 $ 1.35
Diluted earnings per common share $ .29 $ 1.30
- --------------------------------------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional depreciation expense as
a result of fixed asset basis adjustments, additional amortization expense of
goodwill and other intangibles, and increased interest expense on acquisition
debt. They do not necessarily represent results which would have occurred if the
acquisitions had taken place on January 1, 1997, nor are they indicative of the
results of future combined operations.
On December 20, 1996, a subsidiary of the Company acquired certain assets and
assumed certain liabilities of Textile Technologies Industries, Inc. ("Fort
Washington Operation"). The Fort Washington Operation is a manufacturer of
components utilized in highly specialized, advanced structural materials which
are sold to the aerospace, marine, medical device, automotive and sporting goods
industries. The subsidiary paid $2.0 million in cash at closing and issued a
$8.0 million note, which was paid on January 2, 1997, and a $1.75 million note,
which was paid in 1998. As a result of this purchase the Company recorded
goodwill and other intangible assets of $10.4 million. The results of the Fort
Washington Operation since the date of acquisition have been included in the
Company's consolidated results. The pro forma effect on the Company's results of
operations for the year ended December 31, 1996, had the acquisition occurred at
the beginning of the period, was not material.
CAPITAL STOCK
PREFERRED STOCK--The Company has a class of Serial Preferred Stock with a par
value of $1. None of the 500,000 authorized shares has been issued.
COMMON STOCK--At the end of 1998, 1,603 Lydall stockholders of record held
15,693,860 shares of Common Stock. Approximately 7 percent of the Company's
Common Stock was owned by Lydall's officers and directors and their immediate
families. Other Lydall employees, their families, and Lydall associates owned an
additional 12 percent either directly or through participation in the Company's
Employee Stock Ownership Trust.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED 1998 For the Year Ended 1997 For the Year Ended 1996
------------------------- -------------------------- --------------------------
NET PER-SHARE Net Per-Share Net Per-Share
INCOME SHARES AMOUNT Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------- -------------------------- --------------------------
Basic earnings per
share $4,202 15,847 $ .27 $21,911 16,692 $1.31 $24,736 17,140 $1.44
Effect of dilutive
securities
stock options 316 (.01) 627 (.04) 848 (.06)
.........................................................................................................
Diluted earnings per
share $4,202 16,163 $ .26 $21,911 17,319 $1.27 $24,736 17,988 $1.38
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 593,700, 297,946, and 317,446 shares of Lydall Common Stock
were not included in the computation of diluted earnings per share because the
average exercise price was greater than the average market price of the common
shares at the end of each respective year.
STOCK OPTION PLANS
At December 31, 1998, the Company had two stock option plans under which
employees and directors had options to purchase Lydall Common Stock. Under these
plans--the 1982 Stock Incentive Compensation Plan and the 1992 Stock Incentive
Compensation Plan--options are granted at fair market value on the grant date
and expire ten years after the grant date. In most cases, options vest at a rate
of 25 percent per year starting with the first anniversary of
F-13
<PAGE>
the award. A few incentive stock option (ISO) awards have an extended vesting
period because IRS regulations, with regard to ISO awards, cap the total dollar
amount that can vest in one year for an individual at $100,000. The 1982 Plan
has expired; therefore, no further options can be granted under this Plan. The
1992 Plan provides for automatic acceleration of vesting in the event of a
change in control of the Company. The Plan also provides for the use of shares
of Lydall Common Stock in lieu of cash to exercise options if the shares are
held for more than six months and if the Compensation and Stock Option Committee
of the Board of Directors approves this form of exercise.
At December 31, 1996, the Company had three stock option plans under which
employees and directors had options or warrants to purchase Lydall Common Stock.
The 1984 Outside Directors' Warrant Plan was terminated in 1992. At the end of
1996, there were warrants for 30,330 shares outstanding under the Plan. All of
these warrants were exercised during 1997.
The Company applies APB Opinion 25 and its related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's three stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
In thousands except per-share data
For the years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $ 4,202 $ 21,911 $ 24,736
Pro forma 3,228 21,170 24,363
Basic earnings per share As reported $ .27 $ 1.31 $ 1.44
Pro forma .20 1.27 1.42
Diluted earnings per share As reported $ .26 $ 1.27 $ 1.38
Pro forma .20 1.22 1.35
- ------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
The fair value of each option grant is estimated for the above disclosure on the
date of grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively: zero dividend yield for all years; expected volatility of 40
percent, 27 percent and 31 percent; risk-free interest rates of 4.7 percent, 5.8
percent and 6.1 percent; and an expected six-year life for all years.
A summary of the status of the Company's stock option plans as of December 31,
1998, 1997, and 1996, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
In thousands except per share data 1998 1997 1996
- ---------------------------------------- --------------------------- --------------------------- ---------
WEIGHTED-AVERAGE Weighted-Average
FIXED OPTIONS SHARES EXERCISE PRICE Shares Exercise Price Shares
- ---------------------------------------- --------------------------- --------------------------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,592 $13.14 1,772 $11.51 1,822
Granted 21 15.86 156 19.80 191
Exercised (274) 5.35 (303) 6.20 (229)
Forfeited (76) 21.28 (33) 20.80 (12)
.............................................................................................................
Outstanding at end of year 1,263 $14.38 1,592 $13.14 1,772
.............................................................................................................
Options exercisable at year-end 1,037 1,156 1,176
Shares reserved for grants 356 301 424
Weighted-average fair value per option
granted during the year $ 7.37 $ 7.85 $ 10.07
- -------------------------------------------------------------------------------------------------------------
</TABLE>
In 1996, the option price of outstanding shares ranged from $1.85 to $26.00 per
share. Option exercises in 1996 ranged from $1.76 to $16.75.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------ --------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
<S> <C> <C> <C> <C> <C>
- ------------------ ------------------------------------------------------------ --------------------------------
$ 4.21 to $ 5.85 1.3
157,243 years $ 4.55 157,243 $ 4.55
8.21 to 11.75 486,336 3.9 9.66 484,061 9.65
13.13 to 19.81 360,557 6.9 17.80 235,617 17.02
22.63 to 26.00 258,762 7.1 24.45 159,706 24.71
..................................................................................................................
$ 4.21 to $26.00 1,262,898 5.1 $14.38 1,036,627 $12.87
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
EMPLOYER-SPONSORED BENEFIT PLANS
The Company contributes to four defined benefit pension plans which cover
substantially all domestic Lydall employees. The pension plans are
noncontributory, and benefits are based on either years of service or eligible
compensation while a participant is in a plan. The Company's funding policy is
to fund not less than the ERISA minimum funding standard nor more than the
maximum amount which can be deducted for federal income tax purposes.
