-----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, OGPZvA1g3dnilSj5UbI1jx0qhCYYMcIxx3yisjmYd9STrovqwTFHUpzYVjlZW8sP FUHnfwMow3hO3mFSuHlSAA== 0000892569-98-001665.txt : 19980601 0000892569-98-001665.hdr.sgml : 19980601 ACCESSION NUMBER: 0000892569-98-001665 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980502 FILED AS OF DATE: 19980529 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FURON CO CENTRAL INDEX KEY: 0000037755 STANDARD INDUSTRIAL CLASSIFICATION: GASKETS, PACKAGING AND SEALING DEVICES & RUBBER & PLASTIC HOSE [3050] IRS NUMBER: 951947155 STATE OF INCORPORATION: CA FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08088 FILM NUMBER: 98634234 BUSINESS ADDRESS: STREET 1: 1199 SOUTH CHILLICOTHE RD CITY: AURORA STATE: OH ZIP: 44202 BUSINESS PHONE: 7148315350 FORMER COMPANY: FORMER CONFORMED NAME: FLUOROCARBON CO DATE OF NAME CHANGE: 19900322 10-Q 1 QUARTERLY REPORT FOR THE PERIOD ENDED MAY 02, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MAY 2, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-8088 FURON COMPANY (Exact name of registrant as specified in its charter) California 95-1947155 - ---------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 29982 Ivy Glenn Drive Laguna Niguel, CA 92677 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (949) 831-5350 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 [ ] Number of shares of common stock outstanding as of May 25, 1998: 18,291,753 2 FURON COMPANY INDEX PART I - FINANCIAL INFORMATION
PAGE NO. -------- Item 1. Financial Statements Condensed Consolidated Balance Sheets May 2, 1998 and January 31, 1998 3 Condensed Consolidated Statements of Income Three months ended May 2, 1998 and May 3, 1997 5 Condensed Consolidated Statements of Cash Flows Three months ended May 2, 1998 and May 3, 1997 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION 17
2 3 ITEM 1. FINANCIAL STATEMENTS FURON COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
May 2, January 31, In thousands 1998 1998 - ------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 5,405 $ -- Accounts receivable, less allowance for doubtful accounts of $1,689 at May 2, 1998 and $1,741 at January 31, 1998 75,086 75,661 Inventories 59,344 54,704 Deferred income taxes 11,356 11,052 Prepaid expenses and other current assets 6,489 4,959 --------- --------- Total current assets 157,680 146,376 Property, plant & equipment, at cost: Land 6,999 6,976 Buildings and leasehold improvements 32,736 31,493 Machinery and equipment 163,292 158,999 --------- --------- 203,027 197,468 Less accumulated depreciation and amortization (91,993) (87,832) --------- --------- Net property, plant and equipment 111,034 109,636 Intangible assets, at cost less accumulated amortization of $34,418 at May 2, 1998 and $35,354 at January 31, 1998 96,038 83,129 Other assets 10,661 7,208 --------- --------- TOTAL ASSETS $ 375,413 $ 346,349 ========= =========
See accompanying notes. 3 4 FURON COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
May 2, January 31, In thousands, except share data 1998 1998 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Cash, less checks outstanding $ -- $ 1,025 Accounts payable 27,045 25,384 Salaries, wages and related benefits payable 11,267 18,203 Income taxes payable 5,415 4,228 Current portion of long-term debt 1,120 966 Facility rationalization and severance 7,801 10,091 Other current liabilities 18,742 14,035 --------- --------- Total current liabilities 71,390 73,932 Long-term debt 158,788 148,657 Other long-term liabilities 40,842 23,883 Deferred income taxes 18,743 18,738 Commitments and contingencies Shareholders' equity: Preferred stock without par value, 2,000,000 shares authorized, none issued or outstanding -- -- Common stock without par value, 30,000,000 shares authorized, 18,291,753 shares issued and outstanding at May 2, 1998 and 18,227,898 at January 31, 1998 41,000 40,864 Employee Benefit Trust shares (1,169) -- Accumulated other comprehensive income (3,470) (4,236) Unearned ESOP shares (3,229) (3,229) Unearned compensation (193) (232) Retained earnings 52,711 47,972 --------- --------- Total shareholders' equity 85,650 81,139 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 375,413 $ 346,349 ========= =========
See accompanying notes. 4 5 FURON COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended ----------------------------- May 2, May 3, In thousands, except per share amounts 1998 1997 - ----------------------------------------------------------------------------------- Net sales $ 119,805 $ 119,649 Cost of sales 82,539 81,330 --------- --------- Gross profit 37,266 38,319 Selling, general and administrative expenses 27,561 28,139 Nonrecurring charges and facilities rationalization (417) -- Other (income), expense (721) (247) Interest expense, net 2,932 2,886 --------- --------- Income before income taxes 7,911 7,541 Provision for income taxes 2,492 2,564 --------- --------- Net income $ 5,419 $ 4,977 ========= ========= Basic income per share $ 0.30 $ 0.28 ========= ========= Diluted income per share $ 0.29 $ 0.27 ========= ========= Cash dividends per share $ 0.03 $ 0.03 ========= =========
See accompanying notes. 5 6 FURON COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended ----------------------------- May 2, May 3, In thousands 1998 1997 - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 5,419 $ 4,977 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 4,273 4,231 Amortization 1,528 1,406 Provision for losses on accounts receivable 70 155 Deferred income taxes (369) (29) Nonrecurring charges and facilities rationalization (417) -- Loss on sale of assets 62 19 Working capital changes, net of acquisitions and disposals: Accounts receivable 1,790 2,063 Inventories (3,064) 640 Accounts payable and accrued liabilities (4,413) (3,910) Income taxes payable (564) 3,549 Other current assets and liabilities, net (860) (1,741) Changes in other long-term operating assets and liabilities 88 769 --------- --------- Net cash provided by operating activities 3,543 12,129 INVESTING ACTIVITIES Acquisition of businesses (115) -- Cash acquired in purchase of business 3,037 -- Purchases of property, plant and equipment (5,166) (2,892) Proceeds from sale of businesses 5 249 Proceeds from sale of equipment 40 57 Increase in notes receivable (606) -- --------- --------- Net cash used in investing activities (2,805) (2,586) FINANCING ACTIVITIES Proceeds from long-term debt 134,194 4,081 Principal payments on long-term debt (124,341) (7,069) Deferred debt costs (3,918) -- Employee benefit trust funding (1,300) -- Proceeds, net of cancellations, from issuance of common stock 137 (25) Dividends paid on common stock (549) (540) --------- --------- Net cash provided by (used in) financing activities 4,223 (3,553) EFFECT OF EXCHANGE RATE CHANGES ON CASH 444 (730) --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 5,405 5,260 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- -- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,405 $ 5,260 ========= =========
See accompanying notes. 6 7 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS May 2, 1998 (Unaudited) 1. GENERAL The accompanying unaudited consolidated financial statements have been condensed in certain respects and should, therefore, be read in conjunction with the consolidated financial statements and related notes thereto, contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998. Certain reclassifications have been made to prior year amounts in order to be consistent with the current year presentation. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary (consisting only of normal recurring adjustments) to present fairly the financial position of the Company as of May 2, 1998, and the results of operations and cash flows for the three months ended May 2, 1998 and May 3, 1997. Results of the Company's operations for the three months ended May 2, 1998 are not necessarily indicative of the results to be expected for the full year. 2. INVENTORIES Inventories, stated at the lower of cost (first-in, first-out) or market, are summarized as follows:
May 2, January 31, In thousands 1998 1998 - ------------------------------------------------------------------------- Raw materials and purchased parts $ 25,029 $ 24,781 Work-in-process 12,620 11,538 Finished goods 21,695 18,385 ---------- ---------- $ 59,344 $ 54,704 ========== ==========
3. INTANGIBLES Intangible assets, primarily acquired in business combinations, net of accumulated amortization, are summarized as follows:
May 2, January 31, In thousands 1998 1998 - --------------------------------------------------------------- Goodwill $ 67,980 $ 54,476 Other intangible assets 28,058 28,653 ---------- ---------- $ 96,038 $ 83,129 ========== ==========
7 8 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS May 2, 1998 (Unaudited) 4. LONG-TERM DEBT Long-term debt is summarized as follows:
May 2, January 31, In thousands 1998 1998 - -------------------------------------------------------------------------- Senior Subordinated Notes $ 125,000 $ -- Loans under bank credit agreements due through fiscal year 2002 27,000 142,000 Industrial Revenue Bonds 6,175 6,175 Other 1,733 1,448 ---------- ---------- Total long-term debt 159,908 149,623 Less current portion 1,120 966 ---------- ---------- Due after one year $ 158,788 $ 148,657 ========== ==========
Effective February 3, 1998, the Company amended and restated its Credit Agreement to decrease the aggregate credit facility from $250.0 million to $200.0 million. On March 4, 1998 the Company issued $125.0 million of 8.125% Senior Subordinated Notes (the "Notes") due March 1, 2008 (the "Offering"). The Company used the net proceeds of the Offering to repay a portion of existing indebtedness under the Company's amended Credit Agreement. For the three months ended May 2, 1998, the weighted average interest rate on the loans under the bank credit agreement was 6.3%. Interest paid for the three months ended May 2, 1998 and May 3, 1997 was $2.0 million and $2.3 million, respectively. 5. INCOME TAXES The Company's effective tax rate for the three months ended May 2, 1998 was 31.5% as compared with 34.0% for the same period in the prior year. The lower effective tax rate was primarily due to increases in research and experimental credits and foreign tax credits. Income taxes paid (received) for the three months ended May 2, 1998 and May 3, 1997 were $2.1 million and $(0.5 million), respectively. 8 9 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS May 2, 1998 (Unaudited) 6. CONTINGENCIES At May 2, 1998, the Company had approximately $2.6 million of foreign currency hedge contracts outstanding consisting of over-the-counter forward contracts. Net unrealized losses from hedging activities were not material as of May 2, 1998. At May 2, 1998, the Company is obligated under irrevocable letters of credit totaling $7.3 million. The Company is currently involved in various litigation. Management of the Company is of the opinion that the ultimate resolution of such litigation should not have a material adverse effect on the Company's consolidated financial position or results of operations. Compliance with environmental laws and regulations designed to regulate the discharge of materials into the environment or otherwise protect the environment requires continuing management effort and expenditures by the Company. While no assurance can be given, the Company does believe that the operating costs incurred in the ordinary course of business to satisfy air and other permit requirements, properly dispose of hazardous wastes and otherwise comply with these laws and regulations form or are reasonably likely to form a material component of its operating costs or have or are reasonably likely to have a material adverse effect on its competitive or consolidated financial positions. As of May 2, 1998 the Company's reserves for environmental matters totaled approximately $1.6 million. The Company or one or more of its subsidiaries is currently involved in environmental investigation or remediation directly or as an EPA-named potentially responsible party or private cost recovery/contribution action defendant at various sites, including certain "superfund" waste disposal sites. While neither the timing nor the amount of the ultimate costs associated with these matters can be determined with certainty, based on information currently available to the Company, including investigations to determine the nature of the potential liability, the estimated amount of investigation and remedial costs expected to be incurred and other factors, the Company presently believes that its environmental reserves should be sufficient to cover the Company's aggregate liability for these matters and, while no assurance can be given, it does not expect them to have a material adverse effect on its consolidated financial position or results of operations. The actual costs to be incurred by the Company at each site will depend on a number of factors, including one or more of the following: the final delineation of contamination; the final determination of the remedial action required; negotiations with governmental agencies with respect to cleanup levels; changes in regulatory requirements; innovations in investigatory and remedial technology; effectiveness of remedial technologies employed; and the ultimate ability to pay of any other responsible parties. 9 10 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS May 2, 1998 (Unaudited) 7. SHAREHOLDERS' EQUITY Earnings Per Share On November 20, 1997, the Company's Board of Directors approved a two-for-one stock split. One share of the Company's common stock for each full share of common stock outstanding to holders of record on December 2, 1997 was distributed on December 16, 1997. Accordingly, all numbers of Common Shares, and all per share data have been restated to reflect this stock split. The calculation of earnings per share is presented below:
THREE MONTHS ENDED --------------------------------- MAY 2, MAY 3, IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1998 1997 - --------------------------------------------------------------------------------------------------------- Net income $ 5,419 $ 4,977 ============ ============ Weighted average shares outstanding for basic income per share 18,032,374 17,779,198 ------------ ------------ Effect of dilutive securities: Employee stock options and awards 669,146 531,816 ------------ ------------ Weighted average shares outstanding for diluted income per share 18,701,520 18,311,014 ------------ ------------ Basic income per share $ 0.30 $ 0.28 ============ ============ Diluted income per share $ 0.29 $ 0.27 ============ ============
Employee Benefits Trust On March 24, 1998, the Company entered into an Employee Benefits Trust (the "Trust") with Wachovia Bank, N.A., Trustee. The Trust was established to provide a source of funds to assist the Company in meeting obligations under various employee benefit plans. On March 26, 1998, the Company contributed $1.3 million to the Trust to purchase shares of the Company's common stock on the open market. During the first quarter of fiscal year 1999, the Trust purchased 55,795 shares of common stock at an average cost of $23.26 per share (55,795 shares held at May 2, 1998). For financial reporting purposes, the Trust is consolidated with the Company. The shares are accounted for by the treasury stock method. The fair market value of the shares held by the Trust is shown as a reduction to shareholders' equity in the Company's consolidated balance sheet. Any dividend transactions between the Company and the Trust are eliminated. Shares will be released from the Trust as granted to participants in connection with annual incentive plan awards. Common stock held in the Trust is not considered outstanding for earnings per share calculations until they are granted to participants. The Trustee is responsible for voting the shares of common stock held in the Trust. 10 11 FURON COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS May 2, 1998 (Unaudited) 8. COMPREHENSIVE INCOME As of February 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. SFAS No. 130 requires the change in the minimum pension liability and the foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior years' financial statements have been reclassified to conform to these requirements. The components of comprehensive income, net of related tax, are as follows:
