<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 1-7665
LYDALL, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0865505
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
One Colonial Road, P.O.B. 151, Manchester, Connecticut, 06045-0151
(Address of principal executive offices) (zip code)
(860) 646-1233
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock $.10 par value per share.
Total Shares outstanding May 17, 1999 15,730,203
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<PAGE>
LYDALL, INC.
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Net Income and
Comprehensive Income 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 10
Item 3. Quantitive and Qualitative Disclosure about Market Risk 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and equivalents $ 2,133 $ 2,254
Accounts receivable, net 49,937 48,609
Inventories:
Finished goods 9,717 10,303
Work in progress 6,755 8,859
Raw materials 11,565 11,003
LIFO reserve (1,254) (1,216)
--------- ---------
Total inventories 26,783 28,949
Taxes receivable -- 2,256
Prepaid expenses 1,000 1,966
Deferred tax assets 7,203 6,785
--------- ---------
Total current assets 87,056 90,819
Property, plant and equipment, at cost 172,762 172,485
Less accumulated depreciation (66,839) (64,649)
--------- ---------
105,923 107,836
Other assets, at cost, less amortization 29,349 28,193
--------- ---------
Total assets $ 222,328 $ 226,848
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,340 $ 2,340
Short-term borrowings 48,678 52,324
Accounts payable 21,186 22,530
Accrued taxes 1,471 1,411
Accrued payroll and other compensation 6,273 5,810
Other accrued liabilities 14,346 15,494
--------- ---------
Total current liabilities 94,294 99,909
Deferred tax liabilities 10,556 10,726
Other long-term liabilities 6,926 6,988
Contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 2,176 2,171
Capital in excess of par value 38,954 38,697
Retained earnings 133,392 129,310
Accumulated other comprehensive income (3,032) (71)
--------- ---------
171,490 170,107
Less: treasury stock, at cost (60,938) (60,882)
--------- ---------
Total stockholders' equity 110,552 109,225
--------- ---------
Total liabilities and stockholders' equity $ 222,328 $ 226,848
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF NET INCOME
AND COMPREHENSIVE INCOME
(In Thousands Except Per-Share Data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Net sales $ 83,602 $ 56,542
Cost of sales 64,527 40,526
--------- ---------
Gross margin 19,075 16,016
Selling, product development and administrative expenses 13,337 10,737
--------- ---------
Operating income 5,738 5,279
Other (income) expense:
Investment income (6) (324)
Interest expense 721 89
Foreign currency transaction (gain) loss (1,327) 14
Other 215 175
--------- ---------
(397) (46)
--------- ---------
Income before income taxes 6,135 5,325
Income tax expense 2,053 1,776
--------- ---------
Net income $ 4,082 $ 3,549
========= =========
Basic earnings per common share $ .26 $ .22
Weighted average common stock outstanding 15,716 16,043
========= =========
Diluted earnings per common share $ .26 $ .22
Weighted average common stock and equivalents outstanding 15,797 16,498
========= =========
Net income $ 4,082 $ 3,549
Other comprehensive income before tax:
Foreign currency translation adjustments (4,459) (317)
Unrealized loss on securities -- (197)
--------- ---------
Other comprehensive loss, before tax (4,459) (514)
Income tax benefit related to items of other comprehensive
loss 1,498 113
--------- ---------
Other comprehensive loss, net of tax (2,961) (401)
--------- ---------
Comprehensive income $ 1,121 $ 3,148
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 4,082 $ 3,549
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,887 2,180
Amortization 441 442
Loss on disposition of property, plant and equipment 26 150
Foreign currency transaction gain (loss) (1,327) 14
Changes in operating assets and liabilities
excluding effects from acquisitions:
Accounts receivable (3,332) 1,549
Taxes receivable 2,256 2,032
Inventories 1,209 (1,611)
Other assets 54 7
Accounts payable (723) 2,657
Accrued taxes 247 (430)
Accrued payroll and other compensation 713 (2,248)
Deferred income taxes (637) (41)
Other long-term liabilities (41) 70
Other accrued liabilities (383) (537)
--------- ---------
Total adjustments 1,390 4,234
--------- ---------
Net cash provided by operating activities 5,472 7,783
--------- ---------
Cash flows from investing activities:
Acquisitions -- (6,609)
Additions of property, plant, and equipment (4,050) (3,573)
Purchase of investments, net -- (785)
--------- ---------
Net cash used for investing activities (4,050) (10,967)
--------- ---------
Cash flows from financing activities:
Proceeds from short-term borrowings 18,385 --
Payment of short-term borrowings (19,925) --
Issuance of common stock 262 400