The following items are the components of net periodic benefit cost for pension
benefits:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
In thousands For the years ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,184 $ 1,065 $ 1,048
Interest cost 1,530 1,392 1,262
Expected return on assets (1,623) (1,434) (1,287)
Amortization of:
Transition asset (103) (103) (103)
Prior service cost 12 9 8
Actuarial loss 81 77 130
Special termination benefit and curtailment charges 85 -- --
.............................................................................................................
Total net periodic benefit cost $ 1,166 $ 1,006 $ 1,058
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $25.8 million, $21.4 million, and $19.5 million,
respectively, as of December 31, 1998, and $3.5 million, $3.5 million, and $3.3
million, respectively, as of December 31, 1997.
F-16
<PAGE>
Plan assets include investments in bonds and equity securities. The Company
determines the assumed discount rate, long-term rate, and annual compensation
increase rate for each year. The following presents the assumptions and a
summary of the funded status for all plans:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
December 31, 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average assumptions:
Discount rate 6.50% 7.25%
Expected return on plan assets 9.25% 9.25%
Rate of compensation increase 5.00% 5.00%
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
In thousands December 31, 1998 1997
- ------------------------------------------------------------------------------------------
Change in benefit obligation
Net benefit obligation at beginning of year $ 20,250 $ 17,428
Service cost 1,184 1,065
Interest cost 1,530 1,392
Plan amendments 198 35
Actuarial (gain) loss 3,299 1,131
Curtailments (62) --
Special termination benefits 79 --
Gross benefits paid (651) (801)
..........................................................................................
Net benefit obligation at end of year $ 25,827 $ 20,250
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
In thousands December 31, 1998 1997
- ------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 16,929 $ 15,601
Actual return on plan assets 1,836 1,562
Employer contributions 1,342 567
Gross benefits paid (651) (801)
..........................................................................................
Fair value of plan assets at end of year $ 19,456 $ 16,929
..........................................................................................
Funded status at end of year $ (6,371) $ (3,321)
Unrecognized net actuarial (gain) loss 6,130 3,186
Unrecognized prior service cost 373 194
Unrecognized net transition asset (425) (528)
..........................................................................................
Net amount recognized $ (293) $ (469)
- ------------------------------------------------------------------------------------------
Amounts recognized in the statement of financial position consist
of:
Prepaid benefit cost $ 573 $ 709
Accrued benefit liability (866) (1,178)
Additional minimum liability (1,698) (699)
Intangible assets 492 295
Accumulated other comprehensive income 1,206 404
..........................................................................................
Net amount recognized $ (293) $ (469)
- ------------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE>
The Company also sponsors a Stock Purchase Plan, Profit Sharing Plan, and 401(k)
Plan. Contributions are determined under various formulas. Employer
contributions to these plans amounted to $1.9 million in 1998, $2.1 million in
1997, and $1.9 million in 1996.
POSTEMPLOYMENT, POSTRETIREMENT AND DEFERRED COMPENSATION
While it is not Lydall's practice to provide health care or life insurance for
retired employees, it does so for some retired employees of certain units
acquired before 1990. These benefits are unfunded. The plan participants are
primarily retirees; therefore, the postretirement benefit transition obligation
of $691 thousand is being amortized over the actuarially determined average
remaining future lifetime of the plan participants.
The discount rates used in determining the accumulated postretirement benefit
obligations were 7.5 percent at December 31, 1998 and 1997. The health-care cost
trend rate was 8 percent, gradually declining to 5.5 percent over a four-year
period both in 1998 and 1997. An increase of 1 percent in the health-care cost
trend rates would cause the accumulated benefit obligation to increase by $11
thousand. The increase in the service and interest components of the 1998
postretirement benefit cost is immaterial. The total expense was $80 thousand
for 1998, $83 thousand for 1997, and $110 thousand for 1996.
The Company provides deferred compensation to a small number of former
employees, and has a deferred compensation plan, which was frozen as of December
31, 1996, that provides the Company's outside Directors and the former chairman
with compensation upon their retirement from service with the Board. In
addition, the Company provides a Supplemental Executive Retirement Plan ("SERP")
which provides supplemental income payments after retirement for senior
executives. The total net deferred compensation expense related to these three
plans was $564 thousand in 1998 (including a one-time additional expense of $337
thousand related to the severance of the former chairman and chief executive
officer), $234 thousand in 1997, and $246 thousand in 1996.
IMPAIRMENT LOSS
In 1998, the Company recognized $8.5 million in pretax impairment losses on
certain identified assets. The largest portion of the loss, $6.5 million,
represents impaired goodwill of the Fort Washington Operation. Despite the
Company's efforts to integrate and grow Fort Washington, several internal and
external factors have, and are expected to continue to, impact results of
operations. As a result, projected future cash flows from the Operation were
determined to be less than the carrying value of the Operation's long-lived
assets, including goodwill. The revised carrying value of the goodwill was
calculated using discounted estimated future cash flows. Management also
determined that the useful life on the goodwill should be reduced from 20 to 15
years. The residual goodwill, $2.7 million, will be amortized over the remaining
13 years on a straight-line basis. Goodwill of the Fort Washington Operation
will continue to be monitored for impairment in accordance with the Company's
policy.
The remaining impairment losses include $1.5 million recognized on fiber
processing equipment at the Axohm operation and $500 thousand on equipment at
the Manning, Green Island Operation. The equipment at Axohm was written down to
its current market value, less costs of disposal, after management determined it
was no longer needed due to product development changes and alternative capacity
which can fulfill all production requirements for the foreseeable future. The
equipment at Manning was used to convert purchased raw materials into fiber
usable in Manning's production process. Manning secured a second reliable source
of the raw material produced
F-18
<PAGE>
by the equipment in the fourth quarter of 1998. As a result, management
determined there was no longer a use for the equipment. After disposal costs,
the equipment was considered to have no residual value.
No impairment losses were recorded in prior years.
SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
("SFAS 131"). In accordance with SFAS 131, Lydall's reportable segments are:
Heat-Management Products, Filtration Products, Paperboard Products and Woven
Products. All other operating units are aggregated in Other Products and
Services.
Lydall evaluates performance and allocates resources based on sales and
operating income from each segment net of a corporate charge which is a
percentage of average working capital employed. Sales by segment reported below
include intersegment transactions. Operating income is calculated using specific
cost identification for most items, with some allocation of overhead, based on
sales volume.