Three month period ended ----------------------------- May 2, 1998 May 3, 1997 ------------ ------------ Net income $ 5,419 $ 4,977 Foreign currency translation adjustments 766 (846) ------------ ------------ Comprehensive income $ 6,185 $ 4,131 ============ ============
9. SEGMENT INFORMATION The Company operates in two business segments: Industrial Products, including highly engineered seals and bearings, fluid handling, components, tapes, films and coated fabrics, hose and tubing, wire and cable, and plastic formed components; and Medical Device Products, including critical care products and infusion systems for medical and surgical applications. The factors impacting the Company's basis for reportable segments include separate management teams, infrastructures, and discrete financial information about each. Additionally, the long-term financial performance of the Medical Device Products segment is affected by an environment governed by regulatory standards. Sales, operating profit, interest expense, net and identifiable assets are set forth in the following table:
INDUSTRIAL MEDICAL IN THOUSANDS PRODUCTS DEVICE PRODUCTS ADJUSTMENT CONSOLIDATED - ------------------------------------------------------------------------------------------------------------- Three months ended May 2, 1998: Sales to unaffiliated customers $ 97,974 $ 21,831 $119,805 Operating profit 10,010 112 10,122 Interest expense, net -- -- $ 2,932 2,932 Identifiable assets 220,117 155,296 375,413 Three months ended May 3, 1997: Sales to unaffiliated customers $ 92,446 $ 27,203 $119,649 Operating profit 6,503 3,677 10,180 Interest expense, net -- -- $ 2,886 2,886 Identifiable assets 210,592 131,896 342,488
11 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following discussion and analysis is based upon and should be read in conjunction with the historical consolidated financial statements of the Company and related notes thereto. The Company's fiscal 1999 first quarter ended May 2, 1998 and fiscal 1998 first quarter ended May 3, 1997. The fiscal 1999 and 1998 quarters each consisted of 13 weeks. RESULTS OF OPERATIONS THREE MONTHS ENDED MAY 2, 1998 COMPARED WITH THREE MONTHS ENDED MAY 3, 1997 Net Sales. Net sales of $119.8 million for the three months ended May 2, 1998 ("FY 1999 Period") increased $0.2 million, from $119.6 million for the three months ended May 3, 1997 ("FY 1998 Period"). The increase in net sales was the result of increased sales of industrial products, offset by lower volumes in medical device products. Net of acquisitions and divestitures, sales for the FY 1999 Period increased 1.2% over the same period of the prior year. Gross Profit. Gross profit of $37.3 million in the FY 1999 Period decreased $1.0 million, or 2.6% from $38.3 million in the FY 1998 Period. The gross profit margin decreased to 31.1% in the FY 1999 Period from 32.0% in the FY 1998 Period. The decrease was due to lower volume in the medical device segment which offset the impact of continued productivity improvements and cost containment in the Industrial Segment. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses of $27.6 million in the FY 1999 Period decreased $0.5 million, or 1.8%, from $28.1 million in the FY 1998 Period. SG&A expenses as a percentage of net sales was 23.0% in the FY 1999 Period, down from 23.5% in the FY 1998 Period. The decline was mainly the result of lower costs incurred for performance based incentive compensation, group insurance and outside services, partially offset by increased professional fees. Research and development expenses of $3.8 million for the FY 1999 Period increased $0.4 million, or 11.8%, from $3.4 million in the FY 1998 Period. This increase reflects the continued commitment to new products and materials development. Other Income. Other income of $0.7 million in the FY 1999 Period increased $0.5 million, or 250%, from $0.2 million in the FY 1998 Period. The increase primarily resulted from a reduction in foreign exchange transaction losses. Nonrecurring Charges and Facilities Rationalization. For the FY 1999 Period, the Company recorded a $0.4 million net reversal of facilities rationalization charges as a result of a change in facility relocation plans. Interest Expense, Net. Interest expense, net of $2.9 million for the FY 1999 Period remained flat compared to $2.9 million in the FY 1998 Period. The savings in the Company's interest expense as a result of its reduction in overall debt was offset by an increase in interest rates associated with the Company's subordinated debt. Income Before Income Taxes. Income before income taxes of $7.9 million in the FY 1999 Period increased $0.4 million, or 5.3%, from $7.5 million in the FY 1998 Period. Net of acquisitions and divestitures, pretax results of operations were up 8% from the FY 1998 Period. This improvement was generally the result of continued productivity improvements and lower operating expenses in the Industrial Segment, increased other 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) income and a reversal of nonrecurring charges and facilities rationalization, offset by lower volume and margin in the Medical Segment. Provision for Income Taxes. The Company's effective tax rate for the FY 1999 Period was 31.5%, compared with 34.0% in the FY 1998 Period. The lower effective tax rate was primarily the result of increase in research and experimental credits and foreign tax credits. SEGMENT RESULTS The Company operates in two business segments: Industrial Products, including highly engineered seals and bearings, fluid handling components, tapes, films and coated fabrics, hose and tubing, wire and cable, and plastic formed components; and Medical Device Products, including critical care products, infusion systems for medical and surgical applications. For additional financial information about industry segments and performance in various geographic areas, see Note 9 of the "Notes to Condensed Consolidated Financial Statements" contained herein. INDUSTRIAL PRODUCTS
MAY 2, MAY 3, IN THOUSANDS 1998 1997 - --------------------------------------------------------------------------------- Sales $ 97,974 $ 92,446 Operating profit 10,010 6,503 Operating profit before nonrecurring charges and facilities rationalization 9,593 6,503
Net Sales. Industrial net sales for the FY 1999 Period increased $5.5 million, or 6.0% from the FY 1998 period. Net of acquisitions and divestitures, Industrial Product net sales for the FY 1999 Period increased 8% over the FY 1998 Period. Domestically, net sales were particularly strong in several of the markets the Company serves including, commercial aircraft, off-shore exploration, food & beverage and general industrial markets. Continued softness in the electronics and semiconductor markets contributed to lower shipments of products to these markets. Improved demand in Europe across most product lines, along with the impact of an acquisition, was further assisted by the favorable effect of foreign currency exchange rates, resulting in increased dollar net sales of 34% over the FY 1998 Period. (A 14% increase net of acquisitions and a 7% increase after removing the effect of foreign currency exchange rate changes). Gross Profit. The gross profit margin for the FY 1999 Period was 29.8%, an increase from 28.5% in the FY 1998 Period. This was the net result of spending controls in variable and fixed overhead, and increased sales volume, partially offset by product mix. Selling, General and Administrative Expenses. SG&A expenses as a percentage of net sales decreased 1.5% to 20.0%, for the FY 1999 Period from the FY 1998 Period. General and administrative expenses were lower in several categories, including lower performance based incentive compensation, group insurance and outside services, partially offset by increased professional fees. Investments in research and development were up, as the Company continued to increase its focus on new product development. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Operating Profit, before Nonrecurring Charges and Facilities Rationalization. Operating profit, before nonrecurring charges and facilities rationalization, increased 48% to $9.6 million for the FY 1999 Period, from $6.5 million in the FY 1998 Period. The improvement in profitability reflects higher net sales volumes, margins, and reduced operating expenses. MEDICAL DEVICE PRODUCTS
MAY 2, MAY 3, IN THOUSANDS 1998 1997 - --------------------------------------------------------------------------------- Sales $ 21,831 $ 27,203 Operating profit 112 3,677 Operating profit before nonrecurring charges and facilities rationalization 112 3,677
Net Sales. Net sales for the FY 1999 Period decreased $5.4 million, or 19.8% over the FY 1998 Period. Domestically, contributing factors included specific customer inventory build-up in the fourth quarter of the prior year. Additionally, sales of silicone products decreased due to start-up issues in connection with relocating the production of these products from the Company's facility in Fremont, California to Dublin, Ohio. The domestic decrease also reflects a reclassification of freight costs, lower sales of certain product particularly in fluid & drug and infusion systems product lines, and a delay in the introduction of new products. Sales in Europe decreased primarily due to the loss of a large customer which was acquired by a competitor, and the impact of unfavorable foreign currency exchange rates, particularly in Germany. Gross Profit. The gross profit margin for the FY 1999 Period was 37.2% compared to 44.0% in the FY 1998 Period. The decline in margin was due to reduced volume and lesser higher margin product sales associated with much of the inventory build-up referred to above. In addition, cost of sales was further negatively impacted by start-up costs in connection with the move of two production facilities from California to Dublin, Ohio. Selling, General and Administrative Expenses. SG&A expenses as a percentage of net sales for the FY 1999 and FY 1998 Periods, was 36.7% and 30.5%, respectively. Actual expenses for the FY 1999 Period were slightly less than the FY 1998 Period. The decline is the net result of efficiencies that were achieved in connection with the relocation of the silicone products operations, somewhat offset by increased product development expenses. Operating Profit, before Nonrecurring Charges and Facilities Rationalization. Operating profit, before nonrecurring charges and facilities rationalization, decreased 97% to $0.1 million for the FY 1999 Period, from $3.7 million in the FY 1998 Period. This decrease reflects lower net sales volumes and margins in addition to certain one-time relocation and start-up costs incurred in connection with the consolidation of two production facilities. 14 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES On March 4, 1998, the Company completed the Offering of its 8.125% Senior Subordinated Notes (see Note 4 of the "Notes to Condensed Consolidated Financial Statements"). The net proceeds from the Offering were approximately $121.0 million. In conjunction with the Offering, the Company amended its bank credit facility to, among other things, reduce the maximum principal amount available from $250.0 million to $200.0 million (the "Credit Facility"). The Company used the net proceeds of the Offering to repay a portion of existing indebtedness under the Credit Facility. Amounts borrowed under the Credit Facility mature November 12, 2001. The Notes mature March 1, 2008. Cash Provided by Operating Activities. Cash provided by operating activities for the FY 1999 Period decreased to $3.5 million, or $8.6 million from $12.1 million from the FY 1998 Period. This decrease is primarily due to working capital changes in inventory and income taxes payable from a $4.2 million source for the FY 1998 Period, to a $3.6 million use of cash for the FY 1999 Period. Cash Used in Investing Activities. During the quarter the Company completed the acquisition of Corotec GmbH, a medical device supplier based in Mainz, Germany. Cash used in investing activities for the FY 1999 Period included cash balances of $3.0 million obtained in the acquisition. The actual cash outlay for the acquisition occurred subsequent to May 2, 1998. During the FY 1999 Period, the Company invested $5.2 million in renovation of existing facilities, leasehold improvements and the replacement of existing equipment. Capital expenditures for the FY 1999 Period increased $2.3 million from $2.9 million in the FY 1998 Period. The Company believes that it generates sufficient cash flow from its operations to finance near and long-term internal growth and capital expenditures and to make principal and interest payments on its loans payable to banks and the Notes. The Company continually evaluates its employment of capital resources, including asset management and other sources of financing. CONTINGENCIES For information regarding environmental matters and other contingencies, see Note 6 of the "Notes to Condensed Consolidated Financial Statements" and the "Risk Factors" section of the Company's 1998 Annual Report on Form 10-K. While the year 2000 considerations are not expected to materially impact Furon's internal operations, they may have an effect on some of our customers and suppliers, and thus indirectly affect Furon. It is not possible to quantify the aggregate cost to Furon with respect to customers and suppliers with year 2000 problems, although the Company does not anticipate it will have a material adverse impact on the Company's business, financial condition or results of operations. 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) STATEMENT REGARDING FORWARD LOOKING DISCLOSURE This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements that include the words "believes," "expects," "anticipates" or similar expressions and statements relating to anticipated cost savings, the Company's strategic plans, capital expenditures, industry trends and prospects and the Company's financial position. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to differ materially from those expressed or implied by such forward-looking statements. Although the Company believes that its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. For a more complete discussion of risk factors, please refer to the "Risk Factors" section of the Company's 1998 Annual Report on Form 10-K. All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements contained in this Form 10-Q and Cautionary Statements and "Risk Factors" section in the Company's 1998 Annual Report on Form 10-K. 16 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable. ITEM 2. CHANGES IN SECURITIES. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. 17 18 PART II - OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: 10.7* Deferred Compensation Plan, as amended and restated effective February 1, 1998. 10.8* Economic Value Added (EVA) Incentive Compensation Plan, as amended and restated effective February 1, 1998. 27 Financial Data Schedule (b) Reports on Form 8-K: None * A management contract or compensatory plan or arrangement. 18 19 PART II (CONTINUED) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FURON COMPANY REGISTRANT /S/MONTY A. HOUDESHELL /S/DAVID L. MASCARIN - --------------------------------------- ------------------------------------ Monty A. Houdeshell David L. Mascarin Vice President, Chief Financial Officer Controller and Treasurer May 29, 1998 20 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.7* Deferred Compensation Plan, as amended and restated effective February 1, 1998. 10.8* Economic Value Added (EVA) Incentive Compensation Plan, as amended and restated effective February 1, 1998. 27 Financial Data Schedule - ---------- * A management contract or compensatory plan or arrangement. EX-10.7 2 DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.7 FURON COMPANY DEFERRED COMPENSATION PLAN (AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998) 2 TABLE OF CONTENTS
