-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UP2nzn8BOBeA2VcntL/gk+dRTfcCzf6FB3zbYxPgYILS2N2/oV7EsKYPvU4L+hin NnhED80oCQd+1v7wEoFMyw== 0001047469-99-011181.txt : 19990326 0001047469-99-011181.hdr.sgml : 19990326 ACCESSION NUMBER: 0001047469-99-011181 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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: SEC FILE NUMBER: 001-07665 FILM NUMBER: 99571981 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 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- Form 10-K ANNUAL REPORT /X/ Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the Fiscal Year Ended December 31, 1998 OR / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from to Commission File Number: 1-7665 -------------------------- LYDALL, INC. (Exact name of registrant as specified in its charter) DELAWARE 06-0865505 (State or Other Jurisdiction of Incorporation or (I.R.S. Employer Organization) Identification No.) ONE COLONIAL ROAD, MANCHESTER, CONNECTICUT 06045-0151 (Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (860) 646-1233 ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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 15, 1999, the aggregate market value of the Registrant's voting stock held by nonaffiliates was $138,582,758. On March 15, 1999, there were 15,725,703 shares of Common Stock outstanding, exclusive of treasury shares. -------------------------- DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the definitive Proxy Statement to be distributed in connection with the Registrant's Annual Meeting of Stockholders to be held on May 12, 1999. INDEX TO ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1998
PAGE ----- PART I Item 1. Business........................................................................................ 1 Item 2. Properties...................................................................................... 5 Item 3. Legal Proceedings............................................................................... 6 Item 4. Submission of Matters to a Vote of Security Holders............................................. 6 Executive Officers and Other Significant Employees of the Registrant............................ 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 7 Item 6. Selected Financial Data......................................................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 9 Item 7a. Quantitative and Qualitative Disclosure about Market Risk....................................... 22 Item 8. Financial Statements and Supplementary Data..................................................... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 22 PART III Item 10. Directors and Executive Officers of the Registrant.............................................. 23 Item 11. Executive Compensation.......................................................................... 23 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 23 Item 13. Certain Relationships and Related Transactions.................................................. 23 The information called for by items 10, 11, 12, and 13, to the extent not included in this document, is incorporated herein by reference to such information to be included under the captions "Election of Directors," "Common Stock Ownership of Management," "Directors' Compensation" and "Executive Compensation," in the Company's definitive Proxy Statement which is expected to be filed by March 30, 1999. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................ 24
PART I ITEM 1. BUSINESS The subsidiaries of Lydall, Inc. (hereafter referred to as "Lydall", the "Company", or the "Registrant") are manufacturers of technologically advanced engineered products for demanding specialty applications. Lydall develops and manufactures engineered specialty papers in both roll and sheet form; fabricated fiber-based, metal-and-fiber, and all-metal automotive heat shields; and certain medical filtration and bioprocessing components as well as wood-replacement board for pencils. Lydall's specialty papers are supplied to other manufacturers that convert them or incorporate them into finished products. The Company's fabricated products are sold primarily to original equipment manufacturers. Utilizing a broad spectrum of available fibers, materials, binders, resins, etc. combined with dry-laid and wet-laid nonwoven processes, specialty weaving capabilities, and various fabricating operations, the Company has been able to develop a broad range of high-performance materials and products. The Company serves a number of market niches. Lydall's products are primarily sold directly to the customer through an internal sales force and are distributed through common carrier, ocean cargo, or the Company's logistics operation. Within each market niche there are typically several competitors. The Company primarily competes through high-quality products, technology, and customer service. Lydall has a number of domestic and foreign competitors for its products, most of whom are either privately owned or divisions of large companies, making it difficult to determine the Company's market share. Lydall's products fall into four reportable segments: Heat-Management Products, Filtration Products, Paperboard Products, and Woven Products. All other operations are aggregated in Other Products and Services. SEGMENTS HEAT-MANAGEMENT PRODUCTS Lydall's thermal barriers, heat shields, and insulating products include a range of fiber-based materials and fiber-and-metal combinations that protect and insulate within temperature requirements as low as -459 DEG. F (-273 DEG. C) up to +3000 DEG. F (+1649 DEG. C). Lydall's fiber-based materials range in format from specialty papers to textile-like materials to dense, board products. At the highest temperature requirements, Lytherm-Registered Trademark- specialty papers are used as linings for ovens, kilns, and furnaces and in glass and metal manufacturing. In mid-range temperatures, Manninglas-Registered Trademark- specialty papers are employed in consumer appliances as well as heat, ventilation, and air conditioning ductwork. Also, at mid-range temperatures, Lydall's heat-management products are organic or inorganic fiber composites, fiber-and-metal combinations, or all-metal components which are used as thermal barriers and heat shields in medium- and light-duty trucks, vans, sport-utility vehicles, and cars. The Company holds patents on many of its automotive products which are employed both inside and outside vehicles to insulate passenger compartments, exhaust systems, luggage compartments, electrical wiring harnesses, heat and air conditioning ducts, batteries, electronic components, and engine compartments. An acquisition made in April 1998 contributed to the growth of automotive related heat-management sales during the year. A second acquisition, made on December 30, 1998, is expected to be a major contributor to the international growth of this segment in 1999. Lydall also manufactures custom-designed specialty papers employed in automotive airbag pyrotechnic inflators. These materials perform both a filtration and heat-reduction function and are included under Heat-Management Products. At the very coldest temperatures (approaching absolute zero), Cryotherm-Registered Trademark- cryogenic materials, composed of 100-percent inorganic fibers, are used for super-insulating applications. These include tanker trucks that transport liquid gases, stationary and portable cryogenic storage vessels, gas tanks for vehicles fueled by liquid natural gas, and supercolliders. Sales of Heat-Management Products were approximately 36 percent of the Company's sales for 1998, 37 percent for 1997, and 38 percent for 1996. Sales of these products decreased 8 percent in 1998 from 1997 levels. This decline stemmed primarily from the decrease in automotive product sales, product design changes, and a strike at General Motors. FILTRATION PRODUCTS The Company manufactures Lydair-Registered Trademark- high-efficiency, glass microfiber air filtration media for rigid frame applications. Lydall manufactures six filtration classes of Lydair-Registered Trademark- media in over 100 grades with filtering efficiencies from 10 percent at 0.3-micron particle size to 99.999999 percent at 0.1-micron particle size. Lydair-Registered Trademark- filtration media are used in air filters, which are capital goods rather than consumables and which last approximately five years. A replacement market exists related to the upgrading of clean-room efficiency to meet the needs of more sophisticated process and product technology. Lydall also supplies media for pre-filters and intermediary filters in air-handling systems that are replaced more frequently. The Company's HEPA filtration media are also used in home air purification units. In addition, Lydall produces liquid filtration media used primarily in high-efficiency hydraulic oil and lubrication oil elements for off-road vehicles, trucks, and heavy equipment. These products are sold under the Lypore-Registered Trademark- trademark. Lydall's line of fabricated medical filter components are also sold under the trademark Lypore-Registered Trademark-. These products are employed in blood filtration devices, such as cardiotomy reservoirs which filter the blood supply of an open-heart surgery patient during the operation, and autotransfusion filters used to filter blood collected from a patient before surgery or from an injured patient. Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical, Ltd., which acquired CharterMed, Inc., a manufacturer of proprietary medical devices serving applications such as biotech and pharmaceutical packaging, blood bank and transfusion services, and neonatal intensive care. All of Lydall's medical products are now under Charter Medical, Ltd. and are included in the Filtration Products segment. Sales of Filtration Products increased to 24 percent of sales for 1998 compared with 22 percent and 24 percent in 1997 and 1996, respectively. The overall sales of these products increased 6 percent in 1998 from 1997. The increase reflects the acquisition of CharterMed, Inc. PAPERBOARD PRODUCTS The Paperboard Products segment includes commodity paper products which are employed primarily in materials-handling and packaging applications. 2 Lydall produces slipsheets, separator sheets, and protective sheets. Ly-Pak-Registered Trademark- slipsheets are used to ship a growing number of products such as food, pharmaceuticals, and chemicals. Ly-Pak-Registered Trademark- slipsheet systems are used to replace wooden pallets, providing significant cost and space reductions for the customer. Ly-Pak-Registered Trademark- separator sheets are supplied to the glass and plastic bottle industry and are manufactured to meet industry specifications for bulk palletizing. Ly-Pak-Registered Trademark- protective sheets are used as pallet pads, protective top caps, and stabilizing sheets. These products are custom-made from plies of virgin kraft linerboard and laminated with a special moisture-resistant adhesive. Sales of Paperboard Products approximated 14 percent of 1998 total sales as compared with 13 percent in both 1997 and 1996. Sales in 1998 stabilized from the extreme deflationary pressures of 1997. WOVEN PRODUCTS Lydall produces specialty woven composites which are used in advanced structural materials sold to the aerospace, marine, and sporting goods industries. These composites are extremely strong, yet lightweight and are used in high-performance applications. Sales of Woven Products approximated 2 percent of 1998 sales as compared with 4 percent of 1997 sales. The Woven Materials segment did not exist in 1996. OTHER PRODUCTS AND SERVICES Other Products and Services include fiberboard composites sold in sheet form to fabricators of high-performance gaskets and electrical insulating products. It also includes pencil slats made from recycled newsprint and cardboard, which replaces wood. The Company's Logistics Management Operation provides specialized distribution and warehouse services to other Lydall companies and various American, Canadian, and European manufacturers of newsprint, specialty papers and other assorted products. Sales of Other Products and Services approximated 24 percent of the Company's sales in 1998 compared with 24 percent and 25 percent in 1997 and 1996, respectively. GENERAL BUSINESS INFORMATION Lydall operates 13 manufacturing and fabricating facilities in the United States, which are located in Rochester, New Hampshire; Green Island, New York; Hoosick Falls, New York; Manchester, Connecticut; Richmond, Virginia; Hamptonville, North Carolina; St. Johnsbury, Vermont; Lakewood, New Jersey; Winston Salem, North Carolina; Columbus, Ohio; Jacksonville, Florida; Covington, Tennessee; and Fort Washington, Pennsylvania. Lydall also has four international manufacturing facilities located in Saint-Rivalain, France; Ludenscheid, Germany; Ibbenburen, Germany; and Meinerzhagen, Germany. Lydall holds a number of patents, trademarks, and licenses. While no single patent, trademark or license by itself is critical to the success of Lydall, together these intangible assets are of considerable value to the Company's operations. No significant portion of Lydall's business is seasonal. Lydall maintains levels of inventory and grants credit terms which are normal within the industries it serves. The Company uses a wide range of raw materials in the manufacturing of its products and was able to obtain the raw materials needed during 1998. The majority of raw materials used by Lydall are available from a variety of suppliers who can be substituted if necessary. 3 Sales to the automotive market represented 25 percent of Lydall's total sales in 1998 compared with 26 percent and 32 percent in 1997 and 1996, respectively. Lydall sells primarily to original equipment manufacturers for use in a variety of models and applications. Sales to Ford Motor Co. amounted to $35.0 million, or 15 percent of Lydall's total sales, in 1998, and no other single customer accounted for more than 10 percent of total sales. Lydall invested $8.7 million in 1998, $8.7 million in 1997, and $6.8 million in 1996, respectively, to develop new products and manufacturing processes or to improve existing products. Most of Lydall's investment in research and development is application specific; very little is pure research. There were no significant customer-sponsored research and development activities during the past three years. Lydall's backlog was $29.5 million at December 31, 1998, $18.8 million at December 31, 1997, and $25.1 million at December 31, 1996. Lydall expects to fill its backlog of 1998 orders during the first quarter of 1999. Backlog at February 28, 1999 was $28.0 million. There are no seasonal aspects to this backlog. The increase in backlog reflects the inclusion of 1998 acquisitions. No material portion of Lydall's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental body. Lydall believes that its plants and equipment are in substantial compliance with applicable federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Additional measures to maintain compliance with presently enacted laws and regulations are not expected to have a substantial adverse effect on the capital expenditures, earnings, or competitive position of the Company and its subsidiaries. For information relating to certain environmental proceedings involving the Company, please refer to "Contingencies" in "Notes to Consolidated Financial Statements" on page F-24. As of March 1, 1999, Lydall and its subsidiaries had 2,112 employees, including foreign employees. Four unions under contracts expiring at various points up to November 2002 represented approximately 159 of the domestic employees. Lydall considers its employee relationships to be satisfactory, and there have not been any actual or threatened work stoppages due to union-related activities. All employees at the Company's facility in France are covered under a National Collective Bargaining Agreement. Hourly employees at the newly acquired German operations are also covered under a National Collective Bargaining Agreement. Foreign and export sales were 18 percent of total sales in 1998, 20 percent in 1997, and 21 percent in 1996. Export sales are concentrated primarily in Europe, the Far East, Mexico, and Canada and were $30.7 million, $34.9 million, and $37.0 million in 1998, 1997, and 1996, respectively. Foreign sales were $10.8 million, $11.2 million, and $15.3 million for the years ended December 31, 1998, 1997, and 1996, respectively. The French operation incurred losses of $979 thousand (including the recognition of an impairment loss of $941 thousand), $348 thousand, and $796 thousand for the years ended December 31, 1998, 1997 and 1996, respectively. Total foreign assets were $73.4 million at December 31, 1998 compared with $16.4 million at December 31, 1997. The increase in foreign assets in 1998 is due to the acquisition of Gerhardi & Cie. GmbH & Co. KG at the end of 1998. 4 There are no anticipated operating risks related to foreign investment law, expropriation, inflation effects or availability of material, labor and energy. The Company's foreign and domestic operations limit currency and foreign exchange transaction risks by completing transactions primarily in their functional currencies. ITEM 2. PROPERTIES The principal properties of the Company and its subsidiaries are situated at the following locations and have the following characteristics:
Approximate Area Land Buildings Location General Description (Acres) (Sq. Feet) - ---------------------------------------------------------------------------------------------------------------------------- 1 Manchester, Connecticut Office Facility 2.0 25,000 2 Manchester, Connecticut Paperboard Manufacturing 11.6 70,500 3 Covington, Tennessee Composite Materials Manufacturing 26.0 155,000 4 Richmond, Virginia Laminated Paperboard Manufacturing 5.0 104,000 5 Rochester, New Hampshire Specialty Papers Manufacturing 18.0 143,000 6 Hoosick Falls, New York Composite Materials Manufacturing 11.0 129,000 7 Hamptonville, North Carolina Heat-Management Products Manufacturing and 35.2 85,000 Fabricating 8 Green Island, New York Specialty Papers Manufacturing 5.4 275,000 9 Manchester, Connecticut Corporate Office 4.5 20,000 10 Saint-Rivalain, France Specialty Papers Manufacturing 14.3 156,000 11 Columbus, Ohio Heat-Management Products Fabricating 9.0 80,000 12 Jacksonville, Florida Laminated Paperboard Manufacturing -- 52,000 13 Fort Washington, Pennsylvania Specialty Woven Materials Manufacturing -- 60,000 14 Manchester, Connecticut Warehouse and Office Facility 7.08 95,000 15 St. Johnsbury, Vermont Heat-Management Products Fabricating 10.0 45,400 16 Lakewood, New Jersey Biomedical Products Fabricating -- 20,250 17 Winston Salem, North Carolina Biomedical Products Manufacturing and Fabricating -- 29,000 18 Ludenscheid, Germany Heat-Management Products Fabricating and 28.5 108,000 Manufacturing 19 Ibbenburen, Germany Heat-Management Products Fabricating and 99.3 180,000 Manufacturing 20 Meinerzhagen, Germany Heat-Management Products Fabricating and 37.5 36,150 Manufacturing 21 Rockwell, North Carolina Fabricating Facility 9.0 80,000 - ----------------------------------------------------------------------------------------------------------------------------
Properties numbered 4, 11, 12, 13, 15, 16, 17, and 21 are being leased; all others are owned. For information with respect to obligations for lease rentals and owned property, see the "Notes to the Consolidated Financial Statements" of the Company. Lydall considers its properties to be suitable and adequate for its present needs. The properties are being fully utilized, except the Rockwell, North Carolina facility, as substantially all operations have been moved to Hamptonville, North Carolina. In addition to the properties listed above, the Company has several additional leases for sales offices and warehouses in the United States, Europe, and Japan. 5 ITEM 3. LEGAL PROCEEDINGS See "Contingencies" in the "Notes to Consolidated Financial Statements" on page F-24. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1998. EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES OF THE REGISTRANT: The name, age, current position, and other business experience since January 1, 1994 of each executive officer of the Company are listed below. Christopher R. Skomorowski, James P. Carolan, John E. Hanley, Carole F. Butenas, and Mary A. Tremblay are elected annually at the organizational meeting of the Board of Directors. All others are appointed by the President and Chief Executive Officer for an indefinite period. There are no family relationships among executive officers or other significant employees.
Other Business Name Age Title Experience Since 1994 - ----------------------------------------------------------------------------------------------------------------------- Christopher R. Skomorowski 45 President and Chief Executive Division President Officer (since 1998), Director Lydall Westex (1994-1995, 1998-1999) James P. Carolan 56 Executive Vice President N/A (since 1998), Division President (since 1983), Director (1994-1995, 1996-1998) John E. Hanley 42 Vice President-Finance and N/A Treasurer (since 1992) Carole F. Butenas 56 Vice President-Investor Relations N/A (since 1991), Director (1995-1996) Mary A. Tremblay 38 General Counsel and Secretary N/A (since 1991) Raymond J. Lanzi 60 Division President (since 1979), N/A Director (1993-1994) John J. Worthington 50 Division President (since 1996), General Manager, W. R. Grace and Director (1998-1999) Specialty Paperboard, Inc. Bill W. Franks, Jr. 40 Division President (since 1997) Vice President and General Manager, Lydall Logistics Management Raymond S. Grupinski, Jr. 37 Division President (since 1998) Director of Operations, Lydall Westex and General Manager of Lydall Westex-Columbus Operation Lisa Krallis-Nixon 38 President/General Manager Business Unit Manager of Medical (since 1998) Filtration at Lydall Westex Charter Medical, Ltd., Second-tier subsidiary Kevin G. Lynch 46 Division President (since 1998) Vice President of Sales and Marketing at Lydall Technical Papers - -----------------------------------------------------------------------------------------------------------------------
6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY The Company's Common Stock is traded on the New York Stock Exchange under the symbol LDL. Shares totaling 7,507,000 and 7,103,800 were traded during 1998 and 1997, respectively. The table below shows the range of reported last sale prices on the New York Stock Exchange Composite Tape for the Company's Common Stock for the periods indicated. As of March 15, 1999, the record date of the Company's 1999 Annual Meeting, approximately 1,556 stockholders of record held 15,725,703 shares of Lydall's Common Stock, $.10 par value. As of the record date, there were no shares outstanding of the Company's Preferred Stock, $1.00 par value.