Acquisition of common stock (56) (2,284)
--------- ---------
Net cash used for financing activities (1,334) (1,884)
--------- ---------
Effect of exchange rate changes on cash (209) (18)
--------- ---------
Decrease in cash and cash equivalents (121) (5,086)
Cash and cash equivalents at beginning of period 2,254 8,891
--------- ---------
Cash and cash equivalents at end of period $ 2,133 $ 3,805
--------- ---------
Supplemental Schedule of Cash Flow Information:
Cash paid during the period for:
Interest $ 568 $ --
Income taxes 151 376
Non-cash transactions:
Unrealized gains/losses on available-for-sale securities -- 154
Amounts payable for acquired operations -- 720
Reclassification between short and long term assets -- 750
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
LYDALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying consolidated condensed financial statements include the
accounts of Lydall, Inc. and its wholly owned subsidiaries. All financial
information is unaudited for interim periods reported. All significant
intercompany transactions have been eliminated in the consolidated condensed
financial statements. Management believes that all adjustments, which include
only normal recurring accruals, necessary to present a fair statement of the
financial position and results of operations for the periods presented.
The year-end consolidated condensed balance sheet data was derived from
audited financial statements, but does not include all disclosures
required by generally accepted accounting principles.
2. 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, where such effect is dilutive.
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
March 31, 1999 March 31, 1998
Net Net
Income Shares Per-Share Income Shares Per-Share
($000's) (000's) Amount ($000's) (000's) Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $4,082 15,716 $0.26 $3,549 16,043 $0.22
Effect of dilutive securities
stock options 81 -- 455 --
Diluted earnings per share $4,082 15,797 $0.26 $3,549 16,498 $0.22
</TABLE>
3. On December 30, 1998, a subsidiary of the Company acquired for cash all of
the outstanding shares of Gerhardi and Cie. GmbH and 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. Negotiation of the post-closing adjustment is expected to
be completed in the second quarter of 1999. 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 have been
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.
6
<PAGE>
The following table summarizes the unaudited consolidated pro forma information
of Lydall, Inc., assuming the acquisitions had occurred on January 1, 1998.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
In thousands except per-share data For the three months ended: March 31,
1998
-------------------------------------------------------------------------------------------
<S> <C>
Sales $77,566
Net income $ 3,428
Basic earnings per common share $ .21
Diluted earnings per common share $ .21
-------------------------------------------------------------------------------------------
</TABLE>
4. In the mid-1980's, the United States Environmental Protection Agency ("EPA")
notified a former subsidiary of the Company that it and other entities may be
potentially responsible in connection with the release of hazardous
substances at a landfill and property located adjacent to a landfill located
in Michigan City, Indiana. The preliminary indication, based on the Site
Steering Committee's volumetric analysis, is that the alleged contribution to
the waste volume at the site of the plant once owned by a former subsidiary
is approximately 0.434 percent of the total volume. The portion of the 0.434
percent specifically attributable to the former subsidiary by the current
operator of the plant is approximately 0.286 percent. The EPA has completed
its Record of Decision for the site and has estimated the total cost of
remediation to be between $17 million and $22 million. Based on the alleged
volumetric contribution of its former subsidiary to the site, and on the
EPA's estimated remediation costs, Lydall's alleged total exposure would be
less than $100 thousand, which has been accrued.
There are over 800 potentially responsible parties ("prp") 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 the total liability at the site is defined.
Management believes the ultimate disposition of this matter will not have a
material adverse effect upon the Company's consolidated financial position,
or results of operations, or cash flows.
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.
5. Lydall's subsidiaries manufacture and fabricate products with various
distinct applications and provide logistics services. Lydall is organized and
reports results of operations in four segments: Heat-Management, Filtration,
Paperboard and Wovens. All other operations have been aggregated in Other.