Page ---- ARTICLE I. PURPOSE........................................................................ 1 1.1 Establishment of the Plan............................................. 1 1.2 Purpose of the Plan................................................... 1 1.3 Duration of the Plan.................................................. 1 1.4 Definitions........................................................... 1 ARTICLE II. ADMINISTRATION................................................................ 4 2.1 Committee............................................................. 4 2.2 Committee Action...................................................... 4 2.3 Powers and Duties of the Committee.................................... 4 2.4 Construction and Interpretation....................................... 5 2.5 Information........................................................... 5 2.6 Compensation, Expenses and Indemnity.................................. 5 2.7 Quarterly Statements.................................................. 6 ARTICLE III. PARTICIPANTS................................................................. 7 3.1 Participants.......................................................... 7 ARTICLE IV. DEFERRALS..................................................................... 8 4.1 Deferrals............................................................. 8 4.2 Investments........................................................... 9 4.3 Deferral Procedures................................................... 9 4.4 Deferral Options...................................................... 9 4.5 Accounts.............................................................. 9 4.6 Discretionary Investment by Corporation............................... 11 4.7 Change in Control..................................................... 12 4.8 Payment of Deferred Amounts........................................... 14 4.9 Acceleration of Payment of Deferred Amounts........................... 15 ARTICLE V. GENERAL PROVISIONS............................................................. 16 5.1 Unfunded Obligation................................................... 16 5.2 Beneficiary........................................................... 16 5.3 Receipt or Release.................................................... 16 5.4 Incapacity of Participant or Beneficiary.............................. 17 5.5 Nonassignment......................................................... 17 5.6 No Right to Continued Employment...................................... 17 5.7 Withholding Taxes..................................................... 18 5.8 Claims Procedure and Arbitration...................................... 18 5.9 Termination and Amendment............................................. 19 5.10 Applicable Law........................................................ 19 5.11 Compliance with Laws.................................................. 19 5.12 Plan Construction..................................................... 19 5.13 Headings, etc. Not Part of Plan....................................... 20
3 FURON COMPANY DEFERRED COMPENSATION PLAN ARTICLE I. PURPOSE 1.1 ESTABLISHMENT OF THE PLAN. Effective as of January 1, 1993, Furon Company, a California corporation, established the Furon Company Deferred Compensation Plan (the "PLAN"). This amendment and restatement of the Plan is effective as of February 1, 1998. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to permit participating employees of Furon Company and its Subsidiaries to defer the payment of all or part of their annual salary and certain bonuses that they may earn. The opportunity to elect such deferrals is provided in order to help the Company attract and retain key employees who appreciate the tax flexibility and other advantages of such a deferral program. 1.3 DURATION OF THE PLAN. Subject to prior termination by law or by the Board of Directors of Furon Company pursuant to the right of termination it has reserved under section 5.9 hereof, the Plan shall continue in effect indefinitely. 1.4 DEFINITIONS. Whenever the following words and phrases are used in the Plan, with the first letter capitalized, they shall have the meanings specified below: "ACCOUNT" or "ACCOUNTS" shall mean a Participant's Deferral Account and/or Stock Account. "BENEFICIARY" or "BENEFICIARIES" shall have the meaning set forth in Section 5.2. "BOARD OF DIRECTORS" or "BOARD" shall mean the Board of Directors of the Corporation. "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMITTEE" shall mean the committee appointed in accordance with Section 2.1 which shall administer the Plan. "COMMON STOCK" shall mean the common stock, without par value, of the Corporation, subject to adjustment pursuant to Section 4.5(b)(5). "COMPANY" shall mean the Corporation and its Subsidiaries. "CORPORATION" shall mean Furon Company, a California corporation, and any successor corporation. "DEFERRAL ACCOUNT" shall mean the bookkeeping account maintained by the Committee for each Participant that (1) is credited with (i) the amounts that the Participant elects to defer to such account pursuant to Section 4.2, (ii) transfers 1 4 elected by the Participant from his or her Stock Account, and (iii) earnings or losses (determined with reference to the deemed investments selected by the Participant) with respect to amounts credited to such account; and (2) is debited for (i) payments from such account, and (ii) transfers to the Participant's Stock Account. "DEFERRED SHARE" shall mean a non-voting unit of measurement which is deemed solely for bookkeeping purposes under the Plan to be equivalent to one outstanding share of Common Stock (subject to Section 4.5(b)(5)). "DISTRIBUTION SUBACCOUNTS" shall mean the subaccount of a Participant's Deferral Account and/or Stock Account established separately to account for deferred compensation which is subject to different distribution elections. "DIVIDEND EQUIVALENT" shall mean the amount of cash dividends or other cash distributions paid by the Corporation on that number of shares of Common Stock equal to the number of Deferred Shares credited to a Participant's Stock Account as of the applicable record date for the dividend or other distribution, which amount shall be credited in the form of additional Deferred Shares to the Participant's Stock Account, as provided in Section 4.5(b)(3). "ELIGIBLE EMPLOYEE" shall mean any officer or employee of the Company. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. "FAIR MARKET VALUE" shall mean on any date the closing price of the Common Stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal securities exchange or market on which the Common Stock is so listed, admitted to trade, or quoted on such date, or, if there is no trading of (or no available closing price of) the Common Stock on such date, then the closing price of the Common Stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares. If the Common Stock is not so listed, admitted or quoted, the Committee may designate such other exchange, market or source of data as it deems appropriate for determining such value for purposes of the Plan. "PARTICIPANT" shall mean any Eligible Employee who has been selected by the Committee in accordance with Section 3.1 to participate in the Plan. "PLAN" shall mean the Furon Company Deferred Compensation Plan set forth herein, now in effect, or as amended from time to time. "PLAN YEAR" shall mean the 12 consecutive month period beginning January 1 each year and ending the following December 31. 2 5 "STOCK ACCOUNT" shall mean a bookkeeping account maintained by the Committee for each Participant that (1) is credited with (i) Deferred Shares with respect to the amounts that the Participant elects to defer to such account pursuant to Section 4.2, (ii) transfers elected by the Participant from his or her Deferral Account, and (iii) Dividend Equivalents (if any); and (2) is debited for (i) payments or distributions from such account, and (ii) transfers to the Participant's Deferral Account. "SUBSIDIARY" shall mean any corporation or other entity of which more than 50% of the outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. "TRUST PRICE" shall mean, for any calendar quarter, the average price paid (or received) by the trustee of the Furon Company employee Benefits Trust to acquire (or sell) Common Stock in the 30-day period following such quarter. If the trustee made no purchases (or sales) during such period, the Trust Price shall be the volume-weighted average price of the Common Stock on the New York Stock Exchange for such period. 3 6 ARTICLE II. ADMINISTRATION 2.1 COMMITTEE. The Committee shall be appointed by, and serve at the pleasure of, the Board of Directors. Any member of the Board of Directors and/or officer or employee of the Company may be appointed as a Committee member. The number of members comprising the Committee shall be determined by the Board which may from time to time vary the number of members. A member of the Committee may resign by delivering a written notice of resignation to the Board. The Board may remove any member by delivering a certified copy of its resolution of removal to such member. Vacancies in the membership of the Committee shall be filled promptly by the Board. 2.2 COMMITTEE ACTION. The Committee shall act at meetings by affirmative vote of a majority of the members of the Committee. Any action permitted to be taken at a meeting may be taken without a meeting if, prior to such action, a written consent to the action is signed by all members of the Committee and such written consent is filed with the minutes of the proceedings of the Committee. A member of the Committee shall not vote or act upon any matter which relates solely to himself or herself as a Participant. The Chairman or any other member or members of the Committee designated by the Chairman may execute any certificate or other written direction on behalf of the Committee. 2.3 POWERS AND DUTIES OF THE COMMITTEE. The Committee, on behalf of the Participants and their Beneficiaries, shall enforce the Plan in accordance with its terms, shall be charged with the general administration of the Plan, and shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following: (1) To select the funds or portfolios available for the deemed investment of Deferral Accounts; (2) To construe and interpret the terms and provisions of the Plan; (3) To compute and certify to the Corporation the amount and kind of benefits payable to Participants and their Beneficiaries, and to determine the time and manner in which such benefits are paid; (4) To maintain all records that may be necessary for the administration of the Plan; (5) To provide for the disclosure of all information and the filing or provision of all reports and statements to Participants, Beneficiaries or governmental agencies as shall be required by law; (6) To make and publish such rules for the regulation of the Plan and procedures for the administration of the Plan as are not inconsistent with the terms hereof; (7) To appoint a plan administrator or any other agent, and to delegate to them such powers and duties in connection with the 4 7 administration of the Plan as the Committee may from time to time prescribe; (8) To authorize all disbursement by the Corporation pursuant to the Plan; and (9) To direct any Corporation grantor trust established with respect to the Plan (but the Committee's powers and duties shall not extend to the Furon Company Employee Benefits Trust) concerning the performance of various duties and responsibilities under the related trust agreement. 2.4 CONSTRUCTION AND INTERPRETATION. The Committee shall have full discretion to construe and interpret the terms and provisions of the Plan, which interpretation or construction shall be final and binding on all parties, including but not limited to the Corporation, its Subsidiaries and any Participant or Beneficiary. The Committee shall administer such terms and provisions in a uniform and nondiscriminatory manner and in full accordance with any and all laws applicable to the Plan. 2.5 INFORMATION. To enable the Committee to perform its functions, the Corporation shall supply full and timely information to the Committee on all matters relating to the compensation of all Participants, their death or other cause of termination, and such other pertinent facts as the Committee may require. 2.6 COMPENSATION, EXPENSES AND INDEMNITY. The members of the Committee shall serve without compensation for their services hereunder. The Committee is authorized at the expense of the Corporation to employ such legal counsel as it may deem advisable to assist in the performance of its duties hereunder. Expenses and fees in connection with the administration of the Plan shall be paid by the Corporation. To the extent permitted by applicable state law, the Corporation shall indemnify and save harmless the Committee and each member thereof, the Board of Directors and any delegate of the Committee who is an employee of the Corporation against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Corporation or provided by the Corporation under any bylaw, agreement or otherwise, as such indemnities are permitted under state law. 2.7 QUARTERLY STATEMENTS. Under procedures established by the Committee, a Participant shall receive a statement with respect to such Participant's Accounts as soon as administratively practicable following the end of each calendar quarter. 5 8 ARTICLE III. PARTICIPANTS 3.1 PARTICIPANTS. The Committee shall determine and designate from the class of Eligible Employees those individuals who are eligible to elect deferrals under the Plan. To be selected for participation by the Committee, an Eligible Employee must have significant responsibility for the management, direction and/or success of the Company as a whole or a particular business unit thereof. The Committee shall limit the class of Participants to a select group of management or highly compensated employees, as set forth in Sections 201, 301, and 401 of ERISA. 6 9 ARTICLE IV. DEFERRALS 4.1 DEFERRALS. (a) Salary Deferrals. Each Participant may elect to defer any portion of his regular salary, but only to the extent that his compensation (including salary, bonus amounts and taxable payments of deferred compensation) payable during the Plan Year exceeds the Social Security Wage Base for old age and survivors benefits for that year. Any such election must be entered into between the Participant and the Corporation by filing a deferred compensation agreement form with the Corporation on or before the December 1 prior to the beginning of the Plan Year for which the deferral is to be effective. Salary reductions and Company deferrals shall be made throughout the year based on the amount by which a Participant's compensation for the year is expected to exceed such Wage Base. (b) Cash Bonus Deferrals. Each Participant who is eligible for the Company's Economic Value Added Plan (the "EVA Plan") may Elect to defer the payment of all or a portion of his cash bonus to be earned during the current fiscal year, but only to the extent that his compensation projected to be payable for the following Plan Year (including salary, bonus amounts and taxable payments of deferred compensation) exceeds the Social Security Wage Base for old age and survivors benefits for such following year. Any such election must be entered into between the Participant and the Corporation by filing a deferred compensation agreement form with the Corporation prior to October 1 of the fiscal year for which the bonus is to be earned (December 14, in the case of bonuses earned for fiscal year that begins in 1992). (c) Stock Bonus Deferrals. Each Participant who is eligible for the EVA Plan may Elect to defer the delivery of all or a portion of the Common Stock that he or she would otherwise receive under such plan, but only to the extent that his compensation projected to be payable for the following Plan Year (including salary, bonus amounts and taxable payments of deferred compensation) exceeds the Social Security Wage Base for old age and survivors benefits for such following year. Any such election must be entered into between the Participant and the Corporation by filing a deferred compensation agreement form with the Corporation on or before the September 1 prior to the beginning of the Plan Year for which the deferral is to be effective. (d) Withholding Limitation. No election shall be effective to reduce the salary, bonus, or other compensation payable to a Participant for a calendar year to an amount which is less than the amount that the Company is required to withhold from such person's compensation for such calendar year for purposes of federal, state and local (if any) income tax, employment tax (including without limitation Federal Insurance Contributions Act (FICA) tax), and other tax withholdings. 