HEAT-MANAGEMENT PRODUCTS
Lydall's thermal barriers, heat shields, and insulating products include a range
of fiber-based materials, fiber- and-metal combinations and all-metal shields
that protect and insulate within temperature requirements as low as -459 DEG. F
(-273 DEG. C) up to +3000 DEG. F (+1649 DEG. C). Lydall's fiber-based materials
range in format from specialty papers to textile-like materials to dense, board
products.
At the highest temperature requirements, Lytherm-Registered Trademark- specialty
papers are used as linings for ovens, kilns, and furnaces and in glass and metal
manufacturing. In mid-range temperatures, Manninglas-Registered Trademark-
specialty papers are employed in consumer appliances as well as heat,
ventilation, and air conditioning ductwork.
Also, at mid-range temperatures, Lydall's heat-management products are organic
or inorganic fiber composites, fiber-and-metal combinations, or all-metal
components which are used as thermal barriers and heat shields in medium- and
light-duty trucks, vans, sport-utility vehicles, and cars. The Company holds
patents on many of its automotive products which are employed both inside and
outside vehicles to insulate passenger compartments, exhaust systems, luggage
compartments, electrical wiring harnesses, heat and air conditioning ducts,
batteries, electronic components, and engine compartments. An acquisition made
in April 1998 contributed to the growth of automotive related heat-management
sales during the year. A second acquisition made on December 30, 1998 is
expected to be a major contributor to the international growth of this segment
in 1999.
Lydall also manufactures custom-designed specialty papers employed in automotive
airbag pyrotechnic inflators. These materials perform both a filtration and
heat-reduction function and are included under Heat-Management Products.
At the very coldest temperatures (approaching absolute zero),
Cryotherm-Registered Trademark- cryogenic materials, composed of 100-percent
inorganic fibers, are used for super-insulating applications. These include
tanker trucks that transport liquid gases, stationary and portable cryogenic
storage vessels, gas tanks for vehicles fueled by liquid natural gas, and
supercolliders.
F-19
<PAGE>
FILTRATION PRODUCTS
The Company manufactures Lydair-Registered Trademark- high-efficiency, glass
microfiber air filtration media for rigid frame applications. Lydall
manufactures six filtration classes of Lydair-Registered Trademark- media 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.
Lydair-Registered Trademark- filtration media are used in air filters, which are
capital goods rather than consumables and which last approximately five years. A
replacement market exists related to the upgrading of clean-room efficiency to
meet the needs of more sophisticated process and product technology. Lydall also
supplies media for pre-filters and intermediary filters in air-handling systems
that are replaced more frequently. The Company's HEPA filtration media are also
used in home air purification units.
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 sold under the
Lypore-Registered Trademark- trademark.
Lydall's line of fabricated medical filter components are also sold under the
trademark Lypore-Registered Trademark-. These products are employed in blood
filtration devices, such as cardiotomy reservoirs which filter the blood supply
of a patient during open-heart surgery, and autotransfusion filters used to
filter blood collected from a patient before surgery or from an injured patient.
Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical,
Ltd., which acquired CharterMed, Inc., a manufacturer of proprietary medical
devices serving applications such as biotech and pharmaceutical packaging, blood
bank and transfusion services, and neonatal intensive care. All of Lydall's
medical products are now under Charter Medical, Ltd. and are included in the
Filtration Products segment.
PAPERBOARD PRODUCTS
The Paperboard Products segment includes commodity paper products which are
employed primarily in materials-handling and packaging applications.
Lydall produces slipsheets, separator sheets, and protective sheets.
Ly-Pak-Registered Trademark- slipsheets are used to ship a growing number of
products such as food, pharmaceuticals, and chemicals.
Ly-Pak-Registered Trademark- slipsheet systems are used to replace wooden
pallets, providing significant cost and space reductions for the customer.
Ly-Pak-Registered Trademark- separator sheets are supplied to the glass and
plastic bottle industries and are manufactured to meet industry specifications
for bulk palletizing. Ly-Pak-Registered Trademark- 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.
WOVEN PRODUCTS
Lydall produces specialty woven composites which are used in advanced structural
materials sold to the aerospace, marine, and sporting goods industries. These
composites are extremely strong, yet lightweight and are used in
high-performance applications.
OTHER PRODUCTS AND SERVICES
Other Products and Services includes all other operating units of the Company.
These operations primarily produce fiberboard composites in sheet form sold to
fabricators of high-performance gaskets and sealing materials and electrical
insulating products. It also includes pencil slats made from recycled newsprint
and cardboard, which
F-20
<PAGE>
replaces wood. The Company's Logistics Management Operation, also included in
Other Products and Services, provides specialized distribution and warehouse
services to other Lydall companies and various American, Canadian, and European
manufacturers of newsprint, specialty papers and other assorted products.
The table below presents sales and operating income by segment as used by the
chief operating decision-maker of Lydall (the Operating Committee led by the
President and CEO) for the years ended December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Heat- Other
In thousands Management Filtration Paperboard Woven Products and Reconciling Consolidated
For the Years Ended Products Products Products Products Services Items Totals
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998
Sales $ 85,287 $ 59,102 $ 40,418 $ 5,721 $ 48,294 ($ 8,815) $ 230,007
Operating income $ 8,121 $ 5,029 $ 2,125 $ (10,284) $ 2,345 ($ 1,057) $ 6,279
........................................................................................................................
December 31, 1997
Sales $ 87,936 $ 60,047 $ 40,391 $ 9,842 $ 55,427 ($ 9,354) $ 244,289
Operating income $ 15,785 $ 9,045 $ 4,290 $ (1,465) $ 5,349 ($ 251) $ 32,753
........................................................................................................................
December 31, 1996
Sales $ 99,244 $ 63,577 $ 41,649 $ -- $ 57,458 ($ 9,276) $ 252,652
Operating income $ 18,071 $ 10,861 $ 6,422 $ -- $ 6,213 ($ 2,290) $ 39,277
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of total segment sales to total consolidated sales and of total
segment operating income to total consolidated operating income for the years
ended December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
In thousands For the years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
SALES
Total segment sales $ 238,822 $ 253,643 $ 261,928
Elimination of intersegment sales (8,815) (9,354) (9,276)
.........................................................................................
Consolidated sales $ 230,007 $ 244,289 $ 252,652
- -----------------------------------------------------------------------------------------
OPERATING INCOME
Total segment operating income $ 7,336 $ 33,004 $ 41,567
Corporate expenses (844) (269) (2,588)
Elimination of intersegment income (213) 18 298
.........................................................................................
Consolidated operating income $ 6,279 $ 32,753 $ 39,277
- -----------------------------------------------------------------------------------------
</TABLE>
Asset information by reportable segment is not reported, since the Company does
not produce such information internally.