For a full description of each segment, refer to the "Notes to Consolidated
Financial Statements" reported in the Company's 1998 Annual Report on
Form 10-K. The reconciling items between segment sales and
reported sales for the first quarter include intercompany sales between
segments. Corporate expenses and intercompany eliminations are included in
reconciling items between segment operating income and reported operating
income for the first quarter. The table below presents revenues and
operating income by segment for the three months ended March 31, 1999 and
1998.
7
<PAGE>
<TABLE>
<CAPTION>
In thousands Heat Reconciling Consolidated
For the Three Months Ended Management Filtration Paperboard Wovens Other Items Totals
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited)
March 31, 1999
Sales $44,811 $14,678 $ 9,436 $ 669 $14,863 $ (855) $83,602
Operating income (loss) $ 2,240 $ 1,617 $ 879 $ (257) $ 1,129 $ 130 $ 5,738
----------------------------------------------------------------------------------------------------
March 31, 1998
Sales $18,975 $13,857 $ 7,563 $ 2,089 $14,643 $ (585) $56,542
Operating income (loss) $ 2,717 $ 1,370 $ 512 $ (550) $ 575 $ 655 $ 5,279
----------------------------------------------------------------------------------------------------
</TABLE>
6. 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 March 31, 1999, the Company did not have any 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.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<TABLE>
<CAPTION>
For the quarters ended March 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $83,602 100.0% $56,542 100.0%
Cost of sales 64,527 77.2 40,526 71.7
----------------------------- ----------------------------
Gross margin 19,075 22.8 16,016 28.3
Selling, product development and administrative
expenses 13,337 16.0 10,737 19.0
----------------------------- ----------------------------
Operating income 5,738 6.8 5,279 9.3
Other (income) expense (397) (0.5) (46) (0.1)
----------------------------- ----------------------------
Income before income taxes 6,135 7.3 5,325 9.4
Income tax expense 2,053 2.4 1,776 3.1
----------------------------- ----------------------------
Net income $4,082 4.9% $3,549 6.3%
============================= ============================
</TABLE>
NET SALES
Net sales for the first quarter ended March 31, 1999 were $83.6 million, an
increase of $27.1 million or 48 percent from the $56.5 million for the first
quarter ended March 31, 1998. The acquisitions of CharterMed, Ltd., ETSI and
Gerhardi, which were completed by the Company during or subsequent to the
quarter ended March 31, 1998, added $25.9 million in sales quarter over quarter.
After the effect of acquisitions, sales increased by $400 thousand, $300
thousand and $1.9 million in the heat-management, filtration, and paperboard
segments, offset by declines in wovens of $1.4 million.
Excluding the effects of the acquisitions of ETSI and Gerhardi, increased
sales of non automotive products exceeded a small decline in automotive
thermal products resulting in modest improvement in Heat Management sales.
Increased sales in Filtration represents general market improvement and the
consolidation of a full quarter of activity at Charter Medical in 1999. The
Paperboard segment realized improved sales primarily on increased
demand for separator sheets. The decline in sales in the Wovens segment is
due to a general decline in the business at Fort Washington.
GROSS MARGIN
Gross margin for the first quarter 1999 was $19.1 million, compared with
first quarter 1998 margin of $16.0 million, representing a $3.1 million, or
19 percent increase. Excluding the effect of Gerhardi operations, gross
margin percentage in the first quarter of 1999 was approximately the same
compared to the same period in the prior year on higher sales. Gross margin
was influenced by several factors. The major improvements in gross margin
came from operating leverage on incremental sales and reduction of fixed
overhead, mainly at the Fort Washington Operation. These were offset by
slightly lower margins on Charter Medical and ETSI sales than are typical for
Lydall operations, inefficiencies in the heat-management segment caused by
the consolidation of two facilities, and some price/cost erosion.
8
<PAGE>
SELLING, PRODUCT DEVELOPMENT AND ADMINISTRATIVE EXPENSES
Selling, product development and administrative expenses were $13.3 million in
the first quarter of 1999, an increase of $2.6 million over first quarter 1998
expenses of $10.7 million. The increase in these expenses was primarily related
to acquisitions. The Company continued efforts to reduce selling, product
development and administrative expenses and, excluding Gerhardi, was able to
bring these costs more in line with traditional results at 19 percent of sales
compared with 22 percent during the fourth quarter of 1998.