7 10 4.2 INVESTMENTS. Compensation which the Participant elects to defer pursuant to Section 4.1(a) or (b) is to be deferred in the form of cash and credited to the Participant's Deferral Account in accordance with Section 4.5(a). If a Participant elects to defer the delivery of Common Stock pursuant to Section 4.1(c), such Common Stock shall be credited in a corresponding number of Deferred Shares to the Participant's Stock Account. 4.3 DEFERRAL PROCEDURES. If a deferral is elected, the election shall be irrevocable and shall be made on a form and in a manner prescribed by the Committee. The deferral shall authorize appropriate tax withholding measures in accordance with section 5.7. The Committee shall not permit any deferral to be elected on a date that is after the time that a bonus or award to which the election relates has become substantially earned and determinable. If a Participant has not elected a deferral, any compensation that may become payable to the Participant shall be paid in accordance with the Company's normal practices. A deferral election shall be effective only with respect to the Plan Year with respect to which it is made. 4.4 DEFERRAL OPTIONS. If a deferral is elected, the Participant's period of deferral shall end with the Participant's termination of employment with the Company for any reason (including, without limitation, retirement, death, permanent disability, resignation or termination by the Company). In addition, the Participant shall have the right to elect on his or her deferral election that amounts deferred pursuant to such election shall become payable, in the absence of the occurrence of an event described in the preceding sentence, upon the expiration of 5, 10, 15 or 20 years following the original deferral. 4.5 ACCOUNTS. The Corporation shall establish a Deferral Account and a Stock Account for each Participant. Accounts shall reflect the Corporation's obligation to pay the deferred amount as provided in section 4.8. The Corporation may establish separate Distribution Subaccounts under each of a Participant's Accounts. (a) Assumed earnings (or losses) on a Participant's Deferral Account shall accrue quarterly on the deferred amount to the date of distribution. The Corporation shall select, from time to time, two or more investment funds which shall be used for purposes of determining the amount of assumed earnings (or losses) to be credited to Participants' Deferral Accounts. Each Participant shall be notified of the funds available for selection, and then may designate, on a form and in the manner prescribed by the Committee, percentages of his or her Deferral Account which shall be credited with earnings or losses that equal or "mirror" the appreciation or depreciation in the funds to which such percentages of his or her Deferral Account have been identified. Each Participant shall be entitled to change the percentages of his or her Deferral Account identified, on a form and in the manner prescribed by the Committee, to any of the investment funds as of the first day of each calendar quarter, provided that notice is received by the Committee at least two weeks in advance of such date. The Committee may, at any time and without notice, change the number, types and/or particular funds offered. 8 11 As of the end of each fiscal year of the Corporation, the Deferral Account of any Participant that has increased in value during such year shall be decreased, in accordance with procedures adopted for the purpose by the Committee, by the incremental marginal tax rate applicable to the Corporation for such year. (b) STOCK ACCOUNT. (1) A Participant's Stock Account shall be credited in the form of Deferred Shares with respect to that portion of the Participant's compensation that he or she elects under Section 4.1(c) to defer to his or her Stock Account. (2) A Participant's Stock Account shall be credited once each year. As soon as administratively practicable following the close of each calendar quarter in which the Common Stock would otherwise have been paid under the EVA Plan, a Participant's Stock Account shall be credited with a number of Deferred Shares determined by dividing the applicable portion of the Participant's compensation deferred to such account during the quarter by the Trust Price for such quarter. (3) As soon as administratively practicable following the close of the first calendar quarter of each year, the Participant's Stock Account shall be credited with additional Deferred Shares in an amount equal to the amount of the Dividend Equivalents representing cash dividends paid during the preceding four quarters on that number of shares equal to the aggregate Deferred Shares in the Participant's Stock Account as of the beginning of the second quarter of the previous year, divided by the Trust Price for such first calendar quarter. (4) A Participant's Stock Account shall be a memorandum account on the books of the Corporation. The Deferred Shares credited to a Participant's Stock Account shall be used solely as a device for the determination of the number of shares of Common Stock to be eventually distributed to such Participant in accordance with the Plan. The Deferred Shares shall not be treated as property or as a trust fund of any kind. No Participant shall be entitled to any voting or other stockholder rights with respect to Deferred Shares granted or credited under the Plan. The number of Deferred Shares credited (and the Common Stock to which the Participant is entitled under the Plan) shall be subject to adjustment in accordance with Section 4.2(b)(5) of the Plan. (5) If any stock dividend, stock split, recapitalization, merger, consolidation, combination or other reorganization, exchange of shares, sale of all or substantially all of the assets of the Corporation, split-up, split-off, extraordinary redemption, liquidation or similar change in capitalization or any distribution to holders of the Corporation's Common Stock (other than cash dividends and cash distributions) shall occur, proportionate and equitable adjustments consistent with the effect of such 9 12 event on stockholders generally (but without duplication of benefits if Dividend Equivalents are credited) shall be made in the number and type of shares of Common Stock or other securities, property and/or rights contemplated hereunder and of rights in respect of Deferred Shares and Stock Accounts credited under the Plan so as to preserve the benefits intended. (c) TRANSFERS. Effective as of the end of the first calendar quarter in each year, a Participant may elect: (i) to have the Committee reduce the number of any Deferred Shares allocated to his or her Stock Account and credit to such Participant's Deferral Account an amount equal to the Trust Price for such quarter of the same number of shares of Common Stock as the number of Deferred Shares so deducted; or (ii) to have the Committee reduce the amount of cash credited to his or her Deferral Account and credit a number of Deferred Shares to such Participant's Stock Account, which number of Deferred Shares shall be determined by dividing the cash amount of the Participant's Deferral Account that he or she has elected to transfer by the Trust Price for such quarter. Any such election shall be filed with the Committee at least 20 days prior to the end of the applicable quarter on a form and in a manner prescribed by the Committee. The transfers described in the preceding paragraph shall first be allowed as of the end of the first calendar quarter in 1999. The Committee may, in its sole discretion, allow Participants a special opportunity during 1998 to elect a similar transfer according to procedures established by the Committee. The Trust Price applicable to such transfers shall be the Trust Price for the quarter in which such transfer is allowed. 4.6 DISCRETIONARY INVESTMENT BY CORPORATION. The deferred amounts to be paid to Participants are an unfunded obligation of the Corporation. The Committee may annually direct that an amount equal to the deferred amounts for that year shall be invested by the Corporation as the Committee, in its sole discretion, shall determine. Prior to the applicability of Section 4.7, the Committee may in its sole discretion determine that all or some portion of an amount equal to the deferred amounts shall be paid into one or more grantor trusts that may be established by the Corporation for the purpose of providing a potential source of funds to pay Plan benefits. Moreover, such payment of previously deferred amounts to a grantor trust shall be required in connection with Change in Control to the extent required by Section 4.7(e). The Committee may designate an investment advisor to direct the investment of funds that may be used to pay benefits, including the investment of the assets of any grantor trusts hereunder. 4.7 CHANGE IN CONTROL. In the Event of a Change in Control (as defined below), the following rules shall apply: (a) All Participants shall continue to have a fully vested, nonforfeitable interest in their Account balances. (b) Deferrals of amounts payable for the current year or a period ending with 10 13 the end of the current year shall continue in accordance with existing elections and shall apply from the normal payment dates for the amounts deferred. (c) The assumed earnings pursuant to section 4.5(a) following a Change in Control shall be determined on the basis of the calculation formula and options in effect just prior to the Change in Control and shall be compounded at intervals no less frequent than those being used just prior to the Change in Control. (d) All payments of deferred amounts following a Change in Control shall be made as follows: (1) Payments that have already commenced shall continue to be made no less rapidly than under the schedule in effect just prior to the Change in Control. (2) Payments that have not yet commenced shall be made in a cash lump sum at the earliest possible payment date under the normal rules for benefit commencement pursuant to the Plan as in effect on the day before the day of the Change in Control and shall be in an amount equal to the full Account balance on such date (for purposes of this paragraph, the value of Deferred Shares shall equal the Fair Market Value of a share of Common Stock on the day before the Change in Control). (e) If the Corporation has established a grantor trust in connection with the Plan, the Corporation shall continue to make any required payments to that trust in accordance with its funding rules as in effect prior to the Change in Control. (f) A Participant's termination of employment for purposes of the Plan shall be deemed to include any event (such as a constructive discharge) giving the Participant the right to receive salary continuation or other severance benefits following a Change in Control, as determined under any plan, program, or agreement covering the Participant that is in effect at the time of the Change in Control. For purposes of the Plan, a "Change in Control" means any of the following: (1) The dissolution or liquidation of the Corporation; (2) The merger, consolidation, or other reorganization of the Corporation with or into one or more entities which are not Subsidiaries, as a result of which 50% or less of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Corporation; 11 14 (3) The sale or transfer of substantially all of the Corporation's business and/or assets to a person or entity which is not a Subsidiary; or (4) any "person", alone or together with all "affiliates and "associates" of such person is or becomes (a) an "Acquiring Person" as defined in the Rights Agreement, originally dated as of March 21, 1989, by and between the Corporation and The Bank of New York, successor Rights Agent, or (b) the "beneficial owner" of 20% or more of the outstanding voting securities of the Corporation (the terms "person", "affiliates", "associates" and "beneficial owner" are used as such terms are used in the Exchange Act and the General Rules and Regulations thereunder); provided, however, that a "Change in Control" shall not be deemed to have occurred if such "person" is the Corporation, any Subsidiary or any employee benefit plan or employee stock plan of the Corporation or of any Subsidiary, or any trust or other entity organized, established or holding shares of such voting securities by, for or pursuant to, the terms of any such plan; or (5) individuals who at the beginning of any period of two consecutive calendar years constitute the Board cease for any reason, during such period, to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation's shareholders, of each new Board member was approved by a vote of at least three-quarters of the Board members then still in office who were Board members at the beginning of such period. If the approval of the shareholders of the Corporation for any of the occurrences set forth in subsections (1) through (5) is obtained prior to such occurrence, then such shareholder approval shall constitute the event. A Change of Control shall occur on the first day on which any of the preceding conditions has been satisfied. However, notwithstanding the foregoing, this section 4.7 shall not apply to any Participant who alone or together with one or more other persons acting as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of securities of the Corporation, triggers a "Change in Control" within the meaning of paragraphs (1) and (2) above. 4.8 PAYMENT OF DEFERRED AMOUNTS. A Participant shall have a fully vested, nonforfeitable interest in his or her Account balance at all times. However, vesting does not confer a right to payment. Upon the expiration of the deferral period selected by the Participant, the Corporation shall pay to such Participant (or to the Participant's Beneficiary, in the case of the Participant's death), the Participant's benefits in the form of: (a) a single lump sum, or 12 15 (b) substantially equal installments payable not less frequently than annually over a 5, 10, 15 or 20 year period, as selected by the Participant. The form of payment (lump sum or number of installments) shall be as specified by the Participant on his compensation deferral agreement and shall be irrevocable, with respect to deferrals for that year, once made. A Participant's Deferral Account shall be paid in the form of cash, with cash payment equal to the balance of the Participant's Account, plus any assumed earnings on his or her Deferral Account (determined by the Committee pursuant to section 4.5) on the outstanding Deferral Account balance to the date of distribution. Deferred Shares credited to a Participant's Stock Account shall be distributed in an equivalent number of whole shares of Common Stock; provided that the Committee may, in its sole discretion, pay Deferred Shares in the form of cash or may give Participants the ability to elect shares or cash. The Common Stock to be delivered shall be shares owned by the Corporation or any Corporation grantor trust which were acquired through purchase on the open market. Fractional share interests shall be settled in cash. Payment (or distribution of any shares in respect of Deferred Shares) shall commence or be made in January of the year following the Participant's retirement, death, permanent disability, resignation or other termination of employment, provided that with respect to a Participant who retires with advance notice in December or January, the Committee, in its discretion, may direct that payment shall commence or be made on the December 31 nearest the retirement date, on the January 31 following the retirement date or in January of the year following retirement. The cumulative amount by which the assumed earnings of a participant's Deferral Account has been reduced to reflect the Corporation's incremental marginal tax rate in prior years shall represent a bonus pool that shall be distributed to such participant. Each payment of deferred compensation to a participant or beneficiary under this plan shall be accompanied by a payment of a share from this pool that shall equal the net total amount of such reductions (adjusted by the amount of any previous bonus payments from the under this paragraph) times the ratio of assumed earnings being distributed to total assumed earnings that remain to be paid at the time of payment. For this purpose, assumed earnings will be considered distributed first, before deferral amounts. 