-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, KCCoLK8gzidIyBpjWRDoQfy7uanXcyFRxamK5jfD8FJX6TxO54oTToRchAvSFaoW mmHfuRseM7hX5VH/phg0xQ== 0000950109-95-000931.txt : 199507120000950109-95-000931.hdr.sgml : 19950711 ACCESSION NUMBER: 0000950109-95-000931 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LYDALL INC /DE/ CENTRAL INDEX KEY: 0000060977 STANDARD INDUSTRIAL CLASSIFICATION: TEXTILE MILL PRODUCTS [2200] IRS NUMBER: 060865505 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07665 FILM NUMBER: 95523821 BUSINESS ADDRESS: STREET 1: ONE COLONIAL RD STREET 2: P O BOX 151 CITY: MANCHESTER STATE: CT ZIP: 06045-0151 BUSINESS PHONE: 2036461233 FORMER COMPANY: FORMER CONFORMED NAME: COLONIAL BOARD CO DATE OF NAME CHANGE: 19700115 10-K405 1 FORM 10K/12-31-94 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the Fiscal Year Ended December 31, 1994 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from to Commission File Number: 1-7665 LYDALL, INC. (Exact name of registrant as specified in its charter) Delaware 06-0865505 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) One Colonial Road, Manchester, Connecticut 06040 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (203) 646-1233 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, $.10 par value New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X -- On March 13, 1995, the aggregate market value of the Registrant's voting stock held by nonaffiliates was $263,167,659. On March 13, 1995, there were 8,623,003 shares of Common Stock outstanding, exclusive of treasury shares. (CONTINUED) DOCUMENTS INCORPORATED BY REFERENCE Parts I and II incorporate certain information by reference from the Annual Report to Stockholders for the year ended December 31, 1994. 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 10, 1995. 2 PART I ------ Item 1. BUSINESS. Lydall, Inc. (hereafter referred to as "Lydall" or the "Company") is a manufacturer of technologically advanced engineered materials for demanding specialty applications. Lydall develops and manufactures engineered fiber materials and composites in both roll and sheet form; fiber-based as well as combination-metal-and-fiber heat shields; and fabricates certain medical filtration and automotive thermal barrier components. All of Lydall's products are supplied to customers who in turn incorporate them into finished products. Utilizing a broad spectrum of available fibers, materials, binders, resins, etc. combined with both dry-laid or wet-laid forming capabilities, the Company has been able to develop a broad range of high-performance materials. The Company serves a number of market niches. Lydall's products are primarily sold directly to the customer (or fabricator), through an internal sales force and are distributed through common carrier, ocean cargo, or the Company's trucking operation. Within each market niche there are typically several competitors. The Company primarily competes through high-quality products and customer service. Lydall has a number of domestic and foreign competitors for its products, most of whom are either privately owned or divisions of large companies, making it difficult to determine the Company's market share. During 1994, Lydall made two strategic acquisitions. On February 28, 1994, the Company acquired for $15 million in cash and a note payable of $2.25 million, the operations and certain assets and assumed certain liabilities of the Clecon Molding Division of Standard Packaging, Inc. ("Columbus Operation"). As a result of this purchase, the Company recorded goodwill and other intangible assets of approximately $11.4 million. The Columbus Operation is a designer and manufacturer of thermal and acoustical insulation products sold to the automotive market. The results of the Columbus Operation since the date of acquisition have been included in the Company's consolidated results. On June 30, 1994, the Company acquired the laminates operation of Riverwood International Georgia, Inc. located in Jacksonville, Florida ("Jacksonville Operation"). The Company purchased inventory, equipment, and other assets for approximately $1.8 million. This operation, which manufactures materials- handling slipsheets, directly complements Lydall's existing slipsheet business in Richmond, Virginia. The Company will continue to operate the Jacksonville location as part of the Southern Products Division. The results of the operations of the Jacksonville Operation since the date of acquisition have been included in the Company's consolidated results. Lydall's products fall into five basic categories: thermal barriers, air and liquid filtration media, materials handling systems, electrical insulation, and other products and services. 3 MAJOR PRODUCTS Thermal Barriers - ---------------- Lydall manufactures a broad range of materials which serve as heat or thermal barriers. The Cryotherm(R) and Lytherm(R) product lines include an assortment of composites using distinctive materials, in both rigid and flexible forms, manufactured by a variety of processes. Lydall's thermal barrier products in differing forms are capable of withstanding temperatures ranging from -459 degrees F to +3,000 degrees F. At the highest temperature requirements, Lytherm thermal barrier products are used as linings for ovens, kilns, and furnaces and in glass and metal manufacturing. At mid-range temperatures Lytherm nonwovens are patented layered composites of either organic and inorganic fibers or fiber and metal foil combinations which are used as thermal barriers in medium- and light-duty trucks, vans, sport utility vehicles, and passenger cars. The Columbus Operation acquisition contributed to the growth of thermal barrier sales. This acquisition also expanded the Company's product offerings to include metal-and-fiber combination automotive heat shields. Also, in mid-range temperatures, Manninglas(R) nonwovens are employed in consumer appliances and heat ventilation and air conditioning ducting and insulation. At the very coldest temperatures (approaching absolute zero), Cryotherm(R) cryogenic insulation materials are used for super-insulating applications. These include tanker trucks which transport liquid gases; stationary and portable cryogenic storage vessels; gas tanks for vehicles fueled by liquid natural gas; and supercolliders. These nonwovens are composed of 100-percent inorganic fibers. Lydall also manufactures custom-designed media employed in automotive air-bag pyrotechnic inflators. Although these sales are classified as thermal barriers by the Company, this specialty product performs both a filtration and heat-reduction function. Sales of thermal barriers approximated 34 percent of the Company's sales for 1994, 24 percent of sales for 1993, and 20 percent of sales for 1992. The increase in thermal barrier sales as a percent of total sales is primarily attributable to the addition of the Columbus Operation acquired during 1994. Filtration Media - ---------------- The Company manufactures high-efficiency air filtration media, marketed under the Lydair(R) name. Lydair filtration media are used for applications where clean air is vital, such as in semiconductor 4 manufacturing clean rooms, industrial clean rooms, and biotechnology laboratories. Lydall manufactures Lydair media in six filtration classes in over 100 grades with filtering efficiencies from 10 percent at 0.3 micron particle size to 99.999999 percent at 0.1 micron particle size. Lydall filtration media are primarily used in air filters for capital goods rather than consumables and last approximately five years. A replacement market exists as facilities using these filters upgrade clean room technology. The Company's HEPA filtration media are also used in home air-purification units. Lydall's line of fabricated medical filter components are sold under the trademark Lypore(R) and are widely used in blood filtration devices, such as cardiotomy reservoirs which filter the blood supply of an open-heart surgery patient during the operation, and autotransfusion filters used to filter blood collected from a patient before surgery or from an injured patient. Lydall also produces liquid filtration media used primarily in high- efficiency hydraulic oil and lubrication oil elements for off-road vehicles, trucks, and heavy equipment. These products are also sold under the Lypore trademark. Sales of filtration media declined to 20 percent of sales for 1994 compared with 24 percent and 25 percent of sales for 1993 and 1992, respectively. While sales of filtration media as a percentage of overall sales declined, 1994 sales of filtration media actually increased 13 percent over 1993 sales levels. The decline as a percentage of total sales is primarily due to two factors: 1) acquisitions in Lydall's other lines of business, and 2) a recovery in the domestic automotive industry which contributed to increased sales of thermal barriers. Management expects future sales of filtration media as a percentage of overall sales to remain relatively constant, absent any acquisition activity. Materials Handling - ------------------ Lydall produces slipsheets, separator sheets, and protective sheets. The Ly-Pak(R) slipsheets are used to ship a growing number of products such as food, pharmaceuticals, and chemicals. Ly-Pak slipsheet systems are used to replace wooden pallets, providing significant cost and space reductions for a shipper. Ly-Pak separator sheets are supplied to the glass and polyethylene terephthalate (PET) bottle industry and are manufactured to meet industry specifications for bulk palletizing. Ly-Pak protective sheets are used as pallet pads, protective top caps, and stabilizing sheets. These products are custom- made from plies of virgin kraft linerboard and laminated with a special moisture-resistant adhesive. The Company also sells a complete line of dunnage products. 5 Although sales of these products approximated 14 percent of 1994 sales as compared with 15 percent of 1993 and 1992 total sales; 1994 materials-handling sales actually increased by 28 percent over 1993 sales. This exceptional growth is attributable to the acquisition of the Jacksonville Operation and an increasing level of exports. It is expected that this business will continue to grow; however, it is not expected to represent an increasing percentage of Lydall's total sales, absent any acquisition activity. Electrical Insulation - --------------------- Lydall's electrical insulation material, sold under the SE/duroid(R), Sep-R-Max(R), and Voltex(R) trademarks are found in a broad range of applications such as computers, consumer appliances, utility power transformers, electric motors and other wiring devices. These materials are manufactured to electrical resistance, flame retardancy, formability, thermal aging, and moisture resistance specifications. The Company's electrical insulation products also include battery separator materials primarily used in European automotive batteries. These products are manufactured at the Company's European location. Lydall also manufactures Actipore(R) separators used in sealed lead acid batteries which power emergency standby energy systems. A significiant portion of the 1994 electrical insulation sales were derived from foreign operations. 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. Sales of electrical insulation products were approximately 8 percent of total sales in 1994, 10 percent in 1993, and 13 percent in 1992. Actual sales increased in 1994 by 13 percent over 1993 levels. The dynamic growth of the thermal barrier businesses in 1994 accounts for the decline of sales of electrical products as a percent of total sales. The decline from 1992 to 1993 was due to a poor European economy and lower demand for automotive battery separator materials to that market. Also, an expected shift in battery separator technology favoring different materials than those used by the Company affected Lydall beginning in 1993. The Company's electrical insulation sales are tied more closely to economic conditions than other products. Lydall expects that European separator sales will decline gradually and that these sales will be replaced with new products in air filtration and thermal insulation at the foreign facility. Other Products and Services - --------------------------- Lydall maintains a transportation operation which brokers and/or hauls freight for and between Lydall plants as well as for outside customers. In addition, the Company manufactures paperboard products used in games and packaging, specialty gasketing materials, and fiberboard shoe insole materials. Lydall also produces a wood replacement material made from recycled newsprint and cardboard 6 which is currently being made into writing instruments. Sales of all other products and services approximated 24 percent of the Company's sales in 1994, and 27 percent in both 1993 and 1992. GENERAL BUSINESS INFORMATION Lydall operates ten manufacturing facilities in the United States which are located in Rochester, New Hampshire; Green Island, New York; Hoosick Falls, New York; Manchester, Connecticut; Richmond, Virginia; Hamptonville, North Carolina; Rockwell, North Carolina; Columbus, Ohio; Jacksonville, Florida and Covington, Tennessee. Lydall has one manufacturing facility in Saint-Rivalain en Melrand, France. Lydall holds a number of patents, trademarks, and licenses. While no single patent, trademark or license by itself is critical to the success of Lydall, together these intangible assets are of considerable value to the Company's operations. The working capital requirements of the Company are financed primarily from operations. No significant portion of Lydall's business is seasonal. Lydall maintains levels of inventory and grants credit terms which are normal within the industries it serves. The Company uses a wide range of raw materials in the manufacturing of its products and was able to obtain all the raw materials needed during 1994. Generally these materials are available from a variety of suppliers who can be substituted if necessary. Therefore, the availability of any individual raw material is not a significant risk to the Company's operations. Thirty-one percent of Lydall's total sales in 1994 were to the world-wide automotive market. Lydall's automotive sales are sold to various customers including parts suppliers, thermal insulation fabricators, air-bag manufacturers and original equipment manufacturers for use in a variety of models and applications. Although no single customer represents 10 percent or more of Lydall's total sales, the ultimate customers for almost 25 percent of automotive sales are Ford Motor Company, General Motors Corporation and Chrysler Corporation. Lydall invested $5.5 million in 1994, $4.8 million in 1993, and $4.7 million in 1992, respectively, on activities to develop new products and special manufacturing processes or to improve existing products. Most of Lydall's investment in research and development is application specific; very little is pure research. There were no significant customer-sponsored research and development activities during the past three years. Lydall's backlog was $24.5 million at December 31, 1994, $13.7 million at December 31, 1993, and $12.1 million at December 31, 1992. Lydall expects to fill its backlog of 1994 orders during the first quarter of 1995. Backlog at February 28, 1995 was $26.7 million. The increased backlog over prior year levels is primarily due to backlog at the facilities acquired during 1994 and increased demand for both filtration and thermal barrier products. There are no seasonal aspects to this backlog. 7 No material portion of Lydall's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. Lydall believes that its plants and equipment are in substantial compliance with applicable federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Additional measures to maintain compliance with presently enacted laws and regulations are not expected to have a substantial adverse effect on the capital expenditures, earnings and competitive position of the Company and its subsidiaries. For information relating to certain environmental proceedings involving the Company, please refer to Item 3 below. As of March 1, 1995, Lydall and its subsidiaries had 1,307 employees, including foreign employees. Approximately 187 of the domestic employees are represented by eight unions under contracts expiring between November 1997 and November 1999. Lydall considers its employee relationships to be satisfactory, and there have not been any actual or threatened work stoppages due to union related activities. All employees at the Company's facility in France are covered under a National Collective Bargaining Agreement. Foreign and export sales were 21 percent of total sales in 1994 and 1993, and 23 percent in 1992. Export sales are concentrated primarily in Europe, the Far East, Mexico, and Canada and were $30.7 million, $21.7 million, and $19.8 million in 1994, 1993 and 1992, respectively. Foreign sales were $14.4 million, $12.3 million and $16.4 million for the years ended December 31, 1994, 1993, and 1992, respectively. Net income was $192 thousand, $57 thousand, and $1.1 million, for the years ended December 31, 1994, 1993, and 1992, respectively. Total foreign assets were $19.5 million at December 31, 1994, and $17.1 million at December 31, 1993. 8 Item 2. PROPERTIES The principal properties of the Company and its subsidiaries are situated at the following locations and have the following characteristics:
Approximate Area --------------------- General Land Buildings Location Description (Acres) (Sq. Feet) -------- ----------- ------- ---------- 1 Manchester, Warehouse 2.0 25,000 Connecticut Facilities 2 Manchester, Paperboard 11.6 70,500 Connecticut Manufacturing 3 Covington, Composite 26.0 155,000 Tennessee Materials Manufacturing 4 Richmond, Laminated Kraft 5.0 104,000 Virginia Manufacturing 5 Rochester, Specialty Paper 18.0 111,000 New Hampshire Manufacturing 6 Hoosick Falls, Composite 11.0 129,000 New York Materials Manufacturing 7 Hamptonville, Nonwoven Materials 35.2 85,000 North Carolina Manufacturing 8 Green Island, Specialty Paper 6.3 270,000 New York Manufacturing & Warehouse 9 Manchester, Corporate Office 4.5 20,000 Connecticut and Computer Center 10 Rockwell, Fabricating Facility 11.5 51,000 North Carolina 11 Saint-Rivalain Specialty Paper 14.3 156,000 en Melrand, Manufacturing France 12 Columbus, Fabricating Facility 9.0 80,000 Ohio 13 Jacksonville, Laminated Kraft - 52,000 Florida Manufacturing
Properties numbered 1, 4, 10, 12, and 13, are being leased; all others are owned. For information with respect to obligations for lease rentals and owned property, see the operating lease note to the Consolidated Financial Statements of the Company included in the 1994 Annual Report to Stockholders, which are incorporated herein by reference. 9 Lydall considers its properties to be suitable and adequate for its present needs. The properties are being fully utilized. In addition to the properties listed above, the Company has several additional leases for sales offices and warehouses in the United States and overseas. Item 3. LEGAL PROCEEDINGS In the mid-1980's, the United States Environmental Protection Agency ("EPA") notified a former subsidiary of the Company that it and other entities may be potentially responsible in connection with the release of hazardous substances at a landfill and property located adjacent to a landfill located in Michigan City, Indiana. The two sites have been combined and are viewed by the EPA as one site. The preliminary indication, based on the Site Steering Committee's volumetric analysis, is that the alleged contribution to the waste volume at the site of the plant once owned by a former subsidiary is approximately 0.434 percent of the total volume. The portion of the 0.434 percent specifically attributable to the former subsidiary by the current operator of the plant is approximately 0.286 percent. There are over 800 potentially responsible parties ("prp") which have been identified by the Site Steering Committee. Of these, 38, not including the Company's former subsidiary, are estimated to have contributed over 80 percent of the total waste volume at the site. These prp's include Fortune 500 companies, public utilities, and the State of Indiana. The Company believes that, in general, these parties are financially solvent and should be able to meet their obligations at the site. The Company has reviewed the financial statements and credit reports on several of these prp's, and based on these financial reports, does not believe the Company will have any material additional volume attributed to it for reparation of this site due to insolvency of other prp's. During the quarter ended September 30, 1994, the Company learned that the EPA recently completed its Record of Decision ("ROD") for the Michigan site and has estimated the total cost of remediation to be between $17 million and $22 million. Based on the alleged contribution of its former subsidiary to the site, the Company's alleged total exposure would be less than $100 thousand, which has been accrued. 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. 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 1994. EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT: The name, age, current position, and other business experience since January 1, 1990 of each executive officer of the Company are listed on the following page. Leonard R. Jaskol, John E. Hanley, Carole F. Butenas, Alan J. Gnann and Mary Adamowicz are elected 10 annually at the organizational meeting of the Board of Directors. All others are appointed by the President and Chief Executive Officer for an indefinite period. There are no family relationships among executive officers or other significant employees.