INTEREST EXPENSE
Interest expense in the first quarter of 1999 increased $632 thousand over
first quarter 1998 expense of $89 thousand. The large increase in interest was
due to increased borrowings on short term credit facilities mainly needed to
fund the acquisitions of Charter Med, Ltd., ETSI and Gerhardi.
FOREIGN CURRENCY TRANSACTION GAIN
In the first quarter of 1999 the Company recorded a foreign currency
transaction gain of $1.5 million due to the appreciation in the dollar
against the Euro since January. This gain related to the portion of the
Gerhardi purchase price funded from domestic credit lines denominated in
Euros. It is not Lydall's policy to enter into foreign currency denominated
transactions for speculative purposes. As a result, transaction gains such
as this are not expected to recur.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flow (earnings before interest, taxes, depreciation and
amortization) improved by 20 percent to $9.3 million, including Gerhardi and
net of a foreign currency transaction gain, in the first quarter of 1999 over
$7.7 million for the same period of 1998. At March 31, 1999 cash and
equivalents were $2.1 million compared with $2.3 million at December 31, 1998.
Working capital at March 31, 1999 was a deficit of $7.2 million compared to a
deficit of $9.1 million at the end of 1998. Lydall is in the process of
refinancing a significant portion of the $48.7 million classified as
short-term borrowings at March 31, 1999 with a long-term facility. Once this
is completed, working capital is expected to be more consistent with
traditional positive levels.
The Company plans to meet its future working capital and capital expenditures
needs with funds provided from operations and, as needed, short and long term
borrowings.
RESULTS OF GERHARDI
As of December 30, 1998 Lydall began consolidating the results of the newly
acquired Gerhardi operations. Gerhardi added $21.0 million in sales in the
first quarter 1999. Excluding the after-tax effects of one-time
acquisition-related charges of $400 thousand, Gerhardi realized a gross
margin of $2.0 million and a net loss of $100 thousand, or 9.7 percent and
negative 0.5 percent of its sales, respectively. Management is taking several
actions to improve operational efficiencies throughout Gerhardi, but
specifically at the injection molded parts facility which has lower than
average margins. Overall, margins are expected to improve with the
introduction of Lydall's Cost of Quality Program, which has historically
resulted in increased manufacturing efficiencies and levels of product
quality throughout the Company's operations. Lydall is projecting Gerhardi to
break even after acquisition costs for 1999 and to be accretive to earnings
in 2000. The operations are expected to be increasingly profitable thereafter.
ACCOUNTING STANDARDS
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 on the balance sheet and measure those instruments at
their fair value. The statement is effective for fiscal years beginning after
June 15, 1999. At March 31, 1999, the Company did not have any 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.
YEAR 2000
Most of the Company's operating locations are Year 2000 compliant. The Company
expects to be substantially complete with Year 2000 compliance efforts at all
locations in the beginning of the third quarter of 1999. Further, the Company is
continuing efforts to ensure that critical vendors and customers are capable of
handling date-sensitive transactions.
The failure of the Company to correct a material Year 2000 issue or identify
vendors or customers with such a problem could result in an interruption in, or
failure of, certain normal business activities or operations for an indefinite
period of time. Lydall continually seeks to identify alternative sources of
critical raw materials to reduce business risk, in general, and this also serves
to reduce exposure to Year 2000 problems with vendor technology.
9
<PAGE>
The Company has capitalized approximately $10.2 million under its Year 2000
readiness program, Lydall 2000, which has been underway since 1995. It is
expected that there will be an additional $1.0 million capitalized under this
project. The incremental cost to make Gerhardi's date-sensitive technology Year
2000 compliant is negligible.
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.