4.9 ACCELERATION OF PAYMENT OF DEFERRED AMOUNTS. The Committee, in its discretion, may accelerate the payment of the unpaid balance of a Participant's Account in the event of the Participant's retirement, death, permanent disability, resignation or termination of employment, or upon its determination that the Participant (or his Beneficiary in the case of his death) has incurred a severe, unforeseeable financial hardship creating an immediate and heavy need for cash that cannot reasonably be satisfied from sources other than an accelerated payment from the Plan. The Committee in making its determination may consider such factors and require such information as it deems appropriate. 13 16 ARTICLE V. GENERAL PROVISIONS 5.1 UNFUNDED OBLIGATION. The deferred amounts to be paid to Participants pursuant to the Plan are unfunded obligations of the Corporation. Participants and their beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of the Company or any Company grantor trust. Except as provided in section 4.7, the Company is not required to segregate any monies from its general funds, to create any trusts, or to make any special deposits with respect to this obligation. Title to and beneficial ownership of any investments including grantor trust investments which the Committee has determined and directed the Corporation to make to fulfill obligations under the Plan shall at all times remain the general, unpledged, unrestricted assets of the Corporation. At the time a Participant's period of deferral ends, the Corporation may direct that the Participant's Plan benefits be paid directly from a Corporation grantor trust in lieu of payment from other Corporation assets. Any investments and the creation or maintenance of any trust or Accounts shall not create or constitute a trust or a fiduciary relationship between the Committee or the Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or his or her Beneficiary or his or her creditors in any assets of the Company whatsoever. The Participants shall have no claim for any changes in the value of any assets which may be invested or reinvested by the Corporation in an effort to match its liabilities under the Plan. The Corporation's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Corporation to pay money in the future, and the rights of the Participants and beneficiaries shall be no greater than those of unsecured general creditors. 5.2 BENEFICIARY. The term "Beneficiary" shall mean the person or persons to whom payments are to be paid pursuant to the terms of the Plan in the event of the Participant's death. A Participant may designate a Beneficiary on a form provided by the Committee, executed by the Participant, and delivered to the Committee. The Committee may require the consent of the Participant's spouse to a designation relating to a marital property interest of the spouse if the designation specifies a Beneficiary other than the spouse. A Participant may change a Beneficiary designation at any time. If no Beneficiary is designated, if the designation is ineffective, or if the Beneficiary dies before the balance of the Account is paid, the balance shall be paid to the Participant's surviving spouse, or if there is no surviving spouse, to the Participant's estate. 5.3 RECEIPT OR RELEASE. Any payment to a Participant or the Participant's Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Committee, the Company, and any trustee of any Company grantor trust. The Committee may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. 5.4 INCAPACITY OF PARTICIPANT OR BENEFICIARY. Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of age until the date on which the Committee receives a written notice, in a form and manner acceptable to the Committee, that such person is incompetent 14 17 or a minor, for whom a guardian or other person legally vested with the care of his person or estate has been appointed; provided, however, that if the Committee finds that any person to whom a benefit is payable under the Plan is unable to care for his or her affairs because of incompetency, or because he or she is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent, a brother or sister, or to any person or institution considered by the Committee to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under the Plan. If a guardian of the estate of any person receiving or claiming benefits under the Plan is appointed by a court of competent jurisdiction, benefit payments may be made to such guardian provided that proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Committee. In the event a person claiming or receiving benefits under the Plan is a minor, payment may be made to the custodian of an account for such person under the Uniform Gifts to Minors Act. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor under the Plan. 5.5 NONASSIGNMENT. The Corporation shall pay all amounts payable hereunder only to the person or persons designated by the Plan and not to any other person or corporation. No part of a Participant's Accounts shall be liable for the debts, contracts, or engagements of any Participant, his or her Beneficiary, or successors in interest, nor shall a Participant's Accounts be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor shall any such person have any right to alienate, anticipate, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever. If any Participant, Beneficiary or successor in interest is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any distribution or payment from the Plan, voluntarily or involuntarily, the Committee, in its discretion, may cancel such distribution or payment (or any part thereof) to or for the benefit of such Participant, Beneficiary or successor in interest in such manner as the Committee shall direct. 5.6 NO RIGHT TO CONTINUED EMPLOYMENT. Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company, nor shall the Plan interfere in any way with the right of the Company to terminate the employment of such Participant at any time without assigning any reason therefor. 5.7 WITHHOLDING TAXES. The Company may satisfy any state or federal employment tax withholding obligation with respect to compensation deferred under the Plan by deducting such amounts from any compensation payable by the Company to the Participant. There shall be deducted from each payment made under the Plan or any other compensation payable to the Participant (or Beneficiary) all taxes which are required to be withheld by the Company in respect to any payment or distribution of shares under the Plan. The Company shall have the right to reduce any payment by the amount of cash sufficient to provide the 15 18 amount of said taxes. As a condition precedent to the payment of any benefits under the Plan, if the Company (for any reason) elects not to (or cannot) satisfy the withholding obligation from the amounts otherwise payable under the Plan, the Participant shall pay or provide for payment in cash of the amount of any taxes which the Company may be required to withhold with respect to the benefits hereunder. 5.8 CLAIMS PROCEDURE AND ARBITRATION. The Committee shall establish a reasonable claims procedure consistent with the requirements of the Employee Retirement Income Security Act of 1974, as amended. Following a Change in Control of the Corporation (as determined under section 4.5) the claims procedure shall include the following arbitration procedure. Since time will be of the essence in determining whether any payments are due to the Participant under the Plan following a Change in Control, a Participant may submit any claim for payment to arbitration as follows: On or after the second day following the termination of the Participant's employment or other event triggering a right to payment), the claim may be filed orally with an arbitrator of the Participant' choice and thereafter the Corporation shall be notified orally. The arbitrator must be: (a) a member of the National Academy of Arbitrators or one who currently appears on arbitration panels issued by the Federal Mediation and Conciliation Service or the American Arbitration Association; or (b) a retired judge of the State in which the claimant is a resident who served at the appellate level or higher. The arbitration hearing shall be held within 24 hours (or as soon thereafter as possible) after filing of the claim unless the Participant and the Corporation agree to a later date. No continuance of said hearing shall be allowed without the mutual consent of the Participant and the Corporation. Absence from or nonparticipation at the hearing by either party shall not prevent the issuance of an award. Hearing procedures which will expedite the hearing may be ordered at the arbitrator's discretion, and the arbitrator may close the hearing in his or her sole discretion upon deciding he or she has heard sufficient evidence to satisfy issuance of an award. In reaching a decision, the arbitrator shall have no authority to ignore, change, modify, add to or delete from any provision of the Plan, but instead is limited to interpreting the Plan. The arbitrator's award shall be rendered as expeditiously as possible, and in no event, later than seven days after the close of the hearing. If the arbitrator finds that any payment is due to the Participant from the Corporation, the arbitrator shall order the Corporation to pay that amount to the Participant within 48 hours after the decision is rendered. The award of the arbitrator shall be final and binding upon the Participant and the Corporation. Judgment upon the award rendered by the arbitrator may be entered in any court in any State of the United States. In the case of any arbitration regarding this Agreement, the Participant shall be awarded the Participant's costs, including attorney's fees. Such fee award may not be offset against the deferred compensation due hereunder. The 16 19 Corporation shall pay the arbitrator's fee and all necessary expenses of the hearing, including stenographic reporter if employed. 5.9 TERMINATION AND AMENDMENT. The Board may from time to time amend, suspend or terminate the Plan, in whole or in part, and if the Plan is suspended or terminated, such board may reinstate any or all of its provisions. No amendment, suspension or termination may impair the right of a Participant or a designated Beneficiary to receive the deferred compensation benefit accrued prior to the effective date of such amendment, suspension or termination in accordance with the terms of the Plan at such prior time. Following a change in control, as defined in section 4.7, the change in control provisions of such section and arbitration provisions of section 5.8 may not be changed. 5.10 APPLICABLE LAW. The Plan shall be construed and governed in accordance with applicable federal law and, to the extent not preempted by such federal law, the laws of the State of California. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 5.11 COMPLIANCE WITH LAWS. The Plan and the offer, issuance and delivery of shares of Common Stock and/or the payment of money through the deferral of compensation under the Plan are subject to compliance with all applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law) and to such approvals by any listing, agency or any regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Any securities delivered under the Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Corporation, provide such assurances and representations to the Corporation as the Corporation may deem necessary or desirable to assure compliance with all applicable legal requirements. 5.12 PLAN CONSTRUCTION. It is the intent of the Corporation that transactions pursuant to the Plan satisfy and be interpreted in a manner that satisfies the applicable requirements of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3") so that, to the extent elections are timely made, the crediting of Deferred Shares, the distribution of shares of Common Stock and any other event with respect to Deferred Shares under the Plan will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act and will not be subjected to avoidable liability thereunder. 5.13 HEADINGS, ETC. NOT PART OF PLAN. Headings and subheadings in the Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof. 17 20 IN WITNESS WHEREOF, the undersigned duly authorized officer of the Corporation has executed this amendment and restatement of the Plan on this ______ day of March, 1998. FURON COMPANY By: _____________________________________ Print Name: _____________________________ Its: ____________________________________ 18 EX-10.8 3 ECONOMIC VALUE ADDED INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.8 FURON COMPANY ECONOMIC VALUE ADDED (EVA) INCENTIVE COMPENSATION PLAN AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 1, 1998 1.0 INTRODUCTION 1.1 Overview Furon Company (the "Company") has established an Economic Value Added (EVA) Incentive Compensation Plan (the "Plan") in an effort to relate more directly the Company's incentive compensation to an increase in the value of the Company to its shareholders. The Plan, which is for officers, operational vice presidents, general managers of selected business units and selected other key employees, replaces the Company's Short-Term Incentive Bonus Plan and Long-Term Performance Incentive Plan. The Plan provides a direct link between incentive compensation and the return earned on capital relative to a minimum required rate of return and historic actual performance. Pursuant to the Plan, a specific target incentive amount will be established for each participant based on a percentage of his or her base salary at the beginning date of the fiscal year for Plan participation eligibility. Incentive compensation for participants changes as a result of variation in the return on capital for the Company as a whole, in the case of the Company's executive officers and certain other key employees, and the return on capital of a business unit in the case of other participants. The Plan will be administered by the Compensation Committee (the "Committee") of 1 2 the Company's Board of Directors (the "Board") and, to the extent provided herein, the Company's Chairman of the Board, President and Chief Financial Officer (collectively, the "Executive Group"). 1.2 EVA The primary financial objective of the Company is to increase shareholder value. To support that effort the Company has introduced a new system of financial measurement called "Economic Value Added" (EVA). Economic Value Added is the internal measure of operating and financial performance that best reflects the change in shareholder value. Put simply, EVA is what is left over from operating profits after deducting the cost of capital. The Company takes the view that the financial marketplace is a competition for scarce capital. Management of the Company is charged with the task of putting that scarce capital to work to earn the best possible returns. As long as the Company is investing in projects that earn a rate of return higher than its cost of capital, then investors will earn a return in excess of their required reward and the Company's capital or stock will command a premium in the marketplace. This approach places less emphasis on the traditional means of evaluating financial results, such as return on equity or earnings per share, because these measures do not always correspond to the creation of economic value. Economic Value Added provides a framework within which management can make decisions that will build long-term value for the Company and its 2 3 shareholders rather than focus on short-term result. Economic Value Added can be more specifically defined as the economic profit generated by the business, less a charge for the use of capital. Economic profit is an after-tax measure of operating results which differ from normal accounting profit as the consequence of certain adjustments for non-economic charges. 1.3 Incentive Compensation The Company recognizes that the performance and contributions of its key employees will play a pivotal role in maximizing shareholder value. By measuring not only the Company's overall performance, but also the performance of each business unit, EVA provides the backbone of an incentive compensation program that effectively encourages management decisions that maximize the value of investors' capital. The objectives underlying the Plan are to more closely link incentive awards to value added for shareholders, and to provide a culture of performance and ownership among the Company's key employees. This requires management to share some of the Company's business risk with shareholders, but also provides the opportunity for the upside potential that results from the creation of value. Said another way, it helps managers think as owners. Accordingly, the Plan rewards long-term continuous improvements in shareholder value. 