Other Business Experience Since Name Age Title 1990 ---- --- ----- ---------------- Leonard R. Jaskol 57 Chairman of the Board N/A (since 1991) President and Chief Executive Officer (since 1988) John E. Hanley 38 Vice President-Finance and Lydall, Inc. Treasurer Treasurer (since 1992) and Controller Carole F. Butenas 52 Vice-President-Communications Lydall, Inc. Secretary (since 1991) and Manager of Corporate Relations Alan J. Gnann 45 Vice President-Corporate President - Manning Development (since 1993) Nonwovens Division Mary Adamowicz 34 General Counsel and Secretary Litigation Attorney, (since 1991) Murtha, Cullina, Richter & Pinney Raymond S. Lanzi 56 Division President (since 1979) N/A Elliott F. Whitely 51 Division President (since 1987) N/A James P. Carolan 51 Division President (since 1993) President- Director (1994) Lydall International; President-Westex Division William J. Rankin 41 Division President (since 1992) General Manager-Lydall Express Christopher R. 41 Division President (since 1990) N/A Skomorowski Director (1994)
11 PART II ------- Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Information regarding the common stock of the Company and recent market prices of such stock, the cash dividend policy, and the approximate number of holders of common stock, is incorporated herein by reference to pages 26, 35, and 44 of the 1994 Annual Report to Stockholders. Item 6. SELECTED FINANCIAL DATA. Information regarding selected financial data of the Company is incorporated herein by reference to the inside front cover of the 1994 Annual Report to Stockholders. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's discussion and analysis of financial condition and results of operations is incorporated herein by reference to the President's Letter, the Analysis of Results and Key Financial Items on pages 2 through 5 and 18 through 26 of the 1994 Annual Report to Stockholders. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of Lydall, Inc. and its subsidiaries and the supplementary quarterly financial information are incorporated by reference to pages 27 through 31 and 41 of the 1994 Annual Report to Stockholders. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no disagreements with the Company's independent public accountants on accounting and financial disclosure. PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding the directors of Lydall is incorporated by reference to the definitive Proxy Statement of Lydall to be filed with the Commission relating to its Annual Meeting of stockholders to be held on May 10, 1995. Information regarding the executive officers and other significant employees of the Company is contained on pages 10 and 11 of this report. 12 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 10, 1995, excluding the Compensation and Stock Option Committee Report to Stockholders found on pages 12 through 14, and the comparative performance graph located on page 15, 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 10, 1995. 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 10, 1995. 13 PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. a)1) The following consolidated financial statements of Lydall, Inc. and its subsidiaries are found in and are incorporated by reference to the Annual Report to Stockholders for the year ended December 31, 1994:
Annual Report Pages ------ Consolidated Income Statements--Years ended December 31, 1994, 1993, and 1992 27 Consolidated Balance Sheets--December 31, 1994 and 1993 28 - 29 Consolidated Statements of Cash Flows-- Years ended December 31, 1994, 1993, and 1992 30 Consolidated Statements of Changes in Stockholders' Equity--Years ended December 31, 1994, 1993, and 1992 31 Notes to Consolidated Financial Statements 32 - 41 Report of Independent Accountants 42
14 a)2) Financial Statement Schedule:
10-K Pages ----- Report and Consent of Independent Accountants 19 Schedule II--Valuation and Qualifying Accounts-- Years ended December 31, 1994, 1993, and 1992. 20
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or are presented in the notes to financial statements, and therefore have been omitted. With the exception of the consolidated financial statements and the accountants' report thereon listed in the above index, the information referred to in Items 2, 5, 6 and 7 and the supplementary quarterly financial information referred to in Item 8, all of which is included in the 1994 Annual Report to Stockholders of the Company and incorporated by reference into this Form 10-K Annual Report, the 1994 Annual Report to Stockholders is not to be deemed "filed" as part of this report. 15 a)3) Exhibits included herein: 3.1 Amended and Restated Certificate of Incorporation of the registrant dated May 12, 1993, (filed as Exhibit 3.1 to the registrants Annual Report on Form 10-K dated March 28, 1994 and incorporated herein by this reference). 3.2 Bylaws of the registrant (filed as Exhibit 3.2 to the registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 4.1 Certain long-term debt instruments, each representing indebtedness in an amount equal to less than 10 percent of the registrant's total consolidated assets, have not been filed as exhibits to this Annual Report on Form 10-K. The registrant hereby undertakes to file these instruments with the Commission upon request. 10.1* Lydall, Inc. 1978 Long-Term Incentive Compensation Plan (filed as Exhibit 4.4 to the registrant's Registration Statement on Form S-8 dated March 18, 1988 (Reg. No. 33-20777), and incorporated herein by this reference). 10.2* Amended and restated, Lydall, Inc. 1982 Stock Incentive Compensation Plan, amended through May 14, 1991 (filed as Exhibit 10.6 to the registrant's Annual Report on Form 10-K dated March 26, 1992 and incorporated herein by this reference). 10.3* Amended and restated, 1992 Stock Incentive Compensation Plan, dated May 14, 1992, amended through May 11, 1994, filed herewith. 10.4* Lydall, Inc. Senior Management Annual Incentive Compensation Plan (filed as Exhibit 3.5 to the registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 10.5* Lydall, Inc. Management Annual Incentive Compensation Plan (filed as Exhibit 3.6 to the registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 10.6* Employment Agreement with Leonard R. Jaskol dated March 1, 1995, filed herewith. 10.7* Employment Agreement with John E. Hanley dated November 5, 1990 (filed as Exhibit 10.10 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.8* Employment Agreement with James P. Carolan dated November 5, 1990 (filed as Exhibit 10.12 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 16 10.9* Employment Agreement with Elliott F. Whitely dated November 5, 1990 (filed as Exhibit 10.13 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.10* Employment Agreement with Alan J. Gnann dated November 5, 1990 (filed as Exhibit 10.14 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.11* Employment Agreement with Raymond J. Lanzi dated November 5, 1990 (filed as Exhibit 10.15 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.12* Employment Agreement with Christopher R. Skomorowski dated February 6, 1992, filed as Exhibit 10.16 to the registrant's Annual Report on Form 10-K dated March 26, 1992 and incorporated herein by 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). 10.14 Asset Purchase Agreement between Lydall Central, Inc. and Standard Packaging, Inc. (filed as Exhibit 2.1 to the registrant's Current Report on Form 8-K dated February 28, 1994 and incorporated herein by this reference). 10.15 Asset Purchase Agreement between Lydall Eastern, Inc. and Riverwood International Georgia, Inc. (filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q dated August 10, 1994 and incorporated herein by this reference). 11.1 Schedule of Computation of Weighted Average Common Shares and Equivalents Outstanding, filed herewith. 13.1 Annual Report to Stockholders for the year ended December 31, 1994, filed herewith. 21.1 List of subsidiaries of the registrant, filed herewith. 23.1 Consent of Independent Public Accountants, filed herewith. 24.1 Power of Attorney, dated March 20, 1995, authorizing Leonard R. Jaskol and/or John E. Hanley to sign this report on behalf of each member of the Board of Directors indicated therein, filed herewith. 27.1 Financial Data Schedule, filed herewith. *Management contract or compensatory plan. b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter, 1994. 17 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Lydall, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LYDALL, INC. Date March 20, 1995 By Leonard R. Jaskol ------------------------- ------------------------- March 20, 1995 Leonard R. Jaskol Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of Lydall, Inc. in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- Leonard R. Jaskol Chairman, Chief March 20, 1995 - ---------------------- -------------- Leonard R. Jaskol Executive Officer and March 20, 1995 Director John E. Hanley Vice President-Finance March 20, 1995 - ---------------------- -------------- John E. Hanley and Treasurer (Principal March 20, 1995 Financial and Accounting Officer) John E. Hanley March 20, 1995 - ---------------------- -------------- John E. Hanley March 20, 1995 Attorney-in-fact for: Lee A. Asseo Director Paul S. Buddenhagen Director James P. Carolan Director Samuel P. Cooley Director (constituting in excess of W. Leslie Duffy Director a majority of the full Board William P. Lyons Director of Directors) Joel Schiavone Director Christopher R. Skomorowski Director Roger M. Widmann Director Albert E. Wolf Director 18 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholders of Lydall, Inc.: Our report on the consolidated financial statements of Lydall, Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from page 42 of the 1994 Annual Report to Stockholders of Lydall, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 15 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Hartford, Connecticut February 10, 1995 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. 33-68776) of our reports dated February 10, 1995, on our audits of the consolidated financial statements and financial statement schedule of Lydall, Inc. and Subsidiaries as of December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993, and 1992, which reports are incorporated by reference from the Annual Report to Stockholders, and included, respectively, in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Hartford, Connecticut March 27, 1995 19 Schedule II LYDALL, INC. AND SUBSIDIARIES ----------------------------- VALUATION AND QUALIFYING ACCOUNTS --------------------------------- FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992 -----------------------------------------------------
$ thousands Additions ----------------------- Charged To Charged To Other Balance At Costs and Accounts - Deductions - Balance At Description January 1 Expenses Describe Describe December 31 ----------- ---------- ---------- ----------- ------------ ----------- 1994 - ---- Allowance for doubtful receivables $1,126 $1,345 $ - $(747)(1) $1,724 Accumulated amortization of intangible assets 6,733 921 - (130)(3) 7,524 Accrued reorganization 95 72 - (10)(2) 157 Accrued environmental 954 - 90 (4) (42)(2) 1,002 Accumulated amortization of goodwill 34 482 - - 516 1993 - ---- Allowance for doubtful receivables $ 808 $ 340 $ - $ (22)(1) $1,126 Accumulated amortization of intangible assets (5) 5,822 911 - - 6,733 Accrued reorganization 56 42 - (3)(2) 95 Accrued environmental 1,003 67 (59)(4) (57)(2) 954 Accumulated amortization of goodwill (5) 21 13 - - 34 1992 - ---- Allowance for doubtful receivables $ 884 $ 30 $ - $(106)(1) $ 808 Accumulated amortization of intangible assets (5) 4,927 897 - (2)(4) 5,822 Accrued reorganization 42 60 - (46)(2) 56 Accrued environmental 1,063 298 (60)(4) (298)(2) 1,003 Accumulated amortization of goodwill (5) 9 12 - - 21
Notes (1): Uncollected receivables written off. (2): Disbursements of amounts previously accrued. (3): Write off of fully amortized asset. (4): Record foreign currency translation adjustments. (5): Prior year amounts have been adjusted to separately identify goodwill amortization from other intangibles. 20 INDEX TO EXHIBITS -----------------
Page in Exhibit Sequentially Number Description of Document Numbered Copy - ------ ----------------------- ------------- 3.1 Amended and Restated Certificate of Incorporation of the registrant dated May 12, 1993, (filed as Exhibit 3.1 to the registrants Annual Report on Form 10-K dated March 28, 1994 and incorporated herein by this reference). 3.2 Bylaws of the registrant (filed as Exhibit 3.2 to the registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 4.1 Certain long-term debt instruments, each representing indebtedness in an amount equal to less than 10 percent of the registrant's total consolidated assets, have not been filed as exhibits to this Annual Report on Form 10-K. The registrant hereby undertakes to file these instruments with the Commission upon request. 10.1 Lydall, Inc. 1978 Long-Term Incentive Compensation Plan (filed as Exhibit 4.4 to the registrant's Registration Statement on Form S-8 dated March 18, 1988 (Reg. No. 2-77176), and incorporated herein by this reference). 10.2 Amended and restated, Lydall, Inc. 1982 Stock Incentive Compensation Plan, (filed as Exhibit 10.6 to the registrant's Annual Report on Form 10-K dated March 26, 1992) amended through May 14, 1991, by this reference. 10.3 Amended and restated 1992 Stock Incentive Compensation Plan, dated May 14, 1992, amended through May 11, 1994, filed herewith. 10.4 Lydall, Inc. Senior Management Annual Incentive Compensation Plan (filed as Exhibit 3.5 to the registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 10.5 Lydall, Inc. Management Annual Incentive Compensation Plan (filed as Exhibit 3.6 to the registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference).
21 INDEX TO EXHIBITS--continued -----------------
Page in Exhibit Sequentially Number Description of Document Numbered Copy - ------ ----------------------- ------------- 10.6 Employment Agreement with Leonard R. Jaskol dated March 1, 1995, filed herewith. 10.7 Employment Agreement with John E. Hanley dated November 5, 1990 (filed as Exhibit 10.10 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.8 Employment Agreement with James P. Carolan dated November 5, 1990 (filed as Exhibit 10.12 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.9 Employment Agreement with Elliott F. Whitely dated November 5, 1990 (filed as Exhibit 10.13 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.10 Employment Agreement with Alan J. Gnann dated November 5, 1990 (filed as Exhibit 10.14 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.11 Employment Agreement with Raymond J. Lanzi dated November 5, 1990 (filed as Exhibit 10.15 to the registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.12 Employment Agreement with Christopher R. Skomorowski dated February 6, 1992, (filed as Exhibit 10.16 to the registrant's Annual Report on Form 10-K dated March 26, 1992 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). 10.14 Asset Purchase Agreement between Lydall Central, Inc. and Standard Packaging, Inc. (filed as Exhibit 2.1 to the registrant's Current Report on Form 8-K dated February 28, 1994 and incorporated herein by this reference).
22 INDEX TO EXHIBITS (Continued) -----------------------------
Page in Exhibit Sequentially Number Description of Document Numbered Copy - ------- ----------------------- ------------- 10.15 Asset Purchase Agreement between Lydall Eastern, Inc. and Riverwood International Georgia, Inc. (filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q dated August 10, 1994 and incorporated herein by this reference). 11.1 Schedule of Computation of Weighted Average Common Shares and Equivalents Outstanding, filed herewith. 13.1 Annual Report to Stockholders for the year ended December 31, 1994, filed herewith. 21.1 List of subsidiaries of the registrant, filed herewith. 23.1 Consent of Independent Public Accountants, filed herewith. 24.1 Power of Attorney, dated March 20, 1995, authorizing Leonard R. Jaskol and/or John E. Hanley to sign this report on behalf of each member of the Board of Directors indicated therein, filed herewith. 27.1 Financial Data Schedule, filed herewith.
23 EX-10.3 2 STOCK INCENT. COMP. PLAN 1992 STOCK INCENTIVE COMPENSATION PLAN 1. Purpose ------- The purpose of the Plan is to further the growth and prosperity of the Company and its Subsidiaries through payment of incentive compensation in the form of Common Stock to officers, key employees and directors and by encouraging investment in the Company's Common Stock by officers, key employees and directors who are in a position to contribute materially to the Company's prosperity. 2. Definitions ----------- Unless the context clearly indicates otherwise, the following terms, when used in this Plan, shall have the meanings set forth in this Section 2. "Award Period" means for each Restricted Stock Award, the period beginning ------------ with the date on which such Award is granted and ending on a date specified by the Committee at the time of the granting of such Award. In no event shall the Award Period be greater than ten (10) years. "Board of Directors" or "Board" means the Board of Directors of the ------------------ ----- Company. "Change in Control of the Company" means (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 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 of their stock, cash or other securities or a combination of the two, or (ii) the acquisition by a Person (as that term is hereafter defined) of the voting rights with respect to 25% or more of the outstanding Common Stock of the Company if such person was not an officer or director of the Company on May 13, 1992. "Code" means the Internal Revenue Code of 1986, as amended, and any ---- successor Code, and related rules, regulations and interpretations. "Committee" means the committee of the Board of Directors that has been --------- designated to administer the Plan, which shall consist of not less than two members of the Board of Directors as so designated and appointed from time to time by the Board. To be eligible to serve as a member of the committee, a director must qualify as a "disinterested person," as that term is defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and any successor to such rule. "Common Stock" means the common stock of the Company with the par value set ------------ forth in the Certificate of Incorporation. "Company" means Lydall, Inc. ------- "Fair Market Value" means the closing sale price per share on the New York ----------------- Stock Exchange (or on whatever national exchange the shares of the common stock of the Company are traded) on the day before the award date or on the day before the exercise date, as appropriate. If no trade occurred on the Exchange on the day before the award date or on the day before the exercise date, the closing sale price per share on the most recent date on which sales were reported will be substituted for the closing sale price on that day. "Incentive Award" means an Option, a Restricted Stock Award, a Stock Bonus --------------- Award, or a combination of them. "Incentive Stock Option" means an Option which meets the requirements of ---------------------- Section 422A of the Code. "Nonqualified Option" means an Option not qualifying for Incentive Stock ------------------- Option treatment under the Code. "Option" means a Nonqualified Option or Incentive Stock Option. "Person" - ------ ------ for purposes of the definition of "Change in Control of the Company," a "person" means an individual, corporation, trust or other legal or commercial entity and includes 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. "Plan" means the Lydall, Inc. 1992 Stock Incentive Compensation Plan. ---- "Restricted Stock Award" means the right to receive a specified ---------------------- number of shares of Common Stock in annual installments over a designated Award Period. "Stock Bonus Award" means an award of shares of Common Stock to an employee ----------------- in recognition of his or her superior performance. "Subsidiary" or "Subsidiaries" means a corporation or other form of ---------- ------------ business entity, more than 50% of the voting interest of which is owned or controlled, directly or indirectly, by the Company. 3. Shares of Common Stock Subject to the Plan ------------------------------------------ (a) Subject to the provisions of paragraph (c) of this Section 3 and Section 10, the total number of shares of Common Stock which may be issued or transferred under this Plan: 1) upon exercise of Options; 2) when an employee becomes entitled to receive shares of stock pursuant to a Stock Bonus Award; and 3) under the terms of a Restricted Stock Award, shall not exceed 790,000 shares. (b) Shares to be transferred to employees will be made available, at the discretion of the Board of Directors, either from authorized but unissued shares of Common Stock, or from shares of Common Stock held by the Company as treasury shares, including shares purchased in the open market. (c) If any share of Common Stock transferable under an Incentive Award is not transferred and ceases to be issuable or transferable because of the lapse, in whole or in part, of such Incentive Award, or, subject to the provisions of paragraph (b) of Section 7, and paragraphs (c) and (d) of Section 8, or for any other reason, the shares not so issued or transferred shall no longer be charged against the limitation provided for in paragraph (a) of this Section 3 and may again be used for Incentive Awards. 4. Administration of the Plan -------------------------- The Plan shall be administered by the Committee. The Committee shall have authority, in its discretion and after receiving the recommendations of the Chairman of the Company, to determine the employees to whom, and the time or times at which Incentive Awards will be granted and the number of shares to be subject to each Incentive Award. In making such determinations, the nature of the services rendered by the respective employees, their present and potential contributions to the Company's success and such other factors deemed to be relevant will be taken into account. Subject to the express provisions of the Plan, the Committee shall also have authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective Incentive Award Agreements (which need not be identical) including the determination of whether Options granted will be designated as Incentive Stock Options and to make all other determinations necessary or advisable for the administration of the Plan. The Committee will hold its meetings at such times and places as it may determine. A majority of its members will constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. 5. Participation ------------- (a) Except as set forth in Section 6 hereof, Incentive Awards may be granted only to salaried officers and other key employees of the Company and its Subsidiaries. (b) From time to time the Chairman of the Company will determine and recommend to the Committee those officers and key employees of the Company and of its Subsidiaries who should be granted Incentive Awards, the type of Incentive Awards to be granted, and the number of shares subject to each Incentive Award. The Committee shall approve or disapprove such recommendations. (c) Incentive Awards may be granted in the following forms: (i) a Restricted Stock Award, in accordance with Section 7, (ii) an Option, in accordance with Section 8, which may be designated as an Incentive Stock Option as that term is defined in Section 422A of the Code, (iii) a Stock Bonus Award, in accordance with Section 9, (iv) a combination of the foregoing. 6. Automatic Awards to Directors ----------------------------- (a) Subject to the limits set forth in Section 3(a) hereof, each director of the Company is hereby granted a Nonqualified Option, where the director is serving in such position, on each of the following dates: May 7, 1993, May 7, 1996, May 7, 1999 and May 7, 2002. The Option will cover the lesser of (i) 3,000 shares (appropriately adjusted pursuant to Section 10 hereof) of Common Stock, (ii) a number of shares of Common Stock having an aggregate Fair Market Value on the date of grant equal to $100,000, or (iii) the number of shares then available under the applicable limits imposed by Section 3(a) hereof. Except to the extent specified in this Section, the terms and conditions of each such Nonqualified Option shall be specified in Section 8 below. (b) Each person who is first elected a director of the Company after May 13, 1992, shall be granted automatically upon such election a Nonqualified Option covering the lesser of (i) 3,000 shares (appropriately adjusted pursuant to Section 10 hereof) of Common Stock, (ii) a number of shares of Common Stock having an aggregate Fair Market Value on the date of grant equal to $100,000, or (iii) the number of shares then available under the applicable limits imposed by Section 3(a) hereof. (c) If, on account of the limit set forth in Section 3(a) hereof, a director receives no Option or an Option covering fewer shares than he or she would have received under paragraphs (a) and (b) of this Section 6 and additional shares later become available under that limit while he or she remains a director of the Company and during the term of this Plan, then with respect to each such instance, such director shall be granted automatically upon such availability a Nonqualified Option covering a number of shares equal to the lesser of (i) 3,000 shares (appropriately adjusted pursuant to Section 10 hereof) of Common Stock, less the number of shares (as adjusted) for which one or more Options were previously granted to him or her under paragraphs (a) and (b), (ii) a number of shares of Common Stock having an aggregate Fair Market Value on the date of grant equal to $100,000 less the Fair Market Value of the shares for which one or more Options were previously granted to him or her under paragraphs (a) and (b), or (iii) the number of shares then available under Section 3(a). For purposes of the preceding sentence, priority among directors for additional Options as shares become available shall be determined on the basis of the order of their election as such. If the limit set forth in Section 3(a) affects two or more directors elected as such on the same date, the total number of shares which are then available or which later became available for Options shall be allocated equally among such directors entitled to receive additional Options until each such director has received Options for the number of shares he or she would have received initially if said limit had not applied . (d) The purchase price of each share of Common Stock under each Option granted under this Section 6 shall be the Fair Market Value of a share of Common Stock on the date the Option is granted, such date being either the date of the award or the date of the director's election as such, as appropriate . (e) Each Option granted under this Section 6 shall be exercisable as follows: (i) (A) twenty-five percent (25%) of the shares subject to such Option may be purchased commencing one year after the date of grant, and (B) an additional twenty-five percent (25%) of such shares may be purchased commencing on each of the second, third and fourth anniversaries of the date of grant; and (ii) subject to clause (i) above, such Option may only be exercised during the ten-year period beginning on the date the Option is granted. (f) Except as specifically provided for and pursuant to the terms of this Section 6, with respect to the automatic grant of Nonqualified Options, any director who is not a full-time salaried employee of the Company shall not be eligible to receive any Incentive Award or other grant under the Plan. Any director who is a full-time, salaried employee of the Company shall be eligible at the discretion of the Committee to receive additional Incentive Awards, but shall be prohibited from serving as a member of the Committee. 