FORWARD LOOKING INFORMATION
In the interest of more meaningful disclosure, Lydall and its management make
statements regarding the future outlook of the Company. The Company's actual
results could differ materially from those set forth in forward-looking
statements. Certain factors that might cause such a difference include risks and
uncertainties detailed in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section in the Company's 1998 Annual Report
on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
During the first quarter of 1999, the Company had outstanding debt on
domestic credit lines denominated in Euros, on which the company recorded a
transaction gain of $1.5 million. The foreign currency exchange risk on this
loan was monitored closely to mitigate the risk of loss due to currency
fluctuation. Early in the second quarter the Company purchased a forward
contract to buy Euros, on June 4, 1999, the settlement date of the Euro
denominated loan. It is not Lydall's policy to enter into foreign currency
denominated transactions for speculative purposes. As a result, transaction
gains or losses such as this are not expected to recur.
There have been no other significant changes in market risks from those
disclosed in item 7a of Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's 1998 Annual Report on Form
10-K.
10
<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 - Agreement and General Release with Leonard R. Jaskol dated
December 2, 1998.
27.1 - Financial Data Schedule, filed herewith
b. Reports on Form 8-K
On January 14, 1999, the registrant filed a current report on
Form 8-K announcing the purchase of Gerhardi & Cie. GmbH Co. KG
by a wholly-owned subsidiary of Lydall, Inc. The purchase
agreement was included in the filing. In addition, the registrant
also announced that Roger M. Widmann was named Chairman of the
Company's Board of Directors.
11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LYDALL, INC.
(Registrant)
May 17, 1999 By /s/ John E. Hanley
------------------------------------
John E. Hanley
Vice President, Finance and Treasurer
(Principal Accounting and Financial Officer)
12
<PAGE>
LYDALL, INC.
Index to Exhibits
Exhibit No.
- -----------
10.1 Agreement and General Release with Leonard R. Jaskol dated December 2,
1998.
27.1 Financial Data Schedule.
13
<PAGE>
Exhibit 10.1
AGREEMENT AND GENERAL RELEASE
THIS AGREEMENT made this 2nd day of December 1998 by and between
LYDALL, INC. (the "Company") and LEONARD R. JASKOL (the "Executive").
W I T N E S S E T H :
WHEREAS, the Company and the Executive entered into an Agreement
dated March 1, 1995 (the "1995 Agreement") relating to the Executive's
employment as Chairman, President and Chief Executive Officer of the Company (a
copy of which is attached hereto); and
WHEREAS, the Executive has expressed his willingness effective as of
December 2, 1998 to voluntarily resign from these positions as well to
voluntarily resign from his membership on the Board of Directors, and the
Company is willing to accept such resignations; and
WHEREAS, in connection with such resignations, the Executive and the
Company have agreed to modify the 1995 Agreement as hereinafter set forth and
otherwise to fully and finally settle all matters between them to date,
including any issues that might arise out of the Executive's employment or the
termination of his employment;
NOW, THEREFORE, the Company and the Executive, in consideration of
the mutual covenants and promises contained herein, agree as follows:
<PAGE>
2
1. Resignation: On December 2, 1998 and effective as of that date, the
Executive shall tender his resignation as Chairman and Chief Executive
Officer of the Company and shall tender his resignation as a Director.
2. Modification of 1995 Agreement. Effective upon the Executive's
resignation on December 2, 1998 in accordance with Section 1 above, the
Company and the Executive agree as follows with respect to the 1995
Agreement (and the 1995 Agreement shall be deemed amended accordingly):
a. The Executive's resignation shall be considered as a termination
pursuant to Paragraph 4(a) of the 1995 Agreement (other than for cause).
b. The Executive's rate of "Annual Salary" for purposes of Paragraph
8 of the 1995 Agreement shall be $780,000 per annum.
c. The "Employment Period" for purposes of the 1995 Agreement shall
be the 30-month period beginning on December 2, 1998 and ending on June 1,
2001 (subject to earlier termination to the extent provided in clause (a)
or (c) of Paragraph 6 of the 1995 Agreement).