3 4 Incentives are focused on the generation of improved Economic Value Added, which in turn results from: 1. Enhanced business efficiencies - Improve the rate of return on the existing capital base by improving operating profits without tying up any more capital. 2. Profitable growth - Invest more capital as long as the profits earned are in excess of the charge for additional capital; and 3. Strategic downsizing - Reduce capital or liquidate capital where it is employed in products, projects or operations that are earning less than the cost of capital. 2.0 EVA INCENTIVE COMPENSATION 2.1 General Participants in the Plan are eligible to earn an EVA Incentive Compensation Bonus ("Bonus") under the Plan for a fiscal year for which performance is being measured based upon the actual EVA performance for the Company as a whole or their business unit, as the case may be, for the fiscal year, relative to an established EVA target performance for the fiscal year (the "EVA Target"). 4 5 2.2 Eligibility for and Rate of Participation in the Plan The Company's officers, operational vice presidents, general managers of selected business units ("General Managers") and selected other key employees are eligible to participate in the Plan. The rate of participation under the Plan for Company officers shall be determined by the Committee. It is the responsibility of the Group General Manager or appropriate Company officer to secure the necessary approvals from the Executive Group each fiscal year before a participant is eligible to participate in the Plan for that fiscal year. (See Company Human Resources Policy 2.51). Approval must also be secured from the Executive Group to remove a participant from the Plan. The rate of participation under the Plan for operational vice presidents and General Managers shall be determined by the Executive Group. Participation and rate of participation under the Plan at the division level will be recommended by the responsible Vice President or General Manager and subject to the written approval of the Executive Group. Participation and rate of participation at the Main Office for non-officers will be determined by the Executive Group. The rate of participation shall be a percentage amount of the participant's actual base salary at the beginning date of the fiscal year (i.e. Base salary shall not be reduced by (i) 401(k) contributions or deferred base compensation elections, (ii) contributions to any Company cafeteria plan intended to qualify under Section 125 of the Internal Revenue Code, or (iii) contributions to any Company employee stock purchase plan). For a new hire, percentage participation rate 5 6 shall be the base salary on date of hire (see Section 3.2). The determination of which business units are eligible to participate in the Plan will be made by the Executive Group. The Executive Group may elect at any time to terminate such eligibility based on actual operating performance or business conditions. Unless otherwise determined by the Executive Group, general managers and other key employees of discontinued operations or other business units scheduled to be divested shall not be eligible to participate in the Plan. 2.3 EVA Target and Actual Performance In determining the EVA Target for the first and second fiscal years of the Plan's operation and the actual EVA performance for each fiscal year, for the Company as a whole an each business unit, the Company will utilize principles and concepts from the Stern Stewart EVA Bonus System, as may be modified by the Company from time to time, and which is incorporated by reference into this Plan. In future years, the EVA Target for the Company/business unit will be calculated by the Company as (i) an average from the previous year's EVA Target and actual EVA performance if such actual EVA performance is equal to or greater than such EVA Target or (ii) such EVA Target minus an amount equal to 30% of the difference between such EVA Target and such actual EVA performance if it is not. All such determinations, modifications and calculations shall be subject to 6 7 approval by the Executive Group. In addition, the EVA Target for the Company and each business unit for the first fiscal year of the Plan's operation shall be subject to approval by the Committee. 2.4 Current Bonus and EVA Incentive Compensation Bank The Company has placed no cap on the Bonus that a participant may potentially earn for a fiscal year. However, a participant is only eligible to receive up to 100% of his or her Target Bonus for a given fiscal year (the "Current"); the balance (if any) will be deferred. The Plan will use an EVA Incentive Compensation Bank ("Bank") concept where the deferred amount will be "deposited" in a Bank maintained for the participant by the Company as an accounting accrual against a possible future payment by the Company. No interest (subject to Section 2.6(c)) shall be earned on the deferred amount or credited to the Bank. The participant has no vested right to receive the deferred amount; rather, the distribution and unconditional vesting thereof are subject to the future events described herein. An individual record of the participant's Bank will be maintained by corporate accounting at the Company's Main Office. Each participant's Bank will be composed of a Cash Account and a Stock Unit Account. Each Stock Unit Account may be composed of one or more Subaccounts, as necessary, to account for Stock Units credited pursuant to Section 2.6 with respect to different fiscal years. 7 8 The following table sets forth the effects that the various possible Total Unit Values will have on a participant's Current Bonus and Bank for a fiscal year for which performance is being measured:
As a Percentage of Target Bonus ------------------------------------------------------------------ Total Unit Values Current Bonus Bank ----------------- ------------- ---- Greater than 1.5 (150%) 100% Deposit excess attributable to Total Unit Value of up to 1.5 to Stock Unit Account, deposit excess attributable to Total Unit Value over 1.5 to Cash Account. Greater than 1.0 (100%) but no 100% Deposit excess to Stock Unit more than 1.5 (150%) Account. 0 to 1.0 0 to 100% None. Less than 0 None Deduct Shortfall From Cash Account.
At the end of each fiscal year for which performance is being measured under the Plan, a participant will be eligible to receive a payment from his or her Cash Account equal to 33% of: (i) the participant's beginning Cash Account balance for the fiscal year for which performance is being measured less (ii) any subtractions from the Cash Account resulting from a Total Unit Value of less than zero for the fiscal year for which performance is being measure; where such amount is a positive number. Negative Cash Account balances are carried forward in the Bank to be offset by additions to the Cash Account. However, negative Cash Account balances do not reduce the Current Bonus. Stock Unit Accounts are paid in accordance with Section 2.6. 8 9 Examples are attached to this document to illustrate Bonus payments and additions to and subtractions from the Bank for a hypothetical participant receiving an annual 5% base salary increase (see Attachments A and B). Attachment A illustrates positive performance except in Years 4 and 5 and shows how negative performance can impact a participant's Bank in both the current year and in subsequent years beginning in Year 4. Attachment B, on the other hand, illustrates solid performance for all ten (10) years where the participant earns a Bonus each year. 2.5 Acquisitions and Extraordinary Capital Expenditures Funds expended for capital expenditures and acquisitions will be added to the capital base and accrue a capital charge for the cost of capital. In instances where a capital expenditures is for a major internal expansion project (possibly the construction of a new plant) or an acquisition is significant relative to the size of the business unit, the Executive Group may, at their sole discretion, determine that due to the size and significant nature of the capital expenditure or acquisition, the funds expended will be amortized into the capital base over a period of time thereby reducing the capital charge. 9 10 2.6 Stock Unit Accounts (a) The Company shall establish and maintain a Stock Unit Account for each participant. Each participant's Stock Unit Account shall consist of such Subaccounts as necessary to account for Stock Units that are credited with respect to different fiscal years. (b) At the end of each fiscal year (or as soon as administratively practicable after the Unit Value for such year is determined) in which the Unit Value is greater than 1.0 (each a "Crediting Year"), each participant's Subaccount for that Crediting Year shall be credited with Stock Units pursuant to this Section 2.6(b). The number of Stock Units to be credited for each such Crediting Year shall equal (i) the excess amount (expressed in dollars) that is to be credited to such participant's Stock Unit Account pursuant to Section 2.4, divided by (ii) the "Trust Price," as defined below. For the Crediting Year ended January 31, 1998, the Trust Price shall equal the average price per share paid (or received) by the trustee of the Furon Company Employee Benefits Trust to acquire (or sell) Furon Company common stock in the period commencing March 30, 1998 and ending April 30, 1998. For the Crediting Year ended January 31, 1999, the Trust Price shall equal the average price per share paid (or received) by 10 11 the trustee of the Furon Company Employee Benefits Trust to acquire (or sell) Furon Company common stock in the period commencing April 30, 1998 and ending January 31, 1999. For each subsequent Crediting Year, the Trust Price shall equal the average price per share paid (or received) by the trustee of the Furon Company Employee Benefits Trust to acquire (or sell) Furon Company common stock during the fiscal year corresponding to the Crediting Year. If the trustee made no purchases or sales during the relevant period, the Trust Price shall be the volume-weighted average price of Furon Company common stock on the New York Stock Exchange for the 30-day period following the announcement of Unit Values for the Crediting Year. (c) As of the end of each fiscal year (or as soon as administratively practicable thereafter), each of a participant's Subaccounts shall be credited with additional Stock Units in an amount equal to the amount of the Dividend Equivalents representing cash dividends paid during such year on that number of shares equal to the aggregate Stock Units in that Subaccount as of the beginning of that fiscal year, divided by the Trust Price. (d) At the end of each fiscal year (or as soon as administratively practicable thereafter) in which a participant's Cash Account balance (after any adjustments pursuant to Section 2.4 with respect to that fiscal year) is positive (i.e., greater than zero), one-third of the Stock Units then credited to each of the participant's Subaccounts (excluding any Stock Units credited to a Subaccount pursuant to Section 2.6(b) established with respect to that fiscal year but including any Stock Units credited to the participant's Subaccounts pursuant to Section 2.6(c) with respect to that 11 12 fiscal year) will become payable to the participant. (e) Any Stock Units remaining credited to a participant's Subaccount at the end of the tenth fiscal year (or as soon as administratively practicable thereafter) following the Crediting Year with respect to such Subaccount was established shall be distributed in a single lump sum. (f) Benefit distributions in respect of Stock Units shall be in the form of an equivalent number of whole shares of Common Stock. The Committee may settle fractional share interests in cash, permit the accumulation of fractional share interests, disregard fractional share interests, or adopt such other rules as it deems appropriate for the payment or administration of fractional share interests. The Common Stock to be delivered shall be shares owned by the Company or any Company grantor trust which were acquired through purchase on the open market. In the event that the Company (or any Company grantor trust) has an insufficient number of shares of Common Stock (which were purchased on the open market) available for Plan purposes, or for any other reason determined by the Committee (in its sole discretion), amounts payable or distributable in the form of Common Stock may be settled in cash. (g) If any stock dividend, stock split, recapitalization, merger, consolidation, combination or other reorganization, exchange of shares, sale of all or substantially all of the assets of the Company, split-up, split-off, 12 13 extraordinary redemption, liquidation or similar change in capitalization or any distribution to holders of the Company's Common Stock (other than cash dividends and cash distributions) shall occur, proportionate and equitable adjustments consistent with the effect of such event on stockholders generally (but without duplication of benefits if Dividend Equivalents are credited) shall be made in the number and type of shares of Common Stock or other securities, property and/or rights contemplated hereunder and of rights in respect of Stock Units and Stock Unit Accounts credited under this Plan so as to preserve the benefits intended. 3.0 CHANGES IN EMPLOYMENT STATUS 3.1 Termination or Transfer of Employment (a) The only time a participant may receive in a fiscal year a distribution from his or her Cash Account in excess of 33% of the balance, as provided in Section 2.4 is upon the Retirement, Death or Disability (as those terms are defined herein) of the participant while an actual full-time employee of the Company. In such circumstances, the participant's entire Cash Account balance (as determined below in the case of Retirement) shall be paid to the retiree or disabled participant or his or her designated Beneficiary or Beneficiaries. The only time a participant may receive in a fiscal year a distribution from his or her Stock Unit Account other than as provided in Section 2.6(d) or 13 14 2.6(e) is upon the Retirement, Death or Disability (as those terms are defined herein) of the participant while an actual full-time employee of the Company. In such circumstances, the total number of Stock Units then credited to the participant's Stock Unit Account (as determined below in the case of Retirement) shall be paid to the retiree or disabled participant or his or her designated Beneficiary or Beneficiaries. For purposes of this Plan, designated Beneficiary or Beneficiaries shall be the same as the participants designate(s) in the Company Employees' Profit Sharing Retirement Plan Summary Plan Description document, as amended. (b) A participant whose employment with the Company is terminated, either voluntary or involuntary, for any reason other than Retirement, Death or Disability, is not eligible to receive any amount from his or her Bank; rather the entire amount in the Bank (including Stock Units credited pursuant to Section 2.6) is forfeited upon such termination. (c) If a participant is transferred into a position not eligible for participation in the Plan or if he or she is no longer eligible to participate in the Plan, but the participant remains employed by the Company, he or she: (i) is not eligible to receive any amount from his or her Cash Account, rather, the entire amount in the Cash Account is forfeited upon such termination; and (ii) he or she will no longer be eligible for additional Stock Units pursuant 14 15 to Section 2.6(b) or Section 2.6(c) and any Stock Units then credited to his or her Stock Unit Account shall only be payable pursuant to Section 2.6(e) (notwithstanding Section 2.6(d)). If the transferred participant later terminates employment with the Company (for any reason including Death, Disability, or Retirement), the Stock Units then credited to his or her Stock Unit Account shall be forfeited. (d) If a participant's