7. Restricted Stock Awards ----------------------- An Incentive Award in the form of a Restricted Stock Award shall be subject to the following provisions: (a) The restricted stock agreement shall specify (i) the number of shares of Common Stock to be transferred to the recipient over the Award Period, and (ii) the times at which portions of those shares shall be transferred to the recipient. In no event may shares be transferred before one year after the date of the Award, or later than ten years from such date, excepting, however, that for persons who are not officers of the Company, the Committee may waive any part of the one- year period after the date of the Award during which the shares may not be transferred. (b) The Restricted Stock Award shall terminate if the holder, with or without cause, shall cease to be an employee of the Company or any of its Subsidiaries and any installments of shares of Common Stock which have not yet become transferable to such holder shall be forfeited upon cessation of employment; provided, however, in the event that an employee's employment shall terminate as a result of death or disability, the foregoing provision of this subparagraph (b) shall not apply and all shares of stock subject to Restricted Stock Awards shall immediately become vested. (c) At the time an installment of shares of Common Stock is transferred to the holder of a Restricted Stock Award, an additional payment shall be made to such holder, either in cash or shares of Common Stock as the Committee shall determine in its sole discretion, in an amount equal to the cash dividends which would have been payable to the holder of the Restricted Stock Award in respect to the shares transferred to the holder at the time the Restricted Stock Award was granted. (d) Each Restricted Stock Award shall be evidenced by a written instrument containing terms and conditions determined by the Committee, consistent with the terms of the Plan. 8. Options ------- An Incentive Award in the form of an Option shall be subject to the following provisions: (a) At the time of grant, the Option shall specify (i) the number of shares of Common Stock which may be purchased by the recipient over the term of the Option; (ii) the times at which portions of such shares may be purchased by the recipient; and (iii) whether the Option is an Incentive Stock Option. No Option shall be deemed to be an Incentive Stock Option unless the Committee has so designated such Option and the Option states that it is an Incentive Stock Option. (b) The purchase price of each share of Common Stock under each Option will be at least 100 percent of the Fair Market Value of a share of Common Stock at the time of grant. (c) The Option must provide that it is not transferable and may be exercised solely by the person to whom granted, except as provided in paragraph (e) of this Section 8 in the event of such person's death. (d) Each Option granted to an employee will be subject to the condition that it may be exercised only if the optionee remains in the employ of the Company and/or a Subsidiary for at least one year after the date of the granting of the Option. An Option may be exercised at the times and in the amounts determined by the Committee. In no event, however, shall an Option be exercisable after ten years from the granting of the Option. (e) An Option granted to an employee shall terminate if and when the optionee shall cease to be an employee of the Company and its Subsidiaries, except as follows: (i) If an optionee who has been continuously employed by the Company or any of its Subsidiaries for at least one year from the date of grant of an Option dies (x) while employed by the Company or a Subsidiary, or (y) during any period after retirement or the termination of his/her employment when the Option would otherwise be exercisable under subparagraph (ii) below, the Option theretofore granted to him/her may be exercised (x) by the beneficiary designated pursuant to paragraph (g) of Section 11 or (y) in the absence of such designation or if no such beneficiary survives the optionee by a representative of such optionee's estate provided that such Option may be exercised only within six months from the date of death and within ten years from the date of grant of the Option . (ii) If an optionee retires or if his/her employment with the Company or a Subsidiary is terminated for any reason (other than death) subsequent to one year from the date of grant of any Option, such Option may be exercised within three years (or such lesser period as the Option Agreement shall specify) from the date of such retirement or termination of employment, but in no event after ten years from date of grant of the Option; provided, however, that if such Option is an Incentive Stock Option, it may be exercised only within ninety (90) days (or such lesser period as the Option Agreement shall specify) from the date of such retirement or termination of employment, but in no event after ten years from the date of grant of the Option. (iii) Notwithstanding (i) and (ii) above, if an optionee is dismissed for cause, of which the Committee shall be the sole judge, his/her Option shall expire immediately upon termination. (iv) The Committee may determine that, for the purpose of the Plan, an employee who is on a leave of absence will be considered as still in the employ of the Company, provided that an Option shall be exercisable during a leave of absence only as to the number of shares which were exercisable at the commencement of such leave of absence. (v) No Option may be exercised for more than the number of shares for which the optionee might have exercised his/her Option at the time he/she ceased for any reason to be an employee of the Company or a Subsidiary . (f) A Nonqualified Option granted to a nonemployee director of the Company shall terminate if and when the optionee shall cease to serve as a director of the Company, except as follows: (i) If the optionee who has continuously served as a director of the Company for at least one year from the date of grant of a Nonqualified Option dies (x) while serving as a director of the Company, or (y) during any period after having ceased to be a director when the Nonqualified Option would otherwise be exercisable under subparagraph (ii) below, the Nonqualified Option theretofore granted to him/her may be exercised by a representative of his/her estate, provided that such Nonqualified Option may be exercised only within six months after the date of death and prior to the expiration date specified in such Nonqualified Option. (ii) If the optionee ceases for any reason (other than death) to be a director of the Company subsequent to one year from the date of grant, such Nonqualified Option may be exercised within three months from the date of such cessation and prior to the expiration date specified in such Option Agreement. (iii) No Option may be exercised for more than the number of shares for which the optionee might have exercised his/her Option at the time he/she ceased for any reason to be a director of the Company. (g) A person electing to exercise an Option will give written notice to the Company of such election and of the number of shares he/she has elected to purchase and the date on which he/she wishes to exercise the Option. Any person exercising an Option may tender the full purchase price in cash of the shares he/she has elected to purchase on the date specified by him/her for completion of such purchase. If authorized by the Committee, in its discretion, at or after the time of grant, payment in full or in part may also be made by an employee of the Company in the form of shares of Common Stock not then subject to restriction under any Company plan (but which may include shares the disposition of which constitutes a disqualifying disposition for purposes of obtaining incentive stock option treatment for federal tax purposes); provided, however, that shares of Common Stock may not be used to pay any of the purchase price of an Option unless such shares have been owned by the employee for at lease six months, or such longer period as the Committee shall determine, prior to being surrendered as payment in full or in part of the purchase price of an Option. Such surrendered shares shall be valued at "Fair Market Value." (h) The Option agreements or Option grants authorized by the Plan may contain such other provisions, consistent with the terms of the Plan, as the Committee shall consider advisable. (i) Incentive Stock Options may not be issued to any person who at the time of grant owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries. (j) The aggregate Fair Market Value (determined at the time an option is granted) of stock of the Company (including Common Stock) granted an employee to which Incentive Stock Options are exercisable for the first time by such employee during any calendar year (under all incentive stock option plans of the Company or its Subsidiaries) shall not exceed $100,000. 9. Stock Bonus Awards ------------------ A Stock Bonus Award may be granted to any employee of the Company or its Subsidiaries whom the Committee determines, upon recommendation of the Chairman of the Company, should be rewarded for exemplary performance, subject to the following provisions: (a) The Committee shall determine, in its discretion, the number of shares of stock to be granted pursuant to a Stock Bonus Award and the time at which an Award shall be made. (b) A Stock Bonus Award shall be evidenced by the delivery to the employee of a stock certificate representing the shares awarded. (c) Shares of Common Stock transferred pursuant to a Stock Bonus Award shall be subject only to such conditions as are directed by the Board of Directors in accordance with Section 11(a) hereof. 10. Adjustment Provisions --------------------- Except as otherwise provided herein, the following provisions shall apply to all Common Stock authorized for issuance, and optioned, granted or awarded under the Plan: (a) Stock Dividends, Splits, Etc. In the event of a stock dividend, stock split, or other subdivision or combination of the Common Stock, the number of shares of Common Stock authorized under the Plan will be adjusted proportionately. Similarly, in any such event there will be a proportionate adjustment in the number of shares of Common Stock subject to unexercised Options (but without adjustment to the aggregate option price) and in the number of shares of Common Stock then subject to Restricted Stock Awards. (b) Divisive Reorganization, Merger, Exchange or other Reorganization. In the event that the outstanding shares of Common Stock are changed or converted into, exchanged or exchangeable for, a different number or kind of shares or other securities of the Company or of another corporation, by reason of a reorganization, merger, consolidation, reclassification or combination, or in the event that the Company engages in a divisive reorganization, such as a spin-off of any significant portion of its business, the total number of shares of Common Stock which may be issued under the Plan shall be appropriately adjusted and appropriate adjustment shall be made by the Committee in the number of shares, kind of Common Stock and/or the Option price for which Incentive Awards may be or may have been awarded under the Plan, to the end that the proportionate interests of participants and inherent values of outstanding Incentive Awards shall be maintained as before the occurrence of such event. (c) Adjustments under this Section 10 shall be made by the Board of Directors, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of Common Stock shall be issued under the Plan on account of any such adjustments. (d) Change in control of the Company. If, and at such time as, a "change in control of the Company" (as defined in Section 2) shall have occurred, any and all provisions of any and all outstanding Incentive Awards which condition the right to exercise such Incentive Awards upon the holder of any such Incentive Award having been an employee of the Company or any of its Subsidiaries or a director of the Company for a period of time shall be deemed to have been rescinded, so that such holder, upon the occurrence of such change in control, shall have the right to exercise such Incentive Award in full, (including, in the case of Restricted Stock Awards, the right to be issued the stock awarded and any dividend accrued thereon), irrespective of whether such holder has been an employee or director for the period of time specified in the Incentive Award; provided, however, if any such recision would cause the maximum period during which an Option may be exercised or a Restricted Stock Award transferred to exceed nine years, such recision shall not occur with respect to such Option or Restricted Stock Award unless and until such Option or Restricted Stock Award is amended, with the consent of the holder, to reduce such maximum period to nine years or less. 11. General Provisions ------------------ (a) With respect to any shares of Common Stock issued or transferred under the provisions of this Plan, such shares may be issued or transferred subject to such conditions, in addition to those specifically provided in the Plan, as the Board of Directors or Committee may direct. (b) Nothing in the Plan or in any instrument executed pursuant thereto will confer upon any employee any right to continue in the employ of the Company or a Subsidiary or will affect the right of the Company or of a Subsidiary to terminate the employment of any employee with or without cause. Nothing in the Plan or in any instrument executed pursuant thereto will confer upon any director of the Company any right to continue in such capacity or will affect the right of shareholders to remove or not reelect such person as a director of the Company with or without cause. (c) No shares of Common Stock will be issued or transferred pursuant to an Incentive Award unless and until all legal requirements applicable to the issuance or transfer of such shares have, in the opinion of counsel to the Company, been complied with. In connection with any such issuance or transfer, the person acquiring the shares will, if requested by the Company, give written assurances satisfactory to counsel to the Company that the shares are being acquired for investment and not with a view to resale or distribution thereof and assurances in respect of such other matters as the Company or a Subsidiary may consider desirable to assure compliance with all applicable legal requirements. (d) No employee (individually or as a member of a group), and no beneficiary or other person claiming under or through him/her, will have any right, title or interest in any shares of Common Stock allocated or reserved for the purposes of the Plan or subject to any Incentive Award except as to such shares of Common Stock, if any, as shall have been issued or transferred to him/her and except as otherwise provided in Section 12(a). (e) In the case of any employee of a Subsidiary, the Committee may direct the Company to issue the shares covered by the Incentive Award to the Subsidiary for such lawful consideration as the Committee may specify upon the condition that the Subsidiary will transfer the shares to the employee in accordance with the terms of the Incentive Award. Notwithstanding any other provision of this Plan, an Incentive Award, excluding an Incentive Stock Option, may be issued by and in the name of the Subsidiary and shall be considered granted on the date it is approved by the Committee, on the date it is delivered by the Subsidiary, or on such other date between such two dates as the Committee will specify. For options which are intended to qualify as Incentive Stock Options, the date of grant shall be determined in accordance with the applicable regulations under the Code. (f) The Company or a Subsidiary may make such provisions as it may consider appropriate for the withholding of any taxes which the Company or Subsidiary determines it is required to withhold in connection with any Incentive Award. (g) No Incentive Award and no rights under the Plan, contingent or otherwise, shall be assignable, transferable or subject to any encumbrance, pledge or charge of any nature, provided that, under such rules and regulations as the Committee may establish pursuant to the terms of the Plan, a beneficiary may be designated in respect of an Incentive Award in the event of the death of the holder of such Incentive Award and provided, also, that if such beneficiary shall be the executor or administrator of the estate of the holder of such Incentive Award, any rights in respect of such Incentive Award may be transferred to the person or persons or entity (including a trust) entitled thereto under the will of the holder of such Incentive Award or, in case of intestacy, under the laws relating to intestacy. (h) Nothing in the Plan is intended to be a substitute for, or shall preclude or limit the establishment or continuation of, any other plan, practice or arrangement for the payment of directors' fees or compensation or fringe benefits to employees generally, or to any class or group of employees, which the Company or any Subsidiary now has or may hereafter lawfully put into effect, including, with limitation, any retirement, pension, insurance, stock purchase, incentive compensation or bonus plan. (i) Except as the Delaware Corporation law otherwise may require, the place of administration of the Plan will conclusively be deemed to be within the State of Connecticut and the validity, construction, interpretation and administration of the Plan and of any rules and regulations or determinations or decisions made thereunder, will be governed by, and determined exclusively and solely in accordance with, the laws of the State of Connecticut. Without limiting the generality of the foregoing, the period within which any action arising under or in connection with the Plan, or any payment or Award made or purportedly made under or in connection therewith, must be commenced and will be governed by the laws of the State of Connecticut, irrespective of the place where the act or omission complained of took place and of the residence of any party to such action and irrespective of the place where the action may be brought. 12. Amendment, Suspension and Termination of Plan --------------------------------------------- (a) The Board of Directors may at any time terminate, suspend or amend the Plan, provided, however, that no such amendment will, without approval of the shareholders of the Company, except as provided in Section 10 hereof, (i) materially increase the aggregate number of shares which may be issued in connection with Incentive Awards; (ii) change the minimum Option exercise price; (iii) increase the maximum period during which Options may be exercised, or Restricted Stock Awards transferred; (iv) extend the effective period of this Plan; or (v) materially modify the requirements as to eligibility for participation in the Plan. No such amendment will permit the granting of Incentive Awards to members of the Committee. (b) The Committee may, with the consent of the person by whom a Restricted Stock Award or an Option is held, modify or change the terms of any Option or Restricted Stock Award in a manner which does not conflict with the provisions of the Plan. 13. Effective Date and Duration of Plan ----------------------------------- This Plan becomes effective upon its approval by the stockholders of the Company on May 13, 1992. Any amendment to this Plan will become effective upon approval by Directors, unless stockholder approval is deemed necessary, in which case such amendment shall become effective upon approval by stockholders. Unless previously terminated by the Board of Directors, this Plan shall terminate at the close of business on May 12, 2002, and no Restricted Stock Award or Option may be granted under it thereafter, but such termination shall not affect any Incentive Award theretofore granted. As Amended May 11, 1994. EX-10.6 3 EMPLOY. AGMT./JASKOL AGREEMENT --------- THIS AGREEMENT MADE THIS FIRST DAY OF MARCH, 1995 BY AND BETWEEN LYDALL, ----- ----- INC. (THE "COMPANY") AND LEONARD R. JASKOL (THE "EXECUTIVE"). W I T N E S S E T H : RECITALS. - --------- EXECUTIVE IS EMPLOYED BY THE COMPANY AS ITS CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER. THE COMPANY AND EXECUTIVE HAVE AGREED THAT IF EXECUTIVE SHOULD CEASE TO BE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE COMPANY 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: Executive to Serve as Chairman, President and Chief Executive Officer. ---------------------------------------------------------------------- The Executive shall continue to act as Chairman, President and Chief Executive Officer of the Company, subject to the direction of its Board of Directors. 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 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 PRIOR TO TERMINATION OF EXECUTIVE; EXCEPT THAT SUCH NOTICE WOULD NOT BE REQUIRED IF, IN THE BOARD'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. 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 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 CHAIRMAN, PRESIDENT OR CHIEF EXECUTIVE OFFICER BY THE BOARD IN PLACE OF EXECUTIVE AT ANY TIME PRIOR TO APRIL 1, 2002, 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. 2. TERMINATION PRIOR TO CHANGE OF CONTROL. IF PRIOR TO A CHANGE OF --------------------------------------- CONTROL (A) THE EXECUTIVE SHALL RESIGN AS CHAIRMAN, PRESIDENT OR CHIEF EXECUTIVE OFFICER OF THE COMPANY AT THE REQUEST OF THE BOARD OR BECAUSE THE DUTIES AND RESPONSIBILITIES OF THE CHAIRMAN, PRESIDENT OR CHIEF EXECUTIVE OFFICER HAVE BEEN SIGNIFICANTLY MODIFIED BY THE BOARD WITHOUT HIS CONSENT OR (B) ANOTHER IS APPOINTED OR ELECTED CHAIRMAN, PRESIDENT OR CHIEF EXECUTIVE OFFICER BY THE BOARD 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. 3. 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. 4. 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 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 APRIL 1, 2002, 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 (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). 5. 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. 6. COMPENSATION. THE COMPANY SHALL PAY TO EXECUTIVE DURING THE ------------ EMPLOYMENT PERIOD AN ANNUAL SALARY (THE "ANNUAL SALARY") EQUAL TO ONE-THIRD (1/3RD) OF THE AGGREGATE OF THE BASE SALARY AND BONUSES PAID TO HIM DURING THE PERIOD COMMENCING THREE (3) YEARS PRIOR TO THE DATE OF TERMINATION AND ENDING ON THE DATE OF TERMINATION. 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 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 $1,500 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. 