- -------------------------------------------------- High Low Close - -------------------------------------------------- 1998 FIRST QUARTER $20 13/16 $17 1/16 $18 1/16 SECOND QUARTER 18 15/16 14 7/16 14 9/16 THIRD QUARTER 14 3/4 10 1/4 10 1/4 FOURTH QUARTER 13 5/16 9 1/4 11 7/8 1997 First Quarter $24 $20 $20 1/4 Second Quarter 23 5/8 18 3/4 21 1/8 Third Quarter 25 3/4 20 7/8 23 7/16 Fourth Quarter 23 15/16 18 1/2 19 1/2 - --------------------------------------------------
The Company does not pay a cash dividend on its Common Stock and does not anticipate doing so for the foreseeable future. Cash will be reinvested into core businesses. 7 ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR STATISTICAL REVIEW
- --------------------------------------------------------------------------------------------------- $ thousands except per-share amounts 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------- FINANCIAL RESULTS Net sales $230,007 $244,289 $252,652 $252,128 $213,072 Net income 4,202 21,911 24,736 22,438 15,503 - --------------------------------------------------------------------------------------------------- COMMON STOCK PER-SHARE DATA (DILUTED) Net income $ .26 $ 1.27 $ 1.38 $ 1.23 $ .87 Common stockholders' equity 6.96 7.04 6.89 5.88 4.57 - --------------------------------------------------------------------------------------------------- FINANCIAL POSITION Total assets $226,848 $160,124 $182,119 $158,072 $136,613 Working capital (deficit) (9,090) 39,203 53,358 52,730 30,823 Current ratio 0.91 2.39 2.24 2.77 1.93 Long-term debt, net of current maturities -- 2,100 5,050 7,750 10,607 Total stockholders' equity 109,225 113,030 117,844 101,811 76,227 Debt to total capitalization 33.4% 4.3% 12.9% 9.4% 15.0% - --------------------------------------------------------------------------------------------------- PROPERTY, PLANT, AND EQUIPMENT Net property, plant, and equipment $107,836 $ 68,860 $ 62,038 $ 60,074 $ 54,771 Capital additions from acquisitions 32,065 -- 500 -- 3,077 Other capital additions 17,657 17,104 10,893 12,006 7,979 Capital divestment, net 679 685 894 632 687 Depreciation 8,844 7,993 7,824 7,122 6,101 - --------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS AND OTHER ITEMS Return on average assets 2.3% 12.8% 14.5% 15.2% 12.7% Return on average common stockholders' equity 3.8% 19.0% 22.5% 25.2% 22.8% Return on sales 1.8% 9.0% 9.8% 8.9% 7.3% Days of inventory on hand 36 33 31 33 36 Days of receivables outstanding 53 51 50 49 47 Number of employees at year-end 1,330 1,225 1,268 1,227 1,306 - --------------------------------------------------------------------------------------------------- SHARES AND STOCKHOLDERS Weighted average common stock and equivalents 16,163,000 17,319,000 17,988,000 18,197,000 17,864,000 Common stock outstanding at year-end 15,693,860 16,065,473 17,092,011 17,320,252 16,677,524 Stockholders at year-end 1,603 1,653 1,855 1,918 1,900 Market price per share of common stock-- Highest close $ 20.13 $ 25.75 $ 25.87 $ 28.50 $ 18.63 Lowest close $ 9.25 $ 18.50 $ 19.75 $ 14.75 $ 10.13 - ---------------------------------------------------------------------------------------------------
Share figures adjusted to reflect a two-for-one stock split in 1995. 1998 Balance Sheet items incorporate the assets and liabilities of the newly acquired subsidiary, Gerhardi & Cie. GmbH & Co. KG. The balances of Gerhardi are not included in calculations in the Performance Ratios and Other Items section above. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES OVERVIEW Sales declined to $230.0 million in 1998 from $244.3 million in 1997. The internal and external dynamics contributing to this overall sales decline included the following: - Acquisitions accounted for a net increase in sales of $7.2 million. - Internal marketing actions resulted in an increase in sales of approximately $700 thousand. - External forces accounted for a $22.2 million decrease in sales. In 1997, sales from acquisitions amounted to $9.8 million, entirely due to the first-year sales of the Fort Washington Operation, a producer of woven structural composites. Internal marketing actions plus external market forces produced a combined negative impact of $18.2 million. During 1996, acquisitions produced a negligible effect on sales, while internal and external forces largely offset each other. ACQUISITIONS Lydall isolates the impact of acquisitions for three years, after which time it considers these businesses to be fully integrated. The Company made three acquisitions in 1998. 1. CharterMed, Inc., acquired in February 1998, is a producer of proprietary medical devices located in Lakewood, New Jersey. Its products complement the Lypore-Registered Trademark- family of biomedical filtration media and subassemblies. The Company's medical and pharmaceutical products were consolidated under a new corporate entity, Charter Medical, Ltd. 2. Engineered Thermal Systems, Incorporated ("ETSI"), a fabricator of automotive thermal and acoustical barrier products located in St. Johnsbury, Vermont, was acquired in April 1998. ETSI, now known as the St. Johnsbury Operation of Lydall Westex, extended Lydall's automotive heat-management product line and provided increased access to DaimlerChrysler. 3. Gerhardi & Cie. GmbH & Co. KG ("Gerhardi"), a German manufacturer of automotive thermal, acoustical and chrome-plated components, was acquired on December 30, 1998. The acquisition of Gerhardi had no impact on sales or results of operations in 1998. The acquired facilities are located in Ludenscheid, Ibbenburen, and Meinerzhagen, Germany. The addition of CharterMed, Inc. and the St. Johnsbury Operation combined to produce sales of $11.3 million in 1998. Sales from the Fort Washington Operation of Lydall Manning, included under the Woven Products segment, declined to $5.7 million in 1998 from $9.8 million in 1997. This Operation was acquired at the end of 1996. Significant market share was lost during the year as production difficulties associated with the relocation of the plant disrupted customer relations. This business was reorganized early in 1999 to lower its break-even point and to re-establish long-standing customer partnerships. 9 In 1996, acquisitions, which included two operations acquired in 1994, produced modest incremental growth of $900 thousand. INTERNAL MARKETING ACTIONS During 1998, sales increased by $700 thousand as a result of internal marketing actions. Lydall considers factors such as product introductions, net of product discontinuances, market-share changes, and selling price changes to be internal marketing actions. Internal marketing actions caused sales to decrease by $13.0 million in 1997, while these dynamics produced a net gain of $9.5 million in 1996. Lydall introduced $8.9 million of new products in 1998, compared with $2.4 million in 1997 and $11.8 million in 1996. Successes were achieved in the air filtration markets for next generation Hi-alpha and ASHRAE products, moldable high stiffness media, and meltblown materials. A number of new automotive heat-management products, including underbody and gas tank shields, and parts for the European market, were introduced as well. Product discontinuance amounted to $3.1 million in 1998 compared with $6.1 million in 1997 and $2.8 million in 1996. Much of the change in 1998 resulted from the displacement of existing products by new products. In 1997, Lydall exited certain low-margin non-core products, while discontinuing a flame-barrier material sold to the office-panel market. Market-share changes in 1998 caused sales to decrease by $4.2 million, largely stemming from lower demand in the Asian markets for specialty papers employed in high-efficiency air filtration applications and from losses to lower cost competitors in the mature electrical insulation market. Management is confident that as economic conditions improve in Asia, the Company will benefit, specifically in the filtration market. In 1997, market-share losses offset gains resulting in a net sales reduction of $1.4 million. Losses occurred primarily in the Heat-Management Products segment related in general to the automotive market, and specifically to (i) Ford's discontinuation of three models that contained Lydall's thermal barriers and (ii) the loss of a major part supplied to DaimlerChrysler. Gains in the Paperboard Products segment and the Other Products and Services segment offset a portion of the 1997 market-share losses. In 1996, Heat-Management Products and Filtration Products produced $1.5 million of market-share gains. Prices declined by $900 thousand over the course of 1998. Pricing weakness was felt in markets for thermal barriers and air filter media. Prices of Heat-Management Products sold to the automotive market also declined modestly as part of long-term contractual commitments. Paperboard Products for materials-handling applications recorded price increases of approximately $1.7 million. In 1997, prices decreased by $7.9 million, following a decline of $1.0 million in 1996. Price changes in 1997 were concentrated in the Paperboard Products segment. The selling prices of Lydall's materials-handling products move in relation to prices of raw materials, namely linerboard. Competitive pressures forced Lydall to meet historically low market prices. For the most part, these price declines were accompanied by a corresponding decline in linerboard costs. EXTERNAL MARKET FORCES Lydall defines external market forces as the effects of economic and market changes beyond the influence of management actions, including the effects of market decay and foreign exchange. Sales in 1998 declined by $22.2 million due to these conditions. A continuing weakness in the semiconductor market, to which Lydall 10 supplies specialty air filtration materials, and a trend away from the use of pyrotechnic airbag inflator systems that employ Lydall's heat-management materials, were contributing factors. However, the majority of the decrease resulted from the loss of sales of fabricated automotive thermal barriers. Design-out of Lydall components from new models exceeded the number of new Lydall parts being designed in, which accounted for a net $13.6 million decrease in sales. While design-out is a normal occurrence in the automotive industry, this trend reached a peak in 1998, and is not expected to recur at 1998 levels. Also, Lydall had an exceptional number of new products in the commercialization stage during 1998, which were not brought to market in as timely or cost-efficient manner as in the past. These inefficiencies are being corrected in 1999. In 1997, external forces reduced sales by $5.2 million as losses due to design-out plus market decay were offset by positive economic forces and market growth. Currency exchange rates, which have had a nominal effect in other years, resulted in a $2.2 million reduction in sales in 1997 with the dollar stronger in relation to most currencies in which Lydall conducts business. External forces caused net sales to decline by $9.8 million in 1996. The chief causes were decay in battery separator markets, design-out of certain heat shields, and decreased demand for materials-handling products. - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN SALES - ----------------------------------------------------------------
$ millions 1998 1997 1996 - ---------------------------------------------------------------- Prior year's net sales $244.3 $252.7 $252.1 ................................................................ Acquisitions 7.2 9.8 .9 Internal marketing actions .7 (13.0) 9.5 External market forces (22.2) (5.2) (9.8) ................................................................ Total change (14.3) (8.4) .6 ................................................................ Current year's net sales $230.0 $244.3 $252.7 - ----------------------------------------------------------------
GROSS MARGIN OVERVIEW During 1998, gross margin declined to $64.8 million, or 28.2 percent of sales, from $77.6 million, or 31.8 percent of sales, in 1997. In 1996, Lydall's gross margin was $82.1 million, or 32.5 percent of sales. Margins in 1998 were impacted by the following factors: - Acquisitions produced incremental margins despite poor results at the Fort Washington Operation - Significantly lower sales volume - Combined effect of price decreases in relation to net cost increases - Shutdown and consolidation of automotive heat-management operations in North Carolina - Additional overhead to support the operations of Charter Medical, Ltd. as a stand-alone facility 11 In 1997, margins were also negatively impacted by lower sales volume and net effects of price decreases that were only partially offset by cost decreases from vendors. Fort Washington contributed modestly to Lydall's consolidated gross margin while lowering the overall percentage by approximately one point. Cost-reduction programs contributed positively to overall gross margin performance. Gross margin in 1996 was positively impacted by acquisitions, including the Columbus and Jacksonville Operations, a more favorable price/cost environment, and cost-reduction programs. Factors such as lower sales volume and increased depreciation offset some of these gains. ACQUISITIONS Gross margins at Fort Washington declined by $1.8 million, due in part to substantial write-downs of excess raw material inventories to their estimated realizable value. Financial results in 1998 were also hampered by the inability to maintain historical sales levels despite keeping overhead levels relatively constant. Future expectations for this business are being evaluated to determine the most effective approach to realizing value from this producer of lightweight, high-strength composite materials. In early 1999, Lydall reduced overhead levels through layoffs and consolidation of functions. Future savings are projected to be close to $1.0 million annually. The addition of CharterMed, Inc. and the St. Johnsbury Operation resulted in $3.2 million of incremental gross margins in 1998. Both operations were profitable and are expected to grow in sales and profits. The December 1998 acquisition of Gerhardi in Germany had no effect on Lydall's 1998 consolidated operating results. Lydall is committed to achieving a quicker, more thorough integration of Gerhardi than other recent acquisitions. Significant internal and external resources have been allocated for this purpose. Results in 1997 included incremental gross margin of $700 thousand related to the first year of operating Fort Washington. Results were depressed by costs to relocate the facility, uneven supply of key raw materials, and difficulty in meeting customer demand. During 1996, the third year of operating the Columbus and Jacksonville Operations acquired in 1994, acquisitions caused a positive change in gross margin of $2.2 million. Benefits from major process changes and management techniques were realized during the year. EFFECTS OF CHANGES IN SALES VOLUME Lower sales volume produced a $9.7 million decline in gross margin in 1998, accounting for approximately three-quarters of the total margin decline for the year. Despite new-product contributions and market growth in several product lines, the combined negative effects of design-outs in automotive heat-management products; market decay in mature products; market-share losses and effects of the Asian economy; and a poor market for filtration products worldwide overwhelmed the positive dynamics. In 1998, Lydall marked the third year of gross-margin decline caused by decreases in sales volume. Management expects improved results in 1999 and beyond based on new-product approvals in the Heat-Management Products segment for thermal and acoustical barriers sold to automotive markets, and more stable results in other key markets. 12 The same dynamics that affected gross margin in 1998 detracted from gross margin in 1997 by an estimated $5.2 million. The loss of operating leverage due to design-outs and product discontinuation offset the benefits of economic and market growth. Similar effects were felt in 1996, although the magnitude of the change was much lower. Gross margin decreased by $1.0 million on a small decline in volume. PRICE CHANGES IN RELATION TO COST CHANGES As described in the Sales section, 1998 sales prices declined overall by $900 thousand. Vendor costs rose by an estimated $2.0 million, which created a combined negative impact on gross margin of $2.9 million. The largest impact occurred in the Heat-Management Products segment for products sold to non-automotive thermal applications. The materials-handling and automotive thermal-barrier businesses also experienced some margin erosion due to price-cost effects. During 1997, net pricing actions eroded gross margin by $3.5 million. The largest part of this erosion was produced in the Paperboard Products segment related to materials-handling systems. Competitive forces did not allow Lydall to pass vendor-imposed cost increases through to customers. Price concessions were evident in Lydall's Heat-Management Products and Filtration Products segments as well. Net pricing actions resulted in a positive $2.2 million effect on gross margins in 1996. Vendor costs declined in relation to stable customer prices, a cycle that reversed in 1997 after several years of net positive gross margin effects. COST REDUCTIONS Lydall has been able to consistently drive down manufacturing costs over the years through a combination of management actions and capital improvements. Net savings in 1998 were an estimated $2.5 million, compared with savings of $2.4 million in 1997 and $2.9 million in 1996. Lydall's Comprehensive Quality Program, also known as Cost of Quality, continues to result in significant savings. These process improvements and cost-reduction programs produced positive results despite losses of operating leverage in each of the past three years. INVENTORY EFFECTS Gross margin was $700 thousand lower in 1998 due to increased LIFO reserves, inventory write-offs, and changes in FIFO inventory levels. In 1997 and 1996, these factors combined to largely offset each other. OTHER EFFECTS Other effects normally include changes in depreciation expense, fixed overhead, and product-mix shifts. In 1998, these factors reduced gross margin by approximately $2.0 million. Lydall also suspended most operations at a facility in North Carolina, with direct and indirect costs of over $600 thousand, in order to realize savings of an estimated $1.0 million in annual operating and logistics costs. Relocation of the medical business from within the automotive thermal-barrier operation to a separate facility and legal entity impacted fixed overhead by $800 thousand, bringing the total impact of other effects on 1998 gross margin to approximately $3.4 million. In 1997, positive changes in product mix and overhead levels resulted in a $1.1 million increase to gross margin compared with a decrease of $2.2 million in 1996. 13 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN GROSS MARGIN
- ---------------------------------------------------------------------------- $ millions 1998 1997 1996 - ---------------------------------------------------------------------------- Prior year's gross margin $ 77.6 $ 82.1 $ 77.7 ............................................................................ Acquisitions 1.4 0.7 2.2 Effects of changes in sales volume (9.7) (5.2) (1.0) Price changes in relation to cost changes (2.9) (3.5) 2.2 Cost reductions 2.5 2.4 2.9 Inventory effects (0.7) -- .3 Other effects (3.4) 1.1 (2.2) ............................................................................ Total change (12.8) (4.5) 4.4 Current year's gross margin $ 64.8 $ 77.6 $ 82.1 ............................................................................ As a percent of net sales 28.2 31.8 32.5 - ----------------------------------------------------------------------------
PRETAX INCOME OVERVIEW Pretax income declined to $5.4 million in 1998 from $34.5 million in 1997. The major causes include the effects of acquisitions, results of ongoing operations, nonoperating investments and financing, as well as asset impairment charges recorded in the fourth quarter, and the costs associated with the retirement of Lydall's former chairman and chief executive officer. The impairment losses are discussed under "Acquisitions" and "Operations." The chairman's retirement costs are described under "Operations." In 1997, pretax income declined to $34.5 million from $39.9 million in 1996, largely due to the combined effects of reduced operating leverage and a negative price/cost relationship. During 1996, pretax income rose by $3.0 million to $39.9 million as cost-reduction programs and acquisitions provided additional income compared with 1995. ACQUISITIONS In 1998, results were affected by the Fort Washington Operation, acquired at the end of 1996 and operated in 1997 and 1998, and two acquisitions completed during 1998, CharterMed, Inc. and the St. Johnsbury Operation. Fort Washington reported very disappointing results in 1998. A combination of poor market response and continuing negative effects from relocation of the facility produced higher operating losses in 1998 than in 1997. During the fourth quarter, management determined that projected future cash flows from operations were not sufficient to recover the net carrying value of the business. As a result, Lydall recorded a pretax impairment loss of $6.5 million in the fourth quarter to adjust the carrying value of long-lived assets to their expected net realizable value of the Fort Washington Operation. In addition, Lydall wrote down excess raw material inventories to their estimated realizable value, impacting gross margin and pretax income by $800 thousand. Before considering these charges, pretax operating losses at Fort Washington deteriorated to approximately $1.8 million in 1998, from $700 thousand in 1997. As described under the analysis of gross margin, management has reduced fixed overhead levels at Fort 14 Washington in 1999 and expects operating losses to decline by more than $1.0 million in 1999. Efforts to increase revenues are expected to bring about further improvement in operating results. Charter Medical, New Jersey and the St. Johnsbury Operation were both profitable during 1998, adding $700 thousand of operating profits before financing costs. Management feels that both operations are well positioned for healthy sales and income growth beyond 1998. Gerhardi, acquired on December 30, 1998, is also expected to positively impact Lydall's results in future years. This strategically important acquisition moves Lydall toward a position of global leadership in automotive heat-management products. The Columbus and Jacksonville Operations, which Lydall reported as acquisitions through 1996, added $1.6 million of pretax profits in 1996. Lydall normally reports results of newly acquired operations for three full years before considering them as fully integrated. OPERATIONS In 1998, pretax profits from operations other than acquisitions were substantially lower than in 1997, declining by $18.0 million. In the Gross Margin section, management described the various conditions that lowered profits at the gross margin level before acquisitions by $14.2 million. Cost-containment efforts instituted during 1998 resulted in significant savings; however, gains were offset by pricing pressures and the pretax cost of the severance agreement for Lydall's former chairman and chief executive officer of $3.3 million. Lydall continued its aggressive product development spending in 1998, equaling the record levels of 1997. Expenses also increased related to the Company's investment in Lydall 2000, a comprehensive overhaul of systems to meet the demands of doing business in the 21(st) Century. Both of these investments are expected to bring long-term benefits to Lydall and its stockholders. Pretax income from operations declined by $5.4 million in 1997 compared with 1996. Lower margins and increased selling, product development, and administrative spending led to the profit decline. In 1996, existing operations generated a $900 thousand improvement in pretax profits. Key drivers of improvement in 1996 were cost-reduction programs and efficiency improvements in Lydall facilities. Other income and expense, net, reduced earnings by $100 thousand in 1998, compared with an increase of $400 thousand in 1997 and a $200 thousand improvement in 1996. This category normally captures changes in environmental costs, fixed asset dispositions and other non-operating effects. INVESTMENTS AND FINANCING Nonoperating investments and financing costs combined to decrease pretax income by $2.7 million in 1998. Investment balances were much lower as Lydall funded a $17.7 million capital program, $10.3 million to repurchase Common Stock, and the acquisitions of CharterMed and ETSI. In addition, Lydall liquidated certain investments in marketable securities resulting in a decrease from the previous year. In 1997, investments and financing costs produced $700 thousand of additional pretax income, compared with an incremental increase of $500 thousand in 1996. During 1997 and 1996, Lydall's cash flow was in excess of operating and financing requirements, resulting in higher investment income. 15 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN PRETAX INCOME