employment terminates (other than due to Retirement, death or disability), or Plan participation terminates pursuant to Section 3.1(c), the participant shall receive no portion of any Current Bonus. If a participant Retires or terminates employment due to death or disability during the fiscal year, the participant is eligible to receive (i) a prorated amount of the Current Bonus that he or she would have earned for the full fiscal year had he or she remained a participant in the Plan, and (ii) the participant's Bank balance (including distribution of all Stock Units credited to his or her Stock Unit Account in the form of Common Stock or cash) at the end of the fiscal year after giving effect to his or her prorated share of any additions or deletions that would have been made to his or her Bank in respect of the fiscal year if the participant had remained a participant in the Plan. Each such proration shall be based upon a fraction the numerator of which is the number of full months during the fiscal year prior to Retirement death or disability and the denominator of which is 12. If the participant's last work day is before the fifteenth of the month, he or 15 16 she will receive no credit for the entire month. If the last work day is after the fifteenth of the month, he or she will receive full credit for that particular month. Payment to the participant will be made following the end of the fiscal year at the time payments are made to continuing participants in the Plan pursuant to Section 4. (e) In situations where a participant transfers to a new Company business unit and remains an eligible participant, the individual's Bank balance, either positive or negative, shall transfer with him or her. Current Bonus payments and additions or subtractions to the Bank for the fiscal year during which the transfer takes place shall be determined by a proration of the Total Unit Value achieved by the participant's previous and new business units based upon the time during the fiscal year that the participant was employed at each respective business unit. 16 17 3.2 Partial EVA Bonus Credit Unless otherwise determined by the Executive Group, Plan participants who commence participation after the start of a fiscal year will be entitled to receive a partial Bonus credit based on months of service as a Plan participant during the applicable fiscal year. If participation commences on or before the 15th of a month, the participant will receive credit for the entire month. If participation commences after the 15th of a month, the participant will receive no EVA Bonus credit for that month. For example, if an eligible employee commenced Plan participation on June 3, he or she would receive eight (8) months of credit and thus be eligible to earn two-thirds (2/3) of the full fiscal year Bonus. If the participation commenced on June 16, the participant would receive seven (7) months of credit. 4.0 PAYMENT OF BONUS Any and all payments under the Plan and any payment of Stock Units in the form of shares of Common Stock or cash are at the discretion of the Committee and the Executive Group. Payments and the delivery of any shares will be made at the conclusion of the Company's fiscal year and after the Company's financial statements have been audited. All EVA payments will be made less all applicable taxes in accordance with Section 8.4. In order to receive a payment in respect of a participant's Cash Account, other than in the case of Retirement, Death or Disability or the occurrence of an Event (as defined in Section 8.5), the Plan participant must be a full-time employee of the Company at both the end of 17 18 the fiscal year in which the Bonus is earned and at the time the payment is actually made. Unless otherwise determined by the Executive Group, if both of the above conditions are not met, there shall be no payment to the individual. Payment will normally be made to the participant prior to the end of the first fiscal quarter. This includes any payments from a participant's Cash Account pursuant to Section 2.4 and any delivery of shares or payment of cash in respect of a participant's Stock Unit Account pursuant to Section 2.6. Pursuant to Section 3.1, in the case of the Death or Disability of a participant, payment to the participant or to his or her Beneficiary or Beneficiaries of any funds in the participant's Cash Account or delivery of shares or payment of cash in respect of any Stock Units credited to the participant's Stock Unit Account shall be made within sixty (60) days after the occurrence of any of the aforementioned events. 5.0 TRAINING Plan participants will receive a copy of the "EVA Incentive Compensation" booklet prepared for the Company by Stern Stewart & Company and a copy of the Plan Prospectus. In addition, the Company may conduct management training sessions for Plan participants concerning the Plan's application. Training will be determined by Company officials to provide participants with the opportunity to fully understand the Plan and its principles. Responsibility to educate participants of a business unit in the mechanics of EVA shall remain with the unit's Vice President or General Manager, controller and human resources representative. 18 19 6.0 INTERPRETATION The terms and conditions of this Plan shall be interpreted by the Executive Group. 7.0 TERMINATION AND/OR MODIFICATION The Committee retains the complete authority to make any unilateral changes to the Plan for any reason and at any time, which includes the termination of the Plan itself. 8.0 MISCELLANEOUS 8.1 Effective date This Plan was first effective as of February 2, 1992. This amendment to and restatement of the Plan is effective as of February 1, 1998. 8.2 Administration This Plan shall be administered by the Committee and, to the extent provided herein, the Executive Group. Action of the Committee or the Executive Group with respect to the administration of this Plan shall be taken pursuant to a majority vote or written consent of a majority of its members. The Committee and the Executive Group may delegate administrative functions to individuals 19 20 who are officers or employees of the Company. Any action under this Plan taken by, or inaction under this Plan of, the Company, the Board, the Committee, the Executive Group, any officer or any delegate of the Committee or the Executive Group shall be within the absolute discretion of that person and shall be conclusive and binding upon all persons. The Committee may authorize in writing the delayed payment or delivery of shares of Common Stock which may become due under this Plan, pursuant to and under the terms of any Board-approved deferred compensation plan or program. 8.3 No Contract or Other Rights Nothing contained in this Plan (or in any other documents related to this Plan or to Bonuses) shall confer upon any key employee or participant any right to any Bonus or to continue in the employ of the Company or constitute any contract or agreement of compensation, employment or otherwise, or interfere in any way with the right of the Company to reduce such person's Bonus or other compensation or to terminate the employment of such person with or without cause. No benefit payable under, or interest in, this Plan or in any Bonus shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge and any such attempted action shall be void and no such benefit or interest shall be, in any manner, liable for, or subject to debts, 20 21 contracts, liabilities, engagements or torts of any person. The Committee and the Executive Group shall disregard any attempted transfer, assignment or other alienation prohibited by the preceding sentence. No person shall have any right, title or interest in any fund or in any specific asset of the Company by reason of any Bonus granted hereunder. Neither the provisions of this Plan (or of any documents related hereto, nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any person. 8.4 Tax Withholding There shall be deducted from each payment or distribution made under the Plan or any other compensation payable to a participant (or beneficiary) all taxes which are required to be withheld by the Company (or a subsidiary) in respect to such payment or distribution or this Plan. As a condition precedent to any payment of cash or delivery of shares under this Plan, if the Company (or a subsidiary), for any reason, elects not to (or cannot) satisfy the withholding obligation from the amounts otherwise payable under this Plan or otherwise, the participant (or beneficiary) shall pay or provide for payment in cash of the amount of any taxes which the Company (or a subsidiary) may be required to withhold with respect to the benefits hereunder. 21 22 8.5 Acceleration of Bank Payments Notwithstanding the provisions of Section 8.3, upon the occurrence of an "Event" (as defined below), each participant shall immediately have a fully vested and unrestricted contract right to receive full and immediate payment in cash of the participant's then outstanding Cash Account balance and delivery of shares of Common Stock or payment of cash in respect of Stock Units credited to his or her Stock Unit Account. The Committee may accelerate the vesting and payment of Plan benefits in anticipation of or in connection with the occurrence of an Event. Notwithstanding the foregoing, this Section 8.5 shall not apply to any participant who alone or together with one or more other persons acting as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of securities of the Company, triggers a "Change in Control" under clause (iv)(A) below which causes the occurrence of the Event. "Event" shall mean any of the following: (i) Approval by the shareholders of the Company of the dissolution or liquidation of the Company; (ii) Approval by the shareholders of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities which are not "Subsidiaries" (as defined below), as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Company; 22 23 (iii) Approval by the shareholders of the Company of the sale or transfer of substantially all of the Company's business and/or assets to a person or entity which is not a Subsidiary; or (iv) A Change in Control. A "Change in Control" shall be deemed to have occurred if: (A) any "person", alone or together with all "affiliates" and "associates" of such person, is or becomes (1) an "Acquiring Person" as defined in the Rights Agreement, dated as of March 21, 1989 and as amended, by and between the Company and The Bank of New York, Rights Agent or (2) the "beneficial owner" of 30% of the outstanding voting securities of the Company (the terms "person", "affiliates", "associates" and "beneficial owner" are used as such terms are used in the Securities Exchange Act of 1934 and the General Rules and Regulations thereunder); provided, however, that a "Change in Control" shall not be deemed to have occurred if such "person" is the Company, any Subsidiary or any employee benefit plan or employee stock plan of the Company or of any Subsidiary, or any trust or other entity organized, established or holding shares of such voting securities by, for or pursuant to, the terms of any such plan; or 23 24 (B) individuals who at the beginning of any period of two consecutive calendar years constitute the Board cease for any reason, during such period, to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each new Board member was approved by a vote of at least three-quarters (3/4) of the Board members then still in office who were Board members at the beginning of such period. "Subsidiary" shall mean any corporation or other entity a majority or more of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. 8.6 No Shareholder Rights This Plan creates no fiduciary duty to participants. The Stock Units credited to a participant's Stock Unit Account shall be used solely as a device for the determination of the number of shares of Common Stock (or cash) to be eventually distributed to such Participant in accordance with this Plan. The Stock Units shall not be treated as property or as a trust fund of any kind. No Participant shall be entitled to any voting or other stockholder rights with respect to Stock Units granted or credited under this Plan. 8.7 Compliance with Laws This Plan and the offer, issuance and delivery of shares of Common Stock and/or the payment of money under this Plan are subject to compliance with all 24 25 applicable federal and state laws, rules and regulations (including but not limited to state and federal securities law) and to such approvals by any listing, agency or any regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. 25 26 GLOSSARY OF SELECTED TERMS "Bank." Bank means the EVA Incentive Compensation Bank described in Section 2.4 of the Plan, which is composed of a participant's Cash Account and Stock Unit Account. "Base Unit Value." An amount equal to 0.5. "Beneficiary" or "Beneficiaries." See Company Employees Profit Sharing Retirement Plan Summary Plan Description document, as amended, for definition. "Board." The Company's Board of Directors. "Bonus." For a fiscal year for which performance is being measured, the participant's Target Bonus for the fiscal year multiplied by the Total Unit Value for the fiscal year. "Cash Account." Cash Account means the bookkeeping account maintained by the Company for each participant that (i) is credited with cash amounts pursuant to Section 2.4, and (ii) is debited with respect to shortfalls pursuant to Section 2.4, and benefits in respect of such account that are paid, forfeited, or terminated. "Committee." The Compensation Committee of the Board. "Common Stock." Common Stock means the common stock, without par value, of Furon Company (subject to adjustment pursuant to Section 2.6(g)). "Company." Furon Company, a California corporation. "Current Bonus." For a fiscal year for which performance is being measured, the participant's Target Bonus for the fiscal year multiplied by the lesser of (i) the Total Unit Value for the fiscal year or (ii) 1.0, where such amount is a positive number. "Death." In order to receive payment of funds from the Bank, a participant must be an active full-time employee and eligible to participate in the Plan at the time of death. "Disability." Disability shall mean the total and permanent incapacity, as determined by the Executive Group based upon competent
26 27 medical advice, of a participant to render substantial service to the Company by reason of mental or physical disability. "Dividend Equivalent." Dividend Equivalent means the amount of cash dividends or other cash distributions paid by the Company on that number of shares of Common Stock equal to the number of Stock Units credited to a participant's Stock Unit Account as of the applicable record date for the dividend or other distribution, which amount shall be credited in the form of additional Stock Units to the participant's Stock Unit Account, as provided in Section 2.6(c). "EVA Target." The EVA target performance for the Company or a business unit, as the case may be, that has been established pursuant to the Plan for the fiscal year for which performance is being measured. "Executive Group." The Company's Chairman of the Board, President and Chief Financial Officer. "General Managers" The general managers of the Company's business units that the Executive Group from time to time determines are eligible for participation in the Plan. "Performance Unit Value" An amount equal to: (i) the actual EVA performance minus the EVA Target for the Company/business unit for such fiscal year; divided by (ii) the Variation Factor for the Company/business unit. "Plan." The Furon Company Economic Value Added (EVA) Incentive Compensation Plan. "Retirement." A participant is eligible to retire under the Plan if at the time of retirement: (i) The participant is at least age 60; and (ii) the participant has had at least ten (10) years of continuous full-time employment with the Company. "Stock Unit." Stock Unit means a non-voting unit of measurement which is deemed solely for bookkeeping purposes under this Plan to be equivalent to one outstanding share of Common Stock (subject to adjustment pursuant to Section 2.6(g)). "Stock Unit Account." Stock Unit Account means a bookkeeping account maintained by the Company for each participant that (i) is credited with Stock Units pursuant to Section 2.6 and (ii) is debited with respect to Stock Units that are paid, forfeited, or terminated.