7. TAX GROSS-UP. ANYTHING IN THIS AGREEMENT TO THE CONTRARY ------------- NOTWITHSTANDING, IN THE EVENT IT SHALL BE DETERMINED THAT ANY PAYMENT OR DISTRIBUTION MADE, OR BENEFIT PROVIDED, BY THE COMPANY TO OR FOR THE BENEFIT OF THE EXECUTIVE (WHETHER PAID OR PAYABLE OR DISTRIBUTED OR DISTRIBUTABLE PURSUANT TO THE TERMS OF THIS AGREEMENT OR OTHERWISE, BUT DETERMINED WITHOUT REGARD TO ANY ADDITIONAL PAYMENTS REQUIRED UNDER THIS SECTION 9 (A 'PAYMENT') WOULD BE SUBJECT TO THE EXCISE TAX IMPOSED BY SECTION 4999 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED AND THEN IN EFFECT (THE 'CODE') (OR ANY SIMILAR EXCISE TAX) OR ANY INTEREST OR PENALTIES ARE INCURRED BY THE EXECUTIVE WITH RESPECT TO SUCH EXCISE TAX (SUCH EXCISE TAX, TOGETHER WITH ANY SUCH INTEREST AND PENALTIES, ARE HEREINAFTER COLLECTIVELY REFERRED TO AS THE ('EXCISE TAX'), THEN THE EXECUTIVE SHALL BE ENTITLED TO RECEIVE AN ADDITIONAL PAYMENT (A 'GROSS-UP PAYMENT') IN AN AMOUNT SUCH THAT AFTER PAYMENT BY THE EXECUTIVE OF ALL FEDERAL, STATE, LOCAL OR OTHER TAXES (INCLUDING ANY INTEREST OR PENALTIES IMPOSED WITH RESPECT TO ANY SUCH TAXES), INCLUDING, WITHOUT LIMITATION, ANY SUCH INCOME TAXES (AND ANY INTEREST AND PENALTIES IMPOSED WITH RESPECT THERETO) AND EXCISE TAX IMPOSED UPON THE GROSS-UP PAYMENT, THE EXECUTIVE RETAINS AN AMOUNT OF THE GROSS-UP PAYMENT EQUAL TO THE EXCISE TAX IMPOSED UPON THE PAYMENTS. AN EXECUTIVE MAY RECEIVE GROSS-UP PAYMENTS UNDER THIS SECTION 9 WHETHER OR NOT THE EXECUTIVE ACTUALLY RECEIVES OTHER PAYMENTS OR BENEFITS UNDER THE AGREEMENT. (I) SUBJECT TO THE PROVISIONS OF PARAGRAPH (II) OF THIS SECTION 9, ALL DETERMINATIONS REQUIRED TO BE MADE UNDER THIS SECTION 9, INCLUDING WHETHER AND WHEN A GROSS-UP PAYMENT IS REQUIRED AND THE AMOUNT OF SUCH GROSS-UP PAYMENT AND THE ASSUMPTIONS TO BE UTILIZED IN ARRIVING AT SUCH DETERMINATION, SHALL BE MADE BY COOPERS & LYBRAND (THE "ACCOUNTING FIRM') WHICH SHALL PROVIDE DETAILED SUPPORTING CALCULATIONS BOTH TO THE COMPANY AND THE EXECUTIVE WITHIN 20 CALENDAR DAYS OF THE RECEIPT OF WRITTEN NOTICE FROM THE EXECUTIVE THAT THERE HAS BEEN A PAYMENT, OR SUCH EARLIER TIME AS IS REQUESTED BY THE COMPANY. IN THE EVENT THAT THE ACCOUNTING FIRM IS SERVING AS ACCOUNTANT OR AUDITOR FOR THE INDIVIDUAL, ENTITY OR GROUP EFFECTING THE CHANGE OF CONTROL, THE EXECUTIVE SHALL HAVE THE RIGHT BY WRITTEN NOTICE TO THE COMPANY TO APPOINT ANOTHER NATIONALLY RECOGNIZED ACCOUNTING FIRM TO MAKE THE DETERMINATIONS REQUIRED HEREUNDER (WHICH ACCOUNTING FIRM SHALL THEN BE REFERRED TO AS THE ACCOUNTING FIRM HEREUNDER). ALL FEES AND EXPENSES OF THE ACCOUNTING FIRM SHALL BE BORNE SOLELY BY THE COMPANY AND SHALL BE PAID BY THE COMPANY UPON DEMAND OF THE EXECUTIVE AS INCURRED OR BILLED BY THE ACCOUNTING FIRM. ANY GROSS-UP PAYMENT, AS DETERMINED PURSUANT TO THIS SECTION 9, SHALL BE PAID BY THE COMPANY TO THE EXECUTIVE WITHIN FIVE DAYS OF THE RECEIPT OF THE ACCOUNTING FIRM'S DETERMINATION. IF THE ACCOUNTING FIRM DETERMINES THAT NO EXCISE TAX IS PAYABLE BY THE EXECUTIVE, IT SHALL FURNISH THE EXECUTIVE WITH AN UNQUALIFIED WRITTEN OPINION 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 8 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 SUCH CLAIM PRIOR TO THE EXPIRATION OF THE 30-DAY PERIOD FOLLOWING THE DATE ON WHICH IT GIVES SUCH NOTICE TO THE COMPANY (OR SUCH SHORTER PERIOD ENDING ON THE DATE THAT ANY PAYMENT OF TAXES WITH RESPECT TO SUCH CLAIM IS DUE). IF THE COMPANY NOTIFIES THE EXECUTIVE IN WRITING PRIOR TO THE EXPIRATION OF SUCH PERIOD THAT IT DESIRES TO CONTEST SUCH CLAIM, THE EXECUTIVE SHALL AT THE COMPANY'S EXPENSE: A. GIVE THE COMPANY ANY INFORMATION REASONABLY REQUESTED BY THE COMPANY RELATING TO SUCH CLAIM. B. TAKE SUCH ACTION IN CONNECTION WITH CONTESTING SUCH CLAIM AS THE COMPANY SHALL REASONABLY REQUEST IN WRITING FROM TIME TO TIME, INCLUDING, WITHOUT LIMITATION, ACCEPTING LEGAL REPRESENTATION WITH RESPECT TO SUCH CLAIM BY AN ATTORNEY REASONABLY SELECTED BY THE COMPANY. C. COOPERATE WITH THE COMPANY IN GOOD FAITH IN ORDER EFFECTIVELY TO CONTEST SUCH CLAIM, AND D. PERMIT THE COMPANY TO PARTICIPATE IN ANY PROCEEDINGS RELATING TO SUCH CLAIM; PROVIDED, HOWEVER, THAT THE COMPANY SHALL BEAR AND PAY DIRECTLY AS INCURRED ALL COSTS AND EXPENSES (INCLUDING ADDITIONAL INTEREST AND PENALTIES) INCURRED IN CONNECTION WITH SUCH CONTEST AND SHALL INDEMNIFY AND HOLD THE EXECUTIVE HARMLESS, ON AN AFTER-TAX BASIS, FOR ANY EXCISE TAX OR ANY FEDERAL, STATE, LOCAL OR OTHER INCOME OR OTHER TAX (INCLUDING INTEREST AND PENALTIES WITH RESPECT THERETO) IMPOSED AS A RESULT OF SUCH REPRESENTATION AND PAYMENT OF COSTS AND EXPENSES. WITHOUT LIMITATION ON THE FOREGOING PROVISIONS OF THIS SECTION 9, THE COMPANY SHALL CONTROL ALL PROCEEDINGS TAKEN IN CONNECTION WITH SUCH CONTEST AND, AT ITS SOLE OPTION, MAY PURSUE OR FOREGO ANY AND ALL ADMINISTRATIVE APPEALS, PROCEEDINGS, HEARINGS AND CONFERENCES WITH THE TAXING AUTHORITY IN RESPECT OF SUCH CLAIM AND MAY, AT ITS SOLE OPTION, EITHER DIRECT THE EXECUTIVE TO PAY THE TAX CLAIMED AND SUE FOR A REFUND OR CONTEST THE CLAIM IN ANY PERMISSIBLE MANNER, AND THE EXECUTIVE AGREES TO PROSECUTE SUCH CONTEST TO A DETERMINATION BEFORE ANY ADMINISTRATIVE TRIBUNAL, IN A COURT OF INITIAL JURISDICTION AND IN ONE OR MORE APPELLATE COURTS, AS THE COMPANY SHALL DETERMINE; PROVIDED, HOWEVER, THAT IF THE COMPANY DIRECTS THE EXECUTIVE TO PAY SUCH CLAIM AND SUE FOR A REFUND, THE COMPANY SHALL ADVANCE THE AMOUNT OF SUCH PAYMENT TO THE EXECUTIVE ON AN INTEREST-FREE BASIS AND SHALL INDEMNIFY AND HOLD THE EXECUTIVE HARMLESS, ON AN AFTER-TAX BASIS, FROM ANY EXCISE TAX OR FEDERAL, STATE, LOCAL OR OTHER INCOME OR OTHER TAX (INCLUDING INTEREST OR PENALTIES WITH RESPECT THERETO) IMPOSED WITH RESPECT TO SUCH ADVANCE OR WITH RESPECT TO ANY IMPUTED INCOME WITH RESPECT TO SUCH ADVANCE; AND FURTHER PROVIDED THAT ANY EXTENSION OF THE STATUS OF LIMITATIONS RELATING TO PAYMENT OF TAXES FOR THE TAXABLE YEAR OF THE EXECUTIVE WITH RESPECT TO WHICH SUCH CONTESTED AMOUNT IS CLAIMED TO BE DUE IS LIMITED SOLELY TO SUCH CONTESTED AMOUNT. FURTHERMORE, THE COMPANY'S CONTROL OF THE CONTEST SHALL BE LIMITED TO ISSUES WITH RESPECT TO WHICH A GROSS-UP PAYMENT WOULD BE PAYABLE HEREUNDER AND THE EXECUTIVE SHALL BE ENTITLED TO SETTLE OR CONTEST, AS THE CASE MAY BE, ANY OTHER ISSUE RAISED BY THE INTERNAL REVENUE SERVICE OR ANY OTHER TAXING AUTHORITY. (III) IF, AFTER THE RECEIPT BY THE EXECUTIVE OF AN AMOUNT ADVANCED BY THE COMPANY PURSUANT TO PARAGRAPH (II) OF THIS SECTION 9, THE EXECUTIVE BECOMES ENTITLED TO RECEIVE ANY REFUND WITH RESPECT TO SUCH CLAIM, THE EXECUTIVE SHALL (SUBJECT TO THE COMPANY'S COMPLYING WITH THE REQUIREMENTS OF PARAGRAPH (II) OF THIS SECTION 9 PROMPTLY PAY TO THE COMPANY THE AMOUNT OF SUCH REFUND (TOGETHER WITH ANY INTEREST PAID OR CREDITED THEREON AFTER TAXES APPLICABLE THERETO) UPON RECEIPT THEREOF. IF, AFTER THE RECEIPT BY THE EXECUTIVE OF AN AMOUNT ADVANCED BY THE COMPANY PURSUANT TO PARAGRAPH (II) OF THIS SECTION 9, A DETERMINATION IS MADE THAT THE EXECUTIVE SHALL NOT BE ENTITLED TO ANY REFUND WITH RESPECT TO SUCH CLAIM AND THE COMPANY DOES NOT NOTIFY THE EXECUTIVE IN WRITING OF ITS INTENT TO CONTEST SUCH DENIAL OF REFUND PRIOR TO THE EXPIRATION OF 30 DAYS AFTER SUCH DETERMINATION, THEN SUCH ADVANCE SHALL BE FORGIVEN AND SHALL NOT BE REQUIRED TO BE REPAID AND THE AMOUNT OF SUCH ADVANCE SHALL OFFSET, TO THE EXTENT THEREOF, THE AMOUNT OF GROSS-UP PAYMENT REQUIRED TO BE PAID. 1. 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 AND AFTER THE EMPLOYMENT PERIOD UP TO AGE 65 OR EARLIER DEATH. COMPANY AND EXECUTIVE WILL CONTINUE TO PAY THE SAME RELATIVE PORTION OF THE COST OF EACH SUCH PLAN OR PROGRAM AS EACH WERE PAYING AT THE TIME OF THE CHANGE OF CONTROL. FURTHER, IN THE EVENT THAT EXECUTIVE'S OR HIS BENEFICIARIES' CONTINUED PARTICIPATION IN ANY GROUP PLAN OR PROGRAM IS NOT PERMITTED, THEN IN LIEU THEREOF, COMPANY SHALL ACQUIRE INDIVIDUAL INSURANCE POLICIES PROVIDING SUBSTANTIALLY SIMILAR COVERAGE FOR EXECUTIVE AND HIS BENEFICIARIES, AND COMPANY AND EXECUTIVE WILL PAY THE SAME RELATIVE PORTION OF THE COST OF SUCH COMPARABLE COVERAGE PLANS OR PROGRAMS OR IN THE EVENT THAT COMPANY CANNOT ACQUIRE INDIVIDUAL INSURANCE POLICIES PROVIDING SUBSTANTIALLY SIMILIAR COVERAGE, THE COMPANY WILL SELF-INSURE THE EXECUTIVE, AND THE EXECUTIVE IN THE CASE OF SELF INSURANCE WILL PAY THE COBRA RATE THEN APPLICABLE TO THE COMPANY'S GROUP PLAN. 2. 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. 3. 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. 4. INDEMNIFICATION THE PARTIES AGREE TO EXECUTE A SEPARATE --------------- INDEMNIFICATION AGREEMENT IN THE FORM ATTACHED AS EXHIBIT B. 5. 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. 6. LITIGATION EXPENSES IN THE EVENT OF ANY ACTION, SUIT, PROCEEDING, ------------------- ARBITRATION OR CLAIM BETWEEN OR BY OR AGAINST THE COMPANY AND/OR THE EXECUTIVE WITH RESPECT TO THIS AGREEMENT, OTHER BENEFIT PLANS OR ARRANGEMENTS BETWEEN THE PARTIES, AND THE ASSERTION OR ENFORCEMENT OF HIS RIGHTS HEREUNDER, THE COMPANY SHALL PROMPTLY PAY OR REIMBURSE THE EXECUTIVE UPON SUCH EXECUTIVE'S WRITTEN DEMAND THEREFOR, FOR EIGHTY (80) PERCENT OF HIS COSTS AND EXPENSES (INCLUDING COSTS AND FEES OF WITNESSES, EVIDENCE AND ATTORNEY FEES AND EXPENSES) RELATING TO OR ARISING OUT OF (DIRECTLY OR INDIRECTLY) SUCH ACTION, SUIT, PROCEEDING, ARBITRATION OR CLAIM, ON A MONTHLY BASIS, AS SUCH COSTS AND EXPENSES ARE INCURRED IN INVESTIGATING, PROSECUTING, DEFENDING OR PREPARING TO PROSECUTE OR DEFEND, REGARDLESS OF THE OUTCOME THEREOF. IN NO EVENT SHALL THE EXECUTIVE BE REQUIRED TO REIMBURSE THE COMPANY FOR ANY OF THE COSTS AND EXPENSES RELATING TO ANY SUCH ACTION, SUIT, PROCEEDING, ARBITRATION OR CLAIM. THE 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. 7. RABBI TRUST.WITHIN SIXTY (60) DAYS OF THE DATE OF THIS AGREEMENT, THE ----------- COMPANY SHALL ENTER INTO A TRUST AGREEMENT (THE "TRUST AGREEMENT") WITH A THIRD PARTY INSTITUTIONAL TRUSTEE, SUBSTANTIALLY IN THE FORM SET FORTH IN REV. PROC. 92-64, 1992-2 C.B. 422, TO ASSIST IT IN MEETING ITS OBLIGATIONS TO THE EXECUTIVE UNDER THE COMPANY'S SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (THE "SERP"). THE TRUST ESTABLISHED PURSUANT TO THE TRUST AGREEMENT (THE "TRUST") SHALL BE IRREVOCABLE. THE TRUST AGREEMENT SHALL PROVIDE THAT UPON A CHANGE OF CONTROL THE COMPANY SHALL, NO LATER THAN 30 DAYS FOLLOWING THE CHANGE OF CONTROL, MAKE AN IRREVOCABLE CONTRIBUTION OF CASH OR CASH EQUIVALENTS TO THE TRUST IN AN AMOUNT SUFFICIENT TO PAY EACH SERP PARTICIPANT OR BENEFICIARY THE BENEFITS TO WHICH THEY WOULD BE ENTITLED PURSUANT TO THE TERMS OF THE SERP, AND WITHIN 30 DAYS FOLLOWING THE END OF EACH CALENDAR YEAR ENDING AFTER THE CHANGE OF CONTROL THE COMPANY SHALL IRREVOCABLY CONTRIBUTE ANY ADDITIONAL CASH TO THE TRUST NECESSARY FOR THE TRUSTEE TO PAY EACH SERP PARTICIPANT OR BENEFICIARY THE BENEFITS PAYABLE PURSUANT TO THE TERMS OF THE SERP AS OF THE CLOSE OF THE YEAR. THE TRUST AGREEMENT SHALL ALSO PROVIDE (I) THAT ALL INCOME RECEIVED BY THE TRUST SHALL BE ACCUMULATED AND REINVESTED, (II) THAT THE COMPANY WILL BE RESPONSIBLE FOR THE PAYMENT OF ALL FEES AND EXPENSES RELATED TO 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. 8. 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. 9. MODIFICATION THIS AGREEMENT MAY NOT BE CHANGED ORALLY, BUT ONLY BE ------------ MEANS OF AN AGREEMENT IN WRITING SIGNED BY THE PARTIES HERETO. 10. 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. 11. 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. 12. 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, COMPENSATION AND STOCK OPTION COMMITTEE ______________________________ LEONARD R. JASKOL EXHIBIT A - FRINGE BENEFITS --------------------------- 1. MEDICAL BENEFITS A. LYDALL, INC. HEALTH CARE PAYMENT PLAN FOR SALARIED EMPLOYEES (INCLUDES DENTAL BENEFITS) B. LYDALL, INC. EXECUTIVE MEDICAL 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 E. INDIVIDUAL WHOLE LIFE POLICIES (FORMERLY SENIOR OFFICER LIFE 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 1 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 AGREEMENT --------- THIS AGREEMENT MADE THIS _____ DAY OF _____ 1995 BY AND BETWEEN LYDALL, INC. (THE "COMPANY") AND LEONARD R. JASKOL (THE "EXECUTIVE"). W I T N E S S E T H : RECITALS. - -------- EXECUTIVE IS EMPLOYED BY THE COMPANY AS ITS CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER. THE COMPANY AND EXECUTIVE HAVE AGREED THAT IF EXECUTIVE SHOULD CEASE TO BE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE COMPANY 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: Executive to Serve as Chairman, President and Chief Executive Officer. ---------------------------------------------------------------------- The Executive shall continue to act as Chairman, President and Chief Executive Officer of the Company, subject to the direction of its 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 assets or (b) the stockholders of the Company acquire a right to receive, in exchange for or upon surrender a majority of their stock, cash or other securities or a combination of the two; and/or ii) the acquisition by a person (as that term is hereafter defined) of the voting rights with respect to 25 percent or more of the outstanding Common Stock of the Company if such person was not an officer of director of the Company on the date of this Agreement; and/or iii) the election or appointment to the Board of any director or directors whose appointment or election or nomination for election was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date hereof or whose election, appointment or nomination for election was previously so approved. THE WORD "PERSON," AS USED IN THE PRECEDING SENTENCE, SHALL MEAN AN INDIVIDUAL, CORPORATION, TRUST, OR OTHER LEGAL OR COMMERCIAL ENTITY AND INCLUDE 3 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 PRIOR TO TERMINATION OF EXECUTIVE; EXCEPT THAT SUCH NOTICE WOULD NOT BE REQUIRED IF, IN THE BOARD'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. 1. 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 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 CHAIRMAN, PRESIDENT OR CHIEF EXECUTIVE OFFICER BY THE 4 BOARD IN PLACE OF EXECUTIVE AT ANY TIME PRIOR TO APRIL 1, 2002, 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. 2. TERMINATION PRIOR TO CHANGE OF CONTROL. IF PRIOR TO A CHANGE OF --------------------------------------- CONTROL (A) THE EXECUTIVE SHALL RESIGN AS CHAIRMAN, PRESIDENT OR CHIEF EXECUTIVE OFFICER OF THE COMPANY AT THE REQUEST OF THE BOARD OR BECAUSE THE DUTIES AND RESPONSIBILITIES OF THE CHAIRMAN, PRESIDENT OR CHIEF EXECUTIVE OFFICER HAVE BEEN SIGNIFICANTLY MODIFIED BY THE BOARD WITHOUT HIS CONSENT OR (B) ANOTHER IS APPOINTED OR ELECTED CHAIRMAN, PRESIDENT OR CHIEF EXECUTIVE OFFICER BY THE BOARD 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 5 DEEMED A TERMINATION FOR THE PURPOSE OF THIS AGREEMENT AND SHALL NOT ENTITLE EXECUTIVE TO CONTINUE TO BE AN EMPLOYEE OF THE COMPANY AND BE COMPENSATED AND RECEIVE THE BENEFITS PROVIDED FOR IN THIS AGREEMENT. 3. 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. 4. 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 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 APRIL 1, 2002, 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 (BUT SUCH 6 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). 5. 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. 6. COMPENSATION. THE COMPANY SHALL PAY TO EXECUTIVE DURING THE ------------ EMPLOYMENT PERIOD AN ANNUAL SALARY (THE "ANNUAL SALARY") EQUAL TO ONE-THIRD (1/3RD) OF THE AGGREGATE OF THE BASE SALARY AND BONUSES PAID TO HIM DURING THE PERIOD COMMENCING THREE (3) YEARS PRIOR TO THE DATE OF TERMINATION AND ENDING ON THE DATE OF TERMINATION. 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 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 $1,500 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 7 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. 7. 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 8 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 COOPERS & LYBRAND (THE "ACCOUNTING FIRM') WHICH SHALL PROVIDE DETAILED SUPPORTING CALCULATIONS BOTH TO THE COMPANY AND THE EXECUTIVE WITHIN 20 CALENDAR DAYS OF THE RECEIPT OF WRITTEN NOTICE FROM THE EXECUTIVE THAT THERE HAS BEEN A PAYMENT, OR SUCH EARLIER TIME AS IS REQUESTED BY THE COMPANY. IN THE EVENT THAT THE ACCOUNTING FIRM IS SERVING AS ACCOUNTANT OR AUDITOR FOR THE INDIVIDUAL, ENTITY OR GROUP EFFECTING THE CHANGE OF CONTROL, THE EXECUTIVE SHALL HAVE THE RIGHT BY WRITTEN NOTICE TO THE COMPANY TO APPOINT ANOTHER NATIONALLY RECOGNIZED ACCOUNTING FIRM TO MAKE THE DETERMINATIONS REQUIRED HEREUNDER (WHICH ACCOUNTING FIRM SHALL THEN BE REFERRED TO AS THE ACCOUNTING FIRM HEREUNDER). ALL FEES AND EXPENSES OF THE ACCOUNTING FIRM SHALL BE BORNE SOLELY BY THE COMPANY AND SHALL BE PAID BY THE COMPANY UPON DEMAND OF THE 9 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 8 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 10 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 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 11 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) 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 12 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 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. 1. 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 13 EXTENT THAT SUCH CONTINUED PARTICIPATION IS POSSIBLE UNDER THE GENERAL TERMS AND CONDITIONS OF SUCH PLANS AND PROGRAMS, THROUGHOUT THE EMPLOYMENT PERIOD AND AFTER THE EMPLOYMENT PERIOD UP TO AGE 65 OR EARLIER DEATH. COMPANY AND EXECUTIVE WILL CONTINUE TO PAY THE SAME RELATIVE PORTION OF THE COST OF EACH SUCH PLAN OR PROGRAM AS EACH WERE PAYING AT THE TIME OF THE CHANGE OF CONTROL. FURTHER, IN THE EVENT THAT EXECUTIVE'S OR HIS BENEFICIARIES' CONTINUED PARTICIPATION IN ANY GROUP PLAN OR PROGRAM IS NOT PERMITTED, THEN IN LIEU THEREOF, COMPANY SHALL ACQUIRE INDIVIDUAL INSURANCE POLICIES PROVIDING SUBSTANTIALLY SIMILAR COVERAGE FOR EXECUTIVE AND HIS BENEFICIARIES, AND COMPANY AND EXECUTIVE WILL PAY THE SAME RELATIVE PORTION OF THE COST OF SUCH COMPARABLE COVERAGE PLANS OR PROGRAMS OR IN THE EVENT THAT COMPANY CANNOT ACQUIRE INDIVIDUAL INSURANCE POLICIES PROVIDING SUBSTANTIALLY SIMILIAR COVERAGE, THE COMPANY WILL SELF-INSURE THE EXECUTIVE, AND THE EXECUTIVE IN THE CASE OF SELF INSURANCE WILL PAY THE COBRA RATE THEN APPLICABLE TO THE COMPANY'S GROUP PLAN. 2. 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 14 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. 3. 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. 4. INDEMNIFICATION THE PARTIES AGREE TO EXECUTE A SEPARATE --------------- INDEMNIFICATION AGREEMENT IN THE FORM ATTACHED AS EXHIBIT B. 5. 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 15 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. 6. LITIGATION EXPENSES IN THE EVENT OF ANY ACTION, SUIT, PROCEEDING, ------------------- ARBITRATION OR CLAIM BETWEEN OR BY OR AGAINST THE COMPANY AND/OR THE EXECUTIVE WITH RESPECT TO THIS AGREEMENT, OTHER BENEFIT PLANS OR ARRANGEMENTS BETWEEN THE PARTIES, AND THE ASSERTION OR ENFORCEMENT OF HIS RIGHTS HEREUNDER, THE COMPANY SHALL PROMPTLY PAY OR REIMBURSE THE EXECUTIVE UPON SUCH EXECUTIVE'S WRITTEN DEMAND THEREFOR, FOR EIGHTY (80) PERCENT OF HIS COSTS AND EXPENSES (INCLUDING COSTS AND FEES OF WITNESSES, EVIDENCE AND ATTORNEY FEES AND EXPENSES) RELATING TO OR ARISING OUT OF (DIRECTLY OR INDIRECTLY) SUCH ACTION, SUIT, PROCEEDING, ARBITRATION OR CLAIM, ON A MONTHLY BASIS, AS SUCH COSTS AND 16 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. 7. 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 17 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 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. 8. 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. 9. MODIFICATION THIS AGREEMENT MAY NOT BE CHANGED ORALLY, BUT ONLY BE ------------ MEANS OF AN AGREEMENT IN WRITING SIGNED BY THE PARTIES HERETO. 10. 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. 18 11. 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. 12. 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. 19 EXHIBIT B --------- INDEMNIFICATION AGREEMENT ------------------------- This Agreement, made and entered into this lst day of March, 1995 ("Agreement"), by and between Lydall, Inc., a Delaware corporation ("Company"), and ("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 Indemnitee in such position. 1 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 successful in such Proceeding but is successful, on the merits or 2 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 not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as 3 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 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 4 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. 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 5 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. (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 6 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 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 7 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 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 8 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 1, 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. (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. 9 (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: Leonard R. Jaskol 2 Saint Andrews Drive Farmington, CT 06032 (b) If to the Company to: Mary Adamowicz General Counsel and Secretary, Lydall, Inc. P.O. Box 151 One Colonial Road Manchester, CT 06045-0151 or to such other address as may have been furnished to Indemnitee 10 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 _____________________________ Leonard R. Jaskol 2 Saint Andrews Drive Framington, CT 06032 11 EXHIBIT A - FRINGE BENEFITS --------------------------- 1. Medical Benefits a. Lydall, Inc. Health Care Payment Plan for Salaried Employees (includes dental benefits) b. Lydall, Inc. Executive Medical 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 e. Individual whole life policies (Formerly Senior Officer Life 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 18 EX-11.1 4 COMP OF WEIGHTED AVERAGE LYDALL, INC. Exhibit 11.1 Schedule of Computation of Weighted Average Shares Outstanding
Years ended December 31, ---------------------- In thousands 1994 1993 1992 ---- ---- ---- Primary - ------- Weighted average number of common shares 8,319 8,219 7,963 Additional shares assuming conversion of stock options and warrants 657 572 747 ----- ----- ----- Weighted average common shares and equivalents outstanding 8,976 8,791 8,710 ----- ----- ----- Fully Diluted - ------------- Weighted average number of common shares 8,319 8,219 7,963 Additional shares assuming conversion of stock options and warrants 667 573 753 ----- ----- ----- Weighted average common 8,986 8,792 8,716 ----- ----- -----
1992 has been restated to reflect a three-for-two stock split distributed in September 1993. EX-13.1 5 1994 ANNUAL REPORT lydall, inc STRATEGY NEW PRODUCTS QUALITY PROGRAM ACQUISITIONS 1994 Annual Report FINANCIAL HIGHLIGHTS
Percent In thousands, except per-share data 1994 1993 Increase - ---------------------------------------------------------------------------------------------------- Net sales $213,072 $157,431 35 Net income 15,503 10,248 51 Net income per common share 1.73 1.17 48 Stockholders' equity 76,227 60,057 27 Stockholders' equity per share 9.14 7.26 26 Market capitalization at December 31, 271,010 176,751 53 Closing price NYSE on December 31, 32.500 21.375 52 Weighted average common stock & equivalents outstanding 8,976 8,791 2 - ----------------------------------------------------------------------------------------------------
1994 HIGHLIGHTS 10th Consecutive Year of Record Earnings Sales Increased 35% Earnings Per Share Up 48% Return on Sales -- 7.3% Record Operating Cash Flow Two Acquisitions Sales set a new record at $213 million. Net income was a record $15.5 million -- up 51 percent. Earnings per share were $1.73 -- an increase of 48 percent. Strong domestic sales of high-efficiency air filtration products, dynamic growth in sales of thermal barrier and heat shields to the automotive market, and increasing demand for media supplied to automotive air-bag component manufacturers were major contributors to 1994's record results. Another sizable component was a healthy 35 percent rise in international business, including exports as well as sales from a foreign operation. Acquisitions supplemented the robust internal growth of the Company. Two profitable additions -- one, a designer and manufacturer of automotive thermal insulation products in Columbus, Ohio, and the other, a small materials handling slipsheet producer in Jacksonville, Florida -- contributed significantly to record sales levels. With the acquisition of the Columbus plant, Lydall enhanced its position as an automotive supplier. During 1994, sales to the automotive market represented 31 percent of Lydall's total sales. The Company's sales to other market segments also grew during the year. Sales to air and liquid filtration markets increased by 13 percent; the materials handling business was up 13 percent; and electrical insulation sales rose by 19 percent. 1 TO OUR STOCKHOLDERS AND EMPLOYEES Ten consecutive years of earnings growth! I am very proud of the employees of Lydall and the achievements that have led to this impressive milestone in the Company's history. In 1994 we increased sales by 35 percent, net income by 51 percent, and earnings per share by 48 percent. In addition, we closed the year with a strong balance sheet and record operating cash flow. I'm pleased to report that stockholders' value increased by 52 percent during 1994. Lydall was listed in Fortune as one of the "50 Best Performing Stocks in 1994" and in USA Today as one of the best performing stocks for the past five years. Reflecting on what has enabled Lydall to achieve these record results and what will support our future growth, I believe a great deal of credit can be attributed to four key elements. We have a focused strategy; a continuing flow of new products and advancing technologies; a strong, results-oriented philosophy of quality; and an energetic acquisition program. STRATEGY Lydall produces technologically advanced engineered materials for demanding specialty applications. We have not deviated from that focus and concentrate on products or businesses having a high technical component. Lydall sells its products to high-value, niche markets and continuously strives to upgrade its base technologies. We look for opportunities where a leadership position within the market is attainable and where Lydall's distinctive marketing and technical competence fit. Our strategy has given us opportunities to grow with new applications for existing products as well as to enter emerging markets. This has served us particularly well in poor economic times; notably, we were able to post gains in earnings through the recession of the early 1990's. Lydall is customer-driven and highly responsive to service, quality and end-use requirements. This is of the utmost importance. In addition to allowing us to gain customer loyalty, being close to our customers has allowed us to identify opportunities, shifts in our markets, and industry trends -- sometimes well in advance of our competition. NEW PRODUCTS A flow of new products has been and continues to be important to Lydall's growth. We classify products and technology introduced within the previous three-year period as new in the current year. Each year we report incremental sales attributable to new products, and over the past five years, we have added an average of $8 million a year. During 1994, we had robust sales of air-bag media as well as automotive battery covers and heat shields. These are all products introduced by Lydall within the past three years.