- ---------------------------------------------------------------------------------------------------------------- $ millions 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Prior year's pretax income $ 34.5 $ 39.9 $ 36.9 ................................................................................................................ Acquisitions--change in: Gross margin 1.4 0.7 2.2 Selling, product development, and administrative expenses (9.8) (1.4) (0.6) ................................................................................................................ Total change from acquisitions (8.4) (0.7) 1.6 ................................................................................................................ Operations--change in: Gross margin (14.2) (5.2) 2.2 Selling, product development, and administrative expenses (3.7) (0.6) (1.5) Other income/expense (0.1) 0.4 0.2 ................................................................................................................ Total change from operations (18.0) (5.4) 0.9 ................................................................................................................ Nonoperating investments and financing--change in: Investment income (2.3) 0.6 0.3 Interest expense (0.4) 0.1 0.2 ................................................................................................................ Total change from nonoperating investments and financing (2.7) 0.7 0.5 ................................................................................................................ Total change (29.1) (5.4) 3.0 ................................................................................................................ Current year's pretax income $ 5.4 $ 34.5 $ 39.9 - ----------------------------------------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In general, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements within the meaning of Section 21E. Without limiting the generality of the foregoing, the words "believes," "anticipates," "plans," "expects," and other similar expressions are intended to identify forward-looking statements. Investors should be aware that such forward-looking statements are based on the current expectations of management and are inherently subject to a number of risks and uncertainties that could cause the actual results of the Company to differ materially from those reflected in the forward-looking statements. In addition to general economic conditions and market trends, some of the important factors which could cause actual results to differ materially from those projected include, but are not limited to, the following: A MAJOR DOWNTURN OF THE U.S. AND EUROPEAN AUTOMOTIVE MARKETS. Although Lydall's automotive sales are not solely contingent on the strength of the automotive market, a significant downturn of the U.S. and European automotive industry could have a substantial impact on Lydall's results. The Company also can be affected when automotive manufacturers discontinue production of specific models that contain Lydall's products. On the other hand, Lydall benefits from the introduction of new models. Twenty-five percent of Lydall's total sales in 1998 were to the automotive market. This is expected to increase to approximately 45 percent with the addition of Lydall 16 Gerhardi's sales in 1999. Lydall's primary automotive products are thermal barriers and heat shields employed both inside and outside of vehicles. Most of Lydall's products are supplied to meet unique, niche applications. There is no direct correlation between the number of Lydall parts on a vehicle and the number of units built, as with tires or steering wheels for example. Slight fluctuations in automotive production have relatively little effect on Lydall's business; however, a major downward shift could prevent Lydall from achieving its projected results. A SIGNIFICANT CHANGE IN THE NUMBER OF CLEAN ROOMS BEING BUILT. Lydall's high-efficiency air filtration business is linked to the fabrication of clean rooms and the growth of commercial heating, ventilation, and air conditioning applications around the world. Lydall is affected by the cyclicality of these industries. Various independent industry-published forecasts project excellent long-term growth for clean-room fabrications and clean-air applications in general. Lydall relies on these forecasts, feedback from its filtration customers, and other market intelligence sources for forward-looking information. Lydall's outlook for 1999 is based in part on a slight improvement in these markets; however, if a market decline or significant upsurge were to occur, Lydall's results would be affected accordingly. RAW-MATERIAL PRICING AND SUPPLY. Raw-material pricing and supply issues affect all of Lydall's businesses and can influence results in the short term. Pricing fluctuations, however, particularly impact the Company's materials-handling business. These products are made from laminated virgin kraft paperboard, also known as linerboard. The materials-handling business is unique for Lydall because it is the one area where the market pushes for price reductions that directly track decreases in raw materials and accepts price increases in the face of higher raw-material costs. Thus, significant changes in the pricing of linerboard directly affect this portion of Lydall's business. NEW PRODUCT INTRODUCTIONS. Improved performance and growth is partially linked to new product introductions planned for the future. The timing and degree of success of new product programs impact Lydall's projected results. YEAR 2000. The estimates and conclusions relating to Lydall 2000 are based on management's best estimates of future events. Risks to completing the plan include the availability of resources, the ability to discover and correct the potential Year 2000 sensitive problems, and the ability of third parties to bring their systems into Year 2000 compliance. The Company does not undertake to update any forward-looking statement made in this report or that may from time to time be made by or on behalf of the Company. LIQUIDITY AND CAPITAL RESOURCES Lydall ended 1998 with $52.3 million outstanding against short-term credit lines to support significant investments in a variety of areas. The Company completed three strategic acquisitions for cash totaling $46.4 million, in addition to capital expenditures of $17.7 million and purchases of Common Stock totaling $10.3 million. Late in 1998, the Company suspended the purchase of Common Stock except to offset shares granted under the Company's stock option award program, choosing to focus on the cash requirements for existing operations and acquisitions. Lydall funded an aggressive capital plan in 1997 of $17.1 million in addition to purchasing 1.3 million shares of Common Stock for $27.4 million. Lydall ended the year with $8.9 million in cash and cash equivalents, plus $3.9 million in short-term investments. 17 YEAR 2000 Many computer systems and equipment with embedded microchips or processors use only two digits to represent the year, which results in their inability to accurately process certain data before, during or after the year 2000. As a result, business and governmental entities are at risk of possible miscalculations or system failures causing disruptions in their business operations. The century-dating issue can arise at any point in the Company's supply, manufacturing, processing, distribution, and financial chains. Lydall has recognized the urgency of updating its information technology systems to improve product quality, process efficiencies, productivity, and to accommodate century-dating issues. The Company and each of its operating subsidiaries are in the process of implementing a Year 2000 readiness program with the objective of having all significant systems processing date-sensitive transactions properly. The project, Lydall 2000, has been underway since 1995. Lydall 2000 addresses information technology and non-information technology systems as well as an assessment of the status of third parties. Information technology systems were analyzed to determine those which must be replaced to meet the criteria of Lydall 2000. The identified systems have been segregated into two logical implementation projects. The scope of these projects has been determined, the infrastructure has been put in place, and the Company is progressing with the implementations. World-class systems that meet the objectives of the Company were chosen to replace legacy systems. Domestic financial and manufacturing system implementations were approximately 80 percent complete at the end of 1998. The Company expects total completion by the beginning of the third quarter of 1999. Several domestic locations were Year 2000 compliant at the end of 1998. The implementation of the international financial and manufacturing systems were approximately 25 percent completed at the end of 1998 and are expected to be totally integrated by the end of the fourth quarter of 1999. The completion timeframe includes time for testing and verification of newly implemented systems. The human resource management system is currently Year 2000 compliant. An implementation strategy is currently being developed to integrate newly acquired Gerhardi operations and to address any century-dating issues. Assessment of non-information technology systems was also completed as part of Lydall 2000. Systems requiring remediation are expected to be substantially compliant by mid-year 1999. Additionally, customers and suppliers, who could have a material impact on the Company's operations, are being contacted to verify their Year 2000 readiness. The Company intends to assess their compliance and consider alternatives where necessary. Since the inception of Lydall 2000, the Company has capitalized costs of approximately $9.5 million. Based on experience to date, approximately $2.0 million of Lydall 2000 costs remain to be capitalized. The cost to update Gerhardi's systems has not yet been determined. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially affect the Company's results of operations, liquidity or financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on its results of operations, liquidity or financial condition. Lydall 2000 is expected to significantly reduce the level of uncertainty about the Year 2000 problem. The Company believes that, with the implementation of new systems and completion of Lydall 2000, the possibility of significant interruptions of normal operations should be substantially reduced. 18 With respect to contingency plans, the Company is anticipating being compliant prior to the year 2000. The Company will continue to reassess the need for formal contingency plans, based upon progress of Year 2000 efforts by the Company and third parties. If deemed necessary, contingency planning will begin in the first quarter of 1999. CASH FLOW OVERVIEW Cash provided by operating activities was approximately $20.3 million in 1998, compared with $24.5 million and $37.8 million in 1997 and 1996, respectively. Positive cash flows in 1998 were derived from operating earnings before deducting non-cash charges for depreciation, amortization, and impairment losses. Working capital increases partially offset operating earnings and non-cash charges. Operating activities generated substantially higher cash flows in 1997 and 1996 due to higher earnings levels. Working capital increases in 1997 reduced cash flows, while 1996 results were positively impacted by strong working capital management results. Cash flow used in investing activities in 1998 reached a record $60.0 million, with $46.4 million used for strategic acquisitions and $17.7 million for capital expenditures. Investing activities consumed $16.2 million in 1997 and $15.9 million in 1996. In both 1997 and 1996, capital expenditures were the primary use of cash as acquisition activity was minimal. Lydall generated $33.0 million in cash flow from financing activities in 1998. Net proceeds from bank credit lines were $44.6 million, while the largest use of cash was the purchase of Common Stock for $10.3 million. In 1997, financing activities resulted in net cash outflows of $37.5 million, including debt repayments totaling $12.5 million and Common Stock purchases amounting to $27.4 million. Financing activities in 1996 used $11.4 million, which included Common Stock purchases of $10.3 million, debt payments of $2.9 million, and partially offset by $1.8 million of proceeds from stock option exercises. WORKING CAPITAL PRODUCTIVITY Lydall has measured working capital productivity, or working capital turnover, for a number of years to assess short-term utilization of operating resources. Working capital turnover is defined as annual sales divided by the quarterly average of receivables and inventory, less accounts payable. Since the acquisition of Gerhardi was not completed until December 30, 1998, its related working capital has been excluded from this analysis. Turnover declined by 16 percent in 1998 to 6.4 times from 7.6 times in 1997. The overall performance was driven by increased finished goods inventories at many locations, while sales declined by 6 percent. Acquisitions, especially Fort Washington, experienced very low turnover as the dynamics of higher inventories and lower sales were more pronounced. Inventories will be managed more closely in line with demand patterns in 1999. Management's goal is to improve turnover to historical rates in 1999. 19 Turnover in 1997 of 7.6 times compared with turnover of 8.2 times in 1996, the peak efficiency recorded by Lydall. Results in 1997 were also diluted by effects of acquisitions.
- ---------------------------------------------------------------------------------------------------------- $ millions 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Net sales $ 230.0 $ 244.3 $ 252.7 Average working capital 36.2 32.3 30.7 Working capital turnover 6.4 7.6 8.2 Percent change from previous year (16) (8) 12 - ----------------------------------------------------------------------------------------------------------
FUTURE CASH REQUIREMENTS Cash requirements for 1999 include the funding of ongoing operations, capital expenditures, and acquisitions. Lydall anticipates refinancing the short-term credit facilities used to acquire Gerhardi in December 1998. Lydall has suspended purchases of Common Stock except to offset shares granted under the Company's stock option award program, choosing to focus on cash requirements for existing operations and acquisitions. The 1999 capital expenditure budget for operations, excluding Gerhardi, is $11.0 million, down from actual expenditures in 1998 and 1997 exceeding $17.0 million. The lower level reflects the substantial completion of Lydall 2000 and somewhat lower requirements for strategic capital investments. Capital expenditures at Gerhardi will be substantial in 1999 as Lydall takes over a growing company in the midst of a large capacity expansion for the metal heat-shield market. Capital requirements at Gerhardi are expected to range between $8.0 million and $11.0 million in 1999 and to decline substantially in 2000. Management expects to finance capital expenditures and working capital needs from cash provided by operating activities in 1999. Acquisitions, if completed, would require additional borrowing which is anticipated to be provided from a renegotiated credit facility as described under "Credit Arrangements." CREDIT ARRANGEMENTS At the end of 1998, domestic credit arrangements totaled $70.0 million. Lydall also acquired credit capacity with Gerhardi amounting to approximately $7.7 million. Domestic credit lines are renewed annually, and Lydall pays interest at money market rates. Lydall also compensates banks for certain services on a fee basis. Management is in the process of refinancing current facilities to extend maturities beyond one year, to provide adequate capacity for capital spending requirements, and to provide additional capacity for unforeseen events, including potential acquisitions. Based on market conditions in early 1999, Lydall expects the refinancing to occur on reasonable terms by mid-year 1999. CAPITAL STRUCTURE Lydall's long-term financial strategy is to prudently utilize debt financing for future growth opportunities, both internal and external. The Company plans to maintain an investment-grade credit rating, while allowing temporary departures to facilitate acquisitions. At the end of 1998, Lydall's total borrowing was $54.7 million. Coupled with stockholder's equity of $109.2 million, total capitalization was $163.9 million. Debt represented 33 percent of Lydall's total capital structure. Based on capital spending plans in 1999, and expected cash flows from operating activities, Lydall's capacity to fund strategic acquisitions is limited to less than $50 million. Lydall would consider exceeding its long-term goal of 40-percent debt to total capitalization in the short-term, with a goal of refinancing or restructuring the Company to 20 return within those guidelines. The Company continues to seek strategic acquisitions in the filtration and thermal-barrier markets. OTHER KEY FINANCIAL ITEMS CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased to $2.3 million at the end of 1998 from $8.9 million in 1997. SHORT-TERM INVESTMENTS. Lydall invests in highly liquid investments with maturities greater than three months at the time the investments are made. The Company had no short-term investments at December 31, 1998 and $3.9 million at December 31, 1997. RECEIVABLES. Receivables were $48.6 million in 1998 and $32.2 million in 1997, of which trade receivables were $46.0 million and $31.9 million for 1998 and 1997, respectively. Days of sales outstanding in trade receivables were 53 in 1998 and 51 in 1997. Foreign and export sales were approximately 18 percent of total sales in 1998, 20 percent in 1997, and 21 percent in 1996. These sales are concentrated primarily in Europe, the Far East, Mexico, and Canada. INVENTORIES. Inventories were $28.9 million at December 31, 1998, net of LIFO reserves of $1.2 million, and $15.5 million at December 31, 1997, net of LIFO reserves of $1.2 million. WORKING CAPITAL. Working capital decreased to a deficit of $9.1 million on December 31, 1998 from $39.2 million on December 31, 1997. The ratio of current assets to current liabilities decreased to 0.91 from 2.39. CAPITAL ASSET EXPENDITURES. Capital asset expenditures were $17.7 million in 1998, $17.1 million in 1997, and $10.9 million in 1996. Depreciation was $8.8 million in 1998, $8.0 million in 1997, and $7.8 million in 1996. The Company's 1999 Capital Plan calls for commitments of $11.0 million plus expenditures of between $8.0 million and $11.0 million at Gerhardi with spending focused on the following areas--(1) expansion of metal heat-shield capacity at Gerhardi; and (2) process improvements that lower the Company's Cost of Quality. Expenditures in 1999 are expected to be financed from existing cash balances or cash generated from operations. DEBT TO TOTAL CAPITALIZATION. Debt to total capitalization increased to 33 percent in 1998 from 4 percent in 1997. COMMON STOCKHOLDERS' EQUITY. Common stockholders' equity decreased to $109.2 million at December 31, 1998, a decrease of 3 percent from $113.0 million at December 31, 1997. On a per-share basis, common stockholders' equity decreased to $6.96 at December 31, 1998 from $7.04 at December 31, 1997. DIVIDEND POLICY. The Company does not pay a cash dividend on its Common Stock and does not anticipate doing so in the foreseeable future. Cash will be reinvested into core businesses. RESEARCH AND DEVELOPMENT. Research and development investments were $8.7 million in 1998, $8.7 million in 1997, and $6.8 million in 1996. RECENTLY ISSUED ACCOUNTING STANDARDS. See "Significant Accounting Policies" in "Notes to Consolidated Financial Statements" on Page F-8. 21 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Lydall is exposed to market risk related to changes in foreign currency exchange rates and interest rates. FOREIGN CURRENCY RISK Lydall has sales and manufacturing activities in foreign countries. As a result, financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's primary currency exposures are with the French franc and German mark. Lydall's foreign and domestic operations limit foreign currency exchange transaction risk by completing transactions primarily in their local currencies. Lydall utilizes bank loans and other debt instruments throughout its operations. To mitigate foreign currency risk, such debt is primarily taken out in the underlying local currency of the subsidiary. Lydall used a foreign currency forward exchange contract to mitigate exposure to foreign currency volatility in its December 30, 1998 acquisition of a German subsidiary. The contract, for the contractual amount equivalent to $17 million at a contract rate of 1.6733, limited Lydall's exposure to both favorable and unfavorable currency fluctuations and settled on January 5, 1999 resulting in a minimal gain. There were no outstanding foreign currency forward exchange contracts at December 31, 1997. INTEREST RATE RISK Lydall's interest rate exposure is most sensitive to changes in US interest rates. All of Lydall's outstanding debt at December 31, 1998 matures at various dates during 1999. The weighted average interest rate on this debt was 6 percent which approximates market. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is contained under Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements with the Company's independent accountants on accounting and financial disclosure. 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the directors of Lydall and disclosure of late filings required by Section 16 of the Exchange Act are incorporated by reference to the definitive Proxy Statement of Lydall to be filed with the Commission relating to its Annual Meeting of Stockholders to be held on May 12, 1999. Information regarding the executive officers and other significant employees of the Company is contained on page 6 of this report. ITEM 11. EXECUTIVE COMPENSATION Information regarding the compensation of Lydall's directors and executive officers is incorporated by reference to the definitive Proxy Statement of Lydall to be filed with the Commission relating to its Annual Meeting of Stockholders to be held on May 12, 1999, including the Compensation and Stock Option Committee Report to Stockholders, found on pages 6 through 18, and the comparative performance graph located on page 19, therein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding beneficial ownership of the Common Stock by certain beneficial owners and by management of the Company is incorporated by reference to the definitive Proxy Statement of Lydall to be filed with the Commission relating to its Annual Meeting of Stockholders to be held on May 12, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions with management is incorporated by reference to the definitive Proxy Statement of Lydall to be filed with the Commission relating to its Annual Meeting of Stockholders to be held on May 12, 1999. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------------------------------------- PAGE - ---------------------------------------------------------------------------------------------------------- A)1, FINANCIAL STATEMENTS: Report of Management F-1 Report of Independent Accountants F-2 Consolidated Statements of Income and Comprehensive Income for the three years ended December 31, 1998 F-3 Consolidated Balance Sheets at December 31, 1998 and 1997 F-4 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1998 F-6 Consolidated Statements of Cash Flows for the three years ended December 31, 1998 F-7 Notes to Consolidated Financial Statements F-8 A)2, FINANCIAL STATEMENT SCHEDULES: Schedule II-Valuation and Qualifying Accounts for the three years ended December 31, 1998 S-1
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or are presented in the Notes to the Consolidated Financial Statements, and therefore have been omitted. 24 A)3, EXHIBITS INCLUDED HEREIN OR INCORPORATED BY REFERENCE: 3.1 Amended and Restated Certificate of Incorporation of the Registrant dated August 14, 1995 (filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q dated November 9, 1995, and incorporated herein by this reference). 3.2 Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 4.1 Certain long-term debt instruments, each representing indebtedness in an amount equal to less than 10 percent of the Registrant's total consolidated assets, have not been filed as exhibits to this Annual Report on Form 10-K. The Registrant will file these instruments with the Commission upon request. 10.1* Amended and restated, Lydall, Inc. 1982 Stock Incentive Compensation Plan, amended through May 14, 1991 (filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K dated March 26, 1992 and incorporated herein by this reference). 10.2* Lydall, Inc. Senior Management Annual Incentive Compensation Plan (filed as Exhibit 3.5 to the Registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 10.3* Lydall, Inc. Management Annual Incentive Compensation Plan (filed as Exhibit 3.6 to the Registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 10.4* Employment Agreement with Leonard R. Jaskol dated March 1, 1995 (filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K dated March 27, 1995, and incorporated herein by this reference). 10.5* Employment Agreement with John E. Hanley dated March 10, 1995 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.6* Employment Agreement with Elliott F. Whitely dated March 10, 1995 (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.7* Employment Agreement with Raymond J. Lanzi dated March 10, 1995 (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.8* Employment Agreement with William J. Rankin, dated March 10, 1995 (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.9* Employment Agreement with Carole F. Butenas dated March 10, 1995 (filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.10* Employment Agreement with Mona G. Estey dated March 10, 1995 (filed as Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.11* Employment Agreement with Mary A. Tremblay dated March 10, 1995 (filed as Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.12* Employment Agreement with John J. Worthington dated November 7, 1996 (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K dated March 27, 1997 and incorporated herein by this reference). 10.13* Lydall, Inc. Board of Directors Deferred Compensation Plan effective January 1, 1991 (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference).
25 10.14* Lydall, Inc. Supplemental Executive Retirement Plan effective January 1, 1994 (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K dated March 27, 1996, and incorporated herein by this reference). 10.15* Amended and restated, 1992 Stock Incentive Compensation Plan, dated May 14, 1992, amended through May 14, 1997 (filed as Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 dated April 17,1998, Reg. No. [33-93768], and incorporated herein by this reference). 10.16* Employment Agreement with James P. Carolan dated February 1, 1999, filed herewith. 10.17* Employment Agreement with Christopher R. Skomorowski dated February 1, 1999, filed herewith. 10.18 Asset Purchase Agreement between Lydall New York, Inc. and Textile Technologies Industries, Inc. (filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K dated March 27, 1997, and incorporated herein by this reference). 10.19 Asset Purchase Agreement between CharterMed, Inc. and Charter Medical, Ltd. (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K dated March 16, 1998, and incorporated herein by this reference). 10.20 Asset Purchase Agreement between Lydall Central, Inc. and Engineered Thermal Systems, Inc. (filed as Exhibit 10.1 to the Registrant's Quarterly report on Form 10-Q dated May 7, 1998, and incorporated herein by this reference). 10.21 Purchase and Sale Agreement (English Translation) signed as of December 30, 1998 by and between HOHENSTAUFEN EINHUNDERTSTE Vermogensverwaltungs GmbH, a wholly owned subsidiary of Lydall, Inc. and Gerhardi & Cie. GmbH & Co. KG related to the purchase of all the outstanding shares of Gerhardi & Cie. GmbH & Co. KG (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed January 14, 1999). 21.1 List of subsidiaries of the Registrant, filed herewith. 23.1 Consent of PricewaterhouseCoopers LLP, filed herewith. 24.1 Power of Attorney, dated March 10, 1999, authorizing Christopher R. Skomorowski and/or John E. Hanley to sign this report on behalf of each member of the Board of Directors indicated therein, filed herewith. 27.1 Financial Data Schedule, filed herewith. *Management contract or compensatory plan. B) REPORTS ON FORM 8-K: 99.1 The Company filed a Current Report on Form 8-K dated December 3, 1998 reporting the Board of Directors' election of Christopher R. Skomorowski to succeed Leonard R. Jaskol as President and Chief Executive Officer. 99.2 The Company filed a Current Report on Form 8-K dated January 14, 1999 reporting the acquisition of Gerhardi & Cie. GmbH and Co. KG by a wholly owned subsidiary of Lydall, Inc.; the appointment of Roger M. Widmann as Chairman of the Board of Directors; and the Company's recording of non-recurring expenses and write-offs in the fourth quarter ended December 31, 1998, totaling approximately $9 million.