F-21
<PAGE>
Sales and long-lived asset information by geographic area as of and for the
years ended December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Sales Long-Lived Assets
------------------------------- -------------------------------
In thousands 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 219,186 $ 233,122 $ 237,379 $ 97,537 $ 82,893 $ 73,928
France 10,821 11,167 15,273 8,983 9,794 11,820
Germany -- -- -- 29,509 -- --
......................................................................................................
Total $ 230,007 $ 244,289 $ 252,652 $ 136,029 $ 92,687 $ 85,748
- ------------------------------------------------------------------------------------------------------
</TABLE>
Foreign sales are based on the country in which the sales originate, i.e., where
the legal entity is domiciled.
Lydall has a major customer, which accounted for sales of $35.0 million, $47.2
million, and $41.9 million in 1998, 1997, and 1996, respectively. These sales
are reported in the Heat-Management Products segment.
INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
In thousands For the years ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 5,163 $ 9,827 $ 13,662
State 1,264 1,915 2,072
Foreign (187) 341 171
..........................................................................................................
Total current $ 6,240 $ 12,083 $ 15,905
..........................................................................................................
Deferred
Federal $ (3,772) $ 347 $ (385)
State (678) 127 194
Foreign (608) (15) (596)
..........................................................................................................
Total deferred $ (5,058) $ 459 $ (787)
..........................................................................................................
Provision for income taxes $ 1,182 $ 12,542 $ 15,118
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The statutory tax rate in France increased from 36.6 percent to 41.7 percent
retroactive to January 1, 1997. The provision for income taxes for 1997 includes
$127 thousand for the impact of the higher tax rate on the deferred tax
liability balance.
F-22
<PAGE>
The following is a reconciliation of the difference between the actual provision
for income taxes and the provision computed by applying the federal statutory
tax rate on earnings.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rates 35% 35% 35%
..............................................................................................................
State income taxes, net of federal tax deduction 7.1 3.9 3.7
Exempt FSC foreign trade income (13.4) (1.0) (.9)
Tax exempt income (.3) (.8) (.9)
Other (6.4) (.7) 1.0
..............................................................................................................
Effective income tax rates 22.0% 36.4% 37.9%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in the effective tax rate for 1998 is principally attributable to
the proportionate increase of exempt foreign trade income to pretax income.
The following is a schedule of the net current deferred tax assets and long-term
deferred tax liability accounts by tax jurisdiction as of December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997
------------------------------- ------------------------------
LONG-TERM Long-term
CURRENT DEFERRED DEFERRED TAX Current Deferred Deferred Tax
In thousands TAX ASSETS LIABILITIES Tax Assets Liabilities
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal $3,794 $ 4,594 $2,215 $ 7,353
State 2,476 3,694 1,015 2,739
Foreign 515 2,438 356 2,887
...................................................................................................
Total $6,785 $10,726 $3,586 $12,979
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997
------------------------------- ------------------------------
DEFERRED TAX DEFERRED TAX Deferred Tax Deferred Tax
In thousands ASSETS LIABILITIES Assets Liabilities
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accounts receivable $ 634 $ -- $ 568 $ --
Inventory 1,202 -- 434 --
Plant and equipment -- 11,099 -- 10,655
Other accrued expenses 3,337 -- 1,640 --
Retirement accounts 1,394 -- 804 --
Other, net 591 -- -- 2,184
...................................................................................................
Total $7,158 $11,099 $3,446 $12,839
- ---------------------------------------------------------------------------------------------------
</TABLE>
The Internal Revenue Service is currently examining the Company's federal income
tax return for 1996. Lydall's management believes any potential issues resulting
from this examination will be immaterial to the consolidated financial position
or results of operations of the Company.
F-23
<PAGE>
Unremitted earnings of foreign subsidiaries, which are deemed to be permanently
invested amounted to $433 thousand at December 31, 1998. The unrecognized
deferred tax liability on those earnings is not practical to calculate.
CONTINGENCIES
On or about March 10, 1986, 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. Lydall has received no further communication from the
EPA in the 12 years following that notice. The preliminary indication, based on
the Site Steering Committee's volumetric analysis, is that the alleged
contribution to the waste volume at the site of the plant once owned by a former
subsidiary is approximately 0.434 percent of the total volume. The portion of
the 0.434 percent specifically attributable to the former subsidiary by the
current operator of the plant is approximately 0.286 percent. The EPA completed
its Record of Decision for the site and estimated the total cost of remediation
to be between $17 million and $22 million. Based on the alleged volumetric
contribution of its former subsidiary to the site, and on the EPA's estimated
remediation costs, Lydall's alleged total exposure would be less than $100
thousand, which has been accrued.
There are over 800 potentially responsible parties ("prp") that have been
identified by the Site Steering Committee. Of these, 38, not including the
Company's former subsidiary, are estimated to have contributed over 80 percent
of the total waste volume at the site. These prp's include Fortune 500
companies, public utilities, and the State of Indiana. The Company believes
that, in general, these parties are financially solvent and should be able to
meet their obligations at the site. The Company has reviewed Dun & Bradstreet
reports on several of these prp's, and based on these financial reports, does
not believe Lydall will have any material additional volume attributed to it for
reparation of this site due to insolvency of other prp's.
In June 1995, the Company and its former subsidiary were sued in the Northern
District of Indiana by the insurer of the current operator of the former
subsidiary's plant seeking contribution. In October 1997, the insurer made a
settlement demand of $150,591 to the Company in exchange for a release of the
Company's liability at the site and indemnification from the current operator
against site-related claims. The Company executed a settlement agreement with
the insurer and current operator for a full site release; however, the current
operator subsequently backed out of the agreement. In June 1998, a Stipulation
for Dismissal signed by all parties was filed to end current litigation until
total liability at the site could be defined.
Management believes the ultimate disposition of this matter will not have a
material adverse effect upon the Company's consolidated financial position,
results of operations or cash flows.
On March 19, 1996, patent litigation brought by ATD Corporation ("ATD") against
Lydall in the U.S. District Court for the Eastern District of Michigan was
concluded with the jury finding in favor of Lydall and with all of ATD's claims
for damages being denied. A notice of appeal to the U.S. Court of Appeals for
the Federal Circuit regarding this litigation was filed by ATD on March 28,
1997. The appeal issues were fully briefed and argued in January 1998. On
October 6, 1998, a decision on the appeal was issued upholding the District
Court decision on non-infringement and reversing the decision on the invalidity
of ATD's patents. No further appeal is expected.