- ----------------------------------------------------------------------------------------------------------------------------- $ thousands except per-share amounts 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 - ----------------------------------------------------------------------------------------------------------------------------- Net sales from continuing operations 213.11 57.4 151.1 135.5 123.1 128.4 114.7 98.5 75.9 70.4 - -----------------------------------------------------------------------------------------------------------------------------
2
- ----------------------------------------------------------------------------------------------------------------------------- $ thousands except per-share amounts 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 - ----------------------------------------------------------------------------------------------------------------------------- Net income 15.5 10.2 9.0 8.5 8.3 7.9 5.1 4.1 3.0 2.9 - -----------------------------------------------------------------------------------------------------------------------------
Lydall's custom-designed media found in automotive air-bag inflators uniquely combine, in one application, the Company's strongest talents -- filtration technology and heat management expertise. Lydall's specialty products assist in heat reduction and filtration of the pyrotechnic reaction that inflates an air bag. We expect continued opportunities in this business mainly because the law requires all passenger cars to have dual air bags by September 1996 and all vehicles (trucks, vans, etc.) to have dual air bags by 1998. Although inflator devices using technologies other than that which employs Lydall's material are being introduced, we feel confident that the pyrotechnic unit will sustain a major portion of this rapidly expanding market. We look forward to remaining a major supplier in this area for many years. We are also enthusiastic about the continuing growth of our patented Lytherm /(R)/ battery insulating cover. As the sizes of passenger compartments are increasing, the sizes of engine compartments are decreasing; hood lines are being designed lower; and components such as the battery, are being "packed in" more tightly, reducing free air flow. This is causing temperatures under the hood to increase. The need to insulate the battery has arisen because automotive batteries fail prematurely due to excessive heat. We developed our battery cover at Ford Motor Company's request and look forward to supplying it for just about every vehicle made by Ford in the next few years. Other automotive companies are also evaluating various designs of the Lydall cover. Sales of all our heat management products to the automotive market have been strong, and the acquisition early in 1994 of an automotive thermal and acoustical shield manufacturer enhanced this growth. Currently, our heat management shields and components can be found on most domestically produced sport-utility vehicles, about 95 percent of light- and medium-duty trucks, close to 70 percent of vans, and nearly 30 percent of cars. The addition of the battery cover on an increasing number of 1995 and 1996 Ford models will increase the percentage of cars by the end of 1995. Also, if you include the air-bag application, our penetration of passenger cars becomes greater. We will continue to be very active in the development of the next generation of fiber, fiber-and-metal-combination, and all-metal thermal shields. Lydall has unique relationships with its automotive customers, and the opportunities connected with heat management issues continue to proliferate. Vehicle designs, stricter emissions standards, and consumer demands for increasing comfort and safety make this a dynamic market particularly suited to Lydall's abilities. Thirty-one percent of Lydall's total sales in 1994 were to the automotive market. I have been asked if this increasing focus on automotive applications concerns me. The answer is, "No." Lydall supplies unique, niche applications. There is no direct correlation between the number of Lydall parts on a vehicle to the number of units built, as with tires or steering wheels for instance. Typically, we develop one solution for a specific problem in one model; [PHOTO APPEARS HERE] 3 then other applications are identified within that one model; eventually, those applications are addressed in additional models. Other automotive companies in turn recognize the utility of the Lydall solution and begin to employ our products. There is virtually a compounding effect that takes place. In addition to our unique, niche positions in the automotive market, Lydall is committed to aggressively growing its businesses outside of this industry. High-efficiency air filtration is one of those businesses. It has played a major role in our growth over the past ten years. We have continued to advance our expertise and have introduced new products and technologies into that market. During 1994, our domestic sales of high-efficiency air filtration media were particularly healthy -- the strongest we've ever seen. We also gained market share in the United States and Europe, led by increased demand for our advanced High-Alpha and high-strength ASHRAE product lines. An article in Investor's Business Daily recently quoted an industry analyst: "Increased use of semiconductors in staple consumer electronic products and manufacturing, including automobile, cellular and cordless phones, and video equipment is smoothing the demand for semiconductor products. Personal computers are practically consumables now." Obviously, as a world leader in high-efficiency air filtration, Lydall stands to benefit significantly from the increased use of semiconductor products. More and more industrial and process operations are also being performed under clean-room conditions, and we continue to be excited and optimistic about the growth opportunities in the high-efficiency air filtration market. QUALITY It would be very difficult, if not impossible, to credit a single program or effort with Lydall's successes; however, our ongoing, results-oriented quality program rates very high on the list. Although these efforts are referred to as "cost of quality" within the Company, the accounting aspect of Lydall's Comprehensive Quality Program is only one component. Under this program, we measure all the costs associated with using resources with less-than-perfect efficiency. It is a tool that is used by accountants, plant managers, line supervisors, quality control people, R & D engineers, marketing teams -- anyone and everyone involved in delivering a quality Lydall product to a customer. The program is aimed at process efficiency, product consistency and quality, and customer satisfaction. Since 1986, when we started reporting incremental dollars saved, we have gained an average of $2 million a year. In 1994 alone we captured $3.2 million in savings from these efforts. Although dollars are used as a way of measuring success, the most valuable result, of course, is better service and products for our customers. Our capital investment projects go hand in hand with our quality program. We focus on strategic projects to improve product quality, process efficiencies and productivity. During 1994 our capital expenditures totaled $8.0 million. We classify capital appropriations as strategic or
- ------------------------------------------------------------------------------------------------------------------- $ thousands except per-share amounts 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 - ------------------------------------------------------------------------------------------------------------------- Earnings Per Share 1.73 1.17 1.04 .94 .94 .90 .61 .49 .35 .32 - -------------------------------------------------------------------------------------------------------------------
4 upgrade, which relate directly to the strategic objectives we have outlined, and mandatory or replacement, which are projects required by law or necessary for equipment maintenance. Over the last ten years, we estimate that at least two- thirds of all capital projects have been either upgrade or strategic which directly tied to our quality program. ACQUISITION PROGRAM To supplement internal growth, Lydall actively pursues acquisitions of businesses and products that we believe would benefit from our marketing competence and management resources, especially our focused quality improvement program. We look for nondilutive, strategically compatible acquisitions that offer a highly advanced and evolving technological component. Although we focus on companies that are profitable, we need to see some area within the business where we can make a decided difference. Over the past five years, approximately 50 percent of our sales growth has come from acquisitions. In 1994, we acquired a Columbus, Ohio operation that designs and manufactures thermal and acoustical insulation products for the automotive market. This acquisition complemented and extended our heat management product line and brought us closer to certain customers by making us a direct supplier to Ford, General Motors, and Chrysler. It also expanded our product offering to include all-metal and metal-and-fiber-combination automotive heat shields. The operation was profitable in 1994 and contributed significantly to Lydall's sales growth. We expect improved performance in 1995 and into 1996 as we implement our quality program and invest in improving process efficiencies at the facility. In June 1994, we acquired a producer of materials-handling slipsheets located in Jacksonville, Florida. The operation, which is now part of our Southern Products Division, directly complements our existing slipsheet business and enhances our market position. Lydall's systems, which replace wooden pallets, are being used to ship a growing number of products such as food, pharmaceuticals, and chemicals. Our materials-handling business continued to do well in 1994, benefiting from increased market share and broadening export opportunities. - ---------------------------- The four distinct advantages I've outlined -- strategy, new products, quality, and acquisition program -- together with the commitment of our employees, have brought Lydall prolonged growth and powerful market recognition, and I firmly believe they will continue to be the tools of our future successes. I'm very optimistic about the Lydall of tomorrow and look forward to ten more years of growth. /s/ Leonard R. Jaskol - ---------------------------- Leonard R. Jaskol Chairman and Chief Executive Officer 5 [PHOTOS APPEAR HERE] Above: Lydall employees consult with Ford engineers continually from product conception through final vehicle assembly. John J. Hiers, Vice President - Technical Development, Lydall, and Brian Murphy, Battery SBU Manager, Lydall, observe the Installation of a Lydall cover on a new Continental at Ford's Wixom Plant. Top: Lydall produces the battery insulating cover complete through finished product fabrication. Jec Shuping, an operator at Lydall's Rockwell, North Carolina plant, sonically seals Lytherm insulating packs for the Ford Explorer battery cover. 6 STRATEGY Lydall is customer-driven, highly responsive to service, quality and end-use requirements. - -------------------------------------------------------------------------------- Lydall takes pride in the many development partnerships it has with its customers. These joint development efforts have led to a succession of products meeting critical engineering and processing demands and have played an important role in the growth of the Company. The evolution of Lydall's automotive battery insulating cover is an excellent example of how partnering with customers benefits all involved. Systems engineers at Ford Motor Company are constantly seeking innovative solutions to heat management issues brought on by aerodynamic vehicle designs and smaller engine compartments. They are very conscious of the "cost" of losing a Ford buyer, and they focus on making sure that does not happen. In 1990 Ford engineers sent out a call to their suppliers for a solution to premature battery failure due to increasing levels of heat generated in engine compartments. Lydall responded with a cost-effective solution that considered all aspects of Ford's needs: thermal properties, space and cost constraints, aesthetic considerations, and the ability to be easily incorporated into Ford's assembly process. Within nine months of receiving the order from Ford, Lydall, known for its "fanatical response", delivered the final product. Key to Lydall's response is its team approach to product development and marketing. The customer does not work "through" one sales representative as with a traditional customer/supplier relationship. Lydall employees from a variety of functions --marketing, technical development, manufacturing -- interact daily with their counterparts at the customer's facility. This interaction allows Lydall to recognize industry trends and anticipate customers' needs -- to move in rhythm with its customers. Product development does not take place in the vacuum of the laboratory, and flexibility and quick response are invaluable byproducts. In fact, Lydall employees have modified prototype parts directly on the production line, shoulder to shoulder with Ford engineers. 7 The genesis of Lydall's family of automotive thermal barrier products was undercarpet insulation. These components are strategically placed in areas of the carpet assembly that are located over or near sources of heat such as the exhaust system and catalytic converter. Today, Lydall insulating components can be found in virtually all U.S. manufactured sport-utility vehicles, extensively in light- and medium-duty trucks, in vans, and increasingly in automobiles. Lydall sells these products to carpet and mat manufacturers who in turn supply automotive manufacturers. The industry trend requiring total systems from direct automotive suppliers has pushed carpet manufacturers to expand their expertise beyond quality and durability to include thermal protection and acoustical properties as well. Lydall's expertise in these areas, its extensive development and testing capabilities, and its history of partnering with customers fit the needs of the carpet manufacturers perfectly. Of particular importance in the working relationship with its customers has been Lydall's value-engineering and value-analysis efforts. These programs focus on active involvement with automotive manufacturers and carpet producers as early in a program as possible to provide the best solution, avoid overengineering, minimize a trial-and-error approach, and ensure easy adaptation of a product to the final assembly process. Opposite page top: Left to right: Gail Carolan, Lydall Product Manager; Bill Morgan, VE/VA Manager , Collins & Aikman. Mr. Morgan commented, "The Collins & Aikman's partnership with Lydall has reaped benefits for both firms beyond our original expectations. Lydall's testing capabilities and rapid turnaround of thermal assessments have enhanced Collins & Aikman's ability to solve heat issues. We have been able to identify issues sometimes before our OEM customers have recognized there was a problem. This has been very positive for our position in the market." Bottom: Lytherm insulating components are incorporated into the automotive carpet and mat system at points of heat stress such as over the exhaust system and catalytic converter. 8 [PHOTOS APPEAR HERE] 9 [PHOTOS APPEAR HERE] NEW PRODUCTS Lydall considers products or technology introduced within the previous three years as new. High-Alpha air filtration products and the Company's combination filtration/thermal media employed in automotive air-bag inflator components exemplify recent new-product successes. High-Alpha air filtration media Lydall's air filtration customers (rigid-frame filter manufacturers) face intense cost pressures as well as stringent performance issues. In addition, they require filtration media that are "workable" -- media with the strength and integrity to withstand the filter assembly process. Addressing this difficult mandate, Lydall personnel have focused on delivering the highest performance, most "process friendly" media in the industry. The performance of a filter is defined primarily by its efficiency (size and amount of particles captured) and resistance (power required to move air through the filter). These two forces are in direct opposition to one another - -- the greater the efficiency, the less the air flow. The relationship between efficiency and resistance is known as Alpha. In response to its customers' needs, Lydall developed its advanced High-Alpha, Class 4000 HEPA and Class 6000 ULPA, products which provide the highest efficiencies with lower pressure drops than ever before achieved in the industry. Use of Lydall's High-Alpha media enable manufacturers to reduce operating and capital costs while delivering the most advanced filtering capability available; first, because fewer units are needed to reach desired efficiency, and second, because less operating energy is required. In fact, Lydall's High-Alpha media improve efficiency by 15 percent over competitive grades, providing filter manufacturers with a cost-effective, high-performance alternative. Left: The Company's Lydair high-efficiency air filtration media are found in filter systems that literally cover the ceilings and floors of semiconductor and microchip manufacturing facilities, as well as areas in hospitals, industrial clean rooms, food and pharmaceutical processing plants, and biotechnology laboratories. Lydair air filtration media serve a wide range of performance efficiencies from 40 percent ASHRAE up to 99.999999 percent ULPA at the most penetrating particle size. Opposite page: As a component of the inflator system, Lydall's custom-designed media assist in heat reduction and filtration of the pyrotechnic reaction which takes place to inflate an automotive air bag. Opposite page, inset: Bill Lonstein, Lydall Product manager; Rick Lindsay, Senior Buyer, Morton International Automotive Safety Products Kevin Lynch, Vice President-Marketing and Sales for Lydall's Technical Papers Division. 10 [PHOTOS APPEAR HERE] Filtration/thermal air-bag inflator media The growth momentum of Lydall's filtration/thermal media supplied to automotive air-bag igniter manufacturers continued in 1994. Although Lydall has supplied media for components of driver-side inflators for many years, development of media for passenger-side air bags has been a new and different challenge. Passenger-side air bags are much larger and more complex. In addition, designs vary widely from vehicle to vehicle. Lydall's success stems from its intimate understanding of the filtration and thermal performance requirements for hot gases generated by the pyrotechnic reaction that inflates the air bag. Working closely with design engineers, Lydall develops unique media to meet the exacting demands of each inflator design, catering to different sizes, inflation requirements, materials, and flow rates. 11 [PHOTO APPEARS HERE] QUALITY PROGRAM Lydall's quality program, internally referred to as "Cost of Quality" (COQ), has become a way of life at the Company and has infused employees with a determination to continuously improve process and quality. Lydall's quality teams represent all parts of the organization -- engineers, production workers, accountants, sales people, general managers, customer service representatives, and senior management. Used as an extension of traditional financial measurements, COQ enables Lydall employees to track and identify areas that need improvement -- excess waste, unplanned downtime, process inefficiencies, ineffective service, etc. Lydall's COQ Program serves as an excellent framework within which to control costs and engineer continuous quality improvements, thus ensuring customer satisfaction. Photo of John E. Hanley, Vice President - Finance and Treasurer: "... Our goal is a perfectly efficient process, zero `cost of quality,' and a completely satisfied customer every time. This may sound a little idealistic. However, we are always striving towards this end, and it is a very real objective to everyone at Lydall..." [PHOTO APPEARS HERE] 12 [PHOTO APPEARS HERE] Opposite page, top: Lydall Westex Division employees, Grady Gardner, Reclaim Operator; Randy Niston, Web Department Manager; Michael Gregory, Maintenance Department Manager; and Ray Grupinski, Director of Operations. A sophisticated fiber reclaiming system recently installed at the Westex Division is an excellent example of the way Lydall's capital investments are directly tied to continuous process improvement and the systematic elimination of waste. By recycling edge trim generated by Lydall's own process, plus the scrap form customer' die-cut parts, the Company reduces landfill costs and provides cost-effective advantages to customers, while, at the same time improving Lydall's margins. Above: Forklift operator, Dennis Ellis, selects product at Lydall's storage facility for high-efficiency air filtration media. The Company's custom-designed warehouse and roll-tracking system enhance inventory control, product quality, and customer service. 13 [PHOTO APPEARS HERE] Top: Robert Raymond, Production Manager, and Carol Roelofs, Administrative Sales Manager, at Lydall's Southern Products, Jacksonville Operation. Above: Left to right - Verl Harnapp, Molding Process Engineer and Phillip McElroy, Quality Control Technician perform final inspection of a new contour die-cutting process recently installed at the Columbus Operation. The part is an engine-side dash insulator that Lydall supplies for Chrysler minivans. Opposite page: Left to right - John Rash, Mold Line Operator; Ken McGill, Columbus Plant Manager; and Rich Morris, Plant Supervisor, make the last adjustments to the molding specifications of the Chrysler minivan dash insulator before commercial production. 