26 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 18, 1999 By /s/ CHRISTOPHER R. SKOMOROWSKI ------------------------------ ------------------------------------------ March 18, 1999 Christopher R. Skomorowski President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Lydall, Inc. in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ ------------------------------ ---------------------- CHRISTOPHER R. SKOMOROWSKI President, Chief Executive March 18, 1999 - ------------------------------ Officer and Director -------------- Christopher R. Skomorowski March 18, 1999 Vice President-Finance and JOHN E. HANLEY Treasurer (Principal March 18, 1999 - ------------------------------ Financial and Accounting -------------- John E. Hanley Officer) March 18, 1999 JOHN E. HANLEY - ------------------------------ March 18, 1999 John E. Hanley -------------- Attorney-in-fact for: March 18, 1999
Christopher R. Skomorowski Director Lee A. Asseo Director Samuel P. Cooley Director W. Leslie Duffy Director David Freeman Director (constituting in excess of a majority of the full Board of Directors) Joel Schiavone Director Elliott F. Whitely Director Roger M. Widmann Director Albert E. Wolf Director John J. Worthington Director
27 MANAGEMENT'S REPORT While Lydall's financial statements and the related financial data contained in this Annual Report have been prepared in conformity with generally accepted accounting principles and such financial statements have been audited by PricewaterhouseCoopers LLP, the ultimate accuracy and validity of this information is the responsibility of the Company's management. To carry out this responsibility, Lydall maintains comprehensive financial policies, procedures, accounting systems and internal controls which management believes provide reasonable assurance that accurate financial records are maintained and corporate assets are safeguarded. The Audit Committee of the Board of Directors, consisting of three outside directors, meets regularly with Company management and the internal auditor to review corporate financial policies and internal controls. The Audit Committee also meets with the independent auditors to review the scope of the annual audit and any comments they may have regarding the Company's internal accounting controls. In management's opinion, Lydall's system of internal accounting control is adequate to ensure that the financial information in this report presents fairly the Company's results of operations and financial condition. [LOGO] John E. Hanley Vice President-Finance and Treasurer F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Lydall, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 24 present fairly, in all material respects, the financial position of Lydall Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 24 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. [LOGO] Hartford, Connecticut March 10, 1999 F-2 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------ In thousands except per-share data For the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ NET SALES $ 230,007 $ 244,289 $ 252,652 Cost of sales 165,190 166,648 170,597 ...................................................................................................... Gross margin 64,817 77,641 82,055 Selling, product development, and administrative expenses 50,071 44,888 42,778 Impairment loss 8,467 -- -- ...................................................................................................... Operating income 6,279 32,753 39,277 Other (income) expense: Investment (income) loss 284 (1,986) (1,389) Interest expense 825 368 518 Other (214) (82) 294 ...................................................................................................... 895 (1,700) (577) ...................................................................................................... Income before income taxes 5,384 34,453 39,854 Income tax expense 1,182 12,542 15,118 ...................................................................................................... NET INCOME $ 4,202 $ 21,911 $ 24,736 ...................................................................................................... BASIC EARNINGS PER COMMON SHARE $ .27 $ 1.31 $ 1.44 Weighted average common stock outstanding 15,847 16,692 17,140 ...................................................................................................... DILUTED EARNINGS PER COMMON SHARE $ .26 $ 1.27 $ 1.38 Weighted average common stock and equivalents outstanding 16,163 17,319 17,988 ...................................................................................................... NET INCOME $ 4,202 $ 21,911 $ 24,736 ...................................................................................................... Other comprehensive income (loss): Foreign currency translation adjustments, net of $(180), $772, and $406 in tax effect, respectively 637 (1,349) (666) Unrealized gain (loss) on securities: Unrealized holding gains (losses) arising during period, net of $103, $(317), and $(70) in tax effect, respectively (366) 553 116 Less: reclassification adjustment for gains (losses) included in net income (344) 608 34 ...................................................................................................... Net unrealized gain (loss) on securities, net of $6, $31, and $(50) in tax effect, respectively (22) (55) 82 Minimum pension liability adjustment, net of $281, $121, and $(224) in tax effect, respectively (522) (224) 416 ...................................................................................................... Other comprehensive income (loss), net of tax 93 (1,628) (168) ...................................................................................................... COMPREHENSIVE INCOME $ 4,295 $ 20,283 $ 24,568 - ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------ In thousands except share data December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,254 $ 8,891 Short-term investments -- 3,873 Accounts receivable (less allowance for doubtful receivables of $1,504 in 1998 and $1,381 in 1997) 48,609 32,203 Inventories: Finished goods 10,303 6,243 Work in process 8,859 2,867 Raw materials and supplies 11,003 7,600 LIFO reserve (1,216) (1,172) ...................................................................................................... Total inventories 28,949 15,538 Taxes receivable 2,256 2,032 Prepaid expenses 1,966 1,314 Deferred tax assets 6,785 3,586 ...................................................................................................... Total current assets 90,819 67,437 PROPERTY, PLANT, AND EQUIPMENT, at cost: Land 2,729 983 Buildings and improvements 30,764 21,178 Machinery and equipment 111,157 81,496 Office equipment 16,865 10,447 Vehicles 1,310 1,178 Assets in progress 9,660 10,340 ...................................................................................................... 172,485 125,622 Less accumulated depreciation (64,649) (56,762) ...................................................................................................... 107,836 68,860 OTHER NONCURRENT ASSETS: Goodwill, at cost (net of accumulated amortization of $4,463 and an impairment loss of $6,519 in 1998 and accumulated amortization of $2,807 in 1997) 23,380 19,155 Other assets, at cost (net of accumulated amortization of $7,922 in 1998 and $7,526 in 1997) 4,813 4,672 ...................................................................................................... 28,193 23,827 ...................................................................................................... TOTAL ASSETS $ 226,848 $ 160,124 - ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 CONSOLIDATED BALANCE SHEETS (CONTINUED)
- ------------------------------------------------------------------------------------------------------ In thousands except share data December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 2,340 $ 2,950 Short-term borrowings 52,324 -- Accounts payable 22,530 13,342 Accrued taxes 1,411 1,030 Accrued payroll and other compensation 5,810 4,856 Other accrued liabilities 15,494 6,056 ...................................................................................................... Total current liabilities 99,909 28,234 ...................................................................................................... Long-term debt -- 2,100 Deferred tax liabilities 10,726 12,979 Other long-term liabilities 6,988 3,781 Contingencies STOCKHOLDERS' EQUITY: Preferred stock -- -- Common stock, par value $.10 per share, authorized 30,000,000 shares, issued 21,714,301 shares in 1998 and 21,432,346 shares in 1997. 2,171 2,143 Capital in excess of par value 38,697 36,510 Retained earnings 129,310 125,108 Accumulated other comprehensive income (71) (164) ...................................................................................................... 170,107 163,597 Less cost of 6,020,441 shares of common stock in treasury in 1998 and 5,366,873 shares in 1997 (60,882) (50,567) ...................................................................................................... Total stockholders' equity 109,225 113,030 ...................................................................................................... Total liabilities and stockholders' equity $ 226,848 $ 160,124 - ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-5 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------- Accumulated Capital in Other Cost of Total Preferred Common Excess of Retained Comprehensive Stock in Stockholders' In thousands Stock Stock Par Value Earnings Income (Loss) Treasury Equity - ----------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1996 $ -- $ 2,089 $ 32,448 $ 78,461 $ 1,632 $ (12,819) $ 101,811 Stock options exercised 23 1,787 1,810 Purchase of treasury shares (10,345) (10,345) Net income 24,736 24,736 Other comprehensive income (168) (168) ............................................................................................................................. BALANCE AT DECEMBER 31, 1996 -- 2,112 34,235 103,197 1,464 (23,164) 117,844 Stock options exercised 31 2,275 2,306 Purchase of treasury shares (27,403) (27,403) Net income 21,911 21,911 Other comprehensive income (1,628) (1,628) ............................................................................................................................. BALANCE AT DECEMBER 31, 1997 -- 2,143 36,510 125,108 (164) (50,567) 113,030 Stock options exercised 28 2,187 2,215 Purchase of treasury shares (10,315) (10,315) Net income 4,202 4,202 Other comprehensive income 93 93 ............................................................................................................................. BALANCE AT DECEMBER 31, 1998 $ -- $ 2,171 $ 38,697 $ 129,310 $ (71) $ (60,882) $ 109,225 - -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-6 CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------- In thousands For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 4,202 $ 21,911 $ 24,736 ...................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 8,844 7,993 7,824 Amortization 2,052 1,569 1,357 Impairment loss 8,467 -- -- Loss on disposition of property, plant and equipment 403 685 894 Changes in operating assets and liabilities, excluding effects from acquisitions: Accounts receivable 2,045 1,281 2,128 Taxes receivable (224) (2,032) -- Inventories 333 (1,140) 860 Prepaid and other assets 5 (1,708) (579) Accounts payable (895) (2,049) (196) Accrued taxes 343 (249) 1,087 Accrued payroll and other accrued liabilities (2,294) (2,452) 263 Deferred income taxes (5,600) 818 (620) Other long-term liabilities 2,651 (158) -- ...................................................................................................... Total adjustments 16,130 2,558 13,018 ...................................................................................................... NET CASH PROVIDED BY OPERATING ACTIVITIES 20,332 24,469 37,754 ...................................................................................................... CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (46,447) (78) (2,030) Additions of property, plant and equipment (17,657) (17,104) (10,893) Proceeds from the sale of property, plant and equipment 276 -- -- Sale (purchase) of investments, net 3,851 1,013 (2,940) ...................................................................................................... NET CASH USED FOR INVESTING ACTIVITIES (59,977) (16,169) (15,863) ...................................................................................................... CASH FLOWS FROM FINANCING ACTIVITIES: Long-term debt payments (3,484) (4,450) (2,863) Proceeds from short-term borrowings 110,820 -- -- Payments of short-term borrowings (66,245) -- -- Notes payable -- (8,000) -- Issuance of common stock 2,215 2,306 1,810 Acquisition of common stock (10,315) (27,403) (10,345) ...................................................................................................... NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 32,991 (37,547) (11,398) ...................................................................................................... EFFECT OF EXCHANGE RATE CHANGES ON CASH 17 (88) (87) ...................................................................................................... Increase (decrease) in cash and cash equivalents (6,637) (29,335) 10,406 Cash and cash equivalents at beginning of year 8,891 38,226 27,820 ...................................................................................................... CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,254 $ 8,891 $ 38,226 - -------------------------------------------------------------------------------------------------------- SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION - -------------------------------------------------------------------------------------------------------- Cash paid during the year for: Interest $ 734 $ 687 $ 897 Income taxes 6,231 14,678 13,985 Noncash transactions: Amounts payable for acquired operations 240 16 10,527 Additional minimum pension liability 999 591 930 Unrealized gains (losses) on available-for-sale securities (22) (55) 82 Liabilities assumed with acquisitions 26,496 -- -- - --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Lydall, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from estimates. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on hand and highly liquid investments with a maturity of three months or less at the date of purchase. The investments are stated at cost, plus accrued interest which approximates market value. SHORT-TERM INVESTMENTS. Lydall invests in highly liquid investments with maturities greater than three months at the time the investments are made. The investments are recorded at the lower of cost or market, plus accrued interest. Lydall had no short-term investments at December 31, 1998. CONCENTRATION OF RISK. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments, and trade receivables. The Company places its cash, cash equivalents and short-term investments in high-quality financial institutions and instruments. Concentrations of credit risk with respect to trade receivables are limited by the large number of customers comprising the Company's customer base and their dispersion across many different industries and geographies. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral. Sales to the automotive market were 25.4 percent of the Company's 1998 total sales compared with 26.3 percent in 1997 and 32.3 percent in 1996. Sales to the Ford Motor Co. represented 15.2 percent, 19.3 percent, and 16.6 percent of Lydall's total sales in 1998, 1997, and 1996, respectively. No other single customer accounted for more than 10 percent of total sales in 1998, 1997, or 1996. As of December 31, 1998, the Company had no other significant concentrations of risk. INVENTORIES. Approximately 33 percent in 1998 and 54 percent in 1997 of the inventories have been valued on a last-in, first-out (LIFO) method and the balance on a first-in, first-out (FIFO) method at the lower of cost or market. DEPRECIATION AND AMORTIZATION. Property, plant, and equipment are depreciated over their estimated useful lives on the straight-line method for financial statement purposes. Leasehold improvements are depreciated on a straight-line basis over the term of the lease or the life of the asset, whichever is shorter. Useful lives by category are as follows:
- ------------------------------------------------------------------------------------------------ Category Useful Life - ------------------------------------------------------------------------------------------------ Buildings and improvements 10-35 years Machinery and equipment 5-25 years Office equipment 2-8 years Vehicles 3-6 years - ------------------------------------------------------------------------------------------------
F-8 Software capitalized in conjunction with Lydall 2000 is included in Office Equipment and is depreciated over an estimated useful life of 8 years. INTANGIBLES. Goodwill and other intangibles are being amortized on a straight-line basis over periods not exceeding 25 years. VALUATION OF LONG-LIVED ASSETS. The Company periodically evaluates the recoverability of long-lived assets, including goodwill and other intangible assets, by analyzing the associated estimated undiscounted cash flows. At the time such evaluations indicate that the future undiscounted cash flows are not sufficient to recover the carrying value of the asset, the asset is adjusted to fair value. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Based on these evaluations, certain machinery and goodwill were adjusted down to fair value in 1998. There were no such adjustments to carrying values in 1997. RESEARCH AND DEVELOPMENT. Costs are charged to expense as incurred. REVENUE RECOGNITION. Lydall recognizes revenues when the product is shipped. EARNINGS PER SHARE. Basic earnings per common share are based on net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are based on net income divided by the weighted average number of common shares outstanding during the period, including the effect of stock options, stock awards and warrants where such effect is dilutive. INCOME TAXES. The provision for income taxes is based upon income reported in the accompanying financial statements. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. In accordance with SFAS 109, these deferred taxes are measured by applying currently enacted tax laws. FOREIGN OPERATIONS. The Company operates a manufacturing plant in Saint-Rivalain, France. Foreign sales were $10.8 million, $11.2 million, and $15.3 million, for the years ended December 31, 1998, 1997, and 1996, respectively. The French operation incurred losses of $979 thousand (including the recognition of an impairment loss of $941 thousand), $348 thousand and $796 thousand for the years ended December 31, 1998, 1997, and 1996, respectively. Total foreign assets were $73.4 million and $16.4 million at December 31, 1998 and 1997, respectively. Assets in 1998 include those acquired with the purchase of Gerhardi. Gerhardi did not contribute to operations in 1998. TRANSLATION OF FOREIGN CURRENCIES. Assets and liabilities of foreign subsidiaries are translated at exchange rates prevailing on the balance sheet date; revenues and expenses are translated at average exchange rates prevailing during the period except for individually significant transactions which are translated at the prevailing rate on the date of the transaction; and elements of stockholders' equity are translated at historical rates. Any resulting gains or losses are reported in Other Comprehensive Income. RESTATEMENT OF PRIOR YEAR'S FINANCIAL STATEMENTS. Certain components of the financial statements have been restated to reflect the adoption of new accounting standards. RECENTLY ISSUED ACCOUNTING STANDARDS. The Company adopted Statement of Financial Accounting Standards No. 130, No. 131, and No. 132, "Reporting Comprehensive Income," ("SFAS 130"), "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131"), and "Employers' Disclosures about Pensions and Other F-9 Postretirement Benefits," ("SFAS 132"), all of which are effective for fiscal years beginning after December 15, 1997. In June of 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 1999. As of December 31, 1998, the Company does not have any material derivative instruments. Lydall does not anticipate there will be a material effect on the Company's consolidated financial position, results of operations, comprehensive income, or cash flows as a result of implementing this pronouncement. INVESTMENTS The Company's investments are categorized as available-for-sale debt and equity securities, as defined by the Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company held no available-for-sale debt or equity securities at December 31, 1998. The carrying value of these securities was $13.5 million in 1997, which approximated fair market value. In 1997, $9.6 million was classified in cash equivalents and $3.9 million, in short-term investments. The amortized costs of investments in debt securities by contractual maturity are shown below.
- ---------------------------------------------------------------------------------------------------------- In thousands December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------- Due in one year or less $ -- $ 6,400 Due after one year through five years -- -- Due after five years through ten years -- -- Due after ten years -- 220 .......................................................................................................... $ -- $ 6,620 - ----------------------------------------------------------------------------------------------------------
The net unrealized gains and losses at December 31, 1997 are included as a component of Accumulated Other Comprehensive Income. There were no unrealized gains or losses as of December 31, 1998. Gross unrealized gains were $318 thousand, and gross unrealized losses were $296 thousand as of December 31, 1997. Gains were realized on sales of securities of $1.1 million in both 1998 and 1997, and losses were realized of $1.5 million and $136 thousand during 1998 and 1997, respectively. The gross realized gains and losses were immaterial to the consolidated financial statements during 1996. For the purpose of computing realized gains and losses, cost is determined on a specific identification basis. F-10 LONG-TERM DEBT
- ---------------------------------------------------------------------------------------------------------- In thousands December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------- 7.25% Note Purchase Agreement, balance due in full in 1999 $ 2,100 $4,300 5.48% Indemnification Note -- 750 5.37% Note Payable, balance due in full in 1999 240 -- .......................................................................................................... 2,340 5,050 Less portion due within one year (2,340) (2,950) .......................................................................................................... $ -- $2,100 - ----------------------------------------------------------------------------------------------------------
The Note Purchase Agreement is restricted by a debt covenant, among others, that requires a debt-to-capital ratio of no more than .45 in order to borrow under long-term debt agreements in the future. While by commonly used methods Lydall's current debt-to-capital ratio is .33, it is .43 as defined by the terms of this agreement as of December 31, 1998. The Company obtained a waiver for default of certain covenants in the Note Purchase Agreement. The waiver is effective through the date of final payment. CREDIT ARRANGEMENTS Lydall maintains domestic and foreign credit arrangements totaling over $77.7 million, the majority of which are renewed annually. The facilities have interest rate options determinable by the Company based upon prime, money market, or LIBOR rates, plus an applicable margin. During 1998, interest rates on lines of credit averaged 6.0 percent. The Company compensates its banks on a fee-for-service basis for services provided. These credit arrangements contain cross-default provisions that could accelerate payment requirements. At December 31, 1998, $52.3 million was outstanding on domestic and foreign lines of credit. Of this amount, $9.2 million was related to the acquisition of the St. Johnsbury Operation on April 18, 1998, and $31.6 million related to the acquisition of Gerhardi & Cie. GmbH & Co. KG on December 30, 1998. At December 31, 1997, no amounts were outstanding on domestic and foreign lines of credit. FINANCIAL INSTRUMENTS The Company utilizes letters of credit in the ordinary course of business and to satisfy self-insurance security deposit requirements. Outstanding letters of credit were $2.4 million and $1.8 million as of December 31, 1998 and 1997, respectively. The Company does not expect any material losses to result from these off-balance-sheet instruments as performance is not expected to be required. LONG-TERM OPERATING LEASES Lydall has operating leases which resulted in an expense of $2.6 million in 1998, $1.9 million in 1997, and $1.7 million in 1996. These contracts range from vehicle leases to building leases which require payment of property taxes, insurance, repairs and other operating costs. F-11 Future net lease commitments under noncancelable operating leases are:
IN THOUSANDS 1999 2000 2001 2002 2003 THEREAFTER TOTAL - --------------------------------------------------------------------------------------------------------------------- Net lease payments $ 2,204 $ 1,788 $ 1,439 $ 739 $ 656 $ 817 $ 7,643 - ---------------------------------------------------------------------------------------------------------------------
ACQUISITIONS AND OTHER INVESTMENTS On December 30, 1998, a subsidiary of the Company acquired for cash all of the outstanding shares of Gerhardi & Cie GmbH & Co. KG ("Gerhardi"), a privately held German manufacturer of automotive components. Under the terms of the agreement and in consideration for Gerhardi's outstanding shares, the Company's subsidiary paid to Gerhardi a negotiated purchase price of $30.7 million and assumed Gerhardi's existing liabilities, net of cash, of approximately $26.5 million. The purchase price is subject to a post-closing net equity adjustment as defined in the agreement and has been allocated on a preliminary basis. Lydall, Inc. funded the subsidiary's acquisition through interim borrowing on existing lines of credit. It is the Company's intention to evaluate and obtain permanent financing. This acquisition was accounted for under the purchase method of accounting. The fair value of assets acquired exceeded the cost of the acquisition, and as a result, the Company reduced the appraised value of long- term assets by $9.1 million. The operating results of Gerhardi will be included in the Company's consolidated financial statements from the date of acquisition. On April 18, 1998, a subsidiary of Lydall acquired Engineered Thermal Systems, Inc. ("ETSI"), a producer of automotive thermal and acoustical components for $9.2 million, accounted for under the purchase method. ETSI, which operates as the St. Johnsbury Operation of Lydall Westex, complements the Company's extensive automotive thermal-barrier business. The results of the St. Johnsbury Operation have been included in the Company's consolidated results since the date of acquisition. The Company recorded $6.7 million in goodwill and other intangible assets related to this acquisition which are being amortized on a straight-line basis over 17 years. Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical, Ltd. On February 6, 1998, this separate corporate entity acquired CharterMed, Inc., a privately held company located in Lakewood, New Jersey, for $6.6 million in cash and a note for $720 thousand, payable through 1999, accounted for under the purchase method. CharterMed, Inc., a growing and profitable manufacturer of proprietary medical devices, served applications such as biotech and pharmaceutical packaging, blood bank and transfusion services and neonatal intensive care. The results of CharterMed, Inc., now the Charter Medical, New Jersey Operation, since the date of acquisition have been included in the Company's consolidated results. The Company recorded $5.8 million in goodwill and other intangible assets related to this acquisition which are being amortized on a straight-line basis over 20 years. The following table summarizes the unaudited consolidated pro forma information of Lydall, Inc., assuming the acquisitions had occurred on January 1, 1997.