d. Exhibit A of the 1995 Agreement shall be modified to list only
the following Fringe Benefits:
(i) Medical Benefits
a. Lydall, Inc. Health Care Payment Plan for Salaried
Employees (includes dental benefits)
b. Lydall, Inc. Executive Medical Reimbursement Plan
(ii) Life Insurance
a. Executive Life Insurance Plan
b. Individual whole life polices (Formerly Senior
Officer Life Plan)
<PAGE>
3
(iii) 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
(iv) Stock Plans
All of Executive's options outstanding on December 2,
1998 under the Lydall, Inc. 1982 Stock Incentive
Compensation Plan and the Lydall, Inc. 1992 Stock
Incentive Compensation Plan
e. For the purpose only of determining the period during
which the medical benefits described in Section 2 (d)(i) above
shall be available to the Executive, the 30-month "Employment
Period" described in Section 2(c) above shall be treated as
extended until the date on which the Executive attains age 70,
provided, however, that (i) on and after the date on which the
Executive attains age 66, the Executive shall be required to
pay 50 percent of the cost of such medical coverage (but if
the Company self-insures, in no event more than 50 percent of
the COBRA rate applicable under the Company's group medical
plan), (ii) at such time as the Executive attains the earliest
age at which the Executive may qualify for Medicare, the
Executive shall enroll in Medicare Part A and Part B and shall
be required to continue such enrollment as a condition for the
continued applicability of this subsection (e), and (iii) to
the extent consistent with applicable law, the Company's
medical plans may be secondary to Medicare.
f. Any stock options described in Section 2(d)(iv)
<PAGE>
4
above that have not otherwise become exercisable by the end of
the Employment Period as defined in Section 2(c) above shall
become immediately exercisable on the last day of such
Employment Period. Any options described in Section 2(d)(iv)
above which are not incentive stock options within the meaning
of Section 422 of the Internal Revenue Code and which have
note been exercised prior to the end of the Employment Period
as defined in Section 2(c) above shall remain exercisable for
a period of one year after the end of such Employment Period
(but not beyond the term of such option).
g. The Company during the Employment Period as defined
in Section 2(c) above shall provide to the Executive at the
Company's expense tax preparation services comparable to those
provided by the Company to the Executive prior to the date of
this Agreement.
h. The Company shall forgive the outstanding loans from
the Company to the Executive existing on the date of the
Agreement and all accrued interest thereon.
i. If the Company determines that it is unable to
provide any Fringe Benefits listed in Section 2(d) above under
the terms of the applicable plan, the Company shall provide
substantially comparable benefits in some other manner;
provided, however, that on and after the date on which the
Executive attains age 66, the Company shall use its best
efforts to provide the medical coverage pursuant to Section
2(e) above in the most cost-effective manner.
j. For purposes of determining the Executive's "Final
Average Compensation" pursuant to the Company's Supplemental
Executive Retirement Plan, the Executive's last day of
employment shall be the last day of the "Employment Period"
described in Section 2(c) above.
<PAGE>
5
k. Except as modified as set forth above, the 1995
Agreement shall remain in full force and effect.
3. Additional Benefits. The Executive understands and agrees that the
consideration described in Section 2 above is more than the Executive would
otherwise be entitled to under the Company's existing plans and policies.
4. No Disparagement.
a. Unless otherwise required by a court of competent jurisdiction or
pursuant to any recognized subpoena power or as is reasonably
necessary in connection with any adversarial process between the
Executive and the Company, the Executive agrees and promises that he
will not make any oral or written statements or reveal any
information to any person, company, or agency which may be construed
to be negative, disparaging or damaging to the reputation or
business of the Company, its subsidiaries, directors, officers or
affiliates, or which would interfere in any way with the business
relations between the Company or any of its subsidiaries or
affiliates and any of their customers or potential customers.
b. Unless otherwise required by a court of competent jurisdiction or
pursuant to any recognized subpoena power or as is reasonably
necessary in connection with any adversarial process between the
Executive and the Company, the Company agrees and promises that
neither it nor its directors or officers will make any oral or
written statements or reveal any information to any person, company,
or agency which may be construed to be negative, disparaging or
damaging to the reputation or business of the Executive or any
member of his family or which
<PAGE>
6
would interfere in any way with the future business relationships of
the Executive.