14 ACQUISITIONS Early in 1994, Lydall acquired the Clecon Division of Standard Packaging, Inc., located in Columbus, Ohio. Integrated into the Company's Westex Division as the Columbus Operation, this leading designer and manufacturer of thermal insulation products for the automotive market made a significant contribution to the year's record sales. The operation fabricates a variety of highly engineered insulating materials into finished parts sold directly to automotive manufacturers and extends Lydall's thermal barrier business from all- fiber components to include metal-and-fiber combination and all-metal shields. In June 1994, Lydall acquired the Laminates Division of Riverwood International of Georgia, Inc., a manufacturer of materials-handling slipsheets located in Jacksonville, Florida. This business directly complements Lydall's existing materials-handling business and strengthens the Company's position in this market. As the Jacksonville Operation of Lydall's Southern Products Division, this acquisition also contributed positively to growth in 1994. [PHOTO APPEARS HERE] 15 [GRAPHS APPEAR HERE] 16 FINANCIAL REVIEW 18 Analysis of Results 26 Key Financial Items 27 Income Statements 28 Balance Sheets 30 Statements of Cash Flow 31 Statements of Changes in Stockholders' Equity 32 Notes to Consolidated Financial Statements 42 Report of Independent Accountants 42 Management Report 43 Five-Year Statistical Review 44 Officers, Directors, and Stockholders Information 45 Directory of Locations 17 ANALYSIS OF RESULTS Sales - -------------------------------------------------------------------------------- OVERVIEW In 1994, Lydall generated record sales of $213.1 million, the fourth consecutive year of record sales. This represented an increase of $55.7 million, or 35 percent over 1993 sales of $157.4 million. These results compare with increases of 4 percent and 12 percent in 1993 and 1992, respectively. The 1994 revenue growth can be grouped into three major categories: Acquisitions . Two operating companies, specializing in automotive thermal barriers and materials-handling products, contributed approximately half of Lydall's sales growth in 1994 Internal Marketing Actions . Successful commercialization of new products covering most of Lydall's end-use markets . Market-share gains in a number of product lines . Price increases, mostly driven by raw material increases in wood pulp and pulp substitute markets External Market Forces . Improving macroeconomic performance in North America, Europe and the Far East with especially strong sales in automotive and air filtration markets . Substantial market growth in thermal barriers sold to light-duty truck and sport-utility vehicle markets Incremental sales gains from new products in filtration and thermal barrier markets were particularly key to revenue growth in 1993 and 1992. Acquisitions also played a major role. In 1992, the full-year effect of the Axohm and Rockwell acquisitions made in 1991 created a sales increase of $10.2 million. In 1993, while sales from the Rockwell acquisition grew, sales at Axohm declined primarily due to a poor European economy. ACQUISITIONS Lydall purchased two companies in 1994, the Columbus Operation and the Jacksonville Operation. The Columbus Operation, managed under the Westex Division, designs and fabricates automotive thermal and acoustical barriers. Results of operations include ten months of activity for Columbus, which was acquired on February 28, 1994. The Jacksonville Operation, acquired on June 30, 1994, is operated under the Southern Products Division. The addition of the Jacksonville Operation enhanced Lydall's market position as a producer of solid fiber slipsheets and provided valuable economies of scale. Results of operations include activity for Jacksonville since the date acquired. Together, Columbus and Jacksonville contributed $26.1 million in sales in 1994, accounting for 47 percent of Lydall's sales growth for the year. The Company reports results from acquired companies or product lines as acquisitions for three fiscal years. Thus, Lydall reported incremental sales from the Axohm Division and the Rockwell Operation, both acquired in 1991, as sales from acquisitions in 1993 and 1992. In 1994, incremental sales from these operations are captured under External Market Forces and Internal Marketing Actions. In 1993, combined sales from acquired units actually declined by $2.6 million from 1992. This was due to poor economic conditions in the European market for Axohm's battery separator materials and to the effects of an expected shift in technology favoring different materials than those used at Axohm. Increased sales of domestic automotive thermal barrier products from the Rockwell Operation somewhat offset this decline. Sales increased by $10.2 million in 1992 over 1991, representing the full-year effect of the Axohm and Rockwell acquisitions. 18 INTERNAL MARKETING ACTIONS Lydall's internal marketing programs produced sales gains of almost $24.9 million in 1994 compared with $7.5 million in 1993 and $11.4 million in 1992. The largest factor was Lydall's successful new-product commercialization program, which added sales of $15.2 million in 1994. Partially offsetting this gain was the discontinuation of approximately $4.8 million in product sales, much of which was directly displaced by Lydall's own new-product introductions. Successful new products included: . air-filtration products at the highest end of the efficiency spectrum . air-bag materials that perform a filtration and thermal function in the igniter unit . flame barriers for the appliance and office furniture industries . wood-replacement materials used in pencils Lydall's new-product introductions often displace existing sales. In 1994, this phenomenon was particularly evident in the air-filtration and air-bag markets. For the past three years including 1994, product discontinuation has averaged $4.3 million per year, while new-product introductions have averaged $10.5 million. Lydall discontinued sales of $4.8 million in 1994, $5.3 million in 1993, and $2.9 million in 1992. As in 1994, most of the discontinued sales in 1993 and 1992 resulted from direct displacement by Lydall's product upgrades. The Company made significant market-share gains in battery-separator materials, air-filtration products, and transportation services. Market-share gains, estimated to be over $10 million in 1994, were significantly greater than prior-year levels of $2.7 million in 1993 and $6.0 million in 1992. Lydall raised prices more actively in 1994 than in the past two years. In 1994, prices were raised by approximately 2.3 percent compared with increases of less than 1 percent in 1993 and just 1 percent in 1992. Most of the increases were directly related to rising raw material costs of wood pulp and pulp substitute materials. As has been the case for a number of years, pricing remains constrained. EXTERNAL MARKET FORCES For the first time in more than three years, Lydall experienced favorable economic activity in all three of its major trading spheres: North America, Europe and the Far East. External forces, including the effects of economic and market growth beyond the influence of Lydall, less the effects of market decay, produced a net positive impact of $4.7 million on 1994 revenues. This compares to a net positive impact of $1.4 million in 1993, and a net negative impact of $6.0 million in 1992. STATEMENTS OF CHANGES IN SALES
In thousands 1994 1993 1992 - ----------------------------------============================================= Prior year's net sales $157,400 $151,100 $135,500 - ------------------------------------------------------------------------------- Acquisitions 26,100 (2,600) 10,200 Internal marketing actions 24,900 7,500 11,400 External market forces 4,700 1,400 (6,000) - ------------------------------------------------------------------------------- Total change 55,700 6,300 15,600 - ------------------------------------------------------------------------------- Current year's net sales $213,100 $157,400 $151,100 - ----------------------------------=============================================
19 ANALYSIS OF RESULTS continued Gross Margin - -------------------------------------------------------------------------------- OVERVIEW Gross margin rose to $64.9 million, or 30.5 percent of sales, in 1994 compared with $48.5 million, or 30.8 percent of sales in 1993. Strong internal growth and operating leverage in 1994 were offset by the impact of acquisitions that produced gross margins at much lower levels than Lydall's established operations. These plants generated gross margins of $3.8 million on sales of $26.1 million, a rate of 14.6 percent. Established operations, including the 1991 acquisitions, produced gross margins of 32.7 percent compared with 30.8 percent in 1993 and 30.6 percent in 1992. Volume increases other than from acquisitions drove margins up significantly, accounting for over 70 percent of the gain. Cost-reduction efforts under Lydall's continuous improvement programs added a record $3.2 million to gross margin during the year. In 1993, gross margin rose by $2.2 million, largely due to benefits of operating leverage from increased sales volume and cost-reduction programs. Offsetting these positive factors was a net decline in margins at acquired units as well as other effects, such as depreciation and overhead related to capital programs and local capacity expansions. During 1992, margins rose by $5.4 million with positive contributions from acquisitions, sales volume improvements, and cost-reduction programs. ACQUISITIONS The Columbus and Jacksonville Operations were integrated into the Company over the course of 1994 with mixed results. Both factories are undergoing major reconfigurations to improve operating efficiencies, safety, and cost of quality. Although these programs are expected to produce meaningful improvements to gross margin in 1995, progress in 1994 was somewhat disappointing. The blended margin at both plants was 14.6 percent of sales, depressing overall margins by more than 2 percent of sales. During 1993, acquisitions produced a net reduction in margins of $1.6 million, primarily due to lower volume at Lydall's Axohm Division, which was partially offset by improvements at the Rockwell Operation. In 1992, these operations generated a positive contribution of $2.3 million reflecting the first full year as part of Lydall. EFFECTS OF CHANGES IN SALES VOLUME New products and increased worldwide demand for Lydall's products contributed heavily to 1994's record sales. Volume increases at operations other than acquisitions generated gross margins of $11.6 million on sales of approximately $26 million. This compares favorably with results in 1993 and 1992 when increases in sales volume contributed $4.2 million and $2.0 million to gross margin, respectively. New-product mix, with margins that exceed Lydall averages, has been especially strong in recent years. Most of these products have been in development stages for two to three years at substantial development cost to the Company, and premium margins are required to recover these development costs over relatively short product life cycles. PRICE INCREASES IN RELATION TO COST INCREASES In 1994 and 1993, cost increases exceeded price increases by $500 thousand and $300 thousand, respectively. Lydall experienced severe cost inflation in several raw material categories, most notably wood pulp and pulp substitute products. Price increases were passed on to customers for these grades, but only after some of these costs were absorbed by the Company. By the end of 1994, Lydall was able to pass through sufficient price increases to cover the current level of cost increases. In 1992, the relationship between price increases to customers and vendor-imposed cost increases was a positive $100 thousand. 20 COST REDUCTIONS Lydall produced record savings from manufacturing improvement programs in 1994 of $3.2 million compared to $2.0 million in 1993 and $1.6 million in 1992. The record level of savings was caused by continuous quality improvement programs and a net reduction in Cost of Quality, Lydall's internal measure of the cost of inefficiency. Savings from management actions were approximately equivalent to savings generated by capital projects. One capital project to reclaim fiber from formerly disposed of materials produced striking savings in fiber costs while reducing landfill costs. This project is one example of the continuing focus on process efficiency and cost reduction that has increased Lydall's gross margin by $6.8 million over the past three years, more than 3 percent of 1994 sales. INVENTORY EFFECTS Inventory accounting caused $800 thousand of negative effects in 1994 following little or no impact in 1993 and 1992. Contributing circumstances were: . Inflation in raw materials and finished goods necessitated increased LIFO reserves, which rose by $200 thousand. . Inventory obsolescence resulting in modest write-offs . Finished goods and work-in-process inventories at operations other than acquisitions declined by over $1.7 million, affecting absorption of manufacturing overhead OTHER EFFECTS Increased manufacturing overhead and depreciation costs eroded margins by $900 thousand compared to $1.9 million in 1993 and $600 thousand in 1992. STATEMENTS OF CHANGES IN GROSS MARGIN
$ thousands 1994 1993 1992 - ------------------------------------------------------------------------------------------------- Prior year's gross margin $48,500 $46,300 $40,900 - ------------------------------------------------------------------------------------------------- Acquisitions 3,800 (1,600) 2,300 Effects of changes in sales volume 11,600 4,200 2,000 Price increases in relation to cost increases (500) (300) 100 Cost reductions 3,200 2,000 1,600 Inventory effects (800) (200) - Other effects (900) (1,900) (600) - ------------------------------------------------------------------------------------------------- Total change 16,400 2,200 5,400 - ------------------------------------------------------------------------------------------------- Current year's gross margin $64,900 $48,500 $46,300 - ------------------------------------------------------------------------------------------------- As a percent of net sales 30.5 30.8 30.6 - -------------------------------------------------------------------------------------------------
Pretax Income - -------------------------------------------------------------------------------- OVERVIEW Pretax income rose by 57 percent to $26.5 million from $16.9 million in 1993 compared to a 16-percent rise in 1993 and a 10 percent increase in 1992. In 1994, operations other than acquisitions generated a net pretax income gain of $8.7 million, while acquisitions generated $900 thousand of incremental pretax income. The 1994 improvement from operations is the largest ever recorded by the Company. Acquisitions produced a positive impact for the year and, based on programs well underway in 1994 and early 1995, should generate meaningful incremental gains in 1995. The net change in nonoperating investments and financing costs was negligible for 1994 following a gain of $800 thousand in 1993 and no net effect in 1992. ACQUISITIONS The 1994 results indicate positive contributions from the combined results of the Columbus and Jacksonville acquisitions, both of which were profitable for the year. As indicated earlier, both plants are expected to produce progressively improving returns beginning in 1995 and continuing through 1996. Acquisitions made in 1991 had a negative impact on pretax earnings of $1.6 million in 1993 compared with a positive contribution of $700 thousand in 1992 21 ANALYSIS OF RESULTS continued OPERATIONS Lydall's strong performance in new-product commercialization and market-share expansion fueled the majority of the pretax earnings improvement in 1994. Gross margin gains were significant, and support costs, such as selling and product development, increased less dramatically, yielding an $8.7 million increase in pretax income. In the past two years, internally generated new products have proven to be Lydall's most productive method of improving profits. This results primarily from improved operating leverage in plants where fixed costs are already absorbed by preexisting business levels. Other Expense, Net increased by $1.1 million in 1994 after declining by $900 thousand in 1993 and rising by $600 thousand in 1992. Most of the increase resulted from a return to historical levels of equipment disposals resulting from equipment upgrades and changes in manufacturing processes. During 1993 Lydall recovered environmental remediation costs from former owners of a Company property thereby reducing expenses in that year. NONOPERATING INVESTMENTS AND FINANCING The net impact of nonoperating interest income and expenses in 1994 compared with 1993 was negligible as a small decrease in total interest expense was offset by a small decline in investment income. For 1994, interest expense on long-term debt declined by $500 thousand due to lower levels of outstanding debt and lower interest rates negotiated in October 1993. Offsetting most of this decline was an interest payment of $400 thousand in December 1994 to the Internal Revenue Service resulting from the examination of tax years 1987 through 1989. In 1993, lower levels of long-term debt combined with a reduction in the interest rate charged on the Note Purchase Agreement caused interest expense to decline by $600 thousand. Interest income rose in 1993 by $200 thousand resulting in an improvement of $800 thousand in pretax income. There was no net change in 1992 from 1991. STATEMENTS OF CHANGES IN PRETAX INCOME
In thousands 1994 1993 1992 - -------------------------------------------------------------------------------------- Prior year's pretax income $16,900 $14,600 $13,300 - -------------------------------------------------------------------------------------- Acquisitions - change in: Gross margin 3,800 (1,600) 2,300 Selling, product development, and administrative expenses (2,900) - (1,600) - -------------------------------------------------------------------------------------- Total change from acquisitions 900 (1,600) 700 - -------------------------------------------------------------------------------------- Operations - change in: Gross margin 12,600 3,800 3,100 Selling, product development, and administrative expenses (2,800) (1,600) (1,900) Other expense, net (1,100) 900 (600) - -------------------------------------------------------------------------------------- Total change from operations 8,700 3,100 600 - -------------------------------------------------------------------------------------- Nonoperating investments and financing - change in: Income from investments (100) 200 (100) Interest expense 100 600 100 - -------------------------------------------------------------------------------------- Total change from nonoperating investments and financing - 800 - - -------------------------------------------------------------------------------------- Total change 9,600 2,300 1,300 - -------------------------------------------------------------------------------------- Current year's pretax income $26,500 $16,900 $14,600 - --------------------------------------------------------------------------------------
22 Liquidity and Capital Resources - -------------------------------------------------------------------------------- LIQUIDITY OVERVIEW Lydall generated record levels of cash from operating activities in 1994 for the third consecutive year. After-tax cash from operating activities reached $26.8 million, representing a 47 percent increase over 1993 record levels. Liquidity was particularly strong during this period for two key reasons: . Healthy after-tax earnings . Improved working capital productivity and inventory turnover The following table summarizes major components of Lydall's after-tax cash flow from operating activities:
$ thousands 1994 1993 1992 - -------------------------------------------------------------------------------- Net income $15,503 $10,248 $ 9,038 Depreciation and amortization 7,504 5,921 5,256 Working capital changes 4,868 2,572 2,987 Other changes (1,032) (523) 380 - -------------------------------------------------------------------------------- Total cash generated from operating activities $26,843 $18,218 $17,661 - -------------------------------------------------------------------------------- Change from previous year 47% 3% 60% - --------------------------------------------------------------------------------
WORKING CAPITAL PRODUCTIVITY Working capital productivity is an effective financial measure of performance. The management of Lydall is committed to improving all aspects of financial performance by improving processes and utilizing resources more efficiently. The Company's working capital productivity continued to improve in 1994 including the impact of two acquisitions during the year. Lydall's working capital productivity, defined as annual sales divided by the quarterly average of all receivables and inventory, less accounts payable, shows the following three-year trend:
$ thousands 1994 1993 1992 - -------------------------------------------------------------------------------- Net sales $213,072 $157,431 $151,148 Average working capital 29,702 24,542 26,915 Working capital productivity (turnover) 7.17 6.41 5.62 Change from previous year 12% 14% 9% - --------------------------------------------------------------------------------
INVENTORY TURNOVER Inventory turnover continued to improve in 1994 rising to 10.2 times the quarterly average, up from 8.9 times in 1993 and 7.4 times in 1992. These improving financial indicators are by-products of Lydall's continuous improvement programs that are designed with two goals in mind: . continuously improving service to customers . reducing process and product-development cycle times 23 ANALYSIS OF RESULTS continued CASH FLOW OVERVIEW In each of the past three years, Lydall has generated significant cash flow from operating activities. These amounts have been more than sufficient to cover annual capital spending requirements as well as the 1994 acquisitions of the Columbus and Jacksonville Operations. SUMMARY STATEMENTS OF CASH FLOWS
In thousands 1994 1993 1992 - --------------------------------------------------------------------------------------------------- Net cash provided by operations $ 26,843 $18,218 $17,661 Key investing activities: Acquisitions of operating companies (16,846) - - Capital expenditures (7,979) (6,253) (6,235) - --------------------------------------------------------------------------------------------------- (24,825) (6,253) (6,235) - --------------------------------------------------------------------------------------------------- Key financing activities: Repayment of debt (2,724) (5,235) (6,458) Issuance of common stock 519 775 2,177 Acquisition of common stock (855) - - - --------------------------------------------------------------------------------------------------- (3,060) (4,460) (4,281) - --------------------------------------------------------------------------------------------------- Other increase (decrease), net (1,215) 252 453 - --------------------------------------------------------------------------------------------------- Increase (decrease) in cash, cash equivalents and short-term investments $ (2,257) $ 7,757 $ 7,598 - ---------------------------------------------------------------------------------------------------
INTEREST COVERAGE Lydall generated record operating cash flow in 1994 for the eleventh consecutive year. Interest coverage was outstanding for each of the past three years as shown below. Lydall defines operating cash flow as earnings before interest, taxes, depreciation, and amortization.
$ thousands 1994 1993 1992 - -------------------------------------------------------------------------------- Operating cash flow $35,144 $23,941 $21,782 Interest expense 1,335 1,474 2,124 Interest coverage 26.3 16.2 10.3 - --------------------------------------------------------------------------------
FUTURE CASH REQUIREMENTS Cash requirements for 1995 will include ongoing operations, capital expenditures, and acquisitions. Lydall's Board of Directors has approved a $9.6 million capital spending plan for 1995 with spending focused on continuous quality and process improvement as well as capacity expansions for various product lines. Management expects to finance all capital spending and ongoing operating cash needs from cash on hand and cash generated from operations. Lydall remains committed to expansion through acquisitions of product lines and operating companies; however, none are specifically contemplated as of early 1995. CREDIT ARRANGEMENTS Lydall maintains domestic and foreign bank credit arrangements totaling approximately $10 million, which are renewed annually. Lydall primarily pays interest at the lower of prime or money market rates and compensates its banks for services on a fee basis. At December 31, 1994, no amounts were outstanding on the domestic lines of credit and $187 thousand was outstanding on the foreign line of credit. No amounts were outstanding on any lines of credit at December 31, 1993. 24 CAPITAL STRUCTURE The following chart summarizes year-end leverage ratios over the past four years.