- -------------------------------------------------------------------------------------------------- In thousands except per-share data 1998 1997 (UNAUDITED) (unaudited) - -------------------------------------------------------------------------------------------------- Sales $ 313,675 $ 326,976 Net income $ 4,716 22,503 Basic earnings per common share $ .30 $ 1.35 Diluted earnings per common share $ .29 $ 1.30 - --------------------------------------------------------------------------------------------------
F-12 These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as additional depreciation expense as a result of fixed asset basis adjustments, additional amortization expense of goodwill and other intangibles, and increased interest expense on acquisition debt. They do not necessarily represent results which would have occurred if the acquisitions had taken place on January 1, 1997, nor are they indicative of the results of future combined operations. On December 20, 1996, a subsidiary of the Company acquired certain assets and assumed certain liabilities of Textile Technologies Industries, Inc. ("Fort Washington Operation"). The Fort Washington Operation is a manufacturer of components utilized in highly specialized, advanced structural materials which are sold to the aerospace, marine, medical device, automotive and sporting goods industries. The subsidiary paid $2.0 million in cash at closing and issued a $8.0 million note, which was paid on January 2, 1997, and a $1.75 million note, which was paid in 1998. As a result of this purchase the Company recorded goodwill and other intangible assets of $10.4 million. The results of the Fort Washington Operation since the date of acquisition have been included in the Company's consolidated results. The pro forma effect on the Company's results of operations for the year ended December 31, 1996, had the acquisition occurred at the beginning of the period, was not material. CAPITAL STOCK PREFERRED STOCK--The Company has a class of Serial Preferred Stock with a par value of $1. None of the 500,000 authorized shares has been issued. COMMON STOCK--At the end of 1998, 1,603 Lydall stockholders of record held 15,693,860 shares of Common Stock. Approximately 7 percent of the Company's Common Stock was owned by Lydall's officers and directors and their immediate families. Other Lydall employees, their families, and Lydall associates owned an additional 12 percent either directly or through participation in the Company's Employee Stock Ownership Trust.
- --------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED 1998 For the Year Ended 1997 For the Year Ended 1996 ------------------------- -------------------------- -------------------------- NET PER-SHARE Net Per-Share Net Per-Share INCOME SHARES AMOUNT Income Shares Amount Income Shares Amount - ----------------------------------------------- -------------------------- -------------------------- Basic earnings per share $4,202 15,847 $ .27 $21,911 16,692 $1.31 $24,736 17,140 $1.44 Effect of dilutive securities stock options 316 (.01) 627 (.04) 848 (.06) ......................................................................................................... Diluted earnings per share $4,202 16,163 $ .26 $21,911 17,319 $1.27 $24,736 17,988 $1.38 - ---------------------------------------------------------------------------------------------------------
Options to purchase 593,700, 297,946, and 317,446 shares of Lydall Common Stock were not included in the computation of diluted earnings per share because the average exercise price was greater than the average market price of the common shares at the end of each respective year. STOCK OPTION PLANS At December 31, 1998, the Company had two stock option plans under which employees and directors had options to purchase Lydall Common Stock. Under these plans--the 1982 Stock Incentive Compensation Plan and the 1992 Stock Incentive Compensation Plan--options are granted at fair market value on the grant date and expire ten years after the grant date. In most cases, options vest at a rate of 25 percent per year starting with the first anniversary of F-13 the award. A few incentive stock option (ISO) awards have an extended vesting period because IRS regulations, with regard to ISO awards, cap the total dollar amount that can vest in one year for an individual at $100,000. The 1982 Plan has expired; therefore, no further options can be granted under this Plan. The 1992 Plan provides for automatic acceleration of vesting in the event of a change in control of the Company. The Plan also provides for the use of shares of Lydall Common Stock in lieu of cash to exercise options if the shares are held for more than six months and if the Compensation and Stock Option Committee of the Board of Directors approves this form of exercise. At December 31, 1996, the Company had three stock option plans under which employees and directors had options or warrants to purchase Lydall Common Stock. The 1984 Outside Directors' Warrant Plan was terminated in 1992. At the end of 1996, there were warrants for 30,330 shares outstanding under the Plan. All of these warrants were exercised during 1997. The Company applies APB Opinion 25 and its related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's three stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
- ------------------------------------------------------------------------------------ In thousands except per-share data For the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------ Net income As reported $ 4,202 $ 21,911 $ 24,736 Pro forma 3,228 21,170 24,363 Basic earnings per share As reported $ .27 $ 1.31 $ 1.44 Pro forma .20 1.27 1.42 Diluted earnings per share As reported $ .26 $ 1.27 $ 1.38 Pro forma .20 1.22 1.35 - ------------------------------------------------------------------------------------
F-14 The fair value of each option grant is estimated for the above disclosure on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: zero dividend yield for all years; expected volatility of 40 percent, 27 percent and 31 percent; risk-free interest rates of 4.7 percent, 5.8 percent and 6.1 percent; and an expected six-year life for all years. A summary of the status of the Company's stock option plans as of December 31, 1998, 1997, and 1996, and changes during the years ended on those dates is presented below:
- ------------------------------------------------------------------------------------------------------------- In thousands except per share data 1998 1997 1996 - ---------------------------------------- --------------------------- --------------------------- --------- WEIGHTED-AVERAGE Weighted-Average FIXED OPTIONS SHARES EXERCISE PRICE Shares Exercise Price Shares - ---------------------------------------- --------------------------- --------------------------- --------- Outstanding at beginning of year 1,592 $13.14 1,772 $11.51 1,822 Granted 21 15.86 156 19.80 191 Exercised (274) 5.35 (303) 6.20 (229) Forfeited (76) 21.28 (33) 20.80 (12) ............................................................................................................. Outstanding at end of year 1,263 $14.38 1,592 $13.14 1,772 ............................................................................................................. Options exercisable at year-end 1,037 1,156 1,176 Shares reserved for grants 356 301 424 Weighted-average fair value per option granted during the year $ 7.37 $ 7.85 $ 10.07 - -------------------------------------------------------------------------------------------------------------
In 1996, the option price of outstanding shares ranged from $1.85 to $26.00 per share. Option exercises in 1996 ranged from $1.76 to $16.75. The following table summarizes information about stock options outstanding at December 31, 1998:
- ------------------------------------------------------------------------------------------------------------------ Options Outstanding Options Exercisable ------------------------------------------------------------ -------------------------------- Number Weighted-Average Number Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price - ------------------ ------------------------------------------------------------ -------------------------------- $ 4.21 to $ 5.85 1.3 157,243 years $ 4.55 157,243 $ 4.55 8.21 to 11.75 486,336 3.9 9.66 484,061 9.65 13.13 to 19.81 360,557 6.9 17.80 235,617 17.02 22.63 to 26.00 258,762 7.1 24.45 159,706 24.71 .................................................................................................................. $ 4.21 to $26.00 1,262,898 5.1 $14.38 1,036,627 $12.87 - ------------------------------------------------------------------------------------------------------------------
F-15 EMPLOYER-SPONSORED BENEFIT PLANS The Company contributes to four defined benefit pension plans which cover substantially all domestic Lydall employees. The pension plans are noncontributory, and benefits are based on either years of service or eligible compensation while a participant is in a plan. The Company's funding policy is to fund not less than the ERISA minimum funding standard nor more than the maximum amount which can be deducted for federal income tax purposes. The following items are the components of net periodic benefit cost for pension benefits:
- ------------------------------------------------------------------------------------------------------------- In thousands For the years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Service cost $ 1,184 $ 1,065 $ 1,048 Interest cost 1,530 1,392 1,262 Expected return on assets (1,623) (1,434) (1,287) Amortization of: Transition asset (103) (103) (103) Prior service cost 12 9 8 Actuarial loss 81 77 130 Special termination benefit and curtailment charges 85 -- -- ............................................................................................................. Total net periodic benefit cost $ 1,166 $ 1,006 $ 1,058 - -------------------------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $25.8 million, $21.4 million, and $19.5 million, respectively, as of December 31, 1998, and $3.5 million, $3.5 million, and $3.3 million, respectively, as of December 31, 1997. F-16 Plan assets include investments in bonds and equity securities. The Company determines the assumed discount rate, long-term rate, and annual compensation increase rate for each year. The following presents the assumptions and a summary of the funded status for all plans:
- ------------------------------------------------------------------------------------------ December 31, 1998 1997 - ------------------------------------------------------------------------------------------ Weighted average assumptions: Discount rate 6.50% 7.25% Expected return on plan assets 9.25% 9.25% Rate of compensation increase 5.00% 5.00% - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ In thousands December 31, 1998 1997 - ------------------------------------------------------------------------------------------ Change in benefit obligation Net benefit obligation at beginning of year $ 20,250 $ 17,428 Service cost 1,184 1,065 Interest cost 1,530 1,392 Plan amendments 198 35 Actuarial (gain) loss 3,299 1,131 Curtailments (62) -- Special termination benefits 79 -- Gross benefits paid (651) (801) .......................................................................................... Net benefit obligation at end of year $ 25,827 $ 20,250 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ In thousands December 31, 1998 1997 - ------------------------------------------------------------------------------------------ Change in plan assets Fair value of plan assets at beginning of year $ 16,929 $ 15,601 Actual return on plan assets 1,836 1,562 Employer contributions 1,342 567 Gross benefits paid (651) (801) .......................................................................................... Fair value of plan assets at end of year $ 19,456 $ 16,929 .......................................................................................... Funded status at end of year $ (6,371) $ (3,321) Unrecognized net actuarial (gain) loss 6,130 3,186 Unrecognized prior service cost 373 194 Unrecognized net transition asset (425) (528) .......................................................................................... Net amount recognized $ (293) $ (469) - ------------------------------------------------------------------------------------------ Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 573 $ 709 Accrued benefit liability (866) (1,178) Additional minimum liability (1,698) (699) Intangible assets 492 295 Accumulated other comprehensive income 1,206 404 .......................................................................................... Net amount recognized $ (293) $ (469) - ------------------------------------------------------------------------------------------
F-17 The Company also sponsors a Stock Purchase Plan, Profit Sharing Plan, and 401(k) Plan. Contributions are determined under various formulas. Employer contributions to these plans amounted to $1.9 million in 1998, $2.1 million in 1997, and $1.9 million in 1996. POSTEMPLOYMENT, POSTRETIREMENT AND DEFERRED COMPENSATION While it is not Lydall's practice to provide health care or life insurance for retired employees, it does so for some retired employees of certain units acquired before 1990. These benefits are unfunded. The plan participants are primarily retirees; therefore, the postretirement benefit transition obligation of $691 thousand is being amortized over the actuarially determined average remaining future lifetime of the plan participants. The discount rates used in determining the accumulated postretirement benefit obligations were 7.5 percent at December 31, 1998 and 1997. The health-care cost trend rate was 8 percent, gradually declining to 5.5 percent over a four-year period both in 1998 and 1997. An increase of 1 percent in the health-care cost trend rates would cause the accumulated benefit obligation to increase by $11 thousand. The increase in the service and interest components of the 1998 postretirement benefit cost is immaterial. The total expense was $80 thousand for 1998, $83 thousand for 1997, and $110 thousand for 1996. The Company provides deferred compensation to a small number of former employees, and has a deferred compensation plan, which was frozen as of December 31, 1996, that provides the Company's outside Directors and the former chairman with compensation upon their retirement from service with the Board. In addition, the Company provides a Supplemental Executive Retirement Plan ("SERP") which provides supplemental income payments after retirement for senior executives. The total net deferred compensation expense related to these three plans was $564 thousand in 1998 (including a one-time additional expense of $337 thousand related to the severance of the former chairman and chief executive officer), $234 thousand in 1997, and $246 thousand in 1996. IMPAIRMENT LOSS In 1998, the Company recognized $8.5 million in pretax impairment losses on certain identified assets. The largest portion of the loss, $6.5 million, represents impaired goodwill of the Fort Washington Operation. Despite the Company's efforts to integrate and grow Fort Washington, several internal and external factors have, and are expected to continue to, impact results of operations. As a result, projected future cash flows from the Operation were determined to be less than the carrying value of the Operation's long-lived assets, including goodwill. The revised carrying value of the goodwill was calculated using discounted estimated future cash flows. Management also determined that the useful life on the goodwill should be reduced from 20 to 15 years. The residual goodwill, $2.7 million, will be amortized over the remaining 13 years on a straight-line basis. Goodwill of the Fort Washington Operation will continue to be monitored for impairment in accordance with the Company's policy. The remaining impairment losses include $1.5 million recognized on fiber processing equipment at the Axohm operation and $500 thousand on equipment at the Manning, Green Island Operation. The equipment at Axohm was written down to its current market value, less costs of disposal, after management determined it was no longer needed due to product development changes and alternative capacity which can fulfill all production requirements for the foreseeable future. The equipment at Manning was used to convert purchased raw materials into fiber usable in Manning's production process. Manning secured a second reliable source of the raw material produced F-18 by the equipment in the fourth quarter of 1998. As a result, management determined there was no longer a use for the equipment. After disposal costs, the equipment was considered to have no residual value. No impairment losses were recorded in prior years. SEGMENT INFORMATION In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131"). In accordance with SFAS 131, Lydall's reportable segments are: Heat-Management Products, Filtration Products, Paperboard Products and Woven Products. All other operating units are aggregated in Other Products and Services. Lydall evaluates performance and allocates resources based on sales and operating income from each segment net of a corporate charge which is a percentage of average working capital employed. Sales by segment reported below include intersegment transactions. Operating income is calculated using specific cost identification for most items, with some allocation of overhead, based on sales volume. HEAT-MANAGEMENT PRODUCTS Lydall's thermal barriers, heat shields, and insulating products include a range of fiber-based materials, fiber- and-metal combinations and all-metal shields that protect and insulate within temperature requirements as low as -459 DEG. F (-273 DEG. C) up to +3000 DEG. F (+1649 DEG. C). Lydall's fiber-based materials range in format from specialty papers to textile-like materials to dense, board products. At the highest temperature requirements, Lytherm-Registered Trademark- specialty papers are used as linings for ovens, kilns, and furnaces and in glass and metal manufacturing. In mid-range temperatures, Manninglas-Registered Trademark- specialty papers are employed in consumer appliances as well as heat, ventilation, and air conditioning ductwork. Also, at mid-range temperatures, Lydall's heat-management products are organic or inorganic fiber composites, fiber-and-metal combinations, or all-metal components which are used as thermal barriers and heat shields in medium- and light-duty trucks, vans, sport-utility vehicles, and cars. The Company holds patents on many of its automotive products which are employed both inside and outside vehicles to insulate passenger compartments, exhaust systems, luggage compartments, electrical wiring harnesses, heat and air conditioning ducts, batteries, electronic components, and engine compartments. An acquisition made in April 1998 contributed to the growth of automotive related heat-management sales during the year. A second acquisition made on December 30, 1998 is expected to be a major contributor to the international growth of this segment in 1999. Lydall also manufactures custom-designed specialty papers employed in automotive airbag pyrotechnic inflators. These materials perform both a filtration and heat-reduction function and are included under Heat-Management Products. At the very coldest temperatures (approaching absolute zero), Cryotherm-Registered Trademark- cryogenic materials, composed of 100-percent inorganic fibers, are used for super-insulating applications. These include tanker trucks that transport liquid gases, stationary and portable cryogenic storage vessels, gas tanks for vehicles fueled by liquid natural gas, and supercolliders. F-19 FILTRATION PRODUCTS The Company manufactures Lydair-Registered Trademark- high-efficiency, glass microfiber air filtration media for rigid frame applications. Lydall manufactures six filtration classes of Lydair-Registered Trademark- media in over 100 grades with filtering efficiencies from 10 percent at 0.3-micron particle size to 99.999999 percent at 0.1-micron particle size. Lydair-Registered Trademark- filtration media are used in air filters, which are capital goods rather than consumables and which last approximately five years. A replacement market exists related to the upgrading of clean-room efficiency to meet the needs of more sophisticated process and product technology. Lydall also supplies media for pre-filters and intermediary filters in air-handling systems that are replaced more frequently. The Company's HEPA filtration media are also used in home air purification units. In addition, Lydall produces liquid filtration media used primarily in high-efficiency hydraulic oil and lubrication oil elements for off-road vehicles, trucks, and heavy equipment. These products are sold under the Lypore-Registered Trademark- trademark. Lydall's line of fabricated medical filter components are also sold under the trademark Lypore-Registered Trademark-. These products are employed in blood filtration devices, such as cardiotomy reservoirs which filter the blood supply of a patient during open-heart surgery, and autotransfusion filters used to filter blood collected from a patient before surgery or from an injured patient. Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical, Ltd., which acquired CharterMed, Inc., a manufacturer of proprietary medical devices serving applications such as biotech and pharmaceutical packaging, blood bank and transfusion services, and neonatal intensive care. All of Lydall's medical products are now under Charter Medical, Ltd. and are included in the Filtration Products segment. PAPERBOARD PRODUCTS The Paperboard Products segment includes commodity paper products which are employed primarily in materials-handling and packaging applications. Lydall produces slipsheets, separator sheets, and protective sheets. Ly-Pak-Registered Trademark- slipsheets are used to ship a growing number of products such as food, pharmaceuticals, and chemicals. Ly-Pak-Registered Trademark- slipsheet systems are used to replace wooden pallets, providing significant cost and space reductions for the customer. Ly-Pak-Registered Trademark- separator sheets are supplied to the glass and plastic bottle industries and are manufactured to meet industry specifications for bulk palletizing. Ly-Pak-Registered Trademark- protective sheets are used as pallet pads, protective top caps, and stabilizing sheets. These products are custom-made from plies of virgin kraft linerboard and laminated with a special moisture-resistant adhesive. WOVEN PRODUCTS Lydall produces specialty woven composites which are used in advanced structural materials sold to the aerospace, marine, and sporting goods industries. These composites are extremely strong, yet lightweight and are used in high-performance applications. OTHER PRODUCTS AND SERVICES Other Products and Services includes all other operating units of the Company. These operations primarily produce fiberboard composites in sheet form sold to fabricators of high-performance gaskets and sealing materials and electrical insulating products. It also includes pencil slats made from recycled newsprint and cardboard, which F-20 replaces wood. The Company's Logistics Management Operation, also included in Other Products and Services, provides specialized distribution and warehouse services to other Lydall companies and various American, Canadian, and European manufacturers of newsprint, specialty papers and other assorted products. The table below presents sales and operating income by segment as used by the chief operating decision-maker of Lydall (the Operating Committee led by the President and CEO) for the years ended December 31, 1998, 1997, and 1996.