5. Release and Discharge.
a. In consideration of the payments and benefits to the Executive
under this Agreement, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged by the
Executive, the Executive knowingly, voluntarily and unconditionally
hereby forever waives, releases and discharges, and covenants never
to sue on, any and all claims, liabilities, causes of actions,
judgments, orders, assessments, penalties, fines, expenses and costs
(including without limitation attorneys' fees) and/or suits of any
kind arising out of any actions, events or circumstances before the
date of execution of this Agreement ("Claims") which the Executive
has, ever had or may have, including, without limitation, any Claims
arising in whole or in part from the Executive's employment or the
termination of the Executive's employment with the Company or the
manner of said termination; provided, however, that this Section
5(a) shall not apply to any of the obligations of the Company
specifically provided for in this Agreement or the 1995 Agreement
(as modified by this Agreement). This Agreement is intended as a
full and final settlement and compromise of each, every and all
Claims of every kind and nature, whether known or unknown, which
have been or could be asserted against the Company and/or any of its
subsidiaries, shareholders, officers, directors, agents, and
employees, past or present, and their respective heirs, successors
and assigns (collectively, the "Releasees"), including, without
limitation - -
(i) any Claims arising out of any employment
<PAGE>
7
agreement or other contract, side-letter, resolution, promise or
understanding of any kind, whether written or oral or express or
implied;
(ii) any Claims arising under the Age Discrimination in
Employment Act ("ADEA"), as amended, 29 U.S.C. ss.ss.621 et seq.;
and
(iii) any Claims arising under any federal, state, or local
civil rights, human rights, anti-discrimination, labor, employment,
contract or tort law, rule, regulation, order or decision,
including, without limitation, the Americans with Disabilities Act
of 1990, 42 U.S.C. ss.ss.12101 et seq., and Title VII of the Civil
Rights Act of 1964, 42 U.S.C.ss.ss.2000e et seq., and as each of
these laws have been or will be amended, except to the extent that
any governmental authority or other third party, i.e., other than
one of the Releasees, files a charge or institutes an investigation,
lawsuit or any preceeding against the Executive based on any event,
occurrence or omission during the period of the Executive's
employment with the Company, in which case the Executive will be
permitted to implead or bring a court action against the Company
and/or any or the Releases for indemnification of any liability or
other appropriate remedy, provided such impleader or court action
would be available but for this Agreement.
Notwithstanding anything to the contrary in this Section 5(a), the
Executive does not release (i) any claim he many have under any
employee benefit plan in which he was a participant during his
employment with the Company for the payment of a benefit thereunder
to which he would be entitled in respect to his employment through
December 2, 1998 in accordance with the terms of such plan or (ii)
any claim that he may have under this Agreement or the 1995
Agreement as modified by this Agreement.
The Executive understands that this Agreement affects significant
rights and represents and agrees that he has carefully read and
fully understands all of the provisions of this Agreement, that he
is voluntarily entering into this Agreement, and that he has been
advised to consult with and had in fact consulted with legal counsel
<PAGE>
8
before entering into this Agreement.
b. For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by the Company, the Company knowingly,
voluntarily and unconditionally hereby forever waives, releases and
discharges, and covenants never to sue on, any and all claims,
liabilities, causes of actions, judgments, orders, assessments, penalties,
fines, expenses and costs (including without limitation attorneys' fees)
and/or suits of any kind arising out of any actions, events or
circumstances before the date of execution of this Agreement ("Claims")
which the Company has, ever had or may have; provided, however, that this
Section 5(b) shall not apply to any of the obligations of the Executive
specifically provided for in this Agreement or the 1995 Agreement (as
modified by this Agreement). This Agreement is intended as a full and
final settlement and compromise of each, every and all Claims of every
kind and nature, whether known or unknown, which have been or could be
asserted against the Executive, except to the extent that any governmental
authority or other third party, i.e., other than the Executive, files a
charge or institutes an investigation, lawsuit or any proceeding against
the Company based on any event, occurrence or omission during the period
of the Executive's employment with the Company, in which case the Company
will be permitted to implead or bring a court action against the Executive
for indemnification of any liability or other appropriate remedy, provided
such impleader or court action would be available but for this Agreement.
Notwithstanding anything to the contrary in this Section 5(b), the Company does
not release any
<PAGE>
9
claim that the Company may have under this Agreement or the 1995 Agreement as
modified by this Agreement.
6. 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.
IN WITNESS WHEREOF, the parties have hereunto set their hands as of
the date first above written.
LYDALL, INC.
------------------------------
Leonard R. Jaskol
By
----------------------------------
Roger M. Widmann, Chairman,
Compensation and Stock Option
Committee
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