F-24
<PAGE>
By letter dated July 13, 1998, Lydall Eastern, Inc., a subsidiary of Lydall,
Inc. ("Lydall Eastern"), was identified as a "potentially responsible party" by
the EPA in connection with the claimed release or threat of release of hazardous
substances at a site known as the Rogers Fibre Mill in Buxton, Maine (the
"site"). Lydall Eastern merged with the owner and operator of a fiberboard mill
at the site whose ownership dated back to approximately 1912. Lydall Eastern
ceased operation at the site in 1980. In 1982, Lydall Eastern conveyed its
interest in the site.
The EPA is spending public funds to investigate and take action with respect to
the site. The EPA likely will seek to recover the funds it has spent, and will
spend, at the site from potentially responsible parties, including Lydall
Eastern. At this time, it is not possible to predict what future liability or
costs might be incurred by Lydall Eastern in connection with the site.
COMPREHENSIVE INCOME
The following tables disclose the balance by classification within accumulated
other comprehensive income.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Minimum Accumulated
Foreign Unrealized Pension Other
Currency Gain (Loss) Liability Comprehensive
In thousands Adjustment on Securities Adjustment Income (Loss)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BEGINNING BALANCE JANUARY 1, 1998 $ 76 $ 22 $ (262) $ (164)
CHANGE YEAR-TO-DATE 637 (22) (522) 93
....................................................................................................................
ENDING BALANCE DECEMBER 31, 1998 $ 713 $ -- $ (784) $ (71)
- --------------------------------------------------------------------------------------------------------------------
Beginning Balance January 1, 1997 $ 1,425 $ 77 $ (38) $ 1,464
Change Year-to-Date (1,349) (55) (224) (1,628)
....................................................................................................................
Ending Balance December 31, 1997 $ 76 $ 22 $ (262) $ (164)
- --------------------------------------------------------------------------------------------------------------------
Beginning Balance January 1, 1996 $ 2,091 $ (5) $ (454) $ 1,632
Change Year-to-Date (666) 82 416 (168)
....................................................................................................................
Ending Balance December 31, 1996 $ 1,425 $ 77 $ (38) $ 1,464
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes quarterly financial information for 1998 and
1997. In management's opinion, all adjustments necessary to present fairly the
information for such quarters have been reflected below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1(st) Quarter 2(nd) Quarter 3(rd) Quarter 4(th) Quarter
- --------------------------------------------------------------------------------------------------------------
In thousands
Except per-share data 1998 1997 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net Sales $ 56,542 $ 61,971 $ 59,244 $ 64,019 $ 56,495 $ 59,377 $ 57,726 $ 58,922
Gross Margin 16,016 19,263 17,548 20,036 16,329 18,873 14,924 19,469
Net Income (Loss) $ 3,549 $ 5,625 $ 3,851 $ 5,716 $ 3,154 $ 5,515 $ (6,352) $ 5,055
..............................................................................................................
Basic EPS $ .22 $ .33 $ .24 $ .34 $ .20 $ .33 $ (.41) $ .31
Diluted EPS $ .22 $ .32 $ .24 $ .33 $ .20 $ .32 $ (.41) $ .30
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The sum of EPS for the four quarters in 1998 does not agree to the EPS as
reported in the Income Statement for the entire year due to rounding.
F-25
<PAGE>
Schedule II
LYDALL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONS
- --------------------------------------------------------------------- ------------------ ------------------------------
<S> <C> <C> <C> <C> <C>
CHARGED CHARGED
BALANCE TO TO
AT COSTS OTHER
JANUARY AND ACCOUNTS DEDUCTIONS BALANCE AT
$ THOUSANDS 1, EXPENSES DESCRIBE DESCRIBE DECEMBER 31,
- --------------------------------------------------------------------- ------------------ ------------------------------
1998
ALLOWANCE FOR DOUBTFUL RECEIVABLES $1,381 $ 556 $ -- $ (433)(1) $ 1,504
ACCUMULATED AMORTIZATION OF INTANGIBLE ASSETS 7,526 396 -- -- 7,922
ACCRUED ENVIRONMENTAL 384 -- -- (339)(2) 45
ACCUMULATED AMORTIZATION OF GOODWILL 2,807 1,656 -- -- 4,463
LIFO RESERVE 1,172 173 -- (129)(5) 1,216
INVENTORY OBSOLESCENCE RESERVE 577 511 10(4) (449)(6) 649
- ----------------------------------------------------------------------------------------------------------------------------
1997
Allowance for doubtful receivables $1,727 $ 258 $ -- $ (604)(1) $ 1,381
Accumulated amortization of intangible assets 7,741 450 -- (665)(3) 7,526
Accrued reorganization 28 -- -- (28)(7) --
Accrued environmental 998 20 (128)(4) (506)(8) 384
Accumulated amortization of goodwill 1,688 1,119 -- -- 2,807
LIFO reserve 1,740 -- -- (568)(5) 1,172
Inventory obsolescence reserve 519 254 (13)(4) (183)(6) 577
- ----------------------------------------------------------------------------------------------------------------------------
1996
Allowance for doubtful receivables $1,938 $ 235 $ -- $ (446)(1) $ 1,727
Accumulated amortization of intangible assets 8,446 772 -- (1,477)(3) 7,741
Accrued reorganization 137 -- -- (109)(2) 28
Accrued environmental 1,072 -- (62)(4) (12)(2) 998
Accumulated amortization of goodwill 1,103 585 -- -- 1,688
LIFO reserve 2,493 316 -- (1,069)(5) 1,740
Inventory obsolescence reserve 612 453 (6)(4) (540)(6) 519
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Uncollected receivables written off and adjustments to allowance.
(2) Disbursements of amounts previously accrued.
(3) Write-off of fully amortized assets.
(4) Record foreign currency translation adjustments.
(5) Adjustment of LIFO reserve for inventory levels.
(6) Write-off of obsolete inventory and adjustment to reserve level.
(7) Adjustment to reserve level.
(8) Disbursements of amounts previously accrued and adjustments to reserve
level.
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE IN
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED COPY
- ----------- ------------------------------------------------------------------------------------- -------------------
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant dated August 14,
1995 (filed as Exhibit 4.1 to the Registrant's 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 will file these
instruments with the Commission upon request.
10.1* 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).
10.2* 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).
10.3* 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).
10.4* 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).
10.5* 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).
10.6* 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).
10.7* 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).
10.8* 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).
10.9* 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).
10.10* 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).
10.11* Employment Agreement with Mary A. Tremblay dated March 10, 1995 (filed as Exhibit
10.10 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and
incorporated herein by this reference).
10.12* Employment Agreement with John J. Worthington dated November 7, 1996 (filed as
Exhibit 10.17 to the Registrant's Annual Report on Form 10-K dated March 27, 1997 and
incorporated herein by this reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE IN
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED COPY
- ----------- ------------------------------------------------------------------------------------- -------------------
<C> <S> <C>
10.13* 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).