- ------------------------------------------------------------------------------------------------------------------------ Heat- Other In thousands Management Filtration Paperboard Woven Products and Reconciling Consolidated For the Years Ended Products Products Products Products Services Items Totals - ------------------------------------------------------------------------------------------------------------------------ December 31, 1998 Sales $ 85,287 $ 59,102 $ 40,418 $ 5,721 $ 48,294 ($ 8,815) $ 230,007 Operating income $ 8,121 $ 5,029 $ 2,125 $ (10,284) $ 2,345 ($ 1,057) $ 6,279 ........................................................................................................................ December 31, 1997 Sales $ 87,936 $ 60,047 $ 40,391 $ 9,842 $ 55,427 ($ 9,354) $ 244,289 Operating income $ 15,785 $ 9,045 $ 4,290 $ (1,465) $ 5,349 ($ 251) $ 32,753 ........................................................................................................................ December 31, 1996 Sales $ 99,244 $ 63,577 $ 41,649 $ -- $ 57,458 ($ 9,276) $ 252,652 Operating income $ 18,071 $ 10,861 $ 6,422 $ -- $ 6,213 ($ 2,290) $ 39,277 - ------------------------------------------------------------------------------------------------------------------------
A reconciliation of total segment sales to total consolidated sales and of total segment operating income to total consolidated operating income for the years ended December 31, 1998, 1997, and 1996 is as follows:
- ----------------------------------------------------------------------------------------- In thousands For the years ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------- SALES Total segment sales $ 238,822 $ 253,643 $ 261,928 Elimination of intersegment sales (8,815) (9,354) (9,276) ......................................................................................... Consolidated sales $ 230,007 $ 244,289 $ 252,652 - ----------------------------------------------------------------------------------------- OPERATING INCOME Total segment operating income $ 7,336 $ 33,004 $ 41,567 Corporate expenses (844) (269) (2,588) Elimination of intersegment income (213) 18 298 ......................................................................................... Consolidated operating income $ 6,279 $ 32,753 $ 39,277 - -----------------------------------------------------------------------------------------
Asset information by reportable segment is not reported, since the Company does not produce such information internally. F-21 Sales and long-lived asset information by geographic area as of and for the years ended December 31, 1998, 1997, and 1996 is as follows:
- ------------------------------------------------------------------------------------------------------ Sales Long-Lived Assets ------------------------------- ------------------------------- In thousands 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ United States $ 219,186 $ 233,122 $ 237,379 $ 97,537 $ 82,893 $ 73,928 France 10,821 11,167 15,273 8,983 9,794 11,820 Germany -- -- -- 29,509 -- -- ...................................................................................................... Total $ 230,007 $ 244,289 $ 252,652 $ 136,029 $ 92,687 $ 85,748 - ------------------------------------------------------------------------------------------------------
Foreign sales are based on the country in which the sales originate, i.e., where the legal entity is domiciled. Lydall has a major customer, which accounted for sales of $35.0 million, $47.2 million, and $41.9 million in 1998, 1997, and 1996, respectively. These sales are reported in the Heat-Management Products segment. INCOME TAXES The provision (benefit) for income taxes consists of the following:
- ---------------------------------------------------------------------------------------------------------- In thousands For the years ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Current Federal $ 5,163 $ 9,827 $ 13,662 State 1,264 1,915 2,072 Foreign (187) 341 171 .......................................................................................................... Total current $ 6,240 $ 12,083 $ 15,905 .......................................................................................................... Deferred Federal $ (3,772) $ 347 $ (385) State (678) 127 194 Foreign (608) (15) (596) .......................................................................................................... Total deferred $ (5,058) $ 459 $ (787) .......................................................................................................... Provision for income taxes $ 1,182 $ 12,542 $ 15,118 - ----------------------------------------------------------------------------------------------------------
The statutory tax rate in France increased from 36.6 percent to 41.7 percent retroactive to January 1, 1997. The provision for income taxes for 1997 includes $127 thousand for the impact of the higher tax rate on the deferred tax liability balance. F-22 The following is a reconciliation of the difference between the actual provision for income taxes and the provision computed by applying the federal statutory tax rate on earnings.
- -------------------------------------------------------------------------------------------------------------- For the years ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Statutory federal income tax rates 35% 35% 35% .............................................................................................................. State income taxes, net of federal tax deduction 7.1 3.9 3.7 Exempt FSC foreign trade income (13.4) (1.0) (.9) Tax exempt income (.3) (.8) (.9) Other (6.4) (.7) 1.0 .............................................................................................................. Effective income tax rates 22.0% 36.4% 37.9% - --------------------------------------------------------------------------------------------------------------
The decrease in the effective tax rate for 1998 is principally attributable to the proportionate increase of exempt foreign trade income to pretax income. The following is a schedule of the net current deferred tax assets and long-term deferred tax liability accounts by tax jurisdiction as of December 31:
- --------------------------------------------------------------------------------------------------- 1998 1997 ------------------------------- ------------------------------ LONG-TERM Long-term CURRENT DEFERRED DEFERRED TAX Current Deferred Deferred Tax In thousands TAX ASSETS LIABILITIES Tax Assets Liabilities - --------------------------------------------------------------------------------------------------- Federal $3,794 $ 4,594 $2,215 $ 7,353 State 2,476 3,694 1,015 2,739 Foreign 515 2,438 356 2,887 ................................................................................................... Total $6,785 $10,726 $3,586 $12,979 - ---------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------- 1998 1997 ------------------------------- ------------------------------ DEFERRED TAX DEFERRED TAX Deferred Tax Deferred Tax In thousands ASSETS LIABILITIES Assets Liabilities - --------------------------------------------------------------------------------------------------- Accounts receivable $ 634 $ -- $ 568 $ -- Inventory 1,202 -- 434 -- Plant and equipment -- 11,099 -- 10,655 Other accrued expenses 3,337 -- 1,640 -- Retirement accounts 1,394 -- 804 -- Other, net 591 -- -- 2,184 ................................................................................................... Total $7,158 $11,099 $3,446 $12,839 - ---------------------------------------------------------------------------------------------------
The Internal Revenue Service is currently examining the Company's federal income tax return for 1996. Lydall's management believes any potential issues resulting from this examination will be immaterial to the consolidated financial position or results of operations of the Company. F-23 Unremitted earnings of foreign subsidiaries, which are deemed to be permanently invested amounted to $433 thousand at December 31, 1998. The unrecognized deferred tax liability on those earnings is not practical to calculate. CONTINGENCIES On or about March 10, 1986, the United States Environmental Protection Agency ("EPA") notified a former subsidiary of the Company that it and other entities may be potentially responsible in connection with the release of hazardous substances at a landfill and property located adjacent to a landfill located in Michigan City, Indiana. Lydall has received no further communication from the EPA in the 12 years following that notice. The preliminary indication, based on the Site Steering Committee's volumetric analysis, is that the alleged contribution to the waste volume at the site of the plant once owned by a former subsidiary is approximately 0.434 percent of the total volume. The portion of the 0.434 percent specifically attributable to the former subsidiary by the current operator of the plant is approximately 0.286 percent. The EPA completed its Record of Decision for the site and estimated the total cost of remediation to be between $17 million and $22 million. Based on the alleged volumetric contribution of its former subsidiary to the site, and on the EPA's estimated remediation costs, Lydall's alleged total exposure would be less than $100 thousand, which has been accrued. There are over 800 potentially responsible parties ("prp") that have been identified by the Site Steering Committee. Of these, 38, not including the Company's former subsidiary, are estimated to have contributed over 80 percent of the total waste volume at the site. These prp's include Fortune 500 companies, public utilities, and the State of Indiana. The Company believes that, in general, these parties are financially solvent and should be able to meet their obligations at the site. The Company has reviewed Dun & Bradstreet reports on several of these prp's, and based on these financial reports, does not believe Lydall will have any material additional volume attributed to it for reparation of this site due to insolvency of other prp's. In June 1995, the Company and its former subsidiary were sued in the Northern District of Indiana by the insurer of the current operator of the former subsidiary's plant seeking contribution. In October 1997, the insurer made a settlement demand of $150,591 to the Company in exchange for a release of the Company's liability at the site and indemnification from the current operator against site-related claims. The Company executed a settlement agreement with the insurer and current operator for a full site release; however, the current operator subsequently backed out of the agreement. In June 1998, a Stipulation for Dismissal signed by all parties was filed to end current litigation until total liability at the site could be defined. Management believes the ultimate disposition of this matter will not have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. On March 19, 1996, patent litigation brought by ATD Corporation ("ATD") against Lydall in the U.S. District Court for the Eastern District of Michigan was concluded with the jury finding in favor of Lydall and with all of ATD's claims for damages being denied. A notice of appeal to the U.S. Court of Appeals for the Federal Circuit regarding this litigation was filed by ATD on March 28, 1997. The appeal issues were fully briefed and argued in January 1998. On October 6, 1998, a decision on the appeal was issued upholding the District Court decision on non-infringement and reversing the decision on the invalidity of ATD's patents. No further appeal is expected. F-24 By letter dated July 13, 1998, Lydall Eastern, Inc., a subsidiary of Lydall, Inc. ("Lydall Eastern"), was identified as a "potentially responsible party" by the EPA in connection with the claimed release or threat of release of hazardous substances at a site known as the Rogers Fibre Mill in Buxton, Maine (the "site"). Lydall Eastern merged with the owner and operator of a fiberboard mill at the site whose ownership dated back to approximately 1912. Lydall Eastern ceased operation at the site in 1980. In 1982, Lydall Eastern conveyed its interest in the site. The EPA is spending public funds to investigate and take action with respect to the site. The EPA likely will seek to recover the funds it has spent, and will spend, at the site from potentially responsible parties, including Lydall Eastern. At this time, it is not possible to predict what future liability or costs might be incurred by Lydall Eastern in connection with the site. COMPREHENSIVE INCOME The following tables disclose the balance by classification within accumulated other comprehensive income.
- -------------------------------------------------------------------------------------------------------------------- Minimum Accumulated Foreign Unrealized Pension Other Currency Gain (Loss) Liability Comprehensive In thousands Adjustment on Securities Adjustment Income (Loss) - -------------------------------------------------------------------------------------------------------------------- BEGINNING BALANCE JANUARY 1, 1998 $ 76 $ 22 $ (262) $ (164) CHANGE YEAR-TO-DATE 637 (22) (522) 93 .................................................................................................................... ENDING BALANCE DECEMBER 31, 1998 $ 713 $ -- $ (784) $ (71) - -------------------------------------------------------------------------------------------------------------------- Beginning Balance January 1, 1997 $ 1,425 $ 77 $ (38) $ 1,464 Change Year-to-Date (1,349) (55) (224) (1,628) .................................................................................................................... Ending Balance December 31, 1997 $ 76 $ 22 $ (262) $ (164) - -------------------------------------------------------------------------------------------------------------------- Beginning Balance January 1, 1996 $ 2,091 $ (5) $ (454) $ 1,632 Change Year-to-Date (666) 82 416 (168) .................................................................................................................... Ending Balance December 31, 1996 $ 1,425 $ 77 $ (38) $ 1,464 - --------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table summarizes quarterly financial information for 1998 and 1997. In management's opinion, all adjustments necessary to present fairly the information for such quarters have been reflected below:
- -------------------------------------------------------------------------------------------------------------- 1(st) Quarter 2(nd) Quarter 3(rd) Quarter 4(th) Quarter - -------------------------------------------------------------------------------------------------------------- In thousands Except per-share data 1998 1997 1998 1997 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------- Net Sales $ 56,542 $ 61,971 $ 59,244 $ 64,019 $ 56,495 $ 59,377 $ 57,726 $ 58,922 Gross Margin 16,016 19,263 17,548 20,036 16,329 18,873 14,924 19,469 Net Income (Loss) $ 3,549 $ 5,625 $ 3,851 $ 5,716 $ 3,154 $ 5,515 $ (6,352) $ 5,055 .............................................................................................................. Basic EPS $ .22 $ .33 $ .24 $ .34 $ .20 $ .33 $ (.41) $ .31 Diluted EPS $ .22 $ .32 $ .24 $ .33 $ .20 $ .32 $ (.41) $ .30 - --------------------------------------------------------------------------------------------------------------
The sum of EPS for the four quarters in 1998 does not agree to the EPS as reported in the Income Statement for the entire year due to rounding. F-25 Schedule II LYDALL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- ---------------------------------------------------------------------------------------------------------------------------- ADDITIONS - --------------------------------------------------------------------- ------------------ ------------------------------ CHARGED CHARGED BALANCE TO TO AT COSTS OTHER JANUARY AND ACCOUNTS DEDUCTIONS BALANCE AT $ THOUSANDS 1, EXPENSES DESCRIBE DESCRIBE DECEMBER 31, - --------------------------------------------------------------------- ------------------ ------------------------------ 1998 ALLOWANCE FOR DOUBTFUL RECEIVABLES $1,381 $ 556 $ -- $ (433)(1) $ 1,504 ACCUMULATED AMORTIZATION OF INTANGIBLE ASSETS 7,526 396 -- -- 7,922 ACCRUED ENVIRONMENTAL 384 -- -- (339)(2) 45 ACCUMULATED AMORTIZATION OF GOODWILL 2,807 1,656 -- -- 4,463 LIFO RESERVE 1,172 173 -- (129)(5) 1,216 INVENTORY OBSOLESCENCE RESERVE 577 511 10(4) (449)(6) 649 - ---------------------------------------------------------------------------------------------------------------------------- 1997 Allowance for doubtful receivables $1,727 $ 258 $ -- $ (604)(1) $ 1,381 Accumulated amortization of intangible assets 7,741 450 -- (665)(3) 7,526 Accrued reorganization 28 -- -- (28)(7) -- Accrued environmental 998 20 (128)(4) (506)(8) 384 Accumulated amortization of goodwill 1,688 1,119 -- -- 2,807 LIFO reserve 1,740 -- -- (568)(5) 1,172 Inventory obsolescence reserve 519 254 (13)(4) (183)(6) 577 - ---------------------------------------------------------------------------------------------------------------------------- 1996 Allowance for doubtful receivables $1,938 $ 235 $ -- $ (446)(1) $ 1,727 Accumulated amortization of intangible assets 8,446 772 -- (1,477)(3) 7,741 Accrued reorganization 137 -- -- (109)(2) 28 Accrued environmental 1,072 -- (62)(4) (12)(2) 998 Accumulated amortization of goodwill 1,103 585 -- -- 1,688 LIFO reserve 2,493 316 -- (1,069)(5) 1,740 Inventory obsolescence reserve 612 453 (6)(4) (540)(6) 519 - ----------------------------------------------------------------------------------------------------------------------------
(1) Uncollected receivables written off and adjustments to allowance. (2) Disbursements of amounts previously accrued. (3) Write-off of fully amortized assets. (4) Record foreign currency translation adjustments. (5) Adjustment of LIFO reserve for inventory levels. (6) Write-off of obsolete inventory and adjustment to reserve level. (7) Adjustment to reserve level. (8) Disbursements of amounts previously accrued and adjustments to reserve level. S-1 INDEX TO EXHIBITS
PAGE IN EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF DOCUMENT NUMBERED COPY - ----------- ------------------------------------------------------------------------------------- ------------------- 3.1 Amended and Restated Certificate of Incorporation of the Registrant dated August 14, 1995 (filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q dated November 9, 1995, and incorporated herein by this reference). 3.2 Bylaws of the Registrant (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 4.1 Certain long-term debt instruments, each representing indebtedness in an amount equal to less than 10 percent of the Registrant's total consolidated assets, have not been filed as exhibits to this Annual Report on Form 10-K. The Registrant will file these instruments with the Commission upon request. 10.1* Amended and restated, Lydall, Inc. 1982 Stock Incentive Compensation Plan, amended through May 14, 1991 (filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K dated March 26, 1992 and incorporated herein by this reference). 10.2* Lydall, Inc. Senior Management Annual Incentive Compensation Plan (filed as Exhibit 3.5 to the Registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 10.3* Lydall, Inc. Management Annual Incentive Compensation Plan (filed as Exhibit 3.6 to the Registrant's Registration Statement on Form 8-B dated October 16, 1987, and incorporated herein by this reference). 10.4* Employment Agreement with Leonard R. Jaskol dated March 1, 1995 (filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K dated March 27, 1995, and incorporated herein by this reference). 10.5* Employment Agreement with John E. Hanley dated March 10, 1995 (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.6* Employment Agreement with Elliott F. Whitely dated March 10, 1995 (filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.7* Employment Agreement with Raymond J. Lanzi dated March 10, 1995 (filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.8* Employment Agreement with William J. Rankin, dated March 10, 1995 (filed as Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.9* Employment Agreement with Carole F. Butenas dated March 10, 1995 (filed as Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.10* Employment Agreement with Mona G. Estey dated March 10, 1995 (filed as Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.11* Employment Agreement with Mary A. Tremblay dated March 10, 1995 (filed as Exhibit 10.10 to the Registrant's Quarterly Report on Form 10-Q dated May 9, 1995, and incorporated herein by this reference). 10.12* Employment Agreement with John J. Worthington dated November 7, 1996 (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K dated March 27, 1997 and incorporated herein by this reference).
PAGE IN EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF DOCUMENT NUMBERED COPY - ----------- ------------------------------------------------------------------------------------- ------------------- 10.13* Lydall, Inc. Board of Directors Deferred Compensation Plan effective January 1, 1991 (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference). 10.14* Lydall, Inc. Supplemental Executive Retirement Plan effective January 1, 1994 (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K dated March 27, 1996, and incorporated herein by this reference). 10.15* Amended and restated, 1992 Stock Incentive Compensation Plan, dated May 14, 1992, amended through May 14, 1997 (filed as Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 dated April 17,1998, Reg. No. [33-93768], and incorporated herein by this reference). 10.16* Employment Agreement with James P. Carolan dated February 1, 1999, filed herewith. 10.17* Employment Agreement with Christopher R. Skomorowski dated February 1, 1999, filed herewith. 10.18 Asset Purchase Agreement between Lydall New York, Inc. and Textile Technologies Industries, Inc. (filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K dated March 27, 1997, and incorporated herein by this reference). 10.19 Asset Purchase Agreement between CharterMed, Inc. and Charter Medical, Ltd. (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10-K dated March 16, 1998, and incorporated herein by this reference). 10.20 Asset Purchase Agreement between Lydall Central, Inc. and Engineered Thermal Systems, Inc. (filed as Exhibit 10.1 to the Registrant's Quarterly report on Form 10-Q dated May 7, 1998, and incorporated herein by this reference). 10.21 Purchase and Sale Agreement (English Translation) signed as of December 30, 1998 by and between HOHENSTAUFEN EINHUNDERTSTE Vermogensverwaltungs GmbH, a wholly owned subsidiary of Lydall, Inc. and Gerhardi & Cie GmbH & Co. KG related to the purchase of all the outstanding shares of Gerhardi & Cie GmbH & Co. KG (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed January 14, 1999). 21.1 List of subsidiaries of the Registrant, filed herewith. 23.1 Consent of PricewaterhouseCoopers LLP, filed herewith. 24.1 Power of Attorney, dated March 10, 1999, authorizing Christopher R. Skomorowski and/or John E. Hanley to sign this report on behalf of each member of the Board of Directors indicated therein, filed herewith. 27.1 Financial Data Schedule, filed herewith. *Management contract or compensatory plan. B), REPORTS ON FORM 8-K: 99.1 The Company filed a Current Report on Form 8-K dated December 3, 1998 reporting the Board of Directors' election of Christopher R. Skomorowski to succeed Leonard R. Jaskol as President and Chief Executive Officer. 99.2 The Company filed a Current Report on Form 8-K dated January 14, 1999 reporting the acquisition of Gerhardi & Cie. GmbH and Co. KG by a wholly owned subsidiary of Lydall, Inc., the appointment of Roger M. Widmann as Chairman of the Board of Directors, and the Company's recording of non-recurring expenses and write-offs in the fourth quarter ended December 31, 1998, totaling approximately $9 million.