1994 1993 1992 1991 - -------------------------------------------------------------------------------- Debt to equity .18 .23 .38 .66 Debt to total capitalization .15 .19 .28 .40 - --------------------------------------------------------------------------------
A steady decline in debt leverage has been evident over the past four years. Lydall's strong cash flow from operations has exceeded cash requirements for working capital, acquisitions, and capital spending plans over the periods. Because Lydall is actively seeking strategic acquisitions of high quality companies that fit the Company's defined technology and product profiles, management regularly monitors borrowing capacity under what it considers a long-term, debt-to-capitalization target of 40 percent. At the end of 1994, Lydall could have borrowed nearly $40 million while remaining within that long-term target capital structure. Coupled with existing cash and investment balances, Lydall retains significant capacity for external expansion. 25 KEY FINANCIAL ITEMS - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS Cash and cash equivalents decreased to $11.7 million in 1994 from $13.8 million in 1993. SHORT-TERM INVESTMENTS Lydall invests in high-quality, fixed-income securities and other high-quality, liquid money market instruments with a maturity of more than three months when purchased and which management intends to liquidate within one year. The Company had short-term investments of $2.9 million and $3.0 million at December 31, 1994 and 1993, respectively. RECEIVABLES Receivables were $31.8 million in 1994 and $22.2 million in 1993, of which trade receivables were $31.1 million and $20.6 million for 1994 and 1993, respectively. Days of sales outstanding in trade receivables were 47 in 1994 and 52 in 1993. Foreign and export sales were approximately 21 percent of total sales in 1994 and 1993, and 23 percent in 1992. These sales are concentrated primarily in Europe, the Far East, Mexico, and Canada. INVENTORIES Inventories were $13.5 million at December 31, 1994 and $11.8 million at December 31, 1993. Inventory levels were reduced by $1.7 million and $1.4 million at the end of 1994 and 1993, respectively, to reflect the LIFO method of inventory valuation. WORKING CAPITAL Working capital decreased to $30.8 million on December 31, 1994 from $31.8 million on December 31, 1993. The ratio of current assets to current liabilities decreased to 1.93 from 2.48. CAPITAL ASSET EXPENDITURES Capital asset expenditures were $8.0 million in 1994 and $6.3 million in 1993. Depreciation was $6.1 million in 1994, $5.0 million in 1993, and $4.3 million in 1992. The Company's 1995 Capital Plan calls for commitments of $9.6 million with spending focused in two critical areas -- investments that increase utilization of Lydall's fixed assets and overhead, and investments that improve quality and productivity. Expenditures in 1995 are expected to be financed from cash balances or cash generated from operations. Capital spending at Lydall is closely tied to generating new products and supporting continuous improvement in the quality of processes and products. DEBT TO TOTAL CAPITALIZATION Debt to total capitalization decreased to .15 in 1994 from .19 in 1993. COMMON STOCKHOLDERS' EQUITY Common stockholders' equity increased to $76.2 million at December 31, 1994, an increase of 27 percent from $60.1 million last year. On a per-share basis, common stockholders' equity increased to $9.14 in 1994 from $7.26 in 1993. DIVIDEND POLICY The Company does not pay a cash dividend on its common stock and does not anticipate doing so for the foreseeable future. Cash will be conserved and reinvested into core businesses which should continue to earn Lydall stockholders an excellent overall return on their common stock investment. RESEARCH AND DEVELOPMENT Research and development investment was $5.5 million in 1994, $4.8 million in 1993, and $4.7 million in 1992. 26 INCOME STATEMENTS
In thousands except per-share data For the years ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ NET SALES $213,072 $157,431 $151,148 Cost of sales 148,188 108,977 104,894 - ------------------------------------------------------------------------------------------------------------------------------ Gross margin 64,884 48,454 46,254 Selling, product development, and administrative expenses 36,211 30,492 28,910 - ------------------------------------------------------------------------------------------------------------------------------ Operating income 28,673 17,962 17,344 - ------------------------------------------------------------------------------------------------------------------------------ Other (income) expense: Investment income (231) (355) (194) Interest expense 1,335 1,474 2,124 Other 1,033 (58) 818 - ------------------------------------------------------------------------------------------------------------------------------ 2,137 1,061 2,748 - ------------------------------------------------------------------------------------------------------------------------------ Income before income taxes and cumulative effect of accounting change 26,536 16,901 14,596 Income tax expense 11,033 6,888 5,558 - ------------------------------------------------------------------------------------------------------------------------------ Income before cumulative effect of accounting change 15,503 10,013 9,038 Cumulative effect of accounting change/1/ - 235 - - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 15,503 $ 10,248 $ 9,038 - ------------------------------------------------------------------------------------------------------------------------------ Per-share amounts://2// Income per share before cumulative effect of accounting change $ 1.73 $ 1.14 $ 1.04 Cumulative effect of accounting change/1/ - .03 - - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER COMMON SHARE $ 1.73 $ 1.17 $ 1.04 - ------------------------------------------------------------------------------------------------------------------------------ Weighted average common stock and equivalents outstanding/2/ 8,976 8,791 8,710 - ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. /1/ Cumulative effect of adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." /2/ 1992 restated to reflect a three-for-two stock split distributed in 1993. 27 BALANCE SHEETS
In thousands except share data December 31, 1994 1993 - ------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,684 $ 13,820 Short-term investments 2,904 3,025 Accounts receivable (less allowance for doubtful receivables of $1,724 in 1994 and $1,126 in 1993) 31,825 22,248 Inventories: Finished goods 5,423 6,334 Work in process 2,941 3,115 Raw materials and supplies 6,822 3,741 LIFO reserve (1,659) (1,426) - ------------------------------------------------------------------------------------------------- Total inventories 13,527 11,764 - ------------------------------------------------------------------------------------------------- Prepaid expenses 662 944 - ------------------------------------------------------------------------------------------------- Deferred tax assets 3,485 1,427 - ------------------------------------------------------------------------------------------------- Total current assets 64,087 53,228 - ------------------------------------------------------------------------------------------------- PROPERTY, PLANT, AND EQUIPMENT, AT COST: Land 870 865 Buildings and improvements 16,849 15,277 Machinery and equipment 69,753 62,503 Office equipment 5,685 4,404 Vehicles 1,274 1,292 - ------------------------------------------------------------------------------------------------- 94,431 84,341 Less accumulated depreciation (39,660) (34,977) - ------------------------------------------------------------------------------------------------- 54,771 49,364 - ------------------------------------------------------------------------------------------------- OTHER NONCURRENT ASSETS: Goodwill, at cost (net of accumulated amortization of $516 in 1994 and $34 in 1993) 11,171 284 Other assets, at cost (net of accumulated amortization of $7,524 in 1994 and $6,733 in 1993) 6,584 4,966 - ------------------------------------------------------------------------------------------------- 17,755 5,250 - ------------------------------------------------------------------------------------------------- $136,613 $107,842 - -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 28
In thousands except share data December 31, 1994 1993 - ---------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 2,843 $ 2,672 Accounts payable 17,032 9,763 Accrued taxes 2,196 621 Accrued payroll and other compensation 5,420 4,590 Other accrued liabilities 5,773 3,791 - ---------------------------------------------------------------------------------------------------- Total current liabilities 33,264 21,437 - ---------------------------------------------------------------------------------------------------- LONG-TERM DEBT 10,607 11,171 - ---------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES 11,752 10,382 - ---------------------------------------------------------------------------------------------------- OTHER LONG-TERM LIABILITIES 4,763 4,795 - ---------------------------------------------------------------------------------------------------- CONTINGENCIES - ---------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY: Preferred stock - - Common stock, par value $.10 per share, authorized 15,000,000 shares, issued 10,125,613 shares in 1994 and 10,029,914 shares in 1993 1,013 1,003 Capital in excess of par value 31,419 30,910 Foreign currency translation adjustment 1,138 117 Pension liability adjustment (547) (529) Retained earnings 56,023 40,520 - ---------------------------------------------------------------------------------------------------- 89,046 72,021 Less cost of 1,786,851 shares of common stock in treasury in 1994 and 1,760,851 in 1993 (12,819) (11,964) - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 76,227 60,057 - ---------------------------------------------------------------------------------------------------- $136,613 $107,842 - ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 29 STATEMENTS OF CASH FLOWS
In thousands For the years ended December 31, 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $15,503 $10,248 $ 9,038 - --------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 6,101 4,997 4,347 Amortization 1,403 924 909 Changes in operating assets and liabilities, excluding effects from acquisitions: Accounts receivable (5,503) 1,141 1,107 Inventories 645 1,600 (387) Other assets 93 (276) 238 Accounts payable 5,465 (468) 1,142 Accrued taxes 1,532 24 226 Accrued payroll and other accrued liabilities 2,729 275 899 Deferred income taxes (954) 380 148 Other long-term liabilities (171) (627) (6) - --------------------------------------------------------------------------------------------------------------------------- Total adjustments 11,340 7,970 8,623 - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 26,843 18,218 17,661 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of assets of Columbus and Jacksonville Operations (16,846) - - Additions of property, plant, and equipment (7,979) (6,253) (6,235) Disposals of property, plant, and equipment, net 687 356 487 Sale (purchase) of short-term investments, net (1,863) 2,741 (5,766) - --------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES (26,001) (3,156) (11,514) - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term debt repayments (2,724) (5,235) (6,458) Issuance of common stock 519 775 2,177 Acquisition of common stock (855) - - Proceeds from line of credit agreements - 3,820 300 Payments under line of credit agreements - (3,820) (300) - --------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR FINANCING ACTIVITIES (3,060) (4,460) (4,281) - --------------------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 82 (104) (34) - --------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (2,136) 10,498 1,832 Cash and cash equivalents at beginning of year 13,820 3,322 1,490 - --------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $11,684 $13,820 $3,322 - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 1,339 $ 1,644 $2,176 Income taxes 10,894 6,521 3,463 Noncash transactions: Note issued to purchase assets of Columbus Operation 2,250 - - Reclassification of short-term investments to long-term 1,984 - - SFAS 109 cumulative effect fixed asset step-up - 2,912 - Additional minimum pension liability - 574 210 Stock split effected in the form of stock dividend - 333 - Issuance/receipt of treasury stock - 4 576 Reclassification of common stock for reduction in par value - - 20,923 - ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 30 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Foreign Capital in Currency Pension Cost of Total Preferred Common Excess of Translation Liability Retained Stock in Stockholders' In thousands except per share data Stock Stock Par Value Adjustment Adjustment Earnings Treasury Equity - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT JANUARY 1, 1992 $ - $21,317 $ 7,145 $1,463 $ (44) $21,567 $(12,374) $39,074 Reduction of par value from $3.33-1/3 to $.10 (20,923) 20,923 - Stock options exercised 265 1,912 2,177 Issuance of treasury stock to fund the 1991 ESOT contribution 162 414 576 Foreign currency translation adjustment (669) (669) Pension liability adjustment (125) (125) Net income 9,038 9,038 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1992 - 659 30,142 794 (169) 30,605 (11,960) 50,071 Three-for-two stock split in the form of a stock dividend 333 (333) - Stock options exercised 11 768 (4) 775 Foreign currency translation adjustment (677) (677) Pension liability adjustment (360) (360) Net income 10,248 10,248 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1993 - 1,003 30,910 117 (529) 40,520 (11,964) 60,057 Stock options exercised 10 509 519 Acquisition of Common Stock (855) (855) Foreign currency translation adjustment 1,021 1,021 Pension liability adjustment (18) (18) Net income 15,503 15,503 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1994 $ - $ 1,013 $31,419 $1,138 $(547) $56,023 $(12,819) $76,227 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. 31 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. 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. Short-term investments consist primarily of high- quality, fixed-income securities and other high-quality, liquid money market instruments with a maturity of more than three months when purchased and which management intends to liquidate within one year. The investments are recorded at the lower of cost or market, plus accrued interest. CONCENTRATION OF CREDIT RISK. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and short-term investments, and trade receivables. The Company places its cash, cash equivalents and short-term investments in high credit-quality financial institutions and instruments. Concentrations of credit risk with respect to trade receivables are limited becuase of the large number of customers that make up the Company's customer base and their dispersion across many different industries and geographies. The Company performs ongoing credit evaluations of its customers' financial conditions and generally does not require collateral. Thirty-one percent of the Company's sales were to the automotive market in 1994; however, no single customer accounted for more than 10 percent of total sales. As of December 31, 1994, the Company had no other significant concentrations of credit risk. INVENTORIES. Approximately 63 percent in 1994 and 51 percent in 1993 of the inventories have been valued on a last-in, first-out (LIFO) method and the balance on a first-in, first-out (FIFO) method at the lower of cost or market. DEPRECIATION AND AMORTIZATION. Property, plant, and equipment are depreciated over their estimated useful lives on the straight-line method for financial statement purposes. Leasehold improvements are depreciated on a straight-line basis over the term of the lease or the life of the asset, whichever is shorter. INTANGIBLES. Goodwill and other intangibles arising from acquisitions are being amortized on a straight-line basis over periods not exceeding 25 years. The carrying amount of the cost in excess of the net assets acquired is evaluated for future recoverability on a recurring basis. RESEARCH AND DEVELOPMENT. Costs are charged to expense as incurred. REVENUE RECOGNITION. Lydall recognizes revenues when the product is shipped. EARNINGS PER SHARE. Earnings per common share are based on net income divided by the weighted average number of common shares outstanding during the period, including the effect of stock options, stock awards and warrants where such effect is dilutive. Fully diluted earnings per share are not presented since the dilution is not material. 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 nonwovens manufacturing facility located in Saint-Rivalain, Melrand, France. Foreign sales were $14.4 million, $12.3 million, and $16.4 million for the years ended December 31, 1994, 1993, and 1992, respectively. Net income was $192 thousand, $57 thousand, and $1.1 million for the years ended December 31, 1994, 1993, and 1992, respectively. Total foreign assets were $19.5 million and $17.1 million at December 31, 1994 and 1993, respectively. 32 TRANSLATION OF FOREIGN CURRENCIES. Assets and liabilities of the foreign subsidiary are translated at exchange rates prevailing on the balance sheet date; revenues and expenses are translated at average exchange rates prevailing during the period; and elements of stockholders' equity are translated at historical rates. Any resulting translation gains and losses are reported separately in stockholders' equity. INVESTMENTS On January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In connection with the implementation, based upon management's intent and ability to hold these investments, approximately $2 million of securities were transferred from short-term investments to other long-term assets. The net unrealized loss on the available-for-sale portfolio is immaterial and is included in Stockholders' Equity at December 31, 1994. The gross realized gains and losses on sales of available-for-sale securities are immaterial to the consolidated financial statements during 1994. Realized gains or losses are based on specific identification of the security being sold. Investments on December 31, 1994 consisted of available-for-sale and held-to-maturity securities. Available-for-sale securities, which include equity and debt instruments, had an amortized cost of $15.2 million which approximated fair market value. Investments that are classified as held-to-maturity consist of obligations of state and local governments and had an amortized cost which approximated fair value of $2.4 million at December 31, 1994. Investment components for 1993 have not been restated under SFAS 115. The amortized cost of investments in debt securities by contractual maturity are shown below:
In thousands December 31, 1994 Available-for-Sale Held-to-Maturity - -------------------------------------------------------------------------------- One year or less $2,100 $ 383 One year through five years 441 1,200 Five years through ten years - 250 After ten years - 545 - -------------------------------------------------------------------------------- $2,541 $2,378 - --------------------------------------------------------------------------------
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued LONG-TERM DEBT
In thousands December 31, 1994 1993 - -------------------------------------------------------------------------------- 7.25% Note Purchase Agreement, payable annually to 1999. $10,900 $13,100 5% Promissory Note, $500,000 payable annually in 1995 and 1996; balance due in full in 1997. 2,250 - French money market rate plus 0.8% bank loan, payable quarterly to 1996; machinery and equipment of the Axohm Division serve as collateral. 300 387 10% bank loans, payable annually to 1994; shares of Axohm Industries, S.A. stock serve as collateral. - 356 - -------------------------------------------------------------------------------- 13,450 13,843 Less portion due within one year (2,843) (2,672) - -------------------------------------------------------------------------------- $10,607 $11,171 - --------------------------------------------------------------------------------
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 .15, it is .24 as defined by the terms of this agreement as of December 31, 1994. Effective October 1, 1993, the Company renegotiated the interest rate on the Note Purchase Agreement from 9.85 percent to 7.25 percent. Additionally, a loan covenant was deleted. There were no other material changes to the existing agreement. Lydall guarantees an industrial revenue bond of an unrelated party for $1.1 million. At the time of the guarantee and at December 31, 1994, this issue was not in default as to principal or interest, and management has no reason to believe that the debtor will subsequently permit the issue to go into default. In such an unlikely event, Lydall's exposure on its guarantee of the bond issue is collateralized by tangible assets and real property which Lydall management believes have a market value in excess of the obligation. Long-term debt repayment requirements:
In thousands 1995 1996 1997 1998 1999 Total - ------------------------------------------------------------------------------------------------------------ Long-term debt payments $2,843 $2,857 $3,450 $2,200 $2,100 $13,450 - ------------------------------------------------------------------------------------------------------------
CREDIT ARRANGEMENTS Lydall maintains domestic and foreign bank credit arrangements totaling approximately $10 million which are renewed annually. Lydall primarily pays interest at the lower of prime or money market rates and compensates its banks for services on a fee basis. At December 31, 1994, no amounts were outstanding on the domestic lines of credit, and $187 thousand was outstanding on the foreign line of credit. No amounts were outstanding on any lines of credit at December 31, 1993. LONG-TERM OPERATING LEASES Lydall has over 100 leases which cost the Company $1.9 million in 1994, $1.3 million in 1993, and $1.4 million in 1992. These contracts range from vehicle leases to building leases which require payment of property taxes, insurance, repairs and other operating costs. Future net lease commitments under noncancelable operating leases are:
In thousands 1995 1996 1997 1998 1999 Thereafter Total - ----------------------------------------------------------------------------------------------------- Net lease payments $1,553 $1,313 $792 $608 $608 $3,053 $7,927 - -----------------------------------------------------------------------------------------------------
34 ACQUISITIONS AND OTHER INVESTMENTS During 1994, Lydall made two strategic acquisitions. On February 28, 1994, the Company acquired for, $15 million in cash and a note payable of $2.25 million, the operations and certain assets and assumed certain liabilities of the Clecon Molding Division of Standard Packaging, Inc. ("Columbus Operation"). As a result of this purchase, the Company recorded goodwill and other intangible assets of approximately $11.4 million. The Columbus Operation is a designer and manufacturer of thermal and acoustical insulation products sold to the automotive market. The results of the Columbus Operation since the date of acquisition have been included in the Company's consolidated results. On June 30, 1994, the Company acquired the laminates operation of Riverwood International Georgia, Inc. located in Jacksonville, Florida ("Jacksonville Operation"). The Company purchased inventory, equipment, and other assets for approximately $1.8 million. This operation, which manufactures materials- handling slipsheets, directly complements Lydall's existing slipsheet business in Richmond, Virginia. The Company will continue to operate the business at the Jacksonville location as part of the Southern Products Division. The results of the operations of the Jacksonville Operation since the date of acquisition have been included in the Company's consolidated results. The following pro forma consolidated information of Lydall, Inc. reflects the acquisitions described above as if the acquisitions had occurred at the beginning of each period presented.
In thousands except per-share data 1994 1993 - ------------------------------------------------------------------------------------ Sales $220,968 $186,450 Net income 16,020 12,628 Net income per common share and common equivalents 1.78 1.44 - ------------------------------------------------------------------------------------
The pro forma consolidated information is presented for informational purposes only and does not purport to be indicative of results that would actually have been obtained if the acquisitions had been in effect for the periods indicated or of results that may be obtained in the future. CAPITAL STOCK Preferred Stock--The Company has a class of Serial Preferred Stock with a par value of $1. None of the 500,000 authorized shares has been issued. Common Stock--At the end of 1994, 1,900 Lydall stockholders of record held 8,338,762 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 9 percent either directly or through participation in the Company's Employee Stock Ownership Trust. During 1993, Lydall's Board of Directors declared a three-for-two-stock split in the form of a stock dividend which resulted in the issuance of 3,332,175 shares of previously unissued Common Stock. December 31, 1993 account balances reflect the split with an increase in Common Stock and a reduction in Retained Earnings of $333 thousand. The distribution was made on September 15, 1993 to stockholders of record on August 18, 1993. All earnings-per-share information in this report prior to the distribution date has been adjusted to reflect the 1993 stock split. On May 13, 1992, the Company increased its authorized shares to 15,000,000 from 10,000,000. Also on that date, the par value of the Company's Common Stock was changed to $.10 from $3.33-1/3 per share. This resulted in a reclassification from Common Stock toCapital in Excess of Par Value of $20.9 million. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued Stock Plans--The Company has three stock option plans under which employees and directors are granted options or warrants to purchase Lydall Common Stock. Under these plans--the 1984 Outside Directors Warrant Plan, the 1982 Stock Incentive Compensation Plan, and the 1992 Stock Incentive Compensation Plan--options are granted at fair market value on the grant date and expire ten years after the grant date. The Warrant and 1982 Plans have expired. 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. A summary of option transactions under the plans follows: In thousands except per-share data For the years ended December 31, 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ Options outstanding at the beginning of the year 1,142 1,001 1,159 Options granted during the year 118 306 153 Options exercised during the year (96) (150) (288) Options cancelled during the year (3) (15) (23) - ------------------------------------------------------------------------------------------------------------------ Options outstanding at end of the year 1,161 1,142 1,001 Options exercisable at end of the year 711 655 688 Shares reserved for option grants 372 88 387 Option price range per share $3.09-$33.50 $2.94-$21.33 $1.40-$21.33 - ------------------------------------------------------------------------------------------------------------------
EMPLOYER-SPONSORED BENEFIT PLANS The Company contributes to four defined benefit pension plans which cover substantially all domestic Lydall employees. The pension plans are noncontributory, and benefits are based on either years of service or eligible compensation paid while a participant in a plan. The Company's funding policy is to fund not less than the ERISA minimum funding standard nor more than the maximum amount which can be deducted for federal income tax purposes. The following items are the components of net pension cost:
In thousands For the years ended December 31, 1994 1993 1992 - ---------------------------------------------------------------------------------------------------- Service cost-benefits earned during the year $ 851 $ 649 $ 708 Interest cost on projected benefit obligations 1,025 946 778 Actual return on plan assets 75 (1,042) (696) Net amortization and deferral (1,020) 169 (85) - ---------------------------------------------------------------------------------------------------- Net pension cost $ 931 $ 722 $ 705 - ----------------------------------------------------------------------------------------------------
36 Plan assets include investments in bonds and equity securities. Actuarial computations, which used the "projected unit credit" method and the "unit credit" method, assumed discount rates on benefit obligations of 7.25 percent for 1994 and 1993 and 8.5 percent for 1992; expected long-term rates of return on plan assets of 9.5 percent for 1994, 1993, and 1992; and annual compensation increases of 4.75 percent for 1994 and 1993, and 5.5 percent for 1992. The Company determines the assumed discount rate, long-term rate, and annual compensation increase rate for each year. The following table presents a reconciliation of the funded status of the plans:
1994 1993 -------------------------------------------------- ---------------- Plans in Which Plans in Which Plans in Which Assets Exceed Accumulated Accumulated Accumulated Benefits Exceed Benefits Exceed In thousands December 31, Benefits Assets Total Assets - --------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested $7,481 $3,661 $11,142 $11,278 Nonvested 251 94 345 419 - --------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligations 7,732 3,755 11,487 11,697 Additional benefits related to assumed future compensation levels 2,363 - 2,363 2,407 - --------------------------------------------------------------------------------------------------------------------- Projected benefit obligations 10,095 3,755 13,850 14,104 - --------------------------------------------------------------------------------------------------------------------- Plan assets at fair market value 7,791 2,840 10,631 10,122 - --------------------------------------------------------------------------------------------------------------------- Projected benefit obligations in excess of the plan assets (2,304) (915) (3,219) (3,982) Unrecognized net assets (662) (176) (838) (941) Unrecognized prior-service cost (171) 318 147 279 Unrecognized net losses 2,644 937 3,581 4,099 Additional minimum liability - (1,079) (1,079) (1,100) - --------------------------------------------------------------------------------------------------------------------- Accrued pension cost included in Other Long-term Liabilities $ (493) $ (915) $ (1,408) $ (1,645) - ---------------------------------------------------------------------------------------------------------------------
The Company sponsors a Stock Purchase Plan, Profit Sharing Plan, and 401(k) Plan. Contributions are determined under various formulas. Employer contributions to these plans amounted to $1.4 million in 1994 and $1.3 million in 1993 and in 1992. 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 7.25 percent at December 31, 1994 and 8.5 percent at December 31, 1993. The health-care cost trend rate for both years was 12 percent, gradually declining to 6 percent over an eight-year period. A 1-percent 37 increase in the health-care cost trend rates would cause the accumulated benefit obligation to increase by $29 thousand. The increase in the service and interest components of the 1994 postretirement benefit cost is immaterial. The total expense was $136 thousand for 1994 and $143 thousand for 1993. In 1992, prior to the adoption of SFAS 106, these costs totaled $101 thousand. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued During the first quarter of 1994, the Company adopted SFAS 112,"Employers' Accounting for Postemployment Benefits." SFAS 112 requires that postemployment benefits be accounted for under the accrual method of accounting. The implementation of this standard was immaterial to the consolidated results of operations and the consolidated financial position of the Company. The Company provides deferred compensation to a small number of former employees and has a deferred compensation plan which provides the Company's outside directors and the Chairman with compensation upon their retirement from service with the Board. In addition, in 1994, the Company adopted a Supplemental Executive Retirement Plan ("SERP") which provides supplemental income payments after retirement for senior executives. The total net deferred compensation expense related to these three plans was $105 thousand in 1994, $144 thousand in 1993, and $117 thousand in 1992. The 1994 net expense includes $171 thousand related to the SERP, offset by an actuarially calculated credit of $166 thousand related to the retired employees' compensation plan. At December 31, 1994 and 1993, the Company had accrued $824 thousand and $571 thousand, respectively, in Other Long-term Liabilities for these obligations. INCOME TAXES The provision (benefit) for income taxes consists of the following:
In thousands For the years ended December 31, 1994 1993 1992 - --------------------------------------------------------------------------------------------- Current Federal $ 9,802 $5,207 $4,196 State 2,057 910 674 Foreign 142 60 381 - --------------------------------------------------------------------------------------------- Total current 12,001 6,177 5,251 Deferred Federal (895) 437 231 State 7 356 127 Foreign (80) (82) (51) - --------------------------------------------------------------------------------------------- Total deferred (968) 711 307 - --------------------------------------------------------------------------------------------- Provision for income taxes $11,033 $6,888 $5,558 - ---------------------------------------------------------------------------------------------
The Company implemented SFAS 109 effective January 1, 1993. This statement requires the adoption of an asset and liability approach in accounting for income taxes. The cumulative effect of this change on 1993 income was $235 thousand, or $.03 per share. Financial statements for 1992 have not been restated. Additionally, SFAS 109 requires that the Company restate certain assets and the related deferred taxes payable acquired in prior business combinations to a pretax basis versus the after-tax approach required under the prior accounting standard. Accordingly, property, plant, and equipment and deferred taxes were increased by a total of $2.9 million as a result of this implementation. The income statement effect of this change was immaterial. Additionally, under SFAS 109, the Company is permitted to recognize deferred tax assets if it is more likely than not that a benefit will be realized. The Company has determined that a valuation allowance is not required 38 for the deferred tax assets. As a result of the implementation of SFAS 109, the Company recognized deferred tax assets totaling $1.1 million at January 1, 1993, which are expected to be realized upon the reversal of taxable, temporary differences related to existing deferred tax liabilities. Under the Omnibus Budget Reconciliation Act enacted during 1993, the statutory federal income tax rate was increased to 35 percent retroactive to January 1, 1993. The provision for income taxes for 1993 includes $112 thousand for the impact of the higher tax rate on the deferred tax liability balance and $126 thousand for the impact on 1993 results. 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 before the cumulative effect of the change in accounting principle:
For the years ended December 31, 1994 1993 1992 - --------------------------------------------------------------------------------------------- Statutory federal income tax rates 35.0% 34.75% 34.0% - --------------------------------------------------------------------------------------------- State income taxes, net of federal tax deduction 5.1 4.9 3.6 - --------------------------------------------------------------------------------------------- Exempt FSC foreign trade income (1.1) (1.8) (1.1) U.S. and foreign research and other tax credits - - (1.2) Foreign tax rate differential (.1) (.2) - Other 2.7 2.4 2.8 Tax rate changes - .7 - - --------------------------------------------------------------------------------------------- Effective income tax rates 41.6% 40.75% 38.1% - ---------------------------------------------------------------------------------------------
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:
1994 1993 ---------------------------- ---------------------------------- Current Long-term Current Deferred Long-term Deferred Deferred Tax Tax Assets Deferred Tax In thousands Tax Assets Liabilities (Liabilities) Liabilities - --------------------------------------------------------------------------------------------------------------- Federal $2,626 $ 6,732 $1,441 $ 6,442 State 776 2,225 43 1,485 Foreign 83 2,795 (57) 2,455 - --------------------------------------------------------------------------------------------------------------- Total $3,485 $11,752 $1,427 $10,382 - ---------------------------------------------------------------------------------------------------------------
1994 1993 ------------------------------ ---------------------------------- Deferred Tax Deferred Tax Deferred Tax Deferred Tax In thousands Assets Liabilities Assets Liabilities - --------------------------------------------------------------------------------------------------------------- Accounts receivable $ 833 $ - $ 450 $ - Inventory 814 - 484 - Plant and equipment - 10,600 - 9,924 Other accrued expenses 1,838 - 493 - Retirement accounts 742 - 351 - Other, net - 1,894 - 809 $4,227 $12,494 $1,778 $10,733 - ---------------------------------------------------------------------------------------------------------------
39 The Internal Revenue Service has conducted its examination of the Company's federal income tax returns for the years 1987, 1988, and 1989 and has proposed various adjustments which increased federal taxable income in those years. During December 1994, Lydall settled all but one issue raised during the examination and paid approximately $600 thousand in taxes and $400 thousand in interest. The unresolved issue relates to the timing of the deductibility of certain accrued liabilities. An unfavorable resolution of this issue will not result in a material adverse effect upon the Company's consolidated financial position or results of operations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued Unremitted earnings of foreign subsidiaries which are deemed to be permanently invested amounted to $1.9 million at December 31, 1994. The unrecognized deferred tax liability on those earnings is not practical to calculate. CONTINGENCIES In the mid-1980's, the United States Environmental Protection Agency ("EPA") notified a former subsidiary of the Company that it and other entities may be potentially responsible in connection with the release of hazardous substances at a landfill and property located adjacent to a landfill located in Michigan City, Indiana. The two sites have been combined and are viewed by the EPA as one site. The preliminary indication, based on the Site Steering Committee's volumetric analysis, is that the alleged contribution to the waste volume at the site of the plant once owned by a former subsidiary is approximately 0.434 percent of the total volume. The portion of the 0.434 percent specifically attributable to the former subsidiary by the current operator of the plant is approximately 0.286 percent. There are over 800 potentially responsible parties ("prp") which have been identified by the Site Steering Committee. Of these, 38, not including the Company's former subsidiary, are estimated to have contributed over 80 percent of the total waste volume at the site. These prp's include Fortune 500 companies, public utilities, and the State of Indiana. The Company believes that, in general, these parties are financially solvent and should be able to meet their obligations at the site. The Company has reviewed the financial statements and credit reports on several of these prp's, and based on these financial reports, does not believe the Company will have any material additional volume attributed to it for reparation of this site due to insolvency of other prp's. During the quarter ended September 30, 1994, the Company learned that the EPA recently completed its Record of Decision ("ROD") for the Michigan site and has estimated the total cost of remediation to be between $17 million and $22 million. Based on the alleged contribution of its former subsidiary to the site, the Company's alleged total exposure would be less than $100 thousand which has been accrued. 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. 40 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table summarizes quarterly financial information for 1994 and 1993. In management's opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the information for such quarters have been reflected below:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------------------------------------------------------------------------------- In thousands except per-share data 1994 1993 1994 1993 1994 1993 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- Net sales $48,116 $38,239 $53,556 $40,424 $54,446 $38,842 $56,954 $39,926 - --------------------------------------------------------------------------------------------------------------------------------- Gross margin 15,145 11,283 16,047 12,152 16,388 11,744 17,304 13,275 - --------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 3,528 2,547 3,758 2,490 3,878 2,282 4,339 2,694 - --------------------------------------------------------------------------------------------------------------------------------- Cumulative effect of accounting change - 235 - - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 3,528 $ 2,782 $ 3,758 $ 2,490 $ 3,878 $ 2,282 $ 4,339 $ 2,694 - --------------------------------------------------------------------------------------------------------------------------------- Income per common share before cumulative effect of accounting change $ .40 $ .29 $ .42 $ .28 $ .43 $ .26 $ .48 $ .31 - --------------------------------------------------------------------------------------------------------------------------------- Net income per common share $ .40 $ .32 $ .42 $ .28 $ .43 $ .26 $ .48 $ .31 - ---------------------------------------------------------------------------------------------------------------------------------
41 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Lydall, Inc.: We have audited the accompanying consolidated balance sheets of Lydall, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lydall, Inc. and Subsidiaries as of December 31,1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, the Company has changed its methods of accounting for postretirement benefits other than pensions and income taxes in 1993. Hartford, Connecticut (Signature goes here) February 10, 1995 Coopers & Lybrand L.L.P. MANAGEMENT'S REPORT While Lydall's financial statements and the related financial data contained in this Annual Report have been prepared in conformity with generally accepted accounting principles, and such financial statements have been audited by Coopers & Lybrand, L.L.P. the ultimate accuracy and validity of this information is the responsibility of the Company's management. To carry out this responsibility, Lydall maintains comprehensive financial policies, procedures, accounting systems and internal controls which management believes provide reasonable assurance that accurate financial records are maintained and corporate assets are safeguarded. The Audit Committee of the Board of Directors, consisting of three outside directors, meets regularly with Company management and the internal auditor to review corporate financial policies and internal controls. The Audit Committee also meets with the independent auditors to review the scope of the annual audit and any comments they may have regarding the Company's internal accounting controls. In management's opinion, Lydall's system of internal accounting control is adequate to ensure that the financial information in this report presents fairly the Company's operations and financial condition. (Signature goes here) John E. Hanley Vice President-Finance and Treasurer 42 FIVE-YEAR STATISTICAL REVIEW
$ thousands except per-share amounts 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------------- Financial results Net sales $213,072 $157,431 $151,148 $135,487 $123,079 Income before cumulative effect of accounting change 15,503 10,013 9,038 8,486 8,346 Net income 15,503 10,248 9,038 8,486 8,346 - ------------------------------------------------------------------------------------------------------------------------------- Common stock per-share data Income before cumulative effect of accounting change $ 1.73 $ 1.14 $ 1.04 $ .94 $ .94 Net income 1.73 1.17 1.04 .94 .94 Common stockholders' equity 9.14 7.26 6.17 5.01 4.67 - ------------------------------------------------------------------------------------------------------------------------------- Financial position Total assets $136,613 $107,842 $ 99,353 $ 93,213 $ 83,124 Working capital 30,823 31,791 24,614 19,743 26,085 Current ratio 1.93 2.48 2.11 1.96 2.76 Long-term debt, net of current maturities 10,607 11,171 16,195 22,737 20,400 Total stockholders' equity 76,227 60,057 50,071 39,074 38,494 Debt to total capitalization 15.0% 18.7% 27.7% 39.7% 34.9% - ------------------------------------------------------------------------------------------------------------------------------- Property, plant, and equipment Net property, plant, and equipment $ 54,771 $ 49,364 $ 46,269 $ 45,418 $ 35,853 Capital additions from acquisitions 3,077 - - 8,120 - Other capital additions 7,979 6,253 6,235 4,121 8,223 Capital divestments, net 687 356 487 221 304 Depreciation 6,101 4,997 4,347 3,784 3,160 - ------------------------------------------------------------------------------------------------------------------------------- Performance ratios and other items Return on average assets 12.7% 9.9% 9.4% 9.6% 10.6% Return on average common stockholders' equity 22.8% 18.6% 20.3% 21.9% 24.3% Return on sales 7.3% 6.5% 6.0% 6.3% 6.8% Days of inventory on hand (FIFO) 35 48 53 58 60 Days of receivables outstanding 47 52 57 56 52 Number of employees at year-end 1,306 944 945 947 832 - ------------------------------------------------------------------------------------------------------------------------------- Shares and stockholders Weighted average common stock and equivalents 8,976,000 8,791,000 8,710,000 9,051,000 8,886,000 Common shares outstanding at year-end 8,338,762 8,269,063 8,119,690 7,802,702 8,242,452 Stockholders at year-end 1,900 1,904 1,960 2,015 2,121 Market price per share of common stock - Highest close $37.25 $21.38 $22.33 $16.42 $10.08 Lowest close $20.25 $19.00 $16.08 $ 8.58 $ 7.21 - -------------------------------------------------------------------------------------------------------------------------------
Share figures adjusted to reflect a three-for-two stock split in 1993 and a two-for one-stock split in 1991. 43 OFFICERS LEONARD R. JASKOL Chairman and Chief Executive Officer JOHN E. HANLEY Vice President-Finance and Treasurer CAROLE F. BUTENAS Vice President-Communications ALAN J. GNANN Vice President-Corporate Development MARY ADAMOWICZ General Counsel and Secretary GEOFFREY W. NELSON Assistant Secretary DIRECTORS LEE A. ASSEO /2/,/6/ Chairman and Chief Executive Officer The Whiting Company PAUL S. BUDDENHAGEN /1/,/6/ Vice President Mercer Management Consulting, Inc. JAMES P. CAROLAN/5/ President Lydall Manning Nonwovens Division SAMUEL P. COOLEY /3/,/4/ Retired Executive Vice President and Senior Credit Approval Officer Shawmut Bank Connecticut, N.A. W. LESLIE DUFFY /3/,/5/ Partner Cahill Gordon & Reindel LEONARD R. JASKOL /1/,/5/,/6/ Chairman and Chief Executive Officer Lydall, Inc. WILLIAM P. LYONS /3/,/4/ Chairman JVL Corp. JOEL SCHIAVONE /1/ President and Chief Executive Officer The Schiavone Corporation CHRISTOPHER R. SKOMOROWSKI /3/ President Lydall Westex Division ROGER M. WIDMANN /2/,/5/ Senior Managing Director Corporate Finance Chemical Securities, Inc. ALBERT E. WOLF /2/,/4/ Chairman Checkpoint Systems, Inc. /1/ Executive Committee /2/ Compensation and Stock Option Committee /3/ Pension Committee /4/ Audit Committee /5/ Development Committee /6/ Nominating Committee TRANSFER AGENT American Stock Transfer & Trust Company New York, New York AUDITORS Coopers & Lybrand L.L.P. Hartford, Connecticut ANNUAL MEETING Lydall's annual meeting will be held on Wednesday, May 10, 1995 at 11:00 a.m. at The Hartford Club located at 46 Prospect Street in Hartford, Connecticut. Stockholders who are unable to attend the meeting are invited to mail any questions they might have about the Company to any of Lydall's Officers. Questions may also be directed to the Audit Committee of Lydall's Board of Directors. Such inquiries may be sent to Samuel P. Cooley, Chairman of the Audit Committee, in care of Lydall, Inc. STOCKHOLDER INFORMATION Lydall Common Stock is traded on the New York Stock Exchange under the symbol LDL. During 1994 and 1993, 2,765,600 and 1,413,500 shares, respectively, were traded. The closing price on December 31, 1994 was $32.50. As of March 13, 1995, the record date of Lydall's 1995 Annual Meeting, 1,899 stockholders of record held 8,623,003 shares of Common Stock. The following are the high, low and closing prices of Lydall Common Stock for each quarter during the past two years. 1993 prices are restated to reflect a three-for-two stock split distributed in September of that year.
Quarters 1 2 3 4 - ------------------------------------------------------------------ 1994 High $27.375 $28.750 $34.500 $37.250 Low 20.250 24.500 26.500 31.000 Close 25.125 26.250 34.500 32.500 1993 High $21.583 $20.250 $23.500 $22.250 Low 19.417 18.750 19.167 20.000 Close 19.833 19.083 20.375 21.375 - ------------------------------------------------------------------
Any stockholder correspondence regarding change of address or other recordkeeping matters may be addressed to: Isaac Kagan American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005 Telephone: 800-937-5449 All other stockholder correspondence -- questions about the Company and requests for Lydall's Annual Report and Form 10-K -- may be directed to: Carole F. Butenas Vice President-Communications Lydall, Inc. P.O. Box 151 Manchester, Connecticut 06045-0151 Lydall hires and promotes qualified employees without regard to race, color, sex, national origin, age, marital status, or physical or mental disabilities in accordance with law. 44 DIRECTORY CORPORATE HEADQUARTERS Lydall, Inc. One Colonial Road P.O. Box 151 Manchester, Connecticut 06045-0151 Telephone (203) 646-1233 Facsimile (203) 646-4917 Facsimile (203) 646-8847 AXOHM DIVISION Saint-Rivalain 56310 Melrand France Telephone 33-97-28-5300 Facsimile 33-97-39-5890 COMPOSITE MATERIALS DIVISION Division President James P. Carolan 12 Davis Street P.O. Box 400 Hoosick Falls, New York 12090-0400 Telephone (518) 686-7313 Facsimile (518) 686-7205 Covington Operation 230 Industrial Park Road P.O. Box 599 Covington, Tennessee 38019 Telephone (901) 476-7174 Facsimile (901) 476-9685 LOGISTICS MANAGEMENT, INC. Division President William J. Rankin 580 Parker Street P.O. Box 151 Manchester, Connecticut 06045-0151 Telephone (203) 646-1233 Facsimile (203) 645-0822 LYDALL & FOULDS DIVISION Division President William J. Rankin 580 Parker Street P.O. Box 151 Manchester, Connecticut 06045-0151 Telephone (203) 646-1233 Facsimile (203) 646-4448 LYDALL INTERNATIONAL, INC. Saint-Rivalain 56310 Melrand France Telephone 33-97-28-8989 Facsimile 33-97-28-8980 Branch Office Roppongi SK Building 3-15, Roppongi 3-Chome Minato-ku, Tokyo 106 Japan Telephone 81-3-3589-4621 Facsimile 81-3-3584-5249 MANNING NONWOVENS DIVISION Division President James P. Carolan P.O. Box 328 Troy, New York 12181 Telephone (518) 273-6320 Facsimile (518) 273-6361 SOUTHERN PRODUCTS DIVISION Division President Raymond J. Lanzi 3021 Vernon Road P.O. Box 9550 Richmond, Virginia 23228 Telephone (804) 266-9611 Facsimile (804) 266-3875 Jacksonville Operation 500-B North Ellis Road Jacksonville, Florida 32254 Telephone (904) 783-1247 Facsimile (904) 783-8907 Sales Office 1300 West Lodi Avenue, Suite A9 Lodi, California 95242 Telephone (209) 333-0885 Fascimile (209) 333-0887 TECHNICAL PAPERS DIVISION Division President Elliott F. Whitely Chestnut Hill Road P.O. Box 1960 Rochester, New Hampshire 03866 Telephone (603) 332-4600 Facsimile (603) 332-9602 Sales Office One Wakefield Street Rochester, New Hampshire 03867 Telephone (603) 332-8477 Facsimile (603) 332-9604 WESTEX DIVISION Division President Christopher R. Skomorowski Brooks Crossroads P.O. Box 109 Hamptonville, North Carolina 27020 Telephone (910) 468-8522 Facsimile (910) 468-8555 Columbus Operation 6767 Huntley Road Columbus, Ohio 43229 Telephone (614) 885-6379 Facsimile (614) 885-5967 Rockwell Operation 711 Palmer Road Rockwell, North Carolina 28138 Telephone (704) 279-5031 Facsimile (704) 279-6104 Sales Office 4555 Corporate Drive, Suite 205 Troy, Michigan 48098 Telephone (810) 952-5570 Facsimile (810) 952-5575 45 Lydall, Inc. One Colonial Road P.O. Box 151 Manchester, CT 06045-0151 Charts on page 16 of Lydall, Inc. 1994 Annual Report Per-share figures adjusted to reflect stock splits in 1993 and 1991. Net Sales In Millions 1990 $123.1 1991 $135.5 1992 $151.1 1993 $157.4 1994 $213.1 Net Income In Millions 1990 $8.3 1991 $8.4 1992 $9.0 1993 $10.2 1994 $15.5 EPS In dollars 1990 $.94 1991 $.94 1992 $1.04 1993 $1.17 1994 $1.73 Closing Market Price Per Share In dollars 1990 $8.42 1991 $16.42 1992 $19.83 1993 $21.38 1994 $32.50 Return on Sales Percent 1990 6.8% 1991 6.3% 1992 6.0% 1993 6.5% 1994 7.3%
Operating Cash Flow In Millions 1990 $19.1 1991 $19.7 1992 $21.8 1993 $23.9 1994 $35.1
Total Capitalization In Millions Debt Equity 1990 $20.6 $38.5 1991 $25.7 $39.1 1992 $19.2 $50.1 1993 $13.8 $60.1 1994 $13.5 $76.2
Photo Descriptions Page 3: Leonard R. Jaskol, Chairman and CEO of Lydall, Inc. Page 6: Small photo, top, right: Jec Shuping, an operator at Lydall's Rockwell, North Carolina plant, is sonically sealing insulating packs for the Ford Explorer battery cover. Page 6: Large, center photo: Joe Hiers, Vice President of Technical Development of Lydall's Westex Division and Brian Murphy, a Lydall Product Manager, are inspecting Lydall's battery cover as it is installed on a new Continental at Ford's Wixom Plant. Page 9: Large photo, upper center, Bill Morgan, VE/VA Manager of Collins & Aikman, a Lydall customer, and Gail Carolan, a Lydall Product Manager, inspect undercarpet insulation parts made from Lydall material. Page 9: Small photo, lower left: A close-up of Lydall insulating material as it appears installed as part of light-duty truck carpet assembly. Page 10: Upper, left: A semiconductor clean room representing that Lydall's high-efficiency air filtration media can be found in an application such as this type of clean room. Page 10: Lower, left: An arrangement of Lydall high-efficiency air filtration media and some different types of filter housings in which it is used. Page 11: Upper, left: Lydall Product Manager, Bill Lonstein, Risk Lindsay, Senior Buyer, Morton International Automotive Safety Products, a Lydall customer, and Kevin Lynch, Vice President-Marketing and Sales for Lydall's Technical Papers Division, are shown at Morton's manufacturing facility in Utah. Page 11: Center: Stock photo of a deployed, driver-side air bag. Page 12: Upper, left: Lydall Westex, Division employees, Grady Gardner, Randy Niston, Michael Gregory, and Ray Grupinski shown by the division's fiber reclaim system. Page 12: Lower, center: John E. Hanley, Vice President-Finance and Treasurer of Lydall, Inc. Page 13: Warehouse at Lydall's Technical Papers Division. Forklift operator is Dennis Ellis. Page 14: Upper, left: Robert Raymond, Production Manager and Carol Roelofs, Administrative Sales Manager, at Lydall's Southern Products, Jacksonville Operation. Page 14: Center, right. Verl Harnapp, Molding Process Engineer and Phillip McElroy, Quality Control Technician, at Lydall's Westex Division, Columbus Operation. Page 15: John Rash, Mold Line Operator, Ken McGill, Columbus Plant Manager, and Rich Morris, Plant Supervisor, at Lydall's Westex Division, Columbus Operation. EX-21.1 6 LIST OF SUBSIDIARIES 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 Transport, Ltd. - Incorporated in the State of Virginia Lydall Express, Inc. - Incorporated in the State of Connecticut Lydall Eastern, Inc. - Incorporated in State of Connecticut DBA: Lydall Composite Materials, Covington Operation Lydall Southern Products, Richmond Operation Lydall Southern Products, Jacksonville Operation Lydall Technical Papers Lydall & Foulds Lydall New York, Inc. - Incorporated in State of New York DBA: Lydall Composite Materials, Hoosick Falls Operation Lydall Manning Nonwovens Division Lydall Central, Inc. - Incorporated in State of Indiana DBA: Lydall Westex, Hamptonville Operation Lydall Westex, Rockwell Operation Lydall Westex, Columbus Operation Lydall International, Inc. - Incorporated in State of Delaware Lydall FSC, Limited - Incorporated in Jamaica Trident II, Inc. - Incorporated in State of Connecticut Sopatex, S.A. - Organized under the laws of France Axohm Industries, S.A. - Organized under the laws of France DBA: Lydall Axohm Axohm S.A. Operations Axohm U.K. - Organized under the laws of Great Britain EX-23.1 7 CONSENT OF C&L 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. 33-68776) of our reports dated February 10, 1995, on our audits of the consolidated financial statements and financial statement schedule of Lydall, Inc. and Subsidiaries as of December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993, and 1992, which reports are incorporated by reference from the Annual Report to Stockholders, and included, respectively, in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Hartford, Connecticut March 27, 1995 EX-24.1 8 POWER OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and officers of Lydall, Inc. (the "Corporation"), does hereby constitute and appoint Leonard R. Jaskol and John E. Hanley, and each of them singly, as his agent and attorney-in-fact to do any and all things and acts in his name and in the capacities indicated below and to execute any and all instruments for him and in his name in the capacities indicated below which said Leonard R. Jaskol and John E. Hanley, or either of them, may deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the preparation and filing of the Corporation's Annual Report on Form 10-K (the "Annual Report") respecting the fiscal year ended December 31, 1994, including specifically, but not limited to, power and authority to sign for him in his name in the capacities indicated below the Annual Report and any and all amendments thereto, and each of the undersigned does hereby ratify and confirm all that said Leonard R. Jaskol and John E. Hanley, or either of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his or her name. ___________________ Chairman of the March 14, 1995 Leonard R. Jaskol Board and Chief Executive Officer __________________ Director March 14, 1995 Lee A. Asseo __________________ Director March 14, 1995 Paul S. Buddenhagen __________________ Director March 14, 1995 James P. Carolan __________________ Director March 14, 1995 Samuel P. Cooley __________________ Director March 14, 1995 W. Leslie Duffy __________________ Director March 14, 1995 William P. Lyons __________________ Director March 14, 1995 Joel Schiavone __________________ Director March 14, 1995 Christopher R. Skomorowski __________________ Director March 14, 1995 Roger M. Widmann __________________ Director March 14, 1995 A.E. Wolf EX-27.1 9 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 11,684 2,904 32,788 1,724 13,527 64,087 94,431 39,660 136,613 33,264 13,450 1,013 0 0 75,214 136,613 213,072 213,072 148,188 148,188 1,033 1,201 1,335 26,536 11,033 15,503 0 0 0 15,503 1.73 1.73
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