10.14* Lydall, Inc. Supplemental Executive Retirement Plan effective January 1, 1994 (filed
as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K dated March 27, 1996,
and incorporated herein by this reference).
10.15* Amended and restated, 1992 Stock Incentive Compensation Plan, dated May 14, 1992,
amended through May 14, 1997 (filed as Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 dated April 17,1998, Reg. No. [33-93768], and incorporated
herein by this reference).
10.16* Employment Agreement with James P. Carolan dated February 1, 1999, filed herewith.
10.17* Employment Agreement with Christopher R. Skomorowski dated February 1, 1999, filed
herewith.
10.18 Asset Purchase Agreement between Lydall New York, Inc. and Textile Technologies
Industries, Inc. (filed as Exhibit 10.22 to the Registrant's Annual Report on Form
10-K dated March 27, 1997, and incorporated herein by this reference).
10.19 Asset Purchase Agreement between CharterMed, Inc. and Charter Medical, Ltd. (filed as
Exhibit 10.20 to the Registrant's Annual Report on Form 10-K dated March 16, 1998,
and incorporated herein by this reference).
10.20 Asset Purchase Agreement between Lydall Central, Inc. and Engineered Thermal Systems,
Inc. (filed as Exhibit 10.1 to the Registrant's Quarterly report on Form 10-Q dated
May 7, 1998, and incorporated herein by this reference).
10.21 Purchase and Sale Agreement (English Translation) signed as of December 30, 1998 by
and between HOHENSTAUFEN EINHUNDERTSTE Vermogensverwaltungs GmbH, a wholly owned
subsidiary of Lydall, Inc. and Gerhardi & Cie GmbH & Co. KG related to the purchase
of all the outstanding shares of Gerhardi & Cie GmbH & Co. KG (filed as Exhibit 2.1
to the Registrant's Current Report on Form 8-K filed January 14, 1999).
21.1 List of subsidiaries of the Registrant, filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP, filed herewith.
24.1 Power of Attorney, dated March 10, 1999, authorizing Christopher R. Skomorowski
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:
99.1 The Company filed a Current Report on Form 8-K dated December 3, 1998 reporting the
Board of Directors' election of Christopher R. Skomorowski to succeed Leonard R.
Jaskol as President and Chief Executive Officer.
99.2 The Company filed a Current Report on Form 8-K dated January 14, 1999 reporting the
acquisition of Gerhardi & Cie. GmbH and Co. KG by a wholly owned subsidiary of
Lydall, Inc., the appointment of Roger M. Widmann as Chairman of the Board of
Directors, and the Company's recording of non-recurring expenses and write-offs in
the fourth quarter ended December 31, 1998, totaling approximately $9 million.
</TABLE>
<PAGE>
Exhibit 10.16
AGREEMENT
THIS AGREEMENT made this 1st day of February 1999 by and between LYDALL,
INC. and its subsidiaries (the "Company") and James P. Carolan (the
"Executive").
W I T N E S S E T H :
RECITALS.
Executive is employed by the Company as a President of the Technical Papers
Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc.
The Company and Executive have agreed that if Executive should cease to be
President of the Technical Papers Division of Lydall Eastern, Inc. and Executive
Vice President of Lydall, Inc. 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 PRESIDENT OF THE TECHNICAL PAPERS DIVISION OF
LYDALL EASTERN, INC. AND EXECUTIVE VICE PRESIDENT OF
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LYDALL, INC. The Executive shall continue to act as President of the Technical
Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall,
Inc., subject to the direction of Lydall, Inc.'s, 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 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
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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 written notice of intent to terminate
by the Board, providing for sixty (60) days from receipt by Executive to cure
the breach
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prior to termination of Executive; except that such notice would not be required
if, in the 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 President of the Technical Papers Division of Lydall
Eastern, Inc. and Executive Vice President of Lydall, Inc. of the Company within
one year from the time such Change of Control occurs or (b) another shall be
appointed or elected President of the Technical Papers Division of Lydall
Eastern, Inc. and Executive Vice President of Lydall, Inc. by the Company in
place of Executive at any time prior to April 1, 2008, 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
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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.
4. TERMINATION PRIOR TO CHANGE OF CONTROL. If prior to an Change of Control
(a) the Executive shall resign as President of the Technical Papers Division of
Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc. of the Company
at the request of the Company or because the duties and responsibilities of the
President of the Technical Papers Division of Lydall Eastern, Inc. and Executive
Vice President of Lydall, Inc. have been significantly modified by the Company
without his consent or (b) another is appointed President of the Technical
Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall,
Inc. 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
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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 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)
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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 April 1, 2008, 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 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.
8. COMPENSATION. The Company shall pay to Executive during the Employment
Period an annual salary (the "Annual
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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. 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 President of the Technical Papers Division of Lydall
Eastern, Inc. and Executive Vice President of Lydall, Inc. 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
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compete as provided in said Paragraph 11, and such Annual Salary for the
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
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<PAGE>
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 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 PricewaterhouseCoopers (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
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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 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
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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
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<PAGE>
such claim prior to the expiration of the 30-day period following the date on
which it gives such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall at the Company's
expense:
a. give the Company any information reasonably requested by the Company
relating to such claim.
b. take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including, without
limitation, accepting legal representation with respect to such claim by an
attorney reasonably selected by the Company.
c. cooperate with the Company in good faith in order effectively to contest
such claim, and
d. permit the Company to participate in any proceedings relating to such
claim; provided, however, that the Company shall bear and pay directly as
incurred all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
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<PAGE>
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 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)
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<PAGE>
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. (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
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<PAGE>
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.
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
16
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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
similar 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
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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
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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.
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
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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 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
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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 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
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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
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descent and distribution. This Agreement shall 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.
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IN WITNESS WHEREOF, the parties have hereunto set their hands as of the
date first above written.
LYDALL, INC.
By
----------------------------- -----------------------
Roger M. Widmann, Chairman, James P. Carolan
Compensation and Stock Option President of the Technical Papers
Committee Division of Lydall Eastern, Inc.,
and Executive Vice President of
Lydall, Inc.
By
-----------------------------
Christopher R. Skomorowski
Chief Executive Officer
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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
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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
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EXHIBIT B
INDEMNIFICATION AGREEMENT
This Agreement, made and entered into this __ day of ________, 1999
("Agreement"), by and between Lydall, Inc., a Delaware corporation and it
subsidiaries ("Company"), and James P. Carolan ("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 an
officerand employee of the Company. 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 Company shall
have no obligation under this Agreement to continue Indemnitee in such position.