EX-10.16 2 EXHIBIT 10.16 Exhibit 10.16 AGREEMENT THIS AGREEMENT made this 1st day of February 1999 by and between LYDALL, INC. and its subsidiaries (the "Company") and James P. Carolan (the "Executive"). W I T N E S S E T H : RECITALS. Executive is employed by the Company as a President of the Technical Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc. The Company and Executive have agreed that if Executive should cease to be President of the Technical Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc. under the circumstances set forth in this Agreement his employment will be continued in another capacity for a specified period; NOW, THEREFORE, the Company and Executive, in consideration of the mutual promises set forth below, agree as follows: 1. EXECUTIVE TO SERVE AS PRESIDENT OF THE TECHNICAL PAPERS DIVISION OF LYDALL EASTERN, INC. AND EXECUTIVE VICE PRESIDENT OF 1 LYDALL, INC. The Executive shall continue to act as President of the Technical Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc., subject to the direction of Lydall, Inc.'s, Chief Executive Officer. 2. DEFINITIONS. The phrase "Change of Control," as used in this Agreement, shall mean i) an acquisition of the Company by means of a merger or consolidation or purchase of substantially all of its assets if and when incident thereto (a) the composition of the Board of Directors of the Company (the "Board") or its successor changes so that a majority of the Board is not comprised of individuals who were members of the board immediately prior to such merger, consolidation or purchase of assets or (b) the stockholders of the Company acquire a right to receive, in exchange for or upon surrender a majority of their stock, cash or other securities or a combination of the two; and/or ii) the acquisition by a person (as that term is hereafter defined) of the voting rights with respect to 25 percent or more of the outstanding Common Stock of the Company if such person was not an officer of director of the Company on the date of this 2 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 3 prior to termination of Executive; except that such notice would not be required if, in the Chief Executive Officer's discretion, the Company would be immediately harmed. The phrase "Fringe Benefits," as used in this Agreement, shall mean the benefits listed on Exhibit A hereto. 3. TERMINATION AFTER CHANGE OF CONTROL. If a Change of Control occurs after the date of this Agreement and subsequent to such Change of Control (a) Executive shall resign as President of the Technical Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc. of the Company within one year from the time such Change of Control occurs or (b) another shall be appointed or elected President of the Technical Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc. by the Company in place of Executive at any time prior to April 1, 2008, Executive's normal retirement date (such resignation or replacement of Executive being hereinafter referred to as a "Termination"), Executive shall continue to be an employee of the Company and be compensated and receive benefits in accordance with this Agreement; provided, however, that if Executive's resignation shall be requested by the Company for cause or Executive is replaced for cause, such 4 resignation or replacement shall not be deemed a Termination for the purpose of this Agreement and shall not entitle Executive to continue to be an employee of the Company and be compensated and receive the benefits provided for in this Agreement. 4. TERMINATION PRIOR TO CHANGE OF CONTROL. If prior to an Change of Control (a) the Executive shall resign as President of the Technical Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc. of the Company at the request of the Company or because the duties and responsibilities of the President of the Technical Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc. have been significantly modified by the Company without his consent or (b) another is appointed President of the Technical Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc. in place of the Executive (such resignation or replacement of the Executive being hereinafter referred to a "Termination"), the Executive shall continue to be an employee of the Company and be compensated and receive benefits in accordance with this Agreement; provided, however, that if Executive's resignation shall be requested by the Company for Cause or if Executive is replaced for Cause, such resignation or replacement 5 shall not be deemed a Termination for the purpose of this Agreement and shall not entitle Executive to continue to be an employee of the Company and be compensated and receive the benefits provided for in this Agreement. 5. TERMINATION FOR CAUSE If Executive's employment is terminated for cause prior to the beginning of the Employment Period, (either prior or subsequent to a Change of Control), earned but unpaid Base Salary will be paid on a prorated basis for the year in which the termination occurs, plus accrued vacation benefits, but all other Company obligations shall cease as of the date of termination for cause, unless otherwise provided in separate agreements. 6. EMPLOYMENT PERIOD. In the event of a Termination pursuant to paragraph 3b above, Executive shall continue to be an employee of the Company for a period of two years from the date of such Termination, and in the event of a Termination pursuant to either Paragraph 3a or Paragraph 4 above, Executive shall continue to be an employee of the Company for a period of one year from the date of such Termination, such two year period or one year period, as the case may be, being hereinafter referred to as the "Employment Period"; provided, however, that (a) 6 Executive may end the Employment Period at any time in his absolute discretion and the Employment Period may be ended by the Company at any time for cause, (b) the Employment Period shall not extend beyond April 1, 2008, Executive's normal retirement date, and (c) the Employment Period shall terminate if and when the Executive becomes employed on substantially a full time basis by another entity or as a partner or sole proprietor and with Executive's full recognition of his responsibilities under Paragraph 11 below (but such termination of the Employment Period under clause (a), (b) or (c) above shall not preclude the Executive from being paid for his obligation not to compete as provided in Paragraphs 11 and 12 below). 7. TITLE AND DUTIES. During the Employment Period, the Executive shall perform such duties and undertake such responsibilities as are assigned to him from time to time by the Chief Executive Officer; provided, however, that such duties and responsibilities shall be commensurate with his status as a senior executive of the Company and bear a reasonable relationship to the business of the Company. 8. COMPENSATION. The Company shall pay to Executive during the Employment Period an annual salary (the "Annual 7 Salary") equal to one-third (1/3rd) of the aggregate of the base salary and bonuses paid to him during the period commencing three (3) years prior to the date of Termination and ending on the date of Termination. Payment shall be made twice monthly and be appropriately prorated during the first and last month of the Employment Period. In addition, during the Employment Period Executive shall receive (a) the same Fringe Benefits that he would have been entitled to receive if he had continued to be President of the Technical Papers Division of Lydall Eastern, Inc. and Executive Vice President of Lydall, Inc. during such period, (b) reimbursement for reasonable expenses incurred by him in the performance of his duties and (c) the use of an automobile on substantially the same basis as prior to his termination. If the Employment Period shall end, pursuant to Paragraph 6 above, prior to the end of the two year term provided for in Paragraph 3b above or the one year term provided for in Paragraph 3a or Paragraph 4 above, as the case may be, the Annual Salary (but, except to the extent provided in Paragraph 10 below, not fringe benefits and perquisites) shall continue to be payable until the end of the non-compete period provided for in Paragraph 11 below and shall be deemed payment for Executive's obligation not to 8 compete as provided in said Paragraph 11, and such Annual Salary for the remainder of the non-compete period shall be paid to the Executive in a lump sum cash payment within ten days after the end of the Employment Period. 9. TAX GROSS-UP. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided, by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9 (a Payment') would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended and then in effect (the 'Code') (or any similar excise tax) or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the ('Excise Tax'), then the Executive shall be entitled to receive an additional payment (a 'Gross-Up Payment') in an amount such that after payment by the Executive of all Federal, state, local or other taxes (including any interest or penalties imposed with 9 respect to any such taxes), including, without limitation, any such income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. An Executive may receive Gross-Up Payments under this Section 9 whether or not the Executive actually receives other payments or benefits under the Agreement. (i) Subject to the provisions of paragraph (ii) of this Section 9, all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by PricewaterhouseCoopers (the "Accounting Firm') which shall provide detailed supporting calculations both to the Company and the Executive within 20 calendar days of the receipt of written notice from the Executive that there has been a Payment, or such earlier time as is 10 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 11 possible that Gross-Up Payments which will not have been made by the Company should have been made ('Underpayment'), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies described in paragraph (ii) of this Section 9 and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to or for the benefit of the Executive within five days of the receipt of the Accounting Firm's determination. All determinations made by the Accounting Firm in connection with any Gross-Up Payment or Underpayment shall be final and binding upon the Company and the Executive. (ii) The Executive shall notify the Company in writing of any claim asserted in writing by the Internal Revenue Service to the Executive that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but not later than 60 days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay 12 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 13 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) 14 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 15 the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. MEDICAL INSURANCE COVERAGE. Executive and his beneficiaries shall continue to participate in all life, health, disability and other welfare plans or programs existing at the time of a Change of Control in which they were participating at such time (or substantially similar plans or programs), to the extent that such continued participation is possible under the general terms and conditions of such plans and programs throughout the Employment Period. Company and Executive will continue to pay the same relative portion of the cost of each such plan or program as each were paying at the time of the Change of Control. Further, in the event that Executive's or his beneficiaries' continued participation in any group plan or program is not permitted, then in lieu thereof, Company shall acquire individual insurance 16 policies providing substantially similar coverage for Executive and his beneficiaries, and Company and Executive will pay the same relative portion of the cost of such comparable coverage plans or programs or in the event that Company cannot acquire individual insurance policies providing substantially similar coverage, the Company will self-insure the Executive, and the Executive in the case of self insurance will pay the COBRA rate then applicable to the Company's group plan. For purposes of COBRA, a qualifying event is not deemed to occur until the Employment Period, as defined in paragraph 6, has expired. 11. NON-COMPETE. During the Employment Period Executive will not compete directly or indirectly with the Company or be directly or indirectly interested in any business competing with the business being conducted by the Company. Ownership of less than 1 percent of the issued and outstanding capital stock of any corporation the stock of which is listed upon a national exchange or regularly quoted by the National Association of Security Dealers Automated Quotation (NASDAQ) shall not be deemed to create a material conflict of interest as contemplated hereunder. For the purpose of this Paragraph 11, the Employment Period shall be deemed to extend two years from Termination if such 17 Termination occurred pursuant to Paragraph 3b above or one year from Termination if such Termination occurred pursuant to Paragraph 3a or Paragraph 4 above, notwithstanding any prior ending of the Employment Period pursuant to Paragraph 6 above. 12. TRADE SECRETS. Executive shall regard and preserve as confidential and not use, communicate or disclose to any person, orally, in writing or by a publication, any secret or confidential information of the Company, regardless of where or when or how acquired by the Company, or of others which the Company is obligated to maintain in confidence. This obligation shall exist during the Employment Period and after the termination of the Employment Period until such information becomes a matter of public knowledge through no act of Executive. At the termination of employment by the Company, Executive agrees to return to employer all documents, writings, drawings and other property of the Company within his custody and control. 13. INDEMNIFICATION. The parties agree to execute a separate Indemnification Agreement in the form attached as Exhibit B. 14. ARBITRATION. The Company and Executive undertake to execute this Agreement in good faith. Any controversy or claim 18 arising out of or relating to this Agreement other benefit plans or arrangements with the Company or breach of this Agreement, shall receive prompt attention by the other party and both parties agree to make good faith efforts to resolve any controversy or claim in an amicable way. If the Company and Executive fail to settle the controversy or claim in an amicable way, they agree to submit the matter to be settled by arbitration in accordance with the Arbitration Rules of the American Arbitration Association. This Agreement, its execution, interpretation and performance shall be governed by the laws of the state of Connecticut of the United States of America. The arbitration will be held in Hartford, Connecticut, or such other place as may be agreed at the time by the parties. The award of this arbitration shall be final and binding both for the Company and Executive and may be entered in any court with jurisdiction. 15. LITIGATION EXPENSES. In the event of any action, suit, proceeding, arbitration or claim between or by or against the Company and/or the Executive with respect to this Agreement, other benefit plans or arrangements between the parties, and the assertion or enforcement of his rights hereunder, the Company 19 shall promptly pay or reimburse the Executive upon such Executive's written demand therefor, for eighty (80) percent of his costs and expenses (including costs and fees of witnesses, evidence and attorney fees and expenses) relating to or arising out of (directly or indirectly) such action, suit, proceeding, arbitration or claim, on a monthly basis, as such costs and expenses are incurred in investigating, prosecuting, defending or preparing to prosecute or defend, regardless of the outcome thereof. In no event shall the Executive be required to reimburse the Company for any of the costs and expenses relating to any such action, suit, proceeding, arbitration or claim. The obligation of the Company under this Section 15 shall survive the termination for any reason of this Agreement. This Section 15 cannot be amended or modified to affect the rights of the Executive without the prior written consent of such Executive which specifically refers to this Section 15. 16. RABBI TRUST. Within sixty (60) days of the date of this Agreement, the Company shall enter into a trust agreement (the "Trust Agreement") with a third party institutional trustee, substantially in the form set forth in Rev. Proc. 92-64, 1992-2 C.B. 422, to assist it in meeting its obligations to the 20 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 21 party that has been granted corporate trustee powers under state law. The Trust Agreement shall also provide that the provisions of the Trust described in this Paragraph 16 may not be amended after a Change of Control. 17. ENTIRE AGREEMENT. This Agreement embodies the whole understanding between the parties hereto with respect to the subject matter hereof and supersedes all earlier agreements. There are no inducements, promises, terms, conditions or obligations made or entered into by either party other than as contained herein. 18. MODIFICATION. This Agreement may not be changed orally, but only be means of an agreement in writing signed by the parties hereto. 19. WAIVER. The waiver by any party of a breach of any provision of this Agreement shall not operate as, or be construed as, a waiver of any subsequent breach. 20. APPLICABLE LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. 21. SUCCESSORS This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of 22 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. 23 IN WITNESS WHEREOF, the parties have hereunto set their hands as of the date first above written. LYDALL, INC. By ----------------------------- ----------------------- Roger M. Widmann, Chairman, James P. Carolan Compensation and Stock Option President of the Technical Papers Committee Division of Lydall Eastern, Inc., and Executive Vice President of Lydall, Inc. By ----------------------------- Christopher R. Skomorowski Chief Executive Officer 24 EXHIBIT A - FRINGE BENEFITS 1. Medical Benefits a. Lydall, Inc. Health Care Payment Plan for Salaried Employees (includes dental benefits) b. Lydall, Inc. Health Care Expense Plan c. Lydall, Inc. Health Care Spending Reimbursement Plan 2. Disability Benefits a. Lydall, Inc. Short Term Disability Plan b. Lydall, Inc. Executive Group Long Term Disability Plan 3. Life Insurance a. Executive Life Insurance Plan b. Accidental Death and Dismemberment Plan c. Family Assistance Program d. Business Travel Accident Plan 4. Retirement Plans a. Lydall, Inc. Pension Plan No. 1A b. Lydall, Inc. Profit Sharing Plan No. 1 25 c. Lydall, Inc. 401(k) Plan d. Lydall, Inc. Supplemental Executive Retirement Plan 5. Stock Plans a. Lydall, Inc. Employee Stock Purchase Plan b. Lydall, Inc. 1992 Stock Incentive Compensation Plan c. Lydall, Inc. 1982 Stock Incentive Compensation Plan 6. Other a. Holidays, vacations b. Lydall, Inc. Dependent Care Assistance Plan 26 EXHIBIT B INDEMNIFICATION AGREEMENT This Agreement, made and entered into this __ day of ________, 1999 ("Agreement"), by and between Lydall, Inc., a Delaware corporation and it subsidiaries ("Company"), and James P. Carolan ("Indemnitee"): WHEREAS, highly competent persons are becoming more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation; and WHEREAS, the current impracticability of obtaining adequate insurance and the uncertainties relating to indemnification have increased the difficulty of attracting and retaining such persons; WHEREAS, the Board of Directors of the Company has determined that the inability to attract and retain such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; and WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: Section 1. SERVICES BY INDEMNITEE. Indemnitee agrees to serve as an officerand employee of the Company. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. 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 2 successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. Section 6. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. Section 7. ADVANCEMENT OF EXPENSES. The Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within ten days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Section 8. PROCEDURES FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shell, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 8(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case; (i)if a Change in Control (as hereinafter defined) shall be made in the Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall 3 not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee or (C) if so directed by the Board of Directors, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with this person, persons or entity making such determination shall be borne by the Company (Irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b) hereof, the Independent Counsel shall be selected as provided in this Section 8(c). If a Change of Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; PROVIDED, HOWEVER, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 17 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee 4 of a written request for indemnification pursuant to Section 8(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court of by such other person as the Court shall designate, and the person with respect to whom all objections are so resolved or the person so appreciated shall act as Independent Counsel under Section 8(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 8(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 8(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 10(a)(iii) of this Agreement, Independent Counsel shall be discharged and relived of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). Section 9. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 8(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. (b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement of conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. 5 Section 10. REMEDIES OF INDEMNITEE. (a) In the event that (i) a determination is made pursuant to Section 8 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 7 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 8(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5 or 6 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within 10 (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the data on which Indemnitee first has the right to commence such proceeding pursuant to this Section 10(a); PROVIDED, HOWEVER, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5 of this Agreement. (b) In the event that a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 10 shall be conducted in all respects as a DE NOVO trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section 10 the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. 6 (d) In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 17 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. Section 11. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the By-Laws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnities, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extend that Indemnities has otherwise 7 actually received such payment under any insurance policy, contract, agreement or otherwise. Section 12. DURATION OF AGREEMENT. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the date that Indemnities shall have ceased to serve as a director, officer, employee, or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Company; or (b) the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 10 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. Section 13. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed to as to give effect to the intent manifested thereby. Section 14. EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein prior to a Change in Control, unless the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors. Section 15. IDENTICAL COUNTERPARTS. This agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. 8 Section 16. HEADINGS. The headings of the paragraphs of this Agreement re inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. Section 17. DEFINITIONS. (a)The phrase "Change of Control," as used in this Agreement, shall mean i) an acquisition of the Company by means of a merger or consolidation or purchase of substantially all of its assets if and when incident thereto (A) the composition of the Board of Directors of the Company (the "Board") or its successor changes so that a majority of the Board is not comprised of individuals who were members of the board immediately prior to such merger, consolidation or purchase of assets or (B) the stockholders of the Company acquire a right to receive, in exchange for or upon surrender a majority of their stock, cash or other securities or a combination of the two; and/or ii) the acquisition by a person (as that term is hereafter defined) of the voting rights with respect to 25 percent or more of the outstanding Common Stock of the Company if such person was not an officer of director of the Company on the date of this Agreement; and/or iii) the election or appointment to the Board of any director or directors whose appointment or election or nomination for election was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date hereof or whose election, appointment or nomination for election was previously so approved. (b) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. (c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Effective Date" means March 10, 1995. (e) "Expenses" shall include all reasonable attorney's fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding. 9 (f) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (g) "Proceeding" includes any action, suite, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative, or investigative, except one (i) initiated by an Indemnitee pursuant to Section 10 of this Agreement to enforce his rights under this Agreement or (ii) pending on or before the Effective Date. Section 18. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Section 19. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. Section 20. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: James P. Carolan 11 Runnymede Drive North Hampton, NH 03862 10 (b) If to the Company to: Mary A. Tremblay General Counsel and Secretary Lydall, Inc. P.O. Box 151 One Colonial Road Manchester, CT 06045-0151 or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. Section 21. GOVERNING LAW. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. Section 22. MISCELLANEOUS. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first written. ATTEST: LYDALL, INC. By By ----------------------------- --------------------------------- INDEMNITEE ----------------------------------- James P. Carolan 11 Runnymede Drive North Hampton, NH 03862 11 EX-10.17 3 EXHIBIT 10.17 Exhibit 10.17 AGREEMENT THIS AGREEMENT made this lst day of February 1999 by and between LYDALL, INC. its subsidiaries (the "Company") and Christopher R. Skomorowski (the "Executive"). W I T N E S S E T H : RECITALS. Executive is employed by the Company as President and Chief Executive Officer. The Company and Executive have agreed that if Executive should cease to be President and Chief Executive Officer of Lydall, Inc. under the circumstances set forth in this Agreement his employment will be continued in another capacity for a specified period; NOW, THEREFORE, the Company and Executive, in consideration of the mutual promises set forth below, agree as follows: 1. EXECUTIVE TO SERVE AS PRESIDENT AND CHIEF EXECUTIVE OFFICER OF LYDALL, INC. The Executive shall act as President and Chief Executive Officer, subject to the direction of the Board of Directors. 2. DEFINITIONS. The phrase "Change of Control," as used in this Agreement, shall mean i) an acquisition of the Company by means of a merger or consolidation or purchase of substantially all of its assets if and when incident thereto (a) the composition of the Board of Directors of the Company (the "Board") or its successor changes so that a majority of the Board is not comprised of individuals who were members of the board immediately prior to such merger, consolidation or purchase of 1 assets or (b) the stockholders of the Company acquire a right to receive, in exchange for or upon surrender of a majority of their stock, cash or other securities or a combination of the two; and/or ii) the acquisition by a person (as that term is hereafter defined) of the voting rights with respect to 25 percent or more of the outstanding Common Stock of the Company if such person was not an officer or director of the Company on the date of this Agreement; and/or iii) the election or appointment to the Board of any director or directors whose appointment or election or nomination for election was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date hereof or whose election, appointment or nomination for election was previously so approved. The word "person," as used in the preceding sentence, shall mean an individual, corporation, trust, or other legal or commercial entity and include two or more persons acting as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding or disposing of securities of the Company. The word "cause", as used in this Agreement, shall mean (i) conviction of a crime involving moral turpitude, or (ii) material and unexcused breach by Executive of his obligations under this Agreement, which results in material harm to the Company and which is not cured within the period set forth below; PROVIDED, HOWEVER, that a termination shall not be for "cause" hereunder unless such conviction or breach is detailed in a 2 written notice of intent to terminate by the Board, providing for sixty (60) days from receipt by Executive to cure the breach prior to termination of Executive; except that such notice would not be required if, in the Board of Directors' discretion, the Company would be immediately harmed. The phrase "Fringe Benefits," as used in this Agreement, shall mean the benefits listed on Exhibit A hereto. 3. TERMINATION AFTER CHANGE OF CONTROL. If a Change of Control occurs after the date of this Agreement and subsequent to such Change of Control (a) Executive shall resign as President and Chief Executive Officer of the Company within one year from the time such Change of Control occurs or (b) another shall be appointed or elected President or Chief Executive Officer by the Board in place of Executive at any time prior to June 1, 2018, Executive's normal retirement date (such resignation or replacement of Executive being hereinafter referred to as a "Termination"), Executive shall continue to be an employee of the Company and be compensated and receive benefits in accordance with this Agreement; provided, however, that if Executive's resignation shall be requested by the Board for cause or Executive is replaced for cause, such resignation or replacement shall not be deemed a Termination for the purpose of this Agreement and shall not entitle Executive to continue to be an employee of the Company and be compensated and receive the benefits provided for in this Agreement. 