27 28 "Subaccount." Subaccount means a subaccount of a participant's Stock Unit Account established to separately account for Stock Units that are credited with respect to different fiscal years. "Target Bonus." For a fiscal year for which performance is being measured, the participant's base salary for the fiscal year multiplied by the participant's rate of participation under the Plan. "Total Unit Value" The Total Unit Value for the Company as a whole or a business unit, as the case may be, for a fiscal year shall be equal to the Base Unit Value plus the Performance Unit Value. "Variation Factor" The Variation Factor for the Company as a whole or a business unit, as the case may be, shall be equal to the factor then in effect as determined by (i) the Compensation Committee, in the case of the Company's Variation Factor, or (ii) the Executive Group, in the case of a business unit's Variation Factor.
28 29 FURON COMPANY EVA Incentive Compensation Plan
ASSUMPTIONS YR1 YR2 YR3 YR4 YR5 YR6 YR7 YR8 YR9 YR10 - ------------------------------------------------------------------------------------------------------------------------- Stock price ($/share) 20.00 24.00 28.80 34.56 41.47 49.77 59.72 71.66 86.00 103.20 Annual growth in stock price 20% TARGET BONUS % 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% BASE SALARY $65,000 $68,250 $71,663 $ 75,246 $79,008 $82,958 $87,106 $91,462 $96,035 $100,836 TARGET BONUS $9,750 $10,238 $10,749 $ 11,287 $11,851 $12,444 $13,066 $13,719 $14,405 $15,125 TOTAL UNIT VALUE 3.00 2.50 1.70 -1.00 -0.50 1.80 2.20 3.00 1.75 2.00 TOTAL BONUS $29,250 $25,594 $18,274 ($11,287) ($5,926) $22,399 $28,745 $41,158 $25,209 $30,251 CURRENT BONUS $9,750 $10,238 $10,749 $0 $0 $12,444 $13,066 $13,719 $14,405 $15,125 THE CASH BANK ($) - ----------------- BEGINNING BANK BALANCE - $14,625 $19,988 $15,475 $2,792 ($3,134) $600 $9,546 $26,943 $21,563 PERFORMANCE SUBTRACTIONS - $0 $0 ($11,287) ($5,926) $0 $0 $0 $0 $0 ------- ------- -------- ------- ------- ------- ------- ------- ------- BANK PAYOUT BALANCE - $14,625 $19,988 $4,188 ($3,134) ($3,134) $600 $9,546 $26,943 $21,563 BANK PAYOUT PERCENT 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% Bank Payout $0 $4,875 $6,662 $1,396 $0 $0 $200 $3,182 $8,981 $7,188 PERFORMANCE ADDITIONS $14,625 $10,238 $2,150 $0 $0 $3,733 $9,146 $20,579 $3,601 $7,563 ENDING BANK BALANCE $14,625 $19,988 $15,475 $2,792 ($3,134) $600 $9,546 $26,943 $21,563 $21,938 THE STOCK BANK (SHARE UNITS) - ---------------------------- BEGINNING BANK BALANCE - 243.75 375.78 437.14 291.43 291.43 416.45 387.03 353.74 319.58 BANK PAYOUT PERCENT 33% 33% 33% 33% 0% 0% 33% 33% 33% 33% Bank Payout - 81.25 125.26 145.71 - - 138.82 129.01 117.91 106.53 PERFORMANCE ADDITIONS ($) $ 4,875 $5,119 $5,375 $0 $0 $6,222 $6,533 $6,860 $7,203 $7,563 PERFORMANCE ADDITIONS (Share units) 243.75 213.28 186.62 - - 125.02 109.39 95.72 83.75 73.29 ENDING BANK BALANCE 243.75 375.78 437.14 291.43 291.43 416.45 387.03 353.74 319.58 286.34 TOTAL BONUS PAYMENT - ------------------- CURRENT BONUS $ 9,750 $10,238 $10,749 $0 $0 $12,444 $13,066 $13,719 $14,405 $15,125 CASH BANK PAYOUT ($) $0 $4,875 $6,662 $1,396 $0 $0 $200 $3,182 $8,981 $7,188 ------- ------- ------- -------- ------- -------- ------- ------- ------- ------- TOTAL CASH $ 9,750 $15,112 $17,412 $1,396 $0 $12,444 $13,266 $16,901 $23,386 $22,313 TOTAL SHARE UNITS - 81.25 125.26 145.71 - - 138.82 129.01 117.91 106.53 Value = Total Share Units x Share Price $ - $ 1,950 $ 3,607 $ 5,036 $ - $ - $ 8,290 $ 9,245 $10,140 $10,993 - ------------------------------------------------------------------------------------------------------------------------- CASH + VALUE OF STOCK UNITS $ 9,750 $17,062 $21,019 $6,432 $0 $12,444 $21,556 $26,146 $33,526 $33,306 - -------------------------------------------------------------------------------------------------------------------------
ATTACHMENT A A-1 30 FURON COMPANY EVA Incentive Compensation Plan
Assumptions YR1 YR2 YR3 YR4 YR5 YR6 YR7 YR8 YR9 YR10 - ----------------------------------------------------------------------------------------------------------------------- Stock price ($/share) 20.00 24.00 28.80 34.56 41.47 49.77 59.72 71.66 86.00 103.20 Annual growth in stock price 20% TARGET BONUS % 15% 15% 15% 15% 15% 15% 15% 15% 15% 15% BASE SALARY $65,000 $68,250 $71,663 $75,246 $79,008 $82,958 $87,106 $91,462 $96,035 $100,836 TARGET BONUS $9,750 $10,238 $10,749 $11,287 $11,851 $12,444 $13,066 $13,719 $14,405 $15,125 TOTAL UNIT VALUE 3.00 2.50 1.70 1.40 1.60 1.80 2.20 3.00 1.75 2.00 TOTAL BONUS $29,250 $25,594 $18,274 $15,802 $18,962 $22,399 $28,745 $41,158 $25,209 $30,251 CURRENT BONUS $9,750 $10,238 $10,749 $11,287 $11,851 $12,444 $13,066 $13,719 $14,405 $15,125 THE CASH BANK ($) - ----------------- BEGINNING BANK BALANCE - $14,625 $19,988 $15,475 $10,317 $8,063 $9,108 $15,218 $30,724 $24,084 PERFORMANCE SUBTRACTIONS - $0 $0 $0 $0 $0 $0 $0 $0 $0 ------- ------- ------- ------- ------- ------- ------- ------- -------- BANK PAYOUT BALANCE - $14,625 $19,988 $15,475 $10,317 $8,063 $9,108 $15,218 $30,724 $24,084 BANK PAYOUT PERCENT 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% Bank Payout $0 $4,875 $6,662 $5,158 $3,439 $2,688 $3,036 $5,073 $10,241 $8,028 PERFORMANCE ADDITIONS $14,625 $10,238 $2,150 $0 $1,185 $3,733 $9,146 $20,579 $3,601 $7,563 ENDING BANK BALANCE $14,625 $19,988 $15,475 $10,317 $8,063 $9,108 $15,218 $30,724 $24,084 $23,619 THE STOCK BANK (SHARE UNITS) - ---------------------------- BEGINNING BANK BALANCE - 243.75 375.78 437.14 422.06 424.26 407.86 381.30 349.92 317.03 BANK PAYOUT PERCENT 33% 33% 33% 33% 33% 33% 33% 33% 33% 33% Bank Payout - 81.25 125.26 145.71 140.69 141.42 135.95 127.10 116.64 105.68 PERFORMANCE ADDITIONS ($) $4,875 $5,119 $5,375 $4,515 $5,926 $6,222 $6,533 $6,860 $7,203 $7,563 PERFORMANCE ADDITIONS (Share units) 243.75 213.28 186.62 130.63 142.88 125.02 109.39 95.72 83.75 73.29 ENDING BANK BALANCE 243.75 375.78 437.14 422.06 424.26 407.86 381.30 349.92 317.03 284.64 TOTAL BONUS PAYMENT - ------------------- CURRENT BONUS $9,750 $10,238 $10,749 $11,287 $11,851 $12,444 $13,066 $13,719 $14,405 $15,125 CASH BANK PAYOUT ($) $0 $4,875 $6,662 $5,158 $3,439 $2,688 $3,036 $5,073 $10,241 $8,028 ------- ------- ------- ------- ------- ------- ------- ------- -------- -------- TOTAL CASH $9,750 $15,112 $17,412 $16,445 $15,290 $15,131 $16,102 $18,792 $24,647 $23,154 TOTAL SHARE UNITS - 81.25 125.26 145.71 140.69 141.42 135.95 127.10 116.64 105.68 Value = Total Share Units x Share Price $ - $ 1,950 $ 3,607 $ 5,036 $ 5,835 $ 7,038 $ 8,119 $ 9,108 $ 10,031 $ 10,906 - ----------------------------------------------------------------------------------------------------------------------- CASH + VALUE OF STOCK UNITS $9,750 $17,062 $21,019 $21,481 $21,125 $22,169 $24,221 $27,900 $34,677 $34,059 - -----------------------------------------------------------------------------------------------------------------------
ATTACHMENT B B-1 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S UNAUDITED CONDENSED STATEMENTS OF INCOME, CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS CONTAINED WITHIN THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED MAY 2, 1998. 1,000 U.S. DOLLARS 3-MOS JAN-30-1999 FEB-01-1998 MAY-02-1998 1 5,405 0 76,775 1,689 59,344 157,680 203,027 91,993 375,413 71,390 6,175 0 0 41,000 44,650 375,413 119,805 119,805 82,539 110,100 (1,333) 70 3,127 7,911 2,492 5,419 0 0 0 5,419 0.30 0.29
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