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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 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
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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 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
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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 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
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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.
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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.
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(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
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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.
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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
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.
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(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:
James P. Carolan
11 Runnymede Drive
North Hampton, NH 03862
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(b) If to the Company to:
Mary A. Tremblay
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 By
----------------------------- ---------------------------------
INDEMNITEE
-----------------------------------
James P. Carolan
11 Runnymede Drive
North Hampton, NH 03862
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Exhibit 10.17
AGREEMENT
THIS AGREEMENT made this lst day of February 1999 by and between LYDALL,
INC. its subsidiaries (the "Company") and Christopher R. Skomorowski (the
"Executive").
W I T N E S S E T H :
RECITALS.
Executive is employed by the Company as President and Chief Executive
Officer. The Company and Executive have agreed that if Executive should cease to
be President and Chief Executive Officer of Lydall, Inc. 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 PRESIDENT AND CHIEF EXECUTIVE OFFICER OF LYDALL,
INC. The Executive shall act as President and Chief Executive Officer, subject
to the direction of the Board of Directors.
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
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assets or (b) the stockholders of the Company acquire a right to receive, in
exchange for or upon surrender of 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 or 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
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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 Board of
Directors' 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 President and Chief Executive Officer of the Company
within one year from the time such Change of Control occurs or (b) another shall
be appointed or elected President or Chief Executive Officer by the Board in
place of Executive at any time prior to June 1, 2018, 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 Board 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.
4. TERMINATION PRIOR TO CHANGE OF CONTROL. If prior to a
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Change of Control (a) the Executive shall resign as President and Chief
Executive Officer of the Company at the request of the Board or because the
duties and responsibilities of the President and Chief Executive Officer have
been significantly modified by the Board without his consent or (b) another is
appointed President or Chief Executive Officer 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
Board 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 3
above, Executive shall continue to be an employee of the Company for a period of
three years from the date of such Termination, and in the event of a Termination
pursuant
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to Paragraph 4 above, Executive shall continue to be an employee of the Company
for a period of two years from the date of such Termination, such three year
period or two 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 1, 2018, 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 Board; 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.
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
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(3) years prior to the date of Termination 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 President and
Chief Executive Officer during such period, (b) reimbursement for reasonable
expenses incurred by him in the performance of his duties (c) in lieu of an
office and secretarial help, an allowance of $1500 monthly and (d) 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 three year term provided for in Paragraph 3 above or the two year term
provided for in 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 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
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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 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 PricewaterhouseCoopers (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within 20 calendar
days of the receipt
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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 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
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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 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
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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 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,
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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 statute 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.
(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
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be required to be repaid and the amount of such advance shall be 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.
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 his beneficiaries, 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.
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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 three years from Termination if such
Termination occurred pursuant to Paragraph 3 above or two years from Termination
if such Termination occurred pursuant to 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.
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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.
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 therefore, for eighty (80) percent of
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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 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
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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 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.
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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 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
-------------------------------- -------------------------------------
Roger M. Widmann, Chairman, Christopher R. Skomorowski
Board of Directors President and Chief Executive Officer
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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
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EXHIBIT B
INDEMNIFICATION AGREEMENT
This Agreement, made and entered into this lst day of February, 1999
("Agreement"), by and between Lydall, Inc., a Delaware corporation ("Company"),
and Christopher R. Skomorowski ("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 Company shall have no obligation under
this Agreement to continue
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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 or otherwise, in any Proceeding, he shall be
indemnified against
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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 made in the Independent Counsel (as hereinafter defined) in a
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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 serve as
Independent Counsel unless and until such objection is
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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.
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Section 10. REMEDIES OF INDEMNITEE.
(a) In the event that (i) a determination is made pursuant to Section
8 of this Agreement that Indemnitee is not entitled to indemnification under
this Agreement, (ii) advancement of Expenses is not timely made pursuant to
Section 7 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 8(b) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to Section 5 or 6 of this
Agreement within ten (10) days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is not made within 10 (10) days
after a determination has been made that Indemnitee is entitled to
indemnification, Indemnitee shall be entitled to an adjudication in an
appropriate court of the State of Delaware, or in any other court of competent
jurisdiction, of his entitlement to such indemnification or advancement of
Expenses. Alternatively, Indemnitee, at his option, may seek an award in
arbitration to be conducted by a single arbitrator pursuant to the Commercial
Arbitration Rules of the American Arbitration Association. Indemnitee shall
commence such proceeding seeking an adjudication or an award in arbitration
within 180 days following the data on which Indemnitee first has the right to
commence such proceeding pursuant to this Section 10(a); PROVIDED, HOWEVER, that
the foregoing clause shall not apply in respect of a proceeding brought by
Indemnitee to enforce his rights under Section 5 of this Agreement.
(b) In the event that a determination shall have been made pursuant to
Section 8(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 10 shall be conducted in all respects as a DE NOVO trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination. If a Change of Control shall have occurred, in any
judicial proceeding or arbitration commenced pursuant to this Section 10 the
Company shall have the burden of proving that Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made pursuant to Section 8(b)
of this Agreement that Indemnitee is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding or arbitration
commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee
of a material fact, or an omission of a material fact necessary to make
Indemnitee's statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
6
<PAGE>
(d) In the event that Indemnitee, pursuant to this Section 10, seeks a
judicial adjudication of or an award in arbitration to enforce his rights under,
or to recover damages for breach of, this Agreement, Indemnitee shall be
entitled to recover from the Company, and shall be indemnified by the Company
against, any and all expenses (of the types described in the definition of
Expenses in Section 17 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or arbitration
that Indemnitee is entitled to receive part but not all of the indemnification
or advancement of expenses sought, the expenses incurred by Indemnitee in
connection with such judicial adjudication or arbitration shall be appropriately
prorated.
Section 11. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION.
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Certificate of Incorporation, the By-Laws, any agreement, a vote of
stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or
restrict any right of Indemnitee in his Corporate Status prior to such
amendment, alteration or repeal.
(b) To the extent that the Company maintains an insurance policy or
policies providing liability insurance for directors, officers, employees, or
agents of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which such person serves at the
request of the Company, Indemnitee shall be covered by such policy or policies
in accordance with its or their terms to the maximum extent of the coverage
available for any such director, officer, employee or agent under such policy or
policies.
(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnities, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if and to the extend that
Indemnities has otherwise
7
<PAGE>
actually received such payment under any insurance policy, contract, agreement
or otherwise.
Section 12. DURATION OF AGREEMENT. This Agreement shall continue until and
terminate upon the later of: (a)10 years after the date that Indemnities shall
have ceased to serve as a director, officer, employee, or agent of the Company
or of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which Indemnitee served at the request of the Company;
or (b) the final termination of any Proceeding then pending in respect of which
Indemnitee is granted rights of indemnification or advancement of expenses
hereunder and of any proceeding commenced by Indemnitee pursuant to Section 10
of this Agreement relating thereto. This Agreement shall be binding upon the
Company and its successors and assigns and shall inure to the benefit of
Indemnitee and his heirs, executors and administrators.
Section 13. SEVERABILITY. If any provision or provisions of this Agreement
shall be held to be invalid, illegal or unenforceable for any reason whatsoever:
(a) the validity, legality and enforceability of the remaining provisions of
this Agreement (including without limitation, each portion of any Section of
this Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby; and (b) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to
be invalid, illegal or unenforceable, that is not itself invalid, illegal or
unenforceable) shall be construed to as to give effect to the intent manifested
thereby.
Section 14. EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF
EXPENSES. Notwithstanding any other provision of this Agreement, Indemnitee
shall not be entitled to indemnification or advancement of Expenses under this
Agreement with respect to any Proceeding brought by Indemnitee, or any claim
therein prior to a Change in Control, unless the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors.
Section 15. IDENTICAL COUNTERPARTS. This agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
Section 16. HEADINGS. The headings of the
8
<PAGE>
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
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.
9
<PAGE>
(f) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the past five years has been, retained to represent: (i) the Company or
Indemnitee in any matter material to either such party, or (ii) any other party
to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement.
(g) "Proceeding" includes any action, suite, arbitration, alternate
dispute resolution mechanism, investigation, administrative hearing or any other
proceeding, whether civil, criminal, administrative, or investigative, except
one (i) initiated by an Indemnitee pursuant to Section 10 of this Agreement to
enforce his rights under this Agreement or (ii) pending on or before the
Effective Date.
Section 18. MODIFICATION AND WAIVER. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
Section 19. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the
Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder.
Section 20. NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to:
Christopher R. Skomorowski
1108 Wetherburn Court
Winston-Salem, NH 27104
10
<PAGE>
(b) If to the Company to:
Mary A. Tremblay
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.
On behalf of the Board of Directors
ATTEST: LYDALL, INC.
By By
-------------------------------- ---------------------------------
Roger M. Widmann
INDEMNITEE
-----------------------------------
Christopher R. Skomorowski
48 Highwood Road
Simsbury, CT 06070
11
<PAGE>
LYDALL, INC.
Exhibit 21.1
List of Subsidiaries
Lydall, Inc. - Incorporated in the State of Delaware
Logistics Management, Inc. - Incorporated in the State of Connecticut
Lydall Distribution Services, Inc. - Incorporated in the State of Connecticut
Lydall Express, Inc. - Incorporated in the State of Connecticut
Lydall Transport, Ltd. - Incorporated in the State of Virginia
Lydall Eastern, Inc. - Incorporated in the State of Connecticut
DBA: Lydall Composite Materials, Covington Operation
Lydall Southern Products, Richmond Operation
Lydall Southern Products, Jacksonville Operation
Lydall Technical Papers
Lydall & Foulds
Lydall Deutschland Holdsung, GmbH
Subsidiary: Gerhardi & Cie.GmbH & Co. KG
Lydall New York, Inc. - Incorporated in the State of New York
DBA: Lydall Composite Materials, Hoosick Falls Operation
Lydall Manning Nonwovens Division
Lydall Manning Fort Washington Division
Lydall Central, Inc. - Incorporated in the State of Indiana
DBA: Lydall Westex, Hamptonville Operation
Lydall Westex, Rockwell Operation
Lydall Westex, Columbus Operation
Subsidiary: Charter Medical, Ltd. - Incorporated in the
State of Delaware
Lydall International, Inc. - Incorporated in the State of Delaware
Lydall FSC, Limited - Incorporated in Jamaica
Trident II, Inc. - Incorporated in the State of Connecticut
Sopatex, S.A. - Organized under the laws of France
Subsidiary: Axohm Industries, S.A. - Organized under the laws of France
DBA: Lydall Axohm
Axohm S.A. Operations
Axohm U.K. - Organized under the laws of Great Britain
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Lydall, Inc. on Form S-8 (File No. 33-93768) of our reports
dated February 18, 1999, on our audits of the consolidated financial
statements and financial statement schedule of Lydall, Inc., and Subsidiaries
as of December 31, 1998 and 1997, and for the years ended December 31, 1998,
1997 and 1996 included in this Form 10-K.
PricewaterhouseCoopers LLP
March 24, 1999
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors
and officers of Lydall, Inc. (the "Corporation"), does hereby constitute and
appoint Christopher R. Skomorowski and John E. Hanley, and each of them
singly, as his agent and attorney-in-fact to do any and all things and acts
in his name and in the capacities indicated below and to execute any and all
instruments for him and in his name in the capacities indicated below which
said Christopher R. Skomorowski and John E. Hanley, or either of them, may deem
necessary or advisable to enable the Corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with
the preparation and filing of the Corporation's Annual Report on Form 10-K
(the "Annual Report") respecting the fiscal year ended December 31, 1998,
including specifically, but not limited to, power and authority to sign for
him in his name in the capacities indicated below the Annual Report and any
and all amendments thereto, and each of the undersigned does hereby ratify
and confirm all that said Christopher R. Skomorowski and John E. Hanley, or
either of them, shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his or her name.
<TABLE>
<S> <C> <C>
/s/ Christopher R. Skomorowski
- ------------------------------- President, Chief March 10, 1999
Christopher R. Skomorowski Executive Officer
/s/ Lee A. Asseo
- ------------------------------ Director March 10, 1999
Lee A. Asseo
/s/ Samuel P. Cooley
- ------------------------------ Director March 10, 1999
Samuel P. Cooley
/s/ W. Leslie Duffy
- ------------------------------ Director March 10, 1999
W. Leslie Duffy
/s/ David Freeman
- ------------------------------ Director March 10, 1999
David Freeman
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Joel Schiavone
- ------------------------------- Director March 10, 1999
Joel Schiavone
/s/ Elliott F. Whitely
- ------------------------------- Director March 10, 1999
Elliott F. Whitely
/s/ Roger M. Widmann
- ------------------------------- Chairman of the March 10, 1999
Roger M. Widmann Board/Director
/s/ A. E. Wolf
- ------------------------------- Director March 10, 1999
A. E. Wolf
/s/ John J. Worthington
- ------------------------------- Director March 10, 1999
John J. Worthington
</TABLE>
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> OCT-01-1998
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