4. TERMINATION PRIOR TO CHANGE OF CONTROL. If prior to a 3 Change of Control (a) the Executive shall resign as President and Chief Executive Officer of the Company at the request of the Board or because the duties and responsibilities of the President and Chief Executive Officer have been significantly modified by the Board without his consent or (b) another is appointed President or Chief Executive Officer in place of the Executive (such resignation or replacement of the Executive being hereinafter referred to a "Termination"), the Executive shall continue to be an employee of the Company and be compensated and receive benefits in accordance with this Agreement; provided, however, that if Executive's resignation shall be requested by the Board for Cause or if Executive is replaced for Cause, such resignation or replacement shall not be deemed a Termination for the purpose of this Agreement and shall not entitle Executive to continue to be an employee of the Company and be compensated and receive the benefits provided for in this Agreement. 5. TERMINATION FOR CAUSE. If Executive's employment is terminated for cause prior to the beginning of the Employment Period, (either prior or subsequent to a Change of Control), earned but unpaid Base Salary will be paid on a prorated basis for the year in which the termination occurs, plus accrued vacation benefits, but all other Company obligations shall cease as of the date of termination for cause, unless otherwise provided in separate agreements. 6. EMPLOYMENT PERIOD. In the event of a Termination pursuant to paragraph 3 above, Executive shall continue to be an employee of the Company for a period of three years from the date of such Termination, and in the event of a Termination pursuant 4 to Paragraph 4 above, Executive shall continue to be an employee of the Company for a period of two years from the date of such Termination, such three year period or two year period, as the case may be, being hereinafter referred to as the "Employment Period"; provided, however, that (a) Executive may end the Employment Period at any time in his absolute discretion and the Employment Period may be ended by the Company at any time for cause, (b) the Employment Period shall not extend beyond June 1, 2018, Executive's normal retirement date, and (c) the Employment Period shall terminate if and when the Executive becomes employed on substantially a full time basis by another entity or as a partner or sole proprietor [and with Executive's full recognition of his responsibilities under Paragraph 11 below] (but such termination of the Employment Period under clause (a), (b) or (c) above shall not preclude the Executive from being paid for his obligation not to compete as provided in Paragraphs 11 and 12 below). 7. TITLE AND DUTIES. During the Employment Period, the Executive shall perform such duties and undertake such responsibilities as are assigned to him from time to time by the Board; provided, however, that such duties and responsibilities shall be commensurate with his status as a senior executive of the Company and bear a reasonable relationship to the business of the Company. 8. COMPENSATION. The Company shall pay to Executive during the Employment Period an annual salary (the "Annual Salary") equal to one-third (1/3rd) of the aggregate of the base salary and bonuses paid to him during the period commencing three 5 (3) years prior to the date of Termination and ending on the date of Termination. Payment shall be made twice monthly and be appropriately prorated during the first and last month of the Employment Period. In addition, during the Employment Period Executive shall receive (a) the same Fringe Benefits that he would have been entitled to receive if he had continued to be President and Chief Executive Officer during such period, (b) reimbursement for reasonable expenses incurred by him in the performance of his duties (c) in lieu of an office and secretarial help, an allowance of $1500 monthly and (d) the use of an automobile on substantially the same basis as prior to his termination. If the Employment Period shall end, pursuant to Paragraph 6 above, prior to the end of the three year term provided for in Paragraph 3 above or the two year term provided for in Paragraph 4 above, as the case may be, the Annual Salary (but, except to the extent provided in Paragraph 10 below, not fringe benefits and perquisites) shall continue to be payable until the end of the non-compete period provided for in Paragraph 11 below and shall be deemed payment for Executive's obligation not to compete as provided in said Paragraph 11, and such Annual Salary for the remainder of the non-compete period shall be paid to the Executive in a lump sum cash payment within ten days after the end of the Employment Period. 9. TAX GROSS-UP. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution made, or benefit provided, by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms 6 of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9 (a 'Payment') would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended and then in effect (the 'Code') (or any similar excise tax) or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the ('Excise Tax'), then the Executive shall be entitled to receive an additional payment (a 'Gross-Up Payment') in an amount such that after payment by the Executive of all Federal, state, local or other taxes (including any interest or penalties imposed with respect to any such taxes), including, without limitation, any such income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. An Executive may receive Gross-Up Payments under this Section 9 whether or not the Executive actually receives other payments or benefits under the Agreement. (i) Subject to the provisions of paragraph (ii) of this Section 9, all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by PricewaterhouseCoopers (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 20 calendar days of the receipt 7 of written notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall have the right by written notice to the Company to appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and shall be paid by the Company upon demand of the Executive as incurred or billed by the Accounting Firm. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with an unqualified written opinion in form and substance satisfactory to the Executive that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ('Underpayment'), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies described in paragraph (ii) of this Section 9 and the Executive thereafter is 8 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 9 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, 10 from any Excise Tax or Federal, state, local or other income or other tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iii) If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (ii) of this Section 9, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of paragraph (ii) of this Section 9 promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto) upon receipt thereof. If, after the receipt by the Executive of an amount advanced by the Company pursuant to paragraph (ii) of this Section 9, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not 11 be required to be repaid and the amount of such advance shall be offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. MEDICAL INSURANCE COVERAGE. Executive and his beneficiaries shall continue to participate in all life, health, disability and other welfare plans or programs existing at the time of a Change of Control in which they were participating at such time (or substantially similar plans or programs), to the extent that such continued participation is possible under the general terms and conditions of such plans and programs throughout the Employment Period. Company and Executive will continue to pay the same relative portion of the cost of each such plan or program as each were paying at the time of the Change of Control. Further, in the event that Executive's or his beneficiaries' continued participation in any group plan or program is not permitted, then in lieu thereof, Company shall acquire individual insurance policies providing substantially similar coverage for Executive and his beneficiaries, and Company and Executive will pay the same relative portion of the cost of such comparable coverage plans or programs or in the event that Company cannot acquire individual insurance policies providing substantially similiar coverage, the Company will self-insure the Executive and his beneficiaries, and the Executive in the case of self insurance will pay the COBRA rate then applicable to the Company's group plan. For purposes of COBRA, a qualifying event is not deemed to occur until the Employment Period, as defined in paragraph 6, has expired. 12 11. NON-COMPETE. During the Employment Period Executive will not compete directly or indirectly with the Company or be directly or indirectly interested in any business competing with the business being conducted by the Company. Ownership of less than 1 percent of the issued and outstanding capital stock of any corporation the stock of which is listed upon a national exchange or regularly quoted by the National Association of Security Dealers Automated Quotation (NASDAQ) shall not be deemed to create a material conflict of interest as contemplated hereunder. For the purpose of this Paragraph 11, the Employment Period shall be deemed to extend three years from Termination if such Termination occurred pursuant to Paragraph 3 above or two years from Termination if such Termination occurred pursuant to Paragraph 4 above, notwithstanding any prior ending of the Employment Period pursuant to Paragraph 6 above. 12. TRADE SECRETS. Executive shall regard and preserve as confidential and not use, communicate or disclose to any person, orally, in writing or by a publication, any secret or confidential information of the Company, regardless of where or when or how acquired by the Company, or of others which the Company is obligated to maintain in confidence. This obligation shall exist during the Employment Period and after the termination of the Employment Period until such information becomes a matter of public knowledge through no act of Executive. At the termination of employment by the Company, Executive agrees to return to employer all documents, writings, drawings and other property of the Company within his custody and control. 13 13. INDEMNIFICATION. The parties agree to execute a separate Indemnification Agreement in the form attached as Exhibit B. 14. ARBITRATION. The Company and Executive undertake to execute this Agreement in good faith. Any controversy or claim arising out of or relating to this Agreement other benefit plans or arrangements with the Company or breach of this Agreement, shall receive prompt attention by the other party and both parties agree to make good faith efforts to resolve any controversy or claim in an amicable way. If the Company and Executive fail to settle the controversy or claim in an amicable way, they agree to submit the matter to be settled by arbitration in accordance with the Arbitration Rules of the American Arbitration Association. This Agreement, its execution, interpretation and performance shall be governed by the laws of the State of Connecticut of the United States of America. The arbitration will be held in Hartford, Connecticut, or such other place as may be agreed at the time by the parties. The award of this arbitration shall be final and binding both for the Company and Executive and may be entered in any court with jurisdiction. 15. LITIGATION EXPENSES. In the event of any action, suit, proceeding, arbitration or claim between or by or against the Company and/or the Executive with respect to this Agreement, other benefit plans or arrangements between the parties, and the assertion or enforcement of his rights hereunder, the Company shall promptly pay or reimburse the Executive upon such Executive's written demand therefore, for eighty (80) percent of 14 his costs and expenses (including costs and fees of witnesses, evidence and attorney fees and expenses) relating to or arising out of (directly or indirectly) such action, suit, proceeding, arbitration or claim, on a monthly basis, as such costs and expenses are incurred in investigating, prosecuting, defending or preparing to prosecute or defend, regardless of the outcome thereof. In no event shall the Executive be required to reimburse the Company for any of the costs and expenses relating to any such action, suit, proceeding, arbitration or claim. The obligation of the Company under this Section 15 shall survive the termination for any reason of this Agreement. This Section 15 cannot be amended or modified to affect the rights of the Executive without the prior written consent of such Executive which specifically refers to this Section 15. 16. RABBI TRUST. Within sixty (60) days of the date of this Agreement, the Company shall enter into a trust agreement (the "Trust Agreement") with a third party institutional trustee, substantially in the form set forth in Rev. Proc. 92-64, 1992-2 C.B. 422, to assist it in meeting its obligations to the Executive under the Company's Supplemental Executive Retirement Plan (the "SERP"). The trust established pursuant to the Trust Agreement (the "Trust") shall be irrevocable. The Trust Agreement shall provide that upon a Change of Control the Company shall, no later than 30 days following the Change of Control, make an irrevocable contribution of cash or cash equivalents to the Trust in an amount sufficient to pay each SERP participant or beneficiary the benefits to which they would be entitled pursuant to the terms of the SERP, and within 30 days following the end of 15 each calendar year ending after the Change of Control the Company shall irrevocably contribute any additional cash to the Trust necessary for the Trustee to pay each SERP participant or beneficiary the benefits payable pursuant to the terms of the SERP as of the close of the year. The Trust Agreement shall also provide (i) that all income received by the Trust shall be accumulated and reinvested, (ii) that the Company will be responsible for the payment of all fees and expenses related to the Trust, (iii) that after a Change of Control the Trustee may not be removed by the Company, and (iv) that, if the Trustee shall resign, any successor Trustee must be an independent institutional entity, such as a bank trust department or other party that has been granted corporate trustee powers under state law. The Trust Agreement shall also provide that the provisions of the Trust described in this Paragraph 16 may not be amended after a Change of Control. 17. ENTIRE AGREEMENT. This Agreement embodies the whole understanding between the parties hereto with respect to the subject matter hereof and supersedes all earlier agreements. There are no inducements, promises, terms, conditions or obligations made or entered into by either party other than as contained herein. 18. MODIFICATION. This Agreement may not be changed orally, but only be means of an agreement in writing signed by the parties hereto. 19. WAIVER. The waiver by any party of a breach of any provision of this Agreement shall not operate as, or be construed as, a waiver of any subsequent breach. 16 20. APPLICABLE LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. 21. SUCCESSORS. This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. IN WITNESS WHEREOF, the parties have hereunto set their hands as of the date first above written. LYDALL, INC. By -------------------------------- ------------------------------------- Roger M. Widmann, Chairman, Christopher R. Skomorowski Board of Directors President and Chief Executive Officer 17 EXHIBIT A - FRINGE BENEFITS 1. Medical Benefits a. Lydall, Inc. Health Care Payment Plan for Salaried Employees (includes dental benefits) b. Lydall, Inc. Health Care Expense Plan c. Lydall, Inc. Health Care Spending Reimbursement Plan 2. Disability Benefits a. Lydall, Inc. Short Term Disability Plan b. Lydall, Inc. Executive Group Long Term Disability Plan 3. Life Insurance a. Executive Life Insurance Plan b. Accidental Death and Dismemberment Plan c. Family Assistance Program d. Business Travel Accident Plan 4. Retirement Plans a. Lydall, Inc. Pension Plan No. 1A b. Lydall, Inc. Profit Sharing Plan No. 1 c. Lydall, Inc. 401(k) Plan d. Lydall, Inc. Supplemental Executive Retirement Plan 5. Stock Plans a. Lydall, Inc. Employee Stock Purchase Plan b. Lydall, Inc. 1992 Stock Incentive Compensation Plan c. Lydall, Inc. 1982 Stock Incentive Compensation Plan 6. Other a. Holidays, vacations b. Lydall, Inc. Dependent Care Assistance Plan 18 EXHIBIT B INDEMNIFICATION AGREEMENT This Agreement, made and entered into this lst day of February, 1999 ("Agreement"), by and between Lydall, Inc., a Delaware corporation ("Company"), and Christopher R. Skomorowski ("Indemnitee"): WHEREAS, highly competent persons are becoming more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation; and WHEREAS, the current impracticability of obtaining adequate insurance and the uncertainties relating to indemnification have increased the difficulty of attracting and retaining such persons; WHEREAS, the Board of Directors of the Company has determined that the inability to attract and retain such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; and WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: Section 1. SERVICES BY INDEMNITEE. Indemnitee agrees to serve (as a director, officer, employee, agent of the Company) at the request of the Company, as a director, officer, employee, agent, fiduciary of another corporation, partnership, joint venture, trust employee benefit plan or other enterprise. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue 1 Indemnitee in such position. Section 2. INDEMNIFICATION - GENERAL. The Company shall indemnify, and advance Expenses (as hereinafter defined) to, Indemnitee (a) as provided in this Agreement and (b) to the fullest extent permitted by applicable law in effect on the date hereof and as amended from time to time. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other Sections of this Agreement. Section 3. PROCEEDINGS OTHER THAN PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. Indemnitee shall be entitled to the rights of indemnification provided in this Section 3 if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to any threatened, pending, or completed Proceeding (as hereinafter defined), other than a Proceeding by or in the right of the Company. Pursuant to this Section 3, Indemnitee shall be indemnified against all expenses, judgements, penalties, fines, and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner be reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. Section 4. PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware, or the court in which such Proceeding shall have been brought or is pending, shall determine that such indemnification may be made. Section 5. INDEMNIFICATION FOR EXPENSES OF A PARTY WHO IS WHOLLY OR PARTLY SUCCESSFUL. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against 2 all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter. Section 6. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. Section 7. ADVANCEMENT OF EXPENSES. The Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within ten days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Section 8. PROCEDURES FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. (a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shell, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification. (b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 8(a) hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case; (i)if a Change in Control (as hereinafter defined) shall be made in the Independent Counsel (as hereinafter defined) in a 3 written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee or (C) if so directed by the Board of Directors, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee in so cooperating with this person, persons or entity making such determination shall be borne by the Company (Irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b) hereof, the Independent Counsel shall be selected as provided in this Section 8(c). If a Change of Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; PROVIDED, HOWEVER, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in Section 17 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is 4 withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 8(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made the Company or Indemnitee to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court of by such other person as the Court shall designate, and the person with respect to whom all objections are so resolved or the person so appreciated shall act as Independent Counsel under Section 8(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 8(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 8(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 10(a)(iii) of this Agreement, Independent Counsel shall be discharged and relived of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing). Section 9. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS. (a) If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 8(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. (b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement of conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful. 5 Section 10. REMEDIES OF INDEMNITEE. (a) In the event that (i) a determination is made pursuant to Section 8 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 7 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 8(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5 or 6 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within 10 (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the data on which Indemnitee first has the right to commence such proceeding pursuant to this Section 10(a); PROVIDED, HOWEVER, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5 of this Agreement. (b) In the event that a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 10 shall be conducted in all respects as a DE NOVO trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section 10 the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. (c) If a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. 6 (d) In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 17 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated. Section 11. NON-EXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION. (a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the By-Laws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. (b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. (c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnities, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights. (d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extend that Indemnities has otherwise 7 actually received such payment under any insurance policy, contract, agreement or otherwise. Section 12. DURATION OF AGREEMENT. This Agreement shall continue until and terminate upon the later of: (a)10 years after the date that Indemnities shall have ceased to serve as a director, officer, employee, or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Company; or (b) the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 10 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators. Section 13. SEVERABILITY. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed to as to give effect to the intent manifested thereby. Section 14. EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein prior to a Change in Control, unless the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors. Section 15. IDENTICAL COUNTERPARTS. This agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. Section 16. HEADINGS. The headings of the 8 paragraphs of this Agreement re inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. Section 17. DEFINITIONS. (a)The phrase "Change of Control," as used in this Agreement, shall mean i) an acquisition of the Company by means of a merger or consolidation or purchase of substantially all of its assets if and when incident thereto (A) the composition of the Board of Directors of the Company (the "Board") or its successor changes so that a majority of the Board is not comprised of individuals who were members of the board immediately prior to such merger, consolidation or purchase of assets or (B) the stockholders of the Company acquire a right to receive, in exchange for or upon surrender a majority of their stock, cash or other securities or a combination of the two; and/or ii) the acquisition by a person (as that term is hereafter defined) of the voting rights with respect to 25 percent or more of the outstanding Common Stock of the Company if such person was not an officer of director of the Company on the date of this Agreement; and/or iii) the election or appointment to the Board of any director or directors whose appointment or election or nomination for election was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date hereof or whose election, appointment or nomination for election was previously so approved. (b) "Corporate Status" describes the status of a person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company. (c) "Disinterested Director" means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee. (d) "Effective Date" means March 10, 1995. (e) "Expenses" shall include all reasonable attorney's fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding. 9 (f) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. (g) "Proceeding" includes any action, suite, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative, or investigative, except one (i) initiated by an Indemnitee pursuant to Section 10 of this Agreement to enforce his rights under this Agreement or (ii) pending on or before the Effective Date. Section 18. MODIFICATION AND WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Section 19. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. Section 20. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to Indemnitee, to: Christopher R. Skomorowski 1108 Wetherburn Court Winston-Salem, NH 27104 10 (b) If to the Company to: Mary A. Tremblay General Counsel and Secretary Lydall, Inc. P.O. Box 151 One Colonial Road Manchester, CT 06045-0151 or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be. Section 21. GOVERNING LAW. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware. Section 22. MISCELLANEOUS. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first written. On behalf of the Board of Directors ATTEST: LYDALL, INC. By By -------------------------------- --------------------------------- Roger M. Widmann INDEMNITEE ----------------------------------- Christopher R. Skomorowski 48 Highwood Road Simsbury, CT 06070 11 EX-21.1 4 EXHIBIT 21.1 LYDALL, INC. Exhibit 21.1 List of Subsidiaries Lydall, Inc. - Incorporated in the State of Delaware Logistics Management, Inc. - Incorporated in the State of Connecticut Lydall Distribution Services, Inc. - Incorporated in the State of Connecticut Lydall Express, Inc. - Incorporated in the State of Connecticut Lydall Transport, Ltd. - Incorporated in the State of Virginia Lydall Eastern, Inc. - Incorporated in the State of Connecticut DBA: Lydall Composite Materials, Covington Operation Lydall Southern Products, Richmond Operation Lydall Southern Products, Jacksonville Operation Lydall Technical Papers Lydall & Foulds Lydall Deutschland Holdsung, GmbH Subsidiary: Gerhardi & Cie.GmbH & Co. KG Lydall New York, Inc. - Incorporated in the State of New York DBA: Lydall Composite Materials, Hoosick Falls Operation Lydall Manning Nonwovens Division Lydall Manning Fort Washington Division Lydall Central, Inc. - Incorporated in the State of Indiana DBA: Lydall Westex, Hamptonville Operation Lydall Westex, Rockwell Operation Lydall Westex, Columbus Operation Subsidiary: Charter Medical, Ltd. - Incorporated in the State of Delaware Lydall International, Inc. - Incorporated in the State of Delaware Lydall FSC, Limited - Incorporated in Jamaica Trident II, Inc. - Incorporated in the State of Connecticut Sopatex, S.A. - Organized under the laws of France Subsidiary: Axohm Industries, S.A. - Organized under the laws of France DBA: Lydall Axohm Axohm S.A. Operations Axohm U.K. - Organized under the laws of Great Britain EX-23.1 5 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Lydall, Inc. on Form S-8 (File No. 33-93768) of our reports dated February 18, 1999, on our audits of the consolidated financial statements and financial statement schedule of Lydall, Inc., and Subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996 included in this Form 10-K. PricewaterhouseCoopers LLP March 24, 1999 EX-24.1 6 EXHIBIT 24.1 Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and officers of Lydall, Inc. (the "Corporation"), does hereby constitute and appoint Christopher R. Skomorowski and John E. Hanley, and each of them singly, as his agent and attorney-in-fact to do any and all things and acts in his name and in the capacities indicated below and to execute any and all instruments for him and in his name in the capacities indicated below which said Christopher R. Skomorowski and John E. Hanley, or either of them, may deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the preparation and filing of the Corporation's Annual Report on Form 10-K (the "Annual Report") respecting the fiscal year ended December 31, 1998, including specifically, but not limited to, power and authority to sign for him in his name in the capacities indicated below the Annual Report and any and all amendments thereto, and each of the undersigned does hereby ratify and confirm all that said Christopher R. Skomorowski and John E. Hanley, or either of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his or her name. /s/ Christopher R. Skomorowski - ------------------------------- President, Chief March 10, 1999 Christopher R. Skomorowski Executive Officer /s/ Lee A. Asseo - ------------------------------ Director March 10, 1999 Lee A. Asseo /s/ Samuel P. Cooley - ------------------------------ Director March 10, 1999 Samuel P. Cooley /s/ W. Leslie Duffy - ------------------------------ Director March 10, 1999 W. Leslie Duffy /s/ David Freeman - ------------------------------ Director March 10, 1999 David Freeman
/s/ Joel Schiavone - ------------------------------- Director March 10, 1999 Joel Schiavone /s/ Elliott F. Whitely - ------------------------------- Director March 10, 1999 Elliott F. Whitely /s/ Roger M. Widmann - ------------------------------- Chairman of the March 10, 1999 Roger M. Widmann Board/Director /s/ A. E. Wolf - ------------------------------- Director March 10, 1999 A. E. Wolf /s/ John J. Worthington - ------------------------------- Director March 10, 1999 John J. Worthington
EX-27 7 EXHIBIT 27
5 1,000 12-MOS DEC-31-1998 OCT-01-1998 DEC-31-1998 2,254 0 48,340 (1,504) 28,949 90,819 172,485 64,649 226,848 99,909 2,340 0 0 2,171 107,054 226,848 230,007 230,007 165,190 165,190 895 457 825 5,384 1,182 4,202 0 0 0 